<PAGE>
As filed with the Securities and Exchange Commission on 17 April 1996
Registration No. 33-27242
811-5382
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 8
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
SEPARATE ACCOUNT A OF PARAGON LIFE INSURANCE COMPANY
(Exact Name of Registrant)
PARAGON LIFE INSURANCE COMPANY
100 South Brentwood Boulevard
St. Louis, MO 63105
(Address of Principal Executive Office)
Matthew P. McCauley, Esquire
Paragon Life Insurance Company
700 Market Street
St. Louis, MO 63101
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
X on April 29, 1996 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i)
on ( ) pursuant to paragraph (a)(1) of Rule 485
this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
The Registrant has registered an indefinite number of its shares under the
Securities Act of l933 pursuant to Rule 24f-2 under the Investment Company Act
of l940. The notice required by such rule for the Registrant's most recent year
was filed on February 27, 1996.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
Item No. of
Form N-8B-2 Caption in Prospectus
1. Cover Page
2. Cover Page
3. Not Applicable
4. Distribution of the Policies
5. The Company and the Separate Account
6. The Separate Account
7. Not Required
8. Not Required
9. Legal Proceedings
10. Summary; American Variable Insurance
Series; Charges and Deductions; Policy
Benefits; Policy Rights; Voting Rights;
General Matters Relating to the Policy
11. Summary; American Variable Insurance
Series
12. Summary; American Variable Insurance
Series
13. Summary; Charges and Deductions; American
Variable Insurance Series
14. Summary; Payment and Allocation of
Premiums
15. Payment and Allocation of Premiums
16. Payment and Allocation of Premiums;
American Variable Insurance Series
17. Summary; Charges and Deductions; Policy
Rights; American Variable Insurance
Series
18. American Variable Insurance Series;
Payment and Allocation of Premiums
19. General Matters Relating to the Policy;
Voting Rights
20. Not Applicable
21. Policy Rights; General Matters Relating to
the Policy
22. Not Applicable
23. Safekeeping of the Separate Account's
Assets
24. General Matters Relating to the Policy
25. The Company and the Separate Account
26. Not Applicable
27. The Company and the Separate Account
28. Management of the Company
29. The Company and the Separate Account
30. Not Applicable
31. Not Applicable
-i-
<PAGE>
Item No. of
Form N-8B-2 Caption in Prospectus
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Company and the Separate Account
36. Not Required
37. Not Applicable
38. Summary; Distribution of the Policies
39. Summary; Distribution of the Policies
40. Not Applicable
41. The Company and the Separate Account;
Distribution of the Policies
42. Not Applicable
43. Not Applicable
44. Payment and Allocation of Premiums
45. Not Applicable
46. Policy Rights
47. American Variable Insurance Series
48. Not Applicable
49. Not Applicable
50. The Separate Account
51. Cover Page; Summary; Charges and
Deductions;Policy Rights; Policy
Benefits; Payment and Allocation of
Premiums
52. American Variable Insurance Series
53. Federal Tax Matters
54. Not Applicable
55. Not Applicable
56. Not Required
57. Not Required
58. Not Required
59. Not Required
-ii-
<PAGE>
LOGO
LOGO
^ GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
Prospectus dated May 1, 1996
50405
<PAGE>
FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes flexible premium variable life insurance policies
offered by Paragon Life Insurance Company (the "Company") which are designed
for use in group insurance programs. Certificates setting forth the rights of
the Owners and/or Insureds will be issued under a Group Contract issued to a
Contractholder. Certificates are referred to in this Prospectus as "Policy" or
"Policies."
The Policies are designed to provide lifetime insurance protection to age 95
and at the same time provide flexibility to vary premium payments and change
the level of death benefits payable under the Policies. This flexibility allows
an Owner to provide for changing insurance needs under a single insurance
policy. An Owner also has the opportunity to allocate net premiums among
several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount of
the Policy. The insurance under a Policy will remain in force so long as its
Cash Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy.
The Owner may allocate net premiums to one or more of the Divisions of the
Separate Account A (the "Separate Account"). The duration of the Policy and the
amount of the Cash Value will vary to reflect the investment performance of the
Divisions of the Separate Account selected by the Owner, and, depending on the
death benefit option elected, the amount of the death benefit above the minimum
may also vary with that investment performance. Thus, the Owner bears the
entire investment risk under the Policies; there is no minimum guaranteed Cash
Value.
Each Division of the Separate Account will invest solely in a corresponding
investment portfolio of American Variable Insurance Series, an investment
company currently consisting of seven separate investment portfolios, or
"Funds": Cash Management Fund, High-Yield Bond Fund, Growth-Income Fund, Growth
Fund, Asset Allocation Fund, International Fund and U.S. Government/AAA Rated
Securities Fund. The accompanying prospectus for American Variable Insurance
Series describes the investment objectives and policies, and the risks of the
Funds.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
AMERICAN VARIABLE INSURANCE SERIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The Date Of This Prospectus Is May 1, 1996.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................ 3
Summary.................................................................... 4
The Company and the Separate Account....................................... 9
The Company.............................................................. 9
The Separate Account..................................................... 9
American Variable Insurance Series....................................... 10
Addition, Deletion, or Substitution of Investments....................... 11
Payment and Allocation of Premiums......................................... 12
Issuance of a Policy..................................................... 12
Premiums................................................................. 12
Allocation of Net Premiums and Cash Value................................ 14
Policy Lapse and Reinstatement........................................... 14
Policy Benefits............................................................ 15
Death Benefit............................................................ 15
Cash Value............................................................... 20
Policy Rights and Privileges............................................... 21
Exercising Rights and Privileges Under the Policies...................... 21
Loans.................................................................... 21
Surrender and Partial Withdrawals........................................ 22
Transfers................................................................ 24
Right to Examine Policy.................................................. 24
Conversion Right to a Fixed Benefit Policy............................... 24
Eligibility Change Conversion............................................ 25
Payment of Benefits at Maturity.......................................... 25
Payment of Policy Benefits............................................... 26
Charges and Deductions..................................................... 27
Sales Charges............................................................ 27
Premium Tax Charge....................................................... 28
Monthly Deduction........................................................ 28
Partial Withdrawal Transaction Charge.................................... 30
Separate Account Charges................................................. 30
General Matters Relating to the Policy..................................... 31
Distribution of the Policies............................................... 33
General Provisions of the Group Contract................................... 33
Federal Tax Matters........................................................ 35
Safekeeping of the Separate Account's Assets............................... 38
Voting Rights.............................................................. 38
State Regulation of the Company............................................ 39
Management of the Company.................................................. 39
Legal Matters.............................................................. 40
Legal Proceedings.......................................................... 40
Experts.................................................................... 40
Additional Information..................................................... 41
Financial Statements....................................................... 41
Appendix A................................................................. A-1
</TABLE>
THE POLICIES ARE NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
2
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Associated Companies--Those companies listed in a Group Group Contract's
specifications pages that are under common control through stock ownership,
contract or otherwise, with the Contractholder.
Beneficiary--The person(s) named in an application for Individual Insurance
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness, and any contingent deferred sales charges.
Certificate--A document issued to Owners of Policies issued under Group Group
Group Contracts, setting forth or summarizing the Owner's rights and benefits.
Contractholder--The entity that is issued a Group Contract, which may be a
broker-dealer engaged in the distribution of the Policies.
Division--A subaccount of the Separate Account. Each Division invests
exclusively in the shares of a Fund of American Variable Insurance Series.
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Fund--A separate investment portfolio of the American Variable Insurance
Series, a mutual fund in which the Separate Account's assets are invested.
Group Contract--A group flexible premium variable life insurance contract
issued to the Contractholder by the Company.
Guideline Annual Premium--The annual amount of premium that would be payable
through the Maturity Date of a Policy for the specified Face Amount and Death
Benefit Option, if premiums were fixed by the Company as to both timing and
amount, and were based on the guaranteed mortality rates of 125% of the 1980
Commissioners Standard Ordinary Mortality Table C, net investment earnings at
an annual effective rate of five percent, and fees and charges as set forth in
the Policy.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest charged
on loans.
Individual Insurance--Insurance provided under a Group Contract.
Insured--The person whose life is insured under a Policy.
Investment Start Date--The date the initial premium is applied to the
Divisions of the Separate Account. This date is the later of the Issue Date or
the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
Issue Date--The effective date of coverage under a Policy. The Issue Date is
the date from which Policy Anniversaries, Policy Years, and Policy Months are
measured.
3
<PAGE>
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 95.
Monthly Anniversary--The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the
last day of that month.
Net Premium--The premium less any sales charge and any charge for premium
taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--The Certificate offered by the Company and described in this
Prospectus.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the day
immediately preceding the next Policy Anniversary.
Separate Account--Separate Account A, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the close
of business of the next succeeding Valuation Date.
SUMMARY
The following summary of Prospectus information should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the description of the Policies contained in this
Prospectus assumes that a Policy is in effect and that there is no outstanding
Indebtedness.
The Policy. The Policies described in this Prospectus are issued in
connection with group insurance programs pursuant to Group Contracts entered
into between the Company and Contractholders. (See "General Provisions of the
Group Contract," page 33.) The group must exist for purposes other than to
obtain insurance. Provided there is sufficient Cash Surrender Value, Individual
Insurance under a Policy will continue should the Group Contract or the Owner's
eligibility under the Group Contract terminate. (See "Payment and Allocation of
Premiums--Issuance of a Policy," page 12.)
The Policies are life insurance contracts with death benefits, cash values,
surrender rights, policy loan privileges, and other features traditionally
associated with life insurance. The Policies are "variable" policies because,
unlike the fixed benefits under an ordinary life insurance contract, the Cash
Value and, under certain circumstances, the death benefit under a Policy may
increase or decrease depending upon the investment performance of the Divisions
of the Separate Account to which the Owner has allocated net premium payments.
However, so long as a Policy's Cash Surrender Value continues to be sufficient
to pay the monthly deduction, an Owner is guaranteed a minimum death benefit
equal to the Face Amount of his or her Policy.
4
<PAGE>
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. The Separate Account currently consists of
seven Divisions, each of which invests in shares of a corresponding Fund of
American Variable Insurance Series. The seven Funds currently available are the
Cash Management Fund, the High-Yield Bond Fund, the Growth-Income Fund, the
Growth Fund, the Asset Allocation Fund, the International Fund and the U.S.
Government Guaranteed/AAA Rated Securities Fund. Each Fund has a different
investment objective. (See "The Company and the Separate Account--American
Variable Insurance Series," page 10.) An Owner may change future allocations of
net premiums at any time by notifying the Company directly.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to modify the transfer privilege.
(See "Policy Rights and Privileges--Transfers," page 24.)
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the planned
annual premium set forth in the specifications page of a Policy is necessary to
place a Policy in force. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount and certain other
factors. The initial premium and subsequent planned premiums generally will be
remitted by the Contractholder on behalf of the Owner at intervals agreed to by
the Contractholder, typically monthly. However, as is discussed below, planned
premiums need not be paid so long as there is sufficient Cash Surrender Value
to keep the Policy in force. Subject to certain limitations, additional premium
payments in any amount and at any frequency may be made directly by the Owner.
Some Contractholders may offer a cash management or financial services account
where amounts may be held in a money market mutual fund. If the Owner has such
an account, subject to the Contractholder's approval, planned premium payments
may be made from this account. (See "Payment and Allocation of Premiums--
Issuance of a Policy--Premiums," page 12.)
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 14).
The Policies, therefore, differ in two important respects from conventional
life insurance policies. First, the failure to make planned premium payments
following the initial premium payment will not itself cause a Policy to lapse.
Second, under the circumstances described above, a Policy can lapse even if
planned premiums have been paid. Thus, the payment of premiums in any amount
does not guarantee that the Policy will remain in force until the Maturity
Date. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 14.)
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies. Two death benefit options are available.
Under the "Level Type" death benefit, the death benefit is the Face Amount of
the Policy or, if greater, the applicable percentage of Cash Value. Under the
"Increasing Type" death benefit, the death benefit is the Face Amount of the
Policy plus the Cash Value or, if greater, the applicable percentage of Cash
Value. So long as a Policy remains in force, the minimum death benefit under
either option will be at least equal to the current Face Amount. The death
benefit proceeds will be increased by the amount of the cost of insurance for
the portion of the month from the date of death to the end of the month, and
reduced by any outstanding Indebtedness. (See "Policy Benefits--Death Benefit,"
page 15.)
The minimum initial Face Amount is generally $25,000 under the Company's
current rules. The Owner may generally change the Face Amount and the death
benefit option, but in certain cases evidence of insurability may be required.
(See "Policy Benefits--Death Benefit," page 15.)
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy. (See "Policy Benefits--Death
Benefit" page 15, and "Policy Rights and Privileges--Payment of Policy
Benefits," page 26.)
5
<PAGE>
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
premium payments, the investment performance of any selected Divisions of the
Separate Account, any Policy Loans, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value," page
20.) There is no minimum guaranteed Cash Value.
Charges and Deductions. The sales charges imposed will consist of a front-end
sales charge of 2.5 percent, which is deducted from premiums paid ("premium
expense charge"), and a contingent deferred sales charge.
The contingent deferred sales charge will be assessed against the Cash Value
under a Policy upon a surrender, lapse, or decrease in Face Amount during the
first ten Policy Years. Assuming that no increases in Face Amount have become
effective, the charge will be 25 percent of premiums actually received by the
Company in the first Policy Year up to the guideline annual premium for the
initial Face Amount. The amount of the charge will decrease each year after the
first Policy Year by one-tenth of the total charge until it reaches zero at the
end of ten Policy Years. The timing of premium payments may affect the amount
of the charge under a Policy, because the contingent deferred sales charge is
based only on premiums actually received by the Company in the first Policy
Year.
For any increase in the Face Amount an additional contingent deferred sales
charge will be calculated equal to a percentage of premiums associated with the
increase up to the guideline premium for the increase. See "Charges and
Deductions--Sales Charges" page 27, for a discussion of the manner in which
premiums are associated with an increase. The additional charge calculated for
the increase will also decrease by one-tenth of the total charge each year
after the first year following the effective date of the increase until it
reaches zero after ten years. For any decrease in the initial Face Amount or in
an increase in Face Amount during the first ten years such insurance coverage
is in force, a charge will be assessed that is proportionate to the charge that
would apply to a full surrender of initial Face Amount or increase. The
contingent deferred sales charge will apply to a partial withdrawal only if the
partial withdrawal decreases the Face Amount. (See "Policy Rights and
Privileges--Surrender and Partial Withdrawals," page 22, "Policy Benefits--
Death Benefit," page 15, and "Charges and Deductions--Sales Charges--Contingent
Deferred Sales Charge," page 27.)
A charge of 2 percent to cover state premium taxes will be deducted from
premiums paid.
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, and a cost of insurance charge. The administrative charge will
ordinarily be $3.00 per month during all policy years.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance," page 29.)
Monthly cost of insurance rates will be determined by the Company based upon
its expectations as to future mortality experience. The Company currently
underwrites Policies on a simplified issue basis. However, the Company reserves
the right to issue Policies on a guaranteed issue basis or on another basis
which is determined by the Company to be appropriate to a particular group. The
current cost of insurance rates are based on the Attained Age and rate class of
the Insured as well as on the gender mix of the group insured, which is the
proportion of men and women covered under a particular Group Contract. For a
discussion of the factors affecting the rate class of the Insured, see "Charges
and Deductions--Monthly Deduction--Cost of Insurance," page 29.
Cost of insurance rates are guaranteed not to exceed 125 percent of the
maximum rates that could be charged based on the 1980 Commissioners Standard
Ordinary Mortality Table C ("1980 CSO Table"). Generally, the rates currently
charged do not exceed 100% of the 1980 CSO Table. However, instances in which
the Company's current rates may exceed 100% of the 1980 CSO Table are generally
limited to particular Policies issued to Insureds in small groups (i.e.
generally less than 250 eligible employees) and/or groups that are
predominantly male. The guaranteed rates are higher than the 1980 CSO Table
because, under simplified underwriting, the Insured is not required to submit
to a medical or paramedical examination.
6
<PAGE>
Because the Company gathers less health information about these individuals, it
is exposed to additional insurance risks. Although the circumstances in which
the Company could raise its current mortality charges are limited, such an
increase is permitted under the Policy. To the extent that the current cost of
insurance rates exceed or are raised so that they exceed 100% of the 1980 CSO
Table, the monthly cost of insurance charge would, in effect, be a substandard
risk charge for healthy Insureds. In this event, healthy insureds may be able
to obtain coverage elsewhere with lower cost of insurance charges. Cost of
insurance charges are only one element of an insurance policy.
A daily charge of .0024547% (an annual rate of .90%) of the net assets of
each Division of the Separate Account will be imposed for the Company's
assumption of certain mortality and expense risks incurred in connection with
the Policies. (See "Charges and Deductions--Separate Account Charges," page
30.)
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes. (See "Federal Tax Matters," page 35.)
The value of the assets of the Divisions of the Separate Account will reflect
the investment advisory fee and other expenses incurred by American Variable
Insurance Series because the Separate Account purchases the shares of American
Variable Insurance Series. (See "Charges and Deductions--Separate Account
Charges," page 30.)
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net Premiums
and Cash Value," page 14, and "Policy Rights and Privileges--Surrender and
Partial Withdrawals--Transfers," pages 22 and 24, and "Charges and Deductions--
Partial Withdrawal Transaction Charge," page 30.)
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b) minus (c), where
(a) is 85 percent of the Cash Value of the Policy on the date the loan request
is received, (b) is any outstanding Indebtedness and (c) is any contingent
deferred sales charges. Loan interest is due and payable in arrears on each
Policy Anniversary or on a pro rata basis for such shorter period as the Policy
Loan may exist. All outstanding Indebtedness will be deducted from proceeds
payable at the Insured's death, upon maturity, or upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid in
whole or in part at any time while the Policy is in force. (See "Policy Rights
and Privileges--Loans," page 21.) Loans taken from, or secured by, a Policy may
in certain circumstances be treated as taxable distributions from the Policy.
Moreover, with certain exceptions, a ten percent additional income tax would be
imposed on the portion of any loan that is included in income. (See "Federal
Tax Matters," page 35.)
Surrender and Partial Withdrawals. At any time that a Policy is in effect, an
Owner may elect to surrender the Policy and receive its Cash Surrender Value.
An Owner may also request a partial withdrawal of the Cash Value of the Policy.
When the death benefit under either death benefit option is not based on an
applicable percentage of the Cash Value, a partial withdrawal reduces the death
benefit payable under the Policy by an amount equal to the reduction in the
Policy's Cash Value. If Option A is in effect and the death benefit equals the
Face Amount, the death benefit will also be reduced by an amount equal to the
contingent deferred sales charge deducted, if any. (See "Policy Rights and
Privileges--Surrender and Partial Withdrawals," page 22.) Surrenders and
partial withdrawals may have federal income tax consequences. (See "Federal Tax
Matters," page 35.)
7
<PAGE>
Right to Examine Policy. The Owner has a limited right to return a Policy for
cancellation within 20 days after the delivery of the Policy to the Owner,
within 45 days after the Owner signs the application, or within 10 days after
the Company mails a notice of this cancellation right to the Owner. If a Policy
is cancelled within this time period, a refund will be paid which will equal
all premiums paid under the Policy. The Owner also has a right to cancel a
requested increase in Face Amount. Upon cancellation of an increase, the Owner
may request that the Company refund the amount of the additional charges
deducted in connection with the increase, or have the amount of the additional
charges added to the Cash Value. (See "Policy Rights and Privileges--Right to
Examine Policy," page 24.)
Eligibility Change Conversion. In the event that the Owner is no longer
eligible under the Group Contract, either because the Owner leaves the group or
otherwise fails to satisfy the eligibility requirements set forth in a
particular Group Contract or because the Contract terminates, the Individual
Insurance provided by the Policy issued in connection with the Group Contract
will continue unless the Policy is cancelled or surrendered by the Owner or
there is insufficient Cash Surrender Value to prevent the Policy from lapsing.
The Certificate issued in connection with the Group Contract will be amended
automatically to continue in force as an Individual Policy. The Individual
Policy will provide benefits which are identical to those provided under the
Certificate. (See "Policy Right and Privileges--Eligibility Change Conversion,"
page 25.)
Conversion Right to a Fixed Benefit Policy. During the first 24 Policy Months
following a Policy's Issue Date, the Owner may convert the Policy to a life
insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. The Owner also has
a similar right with respect to requested increases in the Face Amount. (See
"Policy Rights and Privileges--Conversion Right to a Fixed Benefit Policy,"
page 24.)
Exercising Rights and Privileges Under the Policies. Owners may exercise
their rights and privileges under the Policies (i.e., make transfers, change
premium allocations, borrow, etc.) by notifying the Company in writing at its
Home Office. Likewise, the Company will send all reports and other notices
described herein or in the Policy directly to the Owner. (See "Policy Rights
and Privileges--Exercising Rights and Privileges Under the Policies," page 21.)
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-2 to A-13 in Appendix A show how death benefits and Cash Surrender
Values may vary based on certain hypothetical rate of return assumptions. These
illustrations also show how these benefits compare with amounts which would
accumulate if premiums were invested to earn interest (after taxes) at 5%
compounded annually. If a Policy is surrendered in the early Policy Years, the
Cash Surrender Value payable will be low as compared with premiums accumulated
with interest, and consequently the insurance protection provided prior to
surrender will be costly.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits payable
under a Policy should be completely excludable from the gross income of the
Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds.
Under certain circumstances, a Policy may be treated as a "modified endowment
contract." If the Policy is a modified endowment contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Loans will not be treated as
8
<PAGE>
distributions. Neither distributions nor loans from a Policy that is not a
modified endowment contract are subject to the 10% penalty tax. (See "Federal
Tax Matters," page 35.)
THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection with
the name change. The Company is principally engaged in writing individual and
group life insurance policies and annuity contracts. As of December 31, 1995,
it had statutory admitted assets in excess of $123 million. The Company is
admitted to do business in 49 states and the District of Columbia. The
principal offices of the Company are at 100 South Brentwood, St. Louis,
Missouri 63105 ("Home Office").
The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a mutual life insurance company. The Parent
Company has agreed that until March 23, 1999, it will maintain capital and
surplus within the Company sufficient to satisfy the capital requirements of
the states in which the Company is authorized to do business.
In addition, the Parent Company agrees to guarantee that the Company will
have sufficient funds to meet all of its contractual obligations. In the event
a policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. This guarantee, which does not have a
predetermined termination date, can be modified or ended only as to policies
not yet issued. The guarantee agreement is binding on the Parent Company, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
THE SEPARATE ACCOUNT
Separate Account A (the "Separate Account") was established by the Company as
a separate investment account on October 30, 1987 under Missouri law. The
Separate Account receives and invests the net premiums paid under the Policies.
In addition, the Separate Account may receive and invest net premiums for other
flexible premium variable life insurance policies that might be issued by the
Company.
The Separate Account currently is divided into seven Divisions. Each Division
invests exclusively in shares of a single fund of American Variable Insurance
Series. Income and both realized and unrealized gains or losses from the assets
of each Division of the Separate Account are credited to or charged against
that Division without regard to income, gains, or losses from any other
Division of the Separate Account or arising out of any other business the
Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
9
<PAGE>
AMERICAN VARIABLE INSURANCE SERIES
The Separate Account invests in shares of American Variable Insurance Series
(the "American Series"), a series-type mutual fund registered with the SEC as
an open-end, diversified management investment company. American Series
currently has seven separate investment portfolios or "Funds": the Cash
Management Fund, the High-Yield Bond Fund, the Growth-Income Fund, the Growth
Fund, the Asset Allocation Fund, the International Fund and the U.S.
Government/AAA-Rated Securities Fund. The assets of each Fund are held separate
from the assets of the other Funds, and each Fund has investment objectives and
policies which are different from those of the other Funds. Thus, each Fund
operates as a separate investment vehicle, and the income or losses of one Fund
generally have no effect on the investment performance of any other Fund.
The investment objectives and policies of each Fund are summarized below:
The Cash Management Fund seeks high current yield while preserving capital by
investing in a diversified selection of money-market instruments including:
corporate bonds and notes; commercial bank and savings association obligations;
securities of the U.S. Government, its agencies and instrumentalities; and
commercial paper. These securities mature in one year or less. The Cash
Management Fund also may enter into repurchase agreements.
The High-Yield Bond Fund seeks high current income. The High-Yield Bond Fund
generally will be invested substantially in intermediate and long-term
corporate obligations, with emphasis on higher-yielding, higher-risk, lower-
rated or unrated securities. These investments are subject to greater market
fluctuations and risk of loss of income and principal than are investments in
lower yield, fixed-income securities. The Fund may also invest in securities of
the U.S. Government, its agencies and instrumentalities, cash and money market
instruments.
The Growth-Income Fund seeks growth of capital and income. In the selection
of securities for investment, the possibilities of appreciation and potential
dividends are given more weight than current yield. Ordinarily, the assets of
the Growth-Income Fund consist principally of a diversified group of common
stocks, but may invest in other types of securities including other equity-type
securities (such as preferred stocks and corporate bonds), bonds (and other
types of fixed income securities), and money market-instruments consistent with
its investment objective.
The Growth Fund seeks growth of capital. Whatever current income is generated
by this portfolio is likely to be incidental to the objective of capital
growth. Ordinarily, accomplishment of the Growth Fund's objective of capital
growth will be sought by investing primarily in common stocks or securities
with common stock characteristics. When the outlook for common stocks is not
considered promising, for temporary defensive purposes a substantial portion of
the assets may be invested in securities of the U.S. Government, its agencies
and instrumentalities, cash and money market instruments in any combination.
The Asset Allocation Fund seeks total return (including income and capital
gains) and preservation of capital over the long-term through a diversified
portfolio that can include common stocks and other equity-type securities (such
as convertible bonds and preferred stocks), bonds and other intermediate and
long-term fixed-income securities, and money market instruments, in any
combination.
The International Fund seeks long-term growth of capital by investing
primarily in securities of issuers domiciled outside the United States. A major
premise of the Fund's investment approach is the belief that economic and
political developments have helped create new opportunities outside the U.S. In
addition to investing directly in equity securities, the Fund may invest in
American Depository Receipts and European Depository Receipts. When prevailing
market, economic, political or currency conditions warrant, the Fund may
purchase fixed-income securities of issuers domiciled outside the U.S. Under
normal circumstances, the Fund will invest at least 65% of its assets in equity
securities of issuers domiciled outside the U.S.
10
<PAGE>
The U.S. Government/AAA-Rated Securities Fund (the "Government/AAA Fund")
seeks a high level of income consistent with prudent investment risk and
preservation of capital. It seeks to achieve its objective by investing
primarily in a combination of (i) securities guaranteed by the U.S. Government
(backed by the full faith and credit of the U.S.), and (ii) other debt
securities (including corporate bonds) rated AAA by Standard and Poor's
Corporation or Aaa by Moody's Investors Service, Inc. (or that have not
received a rating but are determined to be of comparable quality by the
investment adviser, Capital Research and Management Company). Except when the
Government/AAA Fund is in a temporary defensive investment position, at least
65% of assets will be invested in such securities, including those held subject
to repurchase agreements.
There is no assurance that any of the Funds will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for American Series, which must accompany or precede this
Prospectus and which should be read carefully.
Capital Research and Management Company ("Capital") provides investment
advisory services to American Series in accordance with the terms of the
current prospectus for the American Series. For its advisory services to the
Funds, American Series pays Capital an investment advisory fee, accrued daily
and paid monthly at annual rates of 0.60% of that portion of each Fund's
(except International Fund) total net assets not exceeding $30,000,000, and
0.50% of that portion of each Fund's total net assets in excess of $30,000,000.
The investment advisory fee for the International Fund, accrued daily and paid
monthly, is at an annual rate of 0.90% on the first $60 million of the Fund's
total net assets plus 0.78% on the total net assets in excess of $60 million.
American Series is registered with the SEC as an open-end diversified
management company. Registration with the SEC does not involve supervision of
the management or investment practices or policies of American Series by the
Commission.
Resolving Material Conflicts. All of the Funds of American Series are also
available to registered separate accounts of other insurance companies offering
variable annuity and variable life insurance products. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Policies and of owners of policies whose cash values are allocated to other
separate accounts investing in the Funds. In the event a material conflict
arises, the Company will take any necessary steps, including removing the
assets of the Separate Account from one or more of the Funds, to resolve the
matter. See the American Series prospectus for further details.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Funds of
American Series and to substitute shares of another Fund of American Series or
of another registered open-end investment company, if the shares of a Fund are
no longer available for investment, or if in the Company's judgment further
investment in any Fund becomes inappropriate in view of the purposes of the
Separate Account. The Company will not substitute any shares attributable to an
Owner's interest in a Division of the Separate Account without notice to the
Owner and prior approval of the SEC, to the extent required by the 1940 Act or
other applicable law. Nothing contained in this Prospectus shall prevent the
Separate Account from purchasing other securities for other series or classes
of policies, or from permitting a conversion between series or classes of
policies on the basis of requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Fund of American Series,
or in shares of another investment company, with a specified investment
objective. New Divisions may be established when, in the sole discretion of the
Company, marketing needs or investment conditions warrant, and any new Division
will be made available to existing
11
<PAGE>
Owners on a basis to be determined by the Company. To the extent approved by
the SEC, the Company may also eliminate or combine one or more Divisions,
substitute one Division for another Division, or transfer assets between
Divisions if, in its sole discretion, marketing, tax, or investment conditions
warrant.
In the event of a substitution or change, the Company may, if it considers it
necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
If deemed by the Company to be in the best interests of persons having voting
rights under the Policy, and to the extent any necessary SEC approvals or Owner
votes are obtained, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other separate
accounts of the Company. To the extent permitted by applicable law, the Company
may also transfer the assets of the Separate Account associated with the Policy
to another separate account.
The Company cannot guarantee that the shares of American Series will always
be available. American Series sells its shares to the Separate Account in
accordance with the terms of a participation agreement between American Series
and the Company. Should this agreement terminate or should shares become
unavailable for any other reason, the Separate Account will not be able to
purchase American Series shares. Should this occur, the Company will be unable
to honor Owner requests to allocate their cash values or premium payments to
the Divisions of the Separate Account investing in shares of the American
Series. In the event that the American Series is no longer available, the
Company will, of course, take reasonable steps to obtain alternative investment
options.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
A Group Contract will be issued upon receipt of an application for the Group
Contract signed by a duly authorized officer of the entity wishing to enter
into a Group Contract and acceptance by a duly authorized officer of the
Company at its Home Office. (See "General Provisions of the Group Contract--
Issuance," page 33.) Individuals wishing to purchase a Policy issued under a
Group Contract must complete the appropriate application for Individual
Insurance and submit it to the Company's Home Office. An individual must be
eligible to be a member of the group covered by a Group Contract in order to
purchase a Policy under that Group Contract. The eligibility requirements for a
particular group are set forth in the Group Contract's specifications pages.
The Company will issue to each Contractholder a Certificate to give to each
Owner.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
70 who supply evidence of insurability satisfactory to the Company. The Company
may, at its sole discretion, issue Policies to individuals falling outside
those Issue Ages or decline to issue Policies to individuals within those Issue
Ages.
An individual satisfying the group eligibility requirements under a
particular Group Contract may be required to submit to a simplified
underwriting procedure which requires satisfactory responses to certain health
questions in the application. Acceptance of an application is subject to the
Company's underwriting rules, and the Company reserves the right to reject an
application for any reason.
The Issue Date is the effective date for all coverage provided in the
original application for Individual Insurance. The Issue Date is used to
determine Policy Anniversaries, Policy Years, and Policy Months. A Policy will
not take effect until the appropriate application for Individual Insurance is
signed, the initial premium has been paid prior to the Insured's death, the
Insured is eligible for it, and the information in the application is
determined to be acceptable to the Company.
PREMIUMS
The initial premium is due on the Issue Date, and may be remitted by the
Contractholder on behalf of the Owner. The Company requires that the initial
premium for a Policy be at least equal to one-twelfth ( 1/12)
12
<PAGE>
of the planned annual premium for the Policy set forth in the specifications
pages. The planned annual premium is an amount specified for each Policy based
on the requested initial Face Amount, the Issue Age of the Insured and the
charges under the Policy. (See "Charges and Deductions," page 27.) However, the
Owner is not required to pay premiums equal to the planned annual premium.
Premiums remitted by a Contractholder or designated payor shall be applied to
a Policy when received by the Company. Should supporting documentation to
enable the determination of the amount of premium per Policy not be received
prior to or coincident with the cash premium, the premiums shall be promptly
returned to the entity remitting such premiums.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. The planned annual
premium may be remitted by the Contractholder on behalf of the Owner pursuant
to a planned premium payment schedule which will provide for premium payments
in a level amount at fixed intervals agreed to by the Contractholder and the
Company (usually monthly). The amount of the premiums remitted by the
Contractholder will be that amount authorized by the Owner. Some
Contractholders may offer cash management or financial service accounts where
amounts may be held in a money market mutual fund. If the Owner has such an
account, subject to the Contractholder's approval, planned premium payments may
be paid from such account. If the Owner elects to make planned premium payments
from such an account, these will be deducted automatically from the account by
the Contractholder and paid to the Company. To participate in such an account
and to make payments from such accounts, the Owner must satisfy any criteria
established by the Contractholder for such accounts. In addition, if the Group
Contract terminates, the Owner will no longer be able to make planned premium
payments in this manner. However, the Policy will continue on an individual
basis unless cancelled or surrendered by the Owner. (See "General Provisions of
the Group Contract--Termination," page 34.)
Under the Policy, the Owner may skip planned premium payments. Failure to pay
one or more planned premium payments will not cause the Policy to lapse until
such time as the Cash Surrender Value is insufficient to cover the next Monthly
Deduction. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 14.)
In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters,"
page 35.) Unscheduled premium payments may not be made from a cash management
or financial services account, if available. Moreover, as mentioned above, an
Owner may also skip planned premium payments. Therefore, unlike conventional
insurance policies, a Policy does not obligate the Owner to pay premiums in
accordance with a rigid and inflexible premium schedule.
Failure of the Contractholder to remit the authorized planned premium
payments may cause the Group Contract to terminate. (See "General Provisions of
the Group Contract--Termination," page 34.) Nonetheless, provided that there is
sufficient Cash Surrender Value to prevent the Policy from lapsing, the
Individual Insurance provided will automatically continue in the event of such
termination. (See "Policy Rights and Privileges--Eligibility Change
Conversion," page 25.) Individual Insurance will also continue if the Owner's
eligibility under the Group Contract terminates because the Owner is no longer
a part of the group or otherwise fails to satisfy the eligibility requirements
set forth in the Group Contract. In either circumstance, an Owner of an
Individual Policy (or a Certificate converted by amendment to an Individual
Policy) will establish a new schedule of planned premiums which will have the
same planned annual premium, but ordinarily the payment intervals will be no
more frequent than quarterly.
Premium Limitations. Every premium payment remitted by or on behalf of an
Owner must be at least $20. In no event may the total of all premiums paid
under a Policy in any Policy Year exceed the current maximum premium
limitations for that year established by Federal tax laws. The maximum premium
limitation for a Policy Year is the most premium that can be paid in that
Policy Year such that the sum of the premiums paid under the Policy will not at
any time exceed the premium limitation referred to in section 7702(c) of the
Internal Revenue Code of 1986, or any successor provision. If at any time a
premium is paid which would result in total premiums exceeding the current
maximum premium limitation, the Company will accept only that portion of the
premium which will make total premiums equal the maximum. Any part of the
premium in excess of that amount will be returned to the Owner within 60 days
of the end of the
13
<PAGE>
Policy Year in which the payment is received or applied as otherwise agreed and
no further premiums will be accepted until allowed by the current maximum
premium limitations prescribed by Federal tax law. See "Federal Tax Matters" on
page 35, for further explanation of premium limitations. Section 7702A creates
an additional premium limitation, which, if exceeded, can change the tax status
of a Policy to that of a "modified endowment contract." The Company has adopted
administrative steps designed to notify an Owner when it is believed that a
premium payment will cause a Policy to become a modified endowment contract.
The Owner will be given a limited amount of time to request that the premium be
reversed in order to avoid the Policy's being classified as a modified
endowment contract. (See "Federal Tax Matters, " page 35.)
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge and less the premium tax charge. (See "Charges and Deductions--
Sales Charges," page 27.)
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. The initial premium payment will be allocated in accordance
with the Owner's instructions on the later of the day received by the Company
at its Home
Office or the Issue Date of the Policy. All subsequent premiums, irrespective
of whether payments are made through a cash management or financial services
account, will be allocated in accordance with the Owner's instructions upon
receipt of the premiums at the Company's Home Office. However, the minimum
percentage, other than zero ("0"), that may be allocated to a Division is 10
percent of the net premium, and fractional percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers," page 24.)
The value of amounts allocated to Divisions of the Separate Account will vary
with the investment performance of the chosen Divisions and the Owner bears the
entire investment risk. This will affect the Policy's Cash Value, and may
affect the death benefit as well. Owners should periodically review their
allocations of premiums and values in light of market conditions and overall
financial planning requirements.
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy to
lapse. Lapse will occur only when the Cash Surrender Value is insufficient to
cover the monthly deduction, and a grace period expires without a sufficient
payment being made. (See also "General Provisions of the Group Contract--Grace
Period--Termination," page 34.)
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium requirements,
the amount of the premium required to keep the Policy in force will be the
amount of the current monthly deduction. (See "Charges and Deductions," page
27.) If the Company does not receive the required amount within the grace
period, the Policy will lapse and terminate without Cash Value. If the Insured
dies during the grace period, any overdue monthly deductions will be deducted
from the death benefit otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
any time within five years after the date of lapse and before the Maturity
Date. The right to reinstate a lapsed Policy will not be affected
14
<PAGE>
by the termination of a Group Contract or the termination of an Owner's
eligibility under the Group Contract during the reinstatement period.
Reinstatement is subject to the following conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company.
2. Payment of a premium that, after the deduction of premium expense
charges, is large enough to cover: (a) the monthly deductions due at the
time of lapse, and (b) two times the monthly deduction due at the time of
reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death. Payment
of death benefit proceeds will not be affected by termination of the Group
Contract or by termination of an Owner's eligibility after issue.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "Payment of Policy Benefits," page 26.)
The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more of the settlement
options set forth in the Policy. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.) Death benefit proceeds will be paid to the
surviving Beneficiary or Beneficiaries specified in the application or as
subsequently changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long as
the Policy remains in force. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 14.) The minimum Face Amount currently is
$25,000.
Option A. Under Option A, the death benefit is the current Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value on the date of
death. The applicable percentage is 250 percent for an Insured Attained Age 40
or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table on page
16. Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. Owners who prefer to have
15
<PAGE>
favorable investment performance reflected in higher Cash Value for the same
Face Amount, rather than increased death benefit, generally should select
Option A.
Option A Example. For purposes of this example, assume that the Insured's
Attained Age is between 0 and 40 and that there is no outstanding Indebtedness.
Under Option A, a Policy with a $50,000 Face Amount will generally pay $50,000
in death benefits. However, because the death benefit must be equal to or
greater than 250 percent of Cash Value, any time the Cash Value of the Policy
exceeds $20,000, the death benefit will exceed the $50,000 Face Amount. Each
additional dollar added to Cash Value above $20,000 will increase the death
benefit by $2.50. Thus, if the Cash Value exceeds $20,000 and increases by $100
because of investment performance or premium payments, the death benefit will
increase by $250. A Policy with a Cash Value of $30,000 will provide a death
benefit of $75,000 ($30,000 x 250%); a Cash Value of $40,000 will provide a
death benefit of $100,000 ($40,000 x 250%); a Cash Value of $50,000 will
provide a death benefit of $125,000 ($50,000 x 250%).
Similarly, so long as Cash Value exceeds $20,000, each dollar taken out of
Cash Value will reduce the death benefit by $2.50. If, for example, the Cash
Value is reduced from $25,000 to $20,000 because of partial withdrawals,
charges, or negative investment performance, the death benefit will be reduced
from $62,500 to $50,000. If at any time, however, the Cash Value multiplied by
the applicable percentage is less than the Face Amount, the death benefit will
equal the current Face Amount of the Policy.
The applicable percentage becomes lower as the Insured's Attained Age
increases. If the Attained Age of the Insured in the example above were, for
example, 50 (rather than between 0 and 40), the applicable
percentage would be 185 percent. The death benefit would not exceed the $50,000
Face Amount unless the Cash Value exceeded approximately $27,028 (rather than
$20,000), and each dollar then added to or taken from the Cash Value would
change the death benefit by $1.85 (rather than $2.50).
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
40 or younger........... 250%
41...................... 243
42...................... 236
43...................... 229
44...................... 222
45...................... 215
46...................... 209
47...................... 203
48...................... 197
49...................... 191
50...................... 185
51...................... 178
52...................... 171
53...................... 164
54...................... 157
55...................... 150
56...................... 146
57...................... 142
58...................... 138
59...................... 134
60...................... 130
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------- ----------
<S> <C>
61...................... 128%
62...................... 126
63...................... 124
64...................... 122
65...................... 120
66...................... 119
67...................... 118
68...................... 117
69...................... 116
70...................... 115
71...................... 113
72...................... 111
73...................... 109
74...................... 107
75 to 90................ 105
91...................... 104
92...................... 103
93...................... 102
94...................... 101
95 or older............. 100
</TABLE>
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company reserves
the right to alter the applicable percentage to the extent necessary to comply
with changes to Section 7702(d) or any successor provision thereto.
16
<PAGE>
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage is
the same as under Option A: 250 percent for an Insured with an Attained Age of
40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the percentage
declines as shown in the Applicable Percentage Table above. Accordingly, under
Option B the amount of the death benefit will always vary as the Cash Value
varies (but will never be less than the Face Amount). Owners who prefer to have
favorable investment performance reflected in higher death benefits for the
same Face Amount generally should select Option B. All other factors equal, for
the same premium dollar, Option B provides lower initial Face Amount resulting
in earlier cash accumulation.
Option B Example. For purposes of this example, assume that the Insured's
Attained Age is 40 or below and that there is no outstanding Indebtedness.
Under Option B, a Policy with a Face Amount of $50,000 will generally provide a
death benefit of $50,000 plus Cash Value. Thus, for example, a Policy with a
Cash Value of $5,000 will have a death benefit of $55,000 ($50,000 + $5,000); a
Cash Value of $10,000 will provide a death benefit of $60,000 ($50,000 +
$10,000). The death benefit, however, must be at least 250 percent of Cash
Value. As a result, if the Cash Value of the Policy exceeds $33,333, the death
benefit will be greater than the Face Amount plus Cash Value. Each additional
dollar of Cash Value above $33,333 will increase the death benefit by $2.50.
Thus, if the Cash Value exceeds $33,333 and increases by $100 because of
investment performance or premium payments, the death benefit will increase by
$250. A Policy with a Cash
Value of $40,000 will provide a death benefit of $100,000 ($40,000 x 250%); a
Cash Value of $50,000 will provide a death benefit of $125,000 ($50,000 x
250%).
Similarly, any time Cash Value exceeds $33,333, each dollar taken out of Cash
Value will reduce the death benefit by $2.50. If, for example, the Cash Value
is reduced from $45,000 to $40,000 because of partial withdrawals, charges, or
negative investment performance, the death benefit will be reduced from
$112,500 to $100,000. If at any time, however, Cash Value multiplied by the
applicable percentage is less than the Face Amount plus the Cash Value, then
the death benefit will be the current Face Amount plus Cash Value of the
Policy.
The applicable percentage becomes lower as the Insured's Attained Age
increases. If the Attained Age of the Insured in the example above were, for
example, 50 (rather than under 40), the applicable percentage would be 185
percent. The amount of the death benefit would be the sum of the Cash Value
plus $50,000 unless the Cash Value exceeded $58,824 (rather than $33,333), and
each dollar then added to or taken from the Cash Value would change the death
benefit by $1.85 (rather than $2.50).
Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option in effect. The Company reserves the right
to limit the number of changes in death benefit options to one each Policy
Year. A request for change must be made directly to the Company in writing. The
effective date of such a change will be the Monthly Anniversary on or following
the date the Company receives the change request.
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request for a change from Option A to Option B. This change may not be made if
it would result in a Face Amount of less than $25,000.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges will
be imposed upon a change from death benefit Option B to Option A. Changing from
Option A to Option B, however, will result in a decrease in the Face Amount
17
<PAGE>
which may, in turn, result in a contingent deferred sales charge. This
contingent deferred sales charge will be assessed on the decrease in Face
Amount in the same manner as it would be assessed on a requested decrease in
Face Amount, as discussed below. In addition, if, prior to or accompanying a
change in the death benefit option, there has been an increase in the Face
Amount, the cost of insurance charge may be different for the increased amount.
(See "Charges and Deductions--Monthly Deduction--Cost of Insurance," page 29.)
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income due to not satisfying the
requirements of Federal tax law. (See "Federal Tax Matters," page 35.)
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written request
for a change in the Face Amount must be sent directly to the Company. A change
in Face Amount may affect the cost of insurance rate and the net amount at
risk, both of which affect an Owner's cost of insurance charge. (See "Charges
and Deductions--Monthly Deduction--Cost of Insurance," page 29.) In addition, a
change in Face Amount may have Federal income tax consequences. (See "Federal
Tax Matters," page 35.)
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000
and the Face Amount remaining in force after any requested decrease may not be
less than $25,000. If, following a decrease in Face Amount, the Policy would
not comply with the maximum premium limitations required by Federal tax law
(see "Payment and Allocation of Premiums," page 12), the decrease may be
limited or Cash Value may be returned to the Owner (at the Owner's election),
to the extent necessary to meet these requirements. A decrease in the Face
Amount will reduce the Face Amount in the following order:
(a) The Face Amount provided by the most recent increase;
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance," page 29), and whether and in what amount a contingent deferred
sales charge will be deducted. If the decrease in Face Amount is made against
coverage that has been in effect for less than ten years and if the Policy
provides for a contingent deferred sales charge, then such charge will be
assessed against all Divisions proportionately. (See "Charges and Deductions--
Sales Charges--Contingent Deferred Sales Charge," page 27.)
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. If approved, the increase will become
effective on the Monthly Anniversary on or following receipt of the
satisfactory evidence of insurability. In addition, the Insured must have an
Attained Age of not greater than 80 on the effective date of the increase. The
increase may not be less than $5,000. Although an increase need not necessarily
be accompanied by an additional premium (unless it is required to meet the next
monthly deduction), the Cash Surrender Value in effect immediately after the
increase must be sufficient to cover the next monthly deduction. (See "Charges
and Deductions--Monthly Deduction," page 28.) An increase in the Face Amount
may result in certain additional charges. (See "Charges and Deductions," page
27.)
An increase in Face Amount may be cancelled within the later of 20 days from
the date the Owner received the new Policy specifications page for the
increase, within 10 days of mailing the right to cancellation notice to the
Owner, or within 45 days after the application for an increase was signed. Upon
cancellation, any additional charges, which would not have been assessed
without the increase, will be refunded to the Owner if requested. If a request
for a refund is not made, the charges will be restored to the Policy's Cash
Value and allocated to Divisions of the Separate Account in the same manner as
they were deducted. Any
18
<PAGE>
contingent deferred sales charge will also be reduced to the amount that would
have been in effect absent the increase. Premiums paid following an increase in
Face Amount and prior to the time the right to cancel the increase expires will
become part of the Policy's Cash Value and will not be subject to refund. (See
"Policy Rights and Privileges--Right to Examine Policy," page 24.)
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the level
of premium payments, and, to a lesser extent, making partial withdrawals from
the Policy. Although the consequences of each of these methods will depend upon
the individual circumstances, they may be generally summarized as follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit," page 15),
decrease the pure insurance protection and the cost of insurance charges
under the Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if
Option A is in effect) or the Cash Value plus the Face Amount (if Option B
is in effect), increased premium payments will increase the pure insurance
protection. Increased premiums should also increase the amount of funds
available to keep the Policy in force.
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 14.)
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals," page 22.)
However, it only affects the amount of pure insurance protection and cost
of insurance charges if the death benefit before or after the withdrawal is
based on the applicable percentage of Cash Value, because otherwise the
decrease in the death benefit is offset by the amount of Cash Value
withdrawn. The primary use of a partial withdrawal is to withdraw Cash
Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the Policy--Postponement of Payments," page 31.) The Owner may decide the
form in which the proceeds will be paid. During the Insured's lifetime, the
Owner may arrange for the death benefit proceeds to be paid in a single sum or
under one or more of the optional methods of settlement described below. The
death benefit will be increased by the amount of the monthly cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "Charges and Deductions,"
page 27.)
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits," page 25.)
An election or change of method of settlement must be in writing. A change in
Beneficiary revokes any previous settlement election. Once payments have begun,
the settlement option may not be changed.
19
<PAGE>
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash Value
in the Separate Account and the Loan Account. The Policy's Cash Value in the
Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, and the charges assessed in
connection with the Policy. An Owner may at any time surrender the Policy and
receive the Policy's Cash Surrender Value. (See "Policy Rights and Privileges--
Surrender and Partial Withdrawals," page 22.) There is no guaranteed minimum
Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the Issue
Date and the Investment Start Date, this amount may be more than the amount of
one monthly deduction. (See "Payment and Allocation of Premiums," page 12.)
Thereafter, on each Valuation Date, the Cash Value in a Division of the
Separate Account will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
(6) Any amounts transferred from the Division during the current Valuation
Period plus transfer charges if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) Any contingent deferred sales charges incurred during the current
Valuation Period in connection with a partial withdrawal or decrease in
Face Amount allocated to the Division; minus
(9) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions," page 27.)
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
20
<PAGE>
(4) Any amount charged against each Division for taxes, or any amount set
aside during the Valuation Period as a reserve for taxes attributable
to the operation or maintenance of each Division; minus
(5) A charge not to exceed .0024547% of the net assets for each day in the
Valuation Period. This corresponds to 0.90% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value. Unit value is obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date; minus
(2) A reduction based upon a charge not to exceed .0024547% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.90% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
Valuation Date and Valuation Period. A Valuation Date is each day that the
New York Stock Exchange is open for trading except for the day after
Thanksgiving, when the Company is closed. A Valuation Period is the period
between two successive Valuation Dates, commencing at the close of trading,
currently 4:00 p.m. (New York time) each Valuation Date and ending at the close
of trading, currently 4:00 p.m. on the next succeeding Valuation Date.
POLICY RIGHTS AND PRIVILEGES
EXERCISING RIGHTS AND PRIVILEGES UNDER THE POLICIES
Owners may exercise their rights and privileges under the Policies (i.e.,
make transfers, change premium allocations, borrow, etc.) by directly notifying
the Company in writing at its Home Office. The Company will send all reports
and other notices described herein or in the Policy directly to the Owner.
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for such loan. The Loan
Value is equal to (a) minus (b) minus (c), where (a) is 85 percent of the Cash
Value of the Policy on the date the Policy Loan is requested, (b) is the amount
of any outstanding Indebtedness, and (c) is any contingent deferred sales
charges. Loan interest is due and payable in arrears on each Policy Anniversary
or on a pro rata basis for such shorter period as the loan may exist. The
minimum amount that may be borrowed is $100. The loan may be completely or
partially repaid at any time while the Insured is living. Any amount due to an
Owner under a Policy Loan ordinarily will be paid within seven days after the
Company receives the loan request at its Home Office, although payments may be
postponed under certain circumstances. (See "General Matters Relating to the
Policy--Postponement of Payments," page 31.)
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. Unless the Owner
requests a different allocation, amounts will be transferred from the Divisions
of the Separate Account in the same proportion that the Policy's Cash Value in
each Division bears to the Policy's total Cash Value, less the Cash Value in
the Loan Account, at the end of the Valuation Period during which the request
for a Policy Loan is received. This will reduce the Policy's Cash Value in the
Separate Account. These transactions will not be considered transfers for
purposes of the limitations on transfers between Divisions as discussed on page
24.
21
<PAGE>
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of Company
management as authorized by the Board of Directors of the Company. The Loan
Account interest credited will be transferred to the Divisions of the Separate
Account: (1) each Policy Anniversary; (2) when a new loan is made; (3) when a
loan is partially or fully repaid; and (4) when an amount is needed to meet a
monthly deduction.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of Policy Loans," below.) The
amount transferred will be deducted from the Divisions of the Separate Account
in the same proportion that the portion of the Cash Value in each Division
bears to the total Cash Value of the Policy minus the Cash Value in the Loan
Account.
Effect of Policy Loans. A loan taken from, or secured by, a Group Contract
may have Federal income tax consequences (See "Federal Tax Matters," page 35.)
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment performance
of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value minus any contingent
deferred sales charges on any Monthly Anniversary, the Policy may lapse,
subject to a grace period. (See "Charges and Deductions," page 27.) A
sufficient payment must be made within the later of the grace period of 62 days
from the Monthly Anniversary immediately before the date Indebtedness exceeds
the Cash Value less any contingent deferred surrender charges, or 31 days after
notice that the Policy will terminate without a sufficient payment has been
mailed, or the Policy will lapse and terminate without value. A lapsed Policy,
however, may later be reinstated. (See "Payment and Allocation of Premiums--
Policy Lapse and Reinstatement," page 14.)
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part at
any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as repayment
of Indebtedness. When a loan repayment is made, an amount securing the
Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount. A Loan Subaccount exists for each Division of the Separate Account.
Amounts transferred to the Loan Account to secure Indebtedness are allocated to
the appropriate Loan Subaccount to reflect its origin.
SURRENDER AND PARTIAL WITHDRAWALS
At any time during the lifetime of the Insured and while a Policy is in
force, the Owner may surrender, or make a partial withdrawal under, the Policy
by sending a written request to the Company. The amount available upon
surrender is the Cash Surrender Value (described below) at the end of the
Valuation Period during which the surrender request is received at the
Company's Home Office. Amounts payable upon
22
<PAGE>
surrender or a partial withdrawal ordinarily will be paid within seven days of
receipt of the written request. (See "General Matters Relating to the Policy--
Postponement of Payments," page 31.) Surrenders and partial withdrawals may
have Federal income tax consequences. (See "Federal Tax Matters," page 35.)
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The Cash
Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness and any contingent deferred sales charge. (See "Charges and
Deductions--Sales Charges--Contingent Deferred Sales Charge," page 27.)
Surrender proceeds will be paid in a single sum. If the request is received on
a Monthly Anniversary, the monthly deduction otherwise deductible will be
included in the amount paid. Coverage under a Policy will terminate as of the
date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to one
partial withdrawal each Policy Month from the Separate Account. The minimum
amount of a partial withdrawal, net of any transaction charges and any
applicable contingent deferred sales charges, is at least $500. The minimum
amount that can be withdrawn from a Division is $50, or the Policy's Cash Value
in a Division, if smaller. The maximum amount that may be withdrawn, including
the partial withdrawal transaction charge, is the Loan Value. The partial
withdrawal transaction charge is equal to the lesser of $25 or two percent of
the amount withdrawn.
The Owner may allocate the amount withdrawn, subject to the above conditions,
among the Divisions of the Separate Account. If no allocation is specified,
then the partial withdrawal will be allocated among the Divisions of the
Separate Account in the same proportion that the Policy's Cash Value in each
Division bears to the total Cash Value of the Policy, less the Cash Value in
the Loan Account, on the date the request for the partial withdrawal is
received.
A contingent deferred sales charge may be imposed on a partial withdrawal if
the partial withdrawal results in a decrease in the Face Amount and if the
decrease is made against coverage that has been in effect for less than ten
years. A partial withdrawal will decrease the Face Amount in two situations.
First, if the death benefit Option A is in effect and the death benefit equals
the Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge and any applicable contingent deferred
sales charge. Second, if the death benefit equals a percentage of Cash Value
(whether Option A or Option B is in effect), then a partial withdrawal will
decrease the Face Amount by the amount that the partial withdrawal plus the
partial
withdrawal transaction charge and any applicable contingent deferred sales
charge exceeds the difference between the death benefit and the Face Amount.
The death benefit also will be reduced in this circumstance. If Option B is in
effect and the death benefit equals the Face Amount plus the Cash Value, the
partial withdrawal will not reduce the Face Amount, but it will reduce the Cash
Value and, thus, the death benefit by the amount of the partial withdrawal plus
the partial withdrawal transaction charge. In this last situation, no
contingent deferred sales charge will be deducted.
The Face Amount will be decreased in the following order: (i) the Face Amount
at issue; and (2) any increases in the same order in which they were issued.
Where the decrease causes a partial reduction in an increase or the Face Amount
at issue, a proportionate share of the contingent deferred sales charge for
that increase or the Face Amount at issue will be deducted. This charge is
described in more detail under "Charges and Deductions--Sales Charges--
Contingent Deferred Sales Charge," on page 27.
Generally, the partial withdrawal transaction charge and any contingent
deferred sales charge imposed in connection with a partial withdrawal will be
allocated among the Divisions of the Separate Account in the same proportion as
the partial withdrawal is allocated. If, following a partial withdrawal,
insufficient funds remain in a Division to pay the partial withdrawal
transaction charge and any contingent deferred sales charges allocated to a
Division, the unpaid charges will be allocated equally among the remaining
Divisions.
23
<PAGE>
In addition, an Owner may request that the partial withdrawal transaction
charge and any contingent deferred sales charges applicable to an amount
withdrawn from a Division be paid from the Owner's Cash Value in another
Division. No amount may be withdrawn that would result in there being
insufficient Cash Value to meet any contingent deferred sales charges that
would be payable upon the surrender of the remaining Cash Value immediately
following the partial withdrawal.
The Face Amount remaining in force after a partial withdrawal may not be less
than $25,000. Any request for a partial withdrawal that would reduce the Face
Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection," page 19.)
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account. Requests for transfers from or among Divisions of the
Separate Account must be made in writing directly to the Company and may be
made once each Policy Month. Transfers must be in amounts of at least $250 or,
if smaller, the Policy's Cash Value in a Division. The Company will effectuate
transfers and determine all values in connection with transfers as of the end
of the Valuation Period during which the transfer request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 20 days after receiving it, within 45
days after the Owner signed the application, or within 10 days of mailing a
notice of the cancellation right to the Owner, whichever is latest. If a Policy
is cancelled within this time period, a refund will be paid. The refund will
equal all premiums paid under the Policy.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
the Company. A refund of premiums paid by check may be delayed until the check
has cleared the Owner's bank. (See "General Matters Relating to the Policy--
Postponement of Payments," page 31.)
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit," page 15) also may be cancelled. The request for cancellation must be
made within the latest of 20 days from the date the Owner received the new
Policy specifications pages for the increase, 10 days of mailing the right to
cancellation notice to the Owner, or 45 days after the Owner signed the
application for the increase.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have
24
<PAGE>
been made absent the increase (see "Charges and Deductions--Monthly Deduction,"
page 28). If no request is made, the Company will increase the Policy's Cash
Value by the amount of these additional charges. This amount will be allocated
among the Divisions of the Separate Account in the same manner as it was
deducted. The contingent deferred sales charge also will be reduced to the
amount that would have been in effect absent the increase (see "Charges and
Deductions--Sales Charges--Contingent Deferred Sales Charge," page 27).
CONVERSION RIGHT TO A FIXED BENEFIT POLICY
Once during the first 24 Policy Months following the Issue Date of the
Policy, the Owner may, upon written request, convert a Policy still in force to
a life insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. In the event a
Certificate has been amended to operate as an Individual Policy following an
Owner's change in eligibility under a Group Contract, the conversion right will
be measured from the Issue Date of the original Certificate. (See "Policy
Rights and Privileges--Eligibility Change Conversion," page 25). No evidence of
insurability will be required when this right is exercised. However, the
Company will require that the Policy be in force and that the Owner repay any
existing Indebtedness. At the time of the conversion, the new Policy will have,
at the Owner's option, either the same death benefit or the same net amount at
risk as the original Policy. The new Policy will also have the same Issue Date
and Issue Age as the original Policy. The premiums for the new Policy will be
based on the Company's rates in effect for the same Issue Age and rate class as
the original Policy.
In addition, once during the first 24 Policy Months following the effective
date of a requested increase in Face Amount (i.e., an increase that is not the
result of a change in death benefit options), the Owner may, upon written
request, convert the amount of the increase in Face Amount to a life insurance
policy which also provides for fixed benefits. Premiums under this new contract
will be based on the Company's rates in effect for the same Issue Age and rate
class of the Insured as were applied on the effective date of the increase in
the Face Amount. The conditions and principles, described above, which are
applicable to a conversion of the entire Policy, will be equally applicable to
the conversion of an increase in Face Amount to a fixed-benefit policy.
ELIGIBILITY CHANGE CONVERSION
If an Owner's eligibility under a Group Contract ends, the Insured's coverage
will continue nevertheless unless the Policy is no longer in force. An Owner's
eligibility will end if the Group Contract is terminated or
if the Owner leaves the group or otherwise fails to satisfy the eligibility
requirements set forth in a particular Group Contract. Even if the Policy is
not in force due to lapse, the right to reinstate and thus to convert a lapsed
Policy will not be affected by the change in the Owner's eligibility during the
reinstatement period.
The Certificate issued in connection with the Group Contract will be amended
automatically so that it will continue in force as an Individual Policy. The
rights, benefits, and guaranteed charges will not be altered by this amendment.
The amendment will be mailed to the Owner within 31 days after the Company
receives written notice that (a) the Owner leaves the group or otherwise fails
to satisfy the eligibility requirements under a Group Contract or (b) after the
termination of the Group Contract. If, at the time the conversion occurs, the
Policy is in a grace period (see "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 14), any premium necessary to prevent the Policy
from lapsing must be received by to the Company at its Home Office before the
new Individual Policy will be mailed. A new planned premium schedule will be
established which will have the same planned annual premium utilized under the
Group Contract, but, ordinarily, the planned payment intervals will be no more
frequent than quarterly. Of course, unscheduled premium payments can be made at
any time. (See "Payment and Allocation of Premiums--Premiums," page 12.)
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<PAGE>
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay the
Cash Surrender Value of the Policy to the Owner on the Maturity Date. An Owner
may elect to have amounts payable on the Maturity Date paid in a single sum or
under a settlement option. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.) Amounts payable on the Maturity Date ordinarily
will be paid within seven days of that date, although payment may be postponed
under certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments," page 31.) A Policy will mature if and when the
Insured reaches Attained Age 95.
PAYMENT OF POLICY BENEFITS
Settlement Options. The settlement options described below apply to the
payment of death benefit proceeds, as well as to benefits payable at maturity.
The minimum amount of proceeds that may be applied under a settlement option is
$5,000. Each monthly payment must be at least $50. If a payment would be less
than $50, payments will be made less often so that the amount of each payment
is at least $50. Once a settlement option is in effect, there will no longer be
value in the Separate Account. The Company may make other settlement options
available in the future. For additional information concerning these options,
see the Policy itself. The following settlement options are currently
available:
Option A--Life Income. The Company will pay equal monthly payments that will
be made for the payee's lifetime.
Option B--Life Income for Two Lives. The Company will pay monthly
installments jointly and to two named payees if both are living when the
installments become payable. One payee will be designated as primary payee.
Full installments will continue so long as the primary payee is living. If the
primary payee dies after installments begin, full installments or installments
of 1/2 or 2/3 (whichever the Owner elected when applying for this option) will
continue to the other payee during his or her lifetime.
Option C--Income for Specified Number of Years and Life Thereafter. The
Company will pay monthly installments beginning on the effective date of the
option and continuing for 5, 10, 15 or 20 years certain, as may be chosen, and
after that during the payee's lifetime.
Option D--Life Income With Cash Refund. The Company will pay equal monthly
installments as long as the payee lives. If the payee dies before the total
amounts paid equal the proceeds applied, the Company pays the difference in one
sum.
Option E--Installments of a Specified Amount. The Company will pay
installments at dates and in amounts chosen by the payee with the Company's
approval. The Company will continue to make payments until all of the proceeds,
with interest, are paid. The final payment will not exceed the unpaid balance.
Option F--Income for Specified Number of Years. The Company will pay monthly
installments beginning on the effective date of the option and continuing for a
specified number of years, not to exceed 30 years.
Option G--Interest. The Company will hold the proceeds on deposit during the
payee's lifetime or for any other period selected with the Company's approval.
Interest may be accumulated or received in monthly, quarterly, semiannual, or
annual payments, as elected. Interest begins to accrue as of the date of death,
for death benefit proceeds; the Maturity Date, for benefits payable upon
maturity of a Policy; and the date a request for surrender is received, for
surrender of a Policy.
The Company additionally offers a settlement option rider at no additional
cost that accelerates the death benefit otherwise payable in the event of
terminal illness or permanent nursing home confinement of the Insured. This
option may not be available in all states. In addition, should it be determined
that such rider would adversely affect the qualification of the Policy as life
insurance, the Company will no longer offer the
26
<PAGE>
rider. This describes the generally available benefits. The option is a
voluntary election to completely settle the policy for a reduced benefit should
the Insured have a life expectancy of 12 months or less; or be permanently
confined to a qualified nursing home and be expected to remain confined until
death. This option will pay the benefit to the Owner. Any irrevocable
beneficiary and assignee of record must provide written authorization in order
for the Owner to receive the benefit.
The benefit payable is the Cash Surrender Value (less any outstanding
indebtedness) plus a Benefit Factor multiplied by (a) - (b) where (a) is the
death benefit payable as if death had occurred and (b) is net cash surrender
value. The Benefit Factor for terminal illness is .85 and the Benefit Factor
for nursing home confinement is .70.
Benefits received as a result of this settlement option do not currently
qualify as death benefits under Section 101(a)(1) of the Internal Revenue Code.
Therefore, proceeds would be treated as any other distribution as though the
contract was surrendered. (See "Federal Tax Matters", page 35.)
The Company may, from time to time, offer additional settlement options
and/or more favorable settlement option rates to all Insureds or Beneficiaries
under the Policies.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policies to compensate the
Company for providing the insurance benefits set forth in the Policies,
administering the Policies, incurring expenses in distributing the Policies,
and assuming certain risks in connection with the Policies.
SALES CHARGES
The sales charges assessed under the Policies consist of a front-end charge
("premium expense charge") and a deferred charge ("contingent deferred sales
charge"). In no event will the total sales charges on premiums paid up to 20
times the guideline annual premium for the Face Amount at issue (or for any
increase in Face Amount) exceed 9 percent of those premiums. The guideline
annual premium will be fixed and determined on the Issue Date or the effective
date of any requested increase in Face Amount and will be set forth in the
Policy's specifications pages and in the new specifications pages issued upon
an increase. The sales charges will not change in the event that an Owner is no
longer eligible under a Group Contract but continues coverage on an individual
basis.
The sales charges may not be sufficient to cover the distribution expenses
incurred by the Company. The Company expects to recover any deficiency from its
general assets, which may include profits from the mortality and expense risk
charge.
Premium Expense Charge. Prior to allocation of net premiums among the
Divisions of the Separate Account, premium payments will be reduced by a
premium expense charge of 2.5%. The premium payment less the premium expense
charge less charges for premium taxes equals the net premium.
Contingent Deferred Sales Charge. During the first ten Policy Years, the
Company assesses a charge upon surrender or lapse of the Policy, a requested
decrease in Face Amount, or a partial withdrawal that causes the Face Amount to
decrease. The contingent deferred sales charge is calculated separately for the
initial Face Amount and for any increase in Face Amount.
Assuming no increases in Face Amount have yet become effective, the
contingent deferred sales charge will be equal to 25 percent of premiums
received by the Company during the first Policy Year up to the guideline annual
premium for the initial Face Amount. The amount of the charge will decrease
each year after the first Policy Year by one-tenth of the total charge until it
reaches zero at the end of ten Policy Years as shown in the table below.
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<PAGE>
If an increase in Face Amount has gone into effect and the Policy is
surrendered within the first 12 Policy Months after the effective date of
increase, the additional charge associated with the increase will equal 25
percent of premiums "associated with the increase" (explained below) which are
received by the Company within the 12 Policy Months of the effective date of
the increase, up to the guideline annual premium for the increase. The charge
applicable to an increase in Face Amount will decrease by one-tenth of the
total charge each year after the first year that the increase is in effect
until it reaches zero at the end of ten years, as shown below.
The timing of premium payments may affect the amount of the contingent
deferred sales charge under a Policy, as the charge is based only on premiums
actually received by the Company in the first Policy Year or in the first 12
Policy Months after an increase in Face Amount.
CONTINGENT DEFERRED SALES CHARGE (CDSC) PERCENTAGE TABLE
<TABLE>
<CAPTION>
PERCENTAGE OF THE CDSC
POLICY YEAR:* PAYABLE:
------------- ----------------------
<S> <C>
1.................................................. 100%
2.................................................. 90%
3.................................................. 80%
4.................................................. 70%
5.................................................. 60%
6.................................................. 50%
7.................................................. 40%
8.................................................. 30%
9.................................................. 20%
10................................................. 10%
11 and later....................................... 0%
</TABLE>
- --------
* For requested increases, years are measured from the effective date of the
increase.
Because additional premium payments are not required to fund a requested
increase in Face Amount, a special rule applies to determine the amount of
premiums "associated with the increase." In general, the premiums associated
with the increase will equal the sum of a proportionate share of the Cash
Surrender Value on the effective date of the increase, before any deductions
are made, plus a proportionate share of any premium payments actually made on
or after the effective date of the increase. This means that, in effect, a
portion of the existing Cash Value will be deemed to be a premium payment for
the increase, and subsequent premium payments will be prorated. The proportion
of existing Cash Value and subsequent premium payments associated with the
increase will be based on the relative guideline annual premium payments for
the increase and for the Policy's initial Face Amount.
Assuming there has been no prior requested increase in Face Amount, the
amount of the contingent deferred sales charge deducted upon a decrease in Face
Amount will equal a fraction of the charge that would be deducted if the Policy
were surrendered at that time. The fraction will be determined by dividing the
amount of the decrease by the Policy's Face Amount before the decrease and
multiplying the result by the charge.
If there has been a prior increase in Face Amount, the amount of the charge
will depend on whether the initial Face Amount or subsequent increases in Face
Amount are being decreased, which in turn will depend on whether the decrease
arises from a partial withdrawal or a requested decrease in Face Amount. (See
"Policy Rights and Privileges--Surrender and Partial Withdrawals," page 22, and
"Policy Benefits--Death Benefit--Change in Face Amount," page 18.) Where the
decrease causes a partial reduction in an increase or in the initial Face
Amount a proportionate share of the contingent deferred sales charge for that
increase or the initial Face Amount will be deducted.
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<PAGE>
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premium taxes, the Company deducts a charge of 2 percent of premium
paid from all Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate the Company for (a) certain administrative costs; (b)
insurance underwriting and acquisition
expenses in connection with issuing a Policy; (c) the cost of insurance; and
(d) the cost of optional benefits added by rider. The monthly deduction will be
deducted on the Investment Start Date and on each succeeding Monthly
Anniversary. It will be allocated among each Division of the Separate Account
in the same proportion that a Policy's Cash Value in each Division bears to the
total Cash Value of the Policy, less the Cash Value in the Loan Account, on the
date the deduction is made. Because portions of the monthly deduction, such as
the cost of insurance, can vary from month to month, the monthly deduction
itself will vary in amount from month to month.
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping, processing
death benefit claims, cash surrenders, partial withdrawals, Policy changes,
reporting and overhead costs, processing applications, and establishing Policy
records. As reimbursement for administrative expenses related to the
maintenance of each Policy and the Separate Account, the Company deducts a
monthly administration charge of $3.00 per month from each Policy.
This charge is guaranteed not to increase over the life of the Policy. Nor
will the administrative charge change in the event that the Owner is no longer
eligible for group coverage, but continues coverage on an individual basis. The
Company has designed the administrative charge so as not to make any profit on
the charge. In addition, where the Company believes that lower administrative
costs will be incurred in connection with a particular Group Contract due to
the number of eligible Owners or administrative support required, the Company
may deduct a lower charge from Policies issued under that Group Contract.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience. The Company currently issues
the Policies on a simplified underwriting basis without regard to the sex or
smoker/non-smoker status of the Insured. If the Policies were issued on a
guaranteed issue underwriting basis, the current cost of insurance rates might
increase. The Company also reserves the right to issue Policies on another
basis which is determined by the Company to be appropriate for the group and
which may include guaranteed issue.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and the gender mix (i.e., the
proportion of men and women covered under a particular Group Contract). The
cost of insurance rates generally increase as the Insured's Attained Age
increases. An Insured's rate class is generally based on the expected number of
potential Insureds as well as other factors that may affect the mortality risks
assumed by the Company in connection with a particular Group Contract. All
other factors being equal, the cost of insurance rates generally decrease by
rate class as the expected number of potential Insureds in the rate class
increase. The Company reserves the right to change criteria on which a rate
class will be based in the future. The Company will estimate the gender mix of
the pool of
29
<PAGE>
Insureds under a Group Contract upon issuance of the Group Contract. Each year
on the Group Contract's anniversary, the Company may adjust the rate to reflect
the actual gender mix for the particular group.
Currently, in the event that the Owner's eligibility under a Group Contract
ceases, the cost of insurance rate will continue to reflect the gender mix of
the pool of Insureds at the time the Insured's eligibility ceased. However, at
some time in the future, the Company reserves the right to base the gender mix
and rate class on the group consisting of those Insureds who are no longer
under a Group Contract.
The current cost of insurance rates will not be greater than the guaranteed
cost of insurance rates set forth in the Policy. These guaranteed rates are 125
percent of the maximum rates that could be charged based on the 1980
Commissioners Standard Ordinary Mortality Table C ("1980 CSO Table"). The 1980
CSO Table assumes a blending of sixty percent male and forty percent female.
The guaranteed rates are higher than 100 percent of the maximum rates in the
1980 CSO Table because the Company uses simplified underwriting procedures
whereby the insured is not required to submit to a medical or paramedical
examination. The current cost of insurance rates are generally lower than 100
percent of the 1980 CSO Table. Any change in the current cost of insurance
rates, except those changes made to adjust for changes in the gender mix of the
pool of Insureds under a particular Group Contract, will apply to all persons
of the same Attained Age and rate class whose initial Face Amounts or increases
in Face Amount have been in force for the same length of time. (For purposes of
computing guideline premiums under Section 7702 of the Internal Revenue Code of
1986, as amended, the Company will use 100 percent of the 1980 CSO Table.)
The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0040741 (which reduces the net
amount at risk, solely for purposes of computing the cost of insurance, by
taking into account assumed monthly earnings at an annual rate of five
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that for
the initial Face Amount, the net amount at risk will be calculated separately
for each rate class. If Option A is in effect, for purposes of determining the
net amounts at risk for each rate class, Cash Value will first be considered a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, the excess Cash Value will then be considered a part of each
increase in order, starting with the first increase. If Option B is in effect,
the net amount at risk for each rate class will be determined by the Face
Amount associated with that rate class. In calculating the cost of insurance
charge, the cost of insurance rate for a Face Amount is applied to the net
amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option A
and Option B when more than one rate class is in effect, a change in the death
benefit option may result in a different net amount at risk for each rate class
than would have occurred had the death benefit option not been changed. Since
the cost of insurance is calculated separately for each rate class, any change
in the net amount at risk resulting from a change in the death benefit option
may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," page 15, and "Policy Rights and Privileges--Surrender
and Partial Withdrawals," page 22.)
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal to cover the
administrative costs incurred in processing the partial withdrawal.
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at the rate of .0024547% of the net assets of each
Division of the Separate Account, which equals an annual rate of .90% of those
net assets. This deduction is guaranteed not to increase for the duration of
the Policy. The Company may realize a profit from this charge.
30
<PAGE>
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount of
death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future. Charges for other
taxes, if any, attributable to the Account may also be made. (See "Federal Tax
Matters," page 35.)
Expenses of American Series Fund. The value of the net assets of the Separate
Account will reflect the investment advisory fee and other expenses incurred by
American Series Fund. (See "The Company and the Separate Account--American
Variable Insurance Series," page 10.)
GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the SEC; (ii) the SEC by order
permits postponement for the protection of Owners; or (iii) an emergency
exists, as determined by the SEC, as a result of which disposal of securities
is not reasonably practicable or it is not reasonably practicable to determine
the value of the Separate Account's net assets.
Payments under the Policy of any amounts derived from premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE GROUP CONTRACT
The Policy, the attached application, endorsements, any application for an
increase in Face Amount, and any application for reinstatement constitute the
entire contract between the Owner and the Company. Apart from the rights and
benefits described in the Certificate and incorporated by reference into the
Group Contract, the Owner has no rights under the Group Contract. All
statements made by the Owner or Insured in the application are considered
representations and not warranties, except in the case of fraud. Only
statements in the application and any supplemental applications can be used to
contest a claim or the validity of the Policy. Any change to the Policy must be
approved in writing by the President, a Vice President, or the Secretary of the
Company. No agent has the authority to alter or modify any of the terms,
conditions, or agreements of the Policy or to waive any of its provisions.
CONTROL OF POLICY
The Insured will be considered Owner of the Policy unless another person is
shown as the Owner in the application. Ownership may be changed, however, as
described below. The Owner is entitled to all rights provided by the Policy,
prior to its Maturity Date. After the Maturity Date, the Owner cannot change
the payee nor the mode of payment, unless otherwise provided in the Policy. Any
person whose rights of ownership depend upon some future event will not possess
any present rights of ownership. If there is more than one Owner at a given
time, all must exercise the rights of ownership. If the Owner should die, and
the Owner is not the Insured, the Owner's interest will go to his or her estate
unless otherwise provided.
BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If
31
<PAGE>
there is more than one Beneficiary at the death of the Insured, each will
receive equal payments unless otherwise provided by the Owner. If no
Beneficiary is living at the death of the Insured, the proceeds will be payable
to the Owner or, if the Owner is not living, to the Owner's estate.
CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received at
the Company's Home Office. The Company will not be liable for any payment made
or action taken before the Company received the written request for change. If
the Owner is also a Beneficiary of the Policy at the time of the Insured's
death, the Owner may, within 60 days of the Insured's death, designate another
person to receive the Policy proceeds.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or any
applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment thereunder
will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from the
Issue Date during the lifetime of the Insured. An increase in Face Amount or
addition of a rider after the Issue Date is incontestable after such increase
or addition has been in force for two years from its effective date during the
lifetime of the Insured. Any reinstatement of a Policy is incontestable, except
for nonpayment of premiums, only after it has been in force during the lifetime
of the Insured for two years after the effective date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an acknowledged copy to
the Owner. The Company is not responsible for determining the validity of any
assignment. Payment of Policy proceeds is subject to the rights of any assignee
of record. If a claim is based on an assignment, the Company may require proof
of the interest of the claimant. A valid assignment will take precedence over
any claim of a Beneficiary.
SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the
32
<PAGE>
laws of the state in which the Policy was delivered, if less than two years),
the amount payable will be limited to premiums paid, less any partial
withdrawals and outstanding Indebtedness. If the Insured, while sane or insane,
dies by suicide within two years after the effective date of any increase in
Face Amount, the death benefit for that increase will be limited to the amount
of the monthly deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide when
the Policy, or any increase in Face Amount, was applied for.
MISSTATEMENT OF AGE AND CORRECTIONS
If the age of the Insured has been misstated in the application, the amount
of the death benefit will be that which the most recent cost of insurance
charge would have purchased for the correct age.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the American
Series and a list of the portfolio securities held in each Fund. Receipt of
premium payments directly from the Owner, transfers, partial withdrawals,
Policy Loans, loan repayments, changes in death benefit options, increases or
decreases in Face Amount, surrenders and reinstatements will be confirmed
promptly following each transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to a Sales Agreement with the Company.
Walnut Street is a wholly-owned subsidiary of General American Holding Company,
which is an affiliate of the Company. Walnut Street is registered with the SEC
under the Securities Exchange Act of 1934 as a broker-dealer and is a member of
the National Association of Securities Dealers. The Policies will be sold by
broker-dealers who have entered into written sales agreements with Walnut
Street.
Agents will receive commissions based on a commission schedule and the sales
agreements. Agent first-year commissions are based on a percentage of first-
year premiums. The commission rates will generally be no more than 27.5 percent
of first-year premiums paid up to the guideline annual premium. No renewal
commissions are paid.
Walnut Street received $192,684 in commissions on the Policies during the
year ended December 31, 1993, $230,287 for the year ended December 31, 1994,
and $260,132 for the year ended December 31, 1995.
GENERAL PROVISIONS OF THE GROUP CONTRACT
ISSUANCE
The Group Contract will be issued upon receipt of a signed application for
Group Insurance signed by a duly authorized officer of the Contractholder and
acceptance by a duly authorized officer of the Company at its Home Office.
33
<PAGE>
PREMIUM PAYMENTS
The Contractholder may remit planned premium payments for Owners in an amount
authorized by the Owner. All planned premiums under a Group Contract must be
remitted in advance to the Company. The planned premium payment interval is
agreed to by the Contractholder and the Company. Prior to each planned payment
interval, the Company will furnish the Contractholder with a statement of the
planned premium payments to be made under the Group Contract or such other
notification as has been agreed to by the Contractholder and the Company. If
the Contractholder offers cash management or financial services accounts and an
Owner has such an account, the Contractholder may make planned premium payments
from the Owner's account if authorized to do so by the Owner.
GRACE PERIOD
If the Contractholder does not remit planned premium payments in a timely
fashion, the Group Contract will be in default. A grace period of 31 days
begins on the date that the planned premiums were scheduled to be remitted. If
the Contractholder does not remit premiums prior to the end of the grace
period, the Group Contract will terminate. However, the Individual Insurance
will continue following the Group Contract's termination, provided such
insurance is not surrendered or cancelled by the Owner. (See "Policy Rights and
Privileges--Eligibility Change Conversion," page 25.) If the Contractholder
fails to remit premiums to the Company for a particular Owner because that
Owner does not have sufficient funds in his or her cash management account, the
Contractholder will not be deemed to be in default.
TERMINATION
Except as described in "Grace Period" above, the Contract will be terminated
immediately upon default. In addition, the Company may end a Group Contract or
any of its provisions on 31 days notice. If the Group Contract terminates, any
Policies in effect will remain in force on an individual basis, unless such
insurance is surrendered or cancelled by the Owner. New Policies will be issued
as described in "Policy Rights and Privileges--Eligibility Change Conversion,"
page 25. In addition, if the Group Contract terminates, the Owner will no
longer be able to make planned premium payments from a cash management or
financial services account offered by the Contractholder.
RIGHT TO EXAMINE GROUP CONTRACT
The Contractholder may terminate the Group Contract within 20 days after
receiving it, within 45 days after the application was signed or within 10 days
of mailing a notice of the cancellation right, whichever is latest. To cancel
the Group Contract, the Contractholder should mail or deliver the Group
Contract to the Company.
ENTIRE GROUP CONTRACT
The Group Contract, with the attached copy of the Contractholder's
application and other attached papers, if any, is the entire contract between
the Contractholder and the Company. All statements made by the Contractholder,
any Owner or any Insured will be deemed representations and not warranties.
Misstatements will not be used in any contest or to reduce claim under the
Group Contract, unless it is in writing. A copy of the application containing
such misstatement must have been given to the Contractholder or to the Insured
or to his Beneficiary, if any.
INCONTESTABILITY
The Company cannot contest the Group Contract after it has been in force for
two years from the date of issue.
34
<PAGE>
OWNERSHIP OF GROUP CONTRACT
The Contractholder owns the Group Contract. The Group Contract may be changed
or ended by agreement between the Company and the Contractholder without the
consent of, or notice to, any person claiming rights or benefits under the
Group Contract. However, the Contractholder does not have any ownership
interest in the Policies issued under the Group Contract. The rights and
benefits under the Policies inure to the benefit of the Owners, Insureds, and
Beneficiaries as set forth herein and in the Policies.
FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is limited.
The Company nonetheless believes (largely in reliance on IRS Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that the
Policy should meet the Section 7702 definition of a life insurance contract. If
a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy. Therefore, if it is subsequently
determined that a Policy does not satisfy Section 7702, the Company will take
whatever steps are appropriate and necessary to attempt to cause such Policy to
comply with Section 7702, including possibly refunding any premiums paid that
exceed the limitations allowable under Section 7702 (together with interest or
other earnings on any such premiums refunded as required by law). For these
reasons, the Company reserves the right to modify the Policy as necessary to
attempt to qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated as
a life insurance contract for Federal tax purposes. Although the Company does
not control the American Series or its investments, the Series has represented
that it intends to comply with the diversification requirements prescribed by
the Treasury in Treas. Reg. section 1.817-5. Thus, the Company believes that
each Division of the Separate Account, through the American Series, will be in
compliance with the requirements prescribed by the Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
35
<PAGE>
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
significant guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company does not know what standards will be set forth, if any,
in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being considered the owner of
a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. In general. As a life insurance contract, the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101(a)(1) of the Code.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, a conversion to a fixed policy, a Policy loan, an unscheduled premium
payment, a Policy lapse with an outstanding loan, a partial withdrawal, a
surrender, or an assignment of the Policy may have Federal income tax
consequences depending on the circumstances. In addition, Federal estate and
state and local estate, inheritance, and other tax consequences of ownership or
receipt of Policy proceeds depend on the circumstances of each Policy owner or
Beneficiary. A competent tax adviser should be consulted for further
information.
The Federal income tax consequences associated with adding the Accelerated
Death Benefit Settlement Option Rider or receiving the benefits under such a
rider are uncertain. Accordingly, you are urged to consult a tax advisor before
adding the rider or accepting benefits under the rider.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract." Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
2. Policies classified as modified endowment contracts. In general, a Policy
will be a modified endowment contract if the accumulated premiums paid at any
time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. Further, a Policy that is not otherwise a modified endowment contract
may become a modified endowment contract if it is "materially changed." The
determination whether a Policy will be a modified endowment contract after a
material change generally depends upon the relationship of the death benefit
and the cash value at the time of such change and the additional premiums paid
in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a
36
<PAGE>
modified endowment contract are extremely complex. Therefore, a current or
prospective Policy owner is strongly advised to retain and consult with a
competent advisor before purchasing a Policy, making an unscheduled premium
payment on an existing Policy, or making any change in an existing Policy, to
determine whether the Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified endowment
contract. Although the Company cannot provide complete assurance at this time
that a Policy will not inadvertently become a modified endowment contract, it
is continuing its efforts to enhance its administrative systems to
automatically monitor potential modified endowment classifications.
3. Distributions from Policies Classified as Modified Endowment Group
Contracts. Policies classified as modified endowment contracts will be subject
to the following new tax rules: First, all distributions, including
distributions upon surrender and benefits paid at maturity, from such a Policy
are treated as ordinary income subject to tax up to the amount equal to the
excess (if any) of the cash value immediately before the distribution over the
investment in the Policy (described below) at such time. Second, loans taken
from, or secured by, such a Policy (as well as due but unpaid interest that is
added to the loan amount) are treated as distributions from such a Policy and
taxed accordingly. Third, a 10 percent additional income tax is imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distributions or loan is
made on or after the Policy owner attains age 59 1/2, is attributable to the
Policy owner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Policy owner or the
joint lives (or joint life expectancies) of the Policy owner and the Policy
owner's Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that
a distribution from a Policy that is not a modified endowment contract could
later become taxable as a distribution from a modified endowment contract.
4. Distributions From Policies Not Classified as Modified Endowment Group
Contracts. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's death benefit (e.g., partial withdrawal or a
change from Option B to Option A) or any other change that reduces benefits
under the Policy in the first 15-years after the Policy is issued and that
results in a cash distribution to the Policy owner in order for the Policy to
continue complying with the section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a modified endowment contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional income tax.
5. Policy loan interest. If there is any borrowing against a Policy, the
interest paid on the loan may not be tax deductible. A Policyowner should
consult a qualified tax adviser before deducting interest on a policy loan.
6. Investment in the Policy. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Policy owner (except that the amount of any loan from, or secured by, a
Policy that is a modified endowment contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a modified endowment contract to the
extent that such amount is included in the gross income of the Owner.
37
<PAGE>
7. Multiple Policies. All modified endowment contracts that are issued by the
Company (or its affiliates) to the same Policy owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be
properly attributable to the Separate Account or to the Policies.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases and redemptions of
American Series shares by each of the Divisions. Additional protection for the
assets of the Separate Account is afforded by a blanket fidelity bond issued by
Reliance Insurance Company in the amount of $5 million, covering all officers
and employees of the Company who have access to the assets of the Separate
Account.
VOTING RIGHTS
To the extent required by law, the Company will vote the shares of American
Series held in the Separate Account at regular and special shareholder meetings
of American Series in accordance with instructions received from persons having
voting interests in the corresponding Divisions of the Separate Account. If,
however, the 1940 Act or any regulation thereunder should be amended or if the
present interpretation thereof should change, and as a result the Company
determines that it is permitted to vote shares of American Series in its own
right, it may elect to do so.
The Owners of Policies ordinarily are the persons having a voting interest in
the Divisions of the Separate Account. The number of votes which an Owner has
the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Fund in which the Division invests. Fractional
shares will be counted. The number of votes of the Fund which the Owner has
right to instruct will be determined as of the date coincident with the date
established by that Fund for determining shareholders eligible to vote at the
meeting of American Series. Voting instructions will be solicited by written
communications prior to such meeting in accordance with procedures established
by American Series.
Because the Funds of the American Series serve as investment vehicles for
this Policy as well as for other variable life insurance policies sold by
insurers other than the Company and funded through other separate investment
accounts, persons owning the other policies will enjoy similar voting rights.
The Company will vote Fund shares held in the Separate Account for which no
timely voting instructions are received and Fund shares that it owns as a
consequence of accrued charges under the Policies, in proportion to the voting
instructions which are received with respect to all Policies participating in a
Fund. Each person having a voting interest in a Division will receive proxy
material, reports, and other materials relating to the appropriate Fund.
Disregard of Voting Instructions. The Company may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of one or more of the Funds or to
approve or disapprove an investment advisory contract for a Fund. In addition,
the Company itself may disregard voting instructions in favor of changes
initiated by an Owner in the investment policy or by the investment adviser or
sub-adviser of a Fund of American Series if the Company reasonably disapproves
of such changes. A proposed change would be disapproved only if the proposed
change is contrary to state law or prohibited by
38
<PAGE>
state regulatory authorities, or the Company determined that the change would
have an adverse effect on its general assets in that the proposed investment
policy for a Fund may result in overly speculative or unsound investments. In
the event the Company does disregard voting instructions, a summary of that
action and the reasons for such action will be included in the next annual
report to Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of the Company and the
Separate Account and certifies their adequacy, and a full examination of the
Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME DURING PAST FIVE YEARS*
---- -----------------------
<C> <S>
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since
June, 1986, and Vice President, New Ventures,
since June, 1986, General American Life Insur-
ance Co., St. Louis, Mo. (GenAm).
Steven D. Anderson Vice President and Chief Financial Officer
since December, 1993. Formerly, Assistant Vice
President and Chief Financial Officer August
1990-December, 1993.
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actu-
General American Life ary and Treasurer, GenAm since October, 1994.
Insurance Company Executive Vice President-Group Pensions, GenAm
700 Market Street January, 1990-October, 1994.
St. Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984.
General American Life Secretary since February, 1991. Associate Gen-
Insurance Company eral Counsel, GenAm, since August, 1984.
700 Market Street
St. Louis, MO 63101
Craig K. Nordyke@ Vice President and Chief Actuary since August,
1990. Formerly, Second Vice President and Chief
Actuary, May, 1987-August, 1990.
George E. Phillips Vice President--Operations and System Develop-
ment since January, 1995. Formerly, Senior Vice
President, Fortis, Inc. July, 1991-August,
1994. Vice President, Mutual Benefit prior to
July, 1991.
DIRECTORS***
Richard A. Liddy President and Chief Executive Officer, GenAm,
since May, 1992. President and Chief Operating
Officer, GenAm, May, 1988-May, 1992.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME DURING PAST FIVE YEARS*
---- -----------------------
<C> <S>
Leonard M. Rubenstein Executive Vice President--Investments, GenAm, since
February, 1991. Vice President and Treasurer, Securi-
ties, GenAm, November, 1984-February, 1991.
Warren J. Winer Executive Vice President--Group, GenAm, since Septem-
ber, 1995. Formerly, Managing Director, Wm. M. Mer-
cer, July, 1993--August, 1995; President, W. F.
Corroon, September, 1990--July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
November, 1991. Vice President--Life Product Manage-
ment, GenAm, May, 1989-November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc., since
May, 1993. Formerly Executive Vice President--Rein-
surance, GenAm, since January, 1990.
</TABLE>
- --------
* All positions listed are with the Company unless otherwise indicated.
** The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
*** The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring--Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws applicable
to the issue and sale of the Policies. All matters of Missouri law pertaining
to the Policies, including the validity of the Policies and the Company's right
to issue the Policies and the Group Contract under Missouri insurance law, and
all legal matters relating to the Parent Company's resolution concerning
policies issued by Paragon have been passed upon by Matthew P. McCauley,
Esquire, General Counsel of Paragon Life Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The financial statements of the Company and the Separate Account included in
this Prospectus and in the registration statement have been included in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, and on the authority of said firm as experts in accounting
and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of the
Company contains an explanatory paragraph which states that the financial
statements are presented in conformity with accounting practices prescribed or
permitted by the State of Missouri Department of Insurance. These practices
differ in some respects from generally accepted accounting principles. The
financial statements do not include any adjustments that might result from the
differences.
40
<PAGE>
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Vice President and Chief Actuary of the Company, as stated
in the opinion filed as an exhibit to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, the Company and the Policy offered
hereby. Statements contained in this Prospectus as to the contents of the
Policy and other legal instruments are summaries. For a complete statement of
the terms thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this Prospectus
should be distinguished from the financial statements for the Separate Account
included in this Prospectus, and should be considered only as bearing on the
ability of the Company to meet its obligations under the Policy. They should
not be considered as bearing on the investment performance of the assets held
in the Separate Account.
41
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital and surplus of Paragon Life Insurance Company as of
December 31, 1995 and 1994, and related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three-year
period ended December 31, 1995. These statutory financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statutory financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 2, the accompanying financial statements have been
prepared in conformity with accounting practices prescribed or permitted by the
State of Missouri Department of Insurance. These practices differ in some
respects from generally accepted accounting principles. Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations,
and cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
and surplus of Paragon Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flow for each of the years in
the three-year period ended December 31, 1995, on the basis of accounting
described in note 2.
KPMG Peat Marwick LLP
February 16, 1996
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES:
Cash received:
Premiums and considerations....................... $36,612 29,478 20,416
Allowances and reserve adjustments on reinsurance
ceded............................................ 99 125 127
Investment income received, net of related
expenses......................................... 4,252 3,697 2,825
Other income...................................... 347 75 --
------- ------ ------
Total cash received from operating activities... 41,310 33,375 23,368
------- ------ ------
Total benefits, operating charges paid and
transfers:
Life and other benefits paid...................... 9,315 7,627 3,583
Operating charges--commissions, other expenses and
taxes (excluding Federal income tax)............. 7,678 6,319 5,850
Federal income taxes received..................... (93) (121) (697)
Net transfers to separate account................. 14,296 10,247 5,972
------- ------ ------
Total benefits, operating charges paid and
transfers...................................... 31,196 24,072 14,708
------- ------ ------
Net increase in policy loans........................ 1,308 1,438 1,178
------- ------ ------
Net cash provided from operating activities........... 8,806 7,865 7,482
Proceeds from investments sold, matured or repaid--
bonds................................................ 3,082 4,566 8,702
Other cash provided................................... 729 707 363
------- ------ ------
Total cash provided............................. 12,617 13,138 16,547
------- ------ ------
Cost of investments acquired--bonds................... 8,462 11,613 25,447
Other cash applied.................................... 141 50 47
------- ------ ------
Total cash applied.............................. 8,603 11,663 25,494
------- ------ ------
Net increase (decrease) in cash and short term
investments.......................................... 4,014 1,475 (8,947)
Cash and short-term investments:
Beginning of year................................... 3,042 1,567 10,514
------- ------ ------
End of Year......................................... $ 7,056 3,042 1,567
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS,
LIABILITIES, AND CAPITAL AND SURPLUS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
ADMITTED ASSETS
Bonds, at amortized cost (deposited with regulatory authori-
ties, $3,868 and $2,866 in 1995 and 1994)................... $ 56,458 51,077
Policy loans................................................. 7,206 5,418
Cash and short-term investments.............................. 7,056 3,042
Amounts recoverable from reinsurers.......................... 1,183 1,497
Investment income due and accrued............................ 1,041 885
Other assets................................................. 221 161
Separate account assets...................................... 50,194 27,311
-------- ------
Total admitted assets.................................. $123,359 89,391
======== ======
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy reserves--life contracts............................ 57,618 46,661
Policy reserves--without life contingencies................ 399 389
Policy claim liabilities................................... 1,096 709
Amounts due to reinsurers.................................. 833 648
Accrued expenses, commissions, taxes, licenses & fees...... 870 700
Asset valuation reserve.................................... 336 238
Interest maintenance reserve............................... 117 132
Due to parent.............................................. 945 628
Other liabilities.......................................... 858 726
Separate account liabilities............................... 49,509 26,739
-------- ------
Total liabilities...................................... 112,581 77,570
-------- ------
COMMITMENTS AND CONTINGENCIES
Capital and Surplus:
Capital stock--par value of $100 per share; 100,000 shares
authorized; 20,500 shares issued and outstanding.......... 2,050 2,050
Surplus:
Additional paid-in....................................... 17,950 17,950
Unassigned surplus....................................... (9,907) (8,751)
Assigned surplus--separate accounts...................... 685 572
-------- ------
Total capital and surplus.............................. 10,778 11,821
-------- ------
Total liabilities and capital and surplus.............. $123,359 89,391
======== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS, CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Income:
Premiums and considerations......................... $36,612 29,478 20,416
Net investment income............................... 4,905 4,132 3,519
Expense allowances on reinsurance ceded............. 94 130 123
Other income........................................ 461 317 227
------- ------ ------
Total income...................................... 42,072 34,057 24,285
Policy obligations, expenses and net transfers:
Policyholder benefits............................... 10,011 6,243 3,818
Increase in policy reserves--life contracts......... 10,957 11,705 9,481
Increase in policy reserves--without life contingen-
cies............................................... 10 35 354
------- ------ ------
Total policy obligations.......................... 20,978 17,983 13,653
General insurance expenses.......................... 5,996 5,084 4,341
Commissions......................................... 523 491 715
Insurance taxes, licenses and fees.................. 1,329 1,093 697
------- ------ ------
Total expenses.................................... 7,848 6,668 5,753
------- ------ ------
Net transfers to separate account................... 14,283 10,464 5,972
------- ------ ------
Loss before Federal income tax benefit and real-
ized capital gains............................... (1,037) (1,058) (1,093)
Federal income tax benefit............................ (117) (108) (180)
------- ------ ------
Loss before realized capital gains................ (920) (950) (913)
Realized capital gains, net of tax and transfer to
IMR.................................................. -- -- 6
------- ------ ------
Net loss.......................................... (920) (950) (907)
Other changes in capital and surplus:
Increase in asset valuation reserve................. (98) (94) (74)
(Increase) Decrease in non-admitted assets.......... (25) 74 193
------- ------ ------
Total other changes in capital and surplus........ (123) (20) 119
------- ------ ------
Decrease in capital and surplus................... (1,043) (970) (788)
Capital and Surplus:
Beginning of year................................... 11,821 12,791 13,579
------- ------ ------
End of year......................................... $10,778 11,821 12,791
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) AFFILIATION AND GUARANTEE AGREEMENT
Paragon Life Insurance Company (Paragon) is a wholly-owned subsidiary of
General American Life Insurance Company (General American) established for the
purpose of marketing life insurance products through the sponsorship of major
companies and organizations. Paragon is licensed to do business in the District
of Columbia and in all states except New York.
General American has guaranteed that Paragon will have sufficient funds to
meet all of its contractual obligations. In the event a policyholder presents a
legitimate claim for payment on a Paragon insurance policy, General American
will pay such claim directly to the policyholder if Paragon is unable to make
such payment. The guarantee agreement is binding on General American, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than General American's rating.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying statutory financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Missouri
Department of Insurance, which vary in some respects from generally accepted
accounting principles (GAAP). The preparation of statutory financial statements
requires management to make estimates and assumptions which affect the reported
amounts within the statutory financial statements. Actual results could differ
from the estimated amounts. The significant statutory accounting practices and
the related differences from GAAP are as follows:
(a) Premiums on variable universal life and investment contracts under
statutory accounting practices are considered revenue when received;
whereas under GAAP, revenues for universal life and investment products
consist of policy fees that have been assessed against the account balances
for the cost of insurance, policy administration, and surrender charges.
Acquisition expenses, including commissions and other costs related to
acquiring new business, are charged to operations as incurred rather than
being deferred and amortized in relation to gross profits as required by
GAAP.
(b) Bonds are valued as prescribed by the National Association of
Insurance Commissioners (NAIC) and market values are stated at independent
dealer prices. Bonds are carried at amortized cost except for those bonds
required to be carried at values other than amortized cost in accordance
with NAIC guidelines. Accounting for bonds under GAAP would require the
bonds to be carried at amortized cost or market value depending on the
company's intent and ability to hold such investments. The Company
generally intends to hold bonds until maturity. Policy loans are stated at
their net unpaid balance.
(c) Policy reserves are based on statutory mortality and interest
assumptions without consideration for withdrawals. Policy reserves are
computed under the Commissioners Reserve Valuation Method using 5.5%
interest for policies issued from 1986 to 1993, 5.0% interest for policies
issued in 1994 and 4.5% interest for policies issued in 1995. Mortality
assumptions are based upon the 1980 Commissioners Standard Ordinary table.
These reserves differ from reserves based on account values that accrue to
policyholders on universal-life and investment product contracts under
GAAP.
(d) Federal income taxes are charged to operations based on income that
is currently taxable. Deferred income taxes are not provided for the tax
effect of temporary differences between the book and tax basis of assets
and liabilities.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(e) Certain assets designated as non-admitted assets (principally
furniture and equipment and computer software) have been excluded from
assets by a direct charge to surplus.
(f) An asset valuation reserve (AVR), which is a reserve for possible
losses on investments, is recorded as a liability by a direct charge to
surplus in accordance with statutory accounting practices; under GAAP, the
AVR is not maintained.
(g) Certain capital gains and losses on investment sales that resulted
from changes in the level of interest rates are deferred and recorded in an
interest maintenance reserve (IMR), net of related income taxes. The IMR
liability will be amortized into operating income over the approximate
remaining lives of the respective investments sold. Realized gains and
losses from the sale or decrease in valuation basis due to change in credit
quality of invested assets are presented separately from operating income,
net of applicable income taxes. Under GAAP, realized gains and losses from
the sale of investments are recognized currently as a component of pre-tax
income.
(h) Separate account assets and liabilities represent segregated funds
administered and invested by Paragon for the exclusive benefit of variable
life insurance contract holders. Paragon receives administrative fees for
services rendered on behalf of the separate account policyholders. The
amount of the asset balance in excess of liabilities of $685,415 and
$572,334 at December 31, 1995 and 1994, respectively, represents policy
surrender charges which are permitted to be recorded to surplus under
statutory accounting practices. Such amounts are designated as Assigned
Surplus--Separate Accounts in the accompanying balance sheet. Under GAAP,
the amount would be reported as a liability to the separate account
policyholder.
(i) Reinsurance recoverable on unpaid policy claims is netted against the
applicable policyholder liability. Under GAAP, the amount would be reported
as an asset and the policy claim liability would be shown before the
effects of reinsurance.
(3) FEDERAL INCOME TAX
Paragon files a consolidated federal income tax return with General American
which includes the operations of General American and its subsidiaries. In
accordance with a tax allocation agreement between Paragon and General
American, taxes are computed as if Paragon was filing its own income tax
return, and tax expense (benefit) is paid to, or received from, General
American. Paragon recognizes a tax benefit to the extent that its tax losses
are utilized by other members of the General American consolidated tax group.
The current tax law requires life insurance companies to recompute certain
policy reserves for tax purposes and capitalize a percentage of premiums
attributed to acquisition expenses.
Federal income tax expense (benefit) differs from that computed based on the
federal statutory tax rate of 35 percent. The reasons for these differences are
as follows (000's):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit on pretax
loss................................... $(363) (35)% $(370) (35)% $(382) (35)%
Capitalization of acquisition expenses.. 298 29 214 20 168 16
Recomputed policy tax reserves.......... (34) (3) 18 2 31 3
Other................................... (18) (2) 30 3 3 --
----- --- ----- --- ----- ---
</TABLE>
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(4) TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
Paragon purchases certain administrative services from General American.
Charges for services performed are based upon personnel and other costs
involved in providing such service. Charges for services during 1995, 1994 and
1993 were $1,103,028, $651,472 and $597,120, respectively.
Paragon has a risk retention limit of $50,000 on any one life. Amounts over
the risk retention limit are ceded to an affiliate of General American on
either a coinsurance or yearly renewable term basis at rates commensurate with
those which could be obtained from unrelated companies. Premiums ceded in 1995,
1994 and 1993 totaled $9,126,245, $7,135,943 and $5,492,871, respectively, and
represented 99.9% of total premiums ceded in 1995 and 1994 and 95.9% of total
premiums ceded in 1993. Reserve credits taken by Paragon at December 31, 1995
and 1994 were $5,760,070 and $5,604,548, respectively. Amounts due from
reinsurance on paid and unpaid policyholder benefits at December 31, 1995 and
1994 were $3,155,457 and $2,066,748, respectively.
The Company had $3,342,742 and $2,748,885 on deposit with General American at
December 31, 1995 and 1994, respectively. The funds were readily convertible to
cash and earn interest at short-term money market rates.
(5) INVESTMENT SECURITIES
At December 31, 1995, Paragon had $56.5 million invested in bonds; $44.0
million were rated Highest Quality, $12.2 million were High Quality and $ .3
million were Low Quality using the NAIC designation definitions.
The amortized cost and market values of investments in bonds at December 31,
1995 and 1994 are as follows (000's):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1995
US treasury securities................. $ 4,608 281 (1) 4,888
US government agency obligations....... 4,920 173 -- 5,093
Corporate securities................... 42,842 2,842 (438) 45,246
Mortgage backed securities............. 4,088 203 -- 4,291
------- ----- ------ ------
$56,458 3,499 (439) 59,518
======= ===== ====== ======
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1994
US treasury securities................. $ 3,606 24 (87) 3,543
US government agency obligations....... 5,123 24 (253) 4,894
Corporate securities................... 38,027 103 (3,029) 35,101
Mortgage backed securities............. 4,321 17 (325) 4,013
------- ----- ------ ------
$51,077 168 (3,694) 47,551
======= ===== ====== ======
</TABLE>
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Contractual maturities may differ from expected maturities because borrowers
may have the right to call or prepay the obligation with or without call or
prepayment penalties. The amortized cost and market value of investments in
bonds, listed by contractual maturity, at December 31, 1995 are as follows
(000's):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C> <C>
Due in one year or less............................. $ 593 585
Due after one year through five years............... 7,388 7,748
Due after five years through ten years.............. 18,521 19,471
Due after five years through ten years.............. 20,948 22,330
------- ------
47,450 50,134
Mortgage-backed securities (including US government
agency obligations)................................ 9,008 9,384
------- ------ ---
$56,458 59,518
======= ======
</TABLE>
Major categories of net investment income for the years ended December 31,
1995, 1994 and 1993 consist of the following (000's):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Bonds............................................. $4,040 $3,685 $3,229
Policy loans...................................... 480 347 221
Short term investments............................ 407 113 103
------ ------ ------
Total investment income........................... 4,927 4,145 3,553
IMR amortization.................................. 17 15 6
Investment expenses............................... (39) (28) (40)
------ ------ ------
Net investment income............................. $4,905 $4,132 $3,519
====== ====== ======
</TABLE>
Proceeds from sales of investments in bonds during 1995, 1994 and 1993 were
$3,082,387, $4,565,799 and $8,701,679, respectively. Gross gains realized on
sales during 1995 were $1,338 of which $870 of total net gains were transferred
to the interest maintenance reserve, net of taxes of $468. Gross gains realized
on sales during 1994 were $44,095 of which $28,662 of total net gains were
transferred to the interest maintenance reserve, net of taxes of $15,433. Gross
gains realized on sales during 1993 and gross losses were $174,988 and $829 of
which $165,069 of net gains were transferred to the Interest Maintenance
Reserve, net of taxes of $57,774. At December 31, 1995, the Company had 16
investment securities totaling $16,924,493, rated either the highest quality or
high quality using the NAIC definitions, that individually exceeded 10% of
statutory capital and surplus.
(6) BENEFIT PLANS AND POSTRETIREMENT BENEFITS
Associates of Paragon participate in a non-contributory multi-employer
defined benefit pension plan jointly sponsored by Paragon and General American.
The benefits are based on years of service and compensation level. No pension
expense was recognized in 1995, 1994 or 1993 due to overfunding of the plan.
In addition, Paragon has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by General American and are based on
salaries of eligible associates. Full vesting occurs after five years of
continuous service. Total expense to the Company for the incentive plan were
$149,747, $37,533 and $101,398 for 1995, 1994 and 1993, respectively.
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Paragon provides for certain health care and life insurance benefits for
retired employees in accordance with Statement of Financial Accounting
Standards Number 106--Employer's Accounting for Postretirement Benefits Other
Than Pensions (SFAS No. 106). SFAS No. 106 requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services.
SFAS No. 106 allows recognition of the cumulative effect of the liability in
the year of the adoption or the amortization of the transition obligation over
a period of up to 20 years. The Company has elected to recognize the initial
post-retirement benefit obligation of approximately $72, 684 over a period of
20 years. The unrecognized initial post retirement benefit obligation was
approximately $61,782 and $65,416 at December 31, 1995 and 1994, respectively.
Net periodic post-retirement benefit cost for the years ended December 31,
1995, 1994 and 1993 were approximately $35,000, $26,000, and $40,000,
respectively. This includes expected costs of benefits for newly eligible or
vested employees, interest costs, gains and losses from differences between
actuarial and actual experience, and amortization of the initial post-
retirement benefit obligation. The accumulated post-retirement benefit
obligation was approximately $118,000, and $86,000 at December 31, 1995 and
1994. The discount rate used in determining the accumulated post-retirement
benefit obligation was 8.25 percent. The health care cost trend rates were ten
percent for the Indemnity Plan, nine percent for the HMO Plan, and ten percent
for the Dental Plan. These rates were graded to six percent over the next 14
years. A one percentage point increase in the assumed health care cost trend
rates would increase the December 31, 1995 accumulated post-retirement
obligation by 11 percent, and the estimated service cost and interest cost
components of the net periodic post-retirement benefit cost for 1995 by 13.8
percent.
(7) LEASE COMMITMENT
In 1991 Paragon entered into a five year operating lease for home office
space. During 1995, Paragon renewed the operating lease for its home office
space for an additional five year period.
Annual lease obligations for years subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................... $ 288,419
1997........................................................... 368,993
1998........................................................... 390,870
1999........................................................... 390,870
2000........................................................... 390,870
2001........................................................... 97,718
----------
$1,927,740
==========
</TABLE>
Total rental expense during 1995, 1994 and 1993 was $256,631, $239,967 and
$194,234, respectively.
(8) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's
domiciliary state of Missouri impose risk-based capital (RBC) requirements on
insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or activity
levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory
intervention is required based on the ratio of a Company's actual total
adjusted capital (sum of capital and surplus and asset valuation reserve) to
control levels determined by the RBC formula. At December 31, 1995, the
Company's actual total adjusted capital was in excess of minimum requirements
which would cause company action under the RBC formula.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(9) DIVIDEND RESTRICTIONS
Dividend payments by Paragon are restricted by state insurance laws as to the
amount that may be paid without prior notice or approval of the Missouri
Department of Insurance. The maximum amount of dividends which can be paid
without prior approval of the insurance commissioner is limited to the maximum
of (1) 10% of statutory surplus or (2) net gain from operations. The maximum
dividend distribution that can be paid by Paragon during 1996 without prior
notice or approval is $804,291. Paragon did not pay dividends in 1995, 1994 or
1993.
F-10
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company and
Policyholders of Separate Account A:
We have audited the accompanying statements of net assets, including the
schedule of investments, of the Cash Management, High-Yield Bond, Growth-
Income, Growth, U.S. Government/AAA-Rated, Asset Allocation, and International
Divisions of Paragon Separate Account A as of December 31, 1995, and related
statements of operations and changes in net assets for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of Paragon Separate Account A's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at December 31, 1995 by
correspondence with the American Variable Insurance Series Mutual Funds. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Cash Management, High-
Yield Bond, Growth-Income, Growth, U.S. Government/ AAA-Rated, Asset
Allocation, and International Divisions of Paragon Separate Account A as of
December 31, 1995, and the results of their operations and changes in their net
assets for each of the years in the three-year period ended December 31, 1995,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
February 16, 1996
F-11
<PAGE>
PARAGON SEPARATE ACCOUNT A
STATEMENTS OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
CASH HIGH-YIELD GROWTH- U.S. GOV/ ASSET
MANAGEMENT BOND INCOME GROWTH AAA-RATED ALLOCATION INTERNATIONAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------- ---------- ---------- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS:
Investments in American
Variable Insurance
Series, at Market Value
(See Schedule of
Investments)........... $901,939 1,827,568 10,396,993 14,394,088 1,752,910 3,020,010 4,925,876
Receivable (payable)
from/to Paragon Life
Insurance Company...... (4,327) 6,319 15,536 4,886 5,776 3,941 1,164
-------- --------- ---------- ---------- --------- --------- ---------
Total Net Assets....... 897,612 1,833,887 10,412,529 14,398,974 1,758,686 3,023,951 4,927,040
======== ========= ========== ========== ========= ========= =========
Group Variable Universal
Life Cash Value
Invested in Separate
Account................ 897,612 1,833,887 10,412,529 14,398,974 1,758,686 3,023,951 4,927,040
-------- --------- ---------- ---------- --------- --------- ---------
$897,612 1,833,887 10,412,529 14,398,974 1,758,686 3,023,951 4,927,040
======== ========= ========== ========== ========= ========= =========
Total Units Held........ 64,351 77,581 255,708 304,656 104,953 166,536 333,844
Net Asset Value Per
Unit................... 13.95 23.64 40.72 47.26 16.76 18.16 14.76
Cost of Investments..... $857,661 1,541,278 7,605,622 10,505,080 1,528,002 2,329,589 4,254,885
======== ========= ========== ========== ========= ========= =========
</TABLE>
See Accompanying Notes to Financial Statements.
F-12
<PAGE>
PARAGON SEPARATE ACCOUNT A
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
HIGH-YIELD BOND
CASH MANAGEMENT DIVISION DIVISION GROWTH-INCOME DIVISION
------------------------- ------------------------ ----------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- ------- ------- ------- ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Realized Gain
from Sales of
Investments:
Proceeds from
Sales............ $366,213 306,471 146,459 262,793 340,282 112,482 1,182,822 1,522,165 597,210
Cost of Invest-
ments Sold....... 350,096 296,599 141,997 239,767 321,159 98,979 970,013 1,347,363 520,615
-------- ------- ------- ------- ------- ------- --------- --------- -------
Net Realized
Gain from Sales
of Investments. 16,117 9,872 4,462 23,026 19,123 13,503 212,809 174,802 76,595
Net Unrealized Gain
(Loss) on Invest-
ments:
Unrealized Gain
Beginning of
Year............. 22,697 13,149 8,470 16,730 103,435 32,906 635,009 693,527 324,022
Unrealized Gain
End of Year...... 44,278 22,697 13,149 286,290 16,730 103,435 2,791,371 635,009 693,527
-------- ------- ------- ------- ------- ------- --------- --------- -------
Net Unrealized
Gain (Loss) on
Investments...... 21,581 9,548 4,679 269,560 (86,705) 70,529 2,156,362 (58,518) 369,505
-------- ------- ------- ------- ------- ------- --------- --------- -------
Net Gain (Loss)
on Investments. 37,698 19,420 9,141 292,586 (67,582) 84,032 2,369,171 116,284 446,100
Expenses:
Mortality and Ex-
pense Charge..... 6,200 4,509 3,057 13,618 9,014 5,143 75,855 51,426 34,048
-------- ------- ------- ------- ------- ------- --------- --------- -------
Increase (Decrease)
in Assets Result-
ing from Opera-
tions............. $ 31,498 14,911 6,084 278,968 (76,596) 78,889 2,293,316 64,858 412,052
======== ======= ======= ======= ======= ======= ========= ========= =======
<CAPTION>
U.S. GOV/AAA-RATED ASSET ALLOCATION
DIVISION DIVISION INTERNATIONAL DIVISION
------------------------- ------------------------ ----------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- ------- ------- ------- ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Realized Gain
from Sales of
Investments:
Proceeds from
Sales............ $327,158 302,618 149,700 373,568 567,553 207,242 887,260 622,842 212,847
Cost of Invest-
ments Sold....... 303,064 291,091 134,049 316,509 524,683 183,011 803,578 548,568 189,288
-------- ------- ------- ------- ------- ------- --------- --------- -------
Net Realized
Gain from Sales
of Investments. 24,094 11,527 15,651 57,059 42,870 24,231 83,682 74,274 23,559
Net Unrealized Gain
(Loss) on
Investments:
Unrealized Gain
(Loss) Beginning
of Year.......... 28,910 83,561 31,065 117,576 165,652 82,925 240,898 301,986 (9,405)
Unrealized Gain
End of Year...... 224,908 28,910 83,561 690,421 117,576 165,652 670,991 240,898 301,986
-------- ------- ------- ------- ------- ------- --------- --------- -------
Net Unrealized
Gain (Loss) on
Investments...... 195,998 (54,651) 52,496 572,845 (48,076) 82,727 430,093 (61,088) 311,391
-------- ------- ------- ------- ------- ------- --------- --------- -------
Net Gain (Loss)
on Investments. 220,092 (43,124) 68,147 629,904 (5,206) 106,958 513,775 13,186 334,950
Expenses:
Mortality and Ex-
pense Charge..... 13,792 9,615 6,289 22,027 14,645 10,008 37,376 22,801 9,385
-------- ------- ------- ------- ------- ------- --------- --------- -------
Increase (Decrease)
in Assets Result-
ing from Opera-
tions............. $206,300 (52,739) 61,858 607,877 (19,851) 96,950 476,399 (9,615) 325,565
======== ======= ======= ======= ======= ======= ========= ========= =======
<CAPTION>
GROWTH DIVISION
------------------------------
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Net Realized Gain
from Sales of
Investments:
Proceeds from
Sales............ 1,678,564 2,098,228 721,895
Cost of Invest-
ments Sold....... 1,321,909 1,808,991 608,457
--------- ---------- ---------
Net Realized
Gain from Sales
of Investments. 356,655 289,237 113,438
Net Unrealized Gain
(Loss) on Invest-
ments:
Unrealized Gain
Beginning of
Year............. 1,007,900 1,243,996 550,908
Unrealized Gain
End of Year...... 3,889,008 1,007,900 1,243,996
--------- ---------- ---------
Net Unrealized
Gain (Loss) on
Investments...... 2,881,108 (236,096) 693,088
--------- ---------- ---------
Net Gain (Loss)
on Investments. 3,237,763 53,141 806,526
Expenses:
Mortality and Ex-
pense Charge..... 107,470 69,714 46,501
--------- ---------- ---------
Increase (Decrease)
in Assets Result-
ing from Opera-
tions............. 3,130,293 (16,573) 760,025
========= ========== =========
<CAPTION>
<S> <C> <C> <C>
Net Realized Gain
from Sales of
Investments:
Proceeds from
Sales............
Cost of Invest-
ments Sold.......
Net Realized
Gain from Sales
of Investments.
Net Unrealized Gain
(Loss) on
Investments:
Unrealized Gain
(Loss) Beginning
of Year..........
Unrealized Gain
End of Year......
Net Unrealized
Gain (Loss) on
Investments......
Net Gain (Loss)
on Investments.
Expenses:
Mortality and Ex-
pense Charge.....
Increase (Decrease)
in Assets Result-
ing from Opera-
tions.............
</TABLE>
See Accompanying Notes to Financial Statements.
F-13
<PAGE>
PARAGON SEPARATE ACCOUNT A
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CASH MANAGEMENT DIVISION HIGH-YIELD BOND DIVISION GROWTH-INCOME DIVISION
------------------------------ ------------------------------- --------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Realized Gain
from Sales of In-
vestments........ $ 16,117 9,872 4,462 23,026 19,123 13,503 212,809 174,802 76,595
Net Unrealized
Gain (Loss) on
Investments...... 21,581 9,548 4,679 269,560 (86,705) 70,529 2,156,362 (58,518) 369,505
Mortality and Ex-
pense Charge..... (6,200) (4,509) (3,057) (13,618) (9,014) (5,143) (75,855) (51,426) (34,048)
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
Increase (De-
crease) in Net
Assets Resulting
from Operations.. 31,498 14,911 6,084 278,968 (76,596) 78,889 2,293,316 64,858 412,052
Net Deposits into
Separate Account. 298,894 141,438 131,187 365,882 457,529 359,535 1,616,708 1,654,037 1,468,302
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
Increase in Net
Assets......... 330,392 156,350 137,271 644,850 380,933 438,424 3,910,024 1,718,895 1,880,354
Net Assets, Begin-
ning of Year...... 567,220 410,870 273,599 1,189,037 808,104 369,680 6,502,505 4,783,610 2,903,256
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
Net Assets, End of
Year.............. $ 897,612 567,220 410,870 1,833,887 1,189,037 808,104 10,412,529 6,502,505 4,783,610
========== ========= ======= ========= ========= ========= ========== ========= =========
<CAPTION>
U.S. GOV/AAA-RATED DIVISION ASSET ALLOCATION DIVISION INTERNATIONAL DIVISION
------------------------------ ------------------------------- --------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Realized Gain
from Sales of In-
vestments........ $ 24,094 11,527 15,651 57,059 42,870 24,231 83,682 74,274 23,559
Net Unrealized
Gain (Loss) on
Investments...... 195,998 (54,651) 52,496 572,845 (48,076) 82,727 430,093 (61,088) 311,391
Mortality and Ex-
pense Charge..... (13,792) (9,615) (6,289) (22,027) (14,645) (10,008) (37,376) (22,801) (9,385)
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
Increase (De-
crease) in Net
Assets Resulting
from Operations.. 206,300 (52,739) 61,858 607,877 (19,851) 96,950 476,399 (9,615) 325,565
Net Deposits into
Separate Account. 263,499 482,389 337,028 531,105 524,554 432,699 1,191,219 1,480,809 884,790
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
Increase in Net
Assets......... 469,799 429,650 398,886 1,138,982 504,703 529,649 1,667,618 1,471,194 1,210,355
Net Assets, Begin-
ning of Year...... 1,288,887 859,237 460,351 1,884,969 1,380,266 850,617 3,259,422 1,788,228 577,873
---------- --------- ------- --------- --------- --------- ---------- --------- ---------
Net Assets, End of
Year.............. $1,758,686 1,288,887 859,237 3,023,951 1,884,969 1,380,266 4,927,040 3,259,422 1,788,228
========== ========= ======= ========= ========= ========= ========== ========= =========
<CAPTION>
GROWTH DIVISION
---------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Operations:
Net Realized Gain
from Sales of In-
vestments........ 356,655 289,237 113,438
Net Unrealized
Gain (Loss) on
Investments...... 2,881,108 (236,096) 693,088
Mortality and Ex-
pense Charge..... (107,470) (69,714) (46,501)
----------- ---------- ----------
Increase (De-
crease) in Net
Assets Resulting
from Operations.. 3,130,293 (16,573) 760,025
Net Deposits into
Separate Account. 2,454,090 2,076,214 2,094,240
----------- ---------- ----------
Increase in Net
Assets......... 5,584,383 2,059,641 2,854,265
Net Assets, Begin-
ning of Year...... 8,814,591 6,754,950 3,900,685
----------- ---------- ----------
Net Assets, End of
Year.............. 14,398,974 8,814,591 6,754,950
=========== ========== ==========
<CAPTION>
<S> <C> <C> <C>
Operations:
Net Realized Gain
from Sales of In-
vestments........
Net Unrealized
Gain (Loss) on
Investments......
Mortality and Ex-
pense Charge.....
Increase (De-
crease) in Net
Assets Resulting
from Operations..
Net Deposits into
Separate Account.
Increase in Net
Assets.........
Net Assets, Begin-
ning of Year......
Net Assets, End of
Year..............
</TABLE>
See Accompanying Notes to Financial Statements.
F-14
<PAGE>
PARAGON SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) ORGANIZATION
Paragon Life Insurance Company (Paragon) established Paragon Separate Account
A on October 30, 1987. Paragon Separate Account A (the Separate Account)
commenced operations on October 24, 1989 and is registered under the Investment
Company Act of 1940 as a unit investment trust. The Separate Account receives
and invests net premiums for flexible premium group variable life insurance
policies that are issued by Paragon. The Separate Account is divided into
divisions, seven of which invests exclusively in shares of a single fund of
American Variable Insurance Series (American Series), an open-end, diversified
management investment company. These funds are the Cash Management Fund, High-
Yield Bond Fund, Growth Income Fund, Growth Fund, U.S. Government AAA-Rated
Fund, Asset Allocation Fund, and International Fund (the Funds). Policyholders
have the option of directing their premium payments into any or all of the
Funds.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Separate Account in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
Investments
The Separate Account's investments in the Funds of the American Series are
valued daily based on the net asset values of the respective fund shares held.
The average cost method is used in determining the cost of shares sold on
withdrawals by the Separate Account. Share transactions are recorded consistent
with trade date accounting. Dividends are recorded on the ex-dividend date and
are immediately reinvested.
Federal Income Taxes
The operations of the Separate Account are treated as part of Paragon for
income tax purposes. Under existing Federal income tax law, capital gains from
sales of investments of the Separate Account are not taxable. Therefore, no
Federal income tax has been provided.
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions with respect to amounts reported in the financial statements.
Actual results could differ from those estimates.
(3) POLICY CHARGES
Charges are deducted from the policies and the Separate Account to compensate
Paragon for providing the insurance benefits set forth in the contracts and any
additional benefits added by rider, administering the policies, incurring
expenses in distributing the policies, and assuming certain risks in connection
with the policy.
Premium Expense Charge
Certain policies include a provision that premium payments may be reduced by
a premium expense charge. The premium expense charge, if any, is determined by
the costs associated with distributing the policy and is equal to 1%, 2.5% or
3.5% of the premium paid. The premium expense charge compensates Paragon for
providing the insurance benefits set forth in the policies, incurring expenses
of distributing the policies,
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and assuming certain risks in connection with the policies. In addition, some
policies have a premium tax assessment equal to 2% to 2.25% to reimburse
Paragon for premium taxes incurred. The premium payment less premium expense
and premium tax charges equals the net premium that is invested in the
underlying separate account.
Monthly Expense Charge
Paragon has responsibility for the administration of the policies and the
Separate Account. As reimbursement for expenses related to the acquisition and
maintenance of each policy and the Separate Account, Paragon assesses a monthly
administration charge to each policy. This charge, which varies due to the size
of the group, has a maximum of $6.00 per month during the first 12 policy
months and $3.50 per month thereafter.
Cost of Insurance
The cost of insurance is deducted on each monthly anniversary for the
following policy month. Because the cost of insurance depends upon a number of
variables, the cost varies for each policy month. The cost of insurance is
determined separately for the initial face amount and for any subsequent
increase in face amount. Paragon determines the monthly cost of insurance
charge by multiplying the applicable cost of insurance rate or rates by the net
amount at risk for each policy month.
Optional Rider Benefits Charge
The monthly deduction charge for any additional benefits provided by rider.
Surrender or Contingent Deferred Sales Charge
During the first policy years, certain policies include a provision for a
charge upon surrender or lapse of the policy, a requested decrease in face
amount, or a partial withdrawal that causes the face amount to decrease. The
amount assessed under the policy terms, if any, depends upon the cost
associated with distributing the particular policies. The amount of any charge
depends on a number of factors, including whether the event is a full surrender
or lapse or only a decrease in face amount, the amount of premiums received by
Paragon, and the policy year in which the surrender or other event takes place.
Mortality and Expense Charge
In addition to the above contract charges, a daily charge is made against the
operations of each division for the mortality and expense risks assumed by
Paragon. Paragon deducts a daily charge from the Separate Account at the rate
of .0024547% of the net assets of each division of the Separate Account which
equals an annual rate of .90% of those net assets. The mortality risk assumed
by Paragon is that insureds may die sooner than anticipated and that,
therefore, Paragon will pay an aggregate amount of death benefits greater than
anticipated. The expense risk assumed is that expenses incurred in issuing and
administering the policy will exceed the amounts realized from the
administrative charges assessed against the policy.
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PURCHASES AND SALES OF AMERICAN SERIES SHARES
During the years ended December 31, 1995, 1994, and 1993 purchases and
proceeds from sales of the American Series were as follows:
<TABLE>
<CAPTION>
CASH MANAGEMENT HIGH-YIELD BOND GROWTH-INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
------------------------ ------------------------- ----------------------------- -----------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- ------- ------- ------- --------- ------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $658,908 439,719 274,589 615,057 773,567 466,875 2,723,675 3,082,338 2,031,463 4,025,185 4,044,012 2,769,634
Sales........... 366,213 306,471 146,459 262,793 340,282 112,482 1,182,822 1,522,165 597,209 1,678,564 2,098,228 721,895
======== ======= ======= ======= ========= ======= ========= ========= ========= ========= ========= =========
<CAPTION>
U.S. GOVERNMENT/AAA- ASSET ALLOCATION INTERNATIONAL
RATED DIVISION DIVISION DIVISION
------------------------ ------------------------- -----------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- ------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $576,865 760,196 480,028 882,647 1,063,448 629,934 2,041,103 2,060,227 1,088,251
Sales........... 327,158 302,618 149,700 373,568 567,553 207,242 887,260 622,842 212,847
======== ======= ======= ======= ========= ======= ========= ========= =========
</TABLE>
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 5--ACCUMULATION OF UNIT ACTIVITY
The following is a reconciliation of the accumulation of unit activity for
the years ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
CASH MANAGEMENT HIGH-YIELD BOND
DIVISION DIVISION GROWTH-INCOME DIVISION GROWTH DIVISION
--------------------- ---------------------- ----------------------- -----------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993
------- ------ ------ ------- ------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits.............. 48,507 34,100 26,473 28,691 38,697 28,008 77,194 102,084 86,485 96,181 115,695 101,942
Withdrawals........... 26,913 23,251 16,185 11,838 16,106 9,987 31,705 48,384 35,681 37,756 57,424 39,119
------- ------ ------ ------- ------- ------ ------- ------- ------- ------- ------- -------
Net Increase in Units. 21,594 10,849 10,288 16,853 22,591 18,021 45,489 53,700 50,804 58,425 58,271 62,823
Outstanding Units, Be-
ginning of Year........ 42,757 31,908 21,620 60,728 38,137 20,116 210,219 156,519 105,715 246,231 187,960 125,137
------- ------ ------ ------- ------- ------ ------- ------- ------- ------- ------- -------
Outstanding Units, End
of Year................ 64,351 42,757 31,908 77,581 60,728 38,137 255,708 210,219 156,519 304,656 246,231 187,960
======= ====== ====== ======= ======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
U.S. GOVERNMENT/ ASSET ALLOCATION
AAA-RATED DIVISION DIVISION INTERNATIONAL DIVISION
--------------------- ---------------------- -----------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
------- ------ ------ ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits.............. 37,276 51,812 39,476 55,350 75,744 55,551 149,241 154,763 107,985
Withdrawals........... 20,140 19,479 16,729 21,956 38,975 24,166 61,703 45,216 30,031
------- ------ ------ ------- ------- ------ ------- ------- -------
Net Increase in Units. 17,136 32,333 22,747 33,394 36,769 31,385 87,538 109,547 77,954
Outstanding Units, Be-
ginning of Year........ 87,817 55,484 32,737 133,142 96,373 64,988 246,306 136,759 58,805
------- ------ ------ ------- ------- ------ ------- ------- -------
Outstanding Units, End
of Year................ 104,953 87,817 55,484 166,536 133,142 96,373 333,844 246,306 136,759
======= ====== ====== ======= ======= ====== ======= ======= =======
</TABLE>
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 6--RECONCILIATION OF GROSS AND NET DEPOSITS INTO THE SEPARATE ACCOUNT
Deposits into the Separate Account purchase shares in the American Series.
Net deposits represent the amounts available for investment in such shares
after deduction of premium expense charges, monthly expense charges, cost of
insurance and the cost of optional benefits added by rider. The following is a
summary of net deposits made for the years ended December 31, 1995, 1994, 1993.
<TABLE>
<CAPTION>
CASH MANAGEMENT DIVISION HIGH-YIELD BOND DIVISION GROWTH-INCOME DIVISION
-------------------------- -------------------------- -------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- ------- ------- ------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross Depos-
its............... $370,512 289,967 299,196 714,456 761,196 539,268 3,069,549 3,076,577 2,349,443
Transfers Between
Funds and General
Account........... 172,787 1,817 (4,963) (78,833) (47,053) (18,726) (84,335) (289,331) (145,436)
Surrenders and
Withdrawals....... (44,103) (27,318) (8,806) (54,263) (42,171) (14,819) (427,978) (286,371) (66,398)
-------- ------- ------- ------- -------- ------- --------- --------- ---------
Total Gross Depos-
its net of Surren-
ders, Withdrawals,
and Transfers..... 499,196 264,466 285,427 581,360 671,972 505,723 2,557,236 2,500,875 2,137,609
Deductions:
Premium Expense
Charges.......... 9,386 8,127 6,729 18,099 17,943 11,955 77,759 73,414 57,501
Monthly Expense
Charges.......... 8,129 5,135 7,723 9,039 9,194 7,490 43,162 44,064 40,411
Cost of Insurance
and Optional Ben-
efits............ 182,787 109,766 139,788 188,340 187,306 126,743 819,607 729,360 571,395
-------- ------- ------- ------- -------- ------- --------- --------- ---------
Total Deduc-
tions........... 200,302 123,028 154,240 215,478 214,443 146,188 940,528 846,838 669,307
-------- ------- ------- ------- -------- ------- --------- --------- ---------
Net Deposits from
Policyholders..... $298,894 141,438 131,187 365,882 457,529 359,535 1,616,708 1,654,037 1,468,302
======== ======= ======= ======= ======== ======= ========= ========= =========
<CAPTION>
U.S. GOVERNMENT/ ASSET ALLOCATION
AAA-RATED DIVISION DIVISION INTERNATIONAL DIVISION
-------------------------- -------------------------- -------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
-------- ------- ------- ------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross Depos-
its............... 645,709 709,715 544,514 934,273 949,062 672,995 2,169,672 1,541,653 1,111,353
Transfers Between
Funds and General
Account........... (83,942) 3,318 (29,625) (69,060) (129,653) (38,594) (336,376) 401,947 (22,658)
Surrenders and
Withdrawals....... (79,292) (23,660) (6,067) (70,577) (70,137) (19,054) (169,223) (117,514) (36,307)
-------- ------- ------- ------- -------- ------- --------- --------- ---------
Total Gross Depos-
its net of Surren-
ders, Withdrawals,
and Transfers..... 482,475 689,373 508,822 794,636 749,272 615,347 1,664,073 1,826,086 1,052,388
Deductions:
Premium Expense
Charges.......... 16,357 17,148 13,357 23,667 23,072 16,520 54,964 36,641 20,655
Monthly Expense
Charges.......... 9,296 8,760 8,872 11,865 10,921 10,999 20,606 18,102 10,084
Cost of Insurance
and Optional Ben-
efits............ 193,323 181,076 149,565 227,999 190,725 155,129 397,284 290,534 136,859
-------- ------- ------- ------- -------- ------- --------- --------- ---------
Total Deduc-
tions........... 218,976 206,984 171,794 263,531 224,718 182,648 472,854 345,277 167,598
-------- ------- ------- ------- -------- ------- --------- --------- ---------
Net Deposits from
Policyholders..... 263,499 482,389 337,028 531,105 524,554 432,699 1,191,219 1,480,809 884,790
======== ======= ======= ======= ======== ======= ========= ========= =========
<CAPTION>
GROWTH DIVISION
--------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Total Gross Depos-
its............... 4,466,543 3,968,822 3,131,323
Transfers Between
Funds and General
Account........... (241,620) (555,060) (125,934)
Surrenders and
Withdrawals....... (518,645) (326,112) (101,321)
---------- ---------- ----------
Total Gross Depos-
its net of Surren-
ders, Withdrawals,
and Transfers..... 3,706,278 3,087,650 2,904,068
Deductions:
Premium Expense
Charges.......... 113,148 95,964 74,698
Monthly Expense
Charges.......... 55,599 49,095 47,527
Cost of Insurance
and Optional Ben-
efits............ 1,083,441 866,377 687,603
---------- ---------- ----------
Total Deduc-
tions........... 1,252,188 1,011,436 809,828
---------- ---------- ----------
Net Deposits from
Policyholders..... 2,454,090 2,076,214 2,094,240
========== ========== ==========
<CAPTION>
<S> <C> <C> <C>
Total Gross Depos-
its...............
Transfers Between
Funds and General
Account...........
Surrenders and
Withdrawals.......
Total Gross Depos-
its net of Surren-
ders, Withdrawals,
and Transfers.....
Deductions:
Premium Expense
Charges..........
Monthly Expense
Charges..........
Cost of Insurance
and Optional Ben-
efits............
Total Deduc-
tions...........
Net Deposits from
Policyholders.....
</TABLE>
F-19
<PAGE>
PARAGON SEPARATE ACCOUNT A
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE COST
--------- ----------- -----------
<S> <C> <C> <C>
AMERICAN VARIABLE INSURANCE SERIES:
Cash Management Division................... 81,920 $ 901,939 $ 857,661
High-Yield Bond Division................... 131,385 1,827,568 1,541,278
Growth-Income Division..................... 343,248 10,396,993 7,605,622
Growth Division............................ 380,595 14,394,088 10,505,080
U.S. Government AAA-Rated Division......... 152,826 1,752,910 1,528,002
Asset Allocation Division.................. 226,217 3,020,010 2,329,589
International Division..................... 361,400 4,925,876 4,254,885
</TABLE>
See Accompanying Notes to Financial Statements.
F-20
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value, Cash Surrender Value and
Death Benefit of a Policy change with the investment experience of a Division
of the Separate Account. The tables show how the Cash Value, Cash Surrender
Value, and Death Benefit of a Policy issued to an Insured of a given age and at
a given premium would vary over time if the investment return on the assets
held in each Division of the Separate Account were a uniform, gross, after-tax
annual rate of 0%, 6% or 12%. The tables illustrate a Policy issued to
Insureds, age 30 and 50, in a group that is 70% male, 30% female. The Cash
Values, Cash Surrender Values and Death Benefits would be different from those
shown if the gross annual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above and below those averages for
individual Policy years.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the premium expense charge,
the monthly administrative charge and monthly charges for the cost of insurance
based on the 125% of the maximum allowed under the 1980 Commissioners Standard
Ordinary Mortality Table C. The "Cash Surrender Value" column under the
"Guaranteed" heading shows the projected Cash Surrender Values of the Policy,
which are calculated by taking the Cash Value under the "Guaranteed" heading
and deducting any applicable contingent deferred sales charges under the
Policies. The "Cash Value" column under the "Current" heading shows the
accumulated value of the premiums paid reflecting deduction of the premium
expense charge, the monthly administrative charge and monthly charges for the
cost of insurance at the current level for a group that is 70% male, 30%
female, which is less than or equal to the guaranteed rates of 125% of the
maximum allowed by the 1980 Commissioners Standard Ordinary Mortality Table C.
These cost of insurance rates illustrated at the current level as described
would range from 44% to 81% of the guaranteed rates depending upon attained
age. The "Cash Surrender Value" column under the "Current" heading shows the
projected Cash Surrender Value of the Policy, which is calculated by taking the
Cash Value under the "Current" heading and deducting any applicable contingent
deferred sales charge. The illustrations of Death Benefits reflect the above
assumptions. The Death Benefits also vary between tables depending upon whether
Level Type (Option A) or Increasing Type (Option B) Death Benefits are
illustrated. These illustrations also show how these benefits compare with
amounts which would accumulate if premiums were invested to earn interest
(after taxes) at 5% compounded annually.
The amounts shown for the Cash Value, Cash Surrender Value, and Death Benefit
reflect the fact that the investment rate of return is lower than the gross
after-tax return on the assets held in a Division of the Separate Account. The
charges include a .90% charge for mortality and expense risk, an investment
advisory fee of .493%, representing the average of the fees incurred by the
seven Funds in which the Account invests is applicable to each Fund (the actual
investment advisory fee is shown on page 11) and a .041% charge that is an
estimate of the Funds' expenses based on expenses on an average of the actual
expenses incurred in fiscal year 1995. After deduction for these amounts, the
illustrated gross annual investment rates of return of 0%, 6% and 12%
correspond to approximate net annual rates of -1.434%, 4.566%, and 10.566%,
respectively. The Fund has no expense reimbursement arrangement with Capital or
the Company.
The values reflect a premium expense charge of 2.5%, contingent deferred
sales charge of 25%, and a charge for premium taxes of 2%.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against the Separate Account, since the Company is not
currently making any such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return of the
divisions of the Separate Account would have to exceed 0%, 6%, and 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit and Cash Value illustrated. (See "Federal Tax Matters," page 35.)
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, and that no transfer charges were incurred.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, group size and gender mix, the Face Amount and
premium requested, and the proposed frequency of premium payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $287,000. AGE: 30
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM: $200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -1.434%)
-------------------------------------------------
GUARANTEED* CURRENT**
------------------------ ------------------------
CASH CASH
PREMIUM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- --------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,072 1,672 287,000 1,356 1,956 287,000
2 5,052 2,766 3,306 287,000 3,336 3,876 287,000
3 7,769 4,421 4,901 287,000 5,279 5,759 287,000
4 10,622 6,025 6,445 287,000 7,188 7,608 287,000
5 13,618 7,581 7,941 287,000 9,054 9,414 287,000
6 16,763 9,083 9,383 287,000 10,877 11,177 287,000
7 20,066 10,522 10,762 287,000 12,652 12,892 287,000
8 23,534 11,889 12,069 287,000 14,382 14,562 287,000
9 27,175 13,178 13,298 287,000 16,065 16,185 287,000
10 30,998 14,386 14,446 287,000 17,696 17,756 287,000
11 35,013 15,501 15,501 287,000 19,265 19,265 287,000
12 39,228 16,461 16,461 287,000 20,700 20,700 287,000
13 43,654 17,321 17,321 287,000 22,064 22,064 287,000
14 48,301 18,079 18,079 287,000 23,352 23,352 287,000
15 53,181 18,734 18,734 287,000 24,554 24,554 287,000
16 58,304 19,279 19,279 287,000 25,668 25,668 287,000
17 63,684 19,710 19,710 287,000 26,691 26,691 287,000
18 69,333 20,020 20,020 287,000 27,615 27,615 287,000
19 75,264 20,204 20,204 287,000 28,428 28,428 287,000
20 81,492 20,247 20,247 287,000 29,125 29,125 287,000
25 117,624 17,759 17,759 287,000 30,597 30,597 287,000
30 163,740 9,113 9,113 287,000 27,391 27,391 287,000
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $287,000. AGE: 30
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM: $200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6% (NET RATE @ 4.566%)
--------------------------------------------------
GUARANTEED* CURRENT**
------------------------ -------------------------
CASH CASH
PREM @ SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- --------- ------ ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,127 1,727 287,000 1,420 2,020 287,000
2 5,052 2,978 3,518 287,000 3,584 4,124 287,000
3 7,769 4,895 5,375 287,000 5,835 6,315 287,000
4 10,622 6,869 7,289 287,000 8,178 8,598 287,000
5 13,618 8,905 9,265 287,000 10,610 10,970 287,000
6 16,763 10,998 11,298 287,000 13,132 13,432 287,000
7 20,066 13,142 13,382 287,000 15,746 15,986 287,000
8 23,534 15,331 15,511 287,000 18,457 18,637 287,000
9 27,175 17,560 17,680 287,000 21,266 21,386 287,000
10 30,998 19,826 19,886 287,000 24,174 24,234 287,000
11 35,013 22,119 22,119 287,000 27,175 27,175 287,000
12 39,228 24,379 24,379 287,000 30,200 30,200 287,000
13 43,654 26,661 26,661 287,000 33,317 33,317 287,000
14 48,301 28,966 28,966 287,000 36,525 36,525 287,000
15 53,181 31,292 31,292 287,000 39,819 39,819 287,000
16 58,304 33,634 33,634 287,000 43,201 43,201 287,000
17 63,684 35,991 35,991 287,000 46,673 46,673 287,000
18 69,333 38,357 38,357 287,000 50,231 50,231 287,000
19 75,264 40,727 40,727 287,000 53,872 53,872 287,000
20 81,492 43,090 43,090 287,000 57,595 57,595 287,000
25 117,624 54,280 54,280 287,000 77,412 77,412 287,000
30 163,740 62,924 62,924 287,000 98,841 98,841 287,000
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $287,000. AGE: 30
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.566%)
---------------------------------------------------
GUARANTEED* CURRENT**
------------------------- -------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,180 1,780 287,000 1,482 2,082 287,000
2 5,052 3,194 3,734 287,000 3,837 4,377 287,000
3 7,769 5,398 5,878 287,000 6,424 6,904 287,000
4 10,622 7,801 8,221 287,000 9,271 9,691 287,000
5 13,618 10,427 10,787 287,000 12,398 12,758 287,000
6 16,763 13,292 13,592 287,000 15,831 16,131 287,000
7 20,066 16,413 16,653 287,000 19,601 19,841 287,000
8 23,534 19,808 19,988 287,000 23,745 23,925 287,000
9 27,175 23,503 23,623 287,000 28,299 28,419 287,000
10 30,998 27,525 27,585 287,000 33,305 33,365 287,000
11 35,013 31,899 31,899 287,000 38,801 38,801 287,000
12 39,228 36,603 36,603 287,000 44,768 44,768 287,000
13 43,654 41,737 41,737 287,000 51,328 51,328 287,000
14 48,301 47,348 47,348 287,000 58,541 58,541 287,000
15 53,181 53,492 53,492 287,000 66,471 66,471 287,000
16 58,304 60,223 60,223 287,000 75,199 75,199 287,000
17 63,684 67,609 67,609 287,000 84,811 84,811 287,000
18 69,333 75,722 75,722 287,000 95,401 95,401 287,000
19 75,264 84,646 84,646 287,000 107,077 107,077 287,000
20 81,492 94,469 94,469 287,000 119,962 119,962 287,000
25 117,624 161,181 161,181 287,000 207,906 207,906 326,412
30 163,740 272,528 272,528 365,187 351,422 351,422 470,505
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $97,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM: $200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -1.434%)
-------------------------------------------------
GUARANTEED* CURRENT**
------------------------ ------------------------
CASH CASH
PREM @ SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- --------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 896 1,496 97,000 1,173 1,773 97,000
2 5,052 2,382 2,922 97,000 2,944 3,484 97,000
3 7,769 3,790 4,270 97,000 4,650 5,130 97,000
4 10,622 5,116 5,536 97,000 6,290 6,710 97,000
5 13,618 6,355 6,715 97,000 7,863 8,223 97,000
6 16,763 7,508 7,808 97,000 9,357 9,657 97,000
7 20,066 8,571 8,811 97,000 10,775 11,015 97,000
8 23,534 9,544 9,724 97,000 12,112 12,292 97,000
9 27,175 10,424 10,544 97,000 13,363 13,483 97,000
10 30,998 11,204 11,264 97,000 14,521 14,581 97,000
11 35,013 11,876 11,876 97,000 15,557 15,557 97,000
12 39,228 12,362 12,362 97,000 16,423 16,423 97,000
13 43,654 12,702 12,702 97,000 17,176 17,176 97,000
14 48,301 12,875 12,875 97,000 17,805 17,805 97,000
15 53,181 12,862 12,862 97,000 18,303 18,303 97,000
16 58,304 12,649 12,649 97,000 18,648 18,648 97,000
17 63,684 12,220 12,220 97,000 18,751 18,751 97,000
18 69,333 11,563 11,563 97,000 18,610 18,610 97,000
19 75,264 10,658 10,658 97,000 18,219 18,219 97,000
20 81,492 9,468 9,468 97,000 17,566 17,566 97,000
25 117,624 0 0 0 9,282 9,282 97,000
30 163,740 0 0 0 0 0 0
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $97,000. AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.566%)
-------------------------------------------------
GUARANTEED* CURRENT**
------------------------ ------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ---- --------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 945 1,545 97,000 1,231 1,831 97,000
2 5,052 2,571 3,111 97,000 3,168 3,708 97,000
3 7,769 4,211 4,691 97,000 5,151 5,631 97,000
4 10,622 5,861 6,281 97,000 7,179 7,599 97,000
5 13,618 7,518 7,878 97,000 9,256 9,616 97,000
6 16,763 9,183 9,483 97,000 11,372 11,672 97,000
7 20,066 10,852 11,092 97,000 13,530 13,770 97,000
8 23,534 12,528 12,708 97,000 15,732 15,912 97,000
9 27,175 14,211 14,331 97,000 17,973 18,093 97,000
10 30,998 15,894 15,954 97,000 20,253 20,313 97,000
11 35,013 17,572 17,572 97,000 22,548 22,548 97,000
12 39,228 19,172 19,172 97,000 24,816 24,816 97,000
13 43,654 20,738 20,738 97,000 27,116 27,116 97,000
14 48,301 22,252 22,252 97,000 29,449 29,449 97,000
15 53,181 23,702 23,702 97,000 31,816 31,816 97,000
16 58,304 25,078 25,078 97,000 34,207 34,207 97,000
17 63,684 26,371 26,371 97,000 36,563 36,563 97,000
18 69,333 27,576 27,576 97,000 38,895 38,895 97,000
19 75,264 28,682 28,682 97,000 41,215 41,215 97,000
20 81,492 29,665 29,665 97,000 43,535 43,535 97,000
25 117,624 31,129 31,129 97,000 55,339 55,339 97,000
30 163,740 19,402 19,402 97,000 67,846 67,846 97,000
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $97,000. AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.566%)
---------------------------------------------------
GUARANTEED* CURRENT**
------------------------- -------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ---- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 993 1,593 97,000 1,288 1,888 97,000
2 5,052 2,764 3,304 97,000 3,397 3,937 97,000
3 7,769 4,659 5,139 97,000 5,683 6,163 97,000
4 10,622 6,687 7,107 97,000 8,164 8,584 97,000
5 13,618 8,860 9,220 97,000 10,862 11,222 97,000
6 16,763 11,198 11,498 97,000 13,790 14,090 97,000
7 20,066 13,718 13,958 97,000 16,979 17,219 97,000
8 23,534 16,446 16,626 97,000 20,459 20,639 97,000
9 27,175 19,407 19,527 97,000 24,259 24,379 97,000
10 30,998 22,630 22,690 97,000 28,419 28,479 97,000
11 35,013 26,143 26,143 97,000 32,962 32,962 97,000
12 39,228 29,917 29,917 97,000 37,897 37,897 97,000
13 43,654 34,049 34,049 97,000 43,346 43,346 97,000
14 48,301 38,582 38,582 97,000 49,383 49,383 97,000
15 53,181 43,577 43,577 97,000 56,095 56,095 97,000
16 58,304 49,110 49,110 97,000 63,580 63,580 97,000
17 63,684 55,276 55,276 97,000 71,935 71,935 97,000
18 69,333 62,194 62,194 97,000 81,330 81,330 97,000
19 75,264 70,003 70,003 97,000 91,841 91,841 107,454
20 81,492 78,873 78,873 97,000 103,390 103,390 119,932
25 117,624 141,376 141,376 151,272 181,514 181,514 194,220
30 163,740 243,763 243,763 255,951 309,583 309,583 325,062
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-7
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $102,000. AGE: 30
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -1.434%)
-------------------------------------------------
GUARANTEED* CURRENT**
------------------------ ------------------------
CASH CASH
PREMIUM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ------- --------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,436 2,036 104,036 1,538 2,138 104,138
2 5,052 3,498 4,038 106,038 3,701 4,241 106,241
3 7,769 5,523 6,003 108,003 5,831 6,311 108,311
4 10,622 7,509 7,929 109,929 7,927 8,347 110,347
5 13,618 9,457 9,817 111,817 9,987 10,347 112,347
6 16,763 11,364 11,664 113,664 12,011 12,311 114,311
7 20,066 13,228 13,468 115,468 13,999 14,239 116,239
8 23,534 15,046 15,226 117,226 15,950 16,130 118,130
9 27,175 16,815 16,935 118,935 17,864 17,984 119,984
10 30,998 18,535 18,595 120,595 19,740 19,800 121,800
11 35,013 20,201 20,201 122,201 21,574 21,574 123,574
12 39,228 21,752 21,752 123,752 23,302 23,302 125,302
13 43,654 23,247 23,247 125,247 24,985 24,985 126,985
14 48,301 24,685 24,685 126,685 26,620 26,620 128,620
15 53,181 26,067 26,067 128,067 28,205 28,205 130,205
16 58,304 27,389 27,389 129,389 29,738 29,738 131,738
17 63,684 28,651 28,651 130,651 31,219 31,219 133,219
18 69,333 29,851 29,851 131,851 32,644 32,644 134,644
19 75,264 30,986 30,986 132,986 34,009 34,009 136,009
20 81,492 32,052 32,052 134,052 35,312 35,312 137,312
25 117,624 36,141 36,141 138,141 40,799 40,799 142,799
30 163,740 37,677 37,677 139,677 44,104 44,104 146,104
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-8
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $102,000 AGE: 30
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6% (NET RATE @ 4.566%)
---------------------------------------------------
GUARANTEED* CURRENT**
------------------------- -------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,503 2,103 104,103 1,607 2,207 104,207
2 5,052 3,755 4,295 106,295 3,972 4,512 106,512
3 7,769 6,101 6,581 108,581 6,438 6,918 108,918
4 10,622 8,539 8,959 110,959 9,009 9,429 111,429
5 13,618 11,075 11,435 113,435 11,689 12,049 114,049
6 16,763 13,710 14,010 116,010 14,481 14,781 116,781
7 20,066 16,445 16,685 118,685 17,388 17,628 119,628
8 23,534 19,282 19,462 121,462 20,417 20,597 122,597
9 27,175 22,221 22,341 124,341 23,571 23,691 125,691
10 30,998 25,266 25,326 127,326 26,854 26,914 128,914
11 35,013 28,415 28,415 130,415 30,268 30,268 132,268
12 39,228 31,614 31,614 133,614 33,754 33,754 135,754
13 43,654 34,923 34,923 136,923 37,378 37,378 139,378
14 48,301 38,348 38,348 140,348 41,143 41,143 143,143
15 53,181 41,892 41,892 143,892 45,053 45,053 147,053
16 58,304 45,556 45,556 147,556 49,111 49,111 151,111
17 63,684 49,345 49,345 151,345 53,323 53,323 155,323
18 69,333 53,262 53,262 155,262 57,692 57,692 159,692
19 75,264 57,308 57,308 159,308 62,219 62,219 164,219
20 81,492 61,485 61,485 163,485 66,910 66,910 168,910
25 117,624 84,285 84,285 186,285 92,941 92,941 194,941
30 163,740 110,176 110,176 212,176 123,421 123,421 225,421
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-9
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $102,000 AGE: 30
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12% (NET RATE @ 10.566%)
---------------------------------------------------
GUARANTEED* CURRENT**
------------------------- -------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,568 2,168 104,168 1,676 2,276 104,276
2 5,052 4,019 4,559 106,559 4,249 4,789 106,789
3 7,769 6,715 7,195 109,195 7,082 7,562 109,562
4 10,622 9,677 10,097 112,097 10,205 10,625 112,625
5 13,618 12,935 13,295 115,295 13,645 14,005 116,005
6 16,763 16,516 16,816 118,816 17,434 17,734 119,734
7 20,066 20,452 20,692 122,692 21,608 21,848 123,848
8 23,534 24,775 24,955 126,955 26,207 26,387 128,387
9 27,175 29,524 29,644 131,644 31,276 31,396 133,396
10 30,998 34,742 34,802 136,802 36,861 36,921 138,921
11 35,013 40,473 40,473 142,473 43,014 43,014 145,014
12 39,228 46,710 46,710 148,710 49,727 49,727 151,727
13 43,654 53,569 53,569 155,569 57,129 57,129 159,129
14 48,301 61,117 61,117 163,117 65,288 65,288 167,288
15 53,181 69,423 69,423 171,423 74,281 74,281 176,281
16 58,304 78,565 78,565 180,565 84,193 84,193 186,193
17 63,684 88,629 88,629 190,629 95,120 95,120 198,800
18 69,333 99,710 99,710 202,411 107,155 107,155 217,525
19 75,264 111,901 111,901 220,444 120,397 120,397 237,183
20 81,492 125,293 125,293 239,310 134,963 134,963 257,780
25 117,624 214,948 214,948 337,469 233,009 233,009 365,825
30 163,740 359,713 359,713 482,016 392,097 392,097 525,410
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-10
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $45,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 0% (NET RATE @ -1.434%)
-------------------------------------------------
GUARANTEED* CURRENT**
------------------------ ------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ------- --------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,291 1,891 46,891 1,420 2,020 47,020
2 5,052 3,186 3,726 48,726 3,450 3,990 48,990
3 7,769 5,022 5,502 50,502 5,428 5,908 50,908
4 10,622 6,796 7,216 52,216 7,352 7,772 52,772
5 13,618 8,505 8,865 53,865 9,223 9,583 54,583
6 16,763 10,150 10,450 55,450 11,032 11,332 56,332
7 20,066 11,727 11,967 56,967 12,783 13,023 58,023
8 23,534 13,239 13,419 58,419 14,471 14,651 59,651
9 27,175 14,682 14,802 59,802 16,092 16,212 61,212
10 30,998 16,053 16,113 61,113 17,644 17,704 62,704
11 35,013 17,347 17,347 62,347 19,109 19,109 64,109
12 39,228 18,498 18,498 63,498 20,435 20,435 65,435
13 43,654 19,553 19,553 64,553 21,678 21,678 66,678
14 48,301 20,504 20,504 65,504 22,834 22,834 67,834
15 53,181 21,341 21,341 66,341 23,898 23,898 68,898
16 58,304 22,062 22,062 67,062 24,857 24,857 69,857
17 63,684 22,660 22,660 67,660 25,665 25,665 70,665
18 69,333 23,133 23,133 68,133 26,322 26,322 71,322
19 75,264 23,478 23,478 68,478 26,828 26,828 71,828
20 81,492 23,683 23,683 68,683 27,184 27,184 72,184
25 117,624 21,843 21,843 66,843 26,445 26,445 71,445
30 163,740 13,241 13,241 58,241 19,854 19,854 64,854
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER A PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-11
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $45,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6% (NET RATE @ 4.566%)
-------------------------------------------------
GUARANTEED* CURRENT**
------------------------ ------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ------- --------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,353 1,953 46,953 1,486 2,086 47,086
2 5,052 3,425 3,965 48,965 3,705 4,245 49,245
3 7,769 5,555 6,035 51,035 5,998 6,478 51,478
4 10,622 7,742 8,162 53,162 8,367 8,787 53,787
5 13,618 9,984 10,344 55,344 10,813 11,173 56,173
6 16,763 12,284 12,584 57,584 13,332 13,632 58,632
7 20,066 14,641 14,881 59,881 15,927 16,167 61,167
8 23,534 17,056 17,236 62,236 18,600 18,780 63,780
9 27,175 19,530 19,650 64,650 21,347 21,467 66,467
10 30,998 22,061 22,121 67,121 24,167 24,227 69,227
11 35,013 24,645 24,645 69,645 27,048 27,048 72,048
12 39,228 27,215 27,215 72,215 29,935 29,935 74,935
13 43,654 29,822 29,822 74,822 32,889 32,889 77,889
14 48,301 32,456 32,456 77,456 35,906 35,906 80,906
15 53,181 35,108 35,108 80,108 38,983 38,983 83,983
16 58,304 37,773 37,773 82,773 42,109 42,109 87,109
17 63,684 40,444 40,444 85,444 45,236 45,236 90,236
18 69,333 43,118 43,118 88,118 48,361 48,361 93,361
19 75,264 45,788 45,788 90,788 51,485 51,485 96,485
20 81,492 48,441 48,441 93,441 54,604 54,604 99,604
25 117,624 60,523 60,523 105,523 69,765 69,765 114,765
30 163,740 67,727 67,727 112,727 81,979 81,979 126,979
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND FURTHER
ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-12
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $45,000. AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $2,400.00
CONTINGENT DEFERRED SALES CHARGE: 25.0% (MONTHLY PREMIUM:
$200.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12% (NET RATE @ 10.566%)
---------------------------------------------------
GUARANTEED* CURRENT**
------------------------- -------------------------
CASH CASH
PREM SURRENDER CASH DEATH SURRENDER CASH DEATH
YEAR @ 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- ---- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,465 1,413 2,013 47,013 1,551 2,151 47,151
2 5,052 3,669 4,209 49,209 3,966 4,506 49,506
3 7,769 6,121 6,601 51,601 6,605 7,085 52,085
4 10,622 8,787 9,207 54,207 9,488 9,908 54,908
5 13,618 11,686 12,046 57,046 12,642 13,002 58,002
6 16,763 14,841 15,141 60,141 16,085 16,385 61,385
7 20,066 18,277 18,517 63,517 19,849 20,089 65,089
8 23,534 22,021 22,201 67,201 23,964 24,144 69,144
9 27,175 26,105 26,225 71,225 28,461 28,581 73,581
10 30,998 30,559 30,619 75,619 33,377 33,437 78,437
11 35,013 35,416 35,416 80,416 38,738 38,738 83,738
12 39,228 40,649 40,649 85,649 44,536 44,536 89,536
13 43,654 46,352 46,352 91,352 50,879 50,879 95,879
14 48,301 52,563 52,563 97,563 57,818 57,818 102,818
15 53,181 59,325 59,325 104,325 65,411 65,411 110,411
16 58,304 66,691 66,691 111,691 73,714 73,714 118,714
17 63,684 74,717 74,717 119,717 82,747 82,747 127,747
18 69,333 83,470 83,470 128,470 92,588 92,588 137,588
19 75,264 93,019 93,019 138,019 103,321 103,321 148,321
20 81,492 103,436 103,436 148,436 115,038 115,038 160,038
25 117,624 171,143 171,143 216,143 192,067 192,067 237,067
30 163,740 274,140 274,140 319,140 311,823 311,823 356,823
</TABLE>
- --------
* These values reflect investment results using guaranteed cost of insurance
rates.
** These values reflect investment results using current cost of insurance
rates.
THE HYPOTHETICAL INVESTMENT RATE OF RETURN SHOWN ABOVE IS ILLUSTRATIVE ONLY,
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATION MADE BY THE POLICYOWNER,
AND THE INVESTMENT RESULTS FOR THE FUNDS OF AMERICAN VARIABLE INSURANCE SERIES.
THE CASH VALUE, CASH SURRENDER VALUE AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE RATE
SHOWN ABOVE OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT
AVERAGE FOR INDIVIDUAL YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY,
WALNUT STREET SECURITIES, CAPITAL RESEARCH, OR ANY REPRESENTATIVE THEREOF, THAT
THIS HYPOTHETICAL RATE OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR, OR SUSTAINED
OVER ANY PERIOD OF TIME.
ILLUSTRATED VALUES SHOWN ABOVE ARE AS OF THE END OF THE YEARS INDICATED AND
ASSUME PREMIUMS SHOWN ARE RECEIVED MONTHLY ON THE POLICY ANNIVERSARY DAY AND
FURTHER ASSUME THERE IS NO POLICY INDEBTEDNESS OUTSTANDING.
A-13
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore, or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article III, Section 13 of the Company's Bylaws provide: "The Corporation
may indemnify any person who is made a party to any civil or criminal suit, or
made a subject of any administrative or investigative proceeding by reason of
the fact that he is or was a director, officer, or agent of the Corporation.
This indemnity may extend to expenses, including attorney's fees, judgments,
fine, and amounts paid in settlement. The indemnity shall not be available to
persons being sued by or upon the information of the Corporation not to person
who are being investigated by the Corporation. The indemnity shall be
discretionary with the Board of Directors and shall not be granted until the
Board of Directors has made a determination that the person who would be
indemnified acted in good faith and in a manner he reasonably believed to be in
the best interest of the Corporation. The Corporation shall have such other and
further powers of indemnification as are not inconsistent with the laws of
Missouri."
Insofar as indemnification for liability arising under the Securities Act
of l933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Charter and Articles of Incorporation of the Company,
the By-Laws of the Company, agreement, statute, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
REPRESENTATIONS PURSUANT TO RULE 6e-3(T)
This filing is made pursuant to Rules 6c-3 and 6e-3(T) under the
Investment Company Act of l940.
Registrant elects to be governed by Rule 6e-3(T) (b) (l3) (i) (A) under
the Investment Company Act of l940 with respect to the Policy described in the
Prospectus.
Registrant makes the following representations:
(1) Section 6e-3(T) (b) (l3) (iii) (F) has been relied upon.
(2) The level of the mortality and expense risk charge is within the
range of industry practice for comparable flexible premium variable
life insurance policies, and is reasonable in relation to the risks
assumed by the Company under the Policies.
(3) Registrant has concluded that there is a reasonable likelihood that
the distribution financing arrangement of the Separate Account will
benefit the Separate Account and Owners and will keep and make
available to the Commission on request a memorandum setting forth the
basis for this representation.
(4) The Separate Account will invest only in management investment
companies which have undertaken to have a board of directors, a
majority of whom are not interested persons of the company, formulate
and approve any plan under Rule 12b-1 to finance distribution
expenses.
The methodology used to support the representation made in paragraph (2)
above is based on an analysis of the mortality and expense risk charges
contained in other flexible premium variable life insurance policies.
Registrant undertakes to keep and make available to the Commission on request
the documents used to support the representation in paragraph (2) above.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The facing sheet.
The Prospectus consisting of 74 pages.
The undertaking to file reports required by Section 15 (d),
1934 Act.
The undertaking pursuant to Rule 484.
Representations pursuant to Rule 6e-3(T).
The signatures.
The following exhibits:
1. The following exhibits correspond in number to the numbers under paragraph
A of the instructions as to exhibits for Form N-8B-2:
(1) Resolution of the Board of Directors of the Company
authorizing establishment of the Separate Account. 1
(2) (a) Proposed form of Underwriting Agreement. 2
(b) Proposed form of Selling Agreement. 2
(c) Commission Schedule. 2
(4) Not applicable.
(5) (a) Proposed form of Group Contract. 2
(6) (a) Amended Charter and Articles of Incorporation of
the Company. 3
(b) By-Laws of the Company. 1
(7) Not applicable.
(8) Series Participation Agreement. 2
(9) Not applicable.
(10) (a) Form of Application for Group Contract. 2
(b) Form of Application for Individual Insurance
Guaranteed Issue (Group Contract). 2
II-3
<PAGE>
2. Memorandum describing the Company's issuance, transfer, and redemption
procedures for the Policies and the Company's procedure for conversion to a
fixed benefit policy. 2
3. The following exhibits are numbered to correspond to the numbers in the
instructions as to exhibits for Form S-6.
(1) See above.
(2) See Exhibit 1(5).
(3) Opinion of Matthew P. McCauley, Esquire, General
Counsel of Paragon Life Insurance Company. 2
(4) No financial statements are omitted from the Prospectus
pursuant to Instruction 1(b) or (c) of Part I.
(5) Not applicable.
4. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Vice President
and Chief Actuary. 4
5. The consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants. 4
6. Written consent of Sutherland, Asbill & Brennan. 4
7. Original powers of attorney authorizing Matthew P. McCauley, Carl H.
Anderson, and Craig K. Nordyke, and each of them singly, to sign this
Registration Statement and Amendments thereto on behalf of the Board of
Directors of Paragon Life Insurance Company. 3
8. Power of Attorney for Warren J. Winer. 5
1 Incorporated by reference to the initial Registration
Statement in File No. 33-l834l.
2 Incorporated by reference to the Registration Statement in
File No. 33-27242.
3 Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement in File 33-l834l, filed on March 18, 1988.
4 Filed herewith.
5 Incorporated by reference to Post-Effective Amendment No. 8
to the Registration Statement, File No. 33-18341.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Paragon Life
Insurance Company and Separate Account A of Paragon Life Insurance Company
certify that they meet all the requirements for effectiveness of this amended
Registration Statement pursuant to Rule 485(b) under the Securities Act of l933
and have duly caused this amended Registration Statement to be signed on their
behalf by the undersigned thereunto duly authorized, and the seal of Paragon
Life Insurance Company to be hereunto affixed and attested, all in the City of
St. Louis, State of Missouri, on the 5th day of April,1996.
(Seal) Paragon Life Insurance Company
Attest: /s/ MATTHEW P. McCAULEY By: /s/ CARL H. ANDERSON
------------------------ ----------------------
Matthew P. McCauley, Carl H. Anderson, President
Secretary and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ CARL H. ANDERSON 4-5-96
- ------------------------
Carl H. Anderson President and Director
(Chief Executive Officer)
/s/ STEVEN D. ANDERSON 4-5-96
- ------------------------
Steven D. Anderson Vice President
and Chief Financial
Officer (Principal
Accounting Officer and
Principal Financial Officer)
- ------------------------
Warren J. Winer** Director
- ------------------------
Richard A. Liddy* Director
<PAGE>
Signature Title Date
/s/ MATTHEW P. McCAULEY 4-5-96
- ------------------------
Matthew P. McCauley Vice President,
General Counsel,
Secretary and Director
/S/ CRAIG K. NORDYKE 4-5-96
- ------------------------
Craig K. Nordyke Director
- ------------------------
Leonard M. Rubenstein* Director
- ------------------------
E. Thomas Hughes* Director and Treasurer
- ------------------------
Bernard H Wolzenski* Director
- ------------------------
A. Greig Woodring* Director
By: /s/ CRAIG K. NORDYKE
- --------------------------
Craig K. Nordyke 4-5-96
*Original powers of attorney authorizing Matthew P. McCauley, Carl H. Anderson,
and Craig K. Nordyke, and each of them singly, to sign this Registration
Statement and Amendments thereto on behalf of the Board of Directors of Paragon
Life Insurance Company have been filed with the Securities and Exchange
Commission.
**Original power of attorney authorizing Juanita M. Thomas, Carl H. Anderson and
Craig K. Nordyke, and each of them singly, to sign this Registration Statement
and Amendments thereto on behalf of Warren J. Winer is being filed with Post-
Effective Amendment No. 8 (file no. 33-18341).
<PAGE>
EXHIBIT INDEX
Exhibit
4. Opinion and consent of Craig K. Nordyke,
F.S.A., M.A.A.A., Vice President and
Chief Actuary
5. Written consent of KPMG Peat Marwick LLP,
Independent Certified Public Accountants.
6. Written consent of Sutherland, Asbill & Brennan.
<PAGE>
Exhibit 4
OPINION AND CONSENT OF CRAIG K. NORDYKE, F.S.A., M.A.A.A.,
VICE PRESIDENT AND CHIEF ACTUARY
<PAGE>
RE: 33-27242
Gentlemen:
In my capacity as Vice President and Chief Actuary for Paragon Life Insurance
Company, I have provided actuarial advice concerning: (a) the preparation of a
registration statement for Separate Account A filed on Form S-6 with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Registration Statement") regarding the offer and sale of flexible premium
variable life insurance policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
1. The "sales load", as defined in paragraph (c) (4) of Rule 6e-3(T) under
the Investment Company Act of 1940, will not exceed 9 per centum of the
guideline annual premiums for the lesser of 20 years or the life
expectancy of the insured made under the Policies, in conformance with
paragraphs (b) (13) (i) (A) and (c) (7) of Rule 63-3(T).
2. The illustration of cash values, cash surrender values, death benefits,
and accumulated premiums in the Appendix to the prospectus contained in
the Registration Statement, are based on the assumptions stated in the
illustration, and are consistent with the provisions of the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear to be more favorable to prospective purchasers of Policies aged 30
or 50 in the rate class illustrated than to prospective purchasers of
Policies at other ages.
3. The information contained in the examples set forth in the section of the
prospectus entitled "Death Benefits", is based on the assumption stated in
the examples, and is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to the Post-
Effective Amendment No. 8 to the Registration Statement and to the use of my
name under the heading "Experts" in the prospectus.
/S/ CRAIG E. NORDYKE
----------------------------------------
Craig K. Nordyke, FSA, MAAA
Vice President and Chief Actuary
<PAGE>
Exhibit 5
WRITTEN CONSENT OF KPMG PEAT MARWICK LLP,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
Independent Auditors' Consent
-----------------------------
The Board of Directors
Paragon Life Insurance Company
We consent to the use of our reports included herein and to the reference of our
firm under the heading "Experts" in the Registration Statement and Prospectus
for Paragon Separate Account A.
Our report dated February 16, 1996, covering the financial statements of Paragon
Life Insurance Company, contains an explanatory paragraph which states that the
financial statements are presented in conformity with accounting practices
prescribed or permitted by the State of Missouri Department of Insurance. These
practices differ in some respects from generally accepted accounting principles.
The financial statements do not include any adjustments that might result from
the differences.
KPMG Peat Marwick LLP
St. Louis, Missouri
April 17, 1996
<PAGE>
Exhibit 6
WRITTEN CONSENT OF SUTHERLAND, ASBILL & BRENNAN
<PAGE>
April 4, 1996
Board of Directors
Paragon Life Insurance Company
100 South Brentwood Boulevard
St. Louis, Missouri 63105
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus filed as part of Post-Effective Amendment No. 8 to
the registration statement on Form S-6 for Separate Account A of Paragon Life
Insurance Company (File No. 33-27242). In giving this consent, we do not admit
that we are in the category of persons whose consent is required under Section 7
of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN
By: /S/ STEPHEN E. ROTH
---------------------------------------------
Stephen E. Roth
