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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
VARI-EXCEPTIONAL LIFE PLUS
This Prospectus provides important information about Vari-Exceptional Life Plus,
an individual flexible premium variable life insurance policy issued by
Allmerica Financial Life Insurance and Annuity Company to eligible applicants
who are members of a non-qualified benefit plan having five or more members who
are age 80 years old and under. The policies are funded through the VEL Account,
a separate investment account of the Company that is referred to as the Variable
Account. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP IT FOR
FUTURE REFERENCE.
The Variable Account is subdivided into Sub-Accounts. Each Sub-Account invests
exclusively in shares of one of the following Funds of Allmerica Investment
Trust, Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc., and Delaware Group
Premium Fund:
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ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
Select Value Opportunity Fund Fidelity VIP Growth Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund Fidelity VIP II Asset Manager Portfolio
Core Equity Fund Fidelity VIP II Index 500 Portfolio
Equity Index Fund
Select Growth and Income Fund DELAWARE GROUP PREMIUM FUND
Select Investment Grade Income Fund DGPF International Equity Series
Government Bond Fund
Money Market Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
</TABLE>
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.
In certain circumstances, a 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."
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.
THE POLICIES ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. VARIABLE LIFE POLICIES
INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. IT MAY NOT BE ADVANTAGEOUS
TO REPLACE EXISTING INSURANCE WITH THE POLICY. THIS LIFE POLICY IS NOT: A BANK
DEPOSIT OR OBLIGATION; OR FEDERALLY INSURED; OR ENDORSED BY ANY BANK OR
GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
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CORRESPONDENCE MAY BE MAILED TO: DATED MAY 1, 2000
ALLMERICA LIFE 440 LINCOLN STREET
P.O. BOX 8014 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8014 (508) 855-1000
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TABLE OF CONTENTS
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SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND CHARGES................................. 7
SUMMARY OF POLICY FEATURES.................................. 11
DESCRIPTION OF THE COMPANY, THE VEL ACCOUNT AND THE
UNDERLYING FUNDS........................................... 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 21
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 23
VOTING RIGHTS............................................... 24
THE POLICY.................................................. 25
Applying for a Policy..................................... 25
Free-Look Period.......................................... 25
Conversion Privileges..................................... 26
Premium Payments.......................................... 26
Paid-up Insurance Option.................................. 27
Allocation of Net Premiums................................ 28
Transfer Privilege........................................ 28
Death Proceeds............................................ 29
Guideline Premium Test and Cash Value Accumulation Test... 30
Election of Sum Insured Options........................... 30
Change in Sum Insured Option.............................. 32
Change in Face Amount..................................... 33
Policy Value and Surrender Value.......................... 34
Payment Options........................................... 36
Optional Insurance Benefits............................... 36
Surrender................................................. 36
Partial Withdrawal........................................ 36
CHARGES AND DEDUCTIONS...................................... 37
State Premium Tax......................................... 37
Monthly Deduction from Policy Value....................... 37
Charges Against Assets of the VEL Account................. 39
Surrender Charge.......................................... 40
Charges on Partial Withdrawal............................. 41
Transfer Charges.......................................... 42
Charge for Increase in Face Amount........................ 42
Other Administrative Charges.............................. 42
POLICY LOANS................................................ 43
Loan Interest............................................. 43
Repayment of Loans........................................ 43
Effect of Policy Loans.................................... 44
POLICY TERMINATION AND REINSTATEMENT........................ 44
Termination............................................... 44
Reinstatement............................................. 45
OTHER POLICY PROVISIONS..................................... 45
Policyowner............................................... 45
Beneficiary............................................... 46
Incontestability.......................................... 46
Suicide................................................... 46
Age....................................................... 46
Assignment................................................ 46
Postponement of Payments.................................. 46
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 47
DISTRIBUTION................................................ 48
</TABLE>
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<TABLE>
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REPORTS..................................................... 49
LEGAL PROCEEDINGS........................................... 49
FURTHER INFORMATION......................................... 49
INDEPENDENT ACCOUNTANTS..................................... 49
FEDERAL TAX CONSIDERATIONS.................................. 49
The Company and the VEL Account........................... 50
Taxation of the Policies.................................. 50
Policy Loans.............................................. 51
Modified Endowment Contracts.............................. 51
MORE INFORMATION ABOUT THE GENERAL ACCOUNT.................. 52
General Description....................................... 52
General Account Value and Policy Loans.................... 52
The Policy................................................ 53
Transfers, Surrenders, and Partial Withdrawals............ 53
FINANCIAL STATEMENTS........................................ 53
APPENDIX A -- OPTIONAL BENEFITS............................. A-1
APPENDIX B -- PAYMENT OPTIONS............................... B-1
APPENDIX C -- ILLUSTRATIONS................................. C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES...... D-1
APPENDIX E -- PERFORMANCE INFORMATION....................... E-1
FINANCIAL STATEMENTS........................................ FIN-1
</TABLE>
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SPECIAL TERMS
AGE: The Insured's age as of the nearest birthday measured from a Policy
anniversary.
ACCUMULATION UNIT: A measure of your interest in a Sub-Account.
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. "We," "our,"
"us," and "the Company" refer to Allmerica Financial Life Insurance and Annuity
Company in this Prospectus.
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, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option, 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
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, 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 specification pages of the Policy.
FINAL PREMIUM PAYMENT DATE: The Policy anniversary nearest the Insured's 95th
birthday. The Final Premium Payment Date 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. The Net Death Benefit may be different before and after the
Final Payment Date. See DEATH PROCEEDS.
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 of a 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 Table, 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. The percentage factor is a
percentage that, when multiplied by the Policy Value, determines the minimum
death benefit required under federal tax laws. If Option 3 is in effect, the
percentage factor is based on the Insured's attained age, sex, risk
classification, as set forth in the Policy. For both the Option 1 and the Option
2, the percentage factor is based
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on the Insured's attained age, as set forth in GUIDELINE MINIMUM SUM INSURED
TABLE in SUM INSURED OPTIONS -- "GUIDELINE MINIMUM SUM INSURED" under THE
POLICY.
INSURANCE AMOUNT AT RISK: The Sum Insured less the Policy Value.
LOAN VALUE: The maximum amount that may be borrowed under the Policy.
MONTHLY PAYMENT DATE: The date on which the Monthly Deduction is deducted from
Policy Value.
MONTHLY DEDUCTION: Charges deducted monthly from the Policy Value of a Policy
prior to the 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.
NET PREMIUM: An amount equal to the premium less a premium tax 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 a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a 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 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 subdivision of the VEL Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust ("Trust"), a corresponding Portfolio of the Fidelity Variable Insurance
Products Fund ("Fidelity VIP") or the Fidelity Variable Insurance Products Fund
II ("Fidelity VIP II"), the Portfolio of T. Rowe Price International
Series, Inc. ("T. Rowe Price"), or the Series of Delaware Group Premium Fund
("DGPF").
SUM INSURED: The amount payable upon the death of the Insured before the 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 will always be at least equal to
the Face Amount.
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SURRENDER VALUE: The amount payable upon a full surrender of the Policy. It is
the Policy Value, less any Debt and any surrender charges.
UNDERLYING FUNDS (FUNDS): The Funds of the Allmerica Investment Trust ("Trust"),
the Portfolios of the Fidelity Variable Insurance Products Fund ("Fidelity VIP")
and Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), the
Portfolio of T. Rowe Price International Series, Inc. ("T. Rowe Price") and the
Series of the Delaware Group Premium Fund ("DGPF") available under the Policies.
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 a 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 Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
VEL ACCOUNT: A Separate Account of the Company to which the Policyowner may make
Net Premium allocations.
WRITTEN REQUEST: A request by the Policyowner, in writing, 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 OF FEES AND CHARGES
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.
PREMIUM TAX CHARGE
A charge for state and local premium taxes (if any) is deducted from each
premium payment. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The premium
tax charge will change when either the applicable jurisdiction changes or the
tax rate within the applicable jurisdiction changes. The Company should be
notified of any change in address of the Insured as soon as possible.
MONTHLY DEDUCTIONS FROM POLICY VALUE
On the Date of Issue and each Monthly Payment Date thereafter prior to the Final
Premium Payment Date, certain charges ("Monthly Deductions") will be deducted
from the Policy Value. The Monthly Deduction consists of a charge for cost of
insurance, a charge for the cost of any additional benefits provided by rider,
and a charge for administrative expenses. 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.
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk (the Sum Insured minus the Policy Value) 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 of $5 per month is made for administrative
expenses. 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. The monthly
administrative charge is described in CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
As noted above, certain additional insurance rider benefits are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE VEL ACCOUNT
A daily charge equivalent to an effective annual rate of 0.50% of the average
daily net asset value of each Sub-Account of the VEL 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 VEL
Account."
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. See CHARGES AND DEDUCTIONS --
"Charges Against Assets of the VEL Account." The levels of fees and expenses
vary among the Underlying Funds.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is the smaller of 2% of the amount withdrawn or $25,
is assessed at the time of each partial withdrawal to reimburse the Company for
the cost of processing the withdrawal. In addition to the transaction charge, a
partial withdrawal charge may also be made under certain circumstances. The
transaction fee applies to all partial withdrawals, including a Withdrawal
without a surrender charge. See CHARGES AND DEDUCTIONS -- "Charges on Partial
Withdrawal."
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CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in Face Amount, a charge of $40 will be deducted from Policy
Value. This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the increase. See THE POLICY -- "Change in
Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in 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 POLICY -- "Transfer Privilege" and CHARGES AND
DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE 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. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
SURRENDER CHARGES
At any time that a Policy is in effect, a Policyowner may elect to surrender the
Policy and receive its Surrender Value. A surrender charge is calculated upon
issuance of the Policy and upon each increase in Face Amount. The surrender
charge is only imposed if less than ten 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 Face Amount.
DEFERRED ADMINISTRATIVE CHARGE
A component of the surrender charge is a charge for administrative expenses.
This deferred administrative charge is $8.50 per thousand dollars of the initial
Face Amount or of an increase in 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 a Policy. Because the maximum surrender charge reduces
by 1% per month after the 44th Policy month and becomes zero after the 120th
month after Date of Issue or the effective date of an increase in Face Amount,
in certain situations some or all of the deferred administrative charge may not
be assessed upon surrender of the Policy. See THE POLICY -- "Surrender" and
CHARGES AND DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGE ON THE INITIAL 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 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 of initial Face
Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
The maximum surrender charge remains level for the first 44 Policy months,
reduces by 1% per month for the next 76 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 surrender charge imposed may be less than the maximum. See THE
POLICY -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGE ON INCREASES IN 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 D -- CALCULATION OF MAXIMUM
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SURRENDER CHARGES. 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 76 Policy months, and is zero thereafter.
The actual surrender charge with respect to the increase may be less than the
maximum. See THE POLICY -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge."
SURRENDER CHARGES ON DECREASES IN FACE AMOUNT
In the event of a decrease in Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full surrender. For
information, see THE POLICY -- "Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge" or APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
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 1999.
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OTHER EXPENSES
MANAGEMENT FEE (AFTER ANY TOTAL FUND EXPENSES
(AFTER ANY APPLICABLE (AFTER ANY WAIVERS/
UNDERLYING FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- ------------------ --------------- ---------------------
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Select Aggressive Growth Fund.............. 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation Fund........... 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund.............. 0.90% 0.07% 0.97%(1)(2)
Select Emerging Markets Fund............... 1.35% 0.57% 1.92%(1)(2)
Select International Equity Fund........... 0.89% 0.13% 1.02%(1)(2)
DGPF International Equity Series........... 0.83%(4) 0.12% 0.95%(4)
Fidelity VIP Overseas Portfolio............ 0.73% 0.18% 0.91%(3)
T. Rowe Price International Stock
Portfolio................................. 1.05% 0.00% 1.05%
Select Growth Fund......................... 0.78% 0.05% 0.83%(1)(2)
Select Strategic Growth Fund............... 0.85% 0.35% 1.20%(1)(2)
Core Equity Fund........................... 0.43% 0.05% 0.48%(1)(2)
Fidelity VIP Growth Portfolio.............. 0.58% 0.08% 0.66%(3)
Fidelity VIP II Index 500 Portfolio........ 0.24% 0.10% 0.34%(3)
Equity Index Fund.......................... 0.28% 0.07% 0.35%(1)
Fidelity VIP Equity-Income Portfolio....... 0.48% 0.09% 0.57%(3)
Select Growth and Income Fund.............. 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP II Asset Manager Portfolio.... 0.53% 0.10% 0.63%(3)
Fidelity VIP High Income Portfolio......... 0.58% 0.11% 0.69%
Select Investment Grade Income Fund........ 0.43% 0.07% 0.50%(1)
Government Bond Fund....................... 0.50% 0.12% 0.62%(1)
Money Market Fund.......................... 0.24% 0.05% 0.29%(1)
</TABLE>
* Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised. The
Management Fee and Total Fund Expense ratios shown in the table above have been
adjusted to assume that the revised rates took effect January 1, 1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income
Fund, and Government Bond Fund, and 0.60% for 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 1999.
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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-advisor.
Until further notice, the Select Value Opportunity Fund's 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 declaration of a voluntary management fee or 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) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. Including these reductions, total annual fund operating expenses
were 1.01% for Select International Equity Fund, 1.88% for Select Emerging
Markets, 0.84% for Select Aggressive Growth Fund, 0.88% for Select Value
Opportunity Fund, 0.81% for Select Growth Fund, 1.17% for Select Strategic
Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth and Income
Fund.
(3) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds, or
Fidelity Management & Research Company on behalf of certain funds, custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.56% for the Fidelity VIP Equity-Income Portfolio; 0.62%
for the Fidelity VIP II Asset Manager Portfolio 0.65% for the Fidelity VIP
Growth Portfolio; and 0.28% for the Fidelity VIP II Index 500 Portfolio.
(4) The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
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SUMMARY OF POLICY FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. If you are considering the purchase of this
product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Policy, together with its attached application, constitutes the entire agreement
between you and the Company.
There is no guaranteed minimum Policy Value. The value of a 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 will also 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 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. If the Guideline Premium
Test is in effect (See "Election of Sum Insured Options"), 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), and may change between Sum Insured Option 1 and Option 2, subject to
certain conditions. If the Cash Value Accumulation Test is in effect, Sum
Insured Option 3 (the Sum Insured is fixed in amount) will apply. A Minimum Sum
Insured, equivalent to a percentage of the Policy Value, will apply if greater
than the Sum Insured otherwise payable under Option 1, Option 2 or Option 3.
The purpose of the Policy is to provide insurance protection for the Beneficiary
named therein. This Summary is intended to provide only a very brief overview of
the more significant aspects of the Policy. Further detail is provided in this
Prospectus and in the Policy. 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.
FREE-LOOK PERIOD -- The Policy provides 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,
- ten days after you receive the Policy (or, if required by state law, the
longer period indicated in your Policy), or
- ten days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.
When you return the Policy, the Company will mail a refund to you within seven
days. The refund of any premium paid by check may be delayed until the check has
cleared your bank.
Where required by state law, the refund will equal the premiums paid. In other
states, the refund will equal the sum of:
(1) the difference between the premium, including fees and charges paid, and
any amount allocated to the VEL Account, PLUS
(2) the value of the amounts allocated to the VEL Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the VEL Account.
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<PAGE>
The amount refunded in (1) above includes any premiums allocated to the General
Account. A free-look privilege also applies after a requested increase in the
Face Amount. See THE POLICY -- "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 fixed
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 risk classifications as the original Policy. See THE POLICY -- "Conversion
Privileges."
ABOUT THE POLICY
The Policy allows 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, unlike the fixed benefits of ordinary whole life insurance,
the Policy Value will, and under certain circumstances the Death Proceeds may,
increase or decrease depending on the investment experience of the Sub-Accounts
of the VEL Account.
FLEXIBLE PREMIUM
The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. However, you may be
required to provide evidence of insurability as a condition to our accepting any
payment that would increase the Insurance Amount at Risk (the Sum Insured less
the Policy Value). If evidence of insurability is required, the Company will
return the payment to you and if your payment exceeds our maximum limit (defined
below) the Company may not accept any additional payments which would increase
the Insurance Amount at Risk and shall not provide any additional death benefit
until (1) evidence of insurability for the Insured has been received by the
Company and (2) the Company has notified you that the Insured is in a
satisfactory underwriting class. You may then make payments that increase the
Insurance Amount at Risk for 60 days (but not later than the Final Payment Date)
following the date of such notification by the Company.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause a Policy to lapse, nor will making the planned premium payments guarantee
that a Policy will remain in force. Thus, you may, but are not required to, pay
additional premiums. The Company may limit the maximum payment received in any
certificate year but in no event will the limit be less than the maximum Level
Premium shown in the certificate.
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The Policy 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.
APPLYING FOR A POLICY
At the time of applying for a Policy, the proposed Insured will complete an
application, which lists the proposed amount of insurance and indicates how much
of that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the application are answered "Yes" and the application
is returned within 30 days of the eligibility date, the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
Insured is a standard premium class, any insurance in excess of the simplified
underwriting amount will begin on the date the application and medical
examinations, if any, are completed. If the proposed Insured cannot answer the
eligibility questions "Yes" and if the proposed Insured is not a standard risk,
insurance coverage will begin only after the Company (1) approves the
application, (2) the Policy is delivered and accepted, and (3) the first premium
is paid.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the Company's 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 Company's Principal Office. IF A
POLICY IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU
WITHOUT INTEREST.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less the actual premium tax. Net Premiums may
be allocated to one or more Sub-Accounts of the VEL Account, to the General
Account, or to any combination of Accounts. You bear the investment risk of Net
Premiums allocated to the Sub-Accounts. Allocations may be made to no more than
twenty 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
POLICY -- "Allocation of Net Premiums."
Premiums allocated to the Company's 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.
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under a Policy at
any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the VEL Account and all accumulations in the General Account of
the Company 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
VEL Account. The Company does not guarantee a minimum Policy Value.
The Surrender Value will be the Policy Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Policy loans or surrender.
POLICY LAPSE AND REINSTATEMENT
The failure to make premium payments will not cause a 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.
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A 62-day grace period applies to each situation.
Subject to certain conditions (including Evidence of Insurability showing that
the Insured is insurable according to the Company's underwriting rules and the
payment of sufficient premium), a Policy may be reinstated at any time within
three years after the expiration of the grace period and prior to the Final
Premium Payment Date. See POLICY TERMINATION AND REINSTATEMENT.
PARTIAL WITHDRAWAL
After the first Policy year, you may make partial withdrawals in a minimum
amount of $500 from the Policy Value. Under Option 1 or Option 3, 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.
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 POLICY -- "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
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
Policy Value less the surrender charge.
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, a Policy loan may have a
permanent impact on the Policy Value even though it is eventually 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 Policies. 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
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%. Our 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 a preferred
loan, which may be treated as a taxable withdrawal from the Policy. See FEDERAL
TAX CONSIDERATIONS -- "Policy Loans." Consult a qualified tax adviser (and see
FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT AVAILABLE IN ALL
STATES.
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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, 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. Three Sum Insured Options are available. Under Option 1 and
Option 3, 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 POLICY -- "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 -- 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 Final Premium Payment Date, 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
POLICY -- "Change in Face Amount."
The minimum increase in Face Amount is $10,000, and any increase may also
require additional Evidence of Insurability satisfactory to the Company. The
increase is subject to a "free-look period" and, during the first 24 months
after the increase, to a conversion privilege. See THE POLICY -- "Free-Look
Period" and "Conversion Privileges."
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 Policy Value
as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
INVESTMENT OPTIONS
The Policies permit Net Premiums to be allocated either to the Company's General
Account or to the VEL Account. The VEL Account is currently comprised of 22
Sub-Accounts ("Sub-Accounts"). Of these 22 Sub-Accounts, 21 are available to the
Policies. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of the Allmerica Investment Trust ("Trust") managed by Allmerica Financial
Investment Management Services, Inc., the Fidelity Variable Insurance Products
Fund ("Fidelity VIP") or the Fidelity Variable Insurance Products Fund II
("Fidelity VIP II") managed by Fidelity Management & 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 ("DGPF")
managed by Delaware International Advisers Ltd. with respect to the DGPF
International Equity Series. In some states, insurance regulations may restrict
the availability of particular Underlying Funds. The Policies permit you to
transfer Policy Value among the available Sub-Accounts and between the
Sub-Accounts and the General Account of the Company, subject to certain
limitations described under THE POLICY -- "Transfer Privilege."
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The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified series management investment companies. Each of the Funds has its
own investment objectives. However, certain underlying Funds have investment
objectives similar to other underlying Funds. The following Funds are available
under the Policies:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fidelity VIP Overseas Portfolio
Fund Fidelity VIP Equity-Income Portfolio
Select Capital Fidelity VIP Growth Portfolio
Appreciation Fund Fidelity VIP High Income Portfolio
Select Value Opportunity
Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Emerging Markets Fidelity VIP II Asset Manager Portfolio
Fund Fidelity VIP II Index 500 Portfolio
Select International
Equity Fund DELAWARE GROUP PREMIUM FUND
Select Growth Fund DGPF International Equity Series
Select Strategic Growth
Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Core Equity Fund T. Rowe Price International Stock Portfolio
Select Growth and Income
Fund
Equity Index Fund
Select Investment Grade
Income Fund
Government Bond Fund
Money Market Fund
</TABLE>
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. For more information, see
DESCRIPTION OF THE COMPANY, THE VEL ACCOUNT, AND THE UNDERLYING FUNDS.
TAX TREATMENT
A Policy is generally subject to the same federal income tax treatment as a
conventional fixed benefit life insurance policy. Under current tax law, to the
extent there is no change in benefits, you 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 Internal Revenue Code because of a reduction in benefits under the
Policy. Death Proceeds under the Policy are 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."
A Policy offered by this Prospectus may be considered a "modified endowment
contract" if it fails a "seven-pay" test. 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 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 annual premiums. If the Policy is considered a modified endowment
contract, all distributions (including Policy loans, partial withdrawals,
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
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any distribution that is includible in income. For more information, see FEDERAL
TAX CONSIDERATIONS -- "Modified Endowment Contracts."
------------------------
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. The Prospectus and the Policy provide further
detail. The Policy provides insurance protection for the named beneficiary. The
Policy and its attached application or enrollment form are the entire agreement
between you and the Company.
THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. 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.
NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO A
SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
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DESCRIPTION OF THE COMPANY, THE VEL 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, 1999, the
Company had over $17 billion in combined assets and over $26 billion of life
insurance in force. 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 VEL ACCOUNT
The VEL Account was authorized by vote of the Board of Directors of the Company
on April 2, 1987. The VEL 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 VEL Account or the Company
by the SEC.
The assets used to fund the variable portion of the Policies are set aside in
the VEL Account, and are kept separate and apart from the general assets of the
Company. Under Delaware law, assets equal to the reserves and other liabilities
of the VEL Account may not be charged with any liabilities arising out of any
other business of the Company. The VEL Account currently consists of 22
Sub-Accounts, of which 21 are available to the Policies. You may have
allocations in up to 20 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
- Fidelity Variable Insurance Products Fund
- Fidelity Variable Insurance Products Fund II
- T. Rowe Price International Series, Inc.
- Delaware Group Premium Fund
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THE UNDERLYING FUNDS
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waiver/reimbursements see "CHARGES OF THE UNDERLYING FUNDS" under the
SUMMARY OF FEES AND CHARGES section. The prospectuses of the Underlying Funds
also contain information regarding fees for advisory services and should be read
in conjunction with this prospectus.
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 the Company 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
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,
the Select Emerging Markets Fund, Select International Equity Fund, Select
Growth Fund, Select Strategic Growth Fund, Core Equity Fund, Equity Index Fund,
Select Growth and Income Fund, Select Investment Grade Income Fund, Government
Bond Fund and Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment manager of the Trust. AFIMS, which is a wholly-owned subsidiary of
Allmerica Financial, has entered into agreements with other investment managers
("Sub-Advisers"), who manage the investments of the Funds. The Trustees have
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into a management agreement with AFIMS
AFIMS, subject to Trustee review, is responsible for the daily affairs of the
Trust and the general management of the Funds. AFIMS performs 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.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify 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 payments and
brokerage commissions,
- Fees and expenses of the Trustees who are not affiliated with AFIMS, and
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses.
Under the Management Agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees. Under
each Sub-Adviser Agreement, the Sub-Adviser is authorized to engage in portfolio
transactions on behalf of the Fund, subject to the Trustee's instructions. The
Sub-Advisers (other than Allmerica Asset Management, Inc.) are not affiliated
with the Company or the Trust.
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<PAGE>
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Policy: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity
VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate 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. The Portfolios of Fidelity VIP, as part of their
operating expenses, pay monthly investment management fee to FMR for managing
investments and business affairs. The prospectus of Fidelity VIP contains
additional information concerning the Portfolios, including information
concerning additional expenses paid by the Portfolios, and should be read in
conjunction with this Prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see discussion under "Fidelity 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. Two of its investment portfolios are available under the
Policy: the Fidelity VIP II Asset Manager Portfolio and the Fidelity VIP II
Index 500 Portfolio.
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. Price-Fleming, founded in 1979 as
a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Limited, is one of the largest no-load international mutual fund asset
managers, with approximately $42.5 billion (as of December 31, 1999) under
management in its offices in Baltimore, London, Tokyo, Hong Kong, Singapore and
Buenos Aires. One of its investment portfolios is available under the Policies:
the T. Rowe Price International Stock Portfolio. An affiliate of Price-Fleming,
T. Rowe Price Associates, Inc. serves as Sub-Adviser to the Select Capital
Appreciation Fund of the Trust.
DELAWARE GROUP PREMIUM FUND
Delaware Group Premium Fund ("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 DGPF International Equity Series. The Investment adviser
for the DGPF International Equity Series is Delaware International Advisers Ltd.
("Delaware International").
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<PAGE>
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 INVESTMENT COMPANIES 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 -- The Select Aggressive Growth Fund of the Trust
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 -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth 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 will invest
primarily in common stock of industries and companies which are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund of the Trust
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 -- The Select Emerging Markets Fund of the Trust
seeks long-term growth of capital by investing in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust 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 -- The International Equity Series of DGPF
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 -- The Overseas Portfolio of Fidelity VIP 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.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The 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 -- The Select Growth Fund of the Trust seeks to achieve
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 -- The Select Strategic Growth Fund of the Trust
seeks long-term growth of capital by investing primarily in common stocks of
established companies.
CORE EQUITY FUND -- The Core Equity Fund of the Trust 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 Core Equity Fund is to achieve long-term growth of capital.
Realization of current investment income, if any, is incidental to this
objective.
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FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP 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.
FIDELITY VIP II INDEX 500 PORTFOLIO -- The Index 500 Portfolio of Fidelity VIP
II seeks investment results that correspond to the total return of a broad range
of common stocks publicly traded in the United States, as represented by the S&P
500.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond generally to the composite price and yield
performance of United States publicly traded common stocks. The Equity Index
Fund seeks to achieve its objective by attempting to replicate the composite
price and yield performance of the S&P 500.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP 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.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund of the Trust
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 II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II 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 -- The High Income Portfolio of Fidelity VIP
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.
SELECT INVESTMENT GRADE INCOME FUND -- The Select Investment Grade Income Fund
of the Trust 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 realized and unrealized capital gains) as is consistent with prudent
investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust 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.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term debt instruments with the
objective of obtaining maximum current income consistent with the preservation
of capital and liquidity.
Certain Underlying Funds have similar investment objectives and/or policies.
Therefore, to choose the Sub-Accounts which best will meet your needs and
objectives, carefully read the prospectuses of the Trust, Fidelity
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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 by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within 60 days of the later of (1) the effective date of such change in
the investment policy, or (2) the receipt of the notice of your right to
transfer. You may then change your premium and deduction allocation percentages.
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 VEL 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 a 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 the 1940 Act or other applicable law. The VEL Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by a Policyowner.
The Company also reserves the right to establish additional Sub-Accounts of the
VEL Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. 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 are also 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 are also 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 owners. Although the Company and
the Underlying Funds do not currently foresee any such disadvantages to either
variable life insurance policyowners or variable annuity owners, the Company and
the respective Trustees intend to monitor events in order to identify any
material conflicts between such Policyowners and to determine what action, if
any, should be taken in response thereto. 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 attendant expenses.
If any of these substitutions or changes is made, the Company may by appropriate
endorsement change the Policy 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 VEL 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.
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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 received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the VEL Account that it owns and which are not attributable to Policies in
the same proportion.
The number of votes which a 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 each 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.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the Fund shares be voted so
as (1) to cause a change in the subclassification or investment objective of one
or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, we may disregard voting instructions that
are in favor of any change in the investment policies or in any investment
adviser or principal underwriter if the change has been initiated by
Policyowners or the Trustees. Our 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 Funds. In the event we do disregard voting instructions, a
summary of and the reasons for that action will be included in the next periodic
report to Policyowners.
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THE POLICY
APPLYING FOR A POLICY
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 such verification procedures as medical examinations, and
may require that further information be provided by the proposed Policyowner
before a determination of insurability can be made. A Policy cannot be issued
until this underwriting procedure has been completed. The Company reserves the
right to reject an application which does not meet the Company's underwriting
guidelines, but in underwriting insurance, the Company shall comply with all
applicable federal and state prohibitions concerning unfair discrimination.
When applying for a Policy, the proposed Insured will complete an application,
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the application are answered "Yes" and the application is returned
within 30 days of the eligibility date, the Company will provide immediate
coverage equal to the simplified underwriting amount. If the proposed Insured is
in a standard premium class, any insurance in excess of the simplified
underwriting amount will begin on the date the application and medical
examinations, if any, are completed. If the proposed Insured cannot answer the
eligibility questions "Yes" and if the proposed Insured is not a standard risk,
insurance coverage will begin only after the Company (1) approves the
application, (2) the Policy is delivered and accepted, and (3) the first premium
is paid.
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 Company's General Account. If the
application is approved and the Policy is issued and accepted, the initial
premium held in the General Account will be credited with interest not later
than the date of receipt of the premium at the Company's Principal Office. IF A
POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
FREE-LOOK PERIOD
The Policy provides 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, if required by state law, the
longer period indicated in your Policy), 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 mail a refund to you within seven
days. The refund of any premium paid by check, however, may be delayed until the
check has cleared your bank.
Where required by state law, the refund will equal the premiums paid. In all
other states, the refund will equal the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the VEL Account, plus
(2) the value of the amounts allocated to the VEL Account, plus
(3) any fees or charges imposed on the amounts allocated to the VEL Account.
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The amount refunded in (1) above includes any premiums allocated to the General
Account.
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 specification pages issued for the
increase, 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 your 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
Policy 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 Face Amount (assuming the Policy is in force), you may
convert your 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 VEL 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 VEL 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, 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 risk classifications as
the original Policy.
PREMIUM PAYMENTS
Premium Payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the VEL Account or General
Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY
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 may also make unscheduled premium payments
at any time prior to the Final Premium Payment Date or skip planned premium
payments, subject to the maximum and minimum premium limitations described
below. Therefore, unlike conventional insurance policies, a Policy does not
obligate you to pay premiums in accordance with a rigid and inflexible premium
schedule.
You may also 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 a Policy. The minimum payment permitted under MAP is $50.
Premiums are not limited as to frequency and number. However, you may be
required to provide evidence of insurability as a condition to our accepting any
payment that would increase the Insurance Amount at Risk
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(the Sum Insured less the Policy Value). If evidence of insurability is
required, the Company will return the payment to you and if your payment exceeds
our maximum limit (defined below) the Company may not accept any additional
payments which would increase the Insurance Amount at Risk and shall not provide
any additional death benefit until (1) evidence of insurability for the Insured
has been received by the Company and (2) the Company has notified you that the
Insured is in a satisfactory underwriting class. You may then make payments that
increase the Insurance Amount at Risk for 60 days (but not later than the Final
Payment Date) following the date of such notification by the Company.
However, no premium payment may be less than $100, however, without the
Company's consent. Moreover, premium payments must be sufficient to cover the
next Monthly Deduction plus loan interest accrued, or the Policy may lapse. See
POLICY TERMINATION AND REINSTATEMENT.
The Company may limit the maximum payment received in any certificate year but
in no event will the limit be less than the maximum Level Premium shown in the
certificate. 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 will 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, a 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 of the Policy 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 Variable Account 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 Sum Insured options will not apply.
- The Company will transfer the Policy Value in the Variable 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 Variable Account.
- The Policyowner may not make further payments.
- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.
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- Riders will continue only with the Company's consent.
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 loans.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the premium tax charge. In the
application for a Policy, you indicate the initial allocation of Net Premiums
among the General Account and the Sub-Accounts of the VEL Account. You may
allocate premiums to one or more Sub-Accounts, but may not have Policy Value in
more than twenty 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 Request or telephone request. 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 policy of the Company and
its agents and affiliates is that they 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. Such procedures may
include, among other things, requiring some form of personal identification
prior to acting upon instructions received by telephone. All transfer
instructions by telephone are tape recorded. An allocation change will be
effective as of the date of receipt of the notice at the Principal Office. No
charge is currently 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.
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 should periodically 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 a
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 requests. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will by honored.
Currently, transfers to and from 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.
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These rules are subject to change by the Company.
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 a 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), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Policy 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 a lump sum or under one or more of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Death
Proceeds payable depends on the current Face Amount and the Sum Insured Option
that is in effect on the date of death. Prior to the Final Premium Payment Date,
the Death Proceeds are: (1) The Sum Insured provided under Option 1, Option 2,
or Option 3, whichever is in effect on the date of death; plus (2) any
additional insurance on the Insured's life that is provided by rider; minus
(3) 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. After the Final Premium Payment Date, the Death Proceeds
equal the Surrender Value of the Policy. The amount of Death Proceeds payable
will be determined as of the date the Company receives due proof of the
Insured's death for Option 2 and date of death for Option 1 and 3.
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GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
Federal tax law requires a minimum death benefit in relation to cash value for a
Policy to qualify as life insurance. Under current federal tax law, either the
Guideline Premium Test or the Cash Value Accumulation Test can be used to
determine if a Policy complies with the definition of "life insurance" in
Section 7702 of the Code. At the time of application, the employer may elect
either of the tests. THE CASH VALUE ACCUMULATION TEST MAY NOT BE AVAILABLE IN
ALL STATES.
There are two main differences between the Guideline Premium Test and the Cash
Value Accumulation Test. First, the Guideline Premium Test limits the amount of
premium that may be paid into a Policy, while no such limits apply under the
Cash Value Accumulation Test. Second, the factors that determine the minimum Sum
Insured relative to the Policy Value are different. Required increases in the
minimum Sum Insured due to growth in Policy Value will generally be greater
under the Cash Value Accumulation Test than under the Guideline Premium Test.
The Guideline Premium Test limits the amount of premiums payable under a Policy
to a certain amount for an insured of a particular age and sex. Under the
Guideline Premium Test, the Policyowner may choose between Sum Insured Option 1
and Option 2, as described below. After issuance of the Policy, the Policyowner
may change the selection from Option 1 to Option 2 or vice versa. The Cash Value
Accumulation Test requires that the Sum Insured must be sufficient so that the
cash Surrender Value, as defined in Section 7702, does not at any time exceed
the net single premium required to fund the future benefits under the Policy. In
the event the maximum premium limit applies, we reserve the right to obtain
evidence of insurability which is satisfactory to us as a condition to accepting
excess premium. If the Cash Value Accumulation Test is chosen by the employer,
only Sum Insured Option 3 will apply. Sum Insured Option 1 and Option 2 are not
available under the Cash Value Accumulation Test.
ELECTION OF SUM INSURED OPTIONS
If the Guideline Premium Test is chosen by the employer, the Policyowner may
choose between Sum Insured Option 1 or Option 2. The Policyowner may designate
the desired Sum Insured Option in the application form, and may change the
option once per Policy year by Written Request. There is no charge for a change
in option.
Option 3 is available only under the Cash Value Accumulation Test, described
above.
OPTION 1 -- LEVEL SUM INSURED
Under Option 1, the Sum Insured is equal to the greater of Face Amount or the
Minimum Sum Insured, as set forth in the table below. Under Option 1, the Sum
Insured will remain level unless the Minimum Sum Insured is greater than the
Face Amount, in which case the Sum Insured will vary as the Policy Value varies.
Option 1 will offer the best opportunity for the Policy Value under a Policy to
increase without increasing the Death Proceeds as quickly as it might under the
other options. The Sum Insured will never go below the Face Amount.
OPTION 2 -- ADJUSTABLE SUM INSURED
Under Option 2, the Sum Insured is equal to the greater of the Face Amount plus
the Policy Value or the Minimum Sum Insured, as set forth in the table below.
The Sum Insured will, therefore, vary as the Policy Value changes, but will
never be less than the Face Amount. Option 2 will offer the best opportunity for
the Policyowner who would like to have an increasing Sum Insured as early as
possible. The Sum Insured will increase whenever there is an increase in the
Policy Value and will decrease whenever there is a decrease in the Policy Value,
but will never go below the Face Amount.
OPTION 3 -- LEVEL SUM INSURED WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Sum Insured will equal the Face Amount, unless the Policy
Value, multiplied by the applicable Option 3 Sum Insured Factor, gives a higher
Sum Insured. A complete list of Option 3 Sum Insured Factors is set forth in the
Policy. The applicable Sum Insured Factor depends upon the sex, risk
classification,
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and then-attained age of the insured. The Sum Insured Factor decreases slightly
from year to year as the attained age of the insured increases. Option 3 will
offer the best opportunity for the Policyowner who is looking for an increasing
Sum Insured in later Policy years and/or would like to fund the Policy at the
"seven-pay" limit for the full seven years. When the Policy Value multiplied by
the applicable Sum Insured Factor exceeds the Face Amount, the Sum Insured will
increase whenever there is an increase in the Policy Value and will decrease
whenever there is a decrease in the Policy Value, but will never go below the
Face Amount. Option 3 may not be available in all states.
GUIDELINE MINIMUM SUM INSURED UNDER OPTION 1 AND OPTION 2
The Guideline Minimum Sum Insured under Option 1 or Option 2 is equal to a
percentage of the Policy Value as set forth below. The Guideline Minimum Sum
Insured is determined in accordance with the Code regulations to ensure that the
Policy qualifies as a life insurance contract and that the insurance proceeds
may be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM SUM INSURED TABLE
(OPTION 1 AND OPTION 2)
<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.
For any Face Amount, the amount of the Sum Insured, and thus the Death Proceeds,
will be greater under Option 2 than under Option 1, since the Policy Value is
added to the specified Face Amount and included in the Death Proceeds only under
Option 2. However, the cost of insurance included in the Monthly Deduction will
be greater, and thus the rate at which Policy Value will accumulate will be
slower, under Option 2 than under Option 1. See "CHARGES AND DEDUCTIONS --
Monthly Deduction from Policy Value."
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.
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For example, a 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, however, 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, a Policy with a Policy Value of $35,000 will have
a Guideline Minimum Sum Insured of $87,500 ($35,000 X2.50); 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 Policy Value; or
- the Policy Value multiplied by the applicable percentage from the
Guideline Minimum Sum Insured Table.
For example, a Policy with a Face Amount of $50,000 and with Policy Value of
$5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000). Policy Value of
$10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000); 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 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, 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 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, if Sum Insured Option 1 or Option 2 is in effect, 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
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<PAGE>
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. IF
OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
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 less than $40,000. 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. Thus, under Option 2, the Insurance Amount at Risk will
always equal the Face Amount unless the Guideline Minimum Sum Insured is in
effect. The cost of insurance may also be higher or lower than it otherwise
would have been without the change in Sum Insured Option. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from 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 will affect the determination of the Sum Insured from that point on,
however, since the Policy Value will no longer 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, respectively, reduce or increase the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the VEL 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 POLICY -- "Premium
Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a 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 may also be required if the
Face Amount is increased. A request for an increase in 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
Policy Value is less than $50 plus an amount equal to the sum of two Monthly
Deductions. On the effective date of each increase in Face Amount, a transaction
charge of $40 will be deducted from 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 will also
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<PAGE>
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly Deduction
from 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 POLICY -- "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 Face Amount is $10,000. By current Company
practice, the Face Amount in force after any decrease may not be less than
$50,000. If, following a decrease in Face Amount, the Policy would not comply
with the maximum premium limitation applicable under 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 a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from 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: (1) the Face Amount provided by
the most recent increase; (2) the next most recent increases successively; and
(3) the initial Face Amount. This order will also be used to determine whether a
surrender charge will be deducted and in what amount. If the Face Amount is
decreased while the "Payor Provisions" apply (see POLICY TERMINATION AND
REINSTATEMENT -- "Termination"), the above order may be modified to determine
the cost of insurance charge. In such case, you may reduce or eliminate any Face
Amount for which you are paying the insurance charges on a last-in, first-out
basis before you reduce or eliminate amounts of insurance which are paid by the
Payor.
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."
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of the accumulation in the General Account and 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 any surrender charge).
See THE POLICY -- "Surrender." There is no guaranteed minimum Policy Value.
Because Policy Value on any date depends upon a number of variables, it cannot
be predetermined.
Policy Value and 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 underwriting period when premiums
are held in the General Account (before being transferred to the VEL Account;
see
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THE POLICY -- "Applying for a Policy") less any Monthly Deductions due. On each
Valuation Date after the Date of Issue the Policy Value will be:
(1) 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
(2) 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 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 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 VEL 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 (1) by (2) and subtracting (3) from the result, where
(1) 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;
(2) is the value of that Sub-Account's assets at the beginning of the Valuation
Period; and
(3) is a charge for each day in the Valuation Period equal to 0.50% on an annual
basis 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.
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<PAGE>
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 -- PAYMENT
OPTIONS. These choices are also available at the Final Premium Payment Date and
if the Policy is surrendered. 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 a Policy by rider.
The cost of any optional insurance benefits will be deducted as part of the
Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy
Value."
SURRENDER
You may at any time surrender the Policy and receive its Surrender Value. The
Surrender Value is the Policy Value, less 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 will be deducted when a Policy is surrendered if less
than ten full Policy years have elapsed from the Date of Issue of the Policy or
from the effective date of any increase in Face Amount. See CHARGES AND
DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a single lump sum or under one of the
payment options described in APPENDIX B -- PAYMENT OPTIONS. The Company normally
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 WITHDRAWAL
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of your 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 or Option 3, 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.
A partial 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." The Company will normally 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." For important tax consequences which may result from
partial withdrawals, see FEDERAL TAX CONSIDERATIONS.
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<PAGE>
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy 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 Policies. 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.
The Company may waive or reduce the premium tax charge, administrative charges,
surrender charge, or 5% partial withdrawal charge, and will not pay commissions
on Policies where the Insured, as of the date of application, is within the
following class of individuals:
All employees of First Allmerica and its affiliates and subsidiaries located at
First Allmerica's home office (or at off-site locations if such employees are on
First Allmerica's home office payroll); all directors of First Allmerica and its
affiliates and subsidiaries; all retired employees of First Allmerica and its
affiliates and subsidiaries eligible under the Pension Plans of First Allmerica
or of its affiliates or any successor plan; all General Agents, agents and field
staff of First Allmerica; and all spouses, children, siblings, parents and
grandparents of any individuals identified above, who reside in the same
household.
Certain of the charges and deductions described below may be reduced for
Policies issued in connection with a specific group in accordance with the
Company's rules in effect as of the date an application. To qualify for a
reduction, a group must satisfy certain criteria such as the size of the group,
expected number of participants and anticipated premium payments from the group.
Generally, the sales contacts and effort, administrative costs and mortality
costs vary based on such factors as the size of the group, the purposes for
which the Policies are purchased and certain characteristics of the group's
members. The amount of reduction and the criteria for qualification will reflect
in the reduced sales effort and administrative costs resulting from, and the
different mortality experience expected as a result of, sales to qualifying
groups. The Company may modify both the amounts of reductions and the criteria
for qualification. Reductions in these charges will not be unfairly
discriminatory against any person, including the affected Policyowners and all
other Policyowners who purchase a Policy.
STATE PREMIUM TAX
A charge for state and local premium taxes (if any) is deducted from each
premium payment. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The premium
tax charge will change when either the applicable jurisdiction changes or the
tax rate within the applicable jurisdiction changes. The Company should be
notified of any change in address of the Insured as soon as possible.
MONTHLY DEDUCTION FROM POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from 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 charge and the monthly administrative charges are
discussed below. The Monthly Deduction on or following the effective date of a
requested increase in the Face Amount will also include a $40 administrative
charge for the increase. See THE POLICY -- "Change in Face Amount."
Prior to the Final Premium Payment Date, 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. However, if on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will
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<PAGE>
be deducted from that Sub-Account. No Monthly Deductions will be made on or
after the Final Premium Payment Date.
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. 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 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 or Option 3,
however, the applicable cost of insurance rate 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 owners who have selected Sum Insured Option 2 than for those who have
selected Sum Insured Option 1 or Option 3, 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 or Option 3 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 or Option
3 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 Face Amount. If you select Sum Insured
Option 1 or Option 3, 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. If the Guideline Minimum Sum Insured is in effect under either Option, a
monthly cost of insurance charge will also be calculated for that portion of the
Sum Insured which exceeds the current Face Amount. This charge will be
calculated by multiplying the cost of insurance rate applicable to the initial
Face Amount times the Guideline Minimum Sum Insured (Policy Value times the
applicable percentage) less the greater of the Face Amount or the Policy Value
if you selected Sum Insured Option 1 or Option 3, or less 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 in the
preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
Face Amount. See THE POLICY -- "Change in Face Amount" and "Decreases."
COST OF INSURANCE RATES
The Policy is sold to eligible individuals who are members of a non-qualified
employee benefit plan having five or more members. Premium billing will
generally be administered through one premium administrator. A portion of the
initial Face Amount may be issued on a preferred, standard, guaranteed or
simplified underwriting basis. The amount of this portion will be determined for
each group, and may vary within the group based on Age.
The determination of the class of risk for the guaranteed or simplified issue
portion will, in part, be based on the type of group; the purpose for which the
policies are purchased; the number of persons eligible to participate in the
plan; aggregate premiums paid; expected percentage of eligible persons
participating in the plan; and the amount of guaranteed or simplified
underwriting insurance to be issued. Larger groups, higher participation rates
and occupations with historically favorable mortality rates will generally
result in the individuals within that group being placed in a more favorable
class of risk.
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Cost of insurance rates are based on a blended unisex rate table, Age and
Premium Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
Debt, any partial withdrawals and withdrawal charges, and risk classification.
For those Policies issued in certain states or in certain cases on a unisex
basis, 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 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, Non-smoker, Male, Female (or Mortality Table B for
unisex Policies) and the Insured's Age. The tables used for this purpose set
forth different mortality estimates for smokers and non-smokers. Any change in
the cost of insurance rates will apply to all persons of the same insuring Age
and Premium Class whose Policies have been in force for the same length of time
in the group.
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 generally 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. The Premium Classes are also 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 regular 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 Face Amount. For each increase in 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 a monthly administrative charge of $5
per month will be deducted from the Policy Value. 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 VEL ACCOUNT
The Company currently makes a charge on an annual basis of 0.50% 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 Policies. 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 will therefore pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policies
will exceed the
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amounts realized from the administrative charges. 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.
In addition, 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. No charges are currently 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 Policy provides for a contingent surrender charge. A separate contingent
surrender charge, described in more detail below, is calculated upon the
issuance of the Policy and for each increase 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 agents' commissions, advertising
and the printing of the prospectuses and sales literature.
A Surrender Charge may be deducted if you request a full surrender of the Policy
or a decrease in Face Amount if less than ten 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 (1) plus (2) where (1) is a deferred administrative charge equal to $8.50
per thousand dollars of the initial Face Amount, and (2) 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 D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
The maximum surrender charge continues in a level amount for 44 Policy months,
reduces by 1% per month for the next 76 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.
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 D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
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 (1) plus (2), where (1) is equal to $8.50 per thousand dollars of
increase, and (2) 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 D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES. As is true for the initial Face Amount, (1) is a deferred
administrative charge, and (2) is a deferred sales
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<PAGE>
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 (1) $8.50 per thousand dollars of
increase in Face Amount, plus (2) 30% of the Policy Value on the date of
increase associated with the increase in Face Amount, plus (3) 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
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
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 D -- CALCULATION OF MAXIMUM SURRENDER CHARGES 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 a Policy), the surrender charge will be applied in the following order:
(1) the most recent increase; (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.
The minimum withdrawal is $500. Under Option 1 or Option 3, 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.
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. The transaction fee applies to all partial withdrawals,
including a Withdrawal without a surrender charge.
A partial withdrawal charge may also be deducted from 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(s) on
the date of withdrawal. There will be no partial withdrawal charge if there is
no surrender charge on the date of withdrawal (i.e., ten years have elapsed from
the Date of Issue and from the effective date of any increase in the Face
Amount).
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.
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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 for an example
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 will
never exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy Year. See THE POLICY -- "Transfer Privilege."
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
("Dollar-Cost Averaging"); or
- to reallocate Policy Value among the Sub-Accounts ("Automatic
Rebalancing").
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 of the Policy,
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 a
Policy year. See THE POLICY -- "Conversion Privileges" and POLICY LOANS.
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in 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.
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POLICY LOANS
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 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 Policy Value reduced by applicable surrender charges.
There is no minimum limit on the amount of the loan. The loan amount will
normally be paid within seven days after the Company receives the loan request
at its Principal Office, but the Company may delay payments under certain
circumstances. See OTHER POLICY PROVISIONS -- "Postponement of Payments."
A 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. 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 canceled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN INTEREST
LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT
As long as the Policy is in force, 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% per year. NO ADDITIONAL INTEREST WILL BE CREDITED TO SUCH POLICY
VALUE.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policies. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. You may change a preferred loan to a non-preferred loan at any time upon
written request. If this option has been selected, after the tenth Policy
anniversary 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%. Our
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 a preferred loan, which may
be treated as a taxable withdrawal from the Policy. Consult a qualified tax
adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT
AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
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 bear interest at the same rate. After the
due and unpaid interest is added to the loan amount, if the new loan amount
exceeds the Policy Value in the General Account, the Company will transfer
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 Debt 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
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premium allocation instructions; provided, however, that loan repayments
allocated to the VEL Account cannot exceed Policy Value previously transferred
from the VEL Account to secure the Debt.
If the 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.
POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(1) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or (2) if Debt exceeds the Policy Value. If one of these
situations occurs, the Policy will be in default. You will then 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 will still be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies and any other overdue charges
will be deducted from the Death Proceeds.
PAYOR PROVISIONS
Subject to approval in the state in which your Policy was issued, if you name a
"payor" in your application supplement, then the following "Payor Provisions"
will apply.
The payor may designate what portion, if any, of each payment of a premium is
"excess premium" to be allocated to the General Account and Sub-Accounts
according to your allocation instructions then in effect. Except for excess
premium, the payor's premium will automatically be allocated to the Sub-Account
which invests in the Money Market Fund of the Trust, from which the Monthly
Deductions will be made. Payor premiums which are initially held in the General
Account (which are not "excess premiums") will be transferred to the Money
Market Fund not later than three days after underwriting approval of the Policy.
No Policy loans, partial withdrawals or transfers may be made from the amount in
the Money Market Fund attributable to premiums allocated thereto by the payor.
If the amount in the Money Market Fund attributable to premiums allocated by the
payor is insufficient to cover the next Monthly Deduction, the Company will send
the payor a notice of the due date and amount of premium which is due. The
premium may be paid during a grace period of 62 days beginning on the premium
due date. If the premium payable is not received by the Company within 31 days
of the end of the grace period, a second notice will be sent to the payor. A
31-day grace period notice will also be sent to you at this time if your Policy
Value is insufficient to cover the Monthly Deductions then due.
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If the amount in the Money Market Fund attributable to premiums allocated
thereto by the payor is insufficient to cover the Monthly Deductions due at the
end of the grace period, the balance of such Monthly Deductions will be
withdrawn on a Pro-Rata Allocation from the Policy Value, if any, in the General
Account and the Sub-Accounts. A lapse occurs if the Policy Value is
insufficient, at the end of the grace period, to pay the Monthly Deductions
which are due. The Policy terminates on the date of lapse. Any Death Proceeds
payable during the grace period will be reduced by any overdue charges.
The above payor provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when "(a) the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued,"
but do not apply to "(b) if Debt exceeds the Policy Value." See the first
paragraph of this section captioned "Termination." You or the payor may, upon
Written Request, discontinue the above payor provisions. If the payor makes
Written Request to discontinue the payor provisions, we will send you a notice
of the discontinuance to your last known address.
REINSTATEMENT
If the Policy has not been surrendered and the Insured is alive, the terminated
Policy may be reinstated anytime within three years after the date of default
and before the Final Premium Payment Date. The reinstatement will be effective
on the Monthly Payment Date following the date you submit the following to the
Company: (1) a written application for reinstatement; (2) Evidence of
Insurability showing that the Insured is insurable according to the Company's
underwriting rules; and (3) a premium that, after the deduction of the premium
tax charge, is large enough to cover the Monthly Deductions for the three-month
period beginning on the date of reinstatement.
POLICY SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Policy remained in force from the Date of
Issue.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
- the Net Premium paid to reinstate the 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,
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 is generally entitled to exercise
all rights under a 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 may be required whenever the Face Amount
of insurance is increased.
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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.
INCONTESTABILITY
The Company will not contest the validity of a 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 rider or any increase in the Face Amount
after such rider or increase 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, while sane
or insane, 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, less any outstanding Debt and less any partial withdrawals. If the
Insured commits suicide, while sane or insane, 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
If the Insured's Age as stated in the application for a Policy is not correct,
benefits under a Policy will be adjusted to reflect the correct Age, if death
occurs prior to 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. In no event will the Sum Insured be reduced to less than the
Guideline Minimum Sum Insured.
ASSIGNMENT
The Policyowner may assign a 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 VEL Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Policy loan and
transfers may be postponed whenever: (1) the New York Stock Exchange is closed
for other than customary weekend and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the SEC, or (2) 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 VEL 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.
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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.
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Warren E. Barnes
Vice President and Corporate Vice President (since 1996) and Corporate Controller
Controller (since 1998) of First Allmerica
Mark R. Colborn Director (since 2000) and Vice President (since 1992)
Director and Vice President of First Allmerica.
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary
Secretary (since 1999) of Allmerica Investments, Inc.; and
Secretary (since 1999) of Allmerica Financial
Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First
Director, Vice President and Allmerica (since 2000); Vice President (1999) of
General Counsel Promos Hotel Corporation; Vice President & Deputy
General Counsel (1998-1999) of Legg Mason, Inc.; Vice
President and Deputy General Counsel (1995-1998) of
USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Chief and Vice President (since 1991) of First Allmerica;
Investment Officer Vice President (since 1998) of Allmerica Financial
Investment Management Services, Inc.; and President
(since 1995) and Director (since 1996) of Allmerica
Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens Insurance
Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since
Vice President and Treasurer 2000) of First Allmerica; Associate, Investment
Banking (1996-1997) of Merrill Lynch & Co.;
Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica
Investments, Inc., Allmerica Asset Management, Inc.
and Allmerica Financial Investment Management
Services, Inc.
John F. O'Brien Allmerica; director (since 1989) of Allmerica
Director and Chairman of the Board Investments, Inc. of the Board Director, President
and Chief Executive Officer (since 1989) of First
Allmerica
Edward J. Parry, III Director and Chief Financial Officer (since 1996),
Director, Vice President Chief Vice President (since 1993), and Treasurer
Financial Officer (1993-2000) of First Allmerica
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director, President and Chief of First Allmerica; President (since 1995) of
Executive Officer Allmerica Financial Life Insurance and Annuity
Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Director (since 1998) of The Hanover
Insurance Company; Chief Executive Officer (1996 to
1998) of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect 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 VEL 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 independent broker-dealers.
The Company pays commissions, based on a commission schedule, to registered
representatives who sell the Policy. After issue of the Policy or an increase in
Face Amount, commissions may be up to 25% of first-year premiums. Thereafter,
commissions may be up to 15% of any additional premiums. Alternative commission
schedules are available with lower initial commission amounts based on premium
payments, plus ongoing annual compensation of up to 0.50% of Policy Value.
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 may also receive overriding commissions, which will not exceed
2.5% of first-year or 4% of renewal premiums.
To the extent permitted by NASD rules, promotional incentives or payments may
also be provided to broker-dealers based on sales volumes, the assumption of
wholesaling functions or other sales-related criteria. Other payments may be
made for other services that do not directly involve the sale of the Policies.
These services may include the recruitment and training of personnel,
productions of promotional literature, and similar services.
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 the Policyowner
or to the Separate Account. Any surrender charge assessed on a 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.
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<PAGE>
REPORTS
The Company will maintain the records relating to the VEL Account. You will be
promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), 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. An annual
statement will also be sent to you within 30 days after a Policy anniversary.
The annual statement will summarize all of the above transactions and deductions
of charges during the Policy year. It will also set forth the status of the
Death Proceeds, Policy Value, Surrender Value, amounts in the Sub-Accounts and
General Account, and any Policy loan(s). The Owner should review the information
in all statements carefully. All errors or corrections must be reported to the
Company immediately to assure proper crediting to the Contract. The Company will
assume that all transactions are accurately reported on confirmation statements
and quarterly/annual statements unless the Owner notifies the Principal Office
in writing within 30 days after receipt of the statement.
In addition, you will be sent periodic reports containing financial statements
and other information for the VEL Account and the Underlying Funds as required
by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the VEL Account is a party, or
to which the assets of the VEL Account are subject. The Company and Allmerica
Investments, Inc. are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the VEL 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
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, D.C., upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, and the financial
statements of the VEL Account of the Company as of December 31, 1999 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
PricewaterhouseCoopers 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
Policy.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a 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 are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and
possibly retroactively affect the taxation of the Policies. 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.
49
<PAGE>
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policies 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 should always be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE VEL 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 VEL Account. Based on these expectations, no charge is
made for federal income taxes which may be attributable to the VEL Account.
The Company will review periodically the question of a charge to the VEL 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 is ultimately 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 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 VEL
Account.
Under current laws the Company may also 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 VEL
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 policy value is not taxable
until received by the Policyowner or the Policyowner's designee. But see
"Modified Endowment Contracts."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with 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 a separate account. Regulations in this
regard may be issued in the future. It is possible that if and when regulations
are issued, the Policies may need to be modified to comply with such
regulations. For these reasons, the Policies or the Company's administrative
rules may be modified as necessary to prevent a Policyowner from being
considered the owner of the assets of the VEL 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.
50
<PAGE>
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 IRS
guidelines are issued in the future, you may convert your preferred loan to a
non-preferred loan. However, it is possible that, notwithstanding the
conversion, some or all of the loan could be treated as a taxable withdrawal
from the Policy.
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 business-owned policies covering officers or 20-percent owners, up to a
maximum equal to 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.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the Act, any life insurance policy, including a Policy offered
by this Prospectus, that fails to satisfy a "seven-pay" test is considered a
modified endowment contract. A 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 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 annual premiums. In addition, if benefits are reduced at anytime during
the life of the Policy, there may be adverse tax consequences. Please consult
your tax adviser.
If a policy is considered a modified endowment contract, all distributions under
the policy will be taxed on an "income first" basis. Most distributions received
by a policyowner directly or indirectly (including loans, withdrawals, partial
surrenders, or the assignment or pledge of any portion of the value of the
policy) will be includible in gross income to the extent that the cash surrender
value of the policy exceeds the policyowner's investment in the contract. 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 calendar 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 permanently classified as a
modified endowment contract.
51
<PAGE>
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 of the Company 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 VALUE AND POLICY LOANS
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").
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. However, the excess interest rate, if any,
in effect on the date a premium is received at the Principal Office is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan.
AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST
CREDITED ON THE POLICY VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED
MINIMUM RATE PER YEAR WILL BE DETERMINED AT 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 Debt. However, such Policy Value 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 Policy
Value transferred to the General Account, plus interest at an annual rate of 4%
per year, 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.
Policy loans may also be made from the Policy Value in the General Account.
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
52
<PAGE>
will pay interest at least equal to an effective annual yield of 3.5% per year
for the period of deferment. Amounts from the General Account used to pay
premiums on policies with the Company will not be delayed.
THE POLICY
This Prospectus describes a flexible premium variable life insurance policy, and
is generally intended to serve as a disclosure document only for the aspects of
the Policy relating to the VEL Account. For complete details regarding the
General Account, see the Policy itself.
TRANSFERS, SURRENDERS, AND PARTIAL WITHDRAWALS
If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, is imposed if such event
occurs before the Policy, or an increase in Face Amount, has been in force for
ten policy years. In the event of a decrease in 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
Policy Value allocated to the General Account. This means that the last payments
allocated to General Account will be withdrawn first.
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.
FINANCIAL STATEMENTS
Financial Statements for the VEL Account and the Company are included in this
Prospectus, beginning immediately after the Appendices. The financial statements
of the Company which are included in this Prospectus should be considered only
as bearing on the ability of the Company to meet its obligations under the
Policy. They should not be considered as bearing on the investment performance
of the assets held in the VEL Account.
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<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 may be available for issue under the
Policies for an additional charge. CERTAIN RIDERS MAY NOT BE AVAILABLE IN ALL
STATES.
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.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Policy anniversary nearest the Insured's Age 70.
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.
A-1
<PAGE>
APPENDIX B
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 would otherwise by 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 Policies; or
- the rate in the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Variable 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),
(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 3.5%. 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 3.5%. 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;
(2) in an amount equal to two-thirds of the original amount; or
</TABLE>
B-1
<PAGE>
<TABLE>
<C> <S>
(3) in an amount equal to one-half-half of the original amount.
</TABLE>
Payments under Option E 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 this 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. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, 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
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APPENDIX C
ILLUSTRATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Policy's Sum Insured and Policy Value
could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Policy issued to
a male, Age 45, under a standard Premium Class and qualifying for the non-smoker
discount. In each case, one table illustrates the guaranteed cost of insurance
rates and the other table illustrates the current cost of insurance rates as
presently in effect.
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 VEL
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
shows the amount which would accumulate if an amount equal to the premiums paid
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 would also be different depending on the allocation of a
Policy's total Policy Value among the Sub-Accounts of the VEL 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 Policy Values take into account the
deduction from premium for the premium tax charge, the Monthly Deduction from
Policy Value, and the daily charge against the VEL Account for mortality and
expense risks. In the Current Cost of Insurance Tables, the mortality and
expense risk charge is illustrated as equivalent to an effective annual rate of
0.50% In the Guaranteed Cost of Insurance Tables, the mortality and expense risk
charge is equivalent to an effective annual rate of 0.90%.
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 Funds. The actual
fees and expenses of each Underlying Fund vary and, in 1999 ranged from an
annual rate of 0.29% to an annual rate of 1.92% 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.
Until further notice, Allmerica Financial Investment Management Services, Inc.
("AFIMS") has declared a voluntary expense limitation of 1.50% of average net
assets for Select International Equity Fund, 1.35% for Select Aggressive Growth
Fund and Select Capital Appreciation Fund, 1.25% for Select Value Opportunity
Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10% for Select Growth
and Income Fund, 1.00% for Select Investment Grade Income Fund, and Government
Bond Fund, and 0.60% for Money Market
C-1
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Fund and Equity Index Fund. The total operating expenses of these Funds of the
Trust were less than their respective expense limitations throughout 1999.
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-advisor. Until further notice, the Select Value Opportunity
Fund's 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 declaration of a voluntary management fee or
expense limitation in any year does not bind the Manager to declare future
expense limitations with respect to these Funds. These limitations may be
terminated at any time.
The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
NET ANNUAL RATES OF INVESTMENT
In the Current Cost of Insurance Tables, taking into account the 0.50% charge to
the VEL Account 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 -1.35%, 4.65% and 10.65%,
respectively. In the Guaranteed Cost of Insurance Tables, taking into account
the guaranteed 0.90% charge to the VEL Account 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 table do not reflect any charges for
income taxes against the VEL 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 BEST WILL 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
VARI-EXCEPTIONAL LIFE PLUS POLICY
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% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ---------------------------- ---------------------------- ----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
---------- ------------ --------- ---------- ------- --------- ---------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 175 3,517 250,000 404 3,746 250,000 633 3,975 250,000
2 9,041 3,616 6,958 250,000 4,295 7,637 250,000 5,003 8,345 250,000
3 13,903 6,980 10,322 250,000 8,337 11,679 250,000 9,808 13,150 250,000
4 19,008 10,397 13,606 250,000 12,667 15,875 250,000 15,226 18,434 250,000
5 24,368 14,002 16,810 250,000 17,426 20,233 250,000 21,443 24,251 250,000
6 29,996 17,525 19,932 250,000 22,351 24,758 250,000 28,249 30,655 250,000
7 35,906 20,960 22,965 250,000 27,445 29,450 250,000 35,701 37,706 250,000
8 42,112 24,306 25,910 250,000 32,716 34,320 250,000 43,872 45,476 250,000
9 48,627 27,563 28,766 250,000 38,170 39,373 250,000 52,842 54,045 250,000
10 55,469 30,725 31,527 250,000 43,815 44,617 250,000 62,697 63,499 250,000
11 62,652 34,190 34,190 250,000 50,056 50,056 250,000 73,936 73,936 250,000
12 70,195 36,719 36,719 250,000 55,669 55,669 250,000 85,442 85,442 250,000
13 78,114 39,110 39,110 250,000 61,463 61,463 250,000 98,140 98,140 250,000
14 86,430 41,367 41,367 250,000 67,454 67,454 250,000 112,181 112,181 250,000
15 95,161 43,479 43,479 250,000 73,646 73,646 250,000 127,723 127,723 250,000
16 104,330 45,434 45,434 250,000 80,044 80,044 250,000 144,948 144,948 250,000
17 113,956 47,255 47,255 250,000 86,685 86,685 250,000 164,082 164,082 250,000
18 124,064 48,928 48,928 250,000 93,577 93,577 250,000 185,363 185,363 250,000
19 134,677 50,438 50,438 250,000 100,729 100,729 250,000 209,056 209,056 259,229
20 145,821 51,771 51,771 250,000 108,154 108,154 250,000 235,266 235,266 287,025
Age 60 95,161 43,479 43,479 250,000 73,646 73,646 250,000 127,723 127,723 250,000
Age 65 145,821 51,771 51,771 250,000 108,154 108,154 250,000 235,266 235,266 287,025
Age 70 210,477 54,819 54,819 250,000 149,815 149,815 250,000 412,886 412,886 478,948
Age 75 292,995 49,589 49,589 250,000 202,224 202,224 250,000 704,213 704,213 753,508
</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 A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A 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 FIXED 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
VARI-EXCEPTIONAL LIFE PLUS POLICY
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% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ---------------------------- ---------------------------- ----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
---------- ------------ --------- ---------- ------- --------- ---------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,167 250,000 43 3,385 250,000 262 3,604 250,000
2 9,041 2,886 6,228 250,000 3,521 6,863 250,000 4,183 7,526 250,000
3 13,903 5,840 9,182 250,000 7,093 10,436 250,000 8,454 11,796 250,000
4 19,008 8,813 12,022 250,000 10,890 14,099 250,000 13,237 16,446 250,000
5 24,368 11,941 14,748 250,000 15,049 17,857 250,000 18,708 21,515 250,000
6 29,996 14,952 17,358 250,000 19,303 21,709 250,000 24,639 27,046 250,000
7 35,906 17,833 19,839 250,000 23,643 25,648 250,000 31,070 33,075 250,000
8 42,112 20,578 22,182 250,000 28,065 29,669 250,000 38,047 39,651 250,000
9 48,627 23,173 24,376 250,000 32,560 33,764 250,000 45,621 46,824 250,000
10 55,469 25,605 26,407 250,000 37,121 37,923 250,000 53,850 54,652 250,000
11 62,652 28,268 28,268 250,000 42,145 42,145 250,000 63,206 63,206 250,000
12 70,195 29,951 29,951 250,000 46,426 46,426 250,000 72,567 72,567 250,000
13 78,114 31,445 31,445 250,000 50,762 50,762 250,000 82,829 82,829 250,000
14 86,430 32,744 32,744 250,000 55,154 55,154 250,000 94,102 94,102 250,000
15 95,161 33,837 33,837 250,000 59,597 59,597 250,000 106,509 106,509 250,000
16 104,330 34,697 34,697 250,000 64,077 64,077 250,000 120,185 120,185 250,000
17 113,956 35,303 35,303 250,000 68,583 68,583 250,000 135,292 135,292 250,000
18 124,064 35,617 35,617 250,000 73,094 73,094 250,000 152,014 152,014 250,000
19 134,677 35,596 35,596 250,000 77,583 77,583 250,000 170,570 170,570 250,000
20 145,821 35,194 35,194 250,000 82,028 82,028 250,000 191,228 191,228 250,000
Age 60 95,161 33,837 33,837 250,000 59,597 59,597 250,000 106,509 106,509 250,000
Age 65 145,821 35,194 35,194 250,000 82,028 82,028 250,000 191,228 191,228 250,000
Age 70 210,477 26,069 26,069 250,000 103,101 103,101 250,000 331,546 331,546 384,593
Age 75 292,995 0 (2,642) 250,000 119,588 119,588 250,000 555,575 555,575 594,465
</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 A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A 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 FIXED 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
VARI-EXCEPTIONAL LIFE PLUS POLICY
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% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
---------- ------------ --------- ---------- ------- --------- ---------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 399 1,226 76,226 477 1,304 76,304 556 1,383 76,383
2 3,014 1,608 2,435 77,435 1,841 2,668 77,668 2,084 2,911 77,911
3 4,634 2,799 3,626 78,626 3,267 4,094 79,094 3,774 4,601 79,601
4 6,336 4,005 4,799 79,799 4,791 5,585 80,585 5,675 6,469 81,469
5 8,123 5,259 5,953 80,953 6,446 7,141 82,141 7,837 8,532 83,532
6 9,999 6,494 7,089 82,089 8,171 8,766 83,766 10,216 10,812 85,812
7 11,969 7,709 8,205 83,205 9,968 10,464 85,464 12,834 13,331 88,331
8 14,037 8,906 9,303 84,303 11,839 12,236 87,236 15,716 16,113 91,113
9 16,209 10,081 10,379 85,379 13,786 14,084 89,084 18,888 19,186 94,186
10 18,490 11,237 11,435 86,435 15,814 16,012 91,012 22,381 22,579 97,579
11 20,884 12,471 12,471 87,471 18,023 18,023 93,023 26,327 26,327 101,327
12 23,398 13,484 13,484 88,484 20,120 20,120 95,120 30,466 30,466 105,466
13 26,038 14,477 14,477 89,477 22,306 22,306 97,306 35,038 35,038 110,038
14 28,810 15,447 15,447 90,447 24,585 24,585 99,585 40,087 40,087 115,087
15 31,720 16,395 16,395 91,395 26,960 26,960 101,960 45,665 45,665 120,665
16 34,777 17,319 17,319 92,319 29,435 29,435 104,435 51,825 51,825 126,825
17 37,985 18,221 18,221 93,221 32,014 32,014 107,014 58,629 58,629 133,629
18 41,355 19,098 19,098 94,098 34,701 34,701 109,701 66,146 66,146 141,146
19 44,892 19,950 19,950 94,950 37,498 37,498 112,498 74,449 74,449 149,449
20 48,607 20,777 20,777 95,777 40,412 40,412 115,412 83,622 83,622 159,717
Age 60 97,665 27,223 27,223 102,223 76,653 76,653 151,653 248,433 248,433 332,900
Age 65 132,771 28,609 28,609 103,609 100,151 100,151 175,151 416,480 416,480 508,105
Age 70 177,576 27,993 27,993 102,993 127,456 127,456 202,456 691,268 691,268 801,871
Age 75 234,759 24,339 24,339 99,339 158,171 158,171 233,171 1,141,954 1,141,954 1,221,891
</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 A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A 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 FIXED 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
VARI-EXCEPTIONAL LIFE PLUS POLICY
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% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
---------- ------------ --------- ---------- ------- --------- ---------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 351 1,178 76,178 427 1,254 76,254 504 1,331 76,331
2 3,014 1,505 2,332 77,332 1,732 2,559 77,559 1,969 2,796 77,796
3 4,634 2,638 3,465 78,465 3,091 3,918 78,918 3,581 4,408 79,408
4 6,336 3,780 4,574 79,574 4,537 5,331 80,331 5,389 6,183 81,183
5 8,123 4,964 5,658 80,658 6,103 6,797 81,797 7,439 8,133 83,133
6 9,999 6,124 6,719 81,719 7,727 8,322 83,322 9,683 10,279 85,279
7 11,969 7,258 7,755 82,755 9,408 9,905 84,905 12,141 12,637 87,637
8 14,037 8,367 8,764 83,764 11,150 11,547 86,547 14,832 15,229 90,229
9 16,209 9,449 9,747 84,747 12,951 13,248 88,248 17,779 18,076 93,076
10 18,490 10,503 10,702 85,702 14,813 15,012 90,012 21,006 21,205 96,205
11 20,884 11,629 11,629 86,629 16,839 16,839 91,839 24,641 24,641 99,641
12 23,398 12,526 12,526 87,526 18,729 18,729 93,729 28,416 28,416 103,416
13 26,038 13,395 13,395 88,395 20,687 20,687 95,687 32,565 32,565 107,565
14 28,810 14,234 14,234 89,234 22,712 22,712 97,712 37,122 37,122 112,122
15 31,720 15,042 15,042 90,042 24,808 24,808 99,808 42,130 42,130 117,130
16 34,777 15,818 15,818 90,818 26,973 26,973 101,973 47,631 47,631 122,631
17 37,985 16,562 16,562 91,562 29,211 29,211 104,211 53,677 53,677 128,677
18 41,355 17,272 17,272 92,272 31,524 31,524 106,524 60,321 60,321 135,321
19 44,892 17,947 17,947 92,947 33,911 33,911 108,911 67,621 67,621 142,621
20 48,607 18,586 18,586 93,586 36,375 36,375 111,375 75,644 75,644 150,644
Age 60 97,665 22,267 22,267 97,267 64,991 64,991 139,991 215,164 215,164 290,164
Age 65 132,771 21,310 21,310 96,310 81,382 81,382 156,382 352,356 352,356 429,875
Age 70 177,576 16,934 16,934 91,934 97,536 97,536 172,536 570,311 570,311 661,561
Age 75 234,759 7,121 7,121 82,121 110,761 110,761 185,761 917,115 917,115 992,115
</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 A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A 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 FIXED 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>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARI-EXCEPTIONAL LIFE PLUS POLICY
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ---------------------------- ---------------------------- -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
---------- ------------ --------- ---------- ------- --------- ---------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 8,762 12,104 250,000 9,513 12,856 250,000 10,265 13,607 250,000
2 28,327 20,641 23,983 250,000 22,900 26,242 250,000 25,250 28,592 250,000
3 43,561 32,291 35,633 250,000 36,834 40,176 250,000 41,748 45,090 250,000
4 59,557 43,838 47,047 250,000 51,462 54,670 250,000 60,038 63,247 250,000
5 76,353 55,415 58,223 250,000 66,933 69,741 250,000 80,417 83,224 250,000
6 93,989 66,749 69,155 250,000 82,996 85,402 250,000 102,791 105,197 281,927
7 112,506 77,824 79,829 250,000 99,653 101,659 264,313 127,341 129,346 336,300
8 131,950 88,637 90,242 250,000 116,921 118,525 298,683 154,276 155,880 392,818
9 152,365 99,182 100,385 250,000 134,808 136,011 331,868 183,819 185,022 451,455
10 173,801 109,446 110,248 261,288 153,320 154,122 365,269 216,206 217,008 514,310
11 196,309 119,818 119,818 275,580 172,858 172,858 397,574 252,093 252,093 579,813
12 219,943 129,024 129,024 287,725 192,154 192,154 428,503 290,466 290,466 647,740
13 244,758 137,849 137,849 297,755 211,991 211,991 457,900 332,396 332,396 717,974
14 270,814 146,292 146,292 307,213 232,372 232,372 487,982 378,193 378,193 794,206
15 298,173 154,321 154,321 314,816 253,260 253,260 516,651 428,143 428,143 873,412
16 326,899 161,904 161,904 322,190 274,608 274,608 546,469 482,536 482,536 960,246
17 357,062 169,078 169,078 326,321 296,453 296,453 572,154 541,804 541,804 1,045,681
18 388,733 175,808 175,808 330,519 318,741 318,741 599,234 606,279 606,279 1,139,804
19 421,988 182,056 182,056 333,162 341,404 341,404 624,770 676,288 676,288 1,237,607
20 456,905 187,783 187,783 334,255 364,364 364,364 648,568 752,159 752,159 1,338,844
Age 60 298,173 154,321 154,321 314,816 253,260 253,260 516,651 428,143 428,143 873,412
Age 65 456,905 187,783 187,783 334,255 364,364 364,364 648,568 752,159 752,159 1,338,844
Age 70 659,493 206,347 206,347 326,028 478,500 478,500 756,031 1,226,786 1,226,786 1,938,322
Age 75 918,052 204,139 204,139 289,877 576,231 576,231 818,248 1,867,953 1,867,953 2,652,493
</TABLE>
(1) Assumes a $13,160 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 A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A 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 FIXED 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-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARI-EXCEPTIONAL LIFE PLUS POLICY
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ---------------------------- ------------------------------ -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
---------- ------------ --------- ---------- ------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 8,356 11,699 273,397 9,095 12,438 274,875 9,835 13,177 276,354
2 28,327 19,745 23,087 296,174 21,949 25,291 300,582 24,242 27,584 305,169
3 43,561 30,818 34,160 318,321 35,222 38,564 327,127 39,987 43,329 336,659
4 59,557 41,699 44,908 339,815 49,044 52,252 354,505 57,313 60,522 371,043
5 76,353 52,519 55,326 360,652 63,553 66,361 382,721 76,481 79,288 408,576
6 93,989 63,001 65,407 380,814 78,479 80,885 411,771 97,353 99,759 449,518
7 112,506 73,123 75,128 400,256 93,801 95,807 441,613 120,053 122,058 494,116
8 131,950 82,868 84,472 418,945 109,504 111,108 472,216 144,717 146,321 542,641
9 152,365 92,212 93,416 436,831 125,558 126,761 503,522 171,479 172,682 595,364
10 173,801 101,127 101,930 453,859 141,928 142,730 535,459 200,473 201,275 652,550
11 196,309 109,996 109,996 469,991 158,983 158,983 567,966 232,249 232,249 714,497
12 219,943 117,592 117,592 485,184 175,483 175,483 600,966 265,751 265,751 781,503
13 244,758 124,697 124,697 499,394 192,185 192,185 634,370 301,933 301,933 853,866
14 270,814 131,293 131,293 512,586 209,045 209,045 668,090 340,951 340,951 931,901
15 298,173 137,355 137,355 524,710 226,004 226,004 702,009 382,948 382,948 1,015,896
16 326,899 142,831 142,831 535,661 242,964 242,964 735,927 428,015 428,015 1,106,030
17 357,062 147,682 147,682 545,363 259,828 259,828 769,656 476,244 476,244 1,202,487
18 388,733 151,842 151,842 553,683 276,455 276,455 802,911 527,648 527,648 1,305,295
19 421,988 155,230 155,230 560,460 292,670 292,670 835,340 582,165 582,165 1,414,330
20 456,905 157,778 157,778 565,555 308,292 308,292 866,584 639,693 639,693 1,529,386
Age 60 298,173 137,355 137,355 524,710 226,004 226,004 702,009 382,948 382,948 1,015,896
Age 65 456,905 157,778 157,778 565,555 308,292 308,292 866,584 639,693 639,693 1,529,386
Age 70 659,493 156,433 156,433 562,866 371,396 371,396 992,792 965,814 965,814 2,181,627
Age 75 918,052 126,159 126,159 502,317 386,463 386,463 1,022,926 1,302,270 1,302,270 2,854,540
</TABLE>
(1) Assumes a $13,160 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 A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A 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 FIXED 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-8
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge may be calculated upon issuance of the Policy and
upon each increase in the Face Amount. The maximum surrender charge calculated
upon issuance of the 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 the 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:
Maximum surrender charge = (8.5 X Face Amount) + (0.3 X Guideline Annual
Premium)
----------------------------------------------
1000
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charges at certain Ages will not exceed a specified amount
per $1,000 of initial Face Amount (or increase in Face Amount) as shown below.
The maximum surrender charge remains level for the first 44 Policy months,
reduces by 1% per month for the next 76 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) as indicated in the table below.
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at Age at
issue or Unisex Unisex issue or Unisex Unisex
increase Nonsmoker Smoker increase Nonsmoker Smoker
- -------- --------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C>
0 7.53 41 12.88 14.18
1 7.54 42 13.08 14.46
2 7.66 43 13.30 14.75
3 7.79 44 13.53 15.05
4 7.93 45 13.77 15.37
5 8.08 46 14.03 15.71
6 8.24 47 14.31 16.07
7 8.40 48 14.60 16.45
8 8.57 49 14.91 16.85
9 8.76 50 15.24 17.27
10 8.96 51 15.59 17.72
11 9.16 52 15.97 18.20
12 9.38 53 16.37 18.70
13 9.60 54 16.80 19.23
14 9.83 55 17.25 19.80
15 10.07 56 17.73 20.39
16 10.30 57 18.25 21.01
17 10.53 58 18.80 21.68
18 9.91 10.77 59 19.39 22.38
19 10.06 10.84 60 20.02 23.14
20 10.22 .92 61 20.70 23.94
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
Age at Age at
issue or Unisex Unisex issue or Unisex Unisex
increase Nonsmoker Smoker increase Nonsmoker Smoker
- -------- --------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C>
21 10.39 10.99 62 21.42 24.79
22 10.57 11.08 63 22.20 25.70
23 10.64 11.16 64 23.04 26.66
24 10.71 11.26 65 23.93 27.67
25 10.78 11.36 66 24.88 28.74
26 10.86 11.46 67 25.90 29.87
27 10.95 11.58 68 27.00 31.07
28 11.04 11.70 69 28.18 32.35
29 11.14 11.83 70 29.46 33.73
30 11.24 11.97 71 30.85 35.21
31 11.35 12.12 72 32.33 36.79
32 11.47 12.28 73 33.94 38.48
33 11.59 12.44 74 35.66 40.26
34 11.72 12.62 75 37.50 42.14
35 11.86 12.81 76 39.46 44.11
36 12.01 13.01 77 41.56 45.84
37 12.16 13.22 78 43.82 45.59
38 12.32 13.44 79 44.20 45.31
39 12.50 13.67 80 43.88 45.02
40 12.68 13.92
</TABLE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 45 non-smoker
purchases a $100,000 Policy. In this example the Guideline Annual Premium
("GAP") equals $1,682.90. 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 $504.87
(30% of GAP)
Maximum Surrender Charge $1,354.87
</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 $1,354.87. All premiums are associated with the
initial face amount unless the Face Amount is increased.
D-2
<PAGE>
Example 1:
Assume the Policyowner surrenders the Policy in the tenth Policy month, having
paid total premiums of $1,500. The actual surrender charge would be $1,300. If,
instead of $1,500, he had paid total premiums of $1,682.90 or greater, the
actual surrender charge would be $1,354.87.
Example 2:
Assume the Policyowner surrenders the Policy in the 54th month, having paid
total premiums of $1,500. After the 44th Policy month, the maximum surrender
charge decreases by 1% per month ($13,5487 per month in this example). In this
example the maximum surrender charge would be $1,219.38. The actual surrender
charge is $1,219.38. If instead of $1,500, he had paid total premiums of less
than $1,231.27, the actual surrender charge would be less than $1,219.38.
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
Policy is increased. Assume our sample Policyowner increases his Face Amount to
$250,000 on the 25th monthly payment date at Age 47. In this example the
Guideline Annual Premium for the increase is $2,681.26.
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 $804.38
(30% of Guideline Annual Premium for the increase)
Maximum Surrender Charge $2,079.38
</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:
(1) Premium is allocated to the initial face amount if it is received before an
application for an increase.
(2) 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, 39.4% of premium
($1,740.95/$4,422.21) is allocated to the initial face amount and 60.6% of
premium ($2,681.26/$4,422.21) of the Policy Value will be allocated to the
increase.
(3) 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, 60.6% ($2,681.26/$4,422.21) of
the Policy Value will be allocated to the increase.
D-3
<PAGE>
Continuing the example, assume that the Policyowner has paid $1,500 of premium
before and $2,000 after the effective date of the increase. Also, assume that
the Policy Value of the Policy on the effective date of the increase is $1,300.
The following values result when the Policy is surrendered in the 54th Policy
month.
(A) Related to the Initial Face Amount
1. The maximum surrender charge began to decrease in the 44th Policy month
and now equals $1,219.38.
2. The actual surrender charge is the lesser of $1,219.38 and the following
sum.
<TABLE>
<C> <S> <C>
(a) Deferred Administrative Charge $850.00
(b) 30% of premium paid before the increase $450.00
(c) 11.82% (.30 x .394) of premium paid after the $236.40
increase
-------------
$1,536.40
</TABLE>
The actual surrender charge for the initial Face Amount is thus $1,219.38.
(B) Related to the Increase in Face Amount
3. The maximum surrender charge is $2,079.32, decreasing by 1% per month
beginning in the 68th Policy month (44 months after the effective date of
the increase).
4. The actual surrender charge is the lesser of $2,079.38 and the following
sum.
<TABLE>
<C> <S> <C>
(a) Deferred Administrative Charge $1,275.00
(b) 18.18% (.30 X .606) of the $1,300 Policy value on $236.34
the effective date of the increase
(c) 18.18% of the $2,000.00 of premium paid after the $363.60
increase
-------------
$1,874.94
</TABLE>
The surrender charge for the increase in Face Amount is $1,874.94. 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 $3,094.32 (the sum of $1,219.38 + $1,874.94).
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 $2,036.88 (the difference of $2,079.38
- -$42.50) and the actual surrender charge for the increase is $1,932.44 (the
difference of $1,874.94 - $42.50).
The total surrender charge on the Policy is $3,051.82 (the sum of $1,219.38 +
$1,832.44).
D-4
<PAGE>
APPENDIX E
PERFORMANCE INFORMATION
The Policies were first offered to the public 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 I(A) and
I(B)) and based on the periods that the Underlying Funds have been in existence
(Tables II(A) and II(B)). 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 (Table IA and IIA) under a
"representative" Policy that is surrendered at the end of the applicable period.
FOR MORE INFORMATION ON CHARGES UNDER THE POLICIES, SEE CHARGES AND DEDUCTIONS.
Performance information may be compared, in reports and promotional literature,
to: (1) the 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; (2) other groups of variable life Separate
Accounts or other investment products tracked by Lipper Inc., 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
(3) the Consumer Price Index (a measure for inflation) to assess the real rate
of return from an investment. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
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. ("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,
1999. "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.
E-1
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE 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 (unisex rates), 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>
<S> <C> <C> <C>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<CAPTION>
Select Aggressive Growth Fund -74.69% 14.15% 14.92%
<S> <C> <C> <C>
Select Capital Appreciation Fund -86.91% N/A 10.55%
Select Value Opportunity Fund -100.00% 3.30% 4.79%
Select Emerging Markets Fund -49.78% N/A -45.96%
T. Rowe Price International Stock Portfolio -79.60% N/A 3.37%
Fidelity VIP Overseas Portfolio -71.05% 7.59% 7.63%
Select International Equity Fund -81.08% 8.91% 7.24%
DGPF International Equity Series -95.72% 2.94% 5.93%
Fidelity VIP Growth Portfolio -75.82% 21.06% 16.39%
Select Growth Fund -82.83% 20.35% 14.75%
Select Strategic Growth Fund -95.44% N/A -63.52%
Core Equity Fund -83.26% 16.23% 13.70%
Fidelity VIP II Index 500 Portfolio N/A N/A -99.46%
Equity Index Fund -91.45% 18.97% 16.73%
Fidelity VIP Equity-Income Portfolio -100.00% 8.96% 10.80%
Select Growth and Income Fund -93.27% 12.36% 10.56%
Fidelity VIP II Asset Manager Portfolio -100.00% 5.65% 5.14%
Fidelity VIP High Income Portfolio -100.00% 0.27% 8.67%
Select Investment Grade Income Fund -100.00% -3.73% 3.73%
Government Bond Fund -100.00% -5.07% 0.54%
Money Market Fund -100.00% -5.97% 1.14%
</TABLE>
The inception dates for the Sub-Accounts are: 11/19/87 for Core Equity, Fidelity
VIP Overseas, and Fidelity VIP High Income; 12/2/87 for Select 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, Select Growth, and Select
Growth and Income; 5/6/93 for Select Value Opportunity; 5/3/94 for Select
International Equity; 4/30/95 for the Select Capital Appreciation; 11/16/87 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 5/11/94 for Fidelity VIP II
Asset Manager; 5/18/93 for DGPF International Equity; 6/25/95 for T. Rowe Price
International Stock; 5/27/98 for Select Emerging Markets and Select Strategic
Growth; and 10/15/99 for Fidelity VIP II Index 500 Portfolio.
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.
E-2
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
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 and all Sub-Account 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>
<S> <C> <C> <C>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<CAPTION>
Select Aggressive Growth Fund 37.83% 22.50% 19.29%
<S> <C> <C> <C>
Select Capital Appreciation Fund 24.61% N/A 20.60%
Select Value Opportunity Fund -5.27% 12.76% 10.62%
Select Emerging Markets Fund 64.73% N/A 24.34%
T. Rowe Price International Stock Portfolio 32.52% N/A 14.94%
Fidelity VIP Overseas Portfolio 41.77% 16.57% 10.55%
Select International Equity Fund 30.92% 17.75% 14.67%
DGPF International Equity Series 15.06% 12.45% 11.72%
Fidelity VIP Growth Portfolio 36.61% 28.86% 19.00%
Select Growth Fund 29.03% 28.20% 19.13%
Select Strategic Growth Fund 15.37% N/A 7.60%
Core Equity Fund 28.56% 24.40% 16.39%
Fidelity VIP II Index 500 Portfolio N/A N/A 10.10%
Equity Index Fund 19.69% 26.92% 19.68%
Fidelity VIP Equity-Income Portfolio 5.69% 17.80% 13.59%
Select Growth and Income Fund 17.72% 20.87% 15.17%
Fidelity VIP II Asset Manager Portfolio 10.43% 14.84% 12.83%
Fidelity VIP High Income Portfolio 7.51% 10.11% 11.55%
Select Investment Grade Income Fund -1.56% 6.66% 6.84%
Government Bond Fund -0.37% 5.51% 5.02%
Money Market Fund 4.55% 4.75% 4.40%
</TABLE>
The inception dates for the Sub-Accounts are: 11/19/87 for Core Equity, Fidelity
VIP Overseas, and Fidelity VIP High Income; 12/2/87 for Select 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, for Select Growth, and
Select Growth and Income; 5/6/93 for Select Value Opportunity; 5/3/94 for Select
International Equity; 4/30/95 for the Select Capital Appreciation; 11/16/87 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 5/11/94 for Fidelity VIP II
Asset Manager; 5/18/93 for DGPF International Equity; 6/25/95 for T. Rowe Price
International Stock; 5/27/98 for Select Emerging Markets and Select Strategic
Growth and 10/15/99 for Fidelity VIP II Index 500 Portfolio.
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.
E-3
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE 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 (unisex rates), 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>
<S> <C> <C> <C>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<CAPTION>
Select Aggressive Growth Fund -74.69% 14.15% 15.53%
<S> <C> <C> <C>
Select Capital Appreciation Fund -86.91% N/A 10.55%
Select Value Opportunity Fund -100.00% 3.30% 4.98%
Select Emerging Markets Fund -49.78% N/A -39.47%
T. Rowe Price International Stock Portfolio -79.60% 5.19% 5.25%
Fidelity VIP Overseas Portfolio -71.05% 7.59% 7.63%
Select International Equity Fund -81.08% 8.91% 7.43%
DGPF International Equity Series -95.72% 2.94% 5.91%
Fidelity VIP Growth Portfolio -75.82% 21.06% 16.39%
Select Growth Fund -82.83% 20.35% 15.37%
Select Strategic Growth Fund -95.44% N/A -49.02%
Core Equity Fund -83.26% 16.23% 13.70%
Fidelity VIP II Index 500 Portfolio -91.66% 19.34% 16.00%
Equity Index Fund -91.45% 18.97% 16.80%
Fidelity VIP Equity-Income Portfolio -100.00% 8.96% 10.80%
Select Growth and Income Fund -93.27% 12.36% 10.49%
Fidelity VIP II Asset Manager Portfolio -100.00% 5.65% 9.40%
Fidelity VIP High Income Portfolio -100.00% 0.27% 8.67%
Select Investment Grade Income Fund -100.00% -3.73% 3.73%
Government Bond Fund -100.00% -5.07% 1.11%
Money Market Fund -100.00% -5.97% 1.14%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Core Equity,
Select 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;
5/2/94 for Select International Equity; 4/28/95 for the Select Capital
Appreciation Fund; 10/9/86 for Fidelity VIP Equity-Income and Fidelity VIP
Growth; 9/19/85 for Fidelity VIP High Income; 1/28/87 for Fidelity VIP Overseas;
9/6/89 for Fidelity VIP II Asset Manager; 10/29/92 for DGPF International
Equity; 3/31/94 for the T. Rowe Price International Stock; 2/20/98 for Select
Emerging Markets and Select Strategic Growth; and 8/27/92 for Fidelity VIP II
Index 500.
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.
E-4
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
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 and all Sub-Account 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>
<S> <C> <C> <C>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<CAPTION>
Select Aggressive Growth Fund 37.83% 22.50% 19.80%
<S> <C> <C> <C>
Select Capital Appreciation Fund 24.61% N/A 20.60%
Select Value Opportunity Fund -5.27% 12.76% 10.77%
Select Emerging Markets Fund 64.73% N/A 14.46%
T. Rowe Price International Stock Portfolio 32.52% 14.43% 12.65%
Fidelity VIP Overseas Portfolio 41.77% 16.57% 10.55%
Select International Equity Fund 30.92% 17.75% 14.83%
DGPF International Equity Series 15.06% 12.45% 10.95%
Fidelity VIP Growth Portfolio 36.61% 28.86% 19.00%
Select Growth Fund 29.03% 28.20% 19.65%
Select Strategic Growth Fund 15.37% N/A 6.19%
Core Equity Fund 28.56% 24.40% 16.39%
Fidelity VIP II Index 500 Portfolio 19.46% 27.27% 20.26%
Equity Index Fund 19.69% 26.92% 19.72%
Fidelity VIP Equity-Income Portfolio 5.69% 17.80% 13.59%
Select Growth and Income Fund 17.72% 20.87% 15.04%
Fidelity VIP II Asset Manager Portfolio 10.43% 14.84% 12.25%
Fidelity VIP High Income Portfolio 7.51% 10.11% 11.55%
Select Investment Grade Income Fund -1.56% 6.66% 6.84%
Government Bond Fund -0.37% 5.51% 5.40%
Money Market Fund 4.55% 4.75% 4.40%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Core Equity,
Select 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;
5/2/94 for Select International Equity; 4/28/95 for the Select Capital
Appreciation Fund; 10/9/86 for Fidelity VIP Equity-Income and Fidelity VIP
Growth; 9/19/85 for Fidelity VIP High Income; 1/28/87 for Fidelity VIP Overseas;
9/6/89 for Fidelity VIP II Asset Manager; 10/29/92 for DGPF International
Equity; 3/31/94 for the T. Rowe Price International Stock; 2/20/98 for Select
Emerging Markets and Select Strategic Growth; and 8/27/92 for Fidelity VIP II
Index 500.
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.
E-5
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States 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/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 0.5 $ 22.8
Universal life and investment product
policy fees.............................. 328.1 267.4 212.2
Net investment income...................... 150.2 151.3 164.2
Net realized investment (losses) gains..... (8.7) 20.0 2.9
Other income............................... 36.9 0.6 1.4
------ ------ ------
Total revenues......................... 507.0 439.8 403.5
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses......... 173.6 153.9 187.8
Policy acquisition expenses................ 49.8 64.6 2.8
Sales practice litigation.................. -- 21.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Other operating expenses................... 151.3 104.1 101.3
------ ------ ------
Total benefits, losses and expenses.... 374.7 343.6 345.8
------ ------ ------
Income before federal income taxes............. 132.3 96.2 57.7
------ ------ ------
FEDERAL INCOME TAX EXPENSE
Current.................................... 15.5 22.1 13.9
Deferred................................... 30.5 11.8 7.1
------ ------ ------
Total federal income tax expense....... 46.0 33.9 21.0
------ ------ ------
Net income..................................... $ 86.3 $ 62.3 $ 36.7
====== ====== ======
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,354.2 and $1,284.6)............................ $ 1,324.6 $ 1,330.4
Equity securities at fair value (cost of $25.2 and
$27.4)............................................ 32.6 31.8
Mortgage loans...................................... 223.7 230.0
Policy loans........................................ 166.8 151.5
Real estate and other long-term investments......... 25.1 23.6
--------- ---------
Total investments............................... 1,772.8 1,767.3
--------- ---------
Cash and cash equivalents............................. 132.9 217.9
Accrued investment income............................. 36.0 33.5
Deferred policy acquisition costs..................... 1,156.4 950.5
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums...................... 287.2 308.0
Other assets.......................................... 64.8 46.9
Separate account assets............................... 14,527.9 11,020.4
--------- ---------
Total assets.................................... $17,978.0 $14,344.5
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,274.7 $ 2,284.8
Outstanding claims and losses....................... 13.7 17.9
Unearned premiums................................... 2.6 2.7
Contractholder deposit funds and other policy
liabilities....................................... 44.3 38.1
--------- ---------
Total policy liabilities and accruals........... 2,335.3 2,343.5
--------- ---------
Expenses and taxes payable............................ 216.8 146.2
Reinsurance premiums payable.......................... 17.9 45.7
Deferred federal income taxes......................... 94.8 78.8
Separate account liabilities.......................... 14,527.9 11,020.4
--------- ---------
Total liabilities............................... 17,192.7 13,634.6
--------- ---------
Contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,526 and 2,524 shares, issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 423.7 407.9
Accumulated other comprehensive (loss) income......... (2.6) 24.1
Retained earnings..................................... 361.7 275.4
--------- ---------
Total shareholder's equity...................... 785.3 709.9
--------- ---------
Total liabilities and shareholder's equity...... $17,978.0 $14,344.5
========= =========
</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) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 407.9 386.9 346.3
Issuance of common stock................... 15.8 21.0 40.6
------ ------ ------
Balance at end of period................... 423.7 407.9 386.9
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 24.1 38.5 20.5
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (41.1) (23.4) 27.0
Benefit (provision) for deferred
federal income taxes................. 14.4 9.0 (9.0)
------ ------ ------
(26.7) (14.4) 18.0
------ ------ ------
Balance at end of period................... (2.6) 24.1 38.5
------ ------ ------
RETAINED EARNINGS
Balance at beginning of period............. 275.4 213.1 176.4
Net income................................. 86.3 62.3 36.7
------ ------ ------
Balance at end of period................... 361.7 275.4 213.1
------ ------ ------
Total shareholder's equity............. $785.3 $709.9 $641.0
====== ====== ======
</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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $ 86.3 $ 62.3 $36.7
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (41.1) (23.4) 27.0
Benefit (provision) for deferred federal
income taxes.......................... 14.4 9.0 (9.0)
------ ------ -----
Other comprehensive (loss) income... (26.7) (14.4) 18.0
------ ------ -----
Comprehensive income.................... $ 59.6 $ 47.9 $54.7
====== ====== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<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) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 86.3 $ 62.3 $ 36.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized losses/(gains)......... 8.7 (20.0) (2.9)
Net amortization and depreciation... (2.3) (7.1) --
Sales practice litigation expense... -- 21.0 --
Loss from cession of disability
income business................... -- -- 53.9
Deferred federal income taxes....... 30.5 11.8 7.1
Payment related to cession of
disability income business........ -- -- (207.0)
Change in deferred acquisition
costs............................. (169.7) (177.8) (181.3)
Change in reinsurance premiums
payable........................... (31.5) 40.8 3.9
Change in accrued investment
income............................ (2.5) 0.7 3.5
Change in policy liabilities and
accruals, net..................... (8.4) 193.1 (72.4)
Change in reinsurance receivable.... 20.7 (56.9) 22.1
Change in expenses and taxes
payable........................... 64.1 55.4 0.2
Other, net.......................... (14.8) (28.5) (7.1)
------- ------- -------
Net cash (used in) provided by
operating activities.......... (18.9) 94.8 (343.3)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 330.9 187.0 909.7
Proceeds from disposals of equity
securities............................ 30.9 53.3 2.4
Proceeds from disposals of other
investments........................... 0.8 22.7 23.7
Proceeds from mortgages matured or
collected............................. 30.5 60.1 62.9
Purchase of available-for-sale fixed
maturities............................ (415.5) (136.0) (579.7)
Purchase of equity securities........... (20.2) (30.6) (3.2)
Purchase of other investments........... (44.1) (22.7) (9.0)
Purchase of mortgages................... -- (58.9) (70.4)
Other investing activities, net......... 2.0 (3.9) --
------- ------- -------
Net cash (used in) provided by
investing activities.............. (84.7) 71.0 336.4
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from subsidiaries.......... 14.6 -- --
Proceeds from issuance of stock and
capital paid in....................... 4.0 21.0 19.2
------- ------- -------
Net cash provided by financing
activities........................ 18.6 21.0 19.2
------- ------- -------
Net change in cash and cash equivalents..... (85.0) 186.8 12.3
Cash and cash equivalents, beginning of
period..................................... 217.9 31.1 18.8
------- ------- -------
Cash and cash equivalents, end of period.... $ 132.9 $ 217.9 $ 31.1
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ -- $ --
Income taxes paid....................... $ 4.4 $ 36.2 $ 5.4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED 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 First Allmerica Financial Life Insurance Company ("FAFLIC") which
is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC"). As
noted below, the consolidated accounts of AFLIAC include the accounts of certain
wholly-owned non-insurance subsidiaries (principally brokerage and investment
advisory subsidiaries).
Prior to July 1, 1999, AFLIAC was a wholly-owned subsidiary of SMA Financial
Corporation ("SMAFCO"), which was a wholly-owned subsidiary of FAFLIC. Effective
July 1, 1999 and in connection with AFC's restructuring activities, SMAFCO was
renamed Allmerica Asset Management , Inc. ("AAM") and contributed it's ownership
of AFLIAC to FAFLIC. AAM also contributed Allmerica Investments, Inc., Allmerica
Investment Management Company, Inc., Allmerica Financial Investment Management
Services, Inc., and Allmerica Financial Services Insurance Agency, Inc., to
AFLIAC in exchange for one share of AFLIAC common stock. The equity of these
four companies on July 1, 1999 was $11.8 million. For the six months ended
December 31, 1999, the subsidiaries of AFLIAC had total revenue of $35.5 million
and total benefits, losses and expenses of $24.4 million. All significant
intercompany accounts and transactions have been eliminated.
In addition, effective November 1, 1999, the Company's consolidated financial
statements include five wholly-owned insurance agencies. These agencies are
Allmerica Investments Insurance Agency Inc. of Alabama, Allmerica Investments
Insurance Agency of Florida Inc., Allmerica Investment Insurance Agency Inc. of
Georgia, Allmerica Investment Insurance Agency Inc. of Kentucky, and Allmerica
Investments Insurance Agency Inc. of Mississippi.
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary effective
November 30, 1998. Its results of operations are included for eleven months of
1998 and for the month of December, 1997.
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 the Company 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.
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 re-evaluates such designation as of each balance sheet date.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
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 the Company 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 the Company believes may not be collectible in
full. In establishing reserves, the Company 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 adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there was one property remaining in the Company's real
estate portfolio, which is being actively marketed. This asset is carried at the
estimated fair value less costs of disposal. Depreciation is not recorded on
this asset while it is 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 are included
in realized investment gains or losses.
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
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company 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 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, disability income 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
3.0% to 6.0% for life insurance and 3 1/2% 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, variable
universal life and variable annuities include deposits received from customers
and investment earnings on their fund balances, less administrative charges.
Universal life fund balances are also assessed mortality and surrender charges.
Liabilities for variable annuities include a reserve for benefit claims in
excess of a guaranteed minimum fund value.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity 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 and losses are estimates of payments to be
made for reported claims and estimates of claims incurred but not reported for
individual life and disability income policies. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
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.
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
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 insurance and individual and group annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual disability income insurance premiums are
recognized as revenue over the related contract periods. The unexpired portion
of these premiums is recorded as unearned premiums. 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 include annuity benefit claims in excess of a guaranteed
minimum fund value, and 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, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims 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 and its domestic subsidiaries (including certain non-insurance operations)
file a 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
tax losses that can be applied to offset life insurance company taxable income.
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"
("Statement No. 109"). These differences result primarily from policy reserves,
policy acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. OTHER INCOME AND OTHER OPERATING EXPENSES
Other income and other operating expenses for the year ended December 31, 1999
include investment management and brokerage income and sub-advisory expenses
arising from the activities of the non-insurance subsidiaries that were
transferred to AFLIAC during 1999, as more fully described in Note 1A.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (an indirect wholly-owned
subsidiary of Allmerica Financial Corporation) years beginning after June 15,
2000. The Company is currently assessing the impact of adoption of Statement No.
133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $9.8 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement had no effect on the results
of operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). 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. AFLIAC consists
of one segment, Allmerica Financial Services, which underwrites and distributes
variable annuities and variable universal life insurance via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 establishes 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
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 130 for the first quarter of 1998, which resulted
primarily in reporting unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
During 1999, AFLIAC's parent contributed $11.8 million of additional paid-in
capital to the Company in the form of four subsidiaries as disclosed in Note 1A
above. These subsidiaries consisted of assets of $22.0 million, of which $14.6
million was cash and cash equivalents, and liabilities of $10.2 million. During
1999, 1998 and 1997, SMAFCO contributed $4.0 million, $21.0 million, and $40.6
million respectively, of additional paid-in capital to the Company. The nature
of the 1997 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 a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. 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.
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 Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
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....... $ 5.2 $ 0.2 $-- $ 5.4
States and political subdivisions....... 12.4 0.1 -- 12.5
Foreign governments..................... 38.6 0.9 0.6 38.9
Corporate fixed maturities.............. 1,180.0 10.3 38.9 1,151.4
Mortgage-backed securities.............. 118.0 1.1 2.7 116.4
-------- ----- ----- --------
Total fixed maturities.................. $1,354.2 $12.6 $42.2 $1,324.6
======== ===== ===== ========
Equity securities....................... $ 25.2 $ 7.4 $-- $ 32.6
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
-------------------------------------------
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....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities.................. $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</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, 1999, the amortized
cost and market value of these assets on deposit in New York were
$196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.1 million and
$4.2 million were on deposit with various state and governmental authorities at
December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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 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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 54.5 $ 54.8
Due after one year through five years....................... 349.1 347.2
Due after five years through ten years...................... 652.9 637.1
Due after ten years......................................... 297.7 285.5
-------- --------
Total....................................................... $1,354.2 $1,324.6
======== ========
</TABLE>
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 16.2 $ 7.9 $ 24.1
------ ------ ------
Net depreciation on available-for-sale securities........... (75.3) (0.2) (75.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 34.4 -- 34.4
Benefit from deferred federal income taxes.................. 14.3 0.1 14.4
------ ------ ------
(26.6) (0.1) (26.7)
------ ------ ------
Net (depreciation) appreciation, end of year................ $(10.4) $ 7.8 $ (2.6)
====== ====== ======
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
====== ====== ======
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 (depreciation) appreciation on other investments of $(3.1)
million, $0.9 million, and $1.3 million in 1999, 1998, and 1997,
respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans are diversified by property type and location. The real
estate investment was obtained by an affiliate 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 the real estate investment net of
applicable reserves were $234.6 million and $244.5 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $2.4 million and
$3.3 million at December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there was one property remaining in the Company's
real estate portfolio which is being actively marketed. Depreciation is not
recorded on this asset while it is held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $136.1 $129.2
Residential............................................... 18.5 18.9
Retail.................................................... 28.3 37.4
Industrial/warehouse...................................... 51.1 59.2
Other..................................................... 3.0 3.1
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
Geographic region:
South Atlantic............................................ $ 60.7 $ 55.5
Pacific................................................... 76.2 80.0
East North Central........................................ 35.9 41.4
Middle Atlantic........................................... 20.1 22.5
New England............................................... 29.9 26.9
West South Central........................................ 1.9 6.7
Other..................................................... 12.3 14.8
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows:
2000 -- $40.8 million; 2001 -- $6.3 million; 2002 -- $11.2 million; 2003 --
$0.5 million; 2004 -- $23.7 million; and $141.2 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 1999, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $ 3.3 $(0.8) $0.1 $2.4
===== ===== ==== ====
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $3.3
===== ===== ==== ====
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
===== ===== ==== ====
</TABLE>
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $5.4 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $11.4 million and $15.3 million, with
related reserves of $0.7 million and $1.5 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $14.3 million, $17.0 million
and $19.8 million, with related interest income while such loans were impaired
of $1.5 million, $2.0 million and $2.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. OTHER
At December 31, 1999 and 1998, 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 YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.2 $107.7 $130.0
Mortgage loans.............................................. 19.0 25.5 20.4
Equity securities........................................... 0.4 0.3 1.3
Policy loans................................................ 12.4 11.7 10.8
Real estate and other long-term investments................. 4.0 4.8 4.9
Short-term investments...................................... 9.5 4.2 1.4
------ ------ ------
Gross investment income................................. 152.5 154.2 168.8
Less investment expenses.................................... (2.3) (2.9) (4.6)
------ ------ ------
Net investment income................................... $150.2 $151.3 $164.2
====== ====== ======
</TABLE>
F-15
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company had fixed maturities with a carrying value of
$0.8 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. There were no mortgage loans or fixed maturities on
non-accrual status at December 31, 1998. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, was a reduction in net income of $1.2 million in 1999,
and had no impact in 1998 and 1997.
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 $12.2 million, $12.6 million and $21.1 million at December 31,
1999, 1998 and 1997, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $0.9 million, $1.4 million and $1.9 million in 1999,
1998, and 1997, respectively. Actual interest income on these loans included in
net investment income aggregated $1.1 million, $1.8 million and $2.1 million in
1999, 1998 and 1997, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the year ended December 31, 1999.
Included in other long-term investments is income from limited partnerships of
$0.9 million and $0.7 million in 1999 and 1998, respectively. There was no
income from limited partnerships included in other long-term investments in
1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- -----
<S> <C> <C> <C>
Fixed maturities............................................ $(18.8) $(6.1) $ 3.0
Mortgage loans.............................................. 0.8 8.0 (1.1)
Equity securities........................................... 8.5 15.7 0.5
Real estate and other....................................... 0.8 2.4 0.5
------ ----- -----
Net realized investment (losses) gains...................... $ (8.7) $20.0 $ 2.9
====== ===== =====
</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>
1999
Fixed maturities............................................ $162.3 $ 2.7 $4.3
Equity securities........................................... $ 30.4 $10.1 $1.6
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $2.0
Equity securities........................................... $ 52.6 $17.5 $0.9
1997
Fixed maturities............................................ $702.9 $11.4 $5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
</TABLE>
F-16
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the consolidated statements of comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (net
of taxes of $(18.0) million, $(5.6) million and
$10.2 million in 1999, 1998 and 1997, respectively)........ $(33.4) $ (8.2) $20.3
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes of $(3.6) million,
$3.4 million and $1.2 million in 1999, 1998 and 1997,
respectively).............................................. (6.7) 6.2 2.3
------ ------ -----
Other comprehensive (loss) income........................... $(26.7) $(14.4) $18.0
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement 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.
F-17
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
FIXED ANNUITY AND OTHER CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under individual fixed annuity
contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 132.9 $ 132.9 $ 217.9 $ 217.9
Fixed maturities.......................................... 1,324.6 1,324.6 1,330.4 1,330.4
Equity securities......................................... 32.6 32.6 31.8 31.8
Mortgage loans............................................ 223.7 222.8 230.0 241.9
Policy loans.............................................. 166.8 166.8 151.5 151.5
-------- -------- -------- --------
$1,880.6 $1,879.7 $1,961.6 $1,973.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $1,048.0 $1,014.9 $1,069.4 $1,034.6
Supplemental contracts without life contingencies......... 25.0 25.0 21.0 21.0
Other individual contract deposit funds................... 19.3 19.3 17.0 17.0
-------- -------- -------- --------
$1,092.3 $1,059.2 $1,107.4 $1,072.6
======== ======== ======== ========
</TABLE>
F-18
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense in
the consolidated statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $15.5 $22.1 $13.9
Deferred.................................................. 30.5 11.8 7.1
----- ----- -----
Total....................................................... $46.0 $33.9 $21.0
===== ===== =====
</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 income tax (asset) liability represents the tax effects of
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------- -------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(233.7) $(205.1)
Deferred acquisition costs................................ 339.7 278.8
Investments, net.......................................... (4.0) 12.5
Litigation reserves....................................... (4.3) (7.4)
Bad debt reserve.......................................... -- (0.4)
Other, net................................................ (2.9) 0.4
------- -------
Deferred tax liability, net................................. $ 94.8 $ 78.8
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $360.4 million and $291.7 million
at December 31, 1999 and 1998, respectively. Gross deferred income tax assets
totaled $265.6 million and $212.9 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on its 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, the Company 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 Internal
Revenue Service ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The Company has appealed certain adjustments proposed by the IRS with respect
federal income tax returns for 1992, 1993, and 1994 for the FAFLIC/AFLIAC
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In the Company's opinion, adequate tax liabilities have
F-19
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
7. 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 $173.9 million, $145.4 million and $124.1 million in
1999, 1998 and 1997 respectively. The net amounts payable to FAFLIC and
affiliates for accrued expenses and various other liabilities and receivables
were $48.6 million and $16.4 million at December 31, 1999 and 1998,
respectively.
8. 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.
No dividends were declared by the Company during 1999, 1998 or 1997. During
2000, AFLIAC could pay dividends of $34.3 million to FAFLIC without prior
approval.
9. 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 Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement
No. 113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
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
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Amounts recoverable from reinsurers at December 31, 1999 and 1998 for the
disability income business were $241.5 million and $230.8 million, respectively,
traditional life were $9.7 million and $11.4 million, respectively, and
universal and variable universal life were $36.0 million and $65.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 41.3 $ 45.5 $ 48.8
Assumed................................................... -- -- 2.6
Ceded..................................................... (40.8) (45.0) (28.6)
------ ------ ------
Net premiums................................................ $ 0.5 $ 0.5 $ 22.8
====== ====== ======
Insurance and other individual policy benefits, claims and
losses:
Direct.................................................... $210.6 $204.0 $226.0
Assumed................................................... -- -- 4.2
Ceded..................................................... (37.0) (50.1) (42.4)
------ ------ ------
Net policy benefits, claims and losses...................... $173.6 $153.9 $187.8
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition cost
asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 950.5 $765.3 $632.7
Acquisition expenses deferred............................. 219.5 242.4 184.2
Amortized to expense during the year...................... (49.8) (64.6) (53.1)
Adjustment to equity during the year...................... 36.2 7.4 (10.2)
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...................................... $1,156.4 $950.5 $765.3
======== ====== ======
</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.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims and losses as new information becomes available
and further events occur which may impact the resolution of
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unsettled claims. Changes in prior estimates are recorded in results of
operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims and losses
related to the Company's disability income business was $240.7 million and
$233.3 million at December 31, 1999 and 1998. Due to the reinsurance agreement
whereby the Company has ceded substantially all of its disability income
business to a highly rated reinsurer, the Company 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 used in determining the
liability are revised.
12. 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 on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, 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 filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement. The court granted preliminary approval of the settlement
on December 4, 1998. On May 19, 1999, the Court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. AFLIAC recognized a $21.0 million pre-tax expense during the third
quarter of 1998 related to this litigation. Although the Company believes that
this expense reflects appropriate recognition of its obligation under the
settlement, this estimate assumes the availability of insurance coverage for
certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's consolidated 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 resulted from computer programs being written using two
digits rather than four to define the applicable year. 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.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
13. 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
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. In 1999, 49 out of 50 states have adopted the
National Association of Insurance Commissioners proposed Codification, which
provides for uniform statutory accounting principles. These principles are
effective January 1, 2001. The Company is currently assessing the impact that
the adoption of Codification will have on its statutory results of operations
and financial position. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ 5.0 $ (8.2) $ 31.5
Statutory shareholder's surplus............................. $342.7 $312.2 $309.7
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the 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
constituting the VEL Account of Allmerica Financial Life Insurance and Annuity
Company at December 31, 1999, the results of each of their operations and the
changes in each of their net assets for each of the periods indicated, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity Company; 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 auditing standards generally accepted in
the United States, 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, which included confirmation of securities at December 31, 1999 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT
GRADE MONEY EQUITY GOVERNMENT
GROWTH INCOME MARKET INDEX BOND
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust... $68,317,955 $9,242,564 $12,133,362 $35,666,419 $2,766,691
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........................................ -- -- -- -- --
----------- ---------- ----------- ----------- ----------
Total assets........................................ 68,317,955 9,242,564 12,133,362 35,666,419 2,766,691
LIABILITIES: -- -- -- -- --
----------- ---------- ----------- ----------- ----------
Net assets.......................................... $68,317,955 $9,242,564 $12,133,362 $35,666,419 $2,766,691
=========== ========== =========== =========== ==========
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life policies... $66,090,681 $8,849,254 $11,108,961 $32,792,841 $2,508,871
VEL Plus Series variable life policies.............. 2,227,274 393,310 1,024,401 2,873,578 257,820
----------- ---------- ----------- ----------- ----------
$68,317,955 $9,242,564 $12,133,362 $35,666,419 $2,766,691
=========== ========== =========== =========== ==========
Units outstanding and net asset value per unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1999.............. 9,249,879 3,830,904 6,341,325 6,365,699 1,701,287
Net asset value per unit, December 31, 1999....... $ 7.145032 $2.309965 $ 1.751836 $ 5.151491 $ 1.474690
VEL Plus Series:
Units outstanding, December 31, 1999.............. 308,358 168,423 578,437 551,791 172,939
Net asset value per unit, December 31, 1999....... $ 7.223032 $2.335256 $ 1.770980 $ 5.207727 $ 1.490819
<CAPTION>
SELECT SELECT
AGGRESSIVE SELECT SELECT GROWTH SELECT VALUE INTERNATIONAL
GROWTH GROWTH AND INCOME OPPORTUNITY EQUITY
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust... $33,134,201 $24,091,717 $15,594,197 $8,209,652 $12,570,978
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........................................ -- -- -- -- --
----------- ----------- ----------- ---------- -----------
Total assets........................................ 33,134,201 24,091,717 15,594,197 8,209,652 12,570,978
LIABILITIES: -- -- -- -- --
----------- ----------- ----------- ---------- -----------
Net assets.......................................... $33,134,201 $24,091,717 $15,594,197 $8,209,652 $12,570,978
=========== =========== =========== ========== ===========
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life policies... $29,810,677 $22,256,646 $14,838,938 $7,294,853 $11,196,834
VEL Plus Series variable life policies.............. 3,323,524 1,835,071 755,259 914,799 1,374,144
----------- ----------- ----------- ---------- -----------
$33,134,201 $24,091,717 $15,594,197 $8,209,652 $12,570,978
=========== =========== =========== ========== ===========
Units outstanding and net asset value per unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1999.............. 8,334,776 6,282,221 5,359,827 3,767,621 5,212,550
Net asset value per unit, December 31, 1999....... $ 3.576662 $ 3.542799 $ 2.768548 $ 1.936196 $ 2.148053
VEL Plus Series:
Units outstanding, December 31, 1999.............. 919,203 512,389 269,850 467,371 632,817
Net asset value per unit, December 31, 1999....... $ 3.615660 $ 3.581395 $ 2.798810 $ 1.957330 $ 2.171472
<CAPTION>
SELECT
CAPITAL
APPRECIATION
------------
<S> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust... $6,514,094
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........................................ --
----------
Total assets........................................ 6,514,094
LIABILITIES: --
----------
Net assets.......................................... $6,514,094
==========
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life policies... $5,662,971
VEL Plus Series variable life policies.............. 851,123
----------
$6,514,094
==========
Units outstanding and net asset value per unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1999.............. 2,384,175
Net asset value per unit, December 31, 1999....... $ 2.375233
VEL Plus Series:
Units outstanding, December 31, 1999.............. 354,462
Net asset value per unit, December 31, 1999....... $ 2.401171
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT
EMERGING STRATEGIC FIDELITY VIP FIDELITY VIP FIDELITY VIP
MARKETS GROWTH MONEY MARKET HIGH INCOME EQUITY-INCOME
--------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment
Trust.......................................... $ 908,744 $ 433,527 $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance
Products Funds (VIP)........................... -- -- 2,177,105 11,690,700 70,424,153
Investment in shares of T. Rowe Price
International
Series, Inc.................................... -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund................................... -- -- -- -- --
--------- --------- ---------- ----------- -----------
Total assets................................... 908,744 433,527 2,177,105 11,690,700 70,424,153
LIABILITIES: -- -- -- -- --
--------- --------- ---------- ----------- -----------
Net assets..................................... $ 908,744 $ 433,527 $2,177,105 $11,690,700 $70,424,153
========= ========= ========== =========== ===========
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies..................................... $ 685,551 $ 409,871 $2,177,105 $11,050,821 $65,410,222
VEL Plus Series variable life policies......... 223,193 23,656 -- 639,879 5,013,931
--------- --------- ---------- ----------- -----------
$ 908,744 $ 433,527 $2,177,105 $11,690,700 $70,424,153
========= ========= ========== =========== ===========
Units outstanding and net asset value per unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1999......... 490,429 368,744 1,227,827 3,523,635 12,208,087
Net asset value per unit, December 31,
1999....................................... $1.397859 $1.111532 $ 1.773137 $ 3.136199 $ 5.357942
VEL Plus Series:
Units outstanding, December 31, 1999......... 157,601 21,044 -- 201,824 925,678
Net asset value per unit, December 31,
1999....................................... $1.416201 $1.124146 $ -- $ 3.170493 $ 5.416493
<CAPTION>
FIDELITY T. ROWE PRICE
FIDELITY VIP FIDELITY VIP FIDELITY VIP II VIP II INTERNATIONAL
GROWTH OVERSEAS ASSET MANAGER INDEX 500 STOCK
------------ ------------ --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment
Trust.......................................... $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance
Products Funds (VIP)........................... 113,530,598 24,470,730 2,665,893 2,608 --
Investment in shares of T. Rowe Price
International
Series, Inc.................................... -- -- -- -- 4,388,832
Investment in shares of Delaware Group
Premium Fund................................... -- -- -- -- --
------------ ----------- ---------- --------- ----------
Total assets................................... 113,530,598 24,470,730 2,665,893 2,608 4,388,832
LIABILITIES: -- -- -- -- --
------------ ----------- ---------- --------- ----------
Net assets..................................... $113,530,598 $24,470,730 $2,665,893 $ 2,608 $4,388,832
============ =========== ========== ========= ==========
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies..................................... $107,022,473 $23,267,073 $2,273,712 $ -- $4,032,685
VEL Plus Series variable life policies......... 6,508,125 1,203,657 392,181 2,608 356,147
------------ ----------- ---------- --------- ----------
$113,530,598 $24,470,730 $2,665,893 $ 2,608 $4,388,832
============ =========== ========== ========= ==========
Units outstanding and net asset value per unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1999......... 11,522,239 6,084,010 1,163,353 -- 2,173,551
Net asset value per unit, December 31,
1999....................................... $ 9.288340 $ 3.824299 $ 1.954447 $ -- $ 1.855344
VEL Plus Series:
Units outstanding, December 31, 1999......... 693,114 311,338 198,491 2,369 189,882
Net asset value per unit, December 31,
1999....................................... $ 9.389682 $ 3.866076 $ 1.975809 $1.100960 $ 1.875615
<CAPTION>
DGPF
INTERNATIONAL
EQUITY
-------------
<S> <C>
ASSETS:
Investments in shares of Allmerica Investment
Trust.......................................... $ --
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................................... 6,426,490
----------
Total assets................................... 6,426,490
LIABILITIES: --
----------
Net assets..................................... $6,426,490
==========
Net asset distribution by category:
VEL '87 and VEL '91 Series variable life
policies..................................... $5,842,733
VEL Plus Series variable life policies......... 583,757
----------
$6,426,490
==========
Units outstanding and net asset value per unit:
VEL '87 and VEL '91 Series:
Units outstanding, December 31, 1999......... 2,835,725
Net asset value per unit, December 31,
1999....................................... $ 2.060402
VEL Plus Series:
Units outstanding, December 31, 1999......... 280,262
Net asset value per unit, December 31,
1999....................................... $ 2.082889
</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 FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 388,330 $ 567,559 $ 683,187 $ 599,912 $557,875 $592,446
EXPENSES:
Mortality and expense risk
fees........................... 544,746 474,845 423,602 85,291 84,687 82,739
----------- ---------- ---------- --------- -------- --------
Net investment income (loss)... (156,416) 92,714 259,585 514,621 473,188 509,707
----------- ---------- ---------- --------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 5,618,834 542,213 8,215,255 7,801 -- --
Net realized gain (loss) from
sales of investments........... 1,693,454 926,720 800,189 (787) 58,338 16,779
----------- ---------- ---------- --------- -------- --------
Net realized gain (loss)....... 7,312,288 1,468,933 9,015,444 7,014 58,338 16,779
Net unrealized gain (loss)....... 8,147,921 7,381,427 592,925 (704,606) 107,408 225,179
----------- ---------- ---------- --------- -------- --------
Net realized and unrealized
gain (loss).................. 15,460,209 8,850,360 9,608,369 (697,592) 165,746 241,958
----------- ---------- ---------- --------- -------- --------
Net increase (decrease) in net
assets from operations....... $15,303,793 $8,943,074 $9,867,954 $(182,971) $638,934 $751,665
=========== ========== ========== ========= ======== ========
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $539,526 $409,925 $417,826 $ 301,031 $ 279,855 $ 228,820
EXPENSES:
Mortality and expense risk
fees........................... 93,186 67,856 69,497 279,602 212,580 156,372
-------- -------- -------- ---------- ---------- ----------
Net investment income (loss)... 446,340 342,069 348,329 21,429 67,275 72,448
-------- -------- -------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- -- 49,055 671,263 556,659
Net realized gain (loss) from
sales of investments........... -- -- -- 1,390,566 928,258 1,026,548
-------- -------- -------- ---------- ---------- ----------
Net realized gain (loss)....... -- -- -- 1,439,621 1,599,521 1,583,207
Net unrealized gain (loss)....... -- -- -- 4,210,982 4,157,317 2,946,018
-------- -------- -------- ---------- ---------- ----------
Net realized and unrealized
gain (loss).................. -- -- -- 5,650,603 5,756,838 4,529,225
-------- -------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets from operations....... $446,340 $342,069 $348,329 $5,672,032 $5,824,113 $4,601,673
======== ======== ======== ========== ========== ==========
</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 FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
--------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................... $ 152,580 $114,701 $112,464 $ -- $ -- $ --
EXPENSES:
Mortality and expense risk
fees.......................... 23,477 18,390 17,177 236,876 216,937 187,689
--------- -------- -------- ---------- ---------- ----------
Net investment income
(loss)...................... 129,103 96,311 95,287 (236,876) (216,937) (187,689)
--------- -------- -------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............ -- -- -- -- -- 1,862,473
Net realized gain (loss) from
sales of investments.......... (10,540) 8,827 (6,237) 1,629,800 558,112 661,702
--------- -------- -------- ---------- ---------- ----------
Net realized gain (loss)...... (10,540) 8,827 (6,237) 1,629,800 558,112 2,524,175
Net unrealized gain (loss)...... (133,615) 24,441 25,622 7,711,925 2,101,188 1,162,100
--------- -------- -------- ---------- ---------- ----------
Net realized and unrealized
gain (loss)................. (144,155) 33,268 19,385 9,341,725 2,659,300 3,686,275
--------- -------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets from operations...... $ (15,052) $129,579 $114,672 $9,104,849 $2,442,363 $3,498,586
========= ======== ======== ========== ========== ==========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................... $ 10,497 $ 11,966 $ 37,821 $ 159,779 $ 149,234 $ 130,921
EXPENSES:
Mortality and expense risk
fees.......................... 177,454 135,427 96,204 126,773 107,852 90,003
---------- ---------- ---------- ---------- ---------- ----------
Net investment income
(loss)...................... (166,957) (123,461) (58,383) 33,006 41,382 40,918
---------- ---------- ---------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............ 667,040 156,530 677,736 1,068,557 43,671 964,158
Net realized gain (loss) from
sales of investments.......... 966,339 761,567 227,315 369,872 258,827 251,158
---------- ---------- ---------- ---------- ---------- ----------
Net realized gain (loss)...... 1,633,379 918,097 905,051 1,438,429 302,498 1,215,316
Net unrealized gain (loss)...... 3,920,725 3,831,083 2,154,291 806,907 1,392,298 660,971
---------- ---------- ---------- ---------- ---------- ----------
Net realized and unrealized
gain (loss)................. 5,554,104 4,749,180 3,059,342 2,245,336 1,694,796 1,876,287
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from operations...... $5,387,147 $4,625,719 $3,000,959 $2,278,342 $1,736,178 $1,917,205
========== ========== ========== ========== ========== ==========
</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 FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
----------- -------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 52 $ 88,394 $ 50,552 $ -- $ 136,845 $ 211,007
EXPENSES:
Mortality and expense risk
fees........................... 78,319 86,622 64,824 94,188 87,240 71,279
----------- -------- ---------- ---------- ---------- ---------
Net investment income (loss)... (78,267) 1,772 (14,272) (94,188) 49,605 139,728
----------- -------- ---------- ---------- ---------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 523,882 35,407 1,219,528 -- -- 292,738
Net realized gain (loss) from
sales of investments........... 103,820 177,640 414,908 1,197,390 874,923 163,180
----------- -------- ---------- ---------- ---------- ---------
Net realized gain (loss)....... 627,702 213,047 1,634,436 1,197,390 874,923 455,918
Net unrealized gain (loss)....... (1,108,547) 154,495 (31,480) 1,901,167 529,575 (332,962)
----------- -------- ---------- ---------- ---------- ---------
Net realized and unrealized
gain (loss).................. (480,845) 367,542 1,602,956 3,098,557 1,404,498 122,956
----------- -------- ---------- ---------- ---------- ---------
Net increase (decrease) in net
assets from operations....... $ (559,112) $369,314 $1,588,684 $3,004,369 $1,454,103 $ 262,684
=========== ======== ========== ========== ========== =========
<CAPTION>
SELECT CAPITAL APPRECIATION SELECT EMERGING MARKETS
FOR THE
YEAR ENDED FOR THE FOR THE
DECEMBER 31, YEAR ENDED PERIOD
--------------------------------- DECEMBER 31, 5/27/98* TO
1999 1998 1997 1999 12/31/98
---------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ -- $ -- $ -- $ 3,495 $ 285
EXPENSES:
Mortality and expense risk
fees........................... 49,369 43,664 38,200 4,026 312
---------- --------- -------- -------- -------
Net investment income (loss)... (49,369) (43,664) (38,200) (531) (27)
---------- --------- -------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 8,718 841,830 -- -- --
Net realized gain (loss) from
sales of investments........... 170,122 133,074 60,995 40,447 (1,796)
---------- --------- -------- -------- -------
Net realized gain (loss)....... 178,840 974,904 60,995 40,447 (1,796)
Net unrealized gain (loss)....... 1,177,188 (290,988) 560,718 228,896 (2,187)
---------- --------- -------- -------- -------
Net realized and unrealized
gain (loss).................. 1,356,028 683,916 621,713 269,343 (3,983)
---------- --------- -------- -------- -------
Net increase (decrease) in net
assets from operations....... $1,306,659 $ 640,252 $583,513 $268,812 $(4,010)
========== ========= ======== ======== =======
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC GROWTH FIDELITY VIP MONEY MARKET FIDELITY VIP HIGH INCOME
FOR THE FOR THE
FOR THE FOR THE YEAR ENDED YEAR ENDED
YEAR ENDED PERIOD DECEMBER 31, DECEMBER 31,
DECEMBER 31, 5/27/98* TO ------------------------------ -------------------------------------
1999 12/31/98 1999 1998 1997 1999 1998 1997
------------ ----------- -------- -------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $ 1,291 $ 299 $104,266 $111,669 $134,142 $1,112,340 $ 877,703 $ 767,218
EXPENSES:
Mortality and expense
risk fees.............. 2,828 190 18,596 18,853 22,756 106,074 110,615 101,942
------- ------ -------- -------- -------- ---------- ----------- ----------
Net investment income
(loss)................. (1,537) 109 85,670 92,816 111,386 1,006,266 767,088 665,276
------- ------ -------- -------- -------- ---------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors..... -- -- -- -- -- 41,583 557,707 94,825
Net realized gain (loss)
from sales of
investments............ 11,249 (336) -- -- -- (260,246) 43,329 507,660
------- ------ -------- -------- -------- ---------- ----------- ----------
Net realized gain
(loss)................ 11,249 (336) -- -- -- (218,663) 601,036 602,485
Net unrealized gain
(loss)................. 45,676 2,726 -- -- -- 69,846 (2,008,208) 492,547
------- ------ -------- -------- -------- ---------- ----------- ----------
Net realized and
unrealized gain
(loss)................ 56,925 2,390 -- -- -- (148,817) (1,407,172) 1,095,032
------- ------ -------- -------- -------- ---------- ----------- ----------
Net increase (decrease)
in net assets from
operations............ $55,388 $2,499 $ 85,670 $ 92,816 $111,386 $ 857,449 $ (640,084) $1,760,308
======= ====== ======== ======== ======== ========== =========== ==========
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 1,089,494 $ 969,313 $ 981,785 $ 151,755 $ 339,647 $ 396,280
EXPENSES:
Mortality and expense risk
fees........................... 648,087 634,422 566,813 844,798 657,366 565,772
----------- ---------- ----------- ----------- ----------- -----------
Net investment income (loss)... 441,407 334,891 414,972 (693,043) (317,719) (169,492)
----------- ---------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 2,408,355 3,449,614 4,936,197 9,541,625 8,884,448 1,773,823
Net realized gain (loss) from
sales of investments........... 3,508,471 2,222,211 2,055,889 3,525,852 3,173,606 2,849,100
----------- ---------- ----------- ----------- ----------- -----------
Net realized gain (loss)....... 5,916,826 5,671,825 6,992,086 13,067,477 12,058,054 4,622,923
Net unrealized gain (loss)....... (2,406,339) 1,147,695 7,687,046 18,088,986 12,643,345 8,211,480
----------- ---------- ----------- ----------- ----------- -----------
Net realized and unrealized
gain (loss).................. 3,510,487 6,819,520 14,679,132 31,156,463 24,701,399 12,834,403
----------- ---------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations....... $ 3,951,894 $7,154,411 $15,094,104 $30,463,420 $24,383,680 $12,664,911
=========== ========== =========== =========== =========== ===========
<CAPTION>
FIDELITY VIP OVERSEAS
FOR THE
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 291,527 $ 353,234 $ 314,599
EXPENSES:
Mortality and expense risk
fees........................... 176,801 168,825 164,466
---------- ---------- ----------
Net investment income (loss)... 114,726 184,409 150,133
---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 470,205 1,041,112 1,248,863
Net realized gain (loss) from
sales of investments........... 1,656,357 514,428 963,884
---------- ---------- ----------
Net realized gain (loss)....... 2,126,562 1,555,540 2,212,747
Net unrealized gain (loss)....... 5,049,698 347,082 (508,913)
---------- ---------- ----------
Net realized and unrealized
gain (loss).................. 7,176,260 1,902,622 1,703,834
---------- ---------- ----------
Net increase (decrease) in net
assets from operations....... $7,290,986 $2,087,031 $1,853,967
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER FIDELITY VIP II INDEX 500
FOR THE
YEAR ENDED FOR THE
DECEMBER 31, PERIOD
------------------------------------ 10/15/99* TO
1999 1998 1997 12/31/99
-------- -------- -------- -------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 71,663 $ 57,697 $ 44,294 $--
EXPENSES:
Mortality and expense risk
fees........................... 20,896 16,696 13,409 --
-------- -------- -------- ---
Net investment income (loss)..... 50,767 41,001 30,885 --
-------- -------- -------- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 90,774 173,091 111,110 --
Net realized gain (loss) from
sales of investments........... 50,759 29,441 24,571 --
-------- -------- -------- ---
Net realized gain (loss)....... 141,533 202,532 135,681 --
Net unrealized gain (loss)....... 46,533 19,552 110,859 68
-------- -------- -------- ---
Net realized and unrealized
gain (loss).................. 188,066 222,084 246,540 68
-------- -------- -------- ---
Net increase (decrease) in net
assets from operations....... $238,833 $263,085 $277,425 $68
======== ======== ======== ===
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK DGPF INTERNATIONAL EQUITY
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
---------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 16,216 $ 41,865 $ 30,749 $132,596 $224,118 $175,825
EXPENSES:
Mortality and expense risk
fees........................... 33,333 31,640 26,527 54,845 53,965 49,946
---------- -------- --------- -------- -------- --------
Net investment income (loss)..... (17,117) 10,225 4,222 77,751 170,153 125,879
---------- -------- --------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 50,963 14,776 43,561 9,684 -- --
Net realized gain (loss) from
sales of investments........... 671,233 65,296 164,337 405,823 182,396 276,622
---------- -------- --------- -------- -------- --------
Net realized gain (loss)....... 722,196 80,072 207,898 415,507 182,396 276,622
Net unrealized gain (loss)....... 446,110 395,039 (172,676) 389,867 196,193 (127,979)
---------- -------- --------- -------- -------- --------
Net realized and unrealized
gain (loss).................. 1,168,306 475,111 35,222 805,374 378,589 148,643
---------- -------- --------- -------- -------- --------
Net increase (decrease) in net
assets from operations....... $1,151,189 $485,336 $ 39,444 $883,125 $548,742 $274,522
========== ======== ========= ======== ======== ========
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ (156,416) $ 92,714 $ 259,585 $ 514,621 $ 473,188 $ 509,707
Net realized gain (loss)................... 7,312,288 1,468,933 9,015,444 7,014 58,338 16,779
Net unrealized gain (loss)................. 8,147,921 7,381,427 592,925 (704,606) 107,408 225,179
----------- ----------- ----------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 15,303,793 8,943,074 9,867,954 (182,971) 638,934 751,665
----------- ----------- ----------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 3,845,645 4,147,095 4,632,238 894,855 1,014,569 1,285,975
Terminations............................... (2,393,221) (2,473,432) (1,791,890) (552,839) (674,881) (316,217)
Insurance and other charges................ (2,419,965) (2,385,814) (2,372,430) (510,631) (554,423) (598,463)
Transfers between sub-accounts (including
fixed
account), net............................ (1,108,733) (1,184,061) (23,635) 51,188 243,012 (1,447,854)
Other transfers from (to) the General
Account.................................. (1,268,122) (1,337,883) (1,229,320) (231,812) (161,645) (242,295)
----------- ----------- ----------- ---------- ---------- ----------
Net increase (decrease) in net assets from
policy
transactions............................. (3,344,396) (3,234,095) (785,037) (349,239) (133,368) (1,318,854)
----------- ----------- ----------- ---------- ---------- ----------
Net increase (decrease) in net assets...... 11,959,397 5,708,979 9,082,917 (532,210) 505,566 (567,189)
NET ASSETS:
Beginning of year.......................... 56,358,558 50,649,579 41,566,662 9,774,774 9,269,208 9,836,397
----------- ----------- ----------- ---------- ---------- ----------
End of year................................ $68,317,955 $56,358,558 $50,649,579 $9,242,564 $9,774,774 $9,269,208
=========== =========== =========== ========== ========== ==========
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ 446,340 $ 342,069 $ 348,329 $ 21,429 $ 67,275 $ 72,448
Net realized gain (loss)................... -- -- -- 1,439,621 1,599,521 1,583,207
Net unrealized gain (loss)................. -- -- -- 4,210,982 4,157,317 2,946,018
----------- ---------- ---------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 446,340 342,069 348,329 5,672,032 5,824,113 4,601,673
----------- ---------- ---------- ----------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 2,737,005 2,295,240 3,773,110 2,171,232 2,058,578 1,915,757
Terminations............................... (1,433,409) (934,244) (326,856) (1,145,709) (861,456) (505,716)
Insurance and other charges................ (1,508,430) (1,485,131) (1,672,886) (1,053,724) (932,334) (788,505)
Transfers between sub-accounts (including
fixed
account), net............................ 3,225,506 1,134,463 (2,372,407) 2,949,488 1,714,844 1,591,851
Other transfers from (to) the General
Account.................................. (166,914) 160,429 (111,741) (706,089) (597,313) (352,185)
----------- ---------- ---------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy
transactions............................. 2,853,758 1,170,757 (710,780) 2,215,198 1,382,319 1,861,202
----------- ---------- ---------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 3,300,098 1,512,826 (362,451) 7,887,230 7,206,432 6,462,875
NET ASSETS:
Beginning of year.......................... 8,833,264 7,320,438 7,682,889 27,779,189 20,572,757 14,109,882
----------- ---------- ---------- ----------- ----------- -----------
End of year................................ $12,133,362 $8,833,264 $7,320,438 $35,666,419 $27,779,189 $20,572,757
=========== ========== ========== =========== =========== ===========
</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>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ---------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ 129,103 $ 96,311 $ 95,287 $ (236,876) $ (216,937) $ (187,689)
Net realized gain (loss)................. (10,540) 8,827 (6,237) 1,629,800 558,112 2,524,175
Net unrealized gain (loss)............... (133,615) 24,441 25,622 7,711,925 2,101,188 1,162,100
---------- ---------- ---------- ----------- ----------- -----------
Net increase (decrease) in net assets
from
operations............................. (15,052) 129,579 114,672 9,104,849 2,442,363 3,498,586
---------- ---------- ---------- ----------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums............................. 399,589 375,767 682,542 2,408,186 2,607,615 2,824,854
Terminations............................. (87,850) (84,678) (79,493) (979,356) (689,211) (723,396)
Insurance and other charges.............. (255,204) (280,376) (362,563) (1,064,621) (1,074,665) (1,019,076)
Transfers between sub-accounts (including
fixed
account), net.......................... 283,486 316,247 (229,565) (2,240,382) 31,179 949,658
Other transfers from (to) the General
Account................................ (14,319) 7,092 (16,829) (369,747) (600,291) (560,210)
---------- ---------- ---------- ----------- ----------- -----------
Net increase (decrease) in net assets
from policy
transactions........................... 325,702 334,052 (5,908) (2,245,920) 274,627 1,471,830
---------- ---------- ---------- ----------- ----------- -----------
Net increase (decrease) in net assets.... 310,650 463,631 108,764 6,858,929 2,716,990 4,970,416
NET ASSETS:
Beginning of year........................ 2,456,041 1,992,410 1,883,646 26,275,272 23,558,282 18,587,866
---------- ---------- ---------- ----------- ----------- -----------
End of year.............................. $2,766,691 $2,456,041 $1,992,410 $33,134,201 $26,275,272 $23,558,282
========== ========== ========== =========== =========== ===========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (166,957) $ (123,461) $ (58,383) $ 33,006 $ 41,382 $ 40,918
Net realized gain (loss)................. 1,633,379 918,097 905,051 1,438,429 302,498 1,215,316
Net unrealized gain (loss)............... 3,920,725 3,831,083 2,154,291 806,907 1,392,298 660,971
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
from
operations............................. 5,387,147 4,625,719 3,000,959 2,278,342 1,736,178 1,917,205
----------- ----------- ----------- ----------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums............................. 1,441,299 1,467,578 1,393,879 811,749 1,040,338 1,121,777
Terminations............................. (954,014) (630,548) (295,316) (662,885) (385,194) (367,783)
Insurance and other charges.............. (774,818) (682,754) (547,579) (544,136) (550,617) (533,886)
Transfers between sub-accounts (including
fixed
account), net.......................... 1,261,002 588,417 1,941,512 807,623 461,016 942,381
Other transfers from (to) the General
Account................................ (459,058) (310,985) (408,088) (268,213) (296,635) (335,044)
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
from policy
transactions........................... 514,411 431,708 2,084,408 144,138 268,908 827,445
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets.... 5,901,558 5,057,427 5,085,367 2,422,480 2,005,086 2,744,650
NET ASSETS:
Beginning of year........................ 18,190,159 13,132,732 8,047,365 13,171,717 11,166,631 8,421,981
----------- ----------- ----------- ----------- ----------- -----------
End of year.............................. $24,091,717 $18,190,159 $13,132,732 $15,594,197 $13,171,717 $11,166,631
=========== =========== =========== =========== =========== ===========
</TABLE>
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>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss).................... $ (78,267) $ 1,772 $ (14,272) $ (94,188) $ 49,605 $ 139,728
Net realized gain (loss).... 627,702 213,047 1,634,436 1,197,390 874,923 455,918
Net unrealized gain
(loss).................... (1,108,547) 154,495 (31,480) 1,901,167 529,575 (332,962)
----------- ----------- ---------- ----------- ----------- ----------
Net increase (decrease) in
net assets from
operations................ (559,112) 369,314 1,588,684 3,004,369 1,454,103 262,684
----------- ----------- ---------- ----------- ----------- ----------
FROM POLICY TRANSACTIONS:
Net premiums................ 950,663 1,008,376 987,196 868,225 1,037,331 1,200,360
Terminations................ (316,221) (367,166) (170,070) (617,267) (288,800) (265,082)
Insurance and other
charges................... (311,473) (368,767) (311,192) (351,166) (372,166) (327,495)
Transfers between
sub-accounts (including
fixed
account), net............. (1,934,352) 892,181 1,882,742 (711,392) (450,756) 2,615,190
Other transfers from (to)
the General Account....... (128,860) (243,673) (128,761) (115,393) (189,971) (185,377)
----------- ----------- ---------- ----------- ----------- ----------
Net increase (decrease) in
net assets from policy
transactions.............. (1,740,243) 920,951 2,259,915 (926,993) (264,362) 3,037,596
----------- ----------- ---------- ----------- ----------- ----------
Net increase (decrease) in
net assets................ (2,299,355) 1,290,265 3,848,599 2,077,376 1,189,741 3,300,280
NET ASSETS:
Beginning of year........... 10,509,007 9,218,742 5,370,143 10,493,602 9,303,861 6,003,581
----------- ----------- ---------- ----------- ----------- ----------
End of year................. $ 8,209,652 $10,509,007 $9,218,742 $12,570,978 $10,493,602 $9,303,861
=========== =========== ========== =========== =========== ==========
<CAPTION>
SELECT CAPITAL APPRECIATION SELECT EMERGING MARKETS
YEAR ENDED
DECEMBER 31, YEAR ENDED PERIOD
----------------------------------- DECEMBER 31, FROM 5/27/98*
1999 1998 1997 1999 TO 12/31/98
----------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss).................... $ (49,369) $ (43,664) $ (38,200) $ (531) $ (27)
Net realized gain (loss).... 178,840 974,904 60,995 40,447 (1,796)
Net unrealized gain
(loss).................... 1,177,188 (290,988) 560,718 228,896 (2,187)
---------- ---------- ---------- -------- --------
Net increase (decrease) in
net assets from
operations................ 1,306,659 640,252 583,513 268,812 (4,010)
---------- ---------- ---------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums................ 585,539 635,828 778,775 130,910 23,805
Terminations................ (254,258) (188,223) (428,702) (6,288) (694)
Insurance and other
charges................... (220,959) (231,521) (214,729) (10,194) (1,168)
Transfers between
sub-accounts (including
fixed
account), net............. (384,528) (72,244) 318,469 350,912 141,521
Other transfers from (to)
the General Account....... (81,441) (138,648) (82,687) 14,543 595
---------- ---------- ---------- -------- --------
Net increase (decrease) in
net assets from policy
transactions.............. (355,647) 5,192 371,126 479,883 164,059
---------- ---------- ---------- -------- --------
Net increase (decrease) in
net assets................ 951,012 645,444 954,639 748,695 160,049
NET ASSETS:
Beginning of year........... 5,563,082 4,917,638 3,962,999 160,049 --
---------- ---------- ---------- -------- --------
End of year................. $6,514,094 $5,563,082 $4,917,638 $908,744 $160,049
========== ========== ========== ======== ========
</TABLE>
* Date of initial investment.
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>
SELECT STRATEGIC GROWTH
FIDELITY VIP MONEY MARKET
PERIOD YEAR ENDED
YEAR ENDED FROM DECEMBER 31,
DECEMBER 31, 5/27/98* ------------------------------------
1999 TO 12/31/98 1999 1998 1997
------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (1,537) $ 109 $ 85,670 $ 92,816 $ 111,386
Net realized gain (loss)....... 11,249 (336) -- -- --
Net unrealized gain (loss)..... 45,676 2,726 -- -- --
-------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets from
operations................... 55,388 2,499 85,670 92,816 111,386
-------- -------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums................... 21,833 19,993 321,463 394,323 557,101
Terminations................... (3,348) -- (172,248) (145,072) (108,207)
Insurance and other charges.... (5,559) (1,019) (343,328) (384,110) (405,493)
Transfers between sub-accounts
(including fixed
account), net................ 241,221 105,849 339,115 (39,241) 33,400
Other transfers from (to) the
General Account............... (2,801) (529) (68,235) (23,970) (537,869)
-------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................. 251,346 124,294 76,767 (198,070) (461,068)
-------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets........................ 306,734 126,793 162,437 (105,254) (349,682)
NET ASSETS:
Beginning of year.............. 126,793 -- 2,014,668 2,119,922 2,469,604
-------- -------- ---------- ---------- ----------
End of year.................... $433,527 $126,793 $2,177,105 $2,014,668 $2,119,922
======== ======== ========== ========== ==========
<CAPTION>
FIDELITY VIP HIGH INCOME
YEAR ENDED
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 1,006,266 $ 767,088 $ 665,276
Net realized gain (loss)....... (218,663) 601,036 602,485
Net unrealized gain (loss)..... 69,846 (2,008,208) 492,547
----------- ----------- -----------
Net increase (decrease) in net
assets from
operations................... 857,449 (640,084) 1,760,308
----------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums................... 965,604 1,182,612 1,284,342
Terminations................... (579,865) (577,032) (500,117)
Insurance and other charges.... (557,683) (635,010) (632,676)
Transfers between sub-accounts
(including fixed
account), net................ (610,238) 411,921 (165,108)
Other transfers from (to) the
General Account............... (167,067) (282,159) (235,669)
----------- ----------- -----------
Net increase (decrease) in net
assets from policy
transactions................. (949,249) 100,332 (249,228)
----------- ----------- -----------
Net increase (decrease) in net
assets........................ (91,800) (539,752) 1,511,080
NET ASSETS:
Beginning of year.............. 11,782,500 12,322,252 10,811,172
----------- ----------- -----------
End of year.................... $11,690,700 $11,782,500 $12,322,252
=========== =========== ===========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 441,407 $ 334,891 $ 414,972 $ (693,043) $ (317,719) $ (169,492)
Net realized gain (loss)....... 5,916,826 5,671,825 6,992,086 13,067,477 12,058,054 4,622,923
Net unrealized gain (loss)..... (2,406,339) 1,147,695 7,687,046 18,088,986 12,643,345 8,211,480
----------- ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets from
operations................... 3,951,894 7,154,411 15,094,104 30,463,420 24,383,680 12,664,911
----------- ----------- ----------- ------------ ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums................... 4,385,915 5,293,196 5,586,301 5,194,054 5,413,891 6,162,215
Terminations................... (3,308,744) (3,233,988) (2,575,123) (4,178,303) (3,106,874) (2,882,175)
Insurance and other charges.... (2,798,336) (3,011,969) (2,989,132) (3,538,134) (3,165,773) (3,039,823)
Transfers between sub-accounts
(including fixed
account), net................ (3,833,558) (700,825) (1,774,181) 1,939,800 (2,809,723) (3,702,800)
Other transfers from (to) the
General Account.............. (1,291,661) (1,302,733) (1,791,193) (1,831,078) (1,974,673) (1,803,002)
----------- ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets from policy
transactions................. (6,846,384) (2,956,319) (3,543,328) (2,413,661) (5,643,152) (5,265,585)
----------- ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets....................... (2,894,490) 4,198,092 11,550,776 28,049,759 18,740,528 7,399,326
NET ASSETS:
Beginning of year................ 73,318,643 69,120,551 57,569,775 85,480,839 66,740,311 59,340,985
----------- ----------- ----------- ------------ ----------- -----------
End of year...................... $70,424,153 $73,318,643 $69,120,551 $113,530,598 $85,480,839 $66,740,311
=========== =========== =========== ============ =========== ===========
<CAPTION>
FIDELITY VIP OVERSEAS
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 114,726 $ 184,409 $ 150,133
Net realized gain (loss)....... 2,126,562 1,555,540 2,212,747
Net unrealized gain (loss)..... 5,049,698 347,082 (508,913)
----------- ----------- -----------
Net increase (decrease) in net
assets from
operations................... 7,290,986 2,087,031 1,853,967
----------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums................... 1,449,864 1,696,787 1,968,560
Terminations................... (922,962) (755,513) (739,857)
Insurance and other charges.... (801,362) (853,111) (925,180)
Transfers between sub-accounts
(including fixed
account), net................ (1,112,314) (709,531) (2,172,320)
Other transfers from (to) the
General Account.............. (394,455) (472,305) (426,928)
----------- ----------- -----------
Net increase (decrease) in net
assets from policy
transactions................. (1,781,229) (1,093,673) (2,295,725)
----------- ----------- -----------
Net increase (decrease) in net
assets....................... 5,509,757 993,358 (441,758)
NET ASSETS:
Beginning of year................ 18,960,973 17,967,615 18,409,373
----------- ----------- -----------
End of year...................... $24,470,730 $18,960,973 $17,967,615
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER FIDELITY VIP II
YEAR ENDED DECEMBER 31, INDEX 500
------------------------------------ PERIOD FROM
1999 1998 1997 10/15/99* TO 12/31/99
---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 50,767 $ 41,001 $ 30,885 $ --
Net realized gain (loss)....... 141,533 202,532 135,681 --
Net unrealized gain (loss)..... 46,533 19,552 110,859 68
---------- ---------- ---------- ------
Net increase (decrease) in net
assets from
operations................... 238,833 263,085 277,425 68
---------- ---------- ---------- ------
FROM POLICY TRANSACTIONS:
Net premiums................... 139,895 193,174 155,375 888
Terminations................... (89,954) (81,610) (34,787) --
Insurance and other charges.... (83,706) (79,580) (70,273) (48)
Transfers between sub-accounts
(including fixed
account), net................ 278,991 177,963 154,902 1,700
Other transfers from (to) the
General Account.............. (8,812) (18,995) (31,718) --
---------- ---------- ---------- ------
Net increase (decrease) in net
assets from policy
transactions................. 236,414 190,952 173,499 2,540
---------- ---------- ---------- ------
Net increase (decrease) in net
assets....................... 475,247 454,037 450,924 2,608
NET ASSETS:
Beginning of year................ 2,190,646 1,736,609 1,285,685 --
---------- ---------- ---------- ------
End of year...................... $2,665,893 $2,190,646 $1,736,609 $2,608
========== ========== ========== ======
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK DGPF INTERNATIONAL EQUITY
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (17,117) $ 10,225 $ 4,222 $ 77,751 $ 170,153 $ 125,879
Net realized gain (loss)....... 722,196 80,072 207,898 415,507 182,396 276,622
Net unrealized gain (loss)..... 446,110 395,039 (172,676) 389,867 196,193 (127,979)
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from
operations................... 1,151,189 485,336 39,444 883,125 548,742 274,522
---------- ---------- ---------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums................... 266,618 315,417 393,703 507,378 606,163 777,360
Terminations................... (145,509) (111,303) (121,194) (238,718) (169,917) (257,744)
Insurance and other charges.... (128,668) (130,417) (127,737) (241,496) (269,251) (283,121)
Transfers between sub-accounts
(including fixed
account), net................ (324,797) (166,098) 1,108,521 (526,961) (371,589) 659,562
Other transfers from (to) the
General Account.............. (73,544) (95,539) (23,046) (87,364) (83,301) (70,903)
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................. (405,900) (187,940) 1,230,247 (587,161) (287,895) 825,154
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets....................... 745,289 297,396 1,269,691 295,964 260,847 1,099,676
NET ASSETS:
Beginning of year................ 3,643,543 3,346,147 2,076,456 6,130,526 5,869,679 4,770,003
---------- ---------- ---------- ---------- ---------- ----------
End of year...................... $4,388,832 $3,643,543 $3,346,147 $6,426,490 $6,130,526 $5,869,679
========== ========== ========== ========== ========== ==========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-14
<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 insurance 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 twenty-two
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Financial Investment Management Services, Inc. (AFIMS) a wholly-owned subsidiary
of the Company; 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 (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 May 1, 2000, AIT Investment Grade Income Fund will be renamed
Select Investment Grade Income Fund and AIT Growth Fund will be renamed Core
Equity Fund.
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 Funds. 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
Funds 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-15
<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 Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Growth.............................................. 20,633,632 $45,904,486 $ 3.311
Investment Grade Income............................. 8,794,067 9,630,375 1.051
Money Market........................................ 12,133,362 12,133,362 1.000
Equity Index........................................ 8,784,832 19,406,466 4.060
Government Bond..................................... 2,736,589 2,880,456 1.011
Select Aggressive Growth............................ 9,713,926 18,217,545 3.411
Select Growth....................................... 7,901,514 13,227,993 3.049
Select Growth and Income............................ 8,067,355 11,256,376 1.933
Select Value Opportunity............................ 5,397,536 8,294,310 1.521
Select International Equity......................... 6,189,551 9,681,026 2.031
Select Capital Appreciation......................... 3,172,963 4,918,643 2.053
Select Emerging Markets............................. 703,362 682,035 1.292
Select Strategic Growth............................. 385,015 385,125 1.126
Fidelity VIP Money Market........................... 2,177,105 2,177,105 1.000
Fidelity VIP High Income............................ 1,033,661 11,851,987 11.310
Fidelity VIP Equity-Income.......................... 2,739,174 44,727,621 25.710
Fidelity VIP Growth................................. 2,066,823 52,922,643 54.930
Fidelity VIP Overseas............................... 891,790 15,346,403 27.440
Fidelity VIP II Asset Manager....................... 142,790 2,314,727 18.670
Fidelity VIP II Index 500........................... 16 2,537 167.410
T. Rowe Price International Stock................... 230,506 3,600,573 19.040
DGPF International Equity........................... 344,954 5,105,768 18.630
</TABLE>
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 a monthly administrative charge. 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.
The Company makes a charge on the VEL '87 and VEL '91 series of policies of
0.90% 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 0.50% 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 0.90% per annum. This charge is deducted in the
daily computation of unit values and is paid to the Company on a daily basis.
SA-16
<PAGE>
VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, 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. The current series of policies
have a surrender charge and no deduction is made for sales charges at the time
of the sale.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy 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-17
<PAGE>
VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by VEL
during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- -------------------- ------------ ------------
<S> <C> <C>
Growth...................................................... $ 8,122,510 $ 6,004,488
Investment Grade Income..................................... 1,868,080 1,694,897
Money Market................................................ 26,202,824 22,902,726
Equity Index................................................ 5,652,314 3,366,632
Government Bond............................................. 1,190,841 736,036
Select Aggressive Growth.................................... 2,574,299 5,057,095
Select Growth............................................... 3,643,546 2,629,052
Select Growth and Income.................................... 2,628,776 1,383,075
Select Value Opportunity.................................... 2,252,132 3,546,760
Select International Equity................................. 11,035,517 12,056,698
Select Capital Appreciation................................. 1,052,473 1,448,771
Select Emerging Markets..................................... 771,244 291,892
Select Strategic Growth..................................... 408,398 158,589
Fidelity VIP Money Market................................... 998,781 836,344
Fidelity VIP High Income.................................... 7,945,587 7,846,987
Fidelity VIP Equity-Income.................................. 5,510,759 9,507,381
Fidelity VIP Growth......................................... 14,187,202 7,752,281
Fidelity VIP Overseas....................................... 5,380,041 6,576,339
Fidelity VIP II Asset Manager............................... 934,623 556,668
Fidelity VIP II Index 500................................... 2,542 2
T. Rowe Price International Stock........................... 4,000,395 4,372,449
DGPF International Equity................................... 2,116,098 2,615,824
------------ ------------
$108,478,982 $101,340,986
============ ============
</TABLE>
NOTE 7 -- PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-18
