PROSPECTUS
____________, 2001
GROUP IMMEDIATE VARIABLE ANNUITY CONTRACT
issued by
AIG LIFE INSURANCE COMPANY
through its
VARIABLE ACCOUNT I
This prospectus describes a single premium immediate variable annuity contract
offered to individuals within groups. The minimum initial premium is $20,000.
Additional premium is not accepted. Please read this prospectus carefully before
investing and keep it for future reference.
The description of the contract in this prospectus is fully applicable to your
certificate and the word "contract" includes any such certificate.
The contract is available as a qualified contract, such as an individual
retirement annuity contract funded with rollovers from tax-qualified plans, and
as a non-qualified contract funded with money from any source.
The contract provides several options for annuity payments beginning on the
Income Start Date. You select the annuity option at the time of purchase and
annuity payments must begin within 12 months of the Contract Date.
The contract has eight investment options to which you can allocate your money -
seven variable investment options and one fixed investment option. The fixed
investment option is part of our general account and, if chosen, your annuity
payments will each be the same amount. If you select a variable annuity payment,
the periodic payments will change depending on the investment performance of the
portfolios you select. You bear the investment risk. The variable investment
options are portfolios of the Universal Institutional Funds, Inc. ("Universal
Funds") managed by Morgan Stanley Asset Management.
To learn more about the contract, you can obtain a copy of the Statement of
Additional Information ("SAI") dated ________________, 2001. The SAI has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated by
reference into this prospectus. The table of contents of the SAI appears on the
last page of this prospectus. For a free copy of the SAI, call us at (877)
299-1724 or write to us at AIG Life Insurance Company, Attention: Variable
Products, One Alico Plaza, 600 King Street, Wilmington, Delaware 19801.
In addition, the SEC maintains a website at http://www.sec.gov that contains the
prospectus, SAI, materials incorporated by reference and other information that
we have filed electronically with the SEC.
Variable annuities involve risks, including possible loss of principal or
reduced income. They are not a deposit of any bank or insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government agency.
The SEC has not approved or disapproved of the contract or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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TABLE OF CONTENTS
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DEFINITIONS.....................................................................
SUMMARY OF THE CONTRACT.........................................................
FEE TABLES......................................................................
CONDENSED FINANCIAL INFORMATION.................................................
INVESTMENT OPTIONS..............................................................
CHARGES AND DEDUCTIONS..........................................................
THE CONTRACT....................................................................
ANNUITY PAYMENTS................................................................
ACCESS TO YOUR MONEY............................................................
DEATH BENEFIT...................................................................
PERFORMANCE.....................................................................
TAXES...........................................................................
OTHER INFORMATION...............................................................
FINANCIAL STATEMENTS............................................................
APPENDIX........................................................................
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION........................
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DEFINITIONS
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We have capitalized certain terms used in this prospectus. To help you
understand these terms, we have defined them in this glossary.
Annuitant - The person you designate to receive annuity payments and whose life
determines the duration of annuity payments involving life contingencies. The
Annuitant is usually the owner of the contract, but in some circumstances the
owner may not be the Annuitant. Certain annuity options under the contract
permit a Joint Annuitant.
Annuity Unit - An accounting unit of measure used to calculate annuity payments
after the Income Start Date.
Assumed Investment Return - The net investment return that will cause variable
annuity payments to remain level. The Assumed Investment Return is used in
calculating the initial and subsequent variable annuity payments.
Contract Anniversary - An anniversary of the date we issued your contract.
Contract Date - The date your contract is issued and becomes effective.
Contract Year - Each twelve-month period beginning on the Contract Date.
Income Change Date - The date on which the amount of variable annuity payments
changes. Income Change Dates occur as specified in your contract.
Income Start Date - The date on which annuity payments begin. You choose this
date when you purchase the contract. It must be the first day of a month and
cannot be later than 12 months after the Contract Date.
Valuation Date - Each day that the New York Stock Exchange is open for trading.
Valuation Period - The period between the close of business on any Valuation
Date and the close of business for the next succeeding Valuation Date.
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SUMMARY OF THE CONTRACT
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The summary provides a brief overview of the significant features of the
contract. You can find additional information later in the prospectus, in the
SAI, and in the contract. The prospectus applies principally to the variable
investment options and related aspects of the contract. The fixed investment
option is discussed under the heading "Fixed Investment Option."
Purpose
The single premium immediate variable annuity contract provides annuity payments
to the Annuitant for his or her life, and, under certain options, the life of a
Joint Annuitant. You may select from a number of annuity payment options.
Certain options provide a guaranteed minimum number of years of annuity income.
You may choose annuity payments that are fixed, variable, or a combination of
fixed and variable.
Type of Contract
If you are eligible, you may purchase the contract as an individual retirement
annuity ("IRA") with contributions rolled-over from tax-qualified plans such as
401(k) Plans, 403(b) Plans or IRAs. You may also purchase the contract as a
non-tax qualified retirement plan for an individual.
Purchase of the Contract
The minimum amount to purchase a contract is $20,000. We reserve the right to
reject payments in excess of limits we establish from time to time. In general,
we will not issue a contract to anyone who is over age 80, but reserve the right
to increase or decrease that age.
The Investment Options
On your application you may allocate your premium to our variable account to
provide a variable annuity. Our variable account is divided into subaccounts,
seven of which are offered under the contract. Each of the seven subaccounts
invests exclusively in shares of a specific portfolio of the Universal Funds.
The portfolios currently offered are:
Equity Growth Portfolio Money Market Portfolio
Fixed Income Portfolio Technology Portfolio
International Magnum Portfolio Value Portfolio
Mid Cap Growth Portfolio
Allocating part or all of your premium to a subaccount means you have elected to
be paid, at least in part, by a variable annuity. The amount of your variable
annuity payment will increase or decrease depending on the investment
performance of the subaccounts you selected. You bear the investment risk for
amounts allocated to a subaccount.
You can also allocate all or part of your premium to the general account and
receive a fixed annuity payment. Under this option, the periodic amount you
receive will not change, unless you make a partial withdrawal as permitted by
certain annuity options we may offer.
Charges and Deductions
The company does not deduct a sales load from your premium, but does deduct the
following charges in connection with the contract. For additional information,
see "Charges and Deductions."
Mortality and Expense Risk Charge. We deduct a daily charge from the assets of
each subaccount for mortality and expense risks. The maximum charge is 1.25% per
annum based on each subaccount's average daily net assets.
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Premium Tax Charge. We assess a premium tax charge as compensation for any
premium tax we incur related to the contract. We deduct the charge from your
premium if we incur or will incur a premium tax. We reserve the right to deduct
this charge when due or at anytime thereafter.
Transaction Charges
Partial Withdrawals: Annuity options 6, 7, 13 and 14 offer partial withdrawal
rights. Each of these annuity options has a guaranteed annuity payment period.
We do not currently charge for this benefit, but we reserve the right to assess
a charge of up to $200 at the time of a withdrawal.
Complete Surrenders: Annuity options 8 through 14 offer complete surrender
rights within eighteen months of the Contract Date. There is a $200 transaction
charge at surrender.
Other Expenses. The management fees and other expenses of the portfolios are
paid by the portfolios and are reflected in the net asset values of the
portfolios' shares.
Right to Examine Contract
You may cancel your contract within ten days after receiving it (or longer if
your state requires). We will refund your premium, adjusted for investment
performance, except in those states that require a return of premium without
regard to investment performance.
Contacting the Company
You can contact us at the following address and phone number: AIG Life Insurance
Company, Attention: Variable Products, One Alico Plaza, 600 King Street,
Wilmington, Delaware 19801, (877) 299-1724.
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FEE TABLES
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Maximum Owner Transaction Expenses
Sales Load................................................................ None
Partial Withdrawal Charge(1)(3)........................................... $200
Charge for Surrender(2)(3)................................................ $200
Transfer Fee (after twelve in a Contract Year)(4)......................... $ 10
Variable Account Annual Expenses (as a percentage of average account value)
Mortality and Expense Risk Charge......................................... 1.25%
(1) We do not currently impose a charge for partial withdrawals, which are
only permitted under annuity options 6, 7, 13 and 14. However, we reserve
the right to assess a transaction charge of up to $200 at the time of a
withdrawal.
(2) Surrender rights are available for annuity options 8 through 14. The
charge is assessed if you surrender your contract as permitted during the
first eighteen months from the Contract Date.
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(3) For the amount available when you make a partial withdrawal or a
surrender, see "Computing the Partial Withdrawal Amount" and "Computing
the Surrender Value." For tax consequences, see "Tax Treatment of
Distributions - Qualified Contracts" and "Tax Treatment of Distributions -
Non-Qualified Contracts."
(4) We do not currently impose a charge on transfers among the subaccounts or
to the fixed account although we reserve the right to impose a fee of $10
per transfer after the first 12 transfers during a Contract Year.
Annual Portfolio Expenses
After Waivers/Reimbursement
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Management Other Total Annual
Fees(1) Expenses(1) Portfolio Expenses(2)
<S> <C> <C> <C>
Equity Growth Portfolio 0.29% 0.56% 0.85%
Fixed Income Portfolio 0.14% 0.56% 0.70%
International Magnum Portfolio 0.29% 0.87% 1.16%
Mid Cap Growth Portfolio (annualized) 0.00% 1.05% 1.05%
Money Market Portfolio 0.08% 0.47% 0.55%
Technology Portfolio (annualized) 0.00% 1.15% 1.15%
Value Portfolio 0.18% 0.67% 0.85%
</TABLE>
(1) Management fees and other expenses are based on the expenses outlined in
the prospectus for the Universal Institutional Funds.
(2) Total annual portfolio expenses for the following portfolios before
waivers and reimbursement by Morgan Stanley Asset Management for the year
ended December 31, 1999, were as follows:
<TABLE>
<S> <C> <C> <C>
Equity Growth Portfolio 0.55% 0.56% 1.11%
Fixed Income Portfolio 0.40% 0.56% 0.96%
International Magnum Portfolio 0.80% 0.87% 1.67%
Mid Cap Growth Portfolio 0.75% 7.31% 8.06%
(annualized) 0.30% 0.47% 0.77%
Money Market Portfolio 0.80% 11.77% 12.57%
Technology Portfolio (annualized) 0.55% 0.67% 1.22%
Value Portfolio
</TABLE>
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CONDENSED FINANCIAL INFORMATION
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Historical accumulation unit values are not included because no contracts have
been issued using the subaccounts described in this prospectus.
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INVESTMENT OPTIONS
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Variable Investment Options
Variable Account I
Our board of directors authorized the organization of the variable account in
1986. The variable account is maintained pursuant to Delaware insurance law and
is registered with the SEC as a unit investment trust under the Investment
Company Act of 1940, as amended (the "1940 Act"). However, the SEC does not
supervise the management or the investment practices of the variable account.
We own the assets in the variable account and use them to support the variable
portion of your contract and other variable annuity contracts described in other
prospectuses. The variable account's assets are separate from our other assets
and are not chargeable with liabilities arising out of any other businesses we
conduct. Income, gains or losses, whether or not realized, are credited to or
charged against the subaccounts of the variable account without regard to
income, gains or losses arising out of any of our other businesses. As a result,
the investment performance of each subaccount of the variable account is
entirely independent of the investment performance of our general account and of
any other of our variable accounts.
The variable account is divided into subaccounts, each of which invests in
shares of a different portfolio of a mutual fund. The variable account maintains
subaccounts that are not available under the contract. We may, from time to
time, and in our sole discretion, add, remove or close subaccounts to new
premium or transfers if marketing needs, tax or regulatory considerations or
investment conditions warrant. No substitution of shares of one portfolio for
another will be made until you have been notified and we have complied with
legal requirements. If deemed to be in the best interest of persons having
voting rights under the contract, the variable account may be operated as a
management company under the 1940 Act, may be deregistered under that Act in the
event such registration is no longer required, or may be combined with one or
more other variable accounts.
The Fund and Its Portfolios
Universal Funds is a mutual fund registered with the SEC. It has additional
portfolios that are not available under the contract. As the fund's investment
adviser, Morgan Stanley Asset Management may compensate us for providing
administrative services in connection with the portfolios of the fund offered
under the contract. Such compensation will be paid from its assets.
You should carefully read the Universal Funds' prospectus before investing. It
is attached to this prospectus and contains detailed information regarding
management of the portfolios, investment objectives, investment advisory fees,
and other charges. The prospectus also discusses the risks involved in investing
in the portfolios. Below is a summary of the investment objectives of the
portfolios available under the contract. There is no assurance that any of these
portfolios will achieve its stated objectives.
Universal Institutional Funds, Inc.
Equity Growth Portfolio seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of medium and large
capitalization companies. Its adviser seeks to maximize long-term capital
appreciation by investing primarily in the equity securities of U.S. and, to a
limited extent, foreign companies that exhibit strong or accelerating earnings
growth. The universe of eligible companies generally includes those with a
market capitalization of $1 billion or more. The adviser emphasizes individual
security selection and may focus the portfolio's holdings within the limits
permissible for a diversified fund.
Fixed Income Portfolio seeks above-average total return over a market cycle of
three to five years by investing primarily in a diversified mix of dollar
denominated investment grade fixed income securities, particularly U.S.
government,
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corporate and mortgage securities. The portfolio ordinarily will maintain an
average weighted maturity in excess of five years. The portfolio may invest
opportunistically in non-dollar denominated securities and below investment
grade securities; and it may use futures, swaps and other types of derivatives
in managing the portfolio.
International Magnum Portfolio seeks long-term capital appreciation by investing
primarily in equity securities of non-U.S. issuers domiciled in EAFE countries.
EAFE countries include Japan, most nations in Western Europe and the more
developed nations of Asia, such as Hong Kong and Singapore. However, the
portfolio also may invest up to 5% of its assets in countries not included in
the EAFE Index, including emerging market countries. Its adviser seeks to
achieve superior long-term returns by creating a diversified portfolio of
undervalued international equity securities. To achieve this goal, the adviser
uses a combination of strategic geographic asset allocation and fundamental,
value oriented stock selection.
Mid Cap Growth Portfolio seeks long-term capital growth by investing primarily
in common stocks of companies with a capitalization in the range of companies
included in the S&P MidCap 400 Index (currently $500 million to $6 billion). Its
adviser focuses on companies that demonstrate one or more of the following
characteristics: high earnings growth rates, growth stability, rising
profitability and the ability to produce earnings that consistently beat market
expectations.
Money Market Portfolio seeks to maximize current income and preserve capital
while maintaining high levels of liquidity. Its adviser and Morgan Stanley Dean
Witter Advisors Inc., as its sub-adviser, seek as high a level of current income
as is consistent with preservation of capital while maintaining liquidity by
investing in money market instruments with effective maturities of 397 days or
less. In selecting investments, the adviser and subadviser seek to maintain a
share price of $1.00 per share.
Technology Portfolio seeks long-term capital appreciation by investing primarily
in equity securities of companies that its adviser expects to benefit from their
involvement in technology and technology-related industries. The adviser seeks
to maximize long-term capital appreciation by identifying significant long-term
technology trends and by investing primarily in companies the adviser believes
are positioned to benefit materially from these trends.
Value Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in common stocks of companies with an equity
capitalization greater than $2.5 billion. The portfolio focuses on stocks that
are undervalued in comparison with the stock market as a whole, as measured by
the S&P 500 Index. The portfolio may purchase stocks that do not pay dividends.
The portfolio may invest, to a limited extent, in foreign equity securities.
Fixed Investment Option
Premium you allocate to the fixed investment option goes into our general
account. The general account is not registered with the SEC. The general account
is invested in assets permitted by state insurance law. It is made up of all of
our assets other than assets attributable to our variable accounts. Unlike our
variable account assets, assets in the general account are subject to claims of
contract owners like you, as well as claims made by our other creditors.
To the extent that you allocate premium or transfer amounts into the fixed
investment option, we guarantee that the amount of the annuity payments you
receive will be unaffected by investment performance.
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CHARGES AND DEDUCTIONS
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Mortality and Expense Risk Charge
As part of our calculation of the value of Annuity Units during the income
phase, we deduct the mortality and expense risk charge on a daily basis. The
mortality and expense risk charge is equal, on an annual basis, to a percentage
of the daily value of the variable portion of your contract. We may offer
different rates to different groups, based upon our assessment of the risks that
are involved. Once the charge is established it will not change for the group.
The maximum rate we will charge any group is 1.25%. The charge compensates us
for the expenses of administering the contract, for assuming the risk that we
will have to make annuity payments for longer than we anticipate and for
assuming the risk that current charges will be insufficient in the future to
cover the costs associated with the contract. If the charges under the contract
are not sufficient, we will bear the loss. If the charges are sufficient, we
will keep the balance of this charge as profit.
Transaction Charges
Partial Withdrawals. Annuity options 6, 7, 13 and 14 offer partial withdrawal
rights. We do not currently charge for this benefit, but we reserve the right to
assess a charge of up to $200 at the time of a withdrawal.
Complete Surrenders. Annuity options 8 through 14 offer complete surrender
rights within eighteen months of the Contract Date. There is a $200 transaction
charge at surrender.
For the amount available when you make a withdrawal or surrender, see "Computing
the Partial Withdrawal Amount" and "Computing the Surrender Value."
Premium Taxes
We will deduct from your premium any premium tax imposed on us by the state or
locality where you reside. Premium taxes currently imposed on the contract by
various states range from 0% to 1% of premium for qualified contracts and from
0% to 3.5% of premium for non-qualified contracts. In addition, some local
governments may also levy a premium tax. These taxes are deducted from your
premium in determining the amount of income.
Income Taxes
Although we do not currently deduct any charge for income taxes or federal
deferred acquisition cost taxes (also referred to as DAC taxes) attributable to
your contract, we reserve the right to do so in the future.
Fund Expenses
There are deductions from and expenses paid out of the assets of the various
portfolios. These charges are described in the prospectus for the Universal
Funds and are summarized in the fee table.
Reduction of Certain Charges and Additional Amounts Credited
We may charge a mortality and expense risk charge that is lower than the maximum
charge, reduce or eliminate transaction charges or lower the minimum single
premium requirement when the contract is sold to groups of individuals under
circumstances which reduce our sales, administrative, or any other expenses or
mortality risks. We may also vary the initial monthly annuity rate per $1 of
premium. Any variation in charges under the contract will reflect differences in
costs, services or risks, and will not be unfairly discriminatory. We will
determine the eligibility of such groups by considering factors such as:
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(1) the size and nature of the group;
(2) the total amount of premium we expect to receive from the group;
(3) any other circumstances which we believe to be relevant in
determining whether reduced sales, administrative or any other
expenses or mortality risks may be expected.
Any reduction or elimination may be withdrawn or modified by us.
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THE CONTRACT
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General Description
An annuity is a contract between you, as the owner, and a life insurance
company. The contract provides guaranteed income in the form of annuity payments
beginning on the Income Start Date you select, which must be within 12 months
after the Contract Date.
The contract is called a variable annuity because you can allocate your money
among variable investment options. Each subaccount of our variable account
invests in shares of a corresponding portfolio of a mutual fund. Depending on
market conditions, the various portfolios may make or lose money. If you
allocate money to the portfolios, the amount of the variable annuity payments
will depend on the investment performance of the portfolios you select.
The contract also has a fixed investment option that is part of our general
account. Each annuity payment from the fixed portion of your contract will be
for the same amount and will not vary with investment performance. However, a
fixed annuity payment will vary according to any partial withdrawal you make as
permitted by certain annuity options we may offer.
Purchasing a Contract
The minimum investment for both qualified and non-qualified contracts is
$20,000. We may refuse any premium. In general, we will not issue a contract to
anyone who is over age 80, but we reserve the right to lower or increase this
age for new contracts.
Allocation of Premium
When you purchase a contract, you will tell us how to allocate your premium
among the investment options. At the time of application, we must receive your
premium before the contract will be effective. We will issue your contract and
allocate your premium within two business days. If you do not give us all the
necessary information we need to issue the contract, we will contact you to
obtain it. If we are unable to complete this process within five business days,
we will send your money back unless you authorize us to keep it until we get all
the necessary information.
Right to Examine Contract
If you change your mind about owning this contract, you can cancel it within ten
days after receiving it (or longer if required by state law) by mailing it back
to us at AIG Life Insurance Company, Attention: Variable Products, One Alico
Plaza, 600 King Street, Wilmington, Delaware 19801. You will receive the value
of your contract calculated on the day we receive your request, which may be
more or less than the money you invested. No charges will be deducted, however
you bear the investment risk during that time.
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In certain states or if you purchase your contract as an individual retirement
annuity, we may be required to return your premium. If you cancel your contract
during the right to examine period, we will return to you an amount equal to
your premium.
Transfers Among Investment Options
You can transfer a portion of your premium that is allocated to provide variable
annuity payments and reallocate them among the investment options by written
request or by telephone. We reserve the right to charge $10 per transfer after
the first 12 transfers in a Contract Year. You may not make transfers from the
fixed investment option to a variable investment option, but you may make
transfers from the variable investment options to the fixed investment option or
to other variable investment options.
The minimum amount you can transfer is $50 per month of income. Your transfer
request must clearly state which investment options are involved and the amount
of the transfer.
We will accept transfers by telephone from you, your representative or anyone
else designated by you. Neither we nor Universal Funds will be liable for
following telephone instructions we reasonably believe to be genuine or for any
loss, damage, cost or expense in acting on such instructions. We have in place
procedures to provide reasonable assurance that telephone instructions are
genuine.
We reserve the right to modify, suspend or terminate the transfer provisions at
any time. In particular, in order to prevent excessive use of the exchange
privilege that may potentially disrupt the management of the Universal Funds and
increase transaction costs we reserve the right to reject telephone exchange
requests placed by any one person on behalf of more than one contract and
require that they be submitted by U.S. mail.
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ANNUITY PAYMENTS
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Generally
Beginning on the Income Start Date, the Annuitant will receive periodic annuity
payments. You may choose annuity payments that are fixed, variable, or a
combination of fixed and variable. We make annuity payments on a monthly,
quarterly, semiannual, or annual basis.
You select the Income Start Date, which must be the first day of a month within
12 months after the Contract Date. In addition, annuity payments must begin by
the Annuitant's 80th birthday. If a state requires that annuity payments begin
prior to such date, we must comply with those requirements.
We will make annuity payments to you as the Annuitant unless, in the case of
non-qualified contracts only, you designate another person to receive them. In
that case, you must notify us in writing at least fifteen days before the Income
Start Date. You will remain fully responsible for any taxes related to the
annuity payments.
Annuity Options
The contract offers the fourteen annuity options described below, but certain of
these options may not be available to all groups. We may make other annuity
options available subject to our discretion. If your annuity payments would be
less than $100 a month, we have the right to change the frequency of your
payment so that the payments are at least $100.
Annuity options 6, 7, 13 and 14 have partial withdrawal rights. Annuity options
8 through 14 have surrender rights. For additional information about these
rights, see "Partial Withdrawal Rights" and "Complete Surrender of the Contract
(Redemption)." For tax consequences, see "Tax Treatment of Distributions -
Qualified Contracts" and "Tax Treatment of Distributions - Non-Qualified
Contracts."
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Option 1 - Life Annuity
Under this option, we will make annuity payments as long as the Annuitant is
alive. Annuity payments stop when the Annuitant dies.
Option 2 - Life Annuity With a Guaranteed Number of Years
This option is similar to option 1 above with the additional guarantee that
payments will be made for a particular number of years. Under this option, if
the Annuitant dies before all guaranteed payments have been made, the rest will
be paid to the beneficiary for the remainder of the period.
Option 3 - Joint and Survivor Annuity
Under this option, we will make annuity payments as long as either the Annuitant
or Joint Annuitant is alive. Upon the death of the Annuitant, we will continue
to make annuity payments so long as the Joint Annuitant is alive, however the
amount of the remaining annuity payments will be a percentage of the amount that
was payable while the Annuitant was alive. If your contract is issued as an
individual retirement annuity, payments under this option will be made only to
you as Annuitant.
Option 4 - Joint and Survivor Annuity With a Guaranteed Number of Years
This option is similar to option 3 above with the additional guarantee that
payments will be made for a particular number of years. Under this option, if
both the Annuitant and the Joint Annuitant die before all guaranteed payments
have been made, the rest will be paid to the beneficiary for the remainder of
the period.
Option 5 - Life Annuity With Cash Refund
Under this option, we will make annuity payments as long as the Annuitant is
alive. If the Annuitant dies before receiving aggregate annuity payments at
least equal to the premium paid less any premium tax, the difference will be
paid to the beneficiary in a lump sum.
Option 6 - Life Annuity With a Guaranteed Number of Years (partial withdrawal
rights)
This option is similar to option 2 above with the additional benefit of partial
withdrawal rights.
Option 7 - Joint and Survivor Annuity With a Guaranteed Number of Years (partial
withdrawal rights)
This option is similar to option 4 above with the additional benefit of partial
withdrawal rights.
Option 8 - Life Annuity (surrender rights)
This option is similar to option 1 above with the additional benefit of
surrender rights. Under this option, we will make annuity payments as long as
the Annuitant is alive. Annuity payments stop when the Annuitant dies.
Option 9 - Life Annuity With a Guaranteed Number of Years (surrender rights)
This option is similar to option 8 above with the additional guarantee that
payments will be made for a particular number of years. Under this option, if
the Annuitant dies before all guaranteed payments have been made, the rest will
be paid to the beneficiary for the remainder of the period.
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Option 10 - Joint and Survivor Annuity (surrender rights)
This option is similar to option 3 above with the additional benefit of
surrender rights. Under this option, we will make annuity payments as long as
either the Annuitant or Joint Annuitant is alive. Upon the death of the
Annuitant, we will continue to make annuity payments so long as the Joint
Annuitant is alive, however the amount of the remaining annuity payments will be
a percentage of the amount that was payable while the Annuitant was alive.
Option 11 - Joint and Survivor Annuity With a Guaranteed Number of Years
(surrender rights)
This option is similar to option 10 above with the additional guarantee that
payments will be made for a particular number of years. Under this option, if
both the Annuitant and the Joint Annuitant die before all guaranteed payments
have been made, the rest will be paid to the beneficiary for the remainder of
the period.
Option 12 - Life Annuity With Cash Refund (surrender rights)
This option is similar to option 5 above with the additional benefit of
surrender rights. Under this option, we will make annuity payments as long as
the Annuitant is alive. If the Annuitant dies before receiving aggregate annuity
payments at least equal to the premium paid less any premium tax, the difference
will be paid to the beneficiary in a lump sum.
Option 13 - Life Annuity With a Guaranteed Number of Years (partial withdrawal
and surrender rights)
This option is similar to option 2 above with the additional benefit of partial
withdrawal and surrender rights
Option 14 - Joint and Survivor Annuity With a Guaranteed Number of Years
(partial withdrawal and surrender rights)
This option is similar to option 4 above with the additional benefit of partial
withdrawal and surrender rights.
Annuity Units
Upon receiving your single premium, we calculate the number of Annuity Units
associated with each annuity payment as determined by our currently used annuity
rate factors. The Annuity Unit value for each portfolio will vary from one
Valuation Period to the next based on the investment experience of the assets in
the portfolio and the deduction of certain charges and expenses. The SAI
contains an explanation of how Annuity Units are valued.
Determination of the Initial Annuity Payment
The following factors determine the amount of the first annuity payment:
o the portion of the premium allocated to provide variable annuity payments
and the Assumed Investment Return;
o the portion of the premium allocated to provide fixed annuity payments and
prevailing fixed interest rates;
o the age and sex of the Annuitant (and Joint Annuitant, if any);
o the annuity option selected;
o the frequency of annuity payments;
o the deduction of applicable premium taxes; and
o the time period from the Contract Date to the Income Start Date.
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Determination of Subsequent Variable Annuity Payments
On each Income Change Date, we will recalculate the variable annuity payments to
reflect the performance of the investment options you chose after the investment
performance is adjusted by the Assumed Investment Return. We determine the
dollar amount of the variable annuity payment as follows. The portion of the
first annuity payment funded by a particular subaccount is divided by the
Annuity Unit value for that subaccount as of the Contract Date. This establishes
the number of Annuity Units provided by each subaccount for each subsequent
variable annuity payment.
The number of Annuity Units for each subaccount will generally remain constant,
subject to the following exceptions:
o If you make a partial withdrawal, as permitted under annuity options 6, 7,
13 and 14, the number of Annuity Units will decrease during the guaranteed
period, but will be restored after the guaranteed period ends.
o If you transfer value from one investment option to another.
o Upon the first to die where a joint and survivor annuity option (less than
100%) was selected.
The number of Annuity Units for each subaccount is multiplied by the Annuity
Unit value for that subaccount for the Valuation Date for which the payment is
being calculated. The sum of these figures for all the subaccounts in which you
invest establishes the dollar amount of the variable annuity payment.
The variable annuity payments will remain level until the next Income Change
Date. Subsequent variable annuity payments may be more or less than the
previously calculated variable annuity payments depending on whether the net
investment performance of the selected investment options is greater than or
less than the Assumed Investment Return.
On the Income Start Date and each Income Change Date thereafter, we will
calculate the amount of money necessary to make expected payments until the next
Income Change Date. We will transfer that amount to our general account.
Assumed Investment Return
The amount of the annuity payments provided by the portion of the premium
allocated to provide variable income depends on the assumption made about future
investment performance after the deduction of the mortality and expense risk
charge and the portfolio expenses. This assumption is called the Assumed
Investment Return ("AIR"). The AIR not only determines the initial level of
income, but also how future investment performance affects annuity payments.
Generally, the AIR used is 5%, but on occasion another AIR, for example 3.5%,
may be offered to certain groups.
A higher AIR will result in a larger initial payment, but future increases in
the annuity payment will be smaller than with a lower AIR. If net performance
for a year (that is, after deducting all charges) is exactly equal to the AIR,
the level of the variable annuity payment will not change. If the net
performance is less than the AIR, annuity payments will decrease. If the net
performance is more than the AIR, annuity payments will increase. For example,
payments based on a 5% AIR would mean a higher initial payment, but payments
would increase more slowly in a rising market and decline more rapidly in a
falling market. Payments based on a 3.5% AIR would mean a lower initial payment,
but payments would increase more rapidly in a rising market and decline more
slowly in a falling market.
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ACCESS TO YOUR MONEY
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Generally
Depending on the annuity option you select and whether you are the Annuitant,
there are three ways to receive money under your contract:
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1. You may receive annuity payments according to the annuity option you
select.
2. If you select annuity option 6, 7, 13 or 14, each of which
guarantees that payments will be made for a certain period of time
regardless of whether you live or die, you may elect to receive a
portion of the present value of the variable annuity payments
remaining in the guaranteed period as long as your continuing
periodic payment is at least $100.
3. If you select any one of annuity options 8 through 14, you may
completely surrender your contract for its surrender value within
eighteen months after the Contract Date.
Partial Withdrawal Rights
If you select annuity option 6, 7, 13 or 14, at any time after the right to
examine period has ended, you may request a partial withdrawal from your
contract. Partial withdrawals are only available under annuity options 6, 7, 13
or 14, which are either a single or joint life annuity with payments guaranteed
for a minimum number of years (referred to as the guaranteed period). Partial
withdrawals are available under both the variable and the fixed payouts for
these annuity options. To effect a partial withdrawal, the contract must be in
force, the guaranteed period must not have expired, and you must meet the
minimums described below. Only one partial withdrawal is permitted during any
Contract Year. The minimum partial withdrawal amount is $5,000. The remaining
periodic annuity payments after the partial withdrawal must be at least $1,200
on an annualized basis.
Partial Withdrawals Reduce Your Payment During the Guaranteed Period
If you make a partial withdrawal you will still receive a periodic payment, but
it will result in a reduction of the remaining periodic payments during the
guaranteed period. After the guaranteed period, the amount of the annuity
payments will be unaffected by any prior partial withdrawal, but we will make
annuity payments only as long as the Annuitant is alive in the case of a single
life annuity option and as long as either the Annuitant or the Joint Annuitant
is alive in the case of a joint life annuity option.
You tell us how much to reduce the annuity payments during the remaining
guaranteed period. We will compute the partial withdrawal payment based on the
reduction. Unless you tell us otherwise, we will first reduce the variable
component and then the fixed component to the extent needed to meet the
requested amount. Since the amount of annuity payments changes on the next
Income Change Date, the reduction in annuity payments due to the partial
withdrawal (but not the payment of the partial withdrawal amount) will be
delayed until that time.
Computing the Partial Withdrawal Amount
If you make a partial withdrawal, we will calculate your partial withdrawal lump
sum amount based on the amount by which you reduce your periodic payments. In
processing your partial withdrawal request, we determine the amount to be paid
to you in a three-part process. First, we determine the amount resulting from a
reduction in the variable component of the annuity payment for the remaining
annuity payments during the guaranteed period beginning after the next Income
Change Date. We calculate this amount using the Annuity Unit value next computed
after we receive your request and the current number of Annuity Units for each
subaccount as the present value of the reduction in annuity payments using the
AIR. Second, we determine the amount resulting from a reduction in the fixed
component of the annuity payments for the remaining annuity payments during the
guaranteed period beginning after the next Income Change Date. We calculate this
amount as the present value of the reduction in annuity payments using an
interest rate that reflects the current interest rate environment. We use the
commutation interest rate, which is determined each time an amount is allocated
to the fixed component, plus the change in the 10 Year Constant Maturity U.S.
Treasuries since the allocation was made. If more than one allocation has been
made to the fixed component, then we will use a last in-first out accounting
method. Third, we deduct a partial withdrawal charge, if any. Currently there is
none, but we reserve the right to charge $200 for each partial withdrawal.
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Example of Computing a Partial Withdrawal: Suppose you have chosen to receive a
life annuity with ten years guaranteed with a 100% variable annuity payment. You
have been receiving monthly payments for five years and your last monthly
payment was for $1,000. You tell us you want to make a partial withdrawal by
reducing your monthly payment to $100. Since the guaranteed period has five
years left, we will determine the present value of your five-year reduction and
pay that out to you. Your $100 monthly payment is still subject to a variable
payout, and could go up or down. Suppose that during the next five years your
investment selections have done well, and at the end of the period you are
receiving $150, so that your payment has increased by 50% (this is hypothetical
and no representation is made as to actual performance). When the guaranteed
period is over, you would begin to receive $1,500 per month rather than $1,000
per month (representing the same 50% gain on amounts not withdrawn). However,
poor investment results would have the opposite result and reduce your monthly
income.
Complete Surrender Of The Contract (Redemption)
If you select any one of annuity options 8 through 14, at any time within
eighteen months after the Contract Date you may request a complete surrender of
your contract. It is available under both the variable and the fixed payouts
under these annuity options. To effect a complete surrender the contract must be
in force and the primary Annuitant must be alive. A complete surrender is not
available after eighteen months from the Contract Date.
If you surrender your contract, we will pay you a lump sum amount. You will
receive no other payments.
Computing the Surrender Value
If you surrender your contract, we determine the amount to be paid to you in a
four-part process. First, we determine the amount of the variable component of
the remaining annuity payments after the next Income Change Date. We calculate
this amount using the Annuity Unit value next computed after we receive your
request and the current number of Annuity Units for each subaccount as the
present value using the AIR and the mortality rates used to initially determine
annuity payments. Second, we determine the present value of variable payments
through the next Income Change Date as the present value of those payments using
the AIR and the mortality rates used to initially determine annuity payments.
Third, we determine the amount attributable to the fixed component of the
annuity payments. We calculate this amount as the present value of all future
income using an interest rate that reflects the current interest rate
environment and the mortality rates used to initially determine annuity
payments. We use the commutation interest rate, which is determined each time an
amount is allocated to the fixed component, plus the change in the 10 Year
Constant Maturity U.S. Treasuries since the allocation was made. Finally, we
deduct the $200 charge.
Example of Computing a Complete Surrender: Suppose you have chosen to receive a
life annuity and a 100% variable annuity payout and that your last monthly
payment was $1,000, and you then requested a complete surrender within 18 months
of your Contract Date. We would calculate the present value of the Annuity Units
we would expect to pay over your lifetime, using the AIR and mortality tables,
and pay you that amount, less the $200 transaction charge. You would receive no
further benefits.
Deferment of Payments
We may delay making fixed annuity payments, including partial withdrawals and
surrenders, for up to six months subject to state law. We will credit interest
to you during that period.
We may suspend or postpone making variable annuity payments, including partial
withdrawals and surrenders, and processing transfer requests for an undetermined
period of time when:
o the New York Stock Exchange is closed (other than weekend and holiday
closings);
o trading on the New York Stock Exchange is restricted;
o an emergency exists such that disposal of or determination of the value of
shares of the portfolios is not reasonably practicable;
o the SEC by order so permits for the protection of investors.
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DEATH BENEFIT
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Death Prior to Income Start Date
If no Annuitant or Joint Annuitant is alive on the first Income Start Date, the
contract will be canceled and we will pay you a refund equal to your premium,
adjusted for any investment performance and any accumulated interest.
If your contract is a joint and survivor annuity and either you or the Joint
Annuitant die before the first Income Start Date, we will adjust the annuity
income so that it equals what would have been paid under a single life annuity
issued to the survivor. This will usually result in greater annuity income.
Death of Owner After the Income Start Date
If you are not the Annuitant, and if your death occurs on or after the Income
Start Date, no death benefit will be payable under the contract. Any guaranteed
payments remaining unpaid will continue to be paid to the Annuitant pursuant to
the annuity option in force at the date of your death. If the contract is not
owned by an individual, the Annuitant shall be treated as the owner.
Death of Annuitant After the Income Start Date
If an Annuitant dies after the Income Start Date, the remaining payments, if
any, will be as specified in the annuity option in effect when the Annuitant
died. We will require proof of the Annuitant's death. The remaining benefit, if
any, will be paid to the beneficiary at least as rapidly as under the method of
distribution in effect at the Annuitant's death. If you were not the Annuitant
and no beneficiary survives the Annuitant, we will pay any remaining benefit to
you.
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PERFORMANCE
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Occasionally, we may advertise certain performance information concerning one or
more of the subaccounts, including average annual total return and yield
information. A subaccount's performance information is based on its past
performance only and is not intended as an indication of future performance.
Average annual total return is based on the overall dollar or percentage change
in value of a hypothetical investment. When we advertise the average annual
total return of a subaccount, it reflects changes in the portfolio share price,
the automatic reinvestment by the subaccount of all distributions, and the
deduction of contract charges. Average annual total return is the hypothetical
annually compounded return that would have produced the same cumulative total
return if the performance had been constant over the entire period.
When we advertise the yield of a subaccount, we will calculate it based upon a
given thirty-day period. The yield is determined by dividing the net investment
income earned by the subaccount during the period by the value of the subaccount
on the last day of the period.
When we advertise the performance of the money market subaccount, we may
advertise the yield or the effective yield in addition to the average annual
total return. The yield of the money market subaccount refers to the income
generated by an investment in that subaccount over a seven-day period. The
income is then annualized (i.e., the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment). The effective yield is
calculated similarly but when annualized the income earned by
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an investment in the money market subaccount is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment during a 52-week period.
Average annual total return at the variable account level is lower than at the
underlying portfolio level since it is reduced by the mortality and expense risk
charge. Similarly, yield and effective yield at the variable account level are
lower than at the portfolio level because they are reduced by the mortality and
expense risk charge.
Performance information for a subaccount may be compared in reports and
advertising to:
(1) the Standard & Poor's 500 Stock Index, Dow Jones Industrial Average,
Donoghue Money Market Institutional Averages, indices measuring
corporate bond and government security prices as prepared by Lehman
Brothers, Inc. and Salomon Brothers, or other indices measuring
performance of a pertinent group of securities so that investors may
compare a portfolio's results with those of a group of securities
widely regarded by investors as representative of the securities
markets in general;
(2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services (a widely used
independent research firm which ranks mutual funds and other
investment companies by overall performance, investment objectives,
and assets), or tracked by other ratings services, companies,
publications, or persons who rank separate accounts or other
investment products on overall performance or other criteria;
(3) the Consumer Price Index (measure for inflation) to assess the real
rate of return from an investment in the contract; and
(4) indices or averages of alternative financial products available to
prospective investors, including the Bank Rate Monitor which
monitors average returns of various bank instruments.
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TAXES
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Introduction
The following discussion of federal income tax treatment is general in nature
and is not intended as tax advice. This discussion is based on current law and
interpretations, which may change. For a discussion of federal income taxes as
they relate to the funds, please see the accompanying fund prospectuses. No
attempt is made to consider any applicable state or other tax laws. We do not
guarantee the tax status of your contract.
Annuity Contracts in General
The Internal Revenue Code (the "Code") provides special rules regarding the tax
treatment of annuity contracts. Generally, you will not be taxed on the earnings
in an annuity contract until you take the money out. Different rules apply
depending on how you take the money out and whether your contract is qualified
or non-qualified, as explained below.
If you do not purchase your contract under a retirement arrangement entitled to
favorable federal income tax treatment, your contract is referred to as a
non-qualified contract. If you purchase your contract under a retirement
arrangement entitled to favorable federal income tax treatment, your contract is
referred to as a qualified contract.
Tax Treatment of Distributions -- Qualified Contracts
If you purchase your contract under a tax-favored retirement plan or account,
your contract is referred to as a qualified contract. Examples of qualified
plans or accounts are:
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o Individual Retirement Annuities ("IRAs");
o Roth IRAs;
o Tax Deferred Annuities (governed by Code Section 403(b) and referred to as
"403(b) Plans");
o Keogh Plans; and
o Employer-sponsored pension and profit sharing arrangements such as 401(k)
plans.
Withdrawals in General
Generally, with the exception of a Roth IRA, you have not paid any taxes on the
premium used to buy a qualified contract or on any earnings. Therefore, any
amount you take out as annuity payments or as a withdrawal or on surrender will
be taxable income. In addition, a 10% tax penalty may apply to the taxable
income. This additional tax does not apply:
o in general, where the payment is a part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and his designated beneficiary;
o where the taxpayer is age 59 1/2 or older;
o where payment is made by reason of the death of an owner;
o where the payment is made on account of the taxpayer's disability;
o where the payment is made to pay certain medical expenses, certain health
insurance premiums, certain higher education expenses or qualified first
home purchases;
o in some cases, upon separation from service on or after age 55; or
o certain other limited circumstances.
Withdrawals Where Income Start Date Was After Age 59 1/2 -- No 10% Tax Penalty
Applies
Where the Income Start Date is after age 59 1/2, the 10% penalty tax will not
apply because of the age 59 1/2 exception described above.
Withdrawals Where Income Start Date Was Before Age 59 1/2 -- A Partial
Withdrawal Or Surrender May Trigger a 10% Tax Penalty Unless an Exception
Applies
If the Income Start Date is before age 59 1/2 and you relied on the exception
for substantially equal payments to avoid the 10% penalty, it should be noted
that a partial withdrawal or full surrender of the contract after the Income
Start Date but before the later of the taxpayer's reaching age 59 1/2 or 5 years
after the Income Start Date would be treated as changing the substantially equal
payments. In that event, payments excepted from the 10% penalty tax by reason of
the exception for substantially equal payments would be subject to recapture.
The recaptured tax is imposed in the year of the withdrawal or surrender (or
other modification) and is equal to the tax that would have been imposed had the
exception not applied. Interest is also due for the period between when the tax
would have been imposed and when the tax is recaptured. The possible application
of this recapture tax should be considered before making a partial withdrawal or
full surrender of the contract. You should also contact your tax adviser before
taking partial withdrawals or surrenders.
Example: Individual A is age 57 1/2 when he begins to receive annual
annuity payments of $10,000 from a traditional IRA (non-Roth
IRA). Since this is a qualified contract with no tax basis,
each payment of $10,000 is subject to tax. He receives
payments in 2000, 2001 and 2002
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when he is 57 1/2, 58 1/2 and 59 1/2 respectively. The amounts
are not subject to the 10% penalty tax because the payments
are substantially equal payments. In 2003, when A is age 60
1/2, he takes a partial withdrawal. In 2003, A must pay the
10% penalty tax on the annuity payments received in 2000 and
2001, and interest thereon. Therefore, A would owe the IRS a
recapture tax of $2,000 (10% of 10,000 each year for 2 years)
plus interest.
Individual Retirement Annuities
Code Section 408 permits eligible individuals to contribute to an IRA. By
attachment of an endorsement that reflects the limits of Code Section 408(b),
the contracts may be issued as an IRA. Contracts issued in connection with an
IRA are subject to limitations on eligibility, maximum contributions, and time
of distribution. Most IRAs cannot accept additional contributions after the
owner reaches 70 1/2, and must also begin required distributions at that age.
Distributions from certain retirement plans qualifying for federal tax
advantages may be rolled over into an IRA. In addition, distributions from an
IRA may be rolled over to another IRA, provided certain conditions are met.
Sales of the contract for use with IRAs are subject to special requirements,
including the requirement that informational disclosure be given to each person
desiring to establish an IRA. That person must be given the opportunity to
affirm or reverse a decision to purchase the contract. Contracts offered by this
prospectus in connection with an IRA are not available in all states.
Roth IRAs
Code Section 408A provides special rules for "Roth IRAs." The basic distinction
between a Roth IRA and a regular IRA is that contributions to a Roth IRA are not
deductible and "qualified distributions" from a Roth IRA are not includible in
gross income for federal income tax purposes. Other differences include the
ability to make contributions to a Roth IRA after age 70 1/2 and they are not
subject to required distributions. Taxpayers whose adjusted gross incomes exceed
certain levels are not eligible for Roth IRAs.
Rollovers
Distributions from a 401(a) qualified plan or 403(b) plan (other than
non-taxable distributions representing a return of capital, distributions
meeting the minimum distribution requirement, distributions for the life or life
expectancy of the recipient(s) or distributions that are made over a period of
more than 10 years) are eligible for tax-free rollover within 60 days of the
date of distribution, but are also subject to federal income tax withholding at
a 20% rate unless paid directly to another qualified plan, 403(b) plan or IRA. A
prospective owner considering use of the contract in this manner should consult
a competent tax adviser with regard to the suitability of the contract for this
purpose and for information concerning the tax law provisions applicable to
qualified plans, 403(b) plans, and IRAs.
Tax Treatment of Distributions -- Non-Qualified Contracts
General
For annuity payments, generally a portion of each payment will be considered a
return of your premium and will not be taxed. The remaining portion of each
payment is taxed at ordinary income rates. The nontaxable portion of variable
annuity payments is generally determined by a formula that establishes a
specific dollar amount of each payment that is not taxed.
After the full amount of your premium payment has been recovered tax-free, the
full amount of subsequent annuity payments will be taxable. If annuity payments
stop due to the death of the annuitant before the full amount of your purchase
payment has been recovered, a tax deduction is allowed for the unrecovered
amount.
Complete Surrenders
For payments made upon complete surrender of the annuity contract, the taxable
portion is the amount received in excess of the remaining investment in the
contract.
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Partial Withdrawal - Taxed as Ordinary Income First
The tax consequences of partial withdrawals after the Income Start Date are
unclear, including their effect on the tax treatment of distributions and
penalty taxes. However, as a general rule, partial withdrawals will be taxed to
the extent of earnings on the contract and only amounts in excess of earnings
will be treated as withdrawal of your investment in the contract, which is
generally not subject to taxation.
Example: Individual A's contract is worth $100,000 and A has remaining
investment in the contract of $80,000 when he makes a partial
withdrawal of $30,000. In this case, $20,000 would be subject
to income taxes in the year of withdrawal and the remaining
$10,000 would be treated as a tax-free return of basis.
A Partial Withdrawal or Surrender May Trigger an Additional 10% Tax Penalty
Unless an Exception Applies
If a taxable distribution is made under the contract, an additional tax of 10%
of the amount of the taxable distribution may apply. This additional tax does
not apply where:
o the payment is made under an immediate annuity contract, defined for these
purposes as an annuity (1) purchased with a single premium, (2) the
annuity starting date of which commences within one year from the date of
the purchase of the annuity, and (3) which provides for a series of
substantially equal periodic payments (to be made not less frequently than
annually) during the annuity period;
o the payment is a part of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy)
of the taxpayer or the joint lives (or joint life expectancies) of such
taxpayer and his designated beneficiary;
o the taxpayer is age 59 1/2 or older;
o the payment is made on account of the taxpayer's disability;
o the payment is made by reason of the death of an owner;
o and in certain other circumstances.
It should be noted that a partial withdrawal or full surrender of the contract
after the Income Start Date but before the later of the taxpayer's reaching age
59 1/2 or 5 years after the Income Start Date would be treated as changing
substantially equal payments. In that event, payments excepted from the 10%
penalty tax because they were considered part of substantially equal payments
would be subject to recapture. The recaptured tax is imposed in the year of the
withdrawal or surrender (or other modification) and is equal to the tax that
would have been imposed (plus interest) had the exception not applied. The
possible application of this recapture tax should be considered before making a
partial withdrawal or full surrender of the contract. You should also seek the
advice of your tax adviser.
Example: Individual A is age 57 1/2 when he begins to receive annual
annuity payments of $10,000. Of each annuity payment, $3,000
is subject to tax. He receives payments in 2000, 2001 and 2002
when he is 57 1/2, 58 1/2 and 59 1/2 respectively. The amounts
are not subject to the 10% penalty tax because the payments
are substantially equal payments. In 2003, when A is age 60
1/2, he takes a partial withdrawal. In 2003, A must pay the
10% penalty tax on the annuity payments received in 2000 and
2001, and interest thereon. Therefore, A would owe the IRS a
recapture tax of $600 (10% of 3,000 each year for 2 years)
plus interest.
Non-Qualified Contracts Owned by Non-Natural Persons
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As a general rule, non-qualified annuity contracts held by a corporation, trust
or other similar entity, as opposed to a natural person, are not treated as
annuity contracts for federal tax purposes. This rule does not apply where the
non-natural person is only the nominal owner, such as a trust or other entity
acting as an agent for a natural person. There is also an exception to this
general rule for immediate annuity contracts as defined in the prior section.
Corporations, trusts and other similar entities, other than natural persons,
seeking to take advantage of this exception for immediate annuity contracts
should consult with a tax adviser.
Section 1035 Exchanges
Code Section 1035 generally provides that no gain or loss shall be recognized on
the exchange of an annuity contract for another annuity contract unless money or
other property is distributed as part of the exchange. Special rules and
procedures apply to Section 1035 transactions. Prospective owners wishing to
take advantage of Section 1035 of the Code should consult their tax advisers.
Diversification and Investor Control
The Code imposes certain diversification requirements on the underlying
investments for a variable annuity to be treated as a variable annuity for tax
purposes. We believe that the portfolios are being managed so as to comply with
these requirements.
The tax regulations do not provide guidance as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, would be considered the owner of the shares of the portfolios. If
any guidance on this point is provided which is considered a new position, then
the guidance would generally be applied prospectively. However, if such guidance
is considered not to be a new position, it may be applied retroactively. This
would mean you, as the owner of the contract, could be treated as the owner of
assets in the portfolios. We reserve the right to make changes to the contract
we think necessary to see that it qualifies as a variable annuity contract for
tax purposes.
Withholding
We are required to withhold federal income taxes on annuity payments, partial
withdrawals, and complete surrenders that include taxable income unless the
payee elects not to have any withholding or in certain other circumstances. If
you do not provide a social security number or other taxpayer identification
number, you will not be permitted to elect out of withholding. Special
withholding rules apply to payments made to non-resident aliens.
For complete surrenders or partial withdrawals, we are required to withhold 10%
of the taxable portion of any withdrawal or lump sum distribution unless you
elect out of withholding. For annuity payments, the company will withhold on the
taxable portion of annuity payments based on a withholding certificate you file
with us. If you do not file a certificate, you will be treated, for purposes of
determining your withholding rates, as a married person with three exemptions.
You are liable for payment of federal income taxes on the taxable portion of any
withdrawal, distribution, or annuity payment. You may be subject to penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
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OTHER INFORMATION
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AIG Life Insurance Company
We are a stock life insurance company initially organized under the laws of
Pennsylvania and reorganized under the laws of Delaware. We were incorporated in
1962. Our principal business address is One Alico Plaza, 600 King Street,
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Wilmington, Delaware 19801. We provide a full range of life insurance and
annuity plans. We are a subsidiary of American International Group, Inc.
("AIG"), which serves as the holding company for a number of companies engaged
in the international insurance business in approximately 130 countries and
jurisdictions around the world.
We may occasionally publish in advertisements, sales literature and reports the
ratings and other information assigned to the company by one or more independent
rating organizations such as A.M. Best Company, Moody's and Standard & Poor's.
The purpose of the ratings is to reflect the rating organization's opinion of
our financial strength and our ability to meet our contractual obligations to
contract owners and should not be considered as bearing on the investment
performance of assets held in the variable account.
The ratings are not recommendations to purchase our life insurance or annuity
products or to hold or sell these products, and the ratings do not comment on
the suitability of such products for a particular investor. There can be no
assurance that any rating will remain in effect for any given period of time or
that any rating will not be lowered or withdrawn entirely by a rating
organization if, in such organization's judgment, future circumstances so
warrant. The ratings do not reflect the investment performance of the variable
account or the degree of risk associated with an investment in the variable
account.
Ownership
This prospectus describes a group single premium immediate variable annuity
contract. A group contract is issued to a contract holder for the benefit of the
participants in the group. If you are a participant in the group you will
receive a certificate evidencing your ownership. You, as the owner of a
certificate, are entitled to all the rights and privileges of ownership. As used
in this prospectus, the term contract is equally applicable to a certificate.
Voting Rights
To the extent required by law, we will vote the portfolio shares held in the
variable account at shareholder meetings in accordance with instructions
received from persons having a voting interest in the portfolio. However, if
legal requirements or our interpretation of present law changes to permit us to
vote the portfolio shares in our own right, we may elect to do so.
Prior to the Income Start Date, you have a voting interest in each portfolio in
whose corresponding subaccount you have value. We determine the number of
portfolio shares that are attributable to you by dividing the corresponding
value in a particular portfolio by the net asset value of one portfolio share.
After the Income Start Date, we determine the number of portfolio shares that
are attributable to you by dividing the reserve maintained in a particular
portfolio to meet the obligations under the contract by the net asset value of
one portfolio share. The number of votes that you will have a right to cast will
be determined as of the record date established by each portfolio.
We will solicit voting instructions by mail prior to the shareholder meeting.
Each person having a voting interest in a portfolio will receive proxy material,
reports and other materials relating to the appropriate portfolios. We will vote
shares in accordance with instructions received from the person having a voting
interest. We will vote shares for which we receive no timely instructions and
any shares not attributable to owners in proportion to the voting instructions
we have received.
The voting rights relate only to amounts invested in the variable account. There
are no voting rights with respect to funds allocated to the fixed investment
option.
Distribution of the Contract
Our affiliate, AIG Equity Sales Corp. ("AIGESC"), 70 Pine Street, New York, New
York, acts as the distributor of the contract. AIGESC is a wholly owned
subsidiary of AIG. We will not pay any commission to entities that sell the
contract. Payments may be made for services not directly related to the sale of
the contract, including the establishment of administrative arrangements,
recruitment and training of personnel, the distribution and production of
promotional literature, and similar services.
23
<PAGE>
Legal Proceedings
There are no pending legal proceedings which, in our judgment, are material with
respect to the variable account.
================================================================================
FINANCIAL STATEMENTS
================================================================================
Consolidated balance sheets of AIG Life Insurance Company are included in the
SAI and may be obtained without charge by calling (877) 299-1724 or writing to
AIG Life Insurance Company, Attention: Variable Products, One Alico Plaza, 600
King Street, Wilmington, Delaware 19801. A complete set of financial statements
has been filed electronically with the SEC and can be obtained through its
website at http://www.sec.gov. Financial statements of the variable account are
not included because no contracts have been issued using the subaccounts
described in this prospectus.
24
<PAGE>
================================================================================
APPENDIX
================================================================================
Hypothetical Illustrations Of Annuity Payments
We have prepared the following tables to show how variable annuity payments
under the contract change with investment performance over an extended period of
time. The tables illustrate how monthly annuity payments would vary over time if
the return on assets in the selected subaccounts were a uniform gross annual
rate of 0%, 6%, 7.23%, 8%, 10%, or 12%. The values would be different from those
shown if the returns averaged 0%, 6%, 7.23%, 8%, 10%, or 12%, but fluctuated
over and under those averages throughout the years.
The tables reflect the daily mortality and expense risk charge, which is
equivalent to an annual charge of 1.25%. The amounts shown in the tables also
take into account the portfolios' management fees and operating expenses, which
are assumed to be at an annual rate of 0.90% of the average daily net assets of
the portfolios. Actual fees and expenses of the portfolios associated with your
contract may be more or less than 0.90%, will vary from year to year, and will
depend on your allocation. See the section in your current prospectus entitled
"Fee Tables" for more complete details. The monthly annuity payments are
illustrated on a pre-tax basis. The federal income tax treatment of annuity
income considerations is generally described in the section of your prospectus
entitled "Taxes."
The tables show both the gross rate and the net rate. The difference between
gross and net rates represents the 1.25% for mortality and expense risk and the
assumed 0.90% for investment management and operating expenses. Since these
charges are deducted daily from assets, the difference between the gross and net
rate is not exactly 2.15%.
Two sets of tables follow -- one set for a male age 65 and the other for a
female age 60. The first table in each set assumes that 100% of the single
premium payment is allocated to a variable annuity option. The second assumes
that 50% of the single premium payment is allocated to a fixed annuity option
using the fixed crediting rate we offered on the fixed annuity option at the
time this illustration was prepared. Both sets of tables assume that a life
annuity with ten years guaranteed was purchased.
When part of the single premium payment has been allocated to the fixed annuity
option, the guaranteed minimum annuity payment resulting from this allocation is
also shown. The illustrated variable annuity payments use an assumed interest
rate of 5% per year. Thus, actual performance greater than 5% per year will
result in increasing annuity payments and actual performance less than 5% per
year will result in decreasing annuity payments. We may offer alternative
assumed interest rates. Fixed annuity payments remain constant. Initial monthly
annuity payments under a fixed annuity option are generally higher than initial
payments under a variable annuity option.
These tables show the monthly annuity payments for several hypothetical constant
assumed interest rates. Of course, actual investment performance will not be
constant and may be volatile. Actual monthly annuity payments would differ from
those shown if the actual rate of return averaged the rate shown over a period
of years, but also fluctuated above or below those averages from year to year.
Upon request, and when you are considering an annuity option, we will furnish a
comparable illustration based on your individual circumstances, including
purchase rates and the mortality and expense risk charge that would apply to
your group.
25
<PAGE>
ANNUITY PAYMENT ILLUSTRATION
(100% VARIABLE)
Single Premium Payment: $100,000
Sex: Male
Age: 65
Annuity Option Selected: Life Annuity with 10 Years Guaranteed
Frequency of Income Pay: Monthly
Fixed monthly annuity payment based on current rates, if 100% fixed for annuity
option selected: $776.97
Illustrative amounts below assume that 100% of the single premium payment is
allocated to a variable annuity option.
Assumed interest rate at which monthly variable payments remain constant: 5%
Variable monthly annuity payment on the date of the illustration: $675.60
Monthly annuity payments will vary with investment performance. No minimum
dollar amount is guaranteed.
Monthly Payments
With an Assumed Rate of Return of:
<TABLE>
<CAPTION>
Payment Calendar Attained Gross: 0.00% 7.23% 6.00% 8.00% 10.00% 12.00%
Year Year Age Net: -2.14% 5.00% 3.79% 5.76% 7.74% 9.71%
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2000 65 675.60 675.60 675.60 675.60 675.60 675.60
2 2001 66 629.67 675.60 667.79 680.50 693.21 705.91
3 2002 67 586.86 675.60 660.07 685.43 711.27 737.59
4 2003 68 546.96 675.60 652.44 690.40 729.81 770.68
5 2004 69 509.77 675.60 644.90 695.41 748.82 805.26
10 2009 74 358.49 675.60 608.48 720.98 851.61 1002.87
15 2014 79 252.11 675.60 574.11 747.50 968.51 1248.98
20 2019 84 177.30 675.60 541.69 774.99 1101.46 1555.48
</TABLE>
The assumed rates of return shown above are illustrative only and are not a
representation of past or future performance. Actual performance results may be
more or less than those shown and will depend on a number of factors, including
the investment allocations made by the contract owner and the various rates of
return of the portfolios selected. The amount of the annuity payment would be
different from that shown if the actual performance averaged the assumed rates
of return shown above over a period of years, but also fluctuated above or below
those averages from year to year. Since it is highly likely that the performance
will fluctuate from month to month, monthly annuity payments (based on the
variable account) will also fluctuate. No representation can be made by the
company or the fund that this hypothetical performance can be achieved for any
one year or sustained over any period of time.
Notes: Annuity payments are made during the Annuitant's lifetime. If the
Annuitant dies before payments have been made for the guaranteed period,
payments will continue to be paid to the beneficiary for the remainder of the
period. The cumulative amount of annuity payments received depends on how long
the Annuitant lives after the guaranteed period.
The illustrated net assumed rates of return reflect the deduction of average
fund expenses and the maximum mortality and expense risk charge from the gross
rates of return.
26
<PAGE>
ANNUITY PAYMENT ILLUSTRATION
(50% VARIABLE/50% FIXED)
Single Premium Payment: $100,000
Sex: Male
Age: 65
Annuity Option Selected: Life Annuity with 10 Years Guaranteed
Frequency of Income Pay: Monthly
Fixed monthly annuity payment based on current rates, if 100% fixed for annuity
option selected: $776.97
Illustrative amounts below assume that 50% of the single premium payment is
allocated to a variable annuity option.
Assumed interest rate at which monthly variable payments remain constant: 5%
Monthly annuity payments will vary with investment performance, but will never
be less than $388.49. The monthly guaranteed payment of $388.49 is being
provided by the $50,000 applied under the fixed annuity option.
Monthly Payments
With an Assumed Rate of Return of:
<TABLE>
<CAPTION>
Payment Calendar Attained Gross: 0.00% 7.23% 6.00% 8.00% 10.00% 12.00%
Year Year Age Net: -2.14% 5.00% 3.79% 5.76% 7.74% 9.71%
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2000 65 726.29 726.29 726.29 726.29 726.29 726.29
2 2001 66 703.32 726.29 722.38 728.73 735.09 741.44
3 2002 67 681.91 726.29 718.52 731.20 744.12 757.28
4 2003 68 661.96 726.29 714.71 733.69 753.39 773.83
5 2004 69 643.37 726.29 710.93 736.19 762.90 791.12
10 2009 74 567.73 726.29 692.72 748.98 814.29 889.92
15 2014 79 514.54 726.29 675.54 762.24 872.74 1012.98
20 2019 84 477.13 726.29 659.33 775.98 939.21 1166.23
</TABLE>
The assumed rates of return shown above are illustrative only and are not a
representation of past or future performance. Actual performance results may be
more or less than those shown and will depend on a number of factors, including
the investment allocations made by the contract owner and the various rates of
return of the portfolios selected. The amount of the annuity payment would be
different from that shown if the actual performance averaged the assumed rates
of return shown above over a period of years, but also fluctuated above or below
those averages from year to year. Since it is highly likely that the performance
will fluctuate from month to month, monthly annuity payments (based on the
variable account) will also fluctuate. No representation can be made by the
company or the fund that this hypothetical performance can be achieved for any
one year or sustained over any period of time.
Notes: Annuity payments are made during the Annuitant's lifetime. If the
Annuitant dies before payments have been made for the guaranteed period,
payments will continue to be paid to the beneficiary for the remainder of the
period. The cumulative amount of annuity payments received depends on how long
the Annuitant lives after the guaranteed period.
The illustrated net assumed rates of return reflect the deduction of average
fund expenses and the maximum mortality and expense risk charge from the gross
rates of return.
27
<PAGE>
ANNUITY PAYMENT ILLUSTRATION
(100% VARIABLE)
Single Premium Payment: $100,000
Sex: Female
Age: 60
Annuity Option Selected: Life Annuity with 10 Years Guaranteed
Frequency of Income Pay: Monthly
Fixed monthly annuity payment based on current rates, if 100% fixed for annuity
option selected: $683.08
Illustrative amounts below assume that 100% of the single premium payment is
allocated to a variable annuity option.
Assumed interest rate at which monthly variable payments remain constant: 5%
Variable monthly annuity payment on the date of the illustration: $577.87
Monthly annuity payments will vary with investment performance. No minimum
dollar amount is guaranteed.
Monthly Payments
With an Assumed Rate of Return of:
<TABLE>
<CAPTION>
Payment Calendar Attained Gross: 0.00% 7.23% 6.00% 8.00% 10.00% 12.00%
Year Year Age Net: -2.14% 5.00% 3.79% 5.76% 7.74% 9.71%
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2000 60 577.87 577.87 577.87 577.87 577.87 577.87
2 2001 61 538.58 577.87 571.19 582.06 592.93 603.80
3 2002 62 501.96 577.87 564.59 586.28 608.38 630.89
4 2003 63 467.84 577.87 558.06 590.53 624.23 659.20
5 2004 64 436.03 577.87 551.61 594.81 640.50 688.78
10 2009 69 306.64 577.87 520.46 616.69 728.42 857.80
15 2014 74 215.64 577.87 491.06 639.37 828.41 1068.31
20 2019 79 151.65 577.87 463.33 662.89 942.13 1330.47
</TABLE>
The assumed rates of return shown above are illustrative only and are not a
representation of past or future performance. Actual performance results may be
more or less than those shown and will depend on a number of factors, including
the investment allocations made by the contract owner and the various rates of
return of the portfolios selected. The amount of the annuity payment would be
different from that shown if the actual performance averaged the assumed rates
of return shown above over a period of years, but also fluctuated above or below
those averages from year to year. Since it is highly likely that the performance
will fluctuate from month to month, monthly annuity payments (based on the
variable account) will also fluctuate. No representation can be made by the
company or the fund that this hypothetical performance can be achieved for any
one year or sustained over any period of time.
Notes: Annuity payments are made during the Annuitant's lifetime. If the
Annuitant dies before payments have been made for the guaranteed period,
payments will continue to be paid to the beneficiary for the remainder of the
period. The cumulative amount of annuity payments received depends on how long
the Annuitant lives after the guaranteed period.
The illustrated net assumed rates of return reflect the deduction of average
fund expenses and the maximum mortality and expense risk charge from the gross
rates of return.
28
<PAGE>
ANNUITY PAYMENT ILLUSTRATION
(50% VARIABLE/50% FIXED)
Single Premium Payment: $100,000
Sex: Female
Age: 60
Annuity Option Selected: Life Annuity with 10 Years Guaranteed
Frequency of Income Pay: Monthly
Fixed monthly annuity payment based on current rates, if 100% fixed for annuity
option selected: $683.08
Illustrative amounts below assume that 50% of the single premium payment is
allocated to a variable annuity option.
Assumed interest rate at which monthly variable payments remain constant: 5%
Monthly annuity payments will vary with investment performance, but will never
be less than $341.54. The monthly guaranteed payment of $341.54 is being
provided by the $50,000 applied under the fixed annuity option.
Monthly Payments
With an Assumed Rate of Return of:
<TABLE>
<CAPTION>
Payment Calendar Attained Gross: 0.00% 7.23% 6.00% 8.00% 10.00% 12.00%
Year Year Age Net: -2.14% 5.00% 3.79% 5.76% 7.74% 9.71%
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2000 60 630.48 630.48 630.48 630.48 630.48 630.48
2 2001 61 610.83 630.48 627.14 632.57 638.00 643.44
3 2002 62 592.52 630.48 623.83 634.68 645.73 656.99
4 2003 63 575.46 630.48 620.57 636.81 653.66 671.14
5 2004 64 559.55 630.48 617.35 638.95 661.79 685.93
10 2009 69 494.86 630.48 601.77 649.88 705.75 770.44
15 2014 74 449.36 630.48 587.07 661.22 755.75 875.69
20 2019 79 417.36 630.48 573.20 672.98 812.60 1006.78
</TABLE>
The assumed rates of return shown above are illustrative only and are not a
representation of past or future performance. Actual performance results may be
more or less than those shown and will depend on a number of factors, including
the investment allocations made by the contract owner and the various rates of
return of the portfolios selected. The amount of the annuity payment would be
different from that shown if the actual performance averaged the assumed rates
of return shown above over a period of years, but also fluctuated above or below
those averages from year to year. Since it is highly likely that the performance
will fluctuate from month to month, monthly annuity payments (based on the
variable account) will also fluctuate. No representation can be made by the
company or the funds that this hypothetical performance can be achieved for any
one year or sustained over any period of time.
Notes: Annuity payments are made during the Annuitant's lifetime. If the
Annuitant dies before payments have been made for the guaranteed period,
payments will continue to be paid to the beneficiary for the remainder of the
period. The cumulative amount of annuity payments received depends on how long
the Annuitant lives after the guaranteed period.
The illustrated net assumed rates of return reflect the deduction of average
fund expenses and the maximum mortality and expense risk charge from the gross
rates of return.
29
<PAGE>
================================================================================
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
================================================================================
GENERAL INFORMATION.............................................................
AIG Life Insurance Company....................................................
Independent Accountants.......................................................
Legal Counsel.................................................................
Distributor...................................................................
Potential Conflicts...........................................................
CALCULATION OF PERFORMANCE DATA.................................................
Yield and Effective Yield Quotations for the Money Market Subaccount..........
Yield Quotations for Other Subaccounts........................................
Total Return Quotations.......................................................
ANNUITY PROVISIONS..............................................................
Variable Annuity Payments.....................................................
Annuity Unit Value............................................................
Net Investment Factor.........................................................
Misstatement of Age or Sex....................................................
Evidence of Survival..........................................................
FINANCIAL STATEMENTS............................................................
30
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
______________, 2001
GROUP IMMEDIATE VARIABLE ANNUITY CONTRACT
issued by
AIG LIFE INSURANCE COMPANY
through its
VARIABLE ACCOUNT I
This statement of additional information is not a prospectus. It should be read
in conjunction with the prospectus describing the group immediate variable
annuity contract. The prospectus concisely sets forth information that a
prospective investor should know before investing. For a copy of the prospectus
dated __________, 2001, call us at (877) 299-1724 or write to us at AIG Life
Insurance Company, Attention: Variable Products, One Alico Plaza, 600 King
Street, Wilmington, Delaware 19801.
<PAGE>
================================================================================
TABLE OF CONTENTS
================================================================================
GENERAL INFORMATION.............................................................
AIG Life Insurance Company................................................
Independent Accountants...................................................
Legal Counsel.............................................................
Distributor...............................................................
Potential Conflicts.......................................................
CALCULATION OF PERFORMANCE DATA.................................................
Yield and Effective Yield Quotations for the Money Market Subaccount
Yield Quotations for Other Subaccounts....................................
Total Return Quotations...................................................
ANNUITY PROVISIONS..............................................................
Variable Annuity Payments.................................................
Annuity Unit Value........................................................
Net Investment Factor.....................................................
Misstatement of Age or Sex................................................
Evidence of Survival......................................................
FINANCIAL STATEMENTS............................................................
2
<PAGE>
================================================================================
GENERAL INFORMATION
================================================================================
AIG Life Insurance Company
A description of AIG Life Insurance Company and its ownership is contained in
the prospectus. We will provide for the safekeeping of the assets of Variable
Account I.
Independent Accountants
Our financial statements have been audited by PricewaterhouseCoopers, LLP,
independent certified public accountants, whose offices are located in
Philadelphia, Pennsylvania.
Legal Counsel
Legal matters relating to the federal securities laws in connection with the
contract described herein and in the prospectus are being passed upon by Jorden
Burt Boros Cicchetti Berenson & Johnson LLP, Washington, D.C.
Distributor
Our affiliate, AIG Equity Sales Corp. ("AIGESC"), 70 Pine Street, New York, New
York, acts as the distributor of the contract. AIGESC is a wholly owned
subsidiary of American International Group, Inc. Additional payments may be made
for other services not directly related to the sale of the contract, including
the recruitment and training of personnel, production of promotional literature
and similar services. For the sale of other contracts, commissions are paid by
Variable Account I directly to selling dealers and representatives on behalf of
AIGESC. Aggregate commissions were $46,881,581 in 1999, $33,398,137 in 1998, and
$27,225,980 in 1997. Commissions retained by AIGESC were $0 in 1999, $0 in 1998,
and $193,263 in 1997.
Potential Conflicts
Shares of the funds may be sold only to separate accounts of life insurance
companies. They may be sold to our other separate accounts, as well as to
separate accounts of other affiliated or unaffiliated life insurance companies,
to fund variable annuity contracts and variable life insurance policies. It is
conceivable that, in the future, it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
a fund simultaneously. Although neither we nor the funds currently foresee any
such disadvantages, either to variable life insurance policy owners or to
variable annuity owners, each fund's board of directors will monitor events in
order to identify any material irreconcilable conflicts which may possibly arise
and to determine what action, if any, should be taken. If a material
irreconcilable conflict were to occur, we will take whatever steps are deemed
necessary, at our expense, to remedy or eliminate the
3
<PAGE>
irreconcilable material conflict. As a result, one or more insurance company
separate accounts might withdraw their investments in the fund. This might force
the fund to sell securities at disadvantageous prices.
================================================================================
CALCULATION OF PERFORMANCE DATA
================================================================================
Yield and Effective Yield Quotations for the Money Market Subaccount
The yield quotation for the money market subaccount will be for the seven days
ended on the date of the most recent balance sheet of Variable Account I
included in the registration statement. It will be computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one Annuity Unit in the money market
subaccount at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from owner accounts, dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and multiplying the base period return by (365/7) with the resulting
figure carried to at least the nearest hundredth of one percent.
Any effective yield quotation for the money market subaccount will be for the
seven days ended on the date of the most recent balance sheet of Variable
Account I included in the registration statement and will be carried at least to
the nearest hundredth of one percent. It will be computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one Annuity Unit in the money market
subaccount at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from owner accounts, dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
Effective Yield = [(Base Period Return + 1)365/7]-1
For purposes of the yield and effective yield computations, the hypothetical
charge reflects all deductions that are charged to all owner accounts in
proportion to the length of the base period. The yield and effective yield
quotations do not reflect the $200 charge that may be assessed at the time of
surrender. Realized gains and losses from the sale of securities and unrealized
appreciation and depreciation of the money market subaccount and the
corresponding portfolio are excluded from the calculation of yield.
Yield Quotations for Other Subaccounts
Yield quotations will be based on the thirty-day period ended on the date of the
most recent balance sheet of Variable Account I included in the registration
statement, and are computed by dividing the net investment income per Annuity
Unit earned during the
4
<PAGE>
period by the maximum offering price per unit on the last day of the period,
according to the following formula:
Yield=2[(a-b)+1]^(6 - 1)
----
cd
Where: a = net investment income earned during the period by the portfolio
attributable to investments owned by the subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Annuity Units outstanding during the
period
d = the maximum offering price per Annuity Unit on the last day of
the period
Yield quotations for a subaccount reflect all recurring contract charges.
However, they do not reflect the charge of $200 that may be assessed upon
surrender of the contract.
Total Return Quotations
The total return quotations for all of the subaccounts will be average annual
total return quotations reflecting all aspects of a subaccount's return,
including the automatic reinvestment by the variable account of all
distributions, any change in the subaccount's value over the period, and the
effect of any recurring charge and of the $200 charge assessed upon surrender.
Average annual total return is calculated by determining the growth or decline
in value of a hypothetical historical investment in the subaccount over a stated
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady rate
that would equal 100% growth on a compounded basis in ten years. While average
annual total returns are a convenient means of comparing investment
alternatives, investors should realize that the subaccount's performance is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance of a subaccount.
5
<PAGE>
================================================================================
ANNUITY PROVISIONS
================================================================================
Variable Annuity Payments
A variable annuity is an annuity whose payments are not predetermined as to
dollar amount and will vary in amount with the net investment results of the
applicable subaccounts. When you pay your single premium, we calculate the
number of Annuity Units associated with each annuity payment determined by our
currently used annuity rate factor and the Annuity Unit values.
Annuity Unit Value
The value of an Annuity Unit for each subaccount was arbitrarily set initially
at $100. This was done when the first portfolio shares were purchased. The
Annuity Unit value at the end of any subsequent Valuation Period is determined
by multiplying the subaccount's Annuity Unit value for the immediately preceding
Valuation Period by the quotient of (a) and (b) where:
(a) is the net investment factor (described below) for the Valuation
Period for which the Annuity Unit value is being determined; and
(b) is the Assumed Investment Return for such Valuation Period.
The Assumed Investment Return adjusts for the interest assumed in determining
the first variable annuity payment. Such factor for any Valuation Period shall
be the accumulated value, at the end of such period, of $1.00 deposited at the
beginning of such period at the Assumed Investment Return rate.
Net Investment Factor
The net investment factor is used to determine how investment results of a
portfolio affect the Annuity Unit value of the subaccount from one Valuation
Period to the next. The net investment factor for each subaccount for any
Valuation Period is determined by dividing (a) by (b) and subtracting (c) from
the result, where:
(a) is equal to:
(i) the net asset value per share of the portfolio held in the
subaccount determined at the end of that Valuation Period,
plus
(ii) the per share amount of any dividend or capital gain
distribution made by the portfolio held in the subaccount if
the "ex-dividend" date occurs during that same Valuation
Period, plus or minus
6
<PAGE>
(iii) a per share charge or credit, which we determine, for changes
in tax reserves resulting from investment operations of the
subaccount.
(b) is equal to:
(i) the net asset value per share of the portfolio held in the
subaccount determined as of the end of the prior Valuation
Period, plus or minus
(ii) the per share charge or credit for any change in tax reserves
for the prior Valuation Period.
(c) is equal to the mortality and expense risk charge rate for the
valuation period.
The net investment factor may be greater or less than the Assumed Investment
Return. Therefore, the Annuity Unit value may increase or decrease from
Valuation Period to Valuation Period.
Misstatement of Age or Sex
We may require proof of the age of the Annuitant before making any annuity
payment provided for by the contract. If the age or sex of the Annuitant has
been misstated, we will compute the amount payable based on the correct age or
sex. If annuity payments have begun, any underpayment that may have been made
will be paid in full with the next annuity payment, including interest at the
annual rate of 3%. Any overpayments, including interest at the annual rate of 3%
will be deducted from future annuity payments until we are repaid in full.
Evidence of Survival
If a contract provision requires that a person be alive, we may require due
proof that the person is alive before we act under that provision.
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FINANCIAL STATEMENTS
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Our consolidated balance sheets are included herein. A complete set of the
financial statements of the company has been filed electronically with the SEC
and can be obtained through its website at http://www.sec.gov. Our financial
statements shall be considered only as bearing upon our ability to meet our
obligations under the contract. Financial statements of Variable Account I are
not included because no contracts have been issued using the subaccounts
described in the prospectus.
