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INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
This Prospectus describes individual flexible premium variable life insurance
policies ("Policies" or "Policy") which have been issued by Allmerica Financial
Life Insurance and Annuity Company ("Company") on Policy Form No. 1018-87 ("VEL
87 Policies") and on Policy Form No. 1018-91 ("VEL 91 Policies"). The VEL 87
Policies and VEL 91 Policies differ in certain respects, as described in the
SUMMARY and referenced sections of this Prospectus.
The Policies permit you to allocate net premiums among up to 20 sub-accounts
("Sub-Accounts") of the Separate Account ("Separate Account"), a separate
account of the Company, and a fixed-interest account of the Company ("General
Account"), collectively, "Accounts." Each Sub-Account invests its assets in a
corresponding investment portfolio of Allmerica Investment Trust ("Trust"),
Variable Insurance Products Fund ("Fidelity VIP"), Variable Insurance Products
Fund II ("Fidelity VIP II"), T. Rowe Price International Series, Inc. ("T. Rowe
Price") or Delaware Group Premium Fund, Inc. ("DGPF"). The following Underlying
Funds are available under the Policies:
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ALLMERICA INVESTMENT TRUST FIDELITY VIP
- ---------------------------------- --------------------------------------
Select Aggressive Growth Fund Overseas Portfolio
Select Capital Appreciation Fund Equity-Income Portfolio
Select Value Opportunity Fund Growth Portfolio
Select Emerging Markets Fund High Income Portfolio
Select International Equity Fund Money Market Portfolio
Select Growth Fund
Select Strategic Growth Fund FIDELITY VIP II
--------------------------------------
Growth Fund Asset Manager Portfolio
Equity Index Fund
Select Growth and Income Fund T. ROWE PRICE
--------------------------------------
Investment Grade Income Fund T. Rowe Price International Stock
Portfolio
Government Bond Fund
Money Market Fund DGPF
--------------------------------------
International Equity Series
</TABLE>
Certain of the Funds may not be available in all states.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE
PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC., AND DELAWARE GROUP
PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY INVEST IN HIGHER-
YIELDING, HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES
AND POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE POLICY IS AN OBLIGATION OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND IS DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICY IS NOT A
DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICY IS NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICY ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
CORRESPONDENCE MAY BE MAILED TO:
P.O. BOX 8014,
BOSTON MA 02266-8179
PROSPECTUS DATED MAY 1, 1998
WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
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(Continued from cover page)
Each Underlying Fund has its own investment objectives. The accompanying
prospectuses of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF
describe the investment objectives and certain attendant risks of each
Underlying Fund.
Within limits, you may choose the amount of initial premium desired and the
initial Sum Insured. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Policy's Surrender Value, or the Policy may be fully
surrendered at any time, subject to certain limitations. Because of the
substantial nature of the surrender charge, the Policy is not suitable for
short-term investment purposes. The Policyowner contemplating surrender of the
Policy should pay special attention to the limitation of deferred sales charges
on surrenders in the first two years following issuance or Face Amount increase.
There is no guaranteed minimum Policy Value. The value of the Policy will vary
up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Policy Value also will be adjusted for other factors,
including the amount of charges imposed. The Policy will remain in effect so
long as the Policy Value less any surrender charges and less any outstanding
Debt is sufficient to pay certain monthly charges imposed in connection with the
Policy. The Policy Value may decrease to the point where the Policy will lapse
and provide no further death benefit without additional premium payments.
If the Policy is in effect at the death of the Insured, the Company will pay a
death benefit (the "Death Proceeds") to the Beneficiary. Prior to the Final
Premium Payment Date, the Death Proceeds equal the Sum Insured, less any Debt,
partial withdrawals, and any due and unpaid charges. You may choose either Sum
Insured Option 1 (the Sum Insured is fixed in amount) or Sum Insured Option 2
(the Sum Insured includes the Policy Value in addition to a fixed insurance
amount). The Policyowner has the right to change the Sum Insured Option, subject
to certain conditions. A Guideline Minimum Sum Insured, equivalent to a
percentage of the Policy Value, will apply if greater than the Sum Insured
otherwise payable under Option 1 or Option 2.
In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code (the "Code"), any Policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
THE PURPOSE OF THE POLICIES IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE POLICY,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.
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TABLE OF CONTENTS
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SPECIAL TERMS............................................................. 5
SUMMARY................................................................... 8
PERFORMANCE INFORMATION................................................... 20
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE UNDERLYING
FUNDS.................................................................... 28
INVESTMENT OBJECTIVES AND POLICIES........................................ 30
INVESTMENT ADVISORY SERVICES.............................................. 32
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS......................... 35
VOTING RIGHTS............................................................. 36
THE POLICIES.............................................................. 36
Applying for the Policy................................................. 36
Free-Look Period........................................................ 37
Conversion Privileges................................................... 38
Premium Payments........................................................ 38
Paid-Up Insurance Option................................................ 39
Allocation of Net Premiums.............................................. 40
Transfer Privilege...................................................... 40
Death Proceeds.......................................................... 41
Sum Insured Options..................................................... 42
Change in Sum Insured Option............................................ 44
Change in the Face Amount............................................... 45
Policy Value and Surrender Value........................................ 46
Death Proceeds Payment Options.......................................... 47
Optional Insurance Benefits............................................. 47
Policy Surrender........................................................ 47
Partial Withdrawals..................................................... 48
CHARGES AND DEDUCTIONS.................................................... 48
Tax Expense Charge...................................................... 48
Monthly Deductions from the Policy Value................................ 48
Charges Against Assets of The Separate Account.......................... 50
Surrender Charge........................................................ 51
Transfer Charges........................................................ 54
Charge for Increase in the Face Amount.................................. 55
Other Administrative Charges............................................ 55
POLICY LOANS.............................................................. 55
Loan Interest........................................................... 56
Repayment of Loans...................................................... 56
Effect of Policy Loans.................................................. 56
POLICY TERMINATION AND REINSTATEMENT...................................... 57
Termination............................................................. 57
Reinstatement under VEL 87 Policies..................................... 57
Reinstatement under VEL 91 Policies..................................... 58
</TABLE>
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OTHER POLICY PROVISIONS................................................... 59
Policyowner............................................................. 59
Beneficiary............................................................. 59
Incontestability........................................................ 60
Suicide................................................................. 60
Age and Sex............................................................. 60
Assignment.............................................................. 60
Postponement of Payments................................................ 60
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY........................... 61
DISTRIBUTION.............................................................. 62
SERVICES.................................................................. 62
REPORTS................................................................... 62
LEGAL PROCEEDINGS......................................................... 63
FURTHER INFORMATION....................................................... 63
INDEPENDENT ACCOUNTANTS................................................... 63
FEDERAL TAX CONSIDERATIONS................................................ 63
The Company and the Separate Account.................................... 63
Taxation of the Policies................................................ 64
Modified Endowment Contracts............................................ 65
MORE INFORMATION ABOUT THE GENERAL ACCOUNT................................ 65
General Description..................................................... 65
General Account Values.................................................. 65
The Policies............................................................ 66
FINANCIAL STATEMENTS...................................................... 66
APPENDIX A -- OPTIONAL BENEFITS........................................... A-1
APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.............................. B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, POLICY VALUES AND ACCUMULATED
PREMIUMS................................................................. C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES VEL 87 POLICIES.... D-1
APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES VEL 91 POLICIES.... E-1
</TABLE>
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SPECIAL TERMS
ACCUMULATION UNIT: a measure of your interest in a Sub-Account.
AGE: the Insured's age as of the nearest birthday measured from the Policy
anniversary.
BENEFICIARY: the person(s) designated by the Policyowner to receive the
insurance proceeds upon the death of the Insured.
COMPANY: Allmerica Financial Life Insurance and Annuity Company.
DATE OF ISSUE: the date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.
DEATH PROCEEDS: Prior to the Final Premium Payment Date for a VEL 91 Policy or
the Maturity Date for a VEL 87 Policy, the Death Proceeds equal the amount
calculated under the applicable Sum Insured Option (Option 1 or Option 2), less
Debt outstanding at the time of the Insured's death, partial withdrawals, if
any, partial withdrawal charges, and any due and unpaid Monthly Deductions.
After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value of the VEL 91 Policy.
DEBT: all unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: an acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: information, including medical information
satisfactory to the Company, that is used to determine the Insured's Premium
Class.
FACE AMOUNT: the amount of insurance coverage applied for; the Face Amount of
each Policy is set forth in the specifications pages of the Policy.
FINAL PREMIUM PAYMENT DATE: Under a VEL 91 Policy, the Policy anniversary
nearest the Insured's 95th birthday. The Final Premium Payment Date under a VEL
91 Policy is the latest date on which a premium payment may be made. After this
date, the Death Proceeds equal the Surrender Value of the Policy.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUIDELINE ANNUAL PREMIUM: the annual amount of premium that would be payable
through the Final Premium Payment Date or Maturity Date of the Policy for the
specified Sum Insured, if premiums were fixed by the Company as to both timing
and amount, and monthly cost of insurance charges were based on the 1980
Commissioners Standard Ordinary Mortality Tables, Smoker or Non-Smoker, Male,
Female (or Table B for unisex Policies), net investment earnings at an annual
effective rate of 5%, and fees and charges as set forth in the Policy and any
Policy riders. The Sum Insured Option 1 Guideline Annual Premium is used when
calculating the maximum surrender charge.
GUIDELINE MINIMUM SUM INSURED: the minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by age; it is calculated by multiplying the Policy Value by a
percentage determined by the Insured's Age.
INSURANCE AMOUNT AT RISK: the Sum Insured less the Policy Value.
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LOAN VALUE: the maximum amount that may be borrowed under the Policy.
MATURITY DATE: Under a VEL 87 Policy, the Maturity Date is the Policy
anniversary nearest the Insured's 95th birthday. The Maturity Date is the latest
date to which insurance may remain in force under a VEL 87 Policy. If the
Insured under a VEL 87 Policy is still living on the Maturity Date, the Company
pays the Policy Value on the Maturity Date (less any outstanding Debt) to the
Policyowner, and the VEL 87 Policy terminates.
MINIMUM MONTHLY FACTOR: a monthly premium amount calculated by the Company and
specified in the Policy. If you pay this amount, the Company guarantees that the
Policy will not lapse prior to the 49th Monthly Deduction after the Date of
Issue or the effective date of an increase in the Face Amount for a VEL 91
Policy (13th Monthly Deduction for a VEL 87 Policy). Making payments at least
equal to the Minimum Monthly Factors, however, will not prevent the Policy from
lapsing if (a) Debt exceeds Policy Value less surrender charges, or (b) Debt,
partial withdrawals and partial withdrawal charges have reduced premium payments
below an amount equal to the Minimum Monthly Factor multiplied by the number of
months since the Date of Issue or the effective date of an increase.
MONTHLY DEDUCTION: charges deducted monthly from the Policy Value of the Policy
prior to the Maturity Date or Final Premium Payment Date. The charges include
the monthly cost of insurance, the monthly cost of any benefits provided by
riders, and the monthly administrative charge.
MONTHLY PAYMENT DATE: the date on which the Monthly Deduction is deducted from
the Policy Value.
NET PREMIUM: an amount equal to the premium less a tax expense charge.
POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: the total amount available for investment under the Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to the Policy in the Sub-Accounts, and (b) the accumulation in the General
Account credited to that Policy.
POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: the risk classification that the Company assigns the Insured
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insured's Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: the Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account the Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A Separate Account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
Separate Account is determined separately from the other assets of the Company.
The assets of a Separate Account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: a division of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust ("Trust"), a corresponding Portfolio of the Variable Insurance Products
Fund ("Fidelity VIP") or the Variable Insurance Products Fund II ("Fidelity VIP
II"), the
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T. Rowe Price International Stock Portfolio of T. Rowe Price International
Series, Inc. ("T. Rowe Price"),or the International Equity Series of the
Delaware Group Premium Fund, Inc. ("DGPF").
SUM INSURED: the amount payable upon the death of the Insured, before the
Maturity Date or Final Premium Payment Date, prior to deductions for Debt
outstanding at the time of the Insured's death, partial withdrawals and partial
withdrawal charges, if any, and any due and unpaid Monthly Deductions. The
amount of the Sum Insured will depend on the Sum Insured Option chosen, but
always will be at least equal to the Face Amount.
SURRENDER VALUE: the amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS (FUNDS): the Funds of the Allmerica Investment Trust, the
Portfolios of the Variable Insurance Products Fund and Variable Insurance
Products Fund II, the Portfolio of T. Rowe Price International Series, Inc., and
the Series of the Delaware Group Premium Fund, Inc., available under the Policy.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of the Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Underlying Fund may be
affected materially.
WRITTEN REQUEST: a request in writing, by the Policyowner, satisfactory to the
Company.
YOU OR YOUR: the Policyowner, as shown in the application or the latest change
filed with the Company.
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SUMMARY
This Prospectus describes individual flexible premium variable life insurance
policies ("Policy" or "Policies") which have been issued by Allmerica Financial
Life Insurance and Annuity Company ("Company") on Policy Form No. 1018-87 ("VEL
87 Policies") and on Policy Form No. 1018-91 ("VEL 91 Policies"). The VEL 87
Policies and VEL 91 Policies differ in certain respects, as described below and
in the referenced sections of this Prospectus. You can determine whether you own
a VEL 87 Policy or a VEL 91 Policy by checking the Form Number on the lower
left-hand corner of the cover page of the Policy.
DIFFERENCES BETWEEN VEL 87 POLICIES AND VEL 91 POLICIES
"MATURITY DATE" VERSUS "FINAL PREMIUM PAYMENT DATE"
Under VEL 87 Policies, the "Maturity Date" is the Policy anniversary nearest the
Insured's 95th birthday. It is the latest date to which insurance may remain in
force. If the Insured is still living on the Maturity Date, the Company pays the
Policy Value on the Maturity Date (less any outstanding Debt) to the
Policyowner, and the VEL 87 Policy terminates.
Under VEL 91 Policies, the "Final Premium Payment Date" is also the Policy
anniversary nearest the Insured's 95th birthday. However, a VEL 91 Policy does
not terminate on the Final Premium Payment Date. The Policyowner may surrender a
VEL 91 Policy on or after the Final Premium Payment Date without the assessment
of any surrender charge. If the VEL 91 Policy is not surrendered, the Company
will not assess any further Monthly Deductions for the cost of insurance and
administrative charges, and the Death Benefit under the VEL 91 Policy will equal
the Policy Value (less any outstanding Debt).
DEFERRED ADMINISTRATIVE SERVICE CHARGE
Under VEL 87 Policies, the component of the surrender charge which is
attributable to administrative services is $4.50 per thousand dollars of Face
Amount. Under VEL 91 Policies, this charge is $8.50 per thousand dollars of Face
Amount.
MAXIMUM SURRENDER CHARGES
Under VEL 87 Policies, the maximum surrender charge is computed by multiplying
the otherwise applicable surrender charge by a factor which varies with the Age
and smoker/nonsmoker status of the Insured, as set forth in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 87 POLICIES. Under VEL 91
Policies, the maximum surrender charge may be reduced by a dollar amount per
thousand dollars of the Face Amount of the VEL 91 Policy, as set forth in
APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 91 POLICIES.
MINIMUM MONTHLY FACTOR GUARANTEE PERIODS
Under VEL 87 Policies, if the Policyowner pays premiums at least equal to the
Minimum Monthly Factor, the VEL 87 Policy is guaranteed not to lapse during the
12 months following the issuance of the VEL 87 Policy or an increase in the Face
Amount of the VEL 87 Policy. Under VEL 91 Policies, the 12-month period is
currently extended to 48 months, with the guarantee that the period shall not be
less than 36 months.
MINIMUM FACE AMOUNT FOLLOWING A DECREASE OR WITHDRAWAL
Under VEL 87 Policies, the minimum Face Amount following a requested decrease or
withdrawal is $25,000. Under VEL 91 Policies, this amount is $50,000.
REINSTATEMENT PROVISIONS
If a VEL 87 Policy lapses and reinstatement is requested within one year of Date
of Issue, the Policyowner is required to pay the Minimum Monthly factor
multiplied by the number of months which elapsed since the date of default, plus
the Minimum Monthly Factor for the next three months. If reinstatement occurred
more than one year after the Date of Issue, the Policyowner must pay all unpaid
first-year monthly administrative fees. Under VEL 91 Policies, the Policyowner
is not required to pay these amounts. The period during which the
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charges are payable is suspended. Upon reinstatement, the charges resume from
the date of default. See "Policy Lapse and Reinstatement" below, and POLICY
TERMINATION AND REINSTATEMENT.
ABOUT THE POLICIES
THE FOLLOWING INFORMATION APPLIES TO BOTH VEL 87 POLICIES AND VEL 91 POLICIES,
EXCEPT AS NOTED.
The Policies allow you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insured,
- Policy Value,
- surrender rights and partial withdrawal rights,
- loan privileges, and
- in some cases, additional insurance benefits available by rider for an
additional charge.
LIFE INSURANCE
The Policies are life insurance contracts with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policies are
"variable" because the Policy Value will increase or decrease depending on the
investment experience of the Sub-Accounts of the Separate Account. Under some
circumstances, the death benefit may vary with the investment experience of the
Sub-Accounts.
FLEXIBLE PREMIUM
The Policies are "flexible premium" policies because, unlike traditional
insurance policies, there is no fixed schedule for premium payments. You may
vary the frequency and amount of future premium payments, subject to certain
limits, restrictions and conditions set by Company standards and federal tax
laws. Although you may establish a schedule of premium payments ("planned
premium payments"), failure to make the planned premium payments will not
necessarily cause the Policy to lapse. Because of the variable nature of the
Policies, making planned premium payments does not guarantee that the Policy
will remain in force. Thus, you may, but are not required to, pay additional
premiums.
The Policies will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months for a VEL 91 Policy (12 months for a VEL 87 Policy)
after the Date of Issue or the effective date of an increase in the Face Amount,
the Policy will not lapse if the total premiums paid less the Debt, partial
withdrawals and withdrawal charges are equal to or exceed the sum of the Minimum
Monthly Factors for the number of months the Policy, increase, or the Policy
Change which causes a change in the Minimum Monthly Factor has been in force.
Even during these periods, however, making payments at least equal to the
Minimum Monthly Factor will not prevent the Policy from lapsing if the Debt
equals or exceeds the Policy Value less surrender charges.
CONDITIONAL INSURANCE
If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance, equal to the amount of insurance applied for but not to
exceed $500,000. If the application is approved, the Policy will be issued as of
the date the terms of the conditional insurance are met. If you do not wish to
make any payment at the time of application, insurance coverage will not be in
force until delivery of the Policy and payment of sufficient premium to place
the insurance in force.
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If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the General Account. If your application is approved and the Policy
is issued and accepted, the initial premiums held in the General Account will be
credited with interest at a specified rate beginning not later than the date of
receipt of the premiums at the Principal Office. IF THE POLICY IS NOT ISSUED AND
ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in your Policy. If you pay this amount, the Company guarantees
that the Policy will not lapse prior to the 49th Monthly Deduction for a VEL 91
Policy (13th Monthly Deduction for a VEL 87 Policy) after the Date of Issue or
the effective date of an increase in the Face Amount. At all other times,
however, payments of such premiums do not guarantee that the Policy will remain
in force. See THE POLICIES -- "Premium Payments." Moreover, even during the
48-month period, if Debt exceeds the Policy Value less surrender charges, then
making payments at least equal to the Minimum Monthly Factor will not prevent
the Policy from lapsing.
ALLOCATION OF INITIAL PREMIUMS
Upon completion of issuance procedures, delivery of the Policy, and receipt of
any additional premiums, if you have paid less than $10,000 of initial Net
Premiums, such Net Premiums will be allocated to the Sub-Accounts according to
your instructions. If initial Net Premiums equal or exceed $10,000, or if the
Policy provides for planned premium payments during the first year equal to or
exceeding $10,000 annually, $5,000 semi-annually, $2,500 quarterly or $1,000
monthly, the entire Net Premium plus any interest earned will be allocated to
the Sub-Accounts upon return to the Company of a Delivery Receipt. See THE
POLICIES -- "Applying for the Policy."
Net premiums may be allocated to one or more Sub-Accounts of the Separate
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than 20 Sub-Accounts at any one time. The minimum allocation is
1% of Net Premium. All allocations must be in whole numbers and must total 100%.
See THE POLICIES -- "Allocation of Net Premiums." Premiums allocated to the
General Account will earn a fixed rate of interest. Net premiums and minimum
interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PARTIAL WITHDRAWALS
After the first Policy year, you may make partial withdrawals in a minimum
amount of $500 from the Policy Value. Under Option 1, the Face Amount is reduced
by the amount of the partial withdrawal. A partial withdrawal will not be
allowed under Option 1 if it would reduce the Face Amount below $40,000 ($25,000
for a VEL 87 Policy).
A transaction charge, which is described in CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawal," will be assessed to reimburse the Company for the cost
of processing each partial withdrawal. A partial withdrawal charge also may be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICIES -- "Partial Withdrawal" and CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawal."
LOAN PRIVILEGE
You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions, and interest on Debt to
the end of the Policy year. Thereafter, Loan Value is 90% of an amount equal to
the Policy Value less the surrender charge.
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Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, the Policy loan may have a permanent impact on
the Policy Value even though it eventually is repaid. Although the loan amount
is a part of the Policy Value, the Death Proceeds will be reduced by the amount
of outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See "POLICY LOANS."
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time. If
this option has been selected, after the tenth Policy anniversary the Policy
Value in the General Account equal to the loan amount will be credited with
interest at an effective annual yield of at least 7.5%. The Company's current
practice is to credit a rate of interest equal to the rate being charged for the
preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). The preferred loan
option is not available in all states.
POLICY LAPSE AND REINSTATEMENT
The provisions for Policy Lapse and Reinstatement differ slightly for VEL 87
Policies and VEL 91 Policies.
The failure to make premium payments will not cause a VEL 87 Policy or VEL 91
Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any; or
(b) Debt exceeds Policy Value less surrender charges.
A 62-day grace period applies to each situation.
Even if the situation described in (a) above exists, the Policy will not lapse
if you meet the so-called "Minimum Monthly Factor" test. The Minimum Monthly
Factor test is only used to determine whether the Policy will enter the grace
period for a certain period of months after the Date of Issue or following an
increase in the Face Amount. This period is currently 48 months for a VEL 91
Policy and 12 months for a VEL 87 Policy. Under the Minimum Monthly Factor test,
the Company determines two amounts:
- the sum of the payments you have made, MINUS any Policy loans, withdrawals
and withdrawal charges, and
- the amount of the Minimum Monthly Factor (as set forth in the Policy)
MULTIPLIED by the number of months the Policy has been in force or the
number of months which have elapsed since the last increase in the Face
Amount.
The Company then compares the first amount to the second amount. The Policy will
not enter the grace period if the first amount is greater than the second
amount.
11
<PAGE>
If a VEL 87 Policy lapses, it may be reinstated within three years of the date
of default (but not later than the Maturity Date). In order to reinstate, you
must provide satisfactory Evidence of Insurability, and the payment of
sufficient premium and of any unpaid first-year administrative charges which
were due and not yet deducted. See POLICY TERMINATION AND REINSTATEMENT.
If a VEL 91 Policy lapses, it may be reinstated within three years of the date
of default (but not later than the Final Premium Payment Date). In order to
reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement. See POLICY TERMINATION AND REINSTATEMENT.
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account credited to the Policy. The Policy Value reflects the amount and
frequency of Net Premiums paid, charges and deductions imposed under the Policy,
interest credited to accumulations in the General Account, investment
performance of the Sub-Account(s) to which Policy Value has been allocated, and
partial withdrawals. The Policy Value may be relevant to the computation of the
Death Proceeds. You bear the entire investment risk for amounts allocated to the
Separate Account. The Company does not guarantee a minimum Policy Value.
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS
The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date under a VEL 91 Policy (the Maturity Date under a VEL 87 Policy), the Death
Proceeds will be equal to the Sum Insured, reduced by any outstanding Debt,
partial withdrawals, partial withdrawal charges, and any Monthly Deductions due
and not yet deducted through the Policy month in which the Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the Insured's Age) of the Policy Value. On or after the Final Premium Payment
Date, the Death Proceeds will equal the Surrender Value. See THE POLICIES
- --"Death Proceeds."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- DEATH PROCEEDS
PAYMENT OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED
Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Maturity Date for VEL 87 Policies or
the Final Premium Payment Date for VEL 91 Policies, by increasing or decreasing
the Face Amount of the Policy. Any change in the Face Amount will affect the
monthly cost of insurance charges and the amount of the surrender charge. If the
Face Amount is decreased, a pro-rata surrender charge may be imposed. The Policy
Value is reduced by the amount of the charge. See THE POLICIES -- "Change in the
Face Amount."
The minimum increase in the Face Amount is $10,000, and any increase may also
require additional Evidence of Insurability. The increase is subject to a
"free-look period" and, during the first 24 months after the increase, to a
conversion privilege. See THE POLICIES -- "Free-Look Period" and "Conversion
Privileges."
12
<PAGE>
ADDITIONAL INSURANCE BENEFITS
You have the flexibility to add additional insurance benefits by rider. These
include the Waiver of Premium Rider, Accidental Death Benefit Rider, Guaranteed
Insurability Rider, Other Insured Rider, Children's Insurance Rider, Exchange
Option Rider, and Living Benefits Rider. See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from the Policy Value."
FREE-LOOK PERIOD
The Policies provide for an initial free-look period. You may cancel the Policy
by mailing or delivering it to the Principal Office or to an agent of the
Company on or before the latest of:
- 45 days after the application for the Policy is signed,
- 10 days after you receive the Policy (or, if required by state law, the
longer period indicated in the Policy), or
- 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.
Upon returning the Policy, you will receive a refund equal to the sum of:
(1) the difference between the premium, including fees and charges paid, and
any amount allocated to the Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, however, the Company will refund the
entire amount of premiums paid. A free-look privilege also applies after a
requested increase in the Face Amount. See THE POLICIES -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Policy months after the Date of Issue, subject to certain
restrictions, you may convert the Policy to a non-variable flexible premium
adjustable life insurance policy by simultaneously transferring all accumulated
value in the Sub-Accounts to the General Account and instructing the Company to
allocate all future premiums to the General Account. A similar conversion
privilege is in effect for 24 Policy months after the date of an increase in the
Face Amount. Where required by state law, and at your request, the Company will
issue a flexible premium adjustable life insurance policy to you. The new policy
will have the same Face Amount, issue Age, Date of Issue, and Premium Class as
the original Policy. See THE POLICIES -- "Conversion Privileges."
POLICY FEES AND CHARGES
THERE ARE COSTS RELATED TO THE INSURANCE AND INVESTMENT FEATURES OF THE POLICY.
FEES AND CHARGES TO COVER THESE COSTS ARE DEDUCTED IN SEVERAL WAYS.
DEDUCTIONS FROM EACH PREMIUM
A tax expense charge will be deducted from each premium payment to compensate
the Company for premium taxes imposed by various states and local jurisdictions.
The tax expense charge is currently 2 1/2% but may be increased or decreased to
reflect changing tax rates. See CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
13
<PAGE>
MONTHLY DEDUCTIONS FROM THE POLICY VALUE
On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deduction") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy
Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE is made for administrative expenses. The charge
is $25 per month for the first 12 Monthly Deductions and $5 per month
thereafter. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyowner inquiries. If the Policy is
surrendered in the first Policy year, the first-year monthly administrative
charges will be deducted at surrender in addition to any surrender charges which
may be applicable. Under VEL 91 Policies, the Monthly Administrative Charge is
not assessed after the Final Premium Payment Date.
As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policies for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE SEPARATE ACCOUNT
A daily charge currently equivalent to an effective annual rate of 0.90% of the
average daily net asset value of each Sub-Account of the Separate Account is
imposed to compensate the Company for its assumption of certain mortality and
expense risks. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of the
Separate Account."
The Underlying Funds also incur certain expenses which are reflected in the net
asset value of the Sub-Accounts. See "Investment Options -- CHARGES OF THE
UNDERLYING FUNDS," below.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn, or $25. In addition to the
transaction charge, a partial withdrawal charge also may be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICIES
- --"Change in the Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase
in the Face Amount."
TRANSFER CHARGE
The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICIES -- "Transfer Privilege" and CHARGES AND
DEDUCTIONS -- "Transfer Charges."
14
<PAGE>
SURRENDER CHARGES UNDER VEL 91 POLICIES
At any time that a VEL 91 Policy is in effect, the Policyowner may elect to
surrender the VEL 91 Policy and receive its Surrender Value. A surrender charge
is calculated upon issuance of the VEL 91 Policy and upon each increase in Face
Amount. The surrender charge is only imposed if less than 12 years have elapsed
from the Date of Issue or any increase in the Face Amount and you request a full
surrender or a decrease in the Face Amount. If the Policy is surrendered, any
$25 monthly administrative charges not yet deducted will be deducted at
surrender.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the VEL 91 Policy is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge,
and (b) is a deferred sales charge.
The DEFERRED ADMINISTRATIVE CHARGE is $8.50 per thousand dollars of the initial
Face Amount or of an increase in the Face Amount. The charge is designed to
reimburse the Company for administrative costs associated with product research
and development, underwriting, Policy administration, decreasing the Face
Amount, and surrendering the Policy. The deferred sales charge is equal to 30%
of the Guideline Annual Premium.
In accordance with state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of the initial
Face Amount, as indicated in APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER
CHARGES -- VEL 91 POLICIES. The maximum surrender charge remains level for the
first 44 Policy months, reduces by 1% per month for the next 100 Policy months,
and is zero thereafter. If you surrender the Policy before making premium
payments associated with the initial Face Amount which are at least equal to the
Guideline Annual Premium, the actual charge imposed will be less than the
maximum. See THE POLICIES -- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above. The deferred sales charge, however, will not exceed
30% of premiums received. See THE POLICIES -- "Policy Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR INCREASES IN THE FACE AMOUNT
A separate surrender charge will apply to and is calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b), where (a) is equal to $8.50 per thousand dollars of increase,
and (b) is equal to 30% of the Guideline Annual Premium for the increase. In
accordance with limitations under state insurance regulations, the amount of the
surrender charge will not exceed a specified amount per $1,000 of increase, as
indicated in APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 91
POLICIES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge. This maximum
surrender charge remains level for the first 44 Policy months following the
increase, reduces by 1% per month for the next 100 Policy months, and is zero
thereafter. The actual surrender charge with respect to the increase may be less
than the maximum. See THE POLICIES -- "Policy Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT
In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full Policy surrender. See THE
POLICIES -- "Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
15
<PAGE>
SURRENDER CHARGES UNDER VEL 87 POLICIES
At any time that a VEL 87 Policy is in effect, the Policyowner may elect to
surrender the VEL 87 Policy and receive its Surrender Value. A surrender charge
is calculated upon issuance of the Policy and upon each increase in the Face
Amount. The surrender charge is only imposed if less than 12 years have elapsed
from the Date of Issue or any increase in the Face Amount and you request a full
surrender or a decrease in the Face Amount. If the Policy is surrendered, any
$25 monthly administrative charges not yet deducted will be deducted at
surrender.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the VEL 87 Policy is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
equal to $4.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge equal to 30% of the Guideline Annual Premium times a
factor which is not greater than 1.0 and is as specified in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 87 POLICIES. As the factors used
in calculating the deferred sales charge in (b) vary with the attained Age and
Premium Class (smoker or non-smoker) of the Insured, the deferred sales charge
may range between 10.25% and 30% of the Guideline Annual Premium. The maximum
surrender charge remains level for the first 44 Policy months, reduces by 1% per
month for the next 100 Policy months, and is zero thereafter. If you surrender
the VEL 87 Policy before making premium payments associated with the initial
Face Amount which are at least equal to the Guideline Annual Premium, the actual
surrender charge imposed may be less than the maximum. See THE POLICIES --
"Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGE FOR INCREASES IN THE FACE AMOUNT
A separate surrender charge will apply to and is calculated for each increase in
the Face Amount of a VEL 87 Policy. The maximum surrender charge for the
increase is equal to the sum of (a) plus (b), where (a) is equal to $4.50 per
thousand dollars of increase, and (b) is equal to 30% of the Guideline Annual
Premium for the increase times a factor of not greater than 1.0, as specified in
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 87 POLICIES. As is
true for the initial Face Amount, (a) is a deferred administrative charge, and
(b) is a deferred sales charge. This maximum surrender charge remains level for
the first 44 Policy months following the increase, reduces by 1% per month for
the next 100 Policy months, and is zero thereafter. The actual surrender charge
with respect to the increase may be less than the maximum. See THE POLICIES --
"Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT
In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full surrender. See THE
POLICIES -- "Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
OTHER CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. No such charges currently are imposed, and any such
charge is guaranteed not to exceed $25. See CHARGES AND DEDUCTIONS -- "Other
Administrative Charges."
16
<PAGE>
INVESTMENT OPTIONS
The Policies permit Net Premiums to be allocated either to the General Account
or to the Separate Account. The Separate Account currently is comprised of 21
Sub-Accounts ("Sub-Accounts"). Each Sub-Account invests exclusively in a
corresponding Underlying Fund of the Allmerica Investment Trust ("Trust")
managed by Allmerica Financial Investment Management Services, Inc ("AFIMS")
Fidelity Variable Insurance Products Fund ("Fidelity VIP") and Fidelity Variable
Insurance Products Fund II ("Fidelity VIP II") managed by Fidelity Management
and Research Company ("FMR"), T. Rowe Price International Series, Inc. ("T. Rowe
Price") managed by Rowe Price-Fleming International, Inc. ("Price-Fleming"),
with respect to the T. Rowe Price International Stock Portfolio, or the Delaware
Group Premium Fund, Inc. ("DGPF") managed by Delaware International Advisers,
Ltd. with respect to the International Equity Series. You may transfer Policy
Value among the available Sub-Accounts and between the Sub-Accounts and the
General Account, subject to certain limitations described under THE POLICIES --
"Transfer Privilege." The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price
and DGPF are open-end, diversified series management investment companies. The
following Underlying Funds are available under the Policy:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
- ---------------------------------- --------------------------------------
Select Aggressive Growth Fund Overseas Portfolio
Select Capital Appreciation Fund Equity-Income Portfolio
Select Value Opportunity Fund Growth Portfolio
Select Emerging Markets Fund High Income Portfolio
Select International Equity Fund Money Market Portfolio
Select Growth Fund
Select Strategic Growth Fund FIDELITY VIP II
--------------------------------------
Growth Fund Asset Manager Portfolio
Equity Index Fund
Select Growth and Income Fund T. ROWE PRICE
--------------------------------------
Investment Grade Income Fund T. Rowe Price International Stock
Portfolio
Government Bond Fund
Money Market Fund DGPF
--------------------------------------
International Equity Series
</TABLE>
Each of the Underlying Funds has its own investment objectives. Certain
Underlying Funds, however, have investment objectives similar to certain other
Underlying Funds.
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved.
17
<PAGE>
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
TOTAL EXPENSES
MANAGEMENT FEE (AFTER ANY
(AFTER ANY OTHER FUND APPLICABLE
UNDERLYING FUND VOLUNTARY WAIVER) EXPENSES LIMITATIONS)
- ------------------------------------------------------------- ------------------- ------------- ----------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund................................ 0.89%* 0.09% 0.98%(1),(3)
Select Capital Appreciation Fund............................. 0.95%* 0.15% 1.10%(1)
Select Value Opportunity Fund................................ 0.90%** 0.14% 1.04%(1),(3)
Select Emerging Markets Fund @............................... 1.35% 0.65% 2.00%(1)
Select International Equity Fund............................. 0.92%* 0.20% 1.12%(1),(3)
DGPF International Equity Series............................. 0.75%(4) 0.15% 0.90%(4)
Fidelity VIP Overseas Portfolio.............................. 0.75% 0.17% 0.92%(2)
T. Rowe Price International Stock Portfolio.................. 1.05% 0.00% 1.05%
Select Growth Fund........................................... 0.85% 0.08% 0.93%(1),(3)
Select Strategic Growth Fund @............................... 0.85% 0.13% 0.98%(1)
Growth Fund.................................................. 0.46%* 0.06% 0.52%(1),(3)
Fidelity VIP Growth Portfolio................................ 0.60% 0.09% 0.69%(2)
Equity Index Fund............................................ 0.31% 0.13% 0.44%(1)
Select Growth and Income Fund................................ 0.70%* 0.07% 0.77%(1),(3)
Fidelity VIP Equity-Income Portfolio......................... 0.50% 0.08% 0.58%(2)
Fidelity VIP II Asset Manager Portfolio...................... 0.55% 0.10% 0.65%(2)
Fidelity VIP High Income Portfolio........................... 0.59% 0.12% 0.71%
Investment Grade Income Fund................................. 0.44%* 0.10% 0.54%(1)
Government Bond Fund......................................... 0.50% 0.17% 0.67%(1)
Money Market Fund............................................ 0.27% 0.08% 0.35%(1)
Fidelity VIP Money Market Fund............................... 0.21% 0.10% 0.31%
</TABLE>
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
@ Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntarily limitations took effect on January 1, 1997. Without
these adjustments, the management fee ratio and the total fund expense ratio
would have been 0.95% and 1.09%, respectively. The management fee limitation may
be terminated at any time.
(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Investment
Grade Income Fund and Government Bond Fund, and 0.60% for the Money Market Fund
and Equity Index Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1997.
18
<PAGE>
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas Portfolio and
0.64% for Fidelity VIP II Asset Manager Portfolio.
(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses ratios would have been 0.93% for the
Select Aggressive Growth Fund, 1.10% for the Select International Equity Fund,
0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for the
Select Value Opportunity Fund, and 0.74% for the Select Growth and Income Fund.
(4) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntarily limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.
TAXATION OF THE POLICIES
The Policies generally are subject to the same federal income tax treatment as a
conventional fixed benefit life insurance policies. Under current tax law, to
the extent there is no change in benefits, the Policyowner will be taxed on
Policy Value withdrawn from the Policy only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Policy years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Policy. Death Proceeds under the Policy are generally excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Policy Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Policies."
The Policy may be considered a "modified endowment contract" if it fails a
"seven-pay" test at any time during the first seven Policy years or seven years,
or within seven years of a material change in the Policy. The Policy fails to
satisfy the seven-pay test if the cumulative premiums paid under the Policy at
any time during the first seven Policy years, or within seven years of a
material change in the Policy, exceed the sum of the net level premiums that
would have been paid had the Policy provided for paid-up future benefits after
the payment of seven level premiums. If the Policy is considered a modified
endowment contract, all distributions (including Policy loans, partial
withdrawals, Policy surrenders or assignments) will be taxed on an "income-
first" basis. With certain exceptions, an additional 10% penalty will be imposed
on the portion of any distribution that is includible in income. For more
information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment Contracts."
19
<PAGE>
PERFORMANCE INFORMATION
The VEL 87 Policies were first offered to the public in 1987, and the VEL 91
Policies were first offered in 1991. The Company may advertise "Total Return"
and "Average Annual Total Return" performance information based on the periods
that the Sub-Accounts have been in existence (Tables IA and IB) and based on the
periods that the Underlying Funds have been in existence (Tables IIA and IIB).
The results for any period prior to the Policies being offered will be
calculated as if the Policies had been offered during that period of time, with
all charges assumed to be those applicable to the Sub-Accounts, the Underlying
Funds, and (in Table IA and Table IB) under a "representative" Policy that is
surrendered at the end of the applicable period. For more information on charges
under the Policy, see CHARGES AND DEDUCTIONS.
Performance information may be compared, in reports and promotional literature,
to:
- Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow Jones
Industrial Average ("DJIA"), Shearson, Lehman Aggregate Bond Index, or
other unmanaged indices so that investors may compare results with those
of a group of unmanaged securities widely regarded by investors as
representative of the securities markets in general (unmanaged indices may
assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses); or
- other groups of variable life separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by
overall performance, investment objectives and assets, or tracked by other
services, companies, publications or persons, such as Morningstar, Inc.,
who rank such investment products on overall performance or other
criteria; or
- the Consumer Price Index (a measure for inflation) to assess the real rate
of return from an investment.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues,
and do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar-cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
In each table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1997. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
20
<PAGE>
Table I(A-1), Table I(A-2) and Table I(B) are based on the INCEPTION DATES OF
THE SUB-ACCOUNTS OF THE SEPARATE ACCOUNT. Table I(A-1) and Table I(A-2) show
Sub-Account performance net of all charges of the Underlying Funds, all
Sub-Account charges, and all Policy charges (including surrender charges) of a
representative VEL 87 Policy and of a VEL 91 Policy, respectively. Table I(B)
shows Sub-Account performance net of total Underlying Fund expenses, all
Sub-Account charges, and premium tax and expense charges, but does NOT reflect
monthly charges or surrender charges under the VEL 87 Policy or the VEL 91
Policy.
Table II(A-1), Table II(A-2) and Table I(B) are based on the INCEPTION DATES OF
THE UNDERLYING FUNDS. Table II(A-1) and Table II(A-2) show Sub-Account
performance net of all charges of the Underlying Funds, all Sub-Account charges,
and all Policy charges (including surrender charges) of a representative VEL 87
Policy and of a VEL 91 Policy, respectively. Table II(B) shows Sub-Account
performance net of total Underlying Fund expenses, all Sub-Account charges, and
premium tax and expense charges, but does NOT reflect monthly charges or
surrender charges under the VEL 87 Policy or the VEL 91 Policy.
21
<PAGE>
TABLE I(A-1)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF A VEL 87 POLICY
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (non-smoker) Premium Class, that the Face Amount of
the Policy is $250,000, that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year,
that ALL premiums were allocated to EACH Sub-Account individually, and that
there was a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF
TOTAL 5 SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -73.26 % 4.72 % 7.60 %
Select Capital Appreciation Fund -76.99 % N/A -6.34 %
Select Value Opportunity Fund -68.07 % N/A 3.15 %
T. Rowe Price International Stock Portfolio -86.38 % N/A 23.71 %
Fidelity VIP Overseas Portfolio -79.27 % 1.82 % 3.88 %
Select International Equity Fund -85.08 % N/A -8.50 %
DGPF International Equity Series -83.44 % N/A -1.77 %
Fidelity VIP Growth Portfolio -69.22 % 6.00 % 11.99 %
Select Growth Fund -60.28 % 3.02 % 4.15 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -67.83 % 4.26 % 11.84 %
Equity Index Fund -61.67 % 7.65 % 12.01 %
Fidelity VIP Equity-Income Portfolio -65.32 % 8.28 % 11.64 %
Select Growth and Income Fund -70.05 % 4.48 % 4.06 %
Fidelity VIP II Asset Manager Portfolio -71.62 % N/A -5.68 %
Fidelity VIP High Income Portfolio -74.14 % 1.65 % 7.23 %
Investment Grade Income Fund -81.06 % -5.37 % 3.44 %
Government Bond Fund -83.01 % -7.06 % -3.55 %
Money Market Fund -84.39 % -8.47 % -0.15 %
Fidelity VIP Money Market Portfolio -84.38 % -8.32 % -0.03 %
</TABLE>
The inception dates for the Sub-Accounts are: 11/19/87 for Growth; 12/2/87 for
Investment Grade Income; 12/22/87 for Money Market; 10/25/90 for Equity Index;
11/6/91 for Government Bond; 9/17/92 for Select Aggressive Growth; 9/17/92 for
Select Growth; 9/17/92 for Select Growth and Income; 5/6/93 for Select Value
Opportunity; 5/2/94 for Select International Equity; 4/30/95 for the Select
Capital Appreciation Fund; 11/16/87 for Fidelity VIP Equity-Income; 11/16/87 for
Fidelity VIP Growth; 11/19/87 for Fidelity VIP High Income; 11/19/87 for
Fidelity VIP Overseas; 12/10/87 for Fidelity VIP Money Market Portfolio; 5/11/94
for Fidelity VIP II Asset Manager; 5/18/93 for DGPF International Equity;
6/25/95 for the T. Rowe Price International Stock. The Select Emerging Markets
Fund and the Select Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
22
<PAGE>
TABLE I(A-2)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF A VEL 91 POLICY
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF
TOTAL 5 SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -100.00 % 2.88 % 6.09 %
Select Capital Appreciation Fund -100.00 % N/A -15.41 %
Select Value Opportunity Fund -100.00 % N/A 0.70 %
T. Rowe Price International Stock Portfolio -100.00 % N/A -35.88 %
Fidelity VIP Overseas Portfolio -100.00 % -0.17 % 3.76 %
Select International Equity Fund -100.00 % N/A -13.84 %
DGPF International Equity Series -100.00 % N/A -4.58 %
Fidelity VIP Growth Portfolio -100.00 % 4.22 % 11.92 %
Select Growth Fund -96.71 % 1.08 % 2.49 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -100.00 % 2.39 % 11.76 %
Equity Index Fund -98.10 % 5.94 % 11.56 %
Fidelity VIP Equity-Income Portfolio -100.00 % 6.60 % 11.56 %
Select Growth and Income Fund -100.00 % 2.62 % 2.40 %
Fidelity VIP II Asset Manager Portfolio -100.00 % N/A -10.80 %
Fidelity VIP High Income Portfolio -100.00 % -0.36 % 7.13 %
Investment Grade Income Fund -100.00 % -7.80 % 3.31 %
Government Bond Fund -100.00 % -9.62 % -4.91 %
Money Market Fund -100.00 % -11.13 % -0.31 %
Fidelity VIP Money Market Portfolio -100.00 % -10.97 % -0.19 %
</TABLE>
The inception dates for the Sub-Accounts are: 11/19/87 for Growth; 12/2/87 for
Investment Grade Income; 12/22/87 for Money Market; 10/25/90 for Equity Index;
11/6/91 for Government Bond; 9/17/92 for Select Aggressive Growth; 9/17/92 for
Select Growth; 9/17/92 for Select Growth and Income; 5/6/93 for Select Value
Opportunity; 5/2/94 for Select International Equity; 4/30/95 for the Select
Capital Appreciation Fund; 11/16/87 for Fidelity VIP Equity-Income; 11/16/87 for
Fidelity VIP Growth; 11/19/87 for Fidelity VIP High Income; 11/19/87 for
Fidelity VIP Overseas; 12/10/87 for Fidelity VIP Money Market Portfolio; 5/11/94
for Fidelity VIP II Asset Manager; 5/18/93 for DGPF International Equity;
6/25/95 for the T. Rowe Price International Stock. The Select Emerging Markets
Fund and the Select Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
23
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
FOR A VEL 87 OR VEL 91 POLICY
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, all Sub-Account charges, and premium tax and expense
charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICY OR SURRENDER
CHARGES. It is assumed that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year and
that ALL premiums were allocated to EACH Sub-Account individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.64 % 15.76 % 17.75 %
Select Capital Appreciation Fund 13.25 % N/A 21.74 %
Select Value Opportunity Fund 23.73 % N/A 15.70 %
T. Rowe Price International Stock Portfolio 2.17 % N/A 8.32 %
Fidelity VIP Overseas Portfolio 10.56 % 13.08 % 8.61 %
Select International Equity Fund 3.71 % N/A 10.14 %
DGPF International Equity Series 5.65 % N/A 11.33 %
Fidelity VIP Growth Portfolio 22.38 % 16.95 % 16.31 %
Select Growth Fund 32.86 % 14.18 % 14.54 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.02 % 15.33 % 16.16 %
Equity Index Fund 31.23 % 18.48 % 18.52 %
Fidelity VIP Equity-Income Portfolio 26.96 % 19.07 % 15.97 %
Select Growth and Income Fund 21.41 % 15.53 % 14.46 %
Fidelity VIP II Asset Manager Portfolio 19.57 % N/A 12.82 %
Fidelity VIP High Income Portfolio 16.61 % 12.92 % 11.77 %
Investment Grade Income Fund 8.46 % 6.54 % 8.19 %
Government Bond Fund 6.15 % 5.02 % 5.51 %
Money Market Fund 4.52 % 3.77 % 4.85 %
Fidelity VIP Money Market Portfolio 4.54 % 3.90 % 4.96 %
</TABLE>
The inception dates for the Sub-Accounts are: 11/19/87 for Growth; 12/2/87 for
Investment Grade Income; 12/22/87 for Money Market; 10/25/90 for Equity Index;
11/6/91 for Government Bond; 9/17/92 for Select Aggressive Growth; 9/17/92 for
Select Growth; 9/17/92 for Select Growth and Income; 5/6/93 for Select Value
Opportunity; 5/2/94 for Select International Equity; 4/30/95 for the Select
Capital Appreciation Fund; 11/16/87 for Fidelity VIP Equity-Income; 11/16/87 for
Fidelity VIP Growth; 11/19/87 for Fidelity VIP High Income; 11/19/87 for
Fidelity VIP Overseas; 12/10/87 for Fidelity VIP Money Market Portfolio; 5/11/94
for Fidelity VIP II Asset Manager; 5/18/93 for DGPF International Equity;
6/25/95 for the T. Rowe Price International Stock. The Select Emerging Markets
Fund and the Select Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
24
<PAGE>
TABLE II(A-1):
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF A VEL 87 POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -73.26 % 4.72 % 8.57 %
Select Capital Appreciation Fund -76.99 % N/A -6.20 %
Select Value Opportunity Fund -68.07 % N/A 3.42 %
T. Rowe Price International Stock Portfolio -86.38 % N/A -11.23 %
Fidelity VIP Overseas Portfolio -79.27 % 1.82 % 3.88 %
Select International Equity Fund -85.08 % N/A -8.48 %
DGPF International Equity Series -83.44 % -0.84 % -0.75 %
Fidelity VIP Growth Portfolio -69.22 % 6.00 % 11.99 %
Select Growth Fund -60.28 % 3.02 % 5.18 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -67.83 % 4.26 % 11.84 %
Equity Index Fund -61.67 % 7.65 % 12.17 %
Fidelity VIP Equity-Income Portfolio -65.32 % 8.28 % 11.64 %
Select Growth and Income Fund -70.05 % 4.48 % 4.10 %
Fidelity VIP II Asset Manager Portfolio -71.62 % 0.60 % 6.00 %
Fidelity VIP High Income Portfolio -74.14 % 1.65 % 7.23 %
Investment Grade Income Fund -81.06 % -5.37 % 3.44 %
Government Bond Fund -83.01 % -7.06 % -2.75 %
Money Market Fund -84.39 % -8.47 % -0.15 %
Fidelity VIP Money Market Portfolio -84.38 % -8.32 % -0.03 %
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for the Select Capital Appreciation Fund; 10/09/86 for Fidelity
VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
4/1/82 for Fidelity VIP Money Market Portfolio; 10/29/92 for DGPF International
Equity; and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
25
<PAGE>
TABLE II(A-2):
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF A VEL 91 POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -100.00 % 2.88 % 7.16 %
Select Capital Appreciation Fund -100.00 % N/A -15.22 %
Select Value Opportunity Fund -100.00 % N/A 1.01 %
T. Rowe Price International Stock Portfolio -100.00 % N/A -16.59 %
Fidelity VIP Overseas Portfolio -100.00 % -0.17 % 3.76 %
Select International Equity Fund -100.00 % N/A -13.81 %
DGPF International Equity Series -100.00 % -2.99 % -2.76 %
Fidelity VIP Growth Portfolio -100.00 % 4.22 % 11.92 %
Select Growth Fund -96.71 % 1.08 % 3.62 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -100.00 % 2.39 % 11.76 %
Equity Index Fund -98.10 % 5.94 % 11.74 %
Fidelity VIP Equity-Income Portfolio -100.00 % 6.60 % 11.56 %
Select Growth and Income Fund -100.00 % 2.62 % 2.50 %
Fidelity VIP II Asset Manager Portfolio -100.00 % -1.46 % 5.68 %
Fidelity VIP High Income Portfolio -100.00 % -0.36 % 7.13 %
Investment Grade Income Fund -100.00 % -7.80 % 3.31 %
Government Bond Fund -100.00 % -9.62 % -3.97 %
Money Market Fund -100.00 % -11.13 % -0.31 %
Fidelity VIP Money Market Portfolio -100.00 % -10.97 % -0.19 %
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for the Select Capital Appreciation Fund; 10/09/86 for Fidelity
VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
4/1/82 for Fidelity VIP Money Market Portfolio; 10/29/92 for DGPF International
Equity; and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
26
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
FOR A VEL 87 OR VEL 91 POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICY OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.64 % 15.76 % 18.49 %
Select Capital Appreciation Fund 13.25 % N/A 21.78 %
Select Value Opportunity Fund 23.73 % N/A 15.88 %
T. Rowe Price International Stock Portfolio 2.17 % N/A 7.09 %
Fidelity VIP Overseas Portfolio 10.56 % 13.08 % 8.61 %
Select International Equity Fund 3.71 % N/A 10.14 %
DGPF International Equity Series 5.65 % 10.64 % 10.30 %
Fidelity VIP Growth Portfolio 22.38 % 16.95 % 16.31 %
Select Growth Fund 32.86 % 14.18 % 15.32 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.02 % 15.33 % 16.16 %
Equity Index Fund 31.23 % 18.48 % 18.60 %
Fidelity VIP Equity-Income Portfolio 26.96 % 19.07 % 15.97 %
Select Growth and Income Fund 21.41 % 15.53 % 14.32 %
Fidelity VIP II Asset Manager Portfolio 19.57 % 11.96 % 11.71 %
Fidelity VIP High Income Portfolio 16.61 % 12.92 % 11.77 %
Investment Grade Income Fund 8.46 % 6.54 % 8.19 %
Government Bond Fund 6.15 % 5.02 % 5.93 %
Money Market Fund 4.52 % 3.77 % 4.85 %
Fidelity VIP Money Market Portfolio 4.54 % 3.90 % 4.96 %
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for the Select Capital Appreciation Fund; 10/09/86 for Fidelity
VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
12/10/87 for Fidelity VIP Money Market Portfolio; 10/29/92 for DGPF
International Equity; and 3/31/94 for the T. Rowe Price International Stock. The
Select Emerging Markets Fund and the Select Strategic Growth Fund commenced
operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
27
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000. As of December 31, 1997, the
Company had over $9.4 billion in assets. The Company is subject to the laws of
the state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on January 21, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Policies are set aside in
the Separate Account, and are kept separate from the general assets of the
Company. Under Delaware law, assets equal to the reserves and other liabilities
of the Separate Account may not be charged with any liabilities arising out of
any other business of the Company. The Separate Account currently has 21
Sub-Accounts. Each Sub-Account is administered and accounted for as part of the
general business of the Company, but the income, capital gains, or capital
losses of each Sub-Account are allocated to such Sub-Account, without regard to
other income, capital gains or capital losses of the Company or the other
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of one of the following investment companies:
- Allmerica Investment Trust
- Variable Insurance Products Fund
- Variable Insurance Products Fund II
- T. Rowe Price International Series, Inc.
- Delaware Group Premium Fund, Inc.
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<PAGE>
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund generally have no
effect on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public, but solely to separate
accounts of life insurance companies, such as the Separate Account.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and the Separate Account.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds.
The Trust was established by First Allmerica as a Massachusetts business trust
on October 11, 1984, for the purpose of providing a vehicle for the investment
of assets of various separate accounts established by the Company, or other
affiliated insurance companies. Thirteen investment portfolios of the Trust
("Funds") are available under the Policy, each issuing a series of shares:
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Emerging Markets Fund, Select International Equity
Fund, Select Growth Fund, Select Strategic Growth Fund, Growth Fund, Equity
Index Fund, Select Growth and Income Fund, Investment Grade Income Fund,
Government Bond Fund and Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment adviser of the Trust, and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Underlying Funds of the Trust. See INVESTMENT ADVISORY SERVICES --
"Investment Advisory Services to the Trust."
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management and Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and is registered with the SEC under the 1940 Act. Five of its investment
portfolios are available under the Policy: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, Fidelity
VIP Overseas Portfolio, and Fidelity VIP Money Market Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR (see
discussion under "Variable Insurance Products Fund"), is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on March 21, 1988, and is registered with the SEC under the 1940 Act. One
of its investment portfolios is available under the Policy: the Fidelity VIP II
Asset Manager Portfolio.
29
<PAGE>
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), is an open-end, diversified
management investment company organized in 1994 as a Maryland corporation, and
is registered with the SEC under the 1940 Act. One of its investment portfolios
is available under the Policy: the T. Rowe Price International Stock Portfolio.
(See "Investment Advisory Services to T. Rowe Price").
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policy: the International Equity
Series. The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING FUNDS MAY BE FOUND IN THEIR RESPECTIVE
PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ CAREFULLY BEFORE
INVESTING. The statements of additional information of the Underlying Funds are
available upon request. There can be no assurance that the investment objectives
of the Underlying Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration, and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
30
<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
GROWTH FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Growth Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
FIDELITY VIP 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 also may be found
in other types of securities, including bonds and preferred stocks.
EQUITY INDEX FUND -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500 Stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will 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 S&P 500. The Portfolio may invest in high-yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
FIDELITY VIP II 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 money market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative and involve
greater risk of default or price changes than securities assigned a high-quality
rating. See "Risks of Lower-Rated Debt Securities" in the Fidelity VIP
prospectus.
INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of fixed
income securities with the objective of seeking as high a level of total return
(including both income and capital appreciation) as is consistent with prudent
investment management.
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
31
<PAGE>
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
FIDELITY VIP MONEY MARKET PORTFOLIO -- seeks to obtain as high a level of
current income as is consistent with preserving capital and providing liquidity.
The Money Market Portfolio will invest only in high-quality money market
instruments.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Policy Value in that Sub-Account, the
Company will transfer it without charge on Written Request within sixty (60)
days of the later of (1) the effective date of such change in the investment
policy, or (2) your receipt of the notice of the right to transfer. You may then
change the percentages of your premium and deduction allocations.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trustees have entered into a Management Agreement with
AFIMS to handle the day-to-day affairs of the Trust. AFIMS, subject to review by
the Trustees, is responsible for the general management of the Funds. AFIMS also
performs certain administrative and management services for the Trust, furnishes
to the Trust all necessary office space, facilities and equipment, and pays the
compensation, if any, of officers and Trustees who are affiliated with AFIMS.
Allmerica Asset Management, Inc., an indirect wholly owned subsidiary of AFC, is
an affiliate of the Company.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.
32
<PAGE>
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Emerging Markets Fund * 1.35%
Select International Equity First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Growth Fund * 0.85%
Select Strategic Growth Fund * 0.85%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund, the Select Growth Fund, the Select
Strategic Growth Fund and the Government Bond Fund, the investment management
fee does not vary according to the level of assets in the Fund. AFIMS' fee
computed for each Fund will be paid from the assets of such Fund.
AFIMS' fee, computed for each Fund, will be paid from the assets of such Fund.
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of
33
<PAGE>
a majority in interest of the shareholders of the affected Fund. AFIMS is solely
responsible for the payment of all fees for investment management services to
the Sub-Advisers.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds,
including sub-adviser fees, and should be read in conjunction with this
Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectuses of Fidelity VIP and Fidelity VIP II contain additional
information concerning the Portfolios, including information about additional
expenses paid by the Portfolios, and should be read in conjunction with this
Prospectus.
The Fidelity VIP Money Market Portfolio's management fee is (a) the sum of a
group fee rate and an individual fund fee rate of 0.03%, and (b) the addition of
an income component of 6% of the Portfolio's gross income in excess of a 5%
annual yield. The result is multiplied by the Portfolio's average net assets.
The group fee rate, which is based on the average net assets of all of the
mutual funds advised by FMR, cannot rise above 0.37%, and it drops as total
assets under management increase. The income component cannot rise above 0.24%.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
The fee rates of each of the Fidelity VIP Equity-Income, Fidelity VIP Growth,
Fidelity VIP II Asset Manager and Fidelity VIP Overseas Portfolios are made of
two components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month. Thus, the Fidelity VIP High Income
Portfolio may have a fee as high as 0.82% of its average net assets. The
Fidelity VIP Equity-Income Portfolio may have a fee as high as 0.72% of its
average net assets. The Fidelity VIP Growth Portfolio may have a fee as high as
0.82% of its average net assets. The Fidelity VIP II Asset Manager Portfolio may
have a fee as high as 0.77% of its average net assets. The Fidelity VIP Overseas
Portfolio may have a fee as high as 0.97% of its average net assets. The actual
fee rate may be less depending on the total assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers with approximately $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
34
<PAGE>
average daily net assets. An affiliate of Price-Fleming, T. Rowe Price
Associates, Inc. serves as Sub-Adviser to the Select Capital Appreciation Fund
of the Trust.
INVESTMENT ADVISORY SERVICES TO DGPF
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to the Policy interest in a Sub-Account without notice
to the Policyowner and prior approval of the SEC and state insurance
authorities, to the extent required by law. The Separate Account may, to the
extent permitted by law, purchase other securities for other policies or permit
a conversion between policies upon request by the Policyowner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares of a new Underlying Fund
or in shares of another investment company. Subject to applicable law and any
required SEC approval, the Company may, in its sole discretion, establish new
Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Sub-Accounts may be
made available to existing Policyowners on a basis to be determined by the
Company.
Shares of the Funds of the Trust also are issued to Separate Accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price and the Series of DGPF also are issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policyowners or variable annuity contract owners. Although the
Company and the Underlying Funds currently do not foresee any such disadvantages
to either variable life insurance Policyowners or variable annuity contract
owners, the Company and the respective Trustees intend to monitor events in
order to identify any material conflicts and to determine what action, if any,
should be taken. If the Trustees were to conclude that separate Funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the expenses.
If any of these substitutions or changes is made, the Company may endorse the
Policies to reflect the substitution or change, and will notify Policyowners of
all such changes. If the Company deems it to be in the best interest of
Policyowners, and subject to any approvals that may be required under applicable
law, the Separate Account or any Sub-Account(s) may be operated as a management
company under the 1940 Act, may be deregistered under the 1940 Act if
registration is no longer required, or may be combined with other Sub-Accounts
or other Separate Accounts of the Company.
35
<PAGE>
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended, or if the present interpretation of the 1940 Act or such
rules should change and, as a result the Company determines that it is permitted
to vote shares in its own right, whether or not such shares are attributable to
the Policies, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions which have been received by the Company. The Company also will vote
shares held in the Separate Account that it owns and which are not attributable
to the Policies in the same proportion.
The number of votes which the Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing the Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the sub-classification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of and the reasons for that action will
be included in the next periodic report to Policyowners.
THE POLICIES
APPLYING FOR THE POLICY
The Policy cannot be issued until the underwriting procedure has been completed.
Upon receipt at its Principal Office of a completed application from a
prospective Policyowner, the Company will follow certain insurance underwriting
procedures designed to determine whether the proposed Insured is insurable. This
process may involve medical examinations, and may require that further
information be provided by the proposed Policyowner before a determination of
insurability can be made. The Company reserves the right to reject an
application which does not meet its underwriting guidelines, but in underwriting
insurance, the Company complies with all applicable federal and state
prohibitions concerning unfair discrimination.
CONDITIONAL INSURANCE AGREEMENT
It is possible to obtain life insurance protection during the underwriting
process through a Conditional Insurance Agreement. If at the time of application
you make a payment equal to at least one "Minimum Monthly Factor" for the Policy
as applied for, the Company will provide fixed conditional insurance in the
amount of insurance applied for up to a maximum of $500,000, pending
underwriting approval. This coverage generally will continue for a maximum of 90
days from the date of the application or the completion of a medical exam,
should one be required. In no event will any insurance proceeds be paid under
the Conditional Insurance Agreement if death is by suicide.
If the application is approved, the Policy will be issued as of the date the
terms of the Conditional Insurance Agreement were met. If no Conditional
Insurance Agreement is in effect because the prospective Policyowner does not
wish to make any payment until the Policy is issued or has paid an initial
premium that is not
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<PAGE>
sufficient to place the Policy in force, upon delivery of the Policy the Company
will require payment of sufficient premium to place the insurance in force.
PREMIUMS HELD IN THE GENERAL ACCOUNT PENDING UNDERWRITING APPROVAL
Pending completion of insurance underwriting and Policy issuance procedures, the
initial premium will be held in the General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of receipt of the premium at the Principal
Office. IF THE POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU
WITHOUT INTEREST.
If the Policy is issued to the trustee of an employee benefit plan, the amounts
held in the General Account will be allocated to the Sub-Accounts according to
the Policyowner's instructions when the Delivery Receipt is returned to the
Principal Office. For all other Policyowners, the date the Company transfers the
initial net premium from the General Account to the selected Sub-Accounts
depends on the premium amount. If the initial net premiums are less than
$10,000, the amounts held in the General Account will be allocated to the
selected Sub-Accounts not later than three days after underwriting approval of
the Policy. If the initial net premiums equal or exceed $10,000, or if the
Policy provides for planned premium payments during the first year equal to or
exceeding $10,000 annually, $5,000 semi-annually, $2,500 quarterly or $1,000
monthly, the entire Net Premium, plus any interest earned, will remain in the
General Account until return of the Policy's Delivery Receipt to the Principal
Office. The entire amount held in the General Account for allocation to the
Separate Account then will be allocated to the Sub-Accounts according to your
instructions.
FREE-LOOK PERIOD
The Policies provide for an initial "free-look" period. You may cancel the
Policy by mailing or delivering the Policy to the Principal Office or an agent
of the Company on or before the latest of:
- 45 days after the application for the Policy is signed, or
- 10 days after you receive the Policy (or longer if required by state law),
or
- 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you.
When you return the Policy, the Company will, within seven days, mail a refund
equal to the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, the refund will equal the premiums paid.
The refund of any premium paid by check, however, may be delayed until the check
has cleared your bank.
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<PAGE>
FREE LOOK WITH FACE AMOUNT INCREASES
After an increase in the Face Amount, the Company will mail or personally
deliver a notice of a "free look" with respect to the increase. You will have
the right to cancel the increase before the latest of:
- 45 days after the application for the increase is signed, or
- 10 days after you receive the new specifications pages issued for the
increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal rights
to you.
Upon canceling the increase, you will receive a credit to the Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in the Face Amount (assuming the Policy is in force), you
may convert the Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Separate Account to the General Account
and by simultaneously changing your premium allocation instructions to allocate
future premium payments to the General Account. Within 24 months after the
effective date of each increase, you can transfer, without charge, all or part
of the Policy Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, at your request the Company will issue a flexible
premium adjustable life insurance policy to you. The new policy will have the
same Face Amount, issue Age, Dates of Issue, and Premium Class as the original
Policy.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Separate Account
or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY
Unlike conventional insurance policies, the Policies do not obligate you to pay
premiums in accordance with a rigid and inflexible premium schedule. You may
establish a schedule of planned premiums which will be billed by the Company at
regular intervals. Failure to pay planned premiums, however, will not itself
cause the Policy to lapse.
You also may make unscheduled premium payments or skip planned premium payments,
subject to the maximum and minimum premium limitations described below.
You also may elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted each month,
generally on the Monthly Payment Date, from your checking account and applied as
a premium under the Policy. The minimum payment permitted under a MAP procedure
is $50.
Premiums are not limited as to frequency and number. No premium payment may be
less than $100, however, without the Company's consent. Moreover, premium
payments must be sufficient to provide a positive Surrender Value at the end of
each Policy month, or the Policy may lapse. See POLICY TERMINATION AND
REINSTATEMENT.
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MINIMUM MONTHLY FACTOR
If, in the first 48 Policy months for a VEL 91 Policy (12 months for a VEL 87
Policy) following the Date of Issue or an increase in the Face Amount, you make
premium payments, less Debt, partial withdrawals and partial withdrawal charges,
at least equal to the sum of the Minimum Monthly Factor for the number of months
the Policy, increase in the Face Amount, or Policy Change which causes a change
in the Minimum Monthly Factor, has been in force, the Policy is guaranteed not
to lapse during that period. EXCEPT FOR THE 48 POLICY MONTHS FOR A VEL 91 POLICY
(12 MONTHS FOR A VEL 87 POLICY) AFTER THE DATE OF ISSUE, OR THE EFFECTIVE DATE
OF AN INCREASE IN THE FACE AMOUNT, MAKING MONTHLY PAYMENTS AT LEAST EQUAL TO THE
MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Policy during a
Policy year. See POLICY TERMINATION AND REINSTATEMENT.
PAID-UP INSURANCE OPTION
Upon Written Request, the Policyowner may exercise a paid-up insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount, up to the Face Amount of the
Policy, that the Surrender Value can purchase for a net single premium at the
Insured's Age and underwriting class on the date this option is elected. The
Company will transfer any Policy Value in the Sub-Accounts to the General
Account on the date it receives the written request to elect the option. If the
Surrender Value exceeds the net single premium necessary for the fixed
insurance, the Company will pay the excess to the Policyowner. The net single
premium is based on the Commissioners 1980 Standard Ordinary Mortality Table,
Smoker or Non-Smoker, Male, Female (or Table B for unisex Policies) with
increases in the tables for non-standard risks. Interest will not be less than
4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:
- As described above, the paid-up insurance benefit is computed differently
from the net death benefit, and the death benefit options will not apply.
- The Company will transfer the Policy Value in the Separate Account to the
General Account on the date it receives the Written Request to elect the
option. The Company will not allow transfers of Policy Value from the
General Account back to the Separate Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.
- Riders will continue only with the Company's consent.
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<PAGE>
After electing paid-up fixed insurance, the Policyowner may surrender the Policy
for its net cash value. The cash value is equal to the net single premium for
paid-up insurance at the Insured's attained age. The net cash value is the cash
value less any outstanding Debt.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the tax expense charge. In the
application for the Policy, you indicate the initial allocation of Net Premiums
among the General Account and the Sub-Accounts of the Separate Account. You may
allocate premiums to one or more Sub-Accounts, but may not have Policy Value in
more than 20 Sub-Accounts at any one time. The minimum amount which may be
allocated to a Sub-Account is 1% of Net Premium paid. Allocation percentages
must be in whole numbers (for example, 33 1/3% may not be chosen) and must total
100%.
FUTURE CHANGES ALLOWED
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. Currently, no charge is
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The Company and its agents and affiliates will not be responsible for
losses resulting from acting upon telephone requests reasonably believed to be
genuine. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; otherwise, the Company may
be liable for any losses due to unauthorized or fraudulent instructions.
The procedures the Company follows for telephone transactions include requiring
callers to identify themselves by name, and to identify the Policyowner by name,
date of birth and social security number. All transfer instructions by telephone
are tape recorded.
INVESTMENT RISK
The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners periodically should review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. However, the Policy Value held in the General Account to secure the
Policy loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Account(s) next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICIES -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Currently, transfers involving the General Account are permitted only if:
- there has been at least a 90-day period since the last transfer from the
General Account, and
- the amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Policy.
These rules are subject to change by the Company.
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<PAGE>
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust, respectively, to one or more of the other
Sub-Accounts ("Dollar-Cost Averaging Option"), or
- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS
The transfer privilege is subject to the Company's consent. The Company reserves
the right to impose limitations on transfers including, but not limited to:
- the minimum amount that may be transferred,
- the minimum amount that may remain in a Sub-Account following a transfer
from that Sub-Account,
- the minimum period of time between transfers involving the General
Account, and
- the maximum amount that may be transferred each time from the General
Account.
Currently, the first 12 transfers in the Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.
DEATH PROCEEDS
As long as the Policy remains in force (see POLICY TERMINATION AND
REINSTATEMENT), upon due proof of the Insured's death, the Company will pay the
Death Proceeds to the named Beneficiary. The Company normally will pay the Death
Proceeds within seven days of receiving due proof of the Insured's death, but
the Company may delay payments under certain circumstances. See OTHER POLICY
PROVISIONS -- "Postponement of Payments." The Death Proceeds may be received by
the Beneficiary in cash or under one or more of the payment options set forth in
the Policy. See APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.
Prior to the Final Premium Payment Date or Maturity Date, the Death Proceeds are
equal to:
- the Sum Insured provided under Option 1 or Option 2, whichever is elected
and in effect on the date of death; PLUS
- any additional insurance on the Insured's life that is provided by rider;
MINUS
- any outstanding Debt, any partial withdrawals and partial withdrawal
charges, and any Monthly Deductions due and unpaid through the Policy
month in which the Insured dies.
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After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value of the VEL 91 Policy. The amount of Death Proceeds payable will be
determined as of the date of the Company's receipt of due proof of the Insured's
death.
SUM INSURED OPTIONS
The Policies provide two Sum Insured Options: Option 1 and Option 2, as
described below. You designate the desired Sum Insured Option in the
application. You may change the Option once per Policy year by Written Request.
There is no charge for a change in Option. Under Option 1, the Sum Insured is
equal to the greater of the Face Amount of insurance or the Guideline Minimum
Sum Insured. Under Option 2, the Sum Insured is equal to the greater of the Face
Amount of insurance plus the Policy Value or the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED
To remain qualified as "life insurance" for federal tax purposes, federal tax
law requires that policies have a minimum amount of pure life insurance
protection in relation to the size of the Policy Value. The Guideline Minimum
Sum Insured is used to determine compliance with this requirement. So long as
the Policy qualifies as a life insurance contract, the insurance proceeds will
be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM SUM INSURED TABLE
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
- ------------------------------------------------ -----------------
<S> <C>
40 and under.................................... 250%
45.............................................. 215%
50.............................................. 185%
55.............................................. 150%
60.............................................. 130%
65.............................................. 120%
70.............................................. 115%
75.............................................. 105%
80.............................................. 105%
85.............................................. 105%
90.............................................. 105%
95 and above.................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
Under both Option 1 and Option 2, the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under the Guideline Minimum Sum Insured exceeds the Face Amount,
in which case the Sum Insured will vary as the Policy Value varies. Under Option
2, the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured (and the Death Proceeds) will
be greater under Option 2 than under Option 1. This is because the Policy Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. Under Option 2, however, the cost of insurance included in the
Monthly Deduction will be greater, and the rate at which Policy Value will
accumulate will be slower (assuming the same specified Face Amount and the same
actual premiums paid). See CHARGES AND DEDUCTIONS -- "Monthly Deduction from the
Policy Value."
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If you desire to have premium payments and investment performance reflected in
the amount of the Sum Insured, you should choose Option 2. If you desire premium
payments and investment performance reflected to the maximum extent in the
Policy Value, you should select Option 1.
ILLUSTRATIONS
For the purposes of the following illustrations, assume that the Insured is
under the Age of 40 and that there is no outstanding Debt.
ILLUSTRATION OF OPTION 1 -- Under Option 1, the Face Amount of the Policy
generally will equal the Sum Insured. If at any time, however, the Policy Value
multiplied by the applicable percentage is less than the Face Amount, the Sum
Insured will equal the Face Amount of the Policy.
For example, the Policy with a $50,000 Face Amount will generally have a Sum
Insured equal to $50,000. Because the Sum Insured must be equal to or greater
than 250% of Policy Value if at any time the Policy Value exceeds $20,000, the
Sum Insured will exceed the $50,000 Face Amount. In this example, each
additional dollar of Policy Value above $20,000 will increase the Sum Insured by
$2.50. For example, the Policy with the Policy Value of $35,000 will have a
Guideline Minimum Sum Insured of $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 X
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).
Similarly, so long as Policy Value exceeds $20,000, each dollar taken out of
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $25,000 to $20,000 (because of partial withdrawals,
charges or negative investment performance), the Sum Insured will be reduced
from $62,500 to $50,000.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Sum Insured would not
exceed the $50,000 Face Amount unless the Policy Value exceeded $27,027 (rather
than $20,000), and each dollar then added to or taken from Policy Value would
change the Sum Insured by $1.85.
ILLUSTRATION OF OPTION 2 -- Under Option 2, the Sum Insured is generally equal
to the Face Amount of the Policy plus the Policy Value. The Sum Insured under
Option 2, however, always will be the greater of:
- the Face Amount plus the Policy Value; or
- the Policy Value multiplied by the applicable percentage from the
Guideline Minimum Sum Insured Table.
For example, the Policy with a Face Amount of $50,000 and with a Policy Value of
$5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000). A Policy Value
of $10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000); a Policy
Value of $25,000 will produce a Sum Insured of $75,000 ($50,000 + $25,000).
According to the Guideline Minimum Sum Insured Table, however, the Sum Insured
for the example must be at least 250% of the Policy Value. Therefore, if the
Policy Value is greater than $33,333, 250% of that amount will be the required
Sum Insured, which will be greater than the Face Amount plus Policy Value. In
this example, each additional dollar of Policy Value above $33,333 will increase
the Sum Insured by $2.50. For example, if the Policy Value is $35,000, the
Guideline Minimum Sum Insured will be $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000
X2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).
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<PAGE>
Similarly, if the Policy Value exceeds $33,333, each dollar taken out of the
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $45,000 to $40,000 because of partial withdrawals, charges
or negative investment performance, the Sum Insured will be reduced from
$112,500 to $100,000. If at any time, however, Policy Value multiplied by the
applicable percentage is less than the Face Amount plus the Policy Value, then
the Sum Insured will be the current Face Amount plus the Policy Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Sum Insured must be at least
1.85 times the Policy Value. The amount of the Sum Insured would be the sum of
the Policy Value plus $50,000 unless the Policy Value exceeded $58,824 (rather
than $33,000). Each dollar added to or subtracted from the Policy would change
the Sum Insured by $1.85.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
CHANGE FROM OPTION 1 TO OPTION 2
If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount of less than $40,000 for a VEL 91 Policy ($25,000 for a VEL 87
Policy). A change from Option 1 to Option 2 will not alter the amount of the Sum
Insured at the time of the change, but will affect the determination of the Sum
Insured from that point on. Because the Policy Value will be added to the new
specified Face Amount, the Sum Insured will vary with the Policy Value. Under
Option 2, the Insurance Amount at Risk always will equal the Face Amount unless
the Guideline Minimum Sum Insured is in effect. The cost of insurance also may
be higher or lower than it otherwise would have been without the change in Sum
Insured Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from the Policy
Value."
CHANGE FROM OPTION 2 TO OPTION 1
If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. The change in
option, however, will affect the determination of the Sum Insured from that
point on, since the Policy Value no longer will be added to the Face Amount in
determining the Sum Insured; the Sum Insured will equal the new Face Amount (or,
if higher, the Guideline Minimum Sum Insured). The cost of insurance may be
higher or lower than it otherwise would have been since any increases or
decreases in Policy Value will reduce or increase, respectively, the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the Separate Account, changing the Sum Insured Option
from Option 2 to Option 1 will reduce the Insurance Amount at Risk and therefore
the cost of insurance charge for all subsequent Monthly Deductions, compared to
what such charge would have been if no such change were made.
A change in Sum Insured Option may result in total premiums paid exceeding the
then-current maximum premium limitation determined by IRS Rules. In such event,
the Company will pay the excess to the Policyowner. See THE POLICIES -- "Premium
Payments."
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<PAGE>
CHANGE IN THE FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of the Policy at any time by submitting a Written Request to the Company.
Any increase or decrease in the specified Face Amount requested by you will
become effective on the Monthly Payment Date on or next following the date of
receipt of the request at the Principal Office or, if Evidence of Insurability
is required, the date of approval of the request.
INCREASES IN THE FACE AMOUNT
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured also is required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than $10,000. You may not increase the Face Amount after the Insured
reaches Age 80. An increase must be accompanied by an additional premium if the
Surrender Value is less than $50 plus an amount equal to the sum of two Minimum
Monthly Factors.
On the effective date of each increase in the Face Amount, a transaction charge
of $40 will be deducted from the Policy Value for administrative costs. The
effective date of the increase will be the first Monthly Payment Date on or
following the date all of the conditions for the increase are met.
An increase in the Face Amount generally will affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge also will
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from the Policy Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a free-look
period, to have the increase canceled and the charges which would not have been
deducted but for the increase will be credited to the Policy, and (2) during the
first 24 months following the increase, to transfer any or all Policy Value to
the General Account free of charge. See THE POLICIES -- "Free-Look Period" and
"Conversion Privileges." A refund of charges which would not have been deducted
but for the increase will be made at your request.
DECREASES IN THE FACE AMOUNT
The minimum amount for a decrease in the Face Amount is $10,000. The Face Amount
in force after any decrease may not be less than $40,000 ($25,000 for a VEL 87
Policy). If, following a decrease in the Face Amount, the Policy would not
comply with the maximum premium limitation applicable under the IRS Rules, the
decrease may be limited or Policy Value may be returned to the Policyowner (at
your election) to the extent necessary to meet the requirements. A return of
Policy Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect the Policyowner's monthly cost of insurance charges.
See CHARGES AND DEDUCTIONS -- "Monthly Deduction from the Policy Value." For
purposes of determining the cost of insurance charge, any decrease in the Face
Amount will reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase,
- the next most recent increases successively; and
- the initial Face Amount.
This order also will be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
See CHARGES AND DEDUCTIONS -- "Surrender Charge."
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<PAGE>
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of:
- your accumulation in the General Account, PLUS
- the value of the Accumulation Units in the Sub-Accounts.
The Policy Value is used in determining the Surrender Value (the Policy Value
less any Debt and applicable surrender charges). See THE POLICIES -- "Policy
Surrender." There is no guaranteed minimum Policy Value. Because the Policy
Value on any date depends upon a number of variables, it cannot be
predetermined.
The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.
CALCULATION OF POLICY VALUE
The Policy Value is determined first on the Date of Issue and thereafter on each
Valuation Date. On the Date of Issue, the Policy Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
POLICIES -- "Applying for the Policy") less any Monthly Deductions due. On each
Valuation Date after the Date of Issue the Policy Value will be:
- the aggregate of the values in each of the Sub-Accounts on the Valuation
Date, determined for each Sub-Account by multiplying the value of an
Accumulation Unit in that Sub-Account on that date by the number of such
Accumulations Units allocated to the Policy; PLUS
- the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT
Each Net Premium is allocated to the Sub-Account(s) selected by you. Allocations
to the Sub-Accounts are credited to the Policy in the form of Accumulation
Units. Accumulation Units are credited separately for each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Principal Office. The number of Accumulation
Units will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a
Sub-Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
The dollar value of an Accumulation Unit of each Sub-Account varies from
Valuation Date to Valuation Date based on the investment experience of that
Sub-Account. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit
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on a given Valuation Date is determined by multiplying the dollar value of the
corresponding Accumulation Unit as of the immediately preceding Valuation Date
by the appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b) and subtracting (c) from the result, where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal, on an annual basis,
to 0.90% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 0.90%.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- DEATH
PROCEEDS PAYMENT OPTIONS. These choices also are available if the Policy is
surrendered at the Final Premium Payment Date for a VEL 91 Policy, and at the
Maturity Date for a VEL 87 Policy. The Company may make more payment options
available in the future.
If no election is made, the Company will pay the Death Proceeds in a single sum.
When the Death Proceeds are payable in a single sum, the Beneficiary may, within
one year of the Insured's death, select one or more of the payment options if no
payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to the Policy by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from
the Policy Value."
POLICY SURRENDER
You may surrender the Policy at any time and receive its Surrender Value. The
Surrender Value is equal to:
- the Policy Value, MINUS
- any Debt and applicable surrender charges.
The Surrender Value will be calculated as of the Valuation Date on which a
written request for surrender, and the Policy, are received at the Principal
Office. A surrender charge may be deducted when the Policy is surrendered. See
CHARGES AND DEDUCTIONS -- "Surrender Charge."
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The proceeds on surrender may be paid in a lump sum or under one of the payment
options described in APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS. Normally, the
Company will pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of the Policy, subject to the limits stated below, upon written
request filed at the Principal Office. The written request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions, the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500.
Under Option 1, the Face Amount is reduced by the amount of the withdrawal, and
a withdrawal will not be allowed if it would reduce the Face Amount below
$40,000 ($25,000 for VEL 87 Policies).
A withdrawal from a Sub-Account will result in the cancellation of the number of
Accumulation Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges On Partial Withdrawal." Normally, the Company will pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policies to compensate the
Company for providing the insurance benefits set forth in the Policy and any
additional benefits added by rider, administering the Policy, incurring
distribution expenses, and assuming certain risks in connection with the Policy.
Each of the charges identified as an administrative charge is intended to
reimburse the Company for actual administrative costs incurred, and is not
intended to result in a profit to the Company.
TAX EXPENSE CHARGE
Currently, a deduction of 2 1/2% of premiums for state and local premium taxes
is made from each premium payment. The premium payment, less the tax expense
charge, equals the Net Premium.
While the premium tax of 2 1/2% is deducted from each premium payment, some
jurisdictions may not impose premium taxes. Premium taxes vary from state to
state, ranging from zero to 4.0%, and the 2 1/2% rate attributable to premiums
for state and local premium taxes approximates the average expenses to the
Company associated with the premium taxes. The 2% charge may be higher or lower
than the actual premium tax imposed by the applicable jurisdiction. The Company,
however, does not expect to make a profit from this charge.
MONTHLY DEDUCTION FROM THE POLICY VALUE
Prior to the Final Premium Payment Date under a VEL 91 Policy (Maturity Date
under a VEL 87 Policy), a Monthly Deduction from the Policy Value will be made
to cover a charge for the cost of insurance, a charge for any optional insurance
benefits added by rider, and a monthly administrative charge. The cost of
insurance
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charge and the monthly administrative charge is discussed below. The Monthly
Deduction on or following the effective date of a requested increase in the Face
Amount also will include a $40 administrative charge for the increase. See THE
POLICIES -- "Change in the Face Amount."
The Monthly Deduction will be deducted as of each Monthly Payment Date
commencing with the Date of Issue of the Policy. It will be allocated to one
Sub-Account according to your instructions or, if no allocation is specified,
the Company will make a Pro-Rata Allocation. If the Sub-Account you specify does
not have sufficient funds to cover the Monthly Deduction, the Company will
deduct the charge for that month as if no specification were made. If, however,
on subsequent Monthly Payment Dates there is sufficient Policy Value in the
Sub-Account you specified, the Monthly Deduction will be deducted from that
Sub-Account. No Monthly Deductions will be made on or after the Final Premium
Payment Date of a VEL 91 Policy.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date under a VEL 91 Policy or the Maturity Date under a
VEL 87 Policy. The cost of insurance is determined on a monthly basis, and is
determined separately for the initial Face Amount and for each subsequent
increase in the Face Amount. Because the cost of insurance depends upon a number
of variables, it can vary from month to month.
CALCULATION OF THE CHARGE
If you select Sum Insured Option 2, the monthly cost of insurance charge for the
initial Face Amount will equal the applicable cost of insurance rate multiplied
by the initial Face Amount. If you select Sum Insured Option 1, however, the
applicable cost of insurance rate for the initial Face Amount will be multiplied
by the initial Face Amount less the Policy Value (minus charges for rider
benefits) at the beginning of the Policy month. Thus, the cost of insurance
charge may be greater for Policyowners who have selected Sum Insured Option 2
than for those who have selected Sum Insured Option 1 (assuming the same Face
Amount in each case and assuming that the Guideline Minimum Sum Insured is not
in effect). In other words, since the Sum Insured under Option 1 remains
constant while the Sum Insured under Option 2 varies with the Policy Value, any
Policy Value increases will reduce the insurance charge under Option 1 but not
under Option 2.
If you select Sum Insured Option 2, the monthly insurance charge for each
increase in Face Amount (other than an increase caused by a change in Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If you select Sum
Insured Option 1, the applicable cost of insurance rate will be multiplied by
the increase in the Face Amount reduced by any Policy Value (minus rider
charges) in excess of the initial Face Amount at the beginning of the Policy
month.
EFFECT OF THE GUIDELINE MINIMUM SUM INSURED -- If the Guideline Minimum Sum
Insured is in effect under either Option, a monthly cost of insurance charge
also will be calculated for that additional portion of the Sum Insured which is
required to comply with the Guideline rules. This charge will be calculated by:
(a) Multiplying the cost of insurance rate applicable to the initial Face Amount
times the Guideline Minimum Sum Insured (Policy Value times the applicable
percentage), MINUS
(b) the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)
OR
the Face Amount PLUS the Policy Value (if you selected Sum Insured Option
2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICIES -- "Change in the Face
Amount" and "Decreases."
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COST OF INSURANCE RATES
Cost of insurance rates are based on male, female or a blended unisex rate
table, Age and Premium Class of the Insured, the effective date of an increase
or date of rider, as applicable, the amount of premiums paid less Debt, any
partial withdrawals and withdrawal charges, and risk classification. For those
Policies issued on a unisex basis in certain states or in certain cases,
sex-distinct rates do not apply.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in the
Face Amount or rider are determined annually on the anniversary of the effective
date of each increase or rider. The cost of insurance rates generally increase
as the Insured's Age increases. The actual monthly cost of insurance rates will
be based on the Company's expectations as to future mortality experience. They
will not, however, be greater than the guaranteed cost of insurance rates set
forth in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Table, Smoker or Non-Smoker, Male, Female (or Table
B for unisex Policies) and the Insured's sex and Age. The Tables used for this
purpose set forth different mortality estimates for males and females and for
smokers and non-smokers. Any change in the cost of insurance rates will apply to
all persons of the same insuring Age, sex and Premium Class whose Policies have
been in force for the same length of time.
The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into preferred Premium Classes, standard
Premium Classes and substandard Premium Classes. In an otherwise identical
Policy, an Insured in the preferred Premium Class will have a lower cost of
insurance than an Insured in a standard Premium Class who, in turn, will have a
lower cost of insurance than an Insured in a substandard Premium Class with a
higher mortality risk.
Premium Classes also are divided into two categories: smokers and non-smokers.
Non-smoking Insureds will incur lower cost of insurance rates than Insureds who
are classified as smokers but who are otherwise in the same Premium Class. Any
Insured with an Age at issuance under 18 will be classified initially as
standard or substandard. The Insured then will be classified as a smoker at Age
18 unless the Insured provides satisfactory evidence that the Insured is a
non-smoker. The Company will provide notice to you of the opportunity for the
Insured to be classified as a non-smoker when the Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if the Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES
Prior to the Final Premium Payment Date (Maturity Date for a VEL 87 Policy), a
monthly administrative charge will be deducted from the Policy Value. The charge
is $25 per month for the first 12 monthly deductions, and $5 per month
thereafter. This charge will be used to compensate the Company for expenses
incurred in the administration of the Policy, and will compensate the Company
for first-year underwriting and other start-up expenses incurred in connection
with the Policy. These expenses include the cost of processing applications,
conducting medical examinations, determining insurability and the Insured's
Premium Class, and establishing Policy records. The Company does not expect to
derive a profit from these charges.
CHARGES AGAINST ASSETS OF THE SEPARATE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company, and a charge for administrative expenses of the
Separate Account.
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MORTALITY AND EXPENSE RISK CHARGE
The Company currently makes a charge on an annual basis of 0.90% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policy. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 0.90% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company therefore will pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policy
will exceed the amounts realized from the administrative charges provided in the
Policy. If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses. If
costs are less than the amounts provided, the difference will be a profit to the
Company. To the extent this charge results in a current profit to the Company,
such profit will be available for use by the Company for, among other things,
the payment of distribution, sales and other expenses. Since mortality and
expense risks involve future contingencies which are not subject to precise
determination in advance, it is not feasible to identify specifically the
portion of the charge which is applicable to each.
OTHER CHARGES AND EXPENSES
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price and DGPF contain additional information concerning such fees
and expenses.
Currently, no charges are made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policies provides for a contingent surrender charge which differs for VEL 91
Policies and VEL 87 Policies. A separate surrender charge is calculated upon the
issuance of the Policy and for each increase in the Face Amount. A surrender
charge may be deducted if you request a full surrender of the Policy or a
decrease in the Face Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agent's
commissions, advertising and the printing of the Prospectus and sales
literature.
SURRENDER CHARGE UNDER VEL 87 POLICIES
A surrender charge may be deducted if you request a full surrender of the Policy
or a decrease in the Face Amount if less than 12 years have elapsed from the
Date of Issue or from the effective date of any increase in the Face Amount. The
maximum surrender charge calculated upon issuance of the Policy is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$4.50 per thousand dollars of the initial Face Amount, and (b) is a deferred
sales expense charge equal to 30% of the Guideline Annual Premium times a factor
of not greater than 1.0, as specified in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES -- VEL 87 POLICIES. As the factors used in calculating the
deferred sales charge in (b) vary with the Age and Premium Class (smoker versus
non-smoker) of the Insured, the deferred sales charge may range between 10.25%
and 30% of the Guideline Annual Premium. The maximum surrender charge continues
in a level amount for 44 Policy months, reduces by 1% per month for the next 100
policy
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months, and is zero thereafter. This reduction in the maximum surrender charge
will reduce the deferred sales charge and the deferred administrative charge
proportionately. Any $25 monthly administrative charge not yet deducted will
also be deducted at surrender.
If you surrender the Policy before making premium payments with respect to the
initial Face Amount which are at least equal to the Guideline Annual Premium,
the actual surrender charge imposed may be less than the maximum. The actual
surrender charge imposed will be the lesser of either the maximum surrender
charge or the sum of $4.50 per thousand dollars of initial Face Amount plus 30%
of premiums paid. Thus, if the amount of the surrender charge is less than the
maximum, such amount is comprised of the entire deferred administrative charge
plus 30% of premiums paid. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES -- VEL 87 POLICIES.
A separate surrender charge will apply to and is calculated for each increase in
Face Amount. The surrender charge for the increase is in addition to that for
the initial Face Amount. The maximum surrender charge for the increase is equal
to the sum of (a) plus (b), where (a) is equal to $4.50 per thousand dollars of
increase, and (b) is equal to 30% of the Guideline Annual Premium for the
increase times a factor of not greater than 1.0 as specified in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 87 POLICIES. As is true for the
initial Face Amount, (a) is a deferred administrative charge, and (b) is a
deferred sales charge. The actual surrender charge with respect to the increase
may be less than the maximum. The actual surrender charge is the lesser of
either the maximum surrender charge or the sum of (a) $4.50 per thousand dollars
of increase in Face Amount, plus (b) 30% of the Policy Value on the date of
increase associated with the increase in Face Amount, plus (c) 30% of premiums
paid which are associated with the increase in Face Amount.
Additional premium payments may not be required to fund a requested increase in
the Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of existing Policy Value
to the increase and to allocate subsequent premium payments between the initial
Policy and the increase. For example, suppose the Guideline Annual Premium is
equal to $1,500 before an increase and is equal to $2,000 as a result of the
increase. The Policy Value on the effective date of the increase would be
allocated 75% ($1,500/$2,000) to the initial Face Amount, and 25% to the
increase. All future premiums would also be allocated 75% to the initial Face
Amount and 25% to the increase. Thus, existing Policy Value associated with the
increase will equal the portion of the Policy Value allocated to the increase on
the effective date of the increase, before any deductions are made. Premiums
associated with the increase will equal the portion of the premium payments
actually made on or after the effective date of the increase which are allocated
to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 87 POLICIES,
for examples illustrating the calculation of the maximum surrender charge for
the initial Face Amount and for any increases, as well as for the surrender
charge based on actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of the Policy), the surrender charge will be applied in the following order: (1)
the most recent increase followed by (2) the next most recent increases
successively, and (3) the initial Face Amount. Where a decrease causes a partial
reduction in an increase or in the initial Face Amount, a proportionate share of
the surrender charge for that increase or for the initial Face Amount will be
deducted.
SURRENDER CHARGE UNDER VEL 91 POLICIES
A surrender charge may be deducted if you request a full surrender of the Policy
or a decrease in the Face Amount if less than 12 years have elapsed from the
Date of Issue or from the effective date of any increase in
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the Face Amount. The maximum surrender charge calculated upon issuance of the
Policy is equal to the sum of (a) plus (b), where (a) is a deferred
administrative charge equal to $8.50 per thousand dollars of the initial Face
Amount, and (b) is a deferred sales expense charge equal to 30% of the Guideline
Annual Premium. In accordance with limitations under state insurance
regulations, the amount of the maximum surrender charge will not exceed a
specified amount per $1,000 initial Face Amount, as indicated in APPENDIX E --
CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 91 POLICIES.
The maximum surrender charge continues in a level amount for 44 Policy months,
reduces by 1% per month for the next 100 policy months, and is zero thereafter.
This reduction in the maximum surrender charge will reduce the deferred sales
charge and the deferred administrative charge proportionately. Any $25 monthly
administrative charge not yet deducted will also be deducted at surrender.
If you surrender the Policy before making premium payments with respect to the
initial Face Amount which are at least equal to the Guideline Annual Premium,
the actual surrender charge imposed may be less than the maximum. The actual
surrender charge imposed will be the lesser of either the maximum surrender
charge or the sum of $8.50 per thousand dollars of initial Face Amount plus 30%
of premiums paid. Thus, if the amount of the surrender charge is less than the
maximum, such amount is comprised of the entire deferred administrative charge
plus 30% of premiums paid. See APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER
CHARGES -- VEL 91 POLICIES.
A separate surrender charge will apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is
equal to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand
dollars of increase, and (b) is equal to 30% of the Guideline Annual Premium for
the increase. In accordance with limitations under state insurance regulations,
the amount of the surrender charge will not exceed a specified amount per $1,000
of increase, as indicated in APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER
CHARGES -- VEL 91 POLICIES. As is true for the initial Face Amount, (a) is a
deferred administrative charge, and (b) is a deferred sales charge. The actual
surrender charge with respect to the increase may be less than the maximum. The
actual surrender charge is the lesser of either the maximum surrender charge or
the sum of (a) $8.50 per thousand dollars of an increase in the Face Amount,
plus (b) 30% of the Policy Value on the date of the increase associated with the
increase in the Face Amount, plus (c) 30% of premiums paid which are associated
with the increase in the Face Amount.
Additional premium payments may not be required to fund a requested increase in
the Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies whereby the Policy Value will be allocated
between the initial Face Amount and the increase. Subsequent premium payments
are allocated between the initial Face Amount and the increase. For example,
suppose the Guideline Annual Premium is equal to $1,500 before an increase and
is equal to $2,000 as a result of the increase. The Policy Value on the
effective date of the increase would be allocated 75% ($1,500/$2,000) to the
initial Face Amount and 25% to the increase. All future premiums would also be
allocated 75% to the initial Face Amount and 25% to the increase. Thus, existing
Policy Value associated with the increase will equal the portion of Policy Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 91 POLICIES
for examples illustrating the calculation of the maximum surrender charge for
the initial Face Amount and for any increases, as well as for the surrender
charge based on actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
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multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face
Amount), the surrender charge will be applied in the following order: (1) the
most recent increase followed by (2) the next most recent increases
successively, and (3) the initial Face Amount. Where a decrease causes a partial
reduction in an increase or in the initial Face Amount, a proportionate share of
the surrender charge for that increase or for the initial Face Amount will be
deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Policy year, partial withdrawals of Surrender Value may be made
under VEL 87 Policies and VEL 91 Policies. The minimum withdrawal is $500. Under
Option 1, the Face Amount is reduced by the amount of the partial withdrawal,
and a partial withdrawal will not be allowed if it would reduce the Face Amount
below $40,000 for VEL 91 Policies ($25,000 for VEL 87 Policies).
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company, less the
total of any prior withdrawals in that Policy year which were not subject to the
partial withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge on the
date of withdrawal. There will be no partial withdrawal charge if there is no
surrender charge on the date of withdrawal.
This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in Face Amount,
- second, the surrender charge for the next most recent increase
successively,
- last, the surrender charge for the initial Face Amount.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 87 POLICIES
and APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES -- VEL 91 POLICIES
for examples illustrating the calculation of the charges on partial withdrawal
and their impact on the surrender charge(s).
TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICIES -- "Transfer
Privilege."
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You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts, or
- to reallocate Policy Value among the Sub-Accounts.
The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.
If you utilize the conversion privilege, loan privilege or reallocate Policy
Value within 20 days of the Date of Issue, any resulting transfer of Policy
Value from the Sub-Accounts to the General Account will be free of charge and in
addition to the 12 free transfers in the Policy year. See THE POLICIES
- --"Conversion Privileges," and POLICY LOANS.
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase,
and the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
incurred for changing the Net Premium allocation instructions, for changing the
allocation of any Monthly Deductions among the various Sub-Accounts, or for a
projection of values. No such charges are currently imposed and any such charge
is guaranteed not to exceed $25.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value.
In the first Policy year, the Loan Value is 75% of the Policy Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on Debt
to the end of the Policy year. The Loan Value in the second Policy year and
thereafter is 90% of an amount equal to the Policy Value reduced by applicable
surrender charges. There is no minimum limit on the amount of the loan.
The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."
The Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy Value so transferred will
be cancelled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
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LOAN INTEREST
LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT
As long as the Policy is in force, the Policy Value in the General Account equal
to the loan amount will be credited with interest at an effective annual yield
of at least 6.00%.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time. If
this option has been selected, after the tenth Policy anniversary the Policy
Value in the General Account that is equal to the loan amount will be credited
with interest at an effective annual yield of at least 7.5%. The Company's
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). The preferred loan
option may not be available in all states.
LOAN INTEREST CHARGED
Outstanding Policy loans are charged interest. Interest accrues daily, and is
payable in arrears at the annual rate of 8%. Interest is due and payable at the
end of each Policy year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount and
will bear interest at the same rate. If the new loan amount exceeds the Policy
Value in the General Account after the due and unpaid interest is added to the
loan amount, the Company will transfer the Policy Value equal to that excess
loan amount from the Policy Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Policy Value
in each Sub-Account bears to the total Policy Value in all Sub-Accounts.
REPAYMENT OF LOANS
Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Separate Account cannot exceed
the Policy Value previously transferred from the Separate Account to secure the
Debt.
If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Policy will terminate with no value. See
POLICY TERMINATION AND REINSTATEMENT.
EFFECT OF POLICY LOANS
Although Policy loans may be repaid at any time prior to the lapse of the
Policy, Policy loans will permanently affect the Policy Value and Surrender
Value, and may permanently affect the Death Proceeds. The effect could be
favorable or unfavorable, depending upon whether the investment performance of
the Sub-Account(s) is less than or greater than the interest credited to the
Policy Value in the General Account attributable to the loan. Moreover,
outstanding Policy loans and the accrued interest will be deducted from the
proceeds payable upon the death of the Insured or surrender.
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POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds still will be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies, and any other overdue
charge, will be deducted from the Death Proceeds.
LIMITED GUARANTEE
Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months for a VEL 91 Policy (12 months for a VEL 87
Policy) after the Date of Issue or the effective date of an increase in the Face
Amount if you make a minimum amount of premium payments. The minimum amount
paid, minus the Debt, partial withdrawals and partial withdrawal charges, must
be at least equal to the sum of the Minimum Monthly Factor for the number of
months the Policy, increase, or the Policy Change which causes a change in the
Minimum Monthly Factor has been in force. The Policy Change which causes a
change in the Minimum Monthly Factor is a change in the Face Amount or the
addition or deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase for a VEL 91 Policy (12 months for a VEL 87 Policy), making payments
equal to the Minimum Monthly Factor does not guarantee that the Policy will
remain in force.
REINSTATEMENT UNDER VEL 87 POLICIES
A terminated VEL 87 Policy may be reinstated anytime within three years after
the date of default and before the Maturity Date, if the VEL 87 Policy has not
been surrendered and the Insured is alive. The reinstatement will be effective
on the Monthly Payment Date following the date you submit the following to the
Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insured is insurable according
to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge, is large
enough to cover the minimum amount payable, as described below.
MINIMUM AMOUNT PAYABLE
If reinstatement is requested less than 12 months either after the Date of Issue
of the VEL 87 Policy or the effective date of an increase in the Face Amount,
you must pay the lesser of the amount shown in (a) or (b):
Under (a), the minimum amount payable is the sum of the Minimum Monthly Factor
for the three-month period beginning on the date of reinstatement.
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Under (b), the minimum amount payable is the sum of:
- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default; PLUS
- Monthly Deductions for the three-month period beginning on the date of
reinstatement.
If reinstatement is requested 12 months or more after the Date of Issue of the
VEL 87 Policy or an increase in the Face Amount, you must pay the amount shown
in (b) above.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the VEL 87 Policy remained in force from the Date
of Issue. The Policy Value less Debt on the date of default will be restored to
the VEL 87 Policy to the extent it does not exceed the surrender charge on the
date of reinstatement. Any Policy Value less Debt as of the date of default
which exceeds the surrender charge on the date of reinstatement will not be
restored.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
- the Net Premium paid to reinstate the VEL 87 Policy increased by interest
from the date the payment was received at the Principal Office;
- plus an amount equal to the Policy Value less Debt on the date of default
to the extent it does not exceed the surrender charge on the date of
reinstatement;
- minus the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
REINSTATEMENT UNDER VEL 91 POLICIES
A terminated VEL 91 Policy may be reinstated any time within three years after
the date of default and before the Final Premium Payment Date if the VEL 91
Policy has not been surrendered and the Insured is alive. The reinstatement will
be effective on the Monthly Payment Date following the date you submit the
following to the Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insured is insurable according
to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge, is large
enough to cover the minimum amount payable, as described below.
MINIMUM AMOUNT PAYABLE
If reinstatement is requested when fewer than 48 Monthly Deductions have been
made since the Date of Issue or the effective date of an increase in the Face
Amount of a VEL 91 Policy, you must pay the lesser of the amount shown in (a) or
(b).
Under (a), the minimum amount payable is the Minimum Monthly Factor for the
three-month period beginning on the date of reinstatement.
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Under (b), the minimum amount payable is the sum of:
- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default, PLUS
- Monthly Deductions for the three-month period beginning on the date of
reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue of the VEL 91 Policy or any increase in the Face Amount, you
must pay the amount shown in (b) above. The Company reserves the right to
increase the Minimum Monthly Factor upon reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the VEL 91 Policy remained in force from the Date
of Issue. The Policy Value less Debt on the date of default will be restored to
the VEL 91 Policy to the extent it does not exceed the surrender charge on the
date of reinstatement. Any Policy Value less the Debt as of the date of default
which exceeds the surrender charge on the date of reinstatement will not be
restored.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
- the Net Premium paid to reinstate the VEL 91 Policy increased by interest
from the date the payment was received at the Principal Office, PLUS
- an amount equal to the Policy Value less Debt on the date of default to
the extent it does not exceed the surrender charge on the date of
reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is the Insured unless another Policyowner has been named in the
application for the Policy. The Policyowner generally is entitled to exercise
all rights under the Policy while the Insured is alive, subject to the consent
of any irrevocable Beneficiary (the consent of a revocable Beneficiary is not
required). The consent of the Insured is required whenever the Face Amount of
insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Policy, the
Beneficiary has no rights in the Policy before the death of the Insured. While
the Insured is alive, you may change any Beneficiary unless you have declared a
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Policyowner (or the Policyowner's estate) will be the Beneficiary. If more
than one Beneficiary is alive when the Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the Insured will pass
to surviving Beneficiaries proportionally.
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INCONTESTABILITY
The Company will not contest the validity of the Policy after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the Insured's lifetime for two
years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Policy, without interest, and less any
outstanding Debt and any partial withdrawals. If the Insured commits suicide,
generally within two years from the effective date of any increase in the Sum
Insured, the Company's liability with respect to such increase will be limited
to a refund of the cost thereof. The Beneficiary will receive the administrative
charges and insurance charges paid for such increase.
AGE AND SEX
If the Insured's Age or sex as stated in the application for the Policy is not
correct, benefits under the Policy will be adjusted to reflect the correct Age
and sex if death occurs prior to the Maturity Date or the Final Premium Payment
Date. The adjusted benefit will be that which the most recent cost of insurance
charge would have purchased for the correct Age and sex. In no event will the
Sum Insured be reduced to less than the Guideline Minimum Sum Insured. In the
case of a Policy issued on a unisex basis, this provision as it relates to
misstatement of sex does not apply.
ASSIGNMENT
The Policyowner may assign the Policy as collateral or make an absolute
assignment of the Policy. All rights under the Policy will be transferred to the
extent of the assignee's interest. The consent of the assignee may be required
in order to make changes in premium allocations, to make transfers, or to
exercise other rights under the Policy. The Company is not bound by an
assignment or release thereof, unless it is in writing and is recorded at the
Principal Office. When recorded, the assignment will take effect as of the date
the Written Request was signed. Any rights created by the assignment will be
subject to any payments made or actions taken by the Company before the
assignment is recorded. The Company is not responsible for determining the
validity of any assignment or release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of the Policy loan and
transfers, may be postponed whenever:
- 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 SEC; or
- an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Separate Account's
net assets.
Payments under the Policy of any amounts derived from the premiums paid by check
may be delayed until such time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the Insured, as
well as payments of Policy loans and transfers from the General Account, for a
period not to exceed six months.
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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice President,
Director First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel, First
Secretary and Counsel Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer of First
Director, Vice President and Allmerica since 1997; Vice President of First Allmerica
Chief Information Officer since 1995; Corporate Manager, Digital Equipment
Corporation 1979 to 1995
John P. Kavanaugh
Director, Vice President and Director and Chief Investment Officer of First Allmerica
Chief Investment Officer since 1996; Vice President, First Allmerica since 1991
John F. Kelly Director since 1996; General Counsel since 1981; Senior
Director, Vice President and Vice President since 1986; and Assistant Secretary since
General Counsel 1991, all of First Allmerica
J. Barry May Director of First Allmerica since 1996; Director and
Director President, The Hanover Insurance Company since 1996;
Vice President, The Hanover Insurance Company, 1993 to
1996; General Manager, The Hanover Insurance Company
1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996; Director since
Director 1992, President since 1994, and CEO since 1996, all of
Citizens Insurance Company of America; Vice President
1982 to 1994, and Chief Investment Officer 1986 to 1994
of First Allmerica
John F. O'Brien
Director and Chairman of the Director, Chairman of the Board, President and Chief
Board Executive Officer, First Allmerica since 1989
Edward J. Parry, III
Director, Vice President, Director and Chief Financial Officer of First Allmerica
Treasurer and Chief Financial since 1996; Vice President and Treasurer, First
Officer Allmerica since 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice President,
Director, President and Chief First Allmerica since 1990; Director, Allmerica
Executive Officer Investments, Inc. since 1990; Director and President,
Allmerica Financial Investment Management Services, Inc.
since 1990
Eric A. Simonsen Director of First Allmerica since 1996; Vice President,
Director and Vice President First Allmerica since 1990; Chief Financial Officer,
First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice President,
Director First Allmerica since 1987
</TABLE>
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DISTRIBUTION
Allmerica Investments, Inc., a subsidiary of First Allmerica, acts as the
principal underwriter of the Policies pursuant to a Sales and Administrative
Services Agreement with the Company and the Separate Account. Allmerica
Investments, Inc. is registered with the SEC as a broker-dealer, and is a member
of the National Association of Securities Dealers, Inc. ("NASD"). The Policies
are sold by agents of the Company who are registered representatives of
Allmerica Investments, Inc., or of certain independent broker-dealers which are
members of the NASD.
The Company pays commissions to registered representatives who sell the Policies
based on a commission schedule. After issue of the Policy or an increase in the
Face Amount, commissions generally will equal 50% of the first-year premiums up
to a basic premium amount established by the Company. Thereafter, commissions
generally will equal 4% of any additional premiums. Certain registered
representatives, including registered representatives enrolled in the Company's
training program for new agents, may receive additional first-year and renewal
commissions and training reimbursements. General Agents of the Company and
certain registered representatives also may be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 11% of first-year or
14% of renewal premiums.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policyowners or
to the Separate Account. Any surrender charge assessed on the Policy will be
retained by the Company except for amounts it may pay to Allmerica Investments,
Inc. for services it performs and expenses it may incur as principal underwriter
and general distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, Fidelity VIP
Money Market Portfolio, and Fidelity VIP II Asset Manager Portfolio, at an
annual rate of 0.10% of the aggregate net asset value, respectively, of the
shares of such Underlying Funds held by the Separate Account. With respect to
the T. Rowe Price International Stock Portfolio, the Company receives service
fees at an annual rate of 0.15% per annum of the aggregate net asset value of
shares held by the Separate Account. The Company may in the future render
services for which it will receive compensation from the investment advisers or
other service providers of other Underlying Funds.
REPORTS
The Company will maintain the records relating to the Separate Account.
Statements of significant transactions such as premium payments, changes in
specified Face Amount, changes in Sum Insured Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement will be sent to you promptly. An annual statement also will be
sent to you within 30 days after the Policy anniversary. The annual statement
will summarize all of the above transactions and deductions of charges during
the Policy year. It also will set forth the status of the Death Proceeds, Policy
Value, Surrender Value, amounts in the Sub-Accounts and General Account, and any
Policy loans. In addition, you will be sent periodic reports containing
financial statements and other information for the Separate Account and the
Underlying Funds as required by the 1940 Act.
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LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policies and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, and the financial
statements of the VEL Account of the Company as of December 31, 1997 and for the
periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policies.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they currently are interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and
possibly retroactively affect the taxation of the Policy. No representation is
made regarding the likelihood of continuation of current federal income tax laws
or of current interpretations by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policy is not exhaustive, does not purport to
cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the Trustee of an employee benefit plan.
A qualified tax adviser always should be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code,
and files a consolidated tax return with its parent and affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the Separate Account. Based on this, no charge is made for
federal income taxes which may be attributable to the Separate Account.
Periodically, the Company will review the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company ultimately is determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life
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insurance at the Company level, or if there is a change in the Company's tax
status. Any such charge would be designed to cover the federal income taxes
attributable to the investment results of the Separate Account.
Under current laws the Company also may incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE POLICIES
The Company believes that the Policies described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Policy Value to the Insurance Amount at
Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value is not
taxable until received by the Policyowner or the Policyowner's designee. See
"Modified Endowment Contracts."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with the Department of Treasury regulations in order
to be treated as a life insurance policy for tax purposes. Although the Company
does not have control over the investments of the Underlying Funds, the Company
believes that the Underlying Funds currently meet the Treasury's diversification
requirements, and the Company will monitor continued compliance with these
requirements. In connection with the issuance of previous regulations relating
to diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which Policyowners
may direct their investments to particular divisions of the Separate Account.
Regulations in this regard may be issued in the future. It is possible that if
and when regulations are issued, the Policy may need to be modified to comply
with such regulations. For these reasons, the Policy or the Company's
administrative rules may be modified as necessary to prevent the Policyowner
from being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding, or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner or
Beneficiary.
POLICY LOANS
The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Contracts"). There is
a risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal and taxed accordingly. At the present time, the IRS has not issued
any guidance on whether loans with the attributes of a preferred loan should be
treated differently than a non-preferred loan. This lack of specific guidance
makes the tax treatment of preferred loans uncertain. In the event pertinent IRS
guidelines are issued in the future, you may revoke your request for a preferred
loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. Generally, no tax deduction for interest is allowed on Policy
loans if the Insured is an officer or employee of, or is financially interested
in, any business carried on by the taxpayer. There is an exception to this rule
which permits a deduction for interest on loans up to $50,000 related to any
policies covering the greater of (1) five individuals, or (2) the lesser of (a)
5% of the total number of officers and employees of the corporation, or (b) 20
individuals.
64
<PAGE>
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("the 1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. A policy would fail to satisfy the
seven-pay test if the cumulative premiums paid under the policy at any time
during the first seven policy years or within seven years of a material change
in the Policy exceeds the sum of the net level premiums that would have been
paid, had the policy provided for paid-up future benefits after the payment of
seven level premiums.
If the Policy is considered a modified endowment contract, all distributions
under the Policy will be taxed on an "income-first" basis. Most distributions
received by the Policyowner directly or indirectly (including loans,
withdrawals, surrenders, or the assignment or pledge of any portion of the
Policy Value) will be includible in gross income to the extent that the
Surrender Value of the Policy exceeds the Policyowner's investment in the
Policy. Any additional amounts will be treated as a return of capital to the
extent of the Policyowner's basis in the Policy. With certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same Policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be classified permanently as a
modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities law, any amount in the General Account is not generally subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
GENERAL DESCRIPTION
The General Account is made up of all of the general assets of the Company other
than those allocated to any Separate Account. Allocations to the General Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. Subject to applicable law, the Company has sole discretion
over the investment of assets of the General Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUES
The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").
65
<PAGE>
The Company may, at its sole discretion, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. The excess interest rate, if any, in effect
on the date a premium is received at the Principal Office, however, is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for the Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE
POLICYOWNER ASSUMES THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE
GUARANTEED MINIMUM RATE. Even if excess interest is credited to accumulated
value in the General Account, no excess interest will be credited to that
portion of the Policy Value which is equal to the Debt. Such Policy Value,
however, will be credited interest at an effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or the
Policy Value transferred to the General Account, plus interest at an annual rate
of 4%, plus any excess interest which the Company credits, less the sum of all
Policy charges allocable to the General Account and any amounts deducted from
the General Account in connection with loans, partial withdrawals, surrenders or
transfers.
THE POLICIES
This Prospectus describes flexible premium variable life insurance Policies, and
is intended generally to serve as a disclosure document only for the aspects of
the Policy relating to the Separate Account. For complete details regarding the
General Account, see the Policy itself.
SURRENDERS AND PARTIAL WITHDRAWALS
If the Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in the Face Amount, the surrender charge deducted is a fraction of
the charge that would apply to a full surrender of the Policy. Partial
withdrawals are made on a last-in/first-out basis from the Policy Value
allocated to the General Account.
TRANSFERS
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans also may be made from the Policy Value in the General Account.
DELAY OF PAYMENTS
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days or more, however, the Company will pay interest at least
equal to an effective annual yield of 3 1/2% for the period of deferment.
Amounts from the General Account used to pay premiums on policies with the
Company will not be delayed.
FINANCIAL STATEMENTS
Financial Statements for the Company and the Separate Account are included in
this Prospectus beginning immediately after this section. The financial
statements of the Company should be considered only as bearing on the ability of
the Company to meet its obligations under the Policies. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account.
66
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6 )
Other income............................... 1.4 0.9
--------- ---------
Total revenues......................... 403.5 377.9
--------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
--------- ---------
Total benefits, losses and expenses.... 345.8 329.1
--------- ---------
Income before federal income taxes............. 57.7 48.8
--------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8 )
--------- ---------
Total federal income tax expense....... 21.0 17.1
--------- ---------
Net income..................................... $ 36.7 $ 31.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,340.5 and $1,660.2)............................ $1,402.5 $1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ----------
Total investments............................... 1,857.1 2,126.8
---------- ----------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ----------
Total assets.................................... $10,516.8 $7,429.7
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $2,097.3 $2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ----------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ----------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ----------
Total liabilities............................... 9,875.8 6,884.0
---------- ----------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ----------
Total shareholder's equity...................... 641.0 545.7
---------- ----------
Total liabilities and shareholder's equity...... $10,516.8 $7,429.7
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
--------- ---------
Balance at end of period................... 2.5 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
--------- ---------
Balance at end of period................... 386.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
--------- ---------
Balance at end of period................... 213.1 176.4
--------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1 )
(Provision) benefit for deferred federal
income taxes............................. (9.0 ) 1.8
--------- ---------
Balance at end of period................... 38.5 20.5
--------- ---------
Total shareholder's equity............. $641.0 $545.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9 ) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8 )
Payment related to cession of
disability income business........ (207.0 ) --
Change in deferred acquisition
costs............................. (181.3 ) (66.8 )
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2 )
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4 ) (39.9 )
Change in reinsurance receivable.... 22.1 (1.5 )
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5 ) (0.2 )
---------- ----------
Net used in operating
activities.................... (343.3 ) (35.6 )
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7 ) (795.8 )
Purchase of equity securities........... (3.2 ) (13.2 )
Purchase of other investments........... (79.4 ) (36.2 )
Other investing activities, net......... -- (2.0 )
---------- ----------
Net cash provided by investing
activities........................ 336.4 15.1
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
---------- ----------
Net cash provided by financing
activities........................ 19.2 22.0
---------- ----------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
---------- ----------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
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 amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
assessed mortality and surrender charges. Individual health benefit liabilities
for active lives are estimated using the net level premium method, and
assumptions as to future morbidity, withdrawals and interest which provide a
margin for adverse deviation. Benefit liabilities for disabled lives are
estimated using the present value of benefits method and experience assumptions
as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values. Certain policy charges that represent compensation
for services to be provided in future periods are deferred and amortized over
the period benefited using the same assumptions used to amortize capitalized
acquisition costs.
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and AFLIAC, and its non-life
insurance domestic subsidiaries file a life-nonlife consolidated United States
Federal income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. Allmerica P&C and its subsidiaries will be included in the AFC
consolidated return as part of the non-life insurance company subgroup for the
period July 17, 1997 through December 31, 1997. For the period January 1, 1997
through July 16, 1997, Allmerica P&C and its subsidiaries will file a separate
consolidated United States Federal income tax return.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ------- -------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ .5 $ -- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
--------- ------- -------- -------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $4.6 $1,402.5
--------- ------- -------- -------
Equity securities....................... $ 34.4 $19.9 $0.3 $ 54.0
--------- ------- -------- -------
--------- ------- -------- -------
1996
----------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $0.5 $0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
--------- ------- -------- -------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $8.0 $1,698.0
--------- ------- -------- -------
Equity securities....................... $ 33.0 $10.2 $1.7 $ 41.5
--------- ------- -------- -------
--------- ------- -------- -------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these assets on deposit were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or without call or prepayment penalties, or the Company may have the right to
put or sell the obligations back to the issuers. Mortgage backed securities are
included in the category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Due in one year or less..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
-------- --------
Total....................................................... $1,340.5 $1,402.5
-------- --------
-------- --------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------------------------------------------------------ --------- ------ ------
<S> <C> <C> <C>
1997
Fixed maturities............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEAR ENDED DECEMBER 31, FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ --------- ------------ ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
--------- ----- ------
9.4 8.6 18.0
--------- ----- ------
Net appreciation, end of year............................... $22.1 $16.4 $ 38.5
--------- ----- ------
--------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ --------- ------------ ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
--------- ----- ------
(7.7) 4.4 (3.3)
--------- ----- ------
Net appreciation, end of year............................... $12.7 $ 7.8 $ 20.5
--------- ----- ------
--------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Mortgage loans.............................................. $ 228.2 $ 221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
--------- ------
Total real estate....................................... $ 12.0 $ 26.1
--------- ------
Total mortgage loans and real estate........................ $ 240.2 $ 247.7
--------- ------
--------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $15.7 million were written down to the estimated fair value less cost
to sell of $12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. These
commitments generally expire within one year.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Property type:
Office building........................................... $ 101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
--------- ------
Total....................................................... $ 240.2 $ 247.7
--------- ------
--------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
--------- ------
Total....................................................... $ 240.2 $ 247.7
--------- ------
--------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
BALANCE
FOR THE YEAR ENDED DECEMBER 31, AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
--------- --- --- -----
Total................................................... $11.2 $ 4.8 $ 6.6 $ 9.4
--------- --- --- -----
--------- --- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
--------- --- --- -----
Total................................................... $14.6 $ 4.5 $ 7.9 $11.2
--------- --- --- -----
--------- --- --- -----
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Fixed maturities............................................ $ 130.0 $ 137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
--------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
--------- ------
Net investment income....................................... $ 164.2 $ 171.7
--------- ------
--------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities on non-accrual
status at December 31, 1997. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
--------- -----
Net realized investment losses.............................. $ 2.9 $ (3.6)
--------- -----
--------- -----
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- ------------ ------------ ------------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- ------------ ------------ ------------
--------- ------------ ------------ ------------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- ------------ ------------ ------------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- ------------ ------------ ------------
--------- ------------ ------------ ------------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
--------- -----
Total....................................................... $ 21.0 $ 17.1
--------- -----
--------- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $ (137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
--------- ------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
--------- ------------
--------- ------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
--------- ------
Net premiums................................................ $ 22.8 $ 32.7
--------- ------
--------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 226.0 $ 206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
--------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 187.8 $ 192.6
--------- ------
--------- ------
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Balance at beginning of year................................ $ 632.7 $ 555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
--------- ------
Balance at end of year...................................... $ 765.3 $ 632.7
--------- ------
--------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against Allmerica Financial
Corp. and certain of its subsidiaries by individual plaintiffs alleging fraud,
unfair or deceptive acts, breach of contract, misrepresentation and related
claims in the sale of life insurance policies. In October 1997, plaintiffs
voluntarily dismissed the Louisiana suit and refiled the action in Federal
District Court in Worcester, Massachusetts. The plaintiffs seek to be certified
as a class. The case is in the early stages of discovery and the Company is
evaluating the
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
claims. Although the Company believes it has meritorious defenses to plaintiffs'
claims, there can be no assurance that the claims will be resolved on a basis
which is satisfactory to the Company.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies will
not arise.
14. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ --------- ------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $ 307.1 $ 234.0
--------- ------
--------- ------
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the VEL Account of Allmerica Financial Life
Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select International Equity, Select Capital Appreciation, Fidelity
VIP Money Market, Fidelity VIP High Income, Fidelity VIP Equity-Income, Fidelity
VIP Growth, Fidelity VIP Overseas, Fidelity VIP II Asset Manager, T. Rowe Price
International Stock, and DGPF International Equity) constituting the VEL Account
of Allmerica Financial Life Insurance and Annuity Company at December 31, 1997,
the results of each of their operations and the changes in each of their net
assets for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Allmerica Financial Life Insurance and Annuity Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosure in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of investments at
December 31, 1997 by correspondence with the Funds, provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $50,649,579 $9,269,208 $7,320,412 $ 20,572,757 $1,992,410
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 26 -- --
----------- ------------ ------------ ------------ ----------
Total assets.............................. 50,649,579 9,269,208 7,320,438 20,572,757 1,992,410
LIABILITIES: -- -- -- -- --
----------- ------------ ------------ ------------ ----------
Net assets................................ $50,649,579 $9,269,208 $7,320,438 $ 20,572,757 $1,992,410
----------- ------------ ------------ ------------ ----------
----------- ------------ ------------ ------------ ----------
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies................................ $49,347,949 $8,950,536 $6,917,641 $ 19,452,101 $1,869,696
VEL Plus Series variable life policies.... 1,301,630 318,672 402,797 1,120,656 122,714
----------- ------------ ------------ ------------ ----------
$50,649,579 $9,269,208 $7,320,438 $ 20,572,757 $1,992,410
----------- ------------ ------------ ------------ ----------
----------- ------------ ------------ ------------ ----------
Units outstanding and net asset value per
unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1997.... 10,467,553 4,068,936 4,303,822 5,730,292 1,343,819
Net asset value per unit, December 31,
1997.................................. $ 4.714373 $ 2.199724 $ 1.607325 $ 3.394609 $1.391330
VEL Plus Series:
Units outstanding, December 31, 1997.... 274,617 144,089 249,253 328,358 87,724
Net asset value per unit, December 31,
1997.................................. $ 4.739816 $ 2.211628 $ 1.616015 $ 3.412904 $1.398864
<CAPTION>
SELECT SELECT SELECT
AGGRESSIVE SELECT GROWTH SELECT VALUE INTERNATIONAL
GROWTH GROWTH AND INCOME OPPORTUNITY** EQUITY
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $23,558,282 $13,132,732 $11,166,631 $9,218,742 $9,303,861
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
----------- ------------- ------------- ------------- -------------
Total assets.............................. 23,558,282 13,132,732 11,166,631 9,218,742 9,303,861
LIABILITIES: -- -- -- -- --
----------- ------------- ------------- ------------- -------------
Net assets................................ $23,558,282 $13,132,732 $11,166,631 $9,218,742 $9,303,861
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies................................ $21,453,643 $12,369,326 $10,819,516 $8,241,899 $8,439,173
VEL Plus Series variable life policies.... 2,104,639 763,406 347,115 976,843 864,688
----------- ------------- ------------- ------------- -------------
$23,558,282 $13,132,732 $11,166,631 $9,218,742 $9,303,861
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Units outstanding and net asset value per
unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1997.... 9,031,162 6,028,345 5,292,099 4,178,127 5,919,838
Net asset value per unit, December 31,
1997.................................. $ 2.375513 $ 2.051861 $ 2.044466 $ 1.972630 $ 1.425575
VEL Plus Series:
Units outstanding, December 31, 1997.... 881,232 370,066 168,871 492,549 603,305
Net asset value per unit, December 31,
1997.................................. $ 2.388292 $ 2.062891 $ 2.055514 $ 1.983246 $ 1.433251
</TABLE>
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT CAPITAL FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP
APPRECIATION MONEY MARKET HIGH INCOME EQUITY-INCOME GROWTH
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $4,917,638 $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- 2,119,922 12,322,252 69,120,551 66,740,311
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance
and Annuity Company (Sponsor)............. -- -- -- -- --
-------------- ------------ ------------ ------------- ------------
Total assets.............................. 4,917,638 2,119,922 12,322,252 69,120,551 66,740,311
LIABILITIES: -- -- -- -- --
-------------- ------------ ------------ ------------- ------------
Net assets................................ $4,917,638 $2,119,922 $ 12,322,252 $69,120,551 $ 66,740,311
-------------- ------------ ------------ ------------- ------------
-------------- ------------ ------------ ------------- ------------
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies................................ $4,358,373 $2,119,922 $ 11,670,426 $65,102,882 $ 63,966,551
VEL Plus Series variable life policies.... 559,265 -- 651,826 4,017,669 2,773,760
-------------- ------------ ------------ ------------- ------------
$4,917,638 $2,119,922 $ 12,322,252 $69,120,551 $ 66,740,311
-------------- ------------ ------------ ------------- ------------
-------------- ------------ ------------ ------------- ------------
Units outstanding and net asset value per
unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1997.... 2,572,738 1,302,443 3,781,578 14,164,292 12,966,538
Net asset value per unit, December 31,
1997.................................. $ 1.694060 $ 1.627650 $ 3.086126 $ 4.596268 $ 4.933202
VEL Plus Series:
Units outstanding, December 31, 1997.... 328,362 -- 210,076 869,419 559,251
Net asset value per unit, December 31,
1997.................................. $ 1.703200 $ -- $ 3.102813 $ 4.621097 $ 4.959777
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE DGPF INTERNATIONAL
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK EQUITY
------------ --------------- ------------------- ------------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 17,967,615 1,736,609 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- 3,346,147 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- 5,869,679
Receivable from Allmerica Financial Life
Insurance
and Annuity Company (Sponsor)............. -- -- -- --
------------ --------------- ------------------- ------------------
Total assets.............................. 17,967,615 1,736,609 3,346,147 5,869,679
LIABILITIES: -- -- -- --
------------ --------------- ------------------- ------------------
Net assets................................ $ 17,967,615 $1,736,609 $3,346,147 $5,869,679
------------ --------------- ------------------- ------------------
------------ --------------- ------------------- ------------------
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies................................ $ 17,318,052 $1,414,225 $3,113,863 $5,433,630
VEL Plus Series variable life policies.... 649,563 322,384 232,284 436,049
------------ --------------- ------------------- ------------------
$ 17,967,615 $1,736,609 $3,346,147 $5,869,679
------------ --------------- ------------------- ------------------
------------ --------------- ------------------- ------------------
Units outstanding and net asset value per
unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1997.... 7,152,103 908,299 2,545,986 3,307,729
Net asset value per unit, December 31,
1997.................................. $ 2.421393 $ 1.557004 $ 1.223048 $ 1.642707
VEL Plus Series:
Units outstanding, December 31, 1997.... 266,819 205,942 188,903 264,020
Net asset value per unit, December 31,
1997.................................. $ 2.434472 $ 1.565415 $ 1.229647 $ 1.651579
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 683,187 $ 786,603 $ 716,306 $ 592,446 $ 634,850 $ 598,145
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 423,602 345,030 276,867 82,739 87,871 80,882
----------- ----------- ----------- --------- ---------- -----------
Net investment income
(loss).................. 259,585 441,573 439,439 509,707 546,979 517,263
----------- ----------- ----------- --------- ---------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 8,215,255 3,716,918 2,681,990 -- -- --
Net realized gain (loss)
from sales of
investments............. 800,189 603,156 114,997 16,779 (181) (8,055)
----------- ----------- ----------- --------- ---------- -----------
Net realized gain
(loss)................ 9,015,444 4,320,074 2,796,987 16,779 (181) (8,055)
Net unrealized gain
(loss).................. 592,925 1,960,758 5,074,547 225,179 (291,424) 867,289
----------- ----------- ----------- --------- ---------- -----------
Net realized and
unrealized gain
(loss)................ 9,608,369 6,280,832 7,871,534 241,958 (291,605) 859,234
----------- ----------- ----------- --------- ---------- -----------
Net increase in net
assets from
operations............ $ 9,867,954 $ 6,722,405 $ 8,310,973 $ 751,665 $ 255,374 $ 1,376,497
----------- ----------- ----------- --------- ---------- -----------
----------- ----------- ----------- --------- ---------- -----------
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 417,826 $ 355,812 $ 340,880 $ 228,820 $ 315,571 $ 161,071
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 69,497 61,058 54,030 156,372 167,515 168,665
--------- --------- --------- ----------- ------------ -----------
Net investment income
(loss).................. 348,329 294,754 286,850 72,448 148,056 (7,594)
--------- --------- --------- ----------- ------------ -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 556,659 204,788 1,455,547
Net realized gain (loss)
from sales of
investments............. -- -- -- 1,026,548 4,187,907 98,943
--------- --------- --------- ----------- ------------ -----------
Net realized gain
(loss)................ -- -- -- 1,583,207 4,392,695 1,554,490
Net unrealized gain
(loss).................. -- -- -- 2,946,018 (1,586,677) 3,975,325
--------- --------- --------- ----------- ------------ -----------
Net realized and
unrealized gain
(loss)................ -- -- -- 4,529,225 2,806,018 5,529,815
--------- --------- --------- ----------- ------------ -----------
Net increase in net
assets from
operations............ $ 348,329 $ 294,754 $ 286,850 $ 4,601,673 $ 2,954,074 $ 5,522,221
--------- --------- --------- ----------- ------------ -----------
--------- --------- --------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 112,464 $ 112,649 $ 122,508 $ -- $ -- $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 17,177 17,338 18,980 187,689 149,550 107,755
--------- --------- --------- ----------- ----------- -----------
Net investment income
(loss).................. 95,287 95,311 103,528 (187,689) (149,550) (107,755)
--------- --------- --------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 1,862,473 1,307,228 --
Net realized gain (loss)
from sales of
investments............. (6,237) (10,826) (27,790) 661,702 1,036,112 110,726
--------- --------- --------- ----------- ----------- -----------
Net realized gain
(loss)................ (6,237) (10,826) (27,790) 2,524,175 2,343,340 110,726
Net unrealized gain
(loss).................. 25,622 (37,905) 162,592 1,162,100 385,516 3,205,669
--------- --------- --------- ----------- ----------- -----------
Net realized and
unrealized gain
(loss)................ 19,385 (48,731) 134,802 3,686,275 2,728,856 3,316,395
--------- --------- --------- ----------- ----------- -----------
Net increase in net
assets from
operations............ $ 114,672 $ 46,580 $ 238,330 $ 3,498,586 $ 2,579,306 $ 3,208,640
--------- --------- --------- ----------- ----------- -----------
--------- --------- --------- ----------- ----------- -----------
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 37,821 $ 23,659 $ 909 $ 130,921 $ 105,544 $ 89,511
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 96,204 63,265 50,997 90,003 66,237 48,963
----------- ----------- ----------- ----------- ----------- -----------
Net investment income
(loss).................. (58,383) (39,606) (50,088) 40,918 39,307 40,548
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 677,736 1,131,336 -- 964,158 607,726 242,671
Net realized gain (loss)
from sales of
investments............. 227,315 444,292 67,387 251,158 195,278 68,712
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain
(loss)................ 905,051 1,575,628 67,387 1,215,316 803,004 311,383
Net unrealized gain
(loss).................. 2,154,291 (203,667) 1,114,016 660,971 506,567 1,034,046
----------- ----------- ----------- ----------- ----------- -----------
Net realized and
unrealized gain
(loss)................ 3,059,342 1,371,961 1,181,403 1,876,287 1,309,571 1,345,429
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net
assets from
operations............ $ 3,000,959 $ 1,332,355 $ 1,131,315 $ 1,917,205 $ 1,348,878 $ 1,385,977
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY** SELECT INTERNATIONAL EQUITY
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 50,552 $ 37,163 $ 26,084 $ 211,007 $ 111,801 $ 20,488
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 64,824 39,343 28,223 71,279 34,090 11,453
----------- ----------- --------- --------- --------- ---------
Net investment income
(loss).................. (14,272) (2,180) (2,139) 139,728 77,711 9,035
----------- ----------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,219,528 235,932 97,668 292,738 13,112 7,973
Net realized gain (loss)
from sales of
investments............. 414,908 216,241 35,178 163,180 99,532 3,984
----------- ----------- --------- --------- --------- ---------
Net realized gain
(loss)................ 1,634,436 452,173 132,846 455,918 112,644 11,957
Net unrealized gain
(loss).................. (31,480) 612,764 350,342 (332,962) 624,842 187,492
----------- ----------- --------- --------- --------- ---------
Net realized and
unrealized gain
(loss)................ 1,602,956 1,064,937 483,188 122,956 737,486 199,449
----------- ----------- --------- --------- --------- ---------
Net increase in net
assets from
operations............ $ 1,588,684 $ 1,062,757 $ 481,049 $ 262,684 $ 815,197 $ 208,484
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP MONEY MARKET
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31,
------------------- 4/28/95* TO ------------------------------
1997 1996 12/31/95 1997 1996 1995
--------- -------- -------------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ -- $ -- $ 24,495 $ 134,142 $120,292 $ 156,906
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 38,200 24,307 3,057 22,756 20,908 24,582
--------- -------- -------- --------- -------- ---------
Net investment income
(loss).................. (38,200) (24,307) 21,438 111,386 99,384 132,324
--------- -------- -------- --------- -------- ---------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- 9,311 -- -- -- --
Net realized gain (loss)
from sales of
investments............. 60,995 29,698 1,577 -- -- --
--------- -------- -------- --------- -------- ---------
Net realized gain
(loss)................ 60,995 39,009 1,577 -- -- --
Net unrealized gain
(loss).................. 560,718 42,479 106,054 -- -- --
--------- -------- -------- --------- -------- ---------
Net realized and
unrealized gain
(loss)................ 621,713 81,488 107,631 -- -- --
--------- -------- -------- --------- -------- ---------
Net increase in net
assets from
operations............ $ 583,513 $ 57,181 $129,069 $ 111,386 $ 99,384 $ 132,324
--------- -------- -------- --------- -------- ---------
--------- -------- -------- --------- -------- ---------
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 767,218 $ 730,331 $ 527,909 $ 981,785 $ 80,368 $ 1,036,739
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 101,942 90,412 75,188 566,813 486,502 395,590
----------- ----------- ----------- ------------ ---------- ------------
Net investment income
(loss).................. 665,276 639,919 452,721 414,972 (406,134) 641,149
----------- ----------- ----------- ------------ ---------- ------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 94,825 142,891 -- 4,936,197 2,303,888 1,849,940
Net realized gain (loss)
from sales of
investments............. 507,660 403,489 65,770 2,055,889 1,285,708 359,460
----------- ----------- ----------- ------------ ---------- ------------
Net realized gain
(loss)................ 602,485 546,380 65,770 6,992,086 3,589,596 2,209,400
Net unrealized gain
(loss).................. 492,547 49,497 936,558 7,687,046 3,673,472 9,834,460
----------- ----------- ----------- ------------ ---------- ------------
Net realized and
unrealized gain
(loss)................ 1,095,032 595,877 1,002,328 14,679,132 7,263,068 12,043,860
----------- ----------- ----------- ------------ ---------- ------------
Net increase in net
assets from
operations............ $ 1,760,308 $ 1,235,796 $ 1,455,049 $ 15,094,104 $6,856,934 $ 12,685,009
----------- ----------- ----------- ------------ ---------- ------------
----------- ----------- ----------- ------------ ---------- ------------
<CAPTION>
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- -------------------------------------
1997 1996 1995 1997 1996 1995
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 396,280 $ 132,932 $ 210,037 $ 314,599 $ 212,526 $ 64,869
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 565,772 509,772 424,764 164,466 167,042 159,261
------------ ----------- ------------ ----------- ----------- -----------
Net investment income
(loss).................. (169,492) (376,840) (214,727) 150,133 45,484 (94,392)
------------ ----------- ------------ ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,773,823 3,641,885 -- 1,248,863 233,778 64,869
Net realized gain (loss)
from sales of
investments............. 2,849,100 1,452,352 789,394 963,884 749,908 304,440
------------ ----------- ------------ ----------- ----------- -----------
Net realized gain
(loss)................ 4,622,923 5,094,237 789,394 2,212,747 983,686 369,309
Net unrealized gain
(loss).................. 8,211,480 2,500,114 12,592,041 (508,913) 1,102,752 1,219,736
------------ ----------- ------------ ----------- ----------- -----------
Net realized and
unrealized gain
(loss)................ 12,834,403 7,594,351 13,381,435 1,703,834 2,086,438 1,589,045
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets from
operations............ $ 12,664,911 $ 7,217,511 $ 13,166,708 $ 1,853,967 $ 2,131,922 $ 1,494,653
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER T. ROWE PRICE INTERNATIONAL STOCK
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, FOR THE PERIOD
------------------------------- --------------------- 6/23/95* TO
1997 1996 1995 1997 1996 12/31/95
--------- --------- --------- ---------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 44,294 $ 44,029 $ 21,513 $ 30,749 $ 20,250 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 13,409 11,226 10,599 26,527 11,039 1,301
--------- --------- --------- ---------- --------- -------
Net investment income
(loss).................. 30,885 32,803 10,914 4,222 9,211 (1,301)
--------- --------- --------- ---------- --------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 111,110 36,304 -- 43,561 11,344 --
Net realized gain (loss)
from sales of
investments............. 24,571 48,794 13,540 164,337 34,883 (98)
--------- --------- --------- ---------- --------- -------
Net realized gain
(loss)................. 135,681 85,098 13,540 207,898 46,227 (98)
Net unrealized gain
(loss).................. 110,859 41,554 154,558 (172,676) 103,877 15,909
--------- --------- --------- ---------- --------- -------
Net realized and
unrealized gain
(loss)................. 246,540 126,652 168,098 35,222 150,104 15,811
--------- --------- --------- ---------- --------- -------
Net increase in net
assets from
operations............. $ 277,425 $ 159,455 $ 179,012 $ 39,444 $ 159,315 $14,510
--------- --------- --------- ---------- --------- -------
--------- --------- --------- ---------- --------- -------
<CAPTION>
DGPF INTERNATIONAL EQUITY
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 175,825 $ 119,918 $ 55,082
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 49,946 36,315 28,475
--------- --------- ---------
Net investment income
(loss).................. 125,879 83,603 26,607
--------- --------- ---------
REALIZED AND UNREALIZED GAIN
(LOSS) ON
INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- 32,264 20,656
Net realized gain (loss)
from sales of
investments............. 276,622 113,363 18,892
--------- --------- ---------
Net realized gain
(loss)................. 276,622 145,627 39,548
Net unrealized gain
(loss).................. (127,979) 490,548 320,817
--------- --------- ---------
Net realized and
unrealized gain
(loss)................. 148,643 636,175 360,365
--------- --------- ---------
Net increase in net
assets from
operations............. $ 274,522 $ 719,778 $ 386,972
--------- --------- ---------
--------- --------- ---------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 259,585 $ 441,573 $ 439,439 $ 509,707 $ 546,979 $ 517,263
Net realized gain
(loss)................ 9,015,444 4,320,074 2,796,987 16,779 (181) (8,055)
Net unrealized gain
(loss)................ 592,925 1,960,758 5,074,547 225,179 (291,424) 867,289
------------ ------------ ------------ ------------ ----------- -----------
Net increase in net
assets from
operations............ 9,867,954 6,722,405 8,310,973 751,665 255,374 1,376,497
------------ ------------ ------------ ------------ ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 4,632,238 5,044,215 5,348,444 1,285,975 1,542,885 1,777,991
Terminations............ (1,791,890) (1,571,480) (962,528) (316,217) (475,070) (315,011)
Insurance and other
charges............... (2,372,430) (2,218,963) (2,115,819) (598,463) (706,041) (746,882)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and
Annuity Company
(Sponsor)............. (1,252,955) (1,866,231) (733,158) (1,690,149) (688,739) (228,028)
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
------------ ------------ ------------ ------------ ----------- -----------
Net increase (decrease)
in net assets from
capital
transactions.......... (785,037) (612,459) 1,536,939 (1,318,854) (326,965) 488,070
------------ ------------ ------------ ------------ ----------- -----------
Net increase (decrease)
in net assets......... 9,082,917 6,109,946 9,847,912 (567,189) (71,591) 1,864,567
NET ASSETS:
Beginning of period....... 41,566,662 35,456,716 25,608,804 9,836,397 9,907,988 8,043,421
------------ ------------ ------------ ------------ ----------- -----------
End of period............. $ 50,649,579 $ 41,566,662 $ 35,456,716 $ 9,269,208 $ 9,836,397 $ 9,907,988
------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ----------- -----------
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 348,329 $ 294,754 $ 286,850 $ 72,448 $ 148,056 $ (7,594)
Net realized gain
(loss)................ -- -- -- 1,583,207 4,392,695 1,554,490
Net unrealized gain
(loss)................ -- -- -- 2,946,018 (1,586,677) 3,975,325
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net
assets from
operations............ 348,329 294,754 286,850 4,601,673 2,954,074 5,522,221
------------ ------------ ------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 3,773,110 3,687,528 3,733,510 1,915,757 1,682,234 1,721,701
Terminations............ (326,856) (563,991) (337,981) (505,716) (413,060) (251,519)
Insurance and other
charges............... (1,672,886) (1,808,373) (1,878,702) (788,505) (673,588) (601,471)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and
Annuity Company
(Sponsor)............. (2,484,148) (64,453) (1,492,320) 1,239,666 (66,036) 282,043
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- (11,394,141) --
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... (710,780) 1,250,711 24,507 1,861,202 (10,864,591) 1,150,754
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets......... (362,451) 1,545,465 311,357 6,462,875 (7,910,517) 6,672,975
NET ASSETS:
Beginning of period....... 7,682,889 6,137,424 5,826,067 14,109,882 22,020,399 15,347,424
------------ ------------ ------------ ------------ ------------ ------------
End of period............. $ 7,320,438 $ 7,682,889 $ 6,137,424 $ 20,572,757 $ 14,109,882 $ 22,020,399
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 95,287 $ 95,311 $ 103,528 $ (187,689) $ (149,550) $ (107,755)
Net realized gain
(loss)................ (6,237) (10,826) (27,790) 2,524,175 2,343,340 110,726
Net unrealized gain
(loss)................ 25,622 (37,905) 162,592 1,162,100 385,516 3,205,669
----------- ----------- ----------- ------------ ------------ ------------
Net increase in net
assets from
operations............ 114,672 46,580 238,330 3,498,586 2,579,306 3,208,640
----------- ----------- ----------- ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 682,542 842,750 1,087,763 2,824,854 3,003,875 2,791,210
Terminations............ (79,493) (101,929) (224,574) (723,396) (515,815) (332,835)
Insurance and other
charges............... (362,563) (420,415) (489,735) (1,019,076) (953,249) (823,313)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and
Annuity Company
(Sponsor)............. (246,394) (539,744) (847,388) 389,448 92,739 120,078
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
----------- ----------- ----------- ------------ ------------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... (5,908) (219,338) (473,934) 1,471,830 1,627,550 1,755,140
----------- ----------- ----------- ------------ ------------ ------------
Net increase (decrease)
in net assets......... 108,764 (172,758) (235,604) 4,970,416 4,206,856 4,963,780
NET ASSETS:
Beginning of period....... 1,883,646 2,056,404 2,292,008 18,587,866 14,381,010 9,417,230
----------- ----------- ----------- ------------ ------------ ------------
End of period............. $ 1,992,410 $ 1,883,646 $ 2,056,404 $ 23,558,282 $ 18,587,866 $ 14,381,010
----------- ----------- ----------- ------------ ------------ ------------
----------- ----------- ----------- ------------ ------------ ------------
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (58,383) $ (39,606) $ (50,088) $ 40,918 $ 39,307 $ 40,548
Net realized gain
(loss)................ 905,051 1,575,628 67,387 1,215,316 803,004 311,383
Net unrealized gain
(loss)................ 2,154,291 (203,667) 1,114,016 660,971 506,567 1,034,046
------------ ----------- ----------- ------------ ----------- -----------
Net increase in net
assets from
operations............ 3,000,959 1,332,355 1,131,315 1,917,205 1,348,878 1,385,977
------------ ----------- ----------- ------------ ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 1,393,879 1,147,398 1,207,487 1,121,777 1,132,705 1,173,049
Terminations............ (295,316) (206,706) (185,136) (367,783) (149,501) (161,150)
Insurance and other
charges............... (547,579) (433,757) (422,783) (533,886) (466,572) (425,686)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and
Annuity Company
(Sponsor)............. 1,533,424 (14,006) (112,824) 607,337 64,722 (142,200)
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
------------ ----------- ----------- ------------ ----------- -----------
Net increase (decrease)
in net assets from
capital
transactions.......... 2,084,408 492,929 486,744 827,445 581,354 444,013
------------ ----------- ----------- ------------ ----------- -----------
Net increase (decrease)
in net assets......... 5,085,367 1,825,284 1,618,059 2,744,650 1,930,232 1,829,990
NET ASSETS:
Beginning of period....... 8,047,365 6,222,081 4,604,022 8,421,981 6,491,749 4,661,759
------------ ----------- ----------- ------------ ----------- -----------
End of period............. $ 13,132,732 $ 8,047,365 $ 6,222,081 $ 11,166,631 $ 8,421,981 $ 6,491,749
------------ ----------- ----------- ------------ ----------- -----------
------------ ----------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY** SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (14,272) $ (2,180) $ (2,139) $ 139,728 $ 77,711 $ 9,035
Net realized gain
(loss)................ 1,634,436 452,173 132,846 455,918 112,644 11,957
Net unrealized gain
(loss)................ (31,480) 612,764 350,342 (332,962) 624,842 187,492
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net
assets from
operations............ 1,588,684 1,062,757 481,049 262,684 815,197 208,484
----------- ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 987,196 738,397 728,709 1,200,360 827,029 370,401
Terminations............ (170,070) (141,088) (66,720) (265,082) (75,751) (16,371)
Insurance and other
charges............... (311,192) (217,947) (183,241) (327,495) (195,077) (81,910)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. 1,753,981 215,947 221,952 2,429,813 2,483,719 1,024,052
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- (133) --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets from
capital
transactions.......... 2,259,915 595,309 700,700 3,037,596 3,039,787 1,296,172
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets......... 3,848,599 1,658,066 1,181,749 3,300,280 3,854,984 1,504,656
NET ASSETS:
Beginning of period....... 5,370,143 3,712,077 2,530,328 6,003,581 2,148,597 643,941
----------- ----------- ----------- ----------- ----------- -----------
End of period............. $ 9,218,742 $ 5,370,143 $ 3,712,077 $ 9,303,861 $ 6,003,581 $ 2,148,597
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP MONEY MARKET
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31,
------------------------ 4/28/95* TO -------------------------------------
1997 1996 12/31/95 1997 1996 1995
----------- ----------- -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (38,200) $ (24,307) $ 21,438 $ 111,386 $ 99,384 $ 132,324
Net realized gain
(loss)................ 60,995 39,009 1,577 -- -- --
Net unrealized gain
(loss)................ 560,718 42,479 106,054 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net
assets from
operations............ 583,513 57,181 129,069 111,386 99,384 132,324
----------- ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 778,775 721,364 139,022 557,101 549,667 810,746
Terminations............ (428,702) (55,631) (2,350) (108,207) (95,420) (122,754)
Insurance and other
charges............... (214,729) (142,168) (21,550) (405,493) (455,285) (506,776)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. 235,782 2,095,379 1,042,778 (504,469) (344,433) (164,021)
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (295) 200 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets from
capital
transactions.......... 371,126 2,618,649 1,158,100 (461,068) (345,471) 17,195
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets......... 954,639 2,675,830 1,287,169 (349,682) (246,087) 149,519
NET ASSETS:
Beginning of period....... 3,962,999 1,287,169 -- 2,469,604 2,715,691 2,566,172
----------- ----------- ----------- ----------- ----------- -----------
End of period............. $ 4,917,638 $ 3,962,999 $1,287,169 $ 2,119,922 $ 2,469,604 $ 2,715,691
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 665,276 $ 639,919 $ 452,721 $ 414,972 $ (406,134) $ 641,149
Net realized gain
(loss)................ 602,485 546,380 65,770 6,992,086 3,589,596 2,209,400
Net unrealized gain
(loss)................ 492,547 49,497 936,558 7,687,046 3,673,472 9,834,460
------------ ------------ ----------- ------------ ------------ ------------
Net increase in net
assets from
operations............ 1,760,308 1,235,796 1,455,049 15,094,104 6,856,934 12,685,009
------------ ------------ ----------- ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 1,284,342 1,503,725 1,606,889 5,586,301 6,476,408 6,706,020
Terminations............ (500,117) (444,581) (460,673) (2,575,123) (1,997,718) (1,591,639)
Insurance and other
charges............... (632,676) (619,226) (594,685) (2,989,132) (2,976,059) (2,789,429)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... (400,777) (131,997) 69,047 (3,565,374) (2,450,752) 584,745
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
------------ ------------ ----------- ------------ ------------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... (249,228) 307,921 620,578 (3,543,328) (948,121) 2,909,697
------------ ------------ ----------- ------------ ------------ ------------
Net increase (decrease)
in net assets......... 1,511,080 1,543,717 2,075,627 11,550,776 5,908,813 15,594,706
NET ASSETS:
Beginning of period....... 10,811,172 9,267,455 7,191,828 57,569,775 51,660,962 36,066,256
------------ ------------ ----------- ------------ ------------ ------------
End of period............. $ 12,322,252 $ 10,811,172 $ 9,267,455 $ 69,120,551 $ 57,569,775 $ 51,660,962
------------ ------------ ----------- ------------ ------------ ------------
------------ ------------ ----------- ------------ ------------ ------------
<CAPTION>
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (169,492) $ (376,840) $ (214,727) $ 150,133 $ 45,484 $ (94,392)
Net realized gain
(loss)................ 4,622,923 5,094,237 789,394 2,212,747 983,686 369,309
Net unrealized gain
(loss)................ 8,211,480 2,500,114 12,592,041 (508,913) 1,102,752 1,219,736
------------ ------------ ------------ ------------ ------------ ------------
Net increase in net
assets from
operations............ 12,664,911 7,217,511 13,166,708 1,853,967 2,131,922 1,494,653
------------ ------------ ------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 6,162,215 7,257,203 7,347,859 1,968,560 2,712,879 3,368,247
Terminations............ (2,882,175) (2,245,667) (2,006,847) (739,857) (723,134) (687,516)
Insurance and other
charges............... (3,039,823) (3,133,722) (3,008,971) (925,180) (1,037,271) (1,128,664)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... (5,505,802) (2,163,674) (671,182) (2,599,248) (2,947,486) (1,681,189)
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... (5,265,585) (285,860) 1,660,859 (2,295,725) (1,995,012) (129,122)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets......... 7,399,326 6,931,651 14,827,567 (441,758) 136,910 1,365,531
NET ASSETS:
Beginning of period....... 59,340,985 52,409,334 37,581,767 18,409,373 18,272,463 16,906,932
------------ ------------ ------------ ------------ ------------ ------------
End of period............. $ 66,740,311 $ 59,340,985 $ 52,409,334 $ 17,967,615 $ 18,409,373 $ 18,272,463
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER T. ROWE PRICE INTERNATIONAL STOCK
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, FOR THE PERIOD
------------------------------------- ------------------------ 6/23/95* TO
1997 1996 1995 1997 1996 12/31/95
----------- ----------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 30,885 $ 32,803 $ 10,914 $ 4,222 $ 9,211 $ (1,301)
Net realized gain
(loss)................ 135,681 85,098 13,540 207,898 46,227 (98)
Net unrealized gain
(loss)................ 110,859 41,554 154,558 (172,676) 103,877 15,909
----------- ----------- ----------- ----------- ----------- --------
Net increase in net
assets from
operations............ 277,425 159,455 179,012 39,444 159,315 14,510
----------- ----------- ----------- ----------- ----------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 155,375 192,790 258,611 393,703 262,590 42,650
Terminations............ (34,787) (42,364) (19,023) (121,194) (39,469) (453)
Insurance and other
charges............... (70,273) (61,894) (64,900) (127,737) (60,482) (7,061)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. 123,184 (215,416) 17,813 1,085,475 1,224,943 479,913
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (130) -- -- -- --
----------- ----------- ----------- ----------- ----------- --------
Net increase (decrease)
in net assets from
capital
transactions.......... 173,499 (127,014) 192,501 1,230,247 1,387,582 515,049
----------- ----------- ----------- ----------- ----------- --------
Net increase (decrease)
in net assets......... 450,924 32,441 371,513 1,269,691 1,546,897 529,559
NET ASSETS:
Beginning of period....... 1,285,685 1,253,244 881,731 2,076,456 529,559 --
----------- ----------- ----------- ----------- ----------- --------
End of period............. $ 1,736,609 $ 1,285,685 $ 1,253,244 $ 3,346,147 $ 2,076,456 $ 529,559
----------- ----------- ----------- ----------- ----------- --------
----------- ----------- ----------- ----------- ----------- --------
<CAPTION>
DGPF INTERNATIONAL EQUITY
YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 125,879 $ 83,603 $ 26,607
Net realized gain
(loss)................ 276,622 145,627 39,548
Net unrealized gain
(loss)................ (127,979) 490,548 320,817
----------- ----------- -----------
Net increase in net
assets from
operations............ 274,522 719,778 386,972
----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 777,360 717,027 788,037
Terminations............ (257,744) (164,140) (60,216)
Insurance and other
charges............... (283,121) (238,054) (223,624)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. 588,659 180,359 18,029
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- --
----------- ----------- -----------
Net increase (decrease)
in net assets from
capital
transactions.......... 825,154 495,192 522,226
----------- ----------- -----------
Net increase (decrease)
in net assets......... 1,099,676 1,214,970 909,198
NET ASSETS:
Beginning of period....... 4,770,003 3,555,033 2,645,835
----------- ----------- -----------
End of period............. $ 5,869,679 $ 4,770,003 $ 3,555,033
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The VEL Account (VEL) is a separate investment account of Allmerica Financial
Life Insurance and Annuity Company (the Company) established on April 2, 1987
for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of VEL are clearly
identified and distinguished from the other assets and liabilities of the
Company. VEL cannot be charged with liabilities arising out of any other
business of the Company.
VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VEL currently offers nineteen
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price and DGPF (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, this portfolio changed its name to Select Value Opportunity
Fund.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price, or DGPF. Net realized gains and losses on securities sold are
determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, or DGPF at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of VEL. Therefore, no
provision for income taxes has been charged against VEL.
SA-13
<PAGE>
VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price and DGPF at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ------------------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth............................................... 20,964,230 $ 43,765,458 2.416
Investment Grade Income.............................. 8,335,619 9,059,821 1.112
Money Market......................................... 7,320,412 7,320,412 1.000
Equity Index......................................... 7,472,850 12,681,104 2.753
Government Bond...................................... 1,902,970 1,997,001 1.047
Select Aggressive Growth............................. 10,587,992 18,454,739 2.225
Select Growth........................................ 7,251,646 10,020,815 1.811
Select Growth and Income............................. 7,194,994 9,028,015 1.552
Select Value Opportunity*............................ 5,669,584 8,349,348 1.626
Select International Equity.......................... 6,938,003 8,844,652 1.341
Select Capital Appreciation.......................... 2,897,842 4,208,387 1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Money Market......................................... 2,119,922 2,119,922 1.000
High Income.......................................... 907,382 10,545,177 13.580
Equity-Income........................................ 2,846,810 42,165,376 24.280
Growth............................................... 1,798,930 36,864,687 37.100
Overseas............................................. 935,813 14,240,067 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager........................................ 96,424 1,451,529 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.................................. 262,649 3,399,038 12.740
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity............................ 378,201 5,135,017 15.520
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and administrative charges of $25 per month for the first policy year
and $5 per month thereafter. The policyowner may instruct the Company to deduct
this monthly charge from a specific Sub-Account, but if not so specified, it
will be deducted on a pro-rata basis of allocation which is the same proportion
that the policy value in the General Account of the Company and in each
Sub-Account bear to the total policy value. For the years ended December 31,
1997, 1996, and 1995 these monthly deductions from Sub-Account policy values
amounted to $17,222,239, $16,771,511, and $16,115,041, respectively. These
amounts are included on the statements of changes in net assets in Insurance and
other charges.
SA-14
<PAGE>
VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The Company makes a charge on the VEL '87 and VEL '91 series of policies of
up to .90% per annum based on the average daily net assets of each Sub-Account
at each valuation date for mortality and expense risks; on the VEL Plus series
of policies funded by the VEL Account, the charge is .65% per annum. This charge
may be increased or decreased by the Board of Directors of the Company once each
year, subject to compliance with applicable state and federal requirements, but
the total charge may not exceed 1.275% per annum.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of VEL, and does not receive any compensation for sales of VEL policies.
Commissions are paid to registered representatives of Allmerica Investments and
certain registered broker-dealers by the Company. As the current series of
policies have a surrender charge, no deduction is made for sales charges at the
time of the sale. For the years ended December 31, 1997, 1996, and 1995, the
Company received $892,028, $1,397,146, and $1,391,628, respectively, for
surrender charges applicable to VEL.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VEL satisfies the current requirements of
the regulations, and it intends that VEL will continue to meet such
requirements.
SA-15
<PAGE>
VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, and DGPF shares by VEL during the year ended December 31,
1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth.......................................................... $ 11,162,006 $ 3,472,202
Investment Grade Income......................................... 1,496,924 2,306,071
Money Market.................................................... 6,319,276 6,681,753
Equity Index.................................................... 5,159,440 2,669,131
Government Bond................................................. 696,962 607,583
Select Aggressive Growth........................................ 5,614,884 2,468,270
Select Growth................................................... 3,681,135 977,374
Select Growth and Income........................................ 2,904,310 1,071,789
Select Value Opportunity*....................................... 5,616,729 2,151,558
Select International Equity..................................... 4,866,689 1,396,627
Select Capital Appreciation..................................... 2,054,552 1,721,626
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Money Market.................................................... 7,160,863 7,510,545
High Income..................................................... 5,626,324 5,115,451
Equity-Income................................................... 8,063,746 6,255,905
Growth.......................................................... 3,588,113 7,249,367
Overseas........................................................ 3,742,360 4,639,089
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager................................................... 551,019 235,525
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock............................................. 3,667,039 2,389,009
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity....................................... 2,558,762 1,607,729
------------ ------------
Totals.......................................................... $ 84,531,133 $ 60,526,604
------------ ------------
------------ ------------
</TABLE>
* Name changed. See Note 1.
SA-16
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, contact your agent.
The following supplemental benefits are available for issue under the Policy for
an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that during periods of total disability, continuing more
than four months, the Company will add to the Policy Value each month an amount
selected by you or the amount needed to pay the Policy charges, whichever is
greater. This value will be used to keep the Policy in force. This benefit is
subject to the Company's maximum issue benefits. Its cost will change yearly.
GUARANTEED INSURABILITY RIDER
This Rider guarantees that insurance may be added at various option dates
without Evidence of Insurability. This benefit may be exercised on the option
dates even if the Insured is disabled.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At present
this benefit is only available for the spouse and children of the primary
Insured. The Rider includes a feature that allows the "Other Insured" to convert
the coverage to a flexible premium adjustable life insurance Policy.
CHILDREN'S INSURANCE RIDER
This Rider provides coverage for eligible minor children. It also covers future
children, including adopted children and stepchildren.
EXCHANGE OPTION RIDER
This Rider allows you to use the Policy to insure a different person, subject to
Company guidelines.
LIVING BENEFITS RIDER
This Rider permits part of the proceeds of the Policy to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.
Certain Riders May not be available in all states.
A-1
<PAGE>
APPENDIX B
DEATH PROCEEDS PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that otherwise would be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of:
- the rate per $1,000 of value applied based on the Company's non-guaranteed
current payment option rates for the Policy, or
- the rate in the Policy for the applicable payment option.
The following payment options currently are available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Separate Account.
<TABLE>
<C> <S>
OPTION A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30). Payments
may be made annually, semi- annually, quarterly or monthly.
OPTION B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's age on the date
the first payment will be made. One of three variations may be chosen.
Depending upon this choice, payments will end:
(1) upon the death of the payee, with no further payments due (Life Annuity), or
(2) upon the death of the payee, but not before the sum of the payments made
first equals or exceeds the amount applied under this option (Life Annuity
with Installment Refund), or
(3) upon the death of the payee, but not before a selected period (5, 10 or 20
years) has elapsed (Life Annuity with Period Certain).
OPTION C: INTEREST PAYMENTS. The Company will pay interest at a rate determined by the
Company each year, but which will not be less than 3 1/2%. Payments may be
made annually, semi-annually, quarterly or monthly. Payments will end when
the amount left with the Company has been withdrawn. Payments will not
continue, however, after the death of the payee. Any unpaid balance plus
accrued interest will be paid in a lump sum.
OPTION D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the unpaid
balance is exhausted. Interest will be credited to the unpaid balance. The
rate of interest will be determined by the Company each year, but will not
be less than 3 1/2%. Payments may be made annually, semi-annually, quarterly
or monthly. The payment level selected must provide for the payment each
year of at least 8% of the amount applied.
OPTION E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may be
chosen. After the death of one payee, payments will continue to the
survivor:
(1) in the same amount as the original amount; or
(2) in an amount equal to 2/3 of the original amount; or
(3) in an amount equal to 1/2 of the original amount.
</TABLE>
B-1
<PAGE>
Payments are based on the payees' ages on the date the first payment is due.
Payments will end upon the death of the surviving payee.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds becomes payable.
If the amount of monthly income payments under Option B(3) for the attained age
of the payee are the same for different periods certain, the Company will deem
an election to have been made for the longest period certain which could have
been elected for such age and amount.
You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If the payee selects Option C or D when the Policy becomes a
claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the Written Request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the Written Request selecting the option.
A corporation or fiduciary payee may select only Option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. Should a payee under Option B or E die prior to the due date of the
second monthly payment, however, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
B-2
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS
The following tables illustrate the way in which the Surrender Value, Death
Benefit and Policy Value under representative VEL 91 Policies could vary over an
extended period of time. The tables illustrate a VEL 91 Policy issued to a male,
Age 30, under a standard Premium Class and qualifying for the non-smoker
discount, and a VEL 91 Policy issued to a male, Age 45, under a standard Premium
Class and qualifying for the non-smoker discount. For each set of illustrations,
the first table illustrates the current cost of insurance rates and the second
table illustrates the guaranteed cost of insurance rates as presently in effect.
The Surrender Values for Policy years 12 and later, the Death Benefits, and the
Policy Values given in the tables would be the same for VEL 87 Policies issued
with the same underwriting assumptions as the representative VEL 91 Policies
(i.e., to a male, Age 30 or 45, under a standard Premium Class and qualifying
for the non-smoker discount). However, the Surrender Values for a VEL 87 Policy
would generally be slightly higher than for the VEL 91 Policy up until Policy
Year 12, because of the generally lower surrender charges under a VEL 87 Policy.
ASSUMPTIONS
The tables assume that no Policy loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Policy year (so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown. The tables are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
show the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested each year to earn interest (after taxes) at 5%,
compounded annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0% 6%, and 12% over a period of
years, but fluctuated above or below such averages for individual Policy years.
The values also would be different depending on the allocation of the Policy's
total Policy Value among the Sub-Accounts of the Separate Account, if the actual
rates of return averaged 0%, 6% or 12%, but the rates of each Underlying Fund
varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and the Policy Values take into account
the deduction from premium for the tax expense charge, the Monthly Deduction
from Policy Value, and the daily charge against the Separate Account for
mortality and expense risks. In both the the Current Cost of Insurance Charges
illustrations and the Guaranteed Cost of Insurance Charges illustrations, the
Separate Account charges are equivalent to an effective annual rate of 0.90% of
the average daily value of the assets in the Separate Account.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary, and in 1997 ranged from an annual
rate of 0.35% to an annual rate of 2.00% of average daily net assets. The fees
and expenses associated with your Policy may be more or less than 0.85% in the
aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
C-1
<PAGE>
AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Growth Fund and Select Growth Fund, 1.10% for
the Select Growth and Income, 1.00% for the Investment Grade Income Fund and
Government Bond Fund, and 0.60% for the Money Market Fund and Equity Index Fund.
The total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1997. These limitations may be
terminated at any time.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser. These limitations may be terminated at any time.
Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. In 1997, the actual ratio of total annual expenses of
the International Equity Series was 0.85%.
NET ANNUAL RATES OF INVESTMENT
Taking into account the Separate Account mortality and expense risk and the
assumed 0.85% charge for Underlying Fund advisory fees and operating expenses,
the gross annual rates of investment return of 0%, 6% and 12% correspond to net
annual rates of (-1.75%), 4.25% and 10.25%, respectively.
The hypothetical returns shown in the tables do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
If in the future, however, such charges are made in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
TO CHOOSE THE SUB-ACCOUNTS WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T.
ROWE PRICE AND DGPF ALONG WITH THIS PROSPECTUS.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VEL 91 POLICY
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 2,935 250,000 0 3,145 250,000 0 3,356 250,000
2 9,041 2,604 6,001 250,000 3,217 6,614 250,000 3,857 7,254 250,000
3 13,903 5,561 8,957 250,000 6,777 10,174 250,000 8,098 11,495 250,000
4 19,008 8,540 11,801 250,000 10,565 13,826 250,000 12,852 16,113 250,000
5 24,368 11,673 14,527 250,000 14,714 17,567 250,000 18,290 21,143 250,000
6 29,996 14,690 17,136 250,000 18,957 21,403 250,000 24,184 26,629 250,000
7 35,906 17,591 19,629 250,000 23,299 25,337 250,000 30,586 32,624 250,000
8 42,112 20,367 21,998 250,000 27,735 29,365 250,000 37,543 39,174 250,000
9 48,627 23,012 24,235 250,000 32,264 33,487 250,000 45,112 46,335 250,000
10 55,469 25,515 26,330 250,000 36,879 37,694 250,000 53,353 54,168 250,000
11 62,652 27,869 28,277 250,000 41,579 41,987 250,000 62,338 62,746 250,000
12 70,195 30,050 30,050 250,000 46,347 46,347 250,000 72,136 72,136 250,000
13 78,114 31,648 31,648 250,000 50,779 50,779 250,000 82,437 82,437 250,000
14 86,430 33,081 33,081 250,000 55,297 55,297 250,000 93,773 93,773 250,000
15 95,161 34,335 34,335 250,000 59,898 59,898 250,000 106,263 106,263 250,000
16 104,330 35,396 35,396 250,000 64,578 64,578 250,000 120,048 120,048 250,000
17 113,956 36,252 36,252 250,000 69,336 69,336 250,000 135,293 135,293 250,000
18 124,064 36,879 36,879 250,000 74,163 74,163 250,000 152,182 152,182 250,000
19 134,677 37,253 37,253 250,000 79,049 79,049 250,000 170,934 170,934 250,000
20 145,821 37,346 37,346 250,000 83,987 83,987 250,000 191,806 191,806 250,000
Age 60 95,161 34,335 34,335 250,000 59,898 59,898 250,000 106,263 106,263 250,000
Age 65 145,821 37,346 37,346 250,000 83,987 83,987 250,000 191,806 191,806 250,000
Age 70 210,477 32,896 32,896 250,000 109,554 109,554 250,000 333,731 333,731 387,128
Age 75 292,995 16,689 16,689 250,000 136,793 136,793 250,000 561,890 561,890 601,222
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR THE POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VEL 91 POLICY
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 2,914 250,000 0 3,124 250,000 0 3,334 250,000
2 9,041 2,563 5,960 250,000 3,173 6,570 250,000 3,810 7,207 250,000
3 13,903 5,496 8,893 250,000 6,707 10,104 250,000 8,022 11,419 250,000
4 19,008 8,452 11,713 250,000 10,466 13,727 250,000 12,742 16,003 250,000
5 24,368 11,560 14,413 250,000 14,583 17,437 250,000 18,139 20,993 250,000
6 29,996 14,547 16,993 250,000 18,788 21,234 250,000 23,985 26,431 250,000
7 35,906 17,400 19,439 250,000 23,073 25,111 250,000 30,316 32,354 250,000
8 42,112 20,108 21,739 250,000 27,427 29,058 250,000 37,174 38,805 250,000
9 48,627 22,661 23,884 250,000 31,846 33,069 250,000 44,610 45,833 250,000
10 55,469 25,042 25,858 250,000 36,317 37,132 250,000 52,677 53,492 250,000
11 62,652 27,242 27,649 250,000 40,833 41,241 250,000 61,441 61,848 250,000
12 70,195 29,245 29,245 250,000 45,386 45,386 250,000 70,976 70,976 250,000
13 78,114 30,638 30,638 250,000 49,567 49,567 250,000 80,969 80,969 250,000
14 86,430 31,817 31,817 250,000 53,777 53,777 250,000 91,930 91,930 250,000
15 95,161 32,760 32,760 250,000 58,002 58,002 250,000 103,973 103,973 250,000
16 104,330 33,444 33,444 250,000 62,230 62,230 250,000 117,231 117,231 250,000
17 113,956 33,843 33,843 250,000 66,444 66,444 250,000 131,861 131,861 250,000
18 124,064 33,920 33,920 250,000 70,621 70,621 250,000 148,045 148,045 250,000
19 134,677 33,629 33,629 250,000 74,734 74,734 250,000 166,000 166,000 250,000
20 145,821 32,922 32,922 250,000 78,752 78,752 250,000 185,988 185,988 250,000
Age 60 95,161 32,760 32,760 250,000 58,002 58,002 250,000 103,973 103,973 250,000
Age 65 145,821 32,922 32,922 250,000 78,752 78,752 250,000 185,988 185,988 250,000
Age 70 210,477 21,383 21,383 250,000 96,595 96,595 250,000 322,403 322,403 373,988
Age 75 292,995 0 0 250,000 106,325 106,325 250,000 539,910 539,910 577,704
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy Year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR THE POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VEL 91 POLICY
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 100 937 75,937 168 1,006 76,006 237 1,075 76,075
2 3,014 1,256 2,093 77,093 1,460 2,297 77,297 1,673 2,510 77,510
3 4,634 2,389 3,226 78,226 2,804 3,641 78,641 3,253 4,090 79,090
4 6,336 3,533 4,336 79,336 4,235 5,039 80,039 5,024 5,828 80,828
5 8,123 4,719 5,423 80,423 5,787 6,491 81,491 7,037 7,740 82,740
6 9,999 5,881 6,484 81,484 7,396 7,998 82,998 9,238 9,841 84,841
7 11,969 7,018 7,520 82,520 9,062 9,564 84,564 11,649 12,151 87,151
8 14,037 8,129 8,531 83,531 10,786 11,188 86,188 14,287 14,689 89,689
9 16,209 9,213 9,514 84,514 12,570 12,871 87,871 17,177 17,478 92,478
10 18,490 10,269 10,470 85,470 14,415 14,616 89,616 20,341 20,542 95,542
11 20,884 11,298 11,398 86,398 16,322 16,423 91,423 23,807 23,908 98,908
12 23,398 12,297 12,297 87,297 18,292 18,292 93,292 27,604 27,604 102,604
13 26,038 13,166 13,166 88,166 20,228 20,228 95,228 31,665 31,665 106,665
14 28,810 14,005 14,005 89,005 22,230 22,230 97,230 36,126 36,126 111,126
15 31,720 14,813 14,813 89,813 24,300 24,300 99,300 41,027 41,027 116,027
16 34,777 15,588 15,588 90,588 26,439 26,439 101,439 46,411 46,411 121,411
17 37,985 16,330 16,330 91,330 28,649 28,649 103,649 52,326 52,326 127,326
18 41,355 17,037 17,037 92,037 30,930 30,930 105,930 58,823 58,823 133,823
19 44,892 17,708 17,708 92,708 33,284 33,284 108,284 65,962 65,962 140,962
20 48,607 18,342 18,342 93,342 35,711 35,711 110,711 73,805 73,805 148,805
Age 60 97,665 22,170 22,170 97,170 64,098 64,098 139,098 210,401 210,401 285,401
Age 65 132,771 21,672 21,672 96,672 80,793 80,793 155,793 345,181 345,181 421,121
Age 70 177,576 18,618 18,618 93,618 98,351 98,351 173,351 560,680 560,680 650,388
Age 75 234,759 11,963 11,963 86,963 115,531 115,531 190,531 906,179 906,179 981,179
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR THE POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VEL 91 POLICY
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 100 937 75,937 168 1,006 76,006 237 1,075 76,075
2 3,014 1,256 2,093 77,093 1,460 2,297 77,297 1,673 2,510 77,510
3 4,634 2,389 3,226 78,226 2,804 3,641 78,641 3,253 4,090 79,090
4 6,336 3,533 4,336 79,336 4,235 5,039 80,039 5,024 5,828 80,828
5 8,123 4,719 5,423 80,423 5,787 6,491 81,491 7,037 7,740 82,740
6 9,999 5,881 6,484 81,484 7,396 7,998 82,998 9,238 9,841 84,841
7 11,969 7,018 7,520 82,520 9,062 9,564 84,564 11,649 12,151 87,151
8 14,037 8,129 8,531 83,531 10,786 11,188 86,188 14,287 14,689 89,689
9 16,209 9,213 9,514 84,514 12,570 12,871 87,871 17,177 17,478 92,478
10 18,490 10,269 10,470 85,470 14,415 14,616 89,616 20,341 20,542 95,542
11 20,884 11,298 11,398 86,398 16,322 16,423 91,423 23,807 23,908 98,908
12 23,398 12,297 12,297 87,297 18,292 18,292 93,292 27,604 27,604 102,604
13 26,038 13,166 13,166 88,166 20,228 20,228 95,228 31,665 31,665 106,665
14 28,810 14,005 14,005 89,005 22,230 22,230 97,230 36,126 36,126 111,126
15 31,720 14,813 14,813 89,813 24,300 24,300 99,300 41,027 41,027 116,027
16 34,777 15,588 15,588 90,588 26,439 26,439 101,439 46,411 46,411 121,411
17 37,985 16,330 16,330 91,330 28,649 28,649 103,649 52,326 52,326 127,326
18 41,355 17,037 17,037 92,037 30,930 30,930 105,930 58,823 58,823 133,823
19 44,892 17,708 17,708 92,708 33,284 33,284 108,284 65,962 65,962 140,962
20 48,607 18,342 18,342 93,342 35,711 35,711 110,711 73,805 73,805 148,805
Age 60 97,665 21,807 21,807 96,807 63,665 63,665 138,665 209,880 209,880 284,880
Age 65 132,771 20,478 20,478 95,478 79,279 79,279 154,279 343,219 343,219 418,727
Age 70 177,576 15,421 15,421 90,421 94,084 94,084 169,084 554,647 554,647 643,390
Age 75 234,759 4,335 4,335 79,335 104,900 104,900 179,900 889,999 889,999 964,999
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR THE POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
VEL 87 POLICIES
A separate surrender charge is calculated upon issuance of a VEL 87 Policy and
upon each increase in Face Amount. The maximum Surrender Charge calculated upon
issuance of the VEL 87 Policy is equal to $4.50 per thousand dollars of the
initial Face Amount plus 30% of the Guideline Annual Premium times a factor of
not greater than 1.0, as indicated on pages A-10 and A-11. The maximum surrender
charge for an increase in Face Amount is $4.50 per thousand dollars of increase,
plus 30% of the Guideline Annual Premium for the increase times as factor of not
greater than 1.0, as indicated on pages A-10 and A-11. The calculation may be
summarized in the following formula:
<TABLE>
<C> <C> <S>
Face Amount
Maximum Surrender Charge = (4.5 X ----------- ) + (0.3 X Guideline Annual Premium H
1000 Factor)
</TABLE>
The maximum surrender charge remains level for the first 44 policy months,
reduces by 1% per month for the next 100 policy months, and is zero thereafter.
The actual surrender charge imposed may be less than the maximum. The actual
surrender charge imposed will be the lesser of either the maximum surrender
charge or the sum of $4.50 per thousand dollars of Face Amount plus 30% of
premiums paid which are associated with the initial Face Amount or increase, as
applicable.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Premium Class as indicated in the table below.
FACTORS USED IN CALCULATION OF MAXIMUM SURRENDER CHARGES
NON-SMOKER FACTORS
<TABLE>
<CAPTION>
AGE FACTOR AGE FACTOR AGE FACTOR
- --------- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
18 1.0000 39 0.8600 60 0.6500
19 1.0000 40 0.8500 61 0.6400
20 1.0000 41 0.8400 62 0.6300
21 1.0000 42 0.8300 63 0.6200
22 1.0000 43 0.8200 64 0.6100
23 1.0000 44 0.8100 65 0.6000
24 1.0000 45 0.8000 66 0.5900
25 1.0000 46 0.7900 67 0.5800
26 0.9900 47 0.7800 68 0.5700
27 0.9800 48 0.7700 69 0.5600
28 0.9700 49 0.7600 70 0.5500
29 0.9600 50 0.7500 71 0.5400
30 0.9500 51 0.7400 72 0.5300
31 0.9400 52 0.7300 73 0.5200
32 0.9300 53 0.7200 74 0.5100
33 0.9200 54 0.7100 75 0.5000
34 0.9100 55 0.7000 76 0.4900
35 0.9000 56 0.6900 77 0.4800
36 0.8900 57 0.6800 78 0.4700
37 0.8800 58 0.6700 79 0.4600
38 0.8700 59 0.6600 80 0.4500
</TABLE>
D-1
<PAGE>
SMOKER FACTORS
<TABLE>
<CAPTION>
AGE FACTOR AGE FACTOR AGE FACTOR
- --------- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
0 0.8000 27 0.7833 54 0.5583
1 0.8000 28 0.7750 55 0.5500
2 0.8000 29 0.7667 56 0.5417
3 0.8000 30 0.7583 57 0.5333
4 0.8000 31 0.7500 58 0.5250
5 0.8000 32 0.7417 59 0.5167
6 0.8000 33 0.7333 60 0.5083
7 0.8000 34 0.7250 61 0.5000
8 0.8000 35 0.7167 62 0.4917
9 0.8000 36 0.7083 63 0.4833
10 0.8000 37 0.7000 64 0.4750
11 0.8000 38 0.6917 65 0.4667
12 0.8000 39 0.6833 66 0.4583
13 0.8000 40 0.6750 67 0.4500
14 0.8000 41 0.6667 68 0.4417
15 0.8000 42 0.6583 69 0.4333
16 0.8000 43 0.6500 70 0.4250
17 0.8000 44 0.6417 71 0.4167
18 0.8000 45 0.6333 72 0.4083
19 0.8000 46 0.6250 73 0.4000
20 0.8000 47 0.6167 74 0.3917
21 0.8000 48 0.6083 75 0.3833
22 0.8000 49 0.6000 76 0.3750
23 0.8000 50 0.5917 77 0.3667
24 0.8000 51 0.5833 78 0.3583
25 0.8000 52 0.5750 79 0.3500
26 0.7917 53 0.5667 80 0.3417
</TABLE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 45, non-smoker
purchases a $100,000 VEL 87 Policy. In this example the Guideline Annual Premium
equals $1,740.95, and the factor is 0.8000. The maximum surrender charge at
issue is calculated as follows:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $450.00
($4.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $417.83
(30% of Guideline Annual Premium H Factor from
page A-10)
Maximum Surrender Charge $867.83
</TABLE>
The actual surrender charge is the smaller of the maximum surrender charge and
the following sum:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $450.00
($4.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(30% of Premiums Paid associated with the initial
Face Amount)
-------------
Sum of (1)
and (2)
</TABLE>
D-2
<PAGE>
The maximum surrender charge is $867.83. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the VEL 87 Policy in the 10th Policy month,
having paid total premiums of $1,000. The actual surrender charge would be $750.
If, instead of $1,000, total premiums of $1,392.76 or greater had been paid, the
actual surrender charge would be $867.83.
Example 2:
Assume the Policyowner surrenders the VEL 87 Policy in the 54th month, having
paid total premiums of $1,000. After the 44th Policy month, the maximum
surrender charge decreases by 1% per month ($8.6783 per month in this example).
In this example the maximum surrender charge would be $781.05. The actual
surrender charge would be $750. If instead of $1,000, total premiums of
$1,103.50 or greater had been paid, the actual surrender charge would be
$781.05.
Example 3:
This example illustrates the calculation of the surrender charge for an
increase. A separate surrender charge is calculated when the Face Amount of a
VEL 87 Policy is increased. Assume our sample Policyowner increases the Face
Amount to $250,000 on the 24th monthly payment date at Age 47. In this example
the Guideline Annual Premium for the increase is $2,781.62 and the factor is
.7800.
The maximum surrender charge for the increase is $1,325.90 as calculated below:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $675.00
($4.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $650.90
(30% of Guideline Annual Premium for the increase
H Factor)
Maximum Surrender Charge $1,325.90
</TABLE>
The actual surrender charge for the increase is the smaller of the maximum
surrender charge for the increase and the following sum:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $675.00
(2) Deferred Sales Charge Varies
(30% of the Policy Value, on the effective date of
the increase,
associated with the increase)
(3) (30% of Premiums paid associated the increase) Varies
-------------
Sum of (1), (2), and (3)
</TABLE>
To calculate the actual surrender charge, premium and accumulated value must be
allocated between the initial Face Amount and the increase. This is done as
follows:
(a) Premium is allocated to the initial Face Amount if it is received before
an application for an increase.
(b) Premium is associated with the base policy and the increase in
proportion to their respective Guideline Annual Premiums if the premium
is received after an application for an increase. In this example, 38.5%
of premium ($1,740.95/$4,522.57) is allocated to the initial Face Amount
and 61.5% of premium ($2,781.62/$4,522.57) is allocated to the increase.
D-3
<PAGE>
(c) The Policy Value on the effective date of an increase is also allocated
between the initial Face Amount and the increase in proportion to their
Guideline Annual Premiums. In this example 61.5% ($2,781.62/$4,522.57) of
the Policy value will be allocated to the increase.
Continuing the example, assume that the Policyowner has paid $1,000 of premium
before the $2,000 after the effective date of the increase. Also, assume that
the Policy Value of the VEL 87 Policy on the effective date of the increase is
$900. The following values result when the VEL 87 Policy is surrendered in the
54th policy month.
(a) Related to the Initial Face Amount
(i) The maximum surrender charge began to decrease in the 44th policy
month and now equals $781.05.
(ii) The actual surrender charge is the lesser of $781.05 and the
following sum.
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $450.00
(2) 30% of premium paid before the increase $300.00
(3) 11.55% (.30 H .385) of premium paid after the $231.00
increase
$981.00
</TABLE>
The actual surrender charge for the initial Face Amount is thus $781.05
(a) Related to the Increase in Face Amount
(i) The maximum surrender charge is $1,325.90, decreasing by 1% per
month beginning in the 68th Policy month (44 months after the
effective date of the increase).
(ii) The actual surrender charge is the lesser of $1,325.90 and the
following sum.
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $675.00
(2) 18.45% (.30 x .615) of the $900 Policy value on $166.05
the effective date of the increase
(3) 18.45% of the $2,000.00 of premium paid after the $369.00
increase
$1,210.05
</TABLE>
The surrender charge for the increase in Face Amount is $1,210.05. The total
surrender charge on the VEL 87 Policy is the sum of the surrender charge for the
initial Face Amount plus the surrender charge for the increase. The total
surrender charge is therefore $1,991.10 (the sum of $781.05 + $1,210.05).
Example 4:
This example illustrates the calculation of the charges on partial withdrawal
and their impact on the surrender charges. In addition to the facts in Example
3, assume that a $1,000 partial withdrawal is made in the 36th Policy month.
Assume that the Policy Value on the date of the partial withdrawal request was
$1,500. The partial withdrawal charge is $42.50 (10% of Policy Value, $150 in
this example, may be withdrawn at no charge other than the transaction charge.
The balance of $850 is assessed a charge of 5%.) A transaction charge of $20
(equal to the lesser of $25 or 2% of the amount withdrawn) would also be
assessed.
The maximum and actual surrender charges for the increase are reduced by the
partial withdrawal charge of $42.50 (but not the transaction charge of $20).
When the Policyowner surrenders the VEL 87 Policy in the 54th Policy month, the
maximum surrender charge for the increase is $1,283.40 (the difference of
$1,325.90 - $42.50) and the actual surrender charge for the increase is
$1,167.55 (the difference of $1,210.05 - $42.50). The total surrender charge on
the Policy is $1,948.60 (the sum of $781.05 + $1,167.55).
D-4
<PAGE>
APPENDIX E
CALCULATION OF MAXIMUM SURRENDER CHARGES
VEL 91 POLICIES
A separate surrender charge is calculated upon issuance of the VEL 91 Policy and
upon each increase in the Face Amount. The maximum surrender charge calculated
upon issuance of the VEL 91 Policy is equal to $8.50 per thousand dollars of the
initial Face Amount plus 30% of the Guideline Annual Premium. The maximum
surrender charge for an increase in Face Amount is $8.50 per thousand dollars of
increase, plus 30% of the Guideline Annual Premium for the increase. The
calculation may be summarized in the following formula:
<TABLE>
<C> <C> <S>
Face Amount
Maximum Surrender Charge = (8.5 X ----------- ) + (0.3 X Guideline Annual Premium H
1000 Factor)
</TABLE>
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge at certain ages will not exceed a specified amount
per $1,000 of initial Face Amount (or increase in the Face Amount ) as shown on
page .
The maximum surrender charge remains level for the first 44 Policy months,
reduces by 1% per month for the next 100 Policy months, and is zero thereafter.
The actual surrender charge imposed may be less than the maximum. The actual
surrender charge imposed will be the lesser of either the maximum surrender
charge or the sum of $8.50 per thousand dollars of Face Amount plus 30% of
premiums paid which are associated with the initial Face Amount or increase, as
applicable.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Premium Class (smoker) under a VEL 91 Policy, as indicated in the
table below.
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female Unisex Unisex
increase Nonsmoker Smoker Nonsmoker Smoker Nonsmoker Smoker
- --------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
0 8.60 7.86 8.46
1 8.57 7.86 8.44
2 8.67 7.95 8.53
3 8.78 8.05 8.64
4 8.89 8.15 8.75
5 9.02 8.25 8.86
6 9.14 8.35 8.98
7 9.28 8.45 9.11
8 9.42 8.56 9.25
9 9.58 8.68 9.40
10 9.74 8.80 9.55
11 9.92 8.93 9.72
12 10.10 9.06 9.89
13 10.29 9.20 10.07
14 10.49 9.34 10.26
15 N/A 9.50 10.45
16 N/A 9.65 N/A
17 N/A 9.82 N/A
18 10.04 N/A 9.37 9.99 9.91 N/A
19 10.20 N/A 9.52 10.16 10.06 N/A
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female Unisex Unisex
increase Nonsmoker Smoker Nonsmoker Smoker Nonsmoker Smoker
- --------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
20 10.36 N/A 9.67 10.34 10.22 N/A
21 10.53 N/A 9.83 10.53 10.39 N/A
22 N/A N/A 10.00 N/A N/A N/A
23 N/A N/A 10.17 N/A N/A N/A
24 N/A N/A 10.35 N/A N/A N/A
25-74 N/A N/A N/A N/A N/A N/A
75 N/A 46.14 N/A N/A N/A N/A
76 N/A 46.06 N/A N/A N/A N/A
77 N/A 45.91 N/A N/A N/A 45.84
78 44.57 45.73 N/A N/A 44.51 45.59
79 44.28 45.52 N/A 44.01 44.20 45.31
80 44.00 45.33 43.13 43.63 43.88 45.02
</TABLE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 45, non-smoker
purchases a $100,000 VEL 91 Policy. In this example the Guideline Annual Premium
equals $1,740.95. The maximum surrender charge at issue is calculated as
follows:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $522.29
(30% of Guideline Annual Premium)
Maximum Surrender Charge $1,372.29
</TABLE>
The actual surrender charge is the smaller of the maximum surrender charge and
the following sum:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(30% of Premiums Paid associated with the initial
Face Amount)
-------------
Sum of (1)
and (2)
</TABLE>
The maximum surrender charge is $1,372.29. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the VEL 91 Policy in the 10th Policy month,
having paid total premiums of $1,500. The actual surrender charge would be
$1,300. If, instead of $1,500, total premiums of $1,740.95 or greater had been
paid, the actual surrender charge would be $1,372.29.
Example 2:
Assume the Policyowner surrenders the VEL 91 Policy in the 54th Policy month,
having paid total premiums of $1,500. After the 44th Policy month, the maximum
surrender charge decreases by 1% per month ($13.7229 per month in this example).
In this example the maximum surrender charge would be $1,235.06. The actual
E-2
<PAGE>
surrender charge is $1,235.06. If instead of $1,500, total premiums of less than
$1,283.52 had been paid, the actual surrender charge would be less than
$1,235.06.
Example 3:
This example illustrates the calculation of the surrender charge for an
increase. A separate surrender charge is calculated when the Face Amount of the
VEL 91 Policy is increased. Assume our sample Policyowner increases the Face
Amount to $250,000 on the 24th Monthly Payment Date at Age 47. In this example
the Guideline Annual Premium for the increase is $2,781.62.
The maximum surrender charge for the increase is $2,109.49 as calculated below:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $1,275.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $834.49
(30% of Guideline Annual Premium for the increase
H Factor)
Maximum Surrender Charge $2,109.49
</TABLE>
The actual surrender charge for the increase is the smaller of the maximum
surrender charge for the increase and the following sum:
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $1,275.00
(2) Deferred Sales Charge Varies
(30% of the Policy Value, on the effective date of
the increase, associated with the increase)
(3) (30% of Premiums paid associated the increase) Varies
-------------
Sum of (1), (2), and (3)
</TABLE>
To calculate the actual surrender charges, premium and accumulated value must be
allocated between the initial Face Amount and the increase. This is done as
follows:
(a) Premium is allocated to the initial Face Amount if it is received before
an application for an increase.
(b) Premium is associated with the base Policy and the increase in
proportion to their respective Guideline Annual Premiums if the premium
is received after an application for an increase. In this example, 38.5%
of premium ($1,740.95/$4,522.57) is allocated to the initial Face Amount
and 61.5% of premium ($2,781.62/$4,522.57) is allocated to the increase.
(c) The Policy Value on the effective date of an increase is also allocated
between the initial Face Amount and the increase in proportion to their
Guideline Annual Premiums. In this example 61.5% ($2,781.62/$4,522.57) of
the Policy Value will be allocated to the increase.
Continuing the example, assume that the Policyowner has paid $1,500 of premium
before the $2,000 after the effective date of the increase. Also, assume that
the Policy Value of the VEL 91 Policy on the effective date of the increase is
$1,300. The following values result when the VEL 91 Policy is surrendered in the
54th Policy month.
(a) Related to the Initial Face Amount
(i) The maximum surrender charge began to decrease in the 44th Policy
month, and now equals $1,235.06
E-3
<PAGE>
(ii) The actual surrender charge is the lesser of $1,234.06 and the
following sum.
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $850.00
(2) 30% of premium paid before the increase $450.00
(3) 11.55% (.30 H .385) of premium paid after the $231.00
increase
$1,531.00
</TABLE>
The actual surrender charge for the initial face amount is thus $1,235.06.
(a) Related to the increase in Face Amount
1. The maximum surrender charge is $2,109.49, decreasing by 1% per month
beginning in the 68th Policy month (44 months after the effective date of
the increase).
2. The actual surrender charge is the lesser of $2,109.49 and the following
sum.
<TABLE>
<C> <S> <C>
(1) Deferred Administrative Charge $1,27500
(2) 18.45% (.30 x .615) of the $1,300 Policy Value on $369.00
the effective date of the increase
(3) 18.45% of the $2,000.00 of premium paid after the $1,883.85
increase
</TABLE>
The surrender charge for the increase in face amount is $1,883.85. The total
surrender charge on the Policy is the sum of the surrender charge for the
initial Face Amount plus the surrender charge for the increase. The total
surrender charge is therefore $3,118.91 (the sum of $1,235.06 + $1,883.85).
Example 4:
This example illustrates the calculation of the charges on partial withdrawal
and their impact on the surrender charge(s). In addition to the facts in Example
3, assume that a $1,000 partial withdrawal is made in the 36th Policy month.
Assume that the Policy Value on the date of the partial withdrawal request was
$1,500. The partial withdrawal charge is $42.50 (10% of Policy Value, $150 in
this example, may be withdrawn at no charge other than the transaction charge.
The balance of $850 is assessed a charge of 5%.) A transaction charge of $20
(equal to the lesser of $25 or 2% of the amount withdrawn) would also be
assessed.
The maximum and actual surrender charges for the increase are reduced by the
partial withdrawal charge of $42.50 (but not the transaction charge of $20).
When the Policyowner surrenders the Policy in the 54th Policy month, the maximum
surrender charge for the increase is $2,066.99 (the difference of $2,109.49 !
$42.50) and the actual surrender charge for the increase is $1,841.35 (the
difference of $1,883.85 ! $42.50).
The total surrender charge on the Policy is $3,076.41 (the sum of $1,235.06 +
$1,841.35).
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