<PAGE>
As filed with the Securities and Exchange Commission on 30 April 1999
Registration No. 33-1834l
811-5382
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 11
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 LLP
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective (check appropriate space)
[ ] immediately upon filing pursuant to paragraph (b), of Rule 485
[X] 1 May 1999 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date), pursuant to paragraph (a)(1) of rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
Title of securities being registered: Group and Individual Flexible Premium
Variable Life Insurance Policies.
33-18341
<PAGE>
American
Variable
Insurance
Series
. GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
Prospectus dated May 1, 1999
50406
<PAGE>
GROUP AND INDIVIDUAL 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," "we," or "us") which
are designed for use in employer-sponsored insurance programs. When a Group
Contract is issued, Certificates showing the rights of the Owners and/or
Insureds will be issued under the Group Contract. Individual Policies will be
issued when a Group Contract is not issued. The terms of the Certificate and
the Individual Policy are very similar and are collectively referred to in this
Prospectus as "Policy" or "Policies."
The Policies are designed to provide lifetime insurance protection to age 95
and provide flexibility to vary premium payments and change the level of death
benefits payable under the Policies. Flexibility allows an Owner to provide for
changing insurance needs under a single insurance policy. An Owner can allocate
net premiums among several investment portfolios ("Funds") with different
investment objectives.
The Policy provides for: (1) a value upon surrendering the Policy; (2) loans;
and (3) a death benefit payable on the Insured's death. As long as the Policy
remains in force, the death benefit payable on the Insured's death will not be
less than the Face Amount of the Policy. The Policy will remain in force so
long as there is enough value to pay certain monthly charges.
The Owner may allocate net premiums to one or more of the Divisions of
Separate Account A (the "Separate Account"). The Policy value will vary to
reflect the investment experience of the Divisions selected by the Owner.
Depending on the death benefit option elected, portions of the death benefit
may also vary. The Owner bears the entire investment risk under the Policies;
there is no minimum guaranteed value.
Each Division of the Separate Account will invest solely in a corresponding
investment portfolio of American Variable Insurance Series:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
FUND FUND
- ------------------------------------------------------------------
<S> <C>
Cash Management Fund International Fund
- ------------------------------------------------------------------
High-Yield Bond Fund Bond Fund
- ------------------------------------------------------------------
Growth-Income Fund Global Growth Fund
- ------------------------------------------------------------------
Growth Fund U.S. Government/AAA-Rated Securities Fund
- ------------------------------------------------------------------
Asset Allocation Fund Global Small Capitalization Fund
- ------------------------------------------------------------------
</TABLE>
The date of this Prospectus is May 1, 1999.
<PAGE>
Please read this Prospectus carefully and keep it. A full description of the
Funds is contained in the prospectus for each Fund, which must accompany this
Prospectus.
It may not be a good decision 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.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
The Company, The Separate Account, and The Funds......................... 10
The Company
The Separate Account
The Funds
Addition, Deletion, or Substitution of Investments
Payment and Allocation of Premiums....................................... 14
Issuance of a Policy
Premiums
Allocation of Net Premiums and Cash Value
Policy Lapse and Reinstatement
Policy Benefits.......................................................... 18
Death Benefit
Cash Value
Policy Rights and Privileges............................................. 24
Exercising Rights and Privileges Under the Policies
Loans
Surrender and Partial Withdrawals
Transfers
Right to Examine Policy
Conversion Right to a Fixed Benefit Policy
Eligibility Change Conversion
Payment of Benefits at Maturity
Payment of Policy Benefits
Charges and Deductions................................................... 28
Sales Charges
Premium Tax Charge
Monthly Deduction
Partial Withdrawal Transaction Charge
Separate Account Charges
General Matters Relating to the Policy................................... 34
Distribution of the Policies............................................. 37
General Provisions of the Group Contract................................. 38
Federal Tax Matters...................................................... 39
Safekeeping of the Separate Account's Assets............................. 42
Voting Rights............................................................ 43
State Regulation of the Company.......................................... 43
Management of the Company................................................ 44
Legal Matters............................................................ 45
Legal Proceedings........................................................ 45
Experts.................................................................. 45
Additional Information................................................... 46
Definitions.............................................................. 46
Financial Statements..................................................... F-
Appendix A............................................................... A-1
</TABLE>
The Policies are not available in all states.
3
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SUMMARY OF THE POLICY
The following summary of Prospectus information should be read with the
detailed information which follows in this Prospectus. Unless we provide
otherwise, 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 (either an Individual Policy or a Certificate) described in this
Prospectus are designed for use in employer-sponsored insurance programs and
are issued in three situations.
. First--Policies in the form of certificates are issued pursuant to Group
Contracts entered into between the Company and Contractholders (see
"General Provisions of the Group Contract");
. Second--Individual Policies can be issued in connection with employer-
sponsored insurance programs where Group Contracts are not issued; and
The Insured under a Policy is usually an employee of the Contractholder or
sponsoring employer or the employee's spouse. Generally, only an employee is
eligible to be an Insured under an Executive Program Policy. If there is
sufficient Cash Surrender Value, Individual Insurance under a Group Contract or
other employer-sponsored insurance program will continue should the Group
Contract or other program cease or the employee's employment end (see "Payment
and Allocation of Premiums--Issuance of a Policy").
On behalf of Owners, the Contractholder will make planned premium payments
under the Group Contract equal to an amount authorized by employees to be
deducted from their wages. In addition, Owners may pay additional premiums. A
similar procedure will apply when an Individual Policy is issued in connection
with an employer-sponsored program.
The Policies are "variable" policies because, unlike the fixed benefits under
other types of life insurance contracts, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment experience of the Funds underlying the Divisions
to which the Owner has allocated net premium payments. 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 or an accelerated death benefit in a reduced amount determined in
accordance with certain riders available under the Policy. (See "General
Matters Relating to the Policy--Additional Insurance Benefits.")
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 whichever is latest. If a Policy is
cancelled within this time period, a refund will be paid which will equal all
premiums paid under the Policy or any different amount required by state law.
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.")
The Separate Account
The Owner may allocate the net premiums to one or more Divisions. See "The
Company, The Separate Account, and The Funds" for a complete description of the
available Funds. An Owner may change future allocations of net premiums at any
time by notifying the Company directly.
4
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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.")
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 start
a Policy. The planned annual premium is an amount specified for each Policy
based on the requested initial Face Amount and certain other factors.
. Under Group Contracts and employer-sponsored programs, the initial
premium and subsequent planned premiums generally are remitted by the
Contractholder or sponsoring employer on behalf of the Owner at intervals
agreed to by the Contractholder or employer.
However, as 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. (See "Payment and Allocation of
Premiums--Issuance of a Policy--Premiums.")
A Policy will lapse (and terminate without value) when the Cash Surrender Value
is not enough 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.")
Death Benefit
Death benefit proceeds are payable to the Beneficiary when the Insured dies or
to the Owner, prior to the Insured's death under circumstances described in
available riders. (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") Two death benefit options are available, as follows:
. 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; and
. 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. (See "Policy
Benefits--Death Benefit.")
The minimum initial Face Amount is generally $25,000 under the Company's
current rules. Executive Program Policies generally have a minimum Face Amount
of $100,000. The maximum Face Amount is generally $500,000. However, we may
establish a higher maximum Face Amount for Executive Program Policies. The
Owner may generally change the Face Amount (subject to the minimum and maximum
amounts applicable to his or her policy) and the death benefit option, but in
certain cases evidence of insurability may be required. (See "Policy Benefits--
Death Benefit.")
Riders
Additional insurance benefits offered under the Policy by rider may include a
children's insurance rider, an accelerated death benefit settlement option
rider, an accidental death benefit rider, and a waiver of monthly deductions
rider. Some Group Contracts and employer-sponsored insurance programs may not
provide each of the additional benefits described above. Generally, Executive
Program Policies only have the acceleration of death benefits rider. (See
"General Matters Relating to the Policy--Additional Insurance Benefits.") We
will deduct the cost of these additional insurance benefits from Cash Value as
part of the monthly deduction. (See "Charges and Deductions--Monthly
Deduction.")
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 premium payments, the investment performance
of any selected Divisions of the Separate Account, transfers, any Policy Loans,
Loan Account interest rate credited, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value.")
There is no minimum guaranteed Cash Value.
Charges and Deductions
Sales Charges. Sales charges may be deducted under a Policy. The sales charges
imposed, if any, will consist of a contingent deferred sales charge, which is
assessed in the event the Policy is surrendered during the first ten Policy
years, or a combination of a front-end charge, which is deducted from premiums
paid ("premium expenses charge"), and a contingent deferred sales charge. The
amount of the contingent deferred sales charges will depend primarily on
commissions paid by the Company in connection with that Policy. The amount of
commissions paid by the Company reflects the services rendered by the broker-
dealer in enrolling a particular group, the number of employees in the group,
and other costs incurred by the broker-dealer. Where a first year commission is
paid, the applicable contingent deferred sales charge will be equal to 30
percent of premiums paid during the first Policy Year up to the guideline
annual premium for the Policy's initial Face Amount. Where the first year and
renewal commissions are zero ("0"), no sales contingent deferred charges will
be imposed.
A front-end charge will be imposed on Policies that are deemed to be individual
Policies under the Omnibus Budget Reconciliation Act of 1990 ("OBRA"). The
additional charge, which is for federal income taxes measured by premiums, is
equal to 1% of each premium payment, and compensates the Company for a
significantly higher corporate income tax liability resulting from changes made
to the Internal Revenue Code by OBRA. If first year commissions are paid and
the Policy is deemed individual under OBRA, the contingent deferred sales
charge will be reduced to 28% of the premiums paid during the first Policy Year
up to the appropriate guideline annual premium; and the premium expense charge
will be one percent of all premiums paid. The sales charges applicable to a
particular Policy will be set forth in the specifications pages of the Policy.
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 a percentage of premiums actually paid in the
first Policy Year (30%, 28% or 0%) up to the guideline annual premium for the
initial Face Amount. The percentage will be set forth in the specifications
pages of each Policy. The amount of the charge will decrease each year after
the first Policy Year by one-tenth ( 1/10) 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 paid 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", for a discussion of the manner in which premiums
are associated with an increase. The percentage charged will be the same as
that for the initial Face Amount. The additional charge calculated for the
increase will also decrease by one-tenth ( 1/10) 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," "Policy Benefits--Death
Benefit," and "Charges and Deductions--Sales Charges--Contingent Deferred Sales
Charge.")
6
<PAGE>
Premium Tax Charge. We deduct a charge of 2% to cover state premium taxes from
premiums paid. However, a charge of 2( 1/4)% may be deducted from premiums paid
in connection with Executive Programs. (See "Charges and Deductions--Premium
Tax Charge.")
Monthly Deduction. We make a monthly deduction from the Policy's Cash Value in
the Separate Account. The monthly deduction includes the following:
. Administrative Charge. We deduct an administrative charge (see the
specification pages of the Policy) based on 1) the number of Insureds
covered under a Group Contract or other employer-sponsored insurance
program, and 2) the amount of administrative services provided by the
Company. The charge will not exceed $6.00 per month during the first
Policy Year and $3.50 per month during renewal years.
. Cost of Insurance Charge. We deduct a cost of insurance charge calculated
on each Monthly Anniversary. We determine monthly cost of insurance rates
based upon expectations as to future mortality experience. For a
discussion of the factors affecting the rate class of the Insured see
"Charges and Deductions--Monthly Deduction--Cost of Insurance."
. A charge for any additional insurance benefits provided by a rider.
Separate Account Charges
. Mortality and Expense Risk Charge. We deduct a daily charge not to exceed
.0024547% (an annual rate of .90%) of the net assets of each Division for
the Company's assumption of certain mortality and expense risks incurred
in connection with the Policies. (See "Charges and Deductions--Separate
Account Charges.")
. Federal Taxes. No charges are currently made for federal or state income
taxes. (See "Federal Tax Matters.")
. Annual Expenses of the Funds (after fee waiver and reimbursement as
applicable). The value of the assets of the Divisions will reflect the
management fee and other expenses incurred by the Funds. The following
table describes the Fund fees and expenses during the time that the Owner
owns the Policy. These fees and expenses are shown as a percentage of net
assets for the year ended December 31, 1998. The prospectus for each Fund
contains more detail concerning a Fund's fees and expenses. (See "The
Company, The Separate Account, and The Funds.")
<TABLE>
<CAPTION>
Total
Management Other Annual
Fund Fees Expenses Expenses
<S> <C> <C> <C>
Cash Management Fund 0.45% 0.02% .047%
High-Yield Bond Fund 0.49% 0.02% 0.51%
Growth-Income Fund 0.35% 0.01% 0.36%
Growth Fund 0.39% 0.02% 0.41%
Asset Allocation Fund 0.44% 0.01% 0.45%
International Fund 0.57% 0.09% 0.66%
Bond Fund 0.52% 0.02% 0.54%
Global Growth Fund 0.69% 0.06% 0.75%
U.S. Government/
AAA-Rated Securities Fund 0.51% 0.01% 0.52%
Global Small Capitalization Fund(/1/) 0.89% 0.04% 0.93%
</TABLE>
(/1/) The expenses are annualized since the fund began operations on April 30,
1998.
The expense information regarding the Funds was provided by those Funds. We
have not independently verified this information. We cannot guarantee that the
reimbursements provided by certain Funds will continue.
7
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Partial Withdrawal Transaction Charge. We deduct a transaction charge equal to
the lesser of $25 or 2% of the amount withdrawn on each partial withdrawal of
amounts from the Separate Account. Currently, there are no transaction charges
imposed for transfers of amounts between Divisions. 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," "Policy Rights and Privileges--Surrender and Partial Withdrawals--
Transfers," and "Charges and Deductions--Partial Withdrawal Transaction
Charge.")
Policy Loans
After the first Policy Anniversary an Owner may borrow against the Cash Value
of a Policy. All outstanding Indebtedness will be deducted from proceeds
payable at the Insured's death, upon maturity, or upon surrender. We transfer a
portion of the Policy's Cash Value in each Division of the Separate Account to
which the loan is allocated 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,")
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 10% additional income tax would be imposed on the portion of any
loan that is included in income. (See "Federal Tax Matters.")
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. A partial withdrawal may
reduce the Face Amount and the death benefit payable under the Policy. 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.") Surrenders and partial withdrawals may have federal
income tax consequences. (See "Federal Tax Matters.")
Conversion Right
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. The Owner also
has a similar right with respect to increases in the Face Amount. (See "Policy
Rights and Privileges--Conversion Right to a Fixed Benefit Policy.")
Eligibility Change Conversion
In the event that the Insured is no longer eligible for coverage under the
Group Contract, either because the Group Contract has terminated or because the
employee is no longer employed by the Contractholder, 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.
If a Certificate was issued in connection with the Group Contract, the
Certificate will be amended automatically to continue in force as an Individual
Policy. The new Individual Policy will provide benefits which are identical to
those provided under the Certificate. If an Individual Policy was issued in
connection with a Group Contract, the Individual Policy will continue in force
following the termination of the Group Contract. (See "Policy Rights and
Privileges--Eligibility Change Conversion.")
8
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Illustrations
Illustrations in Appendix A show how death benefits and Cash Surrender Values
may vary based on certain hypothetical rate of return assumptions as well as
assumptions pertaining to the level of the charges. These rates are not
guaranteed. They are illustrative only and do not show past or future
performance. If a Policy is surrendered in the early Policy Years, the Cash
Surrender Value payable will be low compared to premiums accumulated with
interest, and consequently the insurance protection provided prior to surrender
will be costly.
Policy Tax Compliance
We intend for the Policy to satisfy the definition of a life insurance contract
under Section 7702 of the Internal Revenue Code (the "Code"). Assuming that a
Policy qualifies as a life insurance contract under the Code, a Policy Owner
should not be taxed for receiving value from the Policy, until there is a
distribution from the Policy. Also, death benefits payable under a Policy
should be excludable from the gross income of the Beneficiary.
A Policy may be treated as a "modified endowment contract." If the Policy is a
modified endowment contract, it will affect the tax advantages offered under
the Policy. (See "Federal Tax Matters.")
Specialized Uses of the Policy
Because the Policy provides for an accumulation of Cash Value as well as a
death benefit, the Policy can be used for various individual and business
financial planning purposes. Purchasing the Policy in part for such purposes
entails certain risks. For example, if the investment performance of Divisions
to which Cash Value is allocated is poorer than expected or if sufficient
premiums are not paid, the Policy may lapse or may not accumulate sufficient
Cash Value to fund the purpose for which the Policy was purchased. Partial
withdrawals and Policy Loans may significantly affect current and future Cash
Value, Cash Surrender Value, or death benefit proceeds. Depending upon Division
investment performance and the amount of a Policy Loan, the loan may cause a
Policy to lapse. Because the Policy is designed to provide benefits on a long-
term basis, before purchasing a Policy for a specialized purpose a purchaser
should consider whether the long-term nature of the Policy is consistent with
the purpose for which it is being considered. Using a Policy for a specialized
purpose may have tax consequences. (See "Federal Tax Matters.")
Questions
If you have any questions, you may write or call the Company at 100 South
Brentwood, St. Louis, MO 63105, (314) 862-2211.
9
<PAGE>
THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
The Company
Paragon Life Insurance Company is a stock life insurance company incorporated
under the laws of Missouri. We were organized in 1981 as General American
Insurance Company and on December 31, 1987, our name was changed. No change in
operations or ownership took place in connection with the name change. Our main
business is writing individual and group life insurance policies and annuity
contracts. As of December 31, 1998, it had assets in excess of $300 million. We
are admitted to do business in 49 states and the District of Columbia. Our
principal offices are at 100 South Brentwood, St. Louis, Missouri 63105 ("Home
Office"). Our Internal Revenue Service Employer Identification Number is 43-
1235869.
We are a wholly-owned subsidiary of General American Life Insurance Company
(the "Parent Company"), a Missouri life insurance company. The Parent Company
is wholly owned by GenAmerica Corporation, a Missouri general business
corporation, which is wholly owned by General American Mutual Holding Company,
a Missouri mutual insurance holding company.
Guarantee. The Parent Company agrees to guarantee that we will have sufficient
funds to meet all of our 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 end 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
that this guarantee cover the investment experience or Cash Values of the
Policy.
Ratings. We may from time to time publish in advertisements, sales literature,
and reports to Owners or Contractholders, the ratings and other information
assigned to us by one or more independent rating organizations such as A. M.
Best Company, Standard & Poor's, and Duff & Phelps. The purpose of the ratings
is to reflect our financial strength and/or claims paying ability and should
not be considered as bearing on the investment performance of assets held in
the Separate Account. Each year the A. M. Best Company reviews the financial
status of thousands of insurers, culminating in the assignment of Best's
ratings. These ratings reflect Best's current opinion of the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. In addition, the claims paying
ability of the Company as measured by Standard & Poor's Insurance Ratings
Services or Duff & Phelps may be referred to in advertisements or sales
literature or in reports to Owners or Contractholders. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. These
ratings do not reflect the investment performance of the Separate Account or
the degree of risk associated with an investment in the Separate Account.
Advertisements. We also may include in advertisements and other literature
certain rankings assigned to us by the National Association of Insurance
Commissioners ("NAIC"), and our analyses of statistical information produced by
the NAIC. These rankings and analyses of statistical information may describe,
among other things, our growth, premium income, investment income, capital
gains and losses, policy reserves, policy claims, and life insurance in force.
Our use of such rankings and statistical information is not an endorsement by
the NAIC.
Advertisements and literature prepared by the Company also may include
discussions of taxable and tax-deferred investment programs (including
comparisons based on selected tax brackets), alternative investment vehicles,
and general economic conditions.
10
<PAGE>
The Separate Account
We established Separate Account A (the "Separate Account") 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 receives and invests net premiums for other flexible premium
variable life insurance policies issued by us.
The Separate Account is divided into Divisions. Each Division will invest in
Funds as shown on the cover page of this Prospectus. 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.
The Funds
The Separate Account invests in shares of American Variable Insurance Series
(referred to as the "American Series"), a series-type mutual fund registered
with the SEC as open-end, diversified management investment company. Only the
funds described in this section of the prospectus are currently available as
investment choices of the policies even though additional Funds may be
described in the prospectus for the American Variable Insurance Series. The
assets of each Portfolio used by the Policies are held separate from the assets
of the other Portfolios, and each Portfolio has investment objectives and
policies which are generally different from those of the other Portfolios. The
income or losses of one Portfolio generally have no effect on the investment
performance of any other Portfolios.
The investment objectives and policies of certain Portfolios are similar to the
investment objectives and policies of other portfolios. The investment results
of the Portfolios may differ from the results of these other portfolios. There
can be no guarantee, and no representation is made, that the investment results
of any of the Portfolios will be comparable to the investment results of any
other portfolio.
The following summarizes the investment policies of each Portfolio:
.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.
.High-Yield Bond Fund
Seeks high current income and secondarily seeks capital appreciation by
investing primarily in intermediate and Long-term corporate obligations, with
emphasis on higher yielding, higher risk, lower rated or unrated securities. In
addition to other risks, high-yield, high-risk bonds (also known as "junk
bonds") are subject to greater fluctuations in value and risk of loss of income
and principal due to default by the Issuer than are investments in lower
yielding, higher rated bonds.
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<PAGE>
.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 the Fund
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.
.Growth Fund
Seeks growth of capital by investing primarily in common stocks or securities
with common stock characteristics such as convertible preferred stocks, which
demonstrate the potential for appreciation. 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.
.Asset Allocation Fund
Seeks high 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, bonds and other intermediate
and long-term fixed-income securities and money market instruments in any
combination.
.International Fund
Seeks long-term growth of capital by investing primarily in common stocks or
securities with common stock characteristics of issues 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.
.Bond Fund
Seeks to provide as high a level of current income as is consistent with the
preservation of capital by investing primarily in fixed-income securities. The
fund invests in a broad variety of fixed-income securities, including
marketable corporate debt securities, loan participations, U.S. Government
securities, mortgage-related securities, other asset-backed securities, and
cash or money market instruments.
.Global Growth Fund
Seeks long-term growth of capital by investing primarily in common stocks or
securities of issuers domiciled around the world. Under normal market
conditions, the fund will invest primarily in common stocks, but may also
invest in securities through depositary receipts, both of which may be
denominated in various currencies. When prevailing market, economic, political
or currency conditions warrant, the fund may invest in other securities such as
preferred stock, debt securities, and securities convertible into common stock.
Under normal market conditions, the fund will invest in issuers domiciled in at
least three countries, with no more than 40% of its assets in any one country.
.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.
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<PAGE>
.Global Small Capitalization Fund
Seeks long-term growth of capital by investing primarily in equity securities
of issuers domiciled around the world with relatively small market
capitalizations (share price times the number of equity securities
outstanding).
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 the Funds, which must accompany or precede this Prospectus and
which should be read carefully. Please also refer to the "Annual Expenses of
the Funds" information of this Prospectus for a list of the Funds' annual
expenses.
Agreements. We have entered into or may enter into arrangements with Funds
pursuant to which we receive a fee based upon an annual percentage of the
average net asset amount invested by us on behalf of the Separate Account and
other separate accounts of the Company. These arrangements are entered into
because of administrative services provided by the Company.
Resolving Material Conflicts. All of the Funds 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.
Addition, Deletion, or Substitution of Investments. We reserve the right,
subject to compliance with applicable law, to make additions to, deletions
from, or substitutions for the shares of the Funds that are held by the
Separate Account or that the Separate Account may purchase. We reserve the
right to (1) eliminate the shares of any of the Funds and (2) substitute shares
of another fund if the shares of a Fund are no longer available for investment,
or further investment in any Fund becomes inappropriate in view of the purposes
of the Separate Account. We will not substitute any shares without notice to
the Owner and prior approval of the SEC, to the extent required by the 1940 Act
or other applicable law, as required
We also reserve the right to establish additional Divisions of the Separate
Account. We will establish new Divisions when marketing needs or investment
confitions warrant. Any new Division will be made available to existing Owners
on a basis to be determined by the Company. To the extent approved by the SEC,
we may also:
. Eliminate or combine one or more Divisions;
. Substitute one Division for another Division; or
. Transfer assets between Divisions if marketing, tax, or investment
conditions warrant.
We may make changes in the Policy by appropriate endorsement in the event of a
substitution or change. We will notify all Owners of any such changes.
If we deem it 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, we may transfer the assets of the
Separate Account associated with the Policy to another separate account.
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<PAGE>
We cannot guarantee that the shares of the Funds will always be available. The
Funds each sell shares to the Separate Account in accordance with the terms of
a participation agreement between the Fund distributors and us. Should this
agreement terminate or should shares become unavailable for any other reason,
the Separate Account will not be able to purchase the existing Fund shares.
Should this occur, we will be unable to honor Owner requests to allocate Cash
Values or premium payments to the Divisions of the Separate Account investing
in such shares. In the event that a Fund is no longer available, we will take
reasonable steps to obtain alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy
We will generally issue a Group Contract to employers whose employees and/or
their spouses may become Owners (and/or Insureds) under the Group Contract so
long as the employee is within the class of employees eligible to be included
in the Group Contract. The class(es) of employees covered by a particular Group
Contract are set forth in that Group Contract's specifications pages.
The Group Contract will be issued upon receipt of an application for a Group
Contract signed by an appropriate officer of the employer and acceptance by us
at our Home Office. (See "General Provisions of the Group Contract--Issuance.")
Individuals (i.e., eligible employees and/or their spouses) wishing to purchase
a Policy, whether under a Group Contract or an employer-sponsored insurance
program, must complete the appropriate application for Individual Insurance and
submit it to our authorized representative or us at our Home Office. We will
issue to each Contractholder either a Certificate or an Individual Policy to
give to each Owner.
Individual Policies, rather than Certificates, will be issued
(1) to independent contractors of the employer;
(2) to persons who wish to continue coverage after a Group Contract has
terminated;
(3) to persons who wish to continue coverage after they no longer are
employed by the Group Contractholder;
(4) if state law restrictions make issuance of a Group Contract
impracticable; or
(5) if the employer chooses to use an employer-sponsored insurance program
that does not involve a Group Contract.
Issue Ages. A Policy generally will be issued only to Insureds of Issue Ages 17
through 70 who supply satisfactory evidence of insurability. We may issue
Policies to individuals falling outside the Issue Ages or decline to issue
Policies to individuals within the Issue Ages.
Employee Eligibility. In order for an employee to be eligible to purchase a
Policy, the employee must be actively at work at the time the application for
Individual Insurance is signed. In addition, the Contractholder may determine
specific classes to which the employee must belong to be eligible to purchase a
Policy. "Actively at work" means that the employee must work for the
Contractholder or sponsoring employer at the employee's usual place of work (or
such other places as required by the Contractholder or sponsoring employer) in
the course of such work for the full number of hours and the full rate of pay,
as set by the employment practices of the employer. Ordinarily the time worked
per week must not be less than 30 hours. However, we reserve the right to waive
or modify the "actively at work" requirement at our discretion.
In addition, the Contractholder may require that an employee must be employed
by the employer as of a certain date or for a certain period of time. We will
set forth this date or time period in the Group Contract specifications pages.
Employees of any Associated Companies of the Contractholder will be considered
employees of the Contractholder. We may also allow an individual who is an
independent contractor working
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<PAGE>
primarily for the sponsoring employer to be considered an eligible employee. An
independent contractor may receive an Individual Policy rather than a
Certificate depending upon state law applicable to the contracts. An employee
may include a partner in a partnership if the employer is a partnership.
Guaranteed Issue. We will issue the Policy and any children's insurance rider
applied for by the employee pursuant to our guaranteed issue procedure. We
offer the guaranteed issue procedure only when an employee is given the
opportunity to purchase a Policy for the first time. Under this procedure the
employee is required to answer qualifying questions in the application for
Individual Insurance, but is not required to submit to a medical or paramedical
examination. The maximum Face Amount that an employee can generally apply for
under the guaranteed issue procedure ("Guaranteed Issue Amount") is three times
the employee's salary up to a ceiling that is based on the number of eligible
employees under a Group Contract or other employer-sponsored insurance program.
We may offer guaranteed issue with Executive Programs or Corporate Programs
depending upon the number of eligible employees or if other existing insurance
coverage is cancelled.
Simplified Underwriting. The employee must submit to a simplified underwriting
procedure requiring the employee to respond satisfactorily to certain health
questions in the application:
. where the Face Amount exceeds the guaranteed issue limits;
. where the Policy has been offered previously to the employee;
. where the guaranteed issue requirements set forth in the application for
Individual Insurance are not met; or
. in connection with certain programs that may be offered without
guaranteed issue.
A blood test may be required. This requirement is generally applicable only to
Executive Programs Programs.
Simplified underwriting must be followed in connection with the issuance of any
children's rider, if the employee is not eligible for guaranteed issue
underwriting, or, (even when the employee is eligible) if the child does not
satisfy the guaranteed issue requirements set forth in the application for
Individual Insurance.
Acceptance of an application is always subject to our underwriting rules, and
we reserve the right to reject an application for any reason.
Employee's Spouse. If a Policy is to be issued to a spouse, the appropriate
application for Individual Insurance must be supplied. We will subject the
spouse to the simplified underwriting procedure described above. Guaranteed
issue is not available. We generally do not offer spouse coverage under
Executive Program Policies or Corporate Program Policies.
Issue Date. 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.
Interim Insurance. Interim Insurance in the amount of insurance applied for may
be available prior to the issuance of a Policy which is being underwritten on a
guaranteed issue basis up to the Guaranteed Issue Amount. If available, interim
insurance will start as of the date of the application. Interim insurance ends
on the earliest of the following dates:
. the date insurance begins on the Policy applied for;
. the date a Policy other than the Policy applied for is offered to the
applicant;
. the date the Company notifies the applicant that the application for any
proposed Insured is declined;
. 60 days from the date of application; or
termination of employment with the Contractholder or sponsoring employer.
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<PAGE>
Premiums
The initial premium is due on the Issue Date, and usually will be paid by the
Contractholder or employer on behalf of the Owner. The Company requires that
the initial premium for a Policy be at least equal to one-twelfth ( 1/12) 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.") The Owner is not
required to pay premiums equal to the planned annual premium.
We will apply premiums paid by a Contractholder or sponsoring employer or
designated payor to a Policy as of the Valuation Date we receive the prmeiums.
Premiums will be "received" on a Valuation Date when we receive supporting
documentation necessary for us to determine the amount of premium per Policy
and the cash premium.
Planned Premium Payments. After the initial premium, and subject to the
limitations described below, premiums may be paid in any amount and at any
interval. Under Group Contracts and Individual Policies issued in connection
with other employer-sponsored insurance programs, the planned annual premium
usually will be paid by the Contractholder or sponsoring employer on behalf of
the Owner pursuant to a planned premium payment schedule. A planned premium
payment schedule provides for premium payments in a level amount at fixed
intervals (usually monthly) agreed to by the Contractholder or employer and us.
The amount of the premiums paid by the sponsoring employer or Contractholder
will be equal to the amount authorized by the employee. The Owner may skip
planned premium payments. Failure to pay one or more planned premium payments
will not always cause the Policy to lapse. The Policy will lapse if the Cash
Surrender Value is insufficient to cover the next Monthly Deduction. (See
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement.")
Unscheduled Premiums. In addition to any planned payments made, an Owner may
make unscheduled premium payments at any time and 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.") 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.
Continuance of Insurance. Failure of the Contractholder to pay the planned
premium payments authorized by its employees may cause the Group Contract to
terminate. (See "General Provisions of the Group Contract--Termination.")
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 Group Contract termination. (See "Policy Rights and Privileges--
Eligibility Change Conversion.") Individual Insurance will also continue if the
employee's employment with the Contractholder or sponsoring employer
terminates. 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. The new schedule will have the same planned
annual premium, and the payment intervals will be no more frequent than
quarterly. In Corporate Programs, there will generally be no change in planned
or scheduled premiums upon discontinuing the employment of an Insured.
Premium Limitations. Every premium payment paid must be at least $20. Total
premiums paid under a Policy may not exceed the current maximum premium
limitations established by federal tax laws in any Policy Year. The maximum
premium limitation for a Policy Year is the sum of the premiums paid under the
Policy that will not at any time exceed the guideline premium limitations
referred to in Section 7702(c) of the Internal Revenue Code of 1986. If at any
time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, we will accept only that portion of the
premium which will make total premiums equal the maximum. Any part of the
premium in excess of the maximum premiums will be returned
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<PAGE>
directly to the Owner within 60 days of the end of the Policy Year in which
payment is received (unless we agree) and no further premiums will be accepted
until allowed by the current maximum premium limitations prescribed by Federal
tax law. See "Federal Tax Matters" for a 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." A
modified endowment contract is a life insurance contract, from which
withdrawals are treated (for tax purposes) (1) as a distribution of any taxable
income under the contract, and (2) as a distribution of nontaxable investment
in the contract. Also, such withdrawals may be subject to a 10% federal income
tax penalty. We have adopted administrative steps designed to notify an Owner
when we believe that a premium payment will cause a Policy to become a modified
endowment contract. Owner will be given a limited amount of time to request
that the premium be reversed in order to avoid the Policy's classification as a
modified endowment contract. (See "Federal Tax Matters.")
Allocation of Net Premiums and Cash Value
Net Premiums. The net premium equals:
(1) the premium paid; less
(2) the premium expense charge;
(3) any charge to compensate us for anticipated higher corporate income
taxes resulting from the sale of a Policy; and
(4) the premium tax charge. (See "Charges and Deductions--Sales Charges.")
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the 10 Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums will
be allocated in accordance with the Owner's instructions upon our receipt of
the premiums. However, the minimum percentage, of any allocation 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 us. Any change in allocation
will take effect immediately upon our receipt 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.")
The value of amounts allocated to the Divisions will vary with the investment
performance of the funds underlying the Divisions. The Owner bears the entire
investment risk. Investment performance 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 payment will not itself cause a
Policy to lapse. However, a Policy can lapse even if planned premiums have been
paid. 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.") Thus, the payment of premiums in any amount does not
guarantee that the Policy will remain in force until the Maturity Date.
The grace period, which is 62 days, begins on the Monthly Anniversary on which
the Cash Surrender Value is not enough to cover the next monthly deduction,
premium expense charge, and premium tax charge. We will notify the Owner at the
beginning of the grace period by mail. 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
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monthly deduction. (See "Charges and Deductions.") 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 payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
at 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 by the
termination of a Group Contract or the termination of an employee's employment
during the reinstatement period. Reinstatement is subject to the following
conditions:
. Evidence of the insurability of the Insured satisfactory to us (including
evidence of insurability of any person covered by a rider to reinstate
the rider).
. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, 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.
. 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. 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 our approval 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, we 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,
employer-sponsored insurance program or by termination of an employee's
employment.
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 "General Matters Relating to the Policy--
Additional Insurance Benefits.")
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.") 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.") The minimum Face Amount currently is $25,000. The
maximum Face Amount is generally $500,000. However, in connection with a
particular Group Contract or employer sponsored insurance program, we may
establish a substantially higher Face Amount for Policies issued under that
Contract or program.
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Option A. Under Option A, the death benefit is:
(1) the current Face Amount of the Policy or, if greater,
(2) the applicable percentage of Cash Value on the date of death.
The applicable percentage is 250% 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 below. 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 favorable investment performance reflected in higher Cash
Value for the same Face Amount, rather than increased death benefit, generally
should select Option A.
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
Applicable
Attained Age Percentage
- ------------ ----------
<S> <C>
40...................... 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.
Option B. Under Option B, the death benefit is equal to:
(1) the current Face Amount plus the Cash Value of the Policy or, if
greater,
(2) the applicable percentage of the Cash Value on the date of death. The
applicable percentage is the same as under Option A.
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.
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Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option. We reserve the right to limit the number
of changes in death benefit options to one each Policy Year. A request for a
change must be made directly to us in writing. The effective date of such a
change will be the Monthly Anniversary on or following the date we receive 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 us 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
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. 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.")
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income because the federal tax
law requirements are not satisfied. (See "Federal Tax Matters.")
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 us. 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.") In addition, a change in
Face Amount may have federal income tax consequences. (See "Federal Tax
Matters.")
Face Amount Decreases. Any decrease in the Face Amount will become effective on
the Monthly Anniversary on or following our receipt of the written request. 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 the
minimum amount Face Amount, generally $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"), 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 those requirements. A
decrease in the Face Amount will reduce the Face Amount in the following order:
(1) The Face Amount provided by the most recent increase;
(2) The next most recent increases successively; and
(3) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance"), and whether an 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.")
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<PAGE>
Face Amount Increases. For an increase in the Face Amount, we require 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 80 or less on the effective date of the increase. The amount of
the increase may not be less than $5,000. The Face Amount may not be increased
more than the maximum Face Amount for that Policy, generally $500,000. However,
in connection with a particular Group Contract or employer-sponsored insurance
program, we may establish a substantially higher Face Amount for Policies
issued under that Contract or program. Although an increase need not
necessarily be accompanied by additional premium, 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.") An
increase in the Face Amount may result in certain additional charges. (See
"Charges and Deductions.")
Cancellation of an Increase. 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 in the same manner as they were deducted. Any
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.")
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.
Examples 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"), 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.")
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<PAGE>
(e) A partial withdrawal will reduce the death benefit. (See "Policy Rights
and Privileges--Surrender and Partial Withdrawals.") 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 we receive all documentation
required. Payment may, however, be postponed in certain circumstances. (See
"General Matters Relating to the Policy--Postponement of Payments.") 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 "General Matters
Relating to the Policy--Additional Insurance Benefits," and "Charges and
Deductions.")
When no election for an optional method of settlement is in force when the
Insured dies, 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.")
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.
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;
. the frequency and amount of net premiums paid;
. transfers;
. partial withdrawals;
. Policy Loans;
. Loan account interest rate credited; 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.") 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.") Thereafter,
on each Valuation Date, the Cash Value in a Division 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
22
<PAGE>
(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.")
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
(4) Any amount charged against each Division for taxes or other economic
burden resulting from the application of tax laws, determined by the
Company to be properly attributable to the Divisions or the Policy, 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.
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<PAGE>
POLICY RIGHTS AND PRIVILEGES
Exercising Rights and Privileges Under the Policies
Owners of Policies issued under a Group Contract may exercise their rights and
privileges under the Policies (i.e., make transfers, change premium
allocations, borrow, etc.) by directly notifying us in writing at our Home
Office. We 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 us, 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 we receive
the loan request at our Home Office, although payments may be postponed under
certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments.")
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 (not including 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.
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 5%. The rate is declared by action of our management as authorized by our
Board of Directors. The Loan Account interest credited will be transferred to
the Divisions: (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 8%. Interest charged will be due and payable annually in arrears
on each Policy Anniversary or for the duration of the Policy Loan, if shorter.
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 "Policy Rights and Privileges Loans--Effect of Policy Loans.") The amount
transferred will be deducted from the Divisions in the same proportion that the
portion of the Cash Value in each Division bears to the total Cash Value of the
Policy (not including the Cash Value in the Loan Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
federal income tax consequences. (See "Federal Tax Matters.")
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.
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
24
<PAGE>
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 on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Charges and
Deductions.") A sufficient payment must be made within the later of:
(1) the grace period of 62 days from the Monthly Anniversary immediately
before the date Indebtedness exceeds the Cash Value; or
(2) 31 days after notice that the Policy will terminate without a
sufficient payment has been mailed.
If a sufficient payment is not received, the Policy will lapse and terminate
without value. A lapsed Policy may later be reinstated. (See "Payment and
Allocation of Premiums--Policy Lapse and Reinstatement.")
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 us. Amounts paid while a
Policy Loan is outstanding will be treated as premiums unless the Owner
requests in writing that the payments 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 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. Amounts
transferred to the Loan Account to secure Indebtedness are allocated to the
appropriate Loan Subaccount to reflect their origin.
Surrender and Partial Withdrawals
During the lifetime of the Insured and while a Policy is in force, the Owner
may surrender, or make a partial withdrawal of the Policy by sending a written
request to us. Any restrictions are described below. 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 by us. Amounts
payable upon 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.") Surrenders and partial withdrawals may
have federal income tax consequences. (See "Federal Tax Matters.")
Surrender. To effect a surrender, the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
lost Policy. Upon request, we can provide a lost Policy Certificate. Upon
surrender, we 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 contingent deferred sales charge. (See "Charges and
Deductions--Sales Charges--Contingent Deferred Sales Charge.") 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 $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 2% of the amount
withdrawn. The Owner may allocate the amount withdrawn, subject to the above
conditions, among the Divisions. If no allocation is specified, then the
partial withdrawal will be allocated among the Divisions in the same proportion
that the Policy's Cash Value in each Division bears to the total Cash Value of
the Policy (not including the Cash Value in the Loan Account) on the date the
request for the partial withdrawal is received.
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<PAGE>
A contingent deferred sales chare 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: (1) the Face Amount
at issue; and (2) any increases in the same order in which they were issued.
The amount of any contingent deferred sales charge deducted will be that which
is in effect for the Face Amount at issue or the increase being decreased.
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."
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 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. 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 approved.
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.")
Transfers
Under the Company's current rules, a Policy's Cash Value, (not including
amounts credited to the Loan Account,) may be transferred among the Divisions
available with the Policy. Requests for transfers from or among Divisions must
be made in writing directly to us 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. We will make 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, we will make 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.
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Although we currently intend to continue to permit transfers for the
foreseeable future, the Policy provides that we 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 we may determine.
Right to Examine Policy
The Owner may cancel a Policy within 10 days of after receiving it or such
longer period if required by state law. 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
us. 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.")
As noted above, a request for an increase in Face Amount (see "Policy
Benefits--Death Benefit") 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 we refund the
amount of the additional charges deducted in connection with the increase. This
amount will equal the amount by which the monthly deductions since the increase
went into effect exceeded the monthly deductions which would have been made
absent the increase. (See "Charges and Deductions--Monthly Deduction.") If no
request is made, we will increase the Policy's Cash Value by the amount of
these additional charges. This amount will be allocated among the Divisions 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.")
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. In the event a Certificate has been amended
to operate as an Individual Policy following an Insured'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.") No evidence of insurability will be required
when this right is exercised. However, we 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 our rates in effect for the
same Issue Age and rate class as the original Policy.
Eligibility Change Conversion
If an Insured's eligibility under a Group Contract or employer-sponsored
insurance program ends due to its termination or due to the termination of the
employee's employment, the Insured's coverage will continue unless the Policy
is no longer in force. 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 employee's eligibility during the reinstatement period.
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<PAGE>
If a Certificate was issued under the Group Contract, the Certificate 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 (a)
after we receive written notice that the employee's employment ended 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"), any premium necessary to prevent
the Policy from lapsing must be paid us 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. The new
planned payment intervals will be no more frequent than quarterly. The Company
may allow payment of planned premium through periodic (usually monthly)
authorized electronic funds transfer. Of course, unscheduled premium payments
can be made at any time. (See "Payment and Allocation of Premiums--Premiums.")
If an Individual Policy was issued under the Group Contract or other employer-
sponsored insurance program including a Corporate Program or Executive Program,
the Policy will continue in force following the change in eligibility. The
rights, benefits, and guaranteed charges under the Policy will remain the same
following this change in eligibility.
When an employee's spouse is the Insured under a Policy, the spouse's insurance
coverage also will continue in the event the employee is no longer eligible. If
a Certificate was originally issued to the employee's spouse, the Certificate
will be amended automatically as described above. If an Individual Policy was
originally issued, the Individual Policy will continue as described above. In
addition, if an Associated Company ceases be to under common control with the
Contractholder, the Insureds of the Associated Company (i.e., employees of the
Associated Company and their spouses) may continue their insurance in the
manner described above.
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.") 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.") A Policy will mature if and when the Insured reaches Attained Age
95.
Payment of Policy Benefits
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written our agreement.
Settlement Options. We may offer settlement options that apply to the payment
of death benefit proceeds, as well as to benefits payable at maturity. Once a
settlement option is in effect, there will no longer be value in the Separate
Account.
Accelerated Death Benefits. We offer certain riders which permit the Owner to
elect to receive an accelerated payment of the Policy's death benefit in a
reduced amount under certain circumstances. (See "General Matters Relating to
the Policy--Additional Insurance Benefits.")
CHARGES AND DEDUCTIONS
We will deduct charges in connection with the Policies to compensate us for
providing the insurance benefits set forth in the Policies and any additional
benefits added by rider, administering the Policies, incurring expenses in
distributing the Policies, and assuming certain risks in connection with the
Policies. We may realize a profit on one or more of these charges. We may use
any such profit for any corporate purpose, including, among other things,
payments of sales and distribution expenses.
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<PAGE>
Sales Charges
Sales charges may be assessed under the Policies. The sales charge, if any,
will be a deferred charge ("contingent deferred sales charge"), or a
combination of a front-end charge ("premium expense charge") and a contingent
deferred sales charge. Whether a premium expense charge will be deducted
depends on whether a Policy is deemed to be an individual contract under OBRA.
The amount of the contingent deferred sales charge will depend primarily on the
first year commissions paid to the broker-dealers distributing the Policies and
the determination of contract type under OBRA. The contingent deferred sales
loads applicable to a particular Policy will depend on the commission rates
agreed to by the contractholder or employer and the broker-dealer. The rates
typically reflect the services rendered by the broker-dealer. There are four
possible combinations of first year commissions and contract categories for
federal tax purposes under OBRA and four corresponding sales charge
configurations which are set forth in the Schedule of Sales Charges below. No
other charges or combination of charges are permitted.
SCHEDULE OF SALES CHARGES
<TABLE>
<CAPTION>
Sales Charges
OBRA Contract -------------
1st Year Commission Category CDSL/1/ PE/2/
- ------------------- ------------- ------- -----
<S> <C> <C> <C>
0%................................................. Group 0% 0%
0%................................................. Individual 0% 1%
15%................................................. Group 30% 0%
14%................................................. Individual 28% 1%
</TABLE>
- --------
/1 /Contingent deferred sales charges (percentage of first year premiums).
/2 /Premium expense charge (percentage of each premium paid).
The sales charge will not change in the event that an Insured is no longer
eligible under a Group contract or employer-sponsored insurance program, but
continues coverage on an individual basis.
As the foregoing schedule indicates the total sales charges imposed on premiums
paid during the first Policy Year following the Issue Date will not exceed 30%
of the premiums actually paid up to the guideline annual premium for the Face
Amount at issue of a particular Policy. Likewise, the total sales charge on
premiums associated with an increase paid during the first 12 policy Months
after the effective date of the increase will not exceed 30% of premiums paid
up to the guideline annual premium for the increase. In no event will the total
sales charges on premiums paid up to 20 times the guideline annual premium for
the increase of Face Amount at issue exceed 9% of those premiums.
The guideline annual premium depends upon the Insured's Attained Age (on the
Issue Date or on the effective date of requested increase). The guideline
annual premium will be fixed an 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.
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.
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<PAGE>
Premium Expense Charge. Prior to allocation of net premiums among the divisions
premium payments will be reduced by premium expense charge equal to a
percentage of each premium paid as set forth on the specifications pages of the
Policy. The charge will either be ("0") or 1% of the premium depending on
whether the Policy is determined to be a group or individual contract under
OBRA.
In addition, as a result of OBRA, insurance companies are generally required to
capitalize and amortize certain policy acquisition expenses over a ten-year
period rather than currently deducting such expenses. A higher capitalization
expense applies to the deferred acquisition expenses of Policies that are
deemed to be individual contracts under OBRA and will result in a significantly
higher corporate income tax liability for the Company in early Policy Years.
Thus, under Policies that are deemed to be individual contracts under OBRA, we
make an additional charge of 1% of each premium payment to compensate us for
the anticipated higher corporate income taxes that result from the sale of such
a Policy. Among other possible employer-sponsored programs, Corporate Program
Policies are deemed to be individual contracts.
The net premium payment is calculated as the premium payment less:
. the premium expense charge less;
. any charge to compensate the Company for anticipated higher corporate
income taxes resulting from the sale of a Policy; and
. the premium tax charge (described below).
Contingent Deferred Sales Charge. During the first ten Policy Years, we may
assess 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 of the charge will depend on a number of factors, including:
. the commission rate paid to the broker-dealer distributing the Policy,
. the allocation of the total sales load between the premium expense
charge, and the contingent deferred sales charges as seen in the chart
above,
. whether the event is a full surrender or lapse or a decrease in Face
Amount,
. the amount of premiums received by the company, and
. the Policy Year in which the surrender or other event takes place.
As seen in the in the above Schedule of Charges, if no commissions are paid, no
contingent deferred sales charge will be charged.
If a contingent deferred sales charge is calculated for a Policy, we will also
calculate an additional charge for each increase in Face Amount. The additional
charge will be charge upon surrender, lapse, or decrease in Face Amount
following the increase. The additional charge will apply for the first ten
years following the effective date of the increase in Face Amount and will
depend on factors similar to those affecting the amount of the basic contingent
deferred sales charge.
Calculation of charge. 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, if a Policy
with a contingent deferred sales charge is surrendered, the charge will be
equal to a percentage of premiums paid during the first Policy Year up to the
guideline annual premium for the initial Face Amount. The percentage either 30%
or 28% of premiums actually paid during the first Policy Year, will be set
forth in the Policy's specifications pages. The mount of the charge will
decrease each year after the first Policy Year by 1/10 of the total charge
until it reaches zero at the end of ten Policy Years (see table below).
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, if any, associated with the increase will
equal a percentage of premiums associated with the increase which are received
within the 12 Policy Months of the
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<PAGE>
increase, up to the guideline premium for the increase. The percentage charged
will be the same as that foe the initial Face Amount and will be set forth in
the specifications pages issued in connection with the increase The charge
applicable to an increase in Face Amount will decrease by 1/10 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 year, as shown below.
The timing of premium payment s may affect the amount of the contingent
deferred sales charge under a Policy, as the charge is based only on premiums
actually paid in the first Policy Year or in the first 12 Policy Months after
an increase in Face Amount.
Contingent Deferred Sales Charge Percentage Table
<TABLE>
<CAPTION>
Policy Year/1/ Percentage of the CDSL 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>
- --------
/1/For requested increases, years are measured from the effective date of the
increase.
Charge for Decreases. If there had 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 had 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", and "Policy
Benefits Death Benefit Change in Face Amount.") 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.
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, premium payments will be reduced by a premium tax charge of 2%
from all Policies. However, we may charge 2 1/4 percent for premium taxes on
premiums paid in connection with Policies issued under an Executive Program.
Monthly Deduction
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate us 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 in the same proportion that a Policy's Cash Value in each Division
bears to
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<PAGE>
the total Cash Value of the Policy (not including 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. We are responsible 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. We assess a monthly
administration charge from each Policy. The amount of this charge is set forth
in the specifications pages of the Policy and depends on the number of
employees eligible to be covered at issue of a Group Contract or an employer-
sponsored insurance program. The following table sets forth the range of
monthly administrative charges under the Policy:
<TABLE>
<CAPTION>
Subsequent
Eligible Employees First Year Years
------------------ ---------- ----------
<S> <C> <C>
250-499................................................ $5.00 $2.50
500-999................................................ $4.75 $2.25
1000+.................................................. $4.50 $2.00
</TABLE>
For Group Contracts or other employer-sponsored insurance programs (1) with
fewer than 250 eligible employees, (2) with additional administrative costs, or
(3) that are offered as Executive Programs or Corporate Programs, the monthly
administrative charge may be higher, but will not exceed $6.00 per month during
the first Policy Year and $3.50 per month in renewal years.
These charges are guaranteed not to increase over the life of the Policy. The
administrative charge will not change in the event that the Insured is no
longer eligible for group coverage, but continues coverage on an individual
basis. In addition, when we believe that lower administrative costs will be
incurred in connection with a particular Group Contract or employer-sponsored
insurance program we may modify the above schedule for that Group Contract or
other employer-sponsored insurance program. The amount of the administrative
charge applicable to a particular Policy will be set forth in specifications
pages for that Policy.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the next 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
increases in Face Amount. We 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.
Cost of Insurance Rates. 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. We will determine the current cost of insurance rates based on our
expectations as to future mortality experience. We currently issue the Policies
on a guaranteed issue or simplified underwriting basis without regard to the
sex of the Insured. Whether a Policy is issued on a guaranteed issue or
simplified underwriting basis does not affect the cost of insurance charge
determined for that Policy.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and possibly the gender mix (i.e., the
proportion of men and women covered under a particular Group Contract or
employer-sponsored program). The cost of insurance rates generally increase as
the Insured's Attained Age increases. An Insured's rate class is generally
based on the number of eligible employees as well as other factors that may
affect the mortality risk we assume in connection with a particular Group
Contract or employer-sponsored insurance program. All other factors being
equal, the cost of insurance rates generally decrease by rate class as the
number of eligible employees in the rate class increase. We reserve the right
to change criteria on which a rate class will be based in the future.
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<PAGE>
If gender mix is a factor, we will estimate the gender mix of the pool of
Insureds under a Group Contract or employer-sponsored insurance program upon
issuance of the Contract. Each year on the Group Contract or employer-sponsored
insurance program's anniversary, we may adjust the rate to reflect the actual
gender mix for the particular group. In the event that the Insured's
eligibility under a Group Contract (or other employer-sponsored insurance
program) 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, we reserve 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 or employer-sponsored program.
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% of the maximum rates that could be charged based on the 1980 Commissioners
Standard Ordinary Mortality Table C ("1980 CSO Table"). The guaranteed rates
are higher than 100% of the maximum rates in the 1980 CSO Table because we use
guaranteed or 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% of the 1980 CSO Table. Any change
in the actual cost of insurance rates, will apply to all persons of the same
Attained Age and rate class whose Face Amounts have been in force for the same
length of time. Any change in the actual cost of insurance rates will not
include changes made to adjust for changes in the gender mix of the pool of
Insureds under a particular Group Contract or employer-sponsored insurance
program. (For purposes of computing guideline premiums under Section 7702 of
the Internal Revenue Code of 1986, as amended, the Company will use 100% of the
1980 CSO Table.)
Net Amount at Risk. 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), less (b)
the Cash Value at the beginning of the Policy Month. Dividing the death benefit
by 1.0040741 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 5%.
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, we will calculate the net amount at risk separately for
each rate class. When we determine the net amounts at risk for each rate class,
when Option A is in effect, we will consider the Cash Value first to be a part
of the initial Face Amount. If the Cash Value is greater than the initial Face
Amount, we will consider the excess Cash Value a part of each increase in
order, starting with the first increase. If Option B is in effect, we will
determine the net amount at risk for each rate class 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. 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," and "Policy Rights and Privileges--Surrender and
Partial Withdrawals.")
Additional Insurance Benefits. The monthly deduction will include charges for
any additional benefits provided by rider. (See "General Matters Relating to
the Policy--Additional Insurance Benefits.")
Partial Withdrawal Transaction Charge
A transaction charge which is the lesser of $25 or 2% of the amount withdrawn
will be assessed on each partial withdrawal, to cover administrative costs
incurred in processing the partial withdrawal.
33
<PAGE>
Separate Account Charges
Mortality and Expense Risk Charge. The Company will deduct a daily charge from
the Separate Account at the rate not to exceed .0024547% of the net assets of
each Division of the Separate Account. This equals an annual rate of .90% of
those net assets. This deduction is guaranteed not to increase for the duration
of the Policy. We may realize a profit from this charge and may use this profit
to finance distribution expenses.
The mortality risk we assume is that an Insured may die sooner than anticipated
and that we 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 incurred by the Separate Account. We may make such a
charge in the future. Charges for other taxes incurred by the Account may also
be made. (See "Federal Tax Matters.")
Expenses of the Funds. The value of the net assets of the Separate Account will
reflect the investment advisory fee and other expenses incurred by the Funds.
(See "Summary of the Policy Separate Account Charges--Annual Expenses of the
Funds" and "The Company, the Separate Accounts and The Funds--The Funds.")
GENERAL MATTERS RELATING TO THE POLICY
Postponement of Payments
Payment of any amount due from the Separate Account because of 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:
(1) the New York Stock Exchange is closed other than customary weekend and
holiday closings, or trading on the New York Stock Exchange is restricted
as determined by the SEC;
(2) the SEC by order permits postponement for the protection of Owners; or
(3) 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 Contract
The Policy, the attached application, any riders, endorsements, any application
for an increase in Face Amount, and any application for reinstatement together
make the entire contract between the Owner and us. Apart from the rights and
benefits described in the Certificate or Individual Policy and incorporated by
reference into the Group Contract, the Owner has no rights under the Group
Contract. All statements made by the 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 the Owner of the Policy unless another person is shown as
the Owner in the application. Ownership may be changed 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
34
<PAGE>
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 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 us 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 by us. We
will not be liable for any payment made or action taken before we receive 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
We reserve 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
We 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 us at our Home
Office; and (c) we send an acknowledged copy to the Owner. We are 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, we may require proof of the interest of the claimant. A
valid assignment will take precedence over any claim of a Beneficiary.
35
<PAGE>
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 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 at the time of
application for the Policy or any increase in Face Amount.
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 we make in good faith, relying on our records or
evidence supplied with respect to such payment, will fully discharge our duty.
We reserve the right to correct any errors in the Policy.
Additional Insurance Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. However, some Group
Contracts or employer-sponsored insurance programs may not offer each of the
additional benefits described below. Certain riders may not be available in all
states. In addition, should it be determined that the tax status of a Policy as
life insurance is adversely affected by the addition of any of these riders, we
will cease offering such riders. The descriptions below are intended to be
general; the terms of the Policy riders providing the additional benefits may
vary from state to state, and the Policy should be consulted. The cost of any
additional insurance benefits will be deducted as part of the monthly
deduction. (See "Charges and Deductions--Monthly Deduction.")
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accidental Death Benefit Rider. Provides additional insurance if the Insured's
death results from accidental bodily injury, as defined in the rider. Under the
terms of the rider, the additional benefits provided in the Policy will be paid
upon receipt of proof by us that death resulted directly from accidental injury
and independently of all other causes; occurred within 120 days from the date
of injury; and occurred before the Policy Anniversary nearest age 70 of the
Insured.
Children's Life Insurance Rider. Provides for term insurance on the Insured's
children, as defined in the rider. To be eligible for insurance under the
rider, the child to be insured must not be confined in a hospital at the time
the application is signed. Under the terms of the rider, the death benefit will
be payable to the named Beneficiary upon the death of any insured child. Upon
receipt of proof of the Insured's death before the rider terminates, the rider
will be continued on a fully paid-up term insurance basis.
HIV Acceleration of Death Benefits Rider. Provides for the Owner's election an
accelerated payment, prior to the death of the Insured upon receipt of
satisfactory evidence that the Insured has tested seropositive for the human
immunodeficiency virus ("HIV") after both the Policy and rider are issued. We
will pay the Policy's death benefit (less any Indebtedness and any term
insurance added by riders), calculated on the date that we receive satisfactory
evidence that the Insured has tested seropositive for HIV, reduced by a $100
administrative
36
<PAGE>
processing fee. We will pay the accelerated benefit to the Owner in a single
payment in full settlement of the obligations under the Policy. The rider may
be added to the Policy only after the Insured satisfactorily meets certain
underwriting requirements which will generally include a negative HIV test
result to a blood or other screening test acceptable to us.
The federal income tax consequences associated with (i) adding the HIV
Acceleration of Death Benefit Rider or (ii) receiving the benefit provided
under the rider are uncertain. Accordingly, we urge you to consult a tax
advisor about such consequences before adding the HIV Acceleration of Death
Benefit Rider to your Policy or requesting a benefit under the rider.
Accelerated Death Benefit Settlement Option Rider. Provides for the accelerated
payment of a portion of death benefit proceeds in a single sum to the Owner if
the Insured is terminally ill or permanently confined to a nursing home. Under
the rider, which is available at no additional cost, the Owner may make a
voluntary election to completely settle the Policy in return for accelerated
payment of a reduced death benefit. The Owner may make such an election under
the rider if evidence, including a certification from a licensed physician, is
provided to us that the Insured (1) has a life expectancy of 12 months or less
or (2) is permanently confined to a qualified nursing home and is expected to
remain there until death. Any irrevocable Beneficiary and assignees of record
must provide written authorization in order for the Owner to receive the
accelerated benefit.
The amount of the death benefit payable under the rider will equal the Cash
Surrender Value under the Policy on the date we receive satisfactory evidence
of either (1) or (2), above, (less any Indebtedness and any term insurance
added by other riders) plus the product of the applicable "benefit factor"
multiplied by the difference of (a) minus (b), where (a) equals the Policy's
death benefit proceeds, and (b) equals the Policy's Cash Surrender Value. The
"benefit factor", in the case of terminal illness, is 0.85 and, in the case of
permanent nursing home confinement, is 0.70.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, we believe that for federal income tax purposes an
accelerated death benefit payment made under the Accelerated Death Benefit
Settlement Option Rider should be fully excludable from the gross income of the
Beneficiary, as long as the Beneficiary is the Insured under the Policy.
However, you should consult a qualified tax advisor about the consequences of
adding this Rider to a Policy or requesting an accelerated death benefit
payment under this Rider.
Records and Reports
We 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 Funds 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 us
for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal underwriter
of the Policies pursuant to an Underwriting Agreement with the Company. Walnut
Street is a wholly-owned subsidiary of GenAmerica Corporation. 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.
Walnut Street's Internal Revenue
37
<PAGE>
Service employer identification No. is 43-1333368. It is a Missouri corporation
formed May 4, 1984. Walnut Street's address is 400 South 4th Street, Suite
1000, St. Louis, MO. 63102. The Policies will be sold by broker-dealers who
have entered into written sales agreements with Walnut Street. Sales of the
Policies may take place in all states (except New York) and the District of
Columbia.
Broker-dealers will receive commissions based upon a commission schedule in the
sales agreement with the Company and Walnut Street. Broker-dealers compensate
their registered representative agents. First-year commissions are based on a
percentage of first-year premiums. The first-year commissions are either zero
("0,") 14, or 15 percent. Renewal Commissions are not paid.
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 employer and
acceptance by a duly authorized officer of the Company at its Home Office.
Premium Payments
The Contractholder will give planned premium payments for Insureds of the
Contractholder or an Associated Company in an amount authorized by the employee
to be deducted from his wages. All planned premiums under a Group Contract must
be given in advance. The planned premium payment interval is agreed to by the
Contractholder and us. Prior to each planned payment interval, we 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 us.
Grace Period
If the Contractholder does not give 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 given. If the
Contractholder does not give 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.")
Termination
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, we 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."
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 us.
Entire 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 us. 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.
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<PAGE>
Incontestability
We cannot contest the Group Contract after it has been in force for two years
from the date of issue.
Ownership of Group Contract
The Contractholder owns the Group Contract. The Group Contract may be changed
or ended by agreement between us 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 advisors 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, we 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,
we reserve 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 to be "adequately
diversified" in order for the Policy to be treated as a life insurance contract
for federal tax purposes. Although we do not control the investment management
companies or their investments, the investment management companies have
represented that they intend to comply with the diversification requirements
prescribed by the Treasury in Reg. Section 1.817-5. Thus, the Company believes
that each Division of the Separate Account 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 determined to be the case, income and gains from the separate account
assets would be includible in the variable contract owner's gross
39
<PAGE>
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
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."
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, we do
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. We
therefore reserve 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, an exchange, 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 advisor should be consulted for further
information.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, the Company believes that for federal income tax
purposes an accelerated death benefit payment made under the Accelerated Death
Benefit Settlement Option Rider should be fully excludable from the gross
income of the Beneficiary, as long as the Beneficiary is the Insured under the
Policy. However, you should consult a qualified tax advisor about the
consequences of adding this Rider to a Policy or requesting an accelerated
death benefit payment under this Rider.
The Policies may be used in various arrangements, such as nonqualified deferred
compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement. In recent years, Congress has adopted new rules relating to life
insurance owned by businesses. Any business contemplating the purchase of a new
Policy or a change in an existing Policy should consult a tax advisor.
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
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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 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 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 Policy Owner
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 monitor
potential modified endowment classifications automatically.
3. Distributions from Policies Classified as Modified Endowment Contracts.
Policies classified as modified endowment contracts will be subject to the
following 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% 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 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
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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% additional income tax.
5. Policy Loan Interest. If there is any borrowing against a Policy, the
interest paid on the loan generally will not be tax deductible. A Policy Owner
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.
7. Multiple Policies. All modified endowment contracts that are issued by us
(or our 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 we incur that may be attributable to the
Separate Account or to the Policies. We reserve 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 we determine to be properly attributable to
the Separate Account or to the Policies.
Possible Changes in Taxation
Although the likelihood of legislative changes is uncertain, there is always
the possibility that the tax treatment of the Policy could change by
legislation or otherwise. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the change). A tax advisor
should be consulted with respect to legislative developments and their effect
on the Policy.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from our general assets. We
maintain records of all purchases and redemptions of Fund shares by each of the
Divisions. Additional protection for the assets of the Separate Account is
afforded by a blended executive risk insurance program, including blanket
fidelity coverage issued by CNA and Chubb Insurance Companies with a limit of
$25 million, covering all officers and employees of the Company who have access
to the assets of the Separate Account.
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<PAGE>
VOTING RIGHTS
To the extent required by law, the Company will vote the shares held in the
Separate Account at regular and special shareholder meetings of the underlying
Funds 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 the underlying Funds 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 the underlying Funds. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the underlying Funds.
Because the Funds 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. We will vote Fund shares held in the
Separate Account for which no timely voting instructions are received and Fund
shares that we own 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 or 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 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 state regulatory authorities, or we determine 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 we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Owners.
IMSA
The Company is a member of the Insurance Market place Standards Association
("IMSA"), and as such may include the IMSA logo and information about IMSA
membership in its advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
STATE REGULATION OF THE COMPANY
We are a stock life insurance company organized under the laws of Missouri and
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 our liabilities and reserves and the liabilities and
reserves of the Separate Account and certifies their adequacy. A full
examination of the Company's operations is conducted by the National
Association of Insurance Commissioners at least once every three years.
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In addition, we are 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.
Preparing for Year 2000
Like all financial service providers, we utilizes systems that may be affected
by Year 2000 transition issues and rely on service providers, including the
Funds, that also may be affected. We have developed and implemented a Year 2000
transition plan, and sought disclosure from our service providers that they are
also so engaged. The resources devoted to this effort have been, and continue
to be, substantial. It is difficult to predict with precision whether the
amount of resources ultimately devoted, or the outcome of these efforts, will
have any negative impact. However, as of the date of this prospectus, it is not
anticipated that Policy Owners will experience negative effects on their
investment, or on the services provided in connection therewith, as a result of
Year 2000 transition implementation. We have examined our systems and made the
necessary changes to ensure proper Year 2000 transition, and put in place the
proper processes to ensure continued Year 2000 transition success. The results
of that examination have been independently reviewed, but there can be no
assurance that we will be completely successful, or that interaction with other
service providers will not impair our services at that time.
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
Principal Occupation(s) During Past Five
Name Years/1/
------------------------------------ ----------------------------------------
<C> <S>
Executive Officers/2/
Carl H. Anderson/4/ President and Chief Executive Officer
since June, 1986. Vice President, New
Ventures, since June 1986, General
American Life Insurance Co., St. Louis,
MO (GenAm).
Matthew K. Duffy Vice President and Chief Financial
Officer since July, 1996. Formerly
Director of Accounting, Prudential
Insurance Company of America, March,
1987--June, 1996.
E. Thomas Hughes, Jr./4 Treasurer since December, 1994.
/ General American Life Corporate Actuary and Treasurer, GenAm
Insurance Company since October, 1994. Executive Vice
700 Market Street President--Group Pensions, GenAm
St. Louis, MO 63101 January, 1990--October, 1994.
Matthew P. McCauley/4 Vice President and General Counsel since
/ General American Life 1984. Secretary since August, 1981. Vice
Insurance Company President and Associate General Counsel,
700 Market Street GenAm, since December 30, 1995.
St. Louis, MO 63101
Craig K. Nordyke/4/ Executive Vice President and Chief
Actuary since November, 1996. Vice
President and Chief Actuary August,
1990--November, 1996; Second Vice
President and Chief Actuary, May, 1987--
August, 1990.
John R. Tremmel Vice President--Operations and System
Development since January 1999. Formerly
Chief Operating Officer, ISP Alliance,
April 1998 December 1998. Vice President
and General Manager of National
Operations Centers, Norell Corporation,
January 1995--March 1998. Senior Vice
President, Citicorp Insurance Group,
September 1986--December 1995.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s) During Past Five
Name Years/1/
------------------------------------ ----------------------------------------
<C> <S>
Directors/3/
Richard A. Liddy Chairman, President, and Chief Executive
Officer, GenAm, since May, 1992.
President and Chief Operating Officer,
GenAm, May, 1988--May, 1992.
Leonard M. Rubenstein Chairman and Chief Executive Officer--
Conning Corporation and Conning Asset
Management Company since January, 1997.
Executive Vice President--Investments,
GenAm, February, 1991--January, 1997.
Warren J. Winer Executive Vice President--Group, GenAm,
since September, 1995. Formerly,
Managing Director, Wm. M. Mercer, July,
1993--August, 1995; President, WF
Corroon, September, 1990--July, 1993.
Bernard H. Wolzenski Executive Vice President--Individual,
GenAm, since November, 1991. Vice
President--Life Product Management,
GenAm, May, 1989--November, 1991.
A. Greig Woodring President, Reinsurance Group of America,
Inc., since May, 1993, and Executive
Vice President--Reinsurance, GenAm,
since January, 1990.
</TABLE>
- --------
/1 /All positions listed are with the Company unless otherwise indicated.
/2 /The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, MO 63105 unless otherwise
noted.
/3 /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.
/4 /Indicates Executive Officers who are also Directors.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain legal matters relating to aspects of federal securities laws. 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 LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
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<PAGE>
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Executive 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.
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed Policy
Years.
Associated Companies--The companies listed in a 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 Individual Insurance Policy 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.
Certificate--A document issued to Owners of Policies issued under Group
Contracts, setting forth or summarizing the Owner's rights and benefits.
Contractholder--The employer, association, sponsoring organization or trust
that is issued a Group Contract.
Division--A subaccount of the Separate Account. Each Division invests
exclusively in an available underlying Fund.
Employee--A person who is employed and paid for services by an employer on a
regular basis. To qualify as an employee, a person ordinarily must work for an
employer at least 30 hours per week. The Company may waive or modify this
requirement at its discretion. An employee may also include an independent
contractor acting in many respects as an employee with a sponsoring employer.
An employee may include a partner in a partnership if the employer is a
partnership.
Executive Program--A category of Policies issued under Group Contracts or
employer-sponsored insurance programs that have a maximum Face Amount available
for each Policy generally in excess of $500,000.
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<PAGE>
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Group Contract--A group flexible premium variable life insurance contract
issued to the Contractholder by the Company.
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 or under an
Individual Policy issued in connection with an employer-sponsored insurance
program on an employee or an employee's spouse.
Insured--The person whose life is insured under a Policy. The term may include
both an employee and an employee's spouse.
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.
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 premium expense charge and any charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--Either the Certificate or the Individual Policy offered by the Company
and described in this Prospectus. Under Group Contracts, the Policy may be
issued on the employee or on the employee's spouse.
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--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy.
Spouse--An employee's legal spouse. The term does not include a spouse who is
legally separated from the employee.
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.
47
<PAGE>
[KPMG LOGO]
10 South Broadway
Suite 900
St. Louis, MO 63102-1761
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying balance sheets of Paragon Life Insurance
Company as of December 31, 1998 and 1997, and the related statements of
operations and comprehensive income, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paragon Life Insurance
Company as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
[LOGO SIGNATURE OF KPMG LLP]
February 3, 1999
F-1
[LOGO OF FOUR BOXES]
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1998 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Assets
Fixed maturities, available for sale....................... $ 83,384 75,704
Policy loans............................................... 14,135 11,487
Cash and cash equivalents.................................. 7,439 5,733
--------- -------
Total cash and invested assets......................... 104,958 92,924
Reinsurance recoverables................................... 1,170 1,733
Deposits relating to reinsured policyholder account
balances.................................................. 6,688 6,416
Accrued investment income.................................. 1,545 1,377
Deferred policy acquisition costs.......................... 20,602 17,980
Fixed assets and leasehold improvements, net............... 4,504 2,609
Other assets............................................... 105 179
Separate account assets.................................... 168,222 118,051
--------- -------
Total assets........................................... $ 307,794 241,269
========= =======
Liabilities and Stockholder's Equity
Policyholder account balances.............................. 93,334 85,152
Policy and contract claims................................. 1,672 1,085
Federal income taxes payable............................... 281 163
Other liabilities and accrued expenses..................... 3,943 3,486
Payable to affiliates...................................... 2,062 1,620
Due to separate account.................................... 183 61
Deferred tax liability..................................... 5,591 4,394
Separate account liabilities............................... 168,222 118,051
--------- -------
Total liabilities...................................... $ 275,288 214,012
--------- -------
Stockholder's equity:
Common stock, par value $25; 100,000 shares authorized;
82,000 shares issued and outstanding.................... 2,050 2,050
Additional paid-in capital............................... 17,950 17,950
Accumulated other comprehensive income................... 2,809 1,958
Retained earnings........................................ 9,697 5,299
--------- -------
Total stockholder's equity............................. $ 32,506 27,257
--------- -------
Total liabilities and stockholder's equity............. $ 307,794 241,269
========= =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Operations and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Revenues:
Policy contract charges............................... $20,437 16,417 13,719
Net investment income................................. 6,983 6,288 5,663
Commissions and expense allowances on reinsurance
ceded................................................ 124 10 114
Net realized investment gains......................... 53 69 72
------- ------ ------
Total revenues...................................... 27,597 22,784 19,568
======= ====== ======
Benefits and expenses:
Policy benefits....................................... 4,774 3,876 3,326
Interest credited to policyholder account balances.... 5,228 4,738 4,126
Commissions, net of capitalized costs................. 167 227 79
General and administration expenses, net of
capitalized costs.................................... 9,512 7,743 6,798
Amortization of deferred policy acquisition costs..... 1,150 424 285
------- ------ ------
Total benefits and expenses......................... 20,831 17,008 14,614
======= ====== ======
Income before federal income tax expense............ 6,766 5,775 4,954
Federal income tax expense.............................. 2,368 1,885 1,738
------- ------ ------
Net income.............................................. $ 4,398 3,890 3,216
Other comprehensive income (loss)....................... 851 1,636 (1,261)
------- ------ ------
Comprehensive income.................................... $ 5,249 5,526 1,955
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Additional other Retained Total
Common paid-in comprehensive earnings stockholder's
Stock capital income (deficit) equity
------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $2,050 17,950 1,583 (1,807) 19,776
Net income............ -- -- -- 3,216 3,216
Other comprehensive
income............... -- -- (1,261) -- (1,261)
------ ------ ------ ------ ------
Balance at December 31,
1996................... $2,050 17,950 322 1,409 21,731
Net income............ -- -- -- 3,890 3,890
Other comprehensive
income............... -- -- 1,636 -- 1,636
------ ------ ------ ------ ------
Balance at December 31,
1997................... $2,050 17,950 1,958 5,299 27,257
Net income............ -- -- -- 4,398 4,398
Other comprehensive
income............... -- -- 851 -- 851
------ ------ ------ ------ ------
Balance at December 31,
1998................... $2,050 17,950 2,809 9,697 32,506
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 4,398 3,890 3,216
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in:
Reinsurance recoverables..................... 563 (892) 407
Deposits relating to reinsured policyholder
account balances............................ (272) (342) (378)
Accrued investment income.................... (168) (79) (257)
Federal income tax payable................... 118 (648) 811
Other assets................................. (1,821) (1,280) (1,019)
Policy and contract claims................... 587 (23) 12
Other liabilities and accrued expenses....... 457 782 741
Payable to affiliates........................ 442 (669) 397
Due to separate account...................... 122 (34) (108)
Deferred tax expense........................... 740 732 615
Policy acquisition costs deferred.............. (3,808) (2,972) (2,447)
Amortization of deferred policy acquisition
costs......................................... 1,150 424 285
Interest credited to policyholder accounts..... 5,228 4,738 4,126
Net gain on sales and calls of fixed
maturities.................................... (53) (69) (72)
-------- ------- -------
Net cash provided by operating activities.......... 7,683 3,558 6,329
-------- ------- -------
Cash flows from investing activities:
Purchase of fixed maturities..................... (14,915) (12,557) (15,290)
Sale or maturity of fixed maturities............. 8,632 5,255 6,860
Increase in policy loans, net.................... (2,648) (1,923) (2,358)
-------- ------- -------
Net cash used in investing activities.............. (8,931) (9,225) (10,788)
-------- ------- -------
Cash flows from financing activities:
Net policyholder account deposits................ 2,954 2,294 6,509
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 1,706 (3,373) 2,050
Cash and cash equivalents at beginning of year..... 5,733 9,106 7,056
-------- ------- -------
Cash and cash equivalents at end of year........... $ 7,439 5,733 9,106
======== ======= =======
Income taxes paid.................................. $ (1,460) (1,801) (198)
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(1) Summary of Significant Accounting Policies
Paragon Life Insurance Company (Paragon or the Company) is a wholly owned
subsidiary of General American Life Insurance Company (General American or the
Parent). Paragon markets universal life and variable universal life insurance
products through the sponsorship of major companies and organizations. Paragon
is licensed to do business in the District of Columbia and 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.
The accompanying financial statements are prepared on the basis of generally
accepted accounting principles. The preparation of financial statements
requires the use of estimates by management which affect the amounts reflected
in the financial statements. Actual results could differ from those estimates.
Accounts that the Company deems to be sensitive to changes in estimates
include deferred policy acquisition costs and contract claims.
The significant accounting policies of the Company are as follows:
(a) Recognition of Policy Revenue and Related Expenses
Revenues for universal life products consist of policy charges for the cost
of insurance, administration and surrender charges during the period. Revenues
for variable universal life products also include policy charges for mortality
and expense risks assumed by Paragon. Policy benefits and expenses include
interest credited to policy account balances on universal life products and
death benefit payments made in excess of policy account balances.
Policy acquisition costs, such as commissions and certain costs of policy
issuance and underwriting, are deferred and amortized in relation to the
present value of expected gross profits over the estimated life of the
policies.
(b) Invested Assets
Investment securities are accounted for at fair value. At December 31, 1998
and 1997, fixed maturity securities are classified as available-for-sale and
are carried at fair value with the unrealized gain or loss, net of taxes,
being reflected as accumulated other comprehensive income, a separate
component of stockholder's equity. Policy loans are valued at aggregate unpaid
balances.
Realized gains or losses on the sale of securities are determined on the
basis of specific identification and include the impact of any related
amortization of premiums or accretion of discounts which is generally computed
consistent with the interest method.
Amortization of the premium or discount on mortgage-backed securities is
recognized using a level-yield method which considers the estimated timing and
amount of prepayments of underlying mortgage loans. Actual prepayment
experience is periodically reviewed and effective yields are recalculated when
differences arise between the prepayments originally anticipated and the
actual prepayments received and currently anticipated. When such differences
occur, the net investment in the mortgage-backed security is adjusted to the
amount that would have existed had the new effective yield been applied since
the acquisition of the security with a corresponding charge or credit to
interest income.
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(c) Policyholder Account Balances
Policyholder account balances are equal to the policyholder account value
before deduction of any surrender charges. The policyholder account value
represents an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals. These expense charges are
recognized in income as earned. Certain variable life policies allow
policyholders to exchange accumulated assets from the variable rate separate
accounts to a fixed-interest general account policy. The fixed-interest
general account guaranteed minimum crediting rates of 4% in 1998, 1997 and
1996. The actual crediting rate was 6.5% in 1998 and 1997, and ranged from
6.5% to 7.0% in 1996.
(d) Federal Income Taxes
The Company establishes deferred taxes under the asset and liability method,
and deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company files its federal income tax return on a consolidated basis with
its Parent and other 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.
(e) Reinsurance
Balances resulting from agreements which transfer funds relating to
policyholder account balances have been accounted for as deposits. Other
reinsurance activities are accounted for consistent with terms of the risk
transfer reinsurance contracts. Premiums for reinsurance ceded to other
companies have been reported as a reduction of policy contract charges.
Amounts applicable to reinsurance ceded for future policy benefits and claim
liabilities have been reported as assets for these items, and commissions and
expense allowances received in connection with reinsurance ceded have been
accounted for in income as earned. Reinsurance does not relieve the Company
from its primary responsibility to meet claim obligations.
(f) Deferred Policy Acquisition Costs
The costs of acquiring new business which vary with, and are primarily
related to, the production of new business have been deferred to the extent
that such costs are deemed recoverable from future gross profits. Such costs
include commissions, premium taxes, as well as certain costs of policy
issuance and underwriting. Deferred policy acquisition costs are adjusted for
the impact on estimated gross margins of net unrealized gains and losses on
investment securities. The estimates of expected gross margins are evaluated
regularly and are revised if actual experience or other evidence indicates
that revision is appropriate. Upon revision, total amortization recorded to
date is adjusted by a charge or credit to income.
(g) Separate Account Business
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding
variable life insurance contracts for the exclusive benefit of variable life
insurance contract holders. The Company charges the separate accounts for
risks it assumes in issuing a policy and retains varying amounts of withdrawal
charges to cover expenses in the event of early withdrawals by contract
holders. The assets and liabilities of the separate account are carried at
fair value.
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(h) Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in assumption
could significantly affect the estimates and such estimates should be used
with care. The following assumptions were used to estimate the fair value of
each class of financial instrument for which it was practicable to estimate
fair value:
Fixed maturities--Fixed maturities are valued using quoted market prices,
if available. If quoted market prices are not available, fair value is
estimated using quoted market prices of similar securities.
Policy loans--Policy loans are carried at their unpaid balances which
approximates fair value.
Separate account assets and liabilities--The separate account assets are
carried at fair value as determined by quoted market prices. Accordingly,
the carrying value of separate account liabilities is equal to their fair
value since it represents the contractholders' interest in the separate
account assets.
Cash and cash equivalents--The carrying amount is a reasonable estimate
of fair value.
(i) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents represent
demand deposits and highly liquid short-term investments, which include U.S.
Treasury bills, commercial paper, and repurchase agreements with original or
remaining maturities of 90 days or less when purchased.
(j) Reclassifications
The Company has reclassified the presentation of certain prior period
information to conform to the 1998 presentation.
(2) Investments
The amortized cost and estimated fair value of fixed maturities at December
31, 1998 and 1997 are as follows (000's):
<TABLE>
<CAPTION>
1998
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 6,705 267 -- 6,972
Corporate securities............ 64,607 4,481 (208) 68,881
Mortgage-backed securities...... 6,854 192 (25) 7,021
Asset-backed securities......... 500 10 -- 510
------- ----- ---- ------
$78,666 4,950 (233) 83,384
======= ===== ==== ======
<CAPTION>
1997
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 4,472 131 -- 4,603
Corporate securities............ 56,973 3,098 (142) 59,929
Mortgage-backed securities...... 9,124 233 (48) 9,309
Asset-backed securities......... 1,762 101 -- 1,863
------- ----- ---- ------
$72,331 3,563 (190) 75,704
======= ===== ==== ======
</TABLE>
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
The amortized cost and estimated fair value of fixed maturities at December
31, 1998, by contractual maturity, are shown below (000's). Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 605 616
Due after one year through five years................. 20,733 21,528
Due after five years through ten years................ 12,600 13,338
Due after ten years through twenty years.............. 37,873 40,881
Mortgage-backed securities............................ 6,855 7,021
------- ------
$78,666 83,384
======= ======
</TABLE>
Proceeds from sales of fixed maturities during 1998, 1997 and 1996 were
$4,069,000, $1,328,585 and $4,129,254 respectively. Gross gains of $53,180,
$68,876 and $71,604 were realized on those sales in 1998, 1997 and 1996,
respectively.
The sources of net investment income follow (000s):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Fixed Maturities.................................... $5,603 4,941 4,626
Short-term investments.............................. 535 608 449
Policy loans and other.............................. 924 807 680
------ ----- -----
$7,062 6,356 5,755
Investment expenses................................. (79) (68) (92)
------ ----- -----
Net investment income........................... $6,983 6,288 5,663
====== ===== =====
</TABLE>
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets carried at fair value is as follows (in
000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ----
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale.............. $ 4,717 3,373 513
Deferred policy acquisition costs................ (396) (361) (17)
Deferred income taxes.............................. (1,512) (1,054) (174)
------- ------ ----
Net unrealized appreciation (depreciation)......... $ 2,809 1,958 322
======= ====== ====
</TABLE>
The Company has fixed maturities on deposit with various state insurance
departments with an amortized cost of approximately $4,121,000 and $3,982,000
at December 31, 1998 and 1997, respectively.
(3) Reinsurance
The Company reinsures certain risks with other insurance companies above a
maximum retention amount (currently $50,000) to help reduce the loss on any
single policy.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
Premiums and related reinsurance amounts for the years ended December 31,
1998, 1997 and 1996 as they relate to transactions with affiliates are
summarized as follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Reinsurance transactions with affiliates:
Premiums for reinsurance ceded.................... $14,723 13,001 10,264
Policy benefits ceded............................. 17,071 14,070 6,274
Commissions and expenses ceded.................... 123 195 114
Reinsurance recoverables.......................... 1,109 1,661 774
</TABLE>
Ceded premiums and benefits to nonaffiliates for 1998, 1997 and 1996 were
insignificant.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized is as
follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year.................... $17,980 15,776 13,006
Policy acquisition costs deferred............... 3,808 2,972 2,447
Policy acquisition costs amortized.............. (1,150) (424) (285)
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on investments
available for sale............................. (36) (344) 608
------- ------ ------
Balance at end of year.......................... $20,602 17,980 15,776
======= ====== ======
</TABLE>
(5) Federal Income Taxes
The Company is taxed as a life insurance company. A summary of Federal
income tax expense is as follows (000s):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Current tax (benefit) expense.......................... $1,628 1,153 1,123
Deferred tax expense................................... 740 732 615
------ ----- -----
Federal income tax expense............................. $2,368 1,885 1,738
====== ===== =====
</TABLE>
A reconciliation of the Company's "expected" federal income tax expense,
computed by applying the federal U.S. corporate tax rate of 35% to income from
operations before federal income tax, is as follows (000s):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Computed "expected" tax expense....................... $2,368 2,022 1,734
Other, net............................................ 0 (137) 4
------ ----- -----
Federal income tax expense............................ $2,368 1,885 1,738
====== ===== =====
</TABLE>
F-10
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1998 and 1997
are presented below (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Unearned reinsurance allowances...................... $ 218 217 153
Policy and contract liabilities...................... 709 1,031 1,305
Tax capitalization of acquisition costs.............. 2,147 1,755 1,386
Other, net........................................... 58 76 69
------ ----- -----
Total deferred tax assets.......................... $3,132 3,079 2,913
====== ===== =====
Deferred tax liabilities:
Unrealized gain on investments....................... $1,512 1,054 174
Deferred policy acquisition costs.................... 7,211 6,419 5,520
------ ----- -----
Total gross deferred tax liabilities............... $8,723 7,473 5,694
------ ----- -----
Net deferred tax liabilities....................... $5,591 4,394 2,781
====== ===== =====
</TABLE>
The Company believes that a valuation allowance with respect to the
realization of the total gross deferred tax asset is not necessary. In
assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The Company files a consolidated tax
return with its Parent. Realization of the gross tax asset will not be
dependent solely on the Company's ability to generate its own taxable income.
General American has a proven history of earnings and it appears more likely
than not that the Company's gross deferred tax asset will ultimately be fully
realized.
(6) Related-Party Transactions
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 1998, 1997 and
1996 were $1,513,433, $1,348,198 and $1,250,396, respectively. See Note 3 for
reinsurance transactions with affiliates.
(7) Pension Plan
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 1998, 1997 or 1996 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 expenses to the Company for the incentive plan were
$188,316, $198,972 and $80,434 for 1998, 1997 and 1996, respectively.
Paragon provides for certain health care and life insurance benefits for
retired employees. The Company accounts for these benefits in accordance with
SFAS No. 106--Employer's Accounting for Postretirement Benefits Other Than
Pensions. The amounts involved are not material.
(8) Statutory Financial Information
The Company is subject to financial statement filing requirements of the
State of Missouri Department of Insurance, its state of domicile, as well as
the states in which it transacts business. Such financial statements,
generally referred to as statutory financial statements, are prepared on a
basis of accounting which varies in some
F-11
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
respects from generally accepted accounting principles (GAAP). Statutory
accounting principles include: (1) charging of policy acquisition costs to
income as incurred; (2) establishment of policy and contract liabilities
computed using required valuation standards which may vary in methodology
utilized; (3) nonprovision of deferred federal income taxes resulting from
temporary differences between financial reporting and tax bases of assets and
liabilities; (4) recognition of statutory liabilities for asset impairments
and yield stabilization on fixed maturity dispositions prior to maturity with
asset valuation reserves based on statutory determined formulae and interest
stabilization reserves designed to level yields over their original purchase
maturities; (5) valuation of investments in fixed maturities at amortized
cost; (6) net presentation of reinsurance balances; and (7) recognition of
deposits and withdrawals on universal life policies as revenues and expenses.
The stockholder's equity (surplus) and net income (loss) of the Company at
December 31, 1998, 1997 and 1996, as determined using statutory accounting
practices, is summarized as follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Statutory surplus as reported to regulatory
authorities...................................... $10,500 10,725 10,751
Net income (loss) as reported to regulatory
authorities...................................... $ 1,596 1,397 982
</TABLE>
(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 1998 without prior
notice or approval is $1,596,000. Paragon did not pay dividends in 1998, 1997
or 1996.
(10) 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 action by the
Company or regulators is required based on the ratio of a company's actual
total adjusted capital to control levels determined by the RBC formula. At
December 31, 1998, the Company's actual total adjusted capital was in excess
of minimum levels which would require action by the Company or regulatory
authorities under the RBC formula.
(11) Commitments and Contingencies
The Company leases certain of its facilities and equipment under
noncancellable leases the majority of which expires March 2001. The future
minimum lease obligations under the terms of the leases are summarized as
follows (000s):
<TABLE>
<S> <C>
Year ended December 31:
1999............................................................. $ 626
2000............................................................. 598
2001............................................................. 256
2002............................................................. 53
------
$1,533
======
</TABLE>
Rent expense totaled $489,999, $433,864 and $388,976 in 1998, 1997 and 1996,
respectively.
F-12
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Concluded)
(12) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The most significant items of
comprehensive income are net income and changes in unrealized gains and losses
on securities. The adoption of SFAS No. 130 does not affect results of
operations or financial position, but affects their presentation and
disclosure. The Company has adopted SFAS No. 130 as of January 1, 1998, and
the following summaries present the components of the Company's comprehensive
income, other than net income, for the periods ending December 31, 1998, 1997
and 1996 (000s):
<TABLE>
<CAPTION>
1998
-------------------------
Before- Tax Net-
Tax (Expense) of-Tax
Amount Benefit Amount
------- -------- ------
<S> <C> <C> <C>
Unrealized holding gains arising during
period....................................... $ 1,361 (476) 885
Less: reclassification adjustment for gains
realized in net income....................... (53) 19 (34)
------- ---- ------
Other comprehensive income.................... 1,308 (457) 851
------- ---- ------
<CAPTION>
1997
-------------------------
Before- Tax Net-
Tax (Expense) of-Tax
Amount Benefit Amount
------- -------- ------
<S> <C> <C> <C>
Unrealized holding gains arising during
period....................................... $ 2,585 (904) 1,681
Less: reclassification adjustment for gains
realized in net income....................... (69) 24 (45)
------- ---- ------
Other comprehensive income.................... 2,516 (880) 1,636
------- ---- ------
<CAPTION>
1996
-------------------------
Before- Tax Net-
Tax (Expense) of-Tax
Amount Benefit Amount
------- -------- ------
<S> <C> <C> <C>
Unrealized holding gains arising during
period....................................... $(1,868) 654 (1,214)
Less: reclassification adjustment for gains
realized in net income....................... (72) 25 (47)
------- ---- ------
Other comprehensive income (loss)............. (1,940) 679 (1,261)
------- ---- ------
</TABLE>
F-13
<PAGE>
[LOGO APPEARS HERE]
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, International,
Global Growth, Bond, and Global Small Capitalization Divisions of Paragon
Separate Account A as of December 31, 1998, and the related statements of
operations and changes in net assets for the periods presented. 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, 1998 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, International, Global Growth, Bond, and Global Small
Capitalization Divisions of Paragon Separate Account A as of December 31,
1998, and the results of their operations and changes in their net assets for
each of the periods presented, in conformity with generally accepted
accounting principles.
[LOGO APPEARS HERE]
April 2, 1999
[LOGO APPEARS HERE]
F-14
<PAGE>
PARAGON SEPARATE ACCOUNT A
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
Cash High-Yield Growth- U.S. Gov/ Asset Global Global Small
Management Bond Income Growth AAA-Rated Allocation International Growth Bond Capitalization
Division Division Division Division Division Division Division Division Division Division
---------- ---------- ---------- ---------- --------- ---------- ------------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets:
Investments in
American
Variable
Insurance
Series, at
Market Value
(See Schedule of
Investments).... $2,161,876 3,569,904 24,915,937 36,907,343 3,039,115 6,801,348 10,906,251 216,014 221,100 72,561
Receivable from
Paragon Life
Insurance
Company......... 2,231 13,233 50,775 64,526 9,913 7,321 7,041 1,352 1,298 341
---------- --------- ---------- ---------- --------- --------- ---------- ------- ------- ------
Total Net As-
sets........... 2,164,107 3,583,137 24,966,712 36,971,869 3,049,028 6,808,669 10,913,292 217,366 222,398 72,902
========== ========= ========== ========== ========= ========= ========== ======= ======= ======
Group Variable
Universal Life
Cash Value
Invested in
Separate
Account......... 2,164,107 3,583,137 24,966,712 36,971,869 3,049,028 6,808,669 10,913,292 217,366 222,398 72,902
---------- --------- ---------- ---------- --------- --------- ---------- ------- ------- ------
$2,164,107 3,583,137 24,966,712 36,971,869 3,049,028 6,808,669 10,913,292 217,366 222,398 72,902
========== ========= ========== ========== ========= ========= ========== ======= ======= ======
Total Units Held. 136,790 121,546 355,175 400,863 154,076 243,318 487,493 15,685 20,098 7,147
Net Asset Value
Per Unit........ $ 15.82 29.48 70.29 92.23 19.79 27.98 22.39 13.86 11.07 10.20
Cost of Invest-
ments........... $2,199,305 3,759,839 21,579,514 28,377,830 3,019,555 6,053,712 9,241,231 193,766 225,505 59,711
========== ========= ========== ========== ========= ========= ========== ======= ======= ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT A
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997, and 1996, except for the Global
Growth Division and Bond Division which are for the period from May 1, 1997
(Inception) to December 31, 1997, and the Global Small Capitalization Division
which is for the period May 15, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
Cash High-Yield Growth-
Management Bond Income
Division Division Division
------------------------- -------------------------- ------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- -------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income... $96,495 74,007 55,304 305,497 264,042 198,702 381,934 350,104 276,437
Expenses:
Mortality and Ex-
pense Charge...... 13,584 10,690 9,781 25,250 22,441 19,133 160,445 133,938 109,341
------- ------- ------- -------- ------- ------- --------- --------- ---------
Net Investment
Income (Ex-
pense).......... 82,911 63,317 45,523 280,247 241,601 179,569 221,489 216,166 167,096
Net Realized Gain
on Investments
Realized Gain from
Distributions..... -- -- -- 49,339 34,716 -- 3,510,810 1,872,910 1,039,674
Proceeds from
Sales............. 628,387 443,594 213,927 463,409 274,962 201,934 1,511,189 1,769,273 914,886
Cost of Invest-
ments Sold........ 638,944 412,545 201,797 456,240 212,893 166,162 1,164,554 1,078,967 646,528
------- ------- ------- -------- ------- ------- --------- --------- ---------
Net Realized
Gain (Loss) on
Investments..... (10,557) 31,049 12,130 56,508 96,785 35,772 3,857,445 2,563,216 1,308,032
Net Unrealized Gain
(Loss) on
Investments:
Unrealized Gain
(Loss) Beginning
of Year........... (46,116) (11,937) 719 159,157 173,880 134,098 3,787,828 2,714,233 2,155,815
Unrealized Gain
(Loss) End of
Year.............. (37,429) (46,116) (11,937) (189,935) 159,157 173,880 3,336,423 3,787,828 2,714,233
------- ------- ------- -------- ------- ------- --------- --------- ---------
Net Unrealized
Gain (Loss) on In-
vestments......... 8,687 (34,179) (12,656) (349,092) (14,723) 39,782 (451,405) 1,073,595 558,418
------- ------- ------- -------- ------- ------- --------- --------- ---------
Net Gain (Loss)
on Investments.. (1,870) (3,130) (526) (292,584) 82,062 75,554 3,406,040 3,636,811 1,866,450
Increase (Decrease)
in Assets Resulting
from Operations.... $81,041 60,187 44,997 (12,337) 323,663 255,123 3,627,529 3,852,977 2,033,546
======= ======= ======= ======== ======= ======= ========= ========= =========
<CAPTION>
Growth
Division
---------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Investment Income:
Dividend Income... $ 115,480 134,259 101,379
Expenses:
Mortality and Ex-
pense Charge...... 215,716 173,987 147,017
----------- ---------- ----------
Net Investment
Income (Ex-
pense).......... (100,236) (39,728) (45,638)
Net Realized Gain
on Investments
Realized Gain from
Distributions..... 4,926,240 3,088,079 1,349,173
Proceeds from
Sales............. 2,408,576 2,854,025 1,374,499
Cost of Invest-
ments Sold........ 1,811,155 1,752,513 1,000,273
----------- ---------- ----------
Net Realized
Gain (Loss) on
Investments..... 5,523,661 4,189,591 1,723,399
Net Unrealized Gain
(Loss) on
Investments:
Unrealized Gain
(Loss) Beginning
of Year........... 4,617,293 2,937,160 2,599,504
Unrealized Gain
(Loss) End of
Year.............. 8,529,513 4,617,293 2,937,160
----------- ---------- ----------
Net Unrealized
Gain (Loss) on In-
vestments......... 3,912,220 1,680,133 337,656
----------- ---------- ----------
Net Gain (Loss)
on Investments.. 9,435,881 5,869,724 2,061,055
Increase (Decrease)
in Assets Resulting
from Operations.... $9,335,645 5,829,996 2,015,417
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Asset Global
AAA-Rated Allocation International Growth
Division Division Division Division
--------------------------- ------------------------- ----------------------------- -------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997
-------- ------- -------- ------- ------- -------- ---------- --------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income... $165,217 147,633 143,559 223,957 174,754 $137,430 $ 131,756 175,293 119,621 1,621 29
Expenses:
Mortality and Ex-
pense Charge...... 19,492 16,289 16,656 44,638 36,970 31,646 72,947 66,681 54,616 940 12
-------- ------- -------- ------- ------- -------- ---------- --------- ------- ------ -----
Net Investment
Income (Ex-
pense).......... 145,725 131,344 126,903 179,319 137,784 105,784 58,809 108,612 65,005 681 17
Net Realized Gain
on Investments
Realized Gain from
Distributions..... -- -- -- 461,427 288,742 267,989 194,147 895,572 290,389 6,913 20
Proceeds from
Sales............. 419,091 363,960 312,394 522,616 593,825 352,789 1,525,220 1,324,190 531,338 63,152 5,402
Cost of Invest-
ments Sold........ 416,180 314,641 279,505 435,583 405,749 266,045 1,342,843 980,764 439,212 60,867 5,506
-------- ------- -------- ------- ------- -------- ---------- --------- ------- ------ -----
Net Realized
Gain (Loss) on
Investments..... 2,911 49,319 32,889 548,460 476,818 354,733 376,524 1,238,998 382,515 9,198 (84)
Net Unrealized
Gain(Loss) on In-
vestments:
Unrealized Gain
(Loss) Beginning
of Year........... (27,162) (6,315) 110,048 772,040 527,649 487,196 254,538 959,525 458,570 (155) --
Unrealized Gain
(Loss) End of
Year.............. 19,560 (27,162) (6,315) 747,636 772,040 527,649 1,665,020 254,538 959,525 22,248 (155)
-------- ------- -------- ------- ------- -------- ---------- --------- ------- ------ -----
Net Unrealized
Gain (Loss) on
Investments....... 46,722 (20,847) (116,363) (24,404) 244,391 40,453 1,410,482 (704,987) 500,955 22,403 (155)
-------- ------- -------- ------- ------- -------- ---------- --------- ------- ------ -----
Net Gain (Loss)
on Investments.. 49,633 28,472 (83,474) 524,056 721,209 395,186 1,787,006 534,011 883,470 31,601 (239)
Increase (Decrease)
in Assets Resulting
from Operations.... $195,358 159,816 43,429 703,375 858,993 500,970 $1,845,815 642,623 948,475 32,282 (222)
======== ======= ======== ======= ======= ======== ========== ========= ======= ====== =====
<CAPTION>
Global Small
Capitalization
Bond Division Division
--------------- --------------
1998 1997 1996
------- ------- --------------
<S> <C> <C> <C>
Investment Income:
Dividend Income... 9,392 926 268
Expenses:
Mortality and Ex-
pense Charge...... 922 9 118
------- ------- --------------
Net Investment
Income (Ex-
pense).......... 8,470 917 150
Net Realized Gain
on Investments
Realized Gain from
Distributions..... 1,020 739 939
Proceeds from
Sales............. 12,969 -- 2,973
Cost of Invest-
ments Sold........ 13,407 -- 3,061
------- ------- --------------
Net Realized
Gain (Loss) on
Investments..... 582 739 851
Net Unrealized
Gain(Loss) on In-
vestments:
Unrealized Gain
(Loss) Beginning
of Year........... (1,574) -- --
Unrealized Gain
(Loss) End of
Year.............. (4,405) (1,574) 12,850
------- ------- --------------
Net Unrealized
Gain (Loss) on
Investments....... (2,831) (1,574) 12,850
------- ------- --------------
Net Gain (Loss)
on Investments.. (2,249) (835) 13,701
Increase (Decrease)
in Assets Resulting
from Operations.... 6,221 82 13,851
======= ======= ==============
</TABLE>
See Accompanying Notes to Financial Statements.
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT A
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997, and 1996, except for the Global
Growth Division and Bond Division which are for the period from May 1, 1997
(Inception) to December 31, 1997, and the Global Small Capitalization Division
which is for the period May 15, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
Cash High-Yield Growth-
Management Bond Income
Division Division Division
-------------------------------- ------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (expense).. $ 82,911 63,317 45,523 280,247 241,601 179,569 221,489 216,166 167,096
Net Realized Gain
(Loss) on
Investment........ (10,557) 31,049 12,130 56,508 96,785 35,772 3,857,445 2,563,216 1,308,032
Net Unrealized
Gain (Loss) on
Investments....... 8,687 (34,179) (12,656) (349,092) (14,723) 39,782 (451,405) 1,073,595 558,418
---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
Increase (De-
crease) in Net
Assets Resulting
from Operations... 81,041 60,187 44,997 (12,337) 323,663 255,123 3,627,529 3,852,977 2,033,546
Net Deposits into
Separate Account.. 596,074 69,053 415,143 239,057 459,664 484,080 1,503,802 1,497,701 2,038,628
---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
Increase in Net
Assets.......... 677,115 129,240 460,140 226,720 783,327 739,203 5,131,331 5,350,678 4,072,174
Net Assets, Begin-
ning of Year....... 1,486,992 1,357,752 897,612 3,356,417 2,573,090 1,833,887 19,835,381 14,484,703 10,412,529
---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
Net Assets, End of
Year............... $2,164,107 1,486,992 1,357,752 3,583,137 3,356,417 2,573,090 24,966,712 19,835,381 14,484,703
========== ========= ========= ========= ========= ========= ========== ========== ==========
<CAPTION>
Growth
Division
------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Operations:
Net Investment
Income (expense).. $ (100,236) (39,728) (45,638)
Net Realized Gain
(Loss) on
Investment........ 5,523,661 4,189,591 1,723,399
Net Unrealized
Gain (Loss) on
Investments....... 3,912,220 1,680,133 337,656
------------ ----------- -----------
Increase (De-
crease) in Net
Assets Resulting
from Operations... 9,335,645 5,829,996 2,015,417
Net Deposits into
Separate Account.. 1,824,078 864,930 2,702,827
------------ ----------- -----------
Increase in Net
Assets.......... 11,159,723 6,694,926 4,718,244
Net Assets, Begin-
ning of Year....... 25,812,144 19,117,218 14,398,974
------------ ----------- -----------
Net Assets, End of
Year............... $36,971,869 25,812,144 19,117,218
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Asset
AAA-Rated Allocation International
Division Division Division
------------------------------- ------------------------------ --------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- --------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (expense).. $ 145,725 131,344 126,903 179,319 137,784 105,784 $ 58,809 108,612 65,005
Net Realized Gain
(Loss) on Invest-
ment.............. 2,911 49,319 32,889 548,460 476,818 354,733 376,524 1,238,998 382,515
Net Unrealized
Gain (Loss) on
Investments....... 46,722 (20,847) (116,363) (24,404) 244,391 40,453 1,410,482 (704,987) 500,955
---------- --------- --------- --------- --------- --------- ----------- --------- ---------
Increase (De-
crease) in Net
Assets Resulting
from Operations... 195,358 159,816 43,429 703,375 858,993 500,970 1,845,815 642,623 948,475
Net Deposits into
Separate Account.. 508,935 158,596 224,208 702,411 389,338 629,631 313,448 722,256 1,513,635
---------- --------- --------- --------- --------- --------- ----------- --------- ---------
Increase in Net
Assets.......... 704,293 318,412 267,637 1,405,786 1,248,331 1,130,601 2,159,263 1,364,879 2,462,110
Net Assets, Begin-
ning of Year....... 2,344,735 2,026,323 1,758,686 5,402,883 4,154,552 3,023,951 8,754,029 7,389,150 4,927,040
---------- --------- --------- --------- --------- --------- ----------- --------- ---------
Net Assets, End of
Year............... $3,049,028 2,344,735 2,026,323 6,808,669 5,402,883 4,154,552 $10,913,292 8,754,029 7,389,150
========== ========= ========= ========= ========= ========= =========== ========= =========
<CAPTION>
Global Small
Global Growth Bond Capitalization
Division Division Division
-------------- ---------------- --------------
1998 1997 1998 1997 1996
------- ------ -------- ------- --------------
<S> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (expense).. 681 17 8,470 917 150
Net Realized Gain
(Loss) on Invest-
ment.............. 9,198 (84) 582 739 851
Net Unrealized
Gain (Loss) on
Investments....... 22,403 (155) (2,831) (1,574) 12,850
------- ------ -------- ------- --------------
Increase (De-
crease) in Net
Assets Resulting
from Operations... 32,282 (222) 6,221 82 13,851
Net Deposits into
Separate Account.. 179,878 5,428 151,370 64,725 59,051
------- ------ -------- ------- --------------
Increase in Net
Assets.......... 212,160 5,206 157,591 64,807 72,902
Net Assets, Begin-
ning of Year....... 5,206 -- 64,807 -- --
------- ------ -------- ------- --------------
Net Assets, End of
Year............... 217,366 5,206 222,398 64,807 72,902
======= ====== ======== ======= ==============
</TABLE>
See Accompanying Notes to Financial Statements.
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT A
Notes to Financial Statements
December 31, 1998
(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 ten divisions, which invest 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, International Fund, Global Growth Fund,
Bond Fund and Global Small Capitalization Fund (the Funds). Policyholders have
the option of directing their premium payments into any or all of the
Divisions.
(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. All dividends received are immediately
reinvested on the ex-dividend date.
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
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT A
Notes to Financial Statements--(Continued)
providing the insurance benefits set forth in the policies, incurring expenses
of distributing the policies, and assuming certain risks in connection with
the policies. In addition, some polices 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 year, 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 .0000206% of the net assets of each division of the Separate Account which
equals an annual rate of .75% 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-19
<PAGE>
PARAGON SEPARATE ACCOUNT A
Notes to Financial Statements--(Continued)
(4) Purchases and Sales of American Series Shares
For the years ended December 31, 1998, 1997, and 1996, except for the Global
Growth Division and Bond Division which are for the period from May 1, 1997
(Inception) to December 31, 1997, and the Global Small Capitalization Division
which are for the period May 15, 1998 (Inception) through December 31, 1998,
purchases and proceeds from the sales of the American Series were as follows:
<TABLE>
<CAPTION>
High-Yield Bond
Cash Management Division Division Growth-Income Division Growth Division
-------------------------- ----------------------- ----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ------- ------- ------- ------- ------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $1,211,759 501,797 612,010 664,784 716,910 667,675 2,826,253 3,148,883 2,821,380 3,933,913 3,567,101 3,931,562
Sales........... $ 628,387 443,594 213,927 463,409 274,962 201,934 1,511,189 1,769,273 914,886 2,408,576 2,854,025 1,374,498
========== ======= ======= ======= ======= ======= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/AAA- Global Growth
Rated Division Asset Allocation Division International Division Division Bond Division
------------------------ ------------------------- ----------------------------- -------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1998 1997
-------- ------- ------- --------- ------- ------- --------- --------- --------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $898,768 512,847 518,994 1,176,859 934,034 966,183 1,701,386 2,043,240 1,985,341 240,471 11,085 162,110 64,725
Sales........... $419,091 363,960 312,394 522,616 593,825 352,789 1,525,220 1,324,190 531,338 63,152 5,402 12,969 --
======== ======= ======= ========= ======= ======= ========= ========= ========= ======= ====== ======= ======
<CAPTION>
Global Small
Capitalization
Division
1998
--------------
<S> <C>
Purchases....... 61,565
Sales........... 2,973
==============
</TABLE>
The purchases above do not include dividends and realized gains from
distributions that have been reinvested into the respective divisions.
F-20
<PAGE>
PARAGON SEPARATE ACCOUNT A
Notes to Financial Statements--(Continued)
(5) Accumulation of Unit Activity
The following is a reconciliation of the accumulation of unit activity for
the years ended December 31, 1998, 1997, and 1996 except for the Global Growth
Division and Bond Division which are for the period from May 1, 1997
(Inception) to December 31, 1997, and the Global Small Capitalization Division
which is for the period May 15, 1998 (Inception) through December 31, 1998.
<TABLE>
<CAPTION>
High-Yield Bond
Cash Management Division Division Growth-Income Division Growth Division
----------------------------------------------- ----------------------- -----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- ----------------------- ------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits............ 78,771 34,468 43,267 23,162 25,785 26,882 45,271 59,235 65,173 53,606 59,854 80,355
Withdrawals......... 40,080 29,861 14,126 15,117 9,362 7,385 21,620 30,135 18,457 29,276 43,445 24,887
-------- ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- -------
Net Increase in
Units............... 38,691 4,607 29,141 8,045 16,423 19,497 23,651 29,100 46,716 24,330 16,409 55,468
Outstanding Units,
Beginning of Year.... 98,099 93,492 64,351 113,501 97,078 77,581 331,524 302,424 255,708 376,533 360,124 304,656
-------- ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- -------
Outstanding Units,
End of Year.......... 136,790 98,099 93,492 121,546 113,501 97,078 355,175 331,524 302,424 400,863 376,533 360,124
======== ======= ======= ======= ======= ====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Global
U.S. Government/ Asset Allocation Growth Bond
AAA-Rated Division Division International Division Division Division
----------------------- ----------------------- ----------------------- ------------ ------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in
Units
Deposits........ 48,167 29,124 31,366 45,193 41,817 50,208 85,032 110,855 126,059 20,277 1,004 15,192 6,056
Withdrawals..... 21,317 20,299 17,918 18,678 24,483 17,275 68,041 70,268 29,988 5,073 523 1,149 1
------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- ------ -----
Net Increase in
Units........... 26,850 8,825 13,448 26,515 17,334 32,933 16,991 40,587 96,071 15,204 481 14,043 6,055
Outstanding
Units, Beginning
of Year.......... 127,226 118,401 104,953 216,803 199,469 186,536 470,502 429,915 333,844 481 -- 6,055 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ----- ------ -----
Outstanding
Units, End of
Year............. 154,076 127,226 118,401 243,318 216,803 199,469 487,493 470,502 429,915 15,685 481 20,098 6,055
======= ======= ======= ======= ======= ======= ======= ======= ======= ====== ===== ====== =====
<CAPTION>
Global Small
Capitalization
Division
--------------
1998
--------------
<S> <C>
Net Increase in
Units
Deposits........ 7,474
Withdrawals..... 327
--------------
Net Increase in
Units........... 7,147
Outstanding
Units, Beginning
of Year.......... --
--------------
Outstanding
Units, End of
Year............. 7,147
==============
</TABLE>
F-21
<PAGE>
PARAGON SEPARATE ACCOUNT A
Notes to Financial Statements--(Continued)
(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 amount 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, 1998, 1997, and
1996, except for the Global Growth Division and Bond Division which are for
the period from May 1, 1997 (Inception) to December 31, 1997, and the Global
Small Capitalization Division which is for the period May 15, 1998 (Inception)
through December 31, 1998.
<TABLE>
<CAPTION>
Cash Management Division High-Yield Bond Division Growth-Income Division
--------------------------- --------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- ------- -------- -------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross
Deposits.......... $900,694 480,549 552,000 939,255 851,440 830,869 4,415,471 4,234,060 3,924,233
Surrenders and
Withdrawals....... (248,642) (255,218) (59,019) (349,977) (164,731) (50,109) (1,194,511) (1,323,100) (437,815)
Transfers Between
Funds and General
Account........... 222,269 103,215 152,979 (66,499) 34,786 (29,486) (362,418) (135,707) (279,077)
-------- -------- ------- -------- -------- ------- ---------- ---------- ---------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers........ 874,321 328,546 645,960 522,779 721,495 751,274 2,858,542 2,775,253 3,207,341
Deductions:
Premium Expense
Charges.......... 23,179 12,315 13,980 24,171 21,821 21,043 113,631 108,510 99,389
Monthly Expense
Charges.......... 9,831 5,351 4,198 10,004 9,481 8,202 47,835 47,147 46,339
Cost of Insurance
and Optional
Benefits......... 245,237 241,827 212,639 249,547 230,529 237,949 1,193,274 1,121,895 1,022,985
-------- -------- ------- -------- -------- ------- ---------- ---------- ---------
Total
Deductions...... 278,247 259,493 230,817 283,722 261,831 267,194 1,354,740 1,277,552 1,168,713
-------- -------- ------- -------- -------- ------- ---------- ---------- ---------
Net Deposits from
Policyholders..... $596,074 69,053 415,143 239,057 459,664 484,080 1,503,802 1,497,701 2,038,628
======== ======== ======= ======== ======== ======= ========== ========== =========
<CAPTION>
Growth Division
----------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Total Gross
Deposits.......... 5,752,879 5,579,506 5,503,055
Surrenders and
Withdrawals....... (1,839,538) (2,433,049) (697,754)
Transfers Between
Funds and General
Account........... (340,651) (680,220) (587,547)
----------- ----------- ----------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers........ 3,572,690 2,466,237 4,217,754
Deductions:
Premium Expense
Charges.......... 148,049 142,991 139,376
Monthly Expense
Charges.......... 61,689 62,129 62,381
Cost of Insurance
and Optional
Benefits......... 1,538,874 1,396,187 1,313,170
----------- ----------- ----------
Total
Deductions...... 1,748,612 1,601,307 1,514,927
----------- ----------- ----------
Net Deposits from
Policyholders..... 1,824,078 864,930 2,702,827
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Global Growth
AAA-Rated Division Asset Allocation Division International Division Division
--------------------------- ------------------------------- ------------------------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997
-------- -------- ------- --------- --------- --------- --------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross
Deposits.......... $830,396 604,392 733,741 1,402,869 1,203,831 1,113,363 2,441,558 2,486,717 2,348,721 81,931 2,352
Surrenders and
Withdrawals....... (255,904) (253,307) (60,672) (286,876) (368,203) (136,639) (600,534) (825,714) (251,775) (26,996) (133)
Transfers Between
Funds and General
Account........... 151,445 17,632 17,632 (26,637) (92,300) (28,327) (907,398) (286,533) (25,778) 134,522 3,026
-------- -------- ------- --------- --------- --------- --------- --------- --------- ------- -----
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 725,937 368,717 456,816 1,089,356 743,328 948,397 933,626 1,374,470 2,071,168 189,457 5,245
Deductions:.......
Premium Expense
Charges.......... 21,369 15,489 18,583 36,102 30,852 28,198 62,833 63,729 59,486 2,108 60
Monthly Expense
Charges.......... 7,540 6,730 7,045 13,522 13,405 13,361 21,481 27,690 22,923 288 26
Cost of Insurance
and Optional
Benefits......... 188,093 187,902 206,980 337,321 309,733 277,207 535,864 560,795 475,124 7,183 (269)
-------- -------- ------- --------- --------- --------- --------- --------- --------- ------- -----
Total
Deductions...... 217,002 210,121 232,608 386,945 353,990 318,766 620,178 652,214 557,533 9,579 (183)
-------- -------- ------- --------- --------- --------- --------- --------- --------- ------- -----
Net Deposits from
Policyholders..... $508,935 158,596 224,208 702,411 389,338 629,631 313,448 722,256 1,513,635 179,878 5,428
======== ======== ======= ========= ========= ========= ========= ========= ========= ======= =====
<CAPTION>
Global Small
Capitalization
Bond Division Division
--------------- --------------
1998 1997 1998
-------- ------ --------------
<S> <C> <C> <C>
Total Gross
Deposits.......... 60,770 -- 16,691
Surrenders and
Withdrawals....... (21,833) -- (4,977)
Transfers Between
Funds and General
Account........... 122,776 64,725 48,497
-------- ------ --------------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 161,713 64,725 60,211
Deductions:.......
Premium Expense
Charges.......... 1,564 -- 430
Monthly Expense
Charges.......... 338 -- 28
Cost of Insurance
and Optional
Benefits......... 8,441 -- 702
-------- ------ --------------
Total
Deductions...... 10,343 -- 1,160
-------- ------ --------------
Net Deposits from
Policyholders..... 151,370 64,725 59,051
======== ====== ==============
</TABLE>
F-22
<PAGE>
PARAGON SEPARATE ACCOUNT A
SCHEDULE OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Number Market
of Shares Value Cost
--------- ----------- -----------
<S> <C> <C> <C>
American Variable Insurance Series:
Cash Management Division................... 196,177 $ 2,161,876 $ 2,199,305
High-Yield Bond Division................... 268,414 3,569,904 3,759,839
Growth-Income Division..................... 686,579 24,915,937 21,579,514
Growth Division............................ 703,936 36,907,343 28,377,830
U.S. Government/AAA-Rated Division......... 268,710 3,039,115 3,019,555
Asset Allocation Division.................. 436,824 6,801,348 6,053,712
International Division..................... 640,790 10,906,251 9,241,231
Global Growth Division..................... 16,217 216,014 193,766
Bond Fund.................................. 21,740 221,100 225,505
Global Small Capitalization................ 7,234 72,561 59,711
</TABLE>
See Accompanying Independent Auditor's Report.
F-23
<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%. In addition, 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 tables illustrate a Policy issued to an Insured, age 40, in a group that
is 75% male, 25% female and had 2,500 eligible employees. The tables show the
results for each of the possible sales charges under the Policies: assuming a
group contract determination under OBRA (1) if the sales charges are assumed to
be zero ("0"); and (2) if the sales charges are assumed to be a contingent
deferred sales charge of 30% and a premium expense charge of zero ("0"). In
each situation the monthly administrative charge is assumed to be $4.50 during
the first Policy Year and $2.00 in subsequent Policy Years. If a particular
Policy has different sales or administrative charges or if a particular group
is larger or smaller or has a different gender mix, the Cash Values, Cash
Surrender Values and Death Benefits would vary from those shown in the tables.
The illustrations reflect the deduction of a 2 percent premium tax charge.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
(except for the contingent deferred sales charge) and monthly charges for the
cost of insurance based on the guaranteed rate which 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 each of the
contingent deferred sales charges available under the Policies. The "Cash
Value" column under the "Current" heading shows the accumulated value of the
premiums paid reflecting deduction of the charges described above (except for
of the contingent deferred sales charge) and monthly charges for the cost of
insurance at the current level for a group that is 75 percent male, 25 percent
female, which is less than or equal to 125% of the maximum allowed by the 1980
Commissioners Standard Ordinary Mortality Table C. 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 each of the contingent deferred sales charges available
under the Policies. 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.
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 .530%, representing the average of the fees incurred in 1998 by
the Funds in which the Divisions invest (the actual investment advisory fee is
shown in the Fund prospectus) and a .030% charge that is an estimate of the
Funds' expenses based on the average of the actual expenses incurred in fiscal
year 1998. 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 -1.417%, 4.583%, and 10.583%, respectively.
The hypothetical values shown in the tables reflect all fees and charges
under the Policy, including the premium expense charge, the premium tax charge,
and all components of the monthly deduction. They do not reflect any charges
for federal income taxes against the Separate Account, since the Company is not
currently
A-1
<PAGE>
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.") Additionally, the
hypothetical values shown in the tables assume that the Policy for which values
are illustrated is not deemed an individual policy under OBRA, and therefore
the values do not reflect the additional 1% premium expense charge for the
Company's increased federal tax liabilities.
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, that no transfer charges were incurred, and
that no optional riders have been requested.
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, the proposed frequency of premium payments, and any
available riders requested.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $80,000 AGE: 40
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $1200.00
PREMIUM EXPENSE CHARGE: 0.00% (Monthly Premium:
CONTINGENT DEFERRED SALES CHARGE: 0.00% $100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 0.00% (NET RATE AT -1.460%)
-------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- ---------------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 827 $ 827 $80,000 $ 987 $ 987 $80,000
2 2,526 1,651 1,651 80,000 1,977 1,977 80,000
3 3,885 2,440 2,440 80,000 2,940 2,940 80,000
4 5,311 3,195 3,195 80,000 3,875 3,875 80,000
5 6,809 3,914 3,914 80,000 4,781 4,781 80,000
6 8,382 4,597 4,597 80,000 5,656 5,656 80,000
7 10,033 5,244 5,244 80,000 6,501 6,501 80,000
8 11,767 5,851 5,851 80,000 7,313 7,313 80,000
9 13,588 6,420 6,420 80,000 8,091 8,091 80,000
10 15,499 6,946 6,946 80,000 8,833 8,833 80,000
11 17,506 7,426 7,426 80,000 9,538 9,538 80,000
12 19,614 7,856 7,856 80,000 10,205 10,205 80,000
13 21,827 8,231 8,231 80,000 10,832 10,832 80,000
14 24,151 8,545 8,545 80,000 11,417 11,417 80,000
15 26,590 8,794 8,794 80,000 11,960 11,960 80,000
16 29,152 8,977 8,977 80,000 12,450 12,450 80,000
17 31,842 9,089 9,089 80,000 12,890 12,890 80,000
18 34,666 9,131 9,131 80,000 13,275 13,275 80,000
19 37,632 9,097 9,097 80,000 13,600 13,600 80,000
20 40,746 8,980 8,980 80,000 13,859 13,859 80,000
25 58,812 6,661 6,661 80,000 13,839 13,839 80,000
30 81,870 0 0 0 10,270 10,270 80,000
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $80,000 AGE: 40
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $1200.00
PREMIUM EXPENSE CHARGE: 0.00% (Monthly Premium:
CONTINGENT DEFERRED SALES CHARGE: 0.00% $100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 6.00% (NET RATE AT 4.540%)
----------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 854 $ 854 $80,000 $ 1,019 $ 1,019 $80,000
2 2,526 1,757 1,757 80,000 2,102 2,102 80,000
3 3,885 2,677 2,677 80,000 3,223 3,223 80,000
4 5,311 3,616 3,616 80,000 4,380 4,380 80,000
5 6,809 4,574 4,574 80,000 5,574 5,574 80,000
6 8,382 5,550 5,550 80,000 6,806 6,806 80,000
7 10,033 6,545 6,545 80,000 8,076 8,076 80,000
8 11,767 7,558 7,558 80,000 9,386 9,386 80,000
9 13,588 8,590 8,590 80,000 10,734 10,734 80,000
10 15,499 9,637 9,637 80,000 12,121 12,121 80,000
11 17,506 10,699 10,699 80,000 13,549 13,549 80,000
12 19,614 11,772 11,772 80,000 15,018 15,018 80,000
13 21,827 12,852 12,852 80,000 16,530 16,530 80,000
14 24,151 13,935 13,935 80,000 18,085 18,085 80,000
15 26,590 15,018 15,018 80,000 19,685 19,685 80,000
16 29,152 16,102 16,102 80,000 21,326 21,326 80,000
17 31,842 17,183 17,183 80,000 23,012 23,012 80,000
18 34,666 18,265 18,265 80,000 24,744 24,744 80,000
19 37,632 19,344 19,344 80,000 26,521 26,521 80,000
20 40,746 20,416 20,416 80,000 28,344 28,344 80,000
25 58,812 25,368 25,368 80,000 38,117 38,117 80,000
30 81,870 28,625 28,625 80,000 49,071 49,071 80,000
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $80,000 AGE: 40
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 0.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 12.00% (NET RATE at 10.540%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH CASH
at SURR CASH DEATH SURR CASH DEATH
YR 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 881 $ 881 $ 80,000 $ 1,051 $ 1,051 $ 80,000
2 2,526 1,864 1,864 80,000 2,231 2,231 80,000
3 3,885 2,928 2,928 80,000 3,523 3,523 80,000
4 5,311 4,081 4,081 80,000 4,938 4,938 80,000
5 6,809 5,332 5,332 80,000 6,486 6,486 80,000
6 8,382 6,692 6,692 80,000 8,182 8,182 80,000
7 10,033 8,172 8,172 80,000 10,041 10,041 80,000
8 11,767 9,784 9,784 80,000 12,079 12,079 80,000
9 13,588 11,543 11,543 80,000 14,314 14,314 80,000
10 15,499 13,463 13,463 80,000 16,768 16,768 80,000
11 17,506 15,561 15,561 80,000 19,464 19,464 80,000
12 19,614 17,855 17,855 80,000 22,430 22,430 80,000
13 21,827 20,364 20,364 80,000 25,696 25,696 80,000
14 24,151 23,113 23,113 80,000 29,296 29,296 80,000
15 26,590 26,129 26,129 80,000 33,271 33,271 80,000
16 29,152 29,449 29,449 80,000 37,660 37,660 80,000
17 31,842 33,111 33,111 80,000 42,516 42,516 80,000
18 34,666 37,164 37,164 80,000 47,898 47,898 80,000
19 37,632 41,660 41,660 80,000 53,871 53,871 80,000
20 40,746 46,660 46,660 80,000 60,513 60,513 81,088
25 58,812 81,664 81,664 99,631 105,503 105,503 128,714
30 81,870 138,411 138,411 160,557 177,815 177,815 206,266
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $80,000 AGE: 40
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 30.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 0.00% (NET RATE AT -1.460%)
-------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- ---------------------------------
PREM CASH CASH
AT SURR CASH DEATH SURR CASH DEATH
YR 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- ------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 467 $ 827 $80,000 $ 627 $ 987 $80,000
2 2,526 1,327 1,651 80,000 1,653 1,977 80,000
3 3,885 2,152 2,440 80,000 2,652 2,940 80,000
4 5,311 2,943 3,195 80,000 3,623 3,875 80,000
5 6,809 3,698 3,914 80,000 4,565 4,781 80,000
6 8,382 4,417 4,597 80,000 5,476 5,656 80,000
7 10,033 5,100 5,244 80,000 6,357 6,501 80,000
8 11,767 5,743 5,851 80,000 7,205 7,313 80,000
9 13,588 6,348 6,420 80,000 8,019 8,091 80,000
10 15,499 6,910 6,946 80,000 8,797 8,833 80,000
11 17,506 7,426 7,426 80,000 9,538 9,538 80,000
12 19,614 7,856 7,856 80,000 10,205 10,205 80,000
13 21,827 8,231 8,231 80,000 10,832 10,832 80,000
14 24,151 8,545 8,545 80,000 11,417 11,417 80,000
15 26,590 8,794 8,794 80,000 11,960 11,960 80,000
16 29,152 8,977 8,977 80,000 12,450 12,450 80,000
17 31,842 9,089 9,089 80,000 12,890 12,890 80,000
18 34,666 9,131 9,131 80,000 13,275 13,375 80,000
19 37,632 9,097 9,097 80,000 13,600 13,600 80,000
20 40,746 8,980 8,980 80,000 13,859 13,859 80,000
25 58,812 6,661 6,661 80,000 13,839 13,839 80,000
30 81,870 0 0 0 10,207 10,270 80,000
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $80,000 AGE: 40
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 2.50% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 25.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 6.00% (NET RATE AT 4.540%)
----------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 494 $ 854 $80,000 $ 659 $ 1,019 $80,000
2 2,526 1,433 1,757 80,000 1,778 2,102 80,000
3 3,885 2,389 2,677 80,000 2,935 3,223 80,000
4 5,311 3,364 3,616 80,000 4,128 4,380 80,000
5 6,809 4,358 4,574 80,000 5,358 5,574 80,000
6 8,382 5,370 5,550 80,000 6,626 6,806 80,000
7 10,033 6,401 6,545 80,000 7,932 8,076 80,000
8 11,767 7,450 7,558 80,000 9,278 9,386 80,000
9 13,588 8,518 8,590 80,000 10,662 10,734 80,000
10 15,499 9,601 9,637 80,000 12,085 12,121 80,000
11 17,506 10,699 10,699 80,000 13,549 13,549 80,000
12 19,614 11,772 11,772 80,000 15,018 15,018 80,000
13 21,827 12,852 12,852 80,000 16,530 16,530 80,000
14 24,151 13,935 13,935 80,000 18,085 18,085 80,000
15 26,590 15,018 15,018 80,000 19,685 19,685 80,000
16 29,152 16,102 16,102 80,000 21,326 21,326 80,000
17 31,842 17,183 17,183 80,000 23,012 23,012 80,000
18 34,666 18,265 18,265 80,000 24,744 24,744 80,000
19 37,632 19,344 19,344 80,000 26,521 26,521 80,000
20 40,746 20,416 20,416 80,000 28,344 28,344 80,000
25 58,812 25,368 25,368 80,000 38,117 38,117 80,000
30 81,870 28,625 28,625 80,000 49,071 49,071 80,000
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-7
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $80,000 AGE: 40
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 30.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 12.00% (NET RATE AT 10.540%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH CASH
AT SURR CASH DEATH SURR CASH DEATH
YR 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 521 $ 881 $ 80,000 $ 691 $ 1,051 $ 80,000
2 2,526 1,540 1,864 80,000 1,907 2,231 80,000
3 3,885 2,640 2,928 80,000 3,235 3,523 80,000
4 5,311 3,829 4,081 80,000 4,686 4,938 80,000
5 6,809 5,116 5,332 80,000 6,270 6,486 80,000
6 8,382 6,512 6,692 80,000 8,002 8,182 80,000
7 10,033 8,028 8,172 80,000 9,897 10,041 80,000
8 11,767 9,676 9,784 80,000 11,971 12,079 80,000
9 13,588 11,471 11,543 80,000 14,242 14,314 80,000
10 15,499 13,427 13,463 80,000 16,732 16,768 80,000
11 17,506 15,561 15,561 80,000 19,464 19,464 80,000
12 19,614 17,855 17,855 80,000 22,430 22,430 80,000
13 21,827 20,364 20,364 80,000 25,696 25,696 80,000
14 24,151 23,113 23,113 80,000 29,296 29,296 80,000
15 26,590 26,129 26,129 80,000 33,271 33,271 80,000
16 29,152 29,449 29,449 80,000 37,660 37,660 80,000
17 31,842 33,111 33,111 80,000 42,516 42,516 80,000
18 34,666 37,164 37,164 80,000 47,898 47,898 80,000
19 37,632 41,660 41,660 80,000 53,871 53,871 80,000
20 40,746 46,660 46,660 80,000 60,513 60,513 81,088
25 58,812 81,664 81,664 99,631 105,503 105,503 128,714
30 81,870 138,411 138,411 160,557 177,815 177,815 206,266
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-8
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $38,000 AGE: 40
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 0.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 0.00% (NET RATE AT -1.460%)
----------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 977 $ 977 $38,977 $ 1,053 $ 1,053 $39,053
2 2,526 1,957 1,957 39,957 2,113 2,113 40,113
3 3,885 2,910 2,910 40,910 3,151 3,151 41,153
4 5,311 3,837 3,837 41,837 4,166 4,166 42,166
5 6,809 4,737 4,737 42,737 5,158 5,158 43,158
6 8,382 5,608 5,608 43,608 6,125 6,125 44,125
7 10,033 6,452 6,452 44,452 7,067 7,067 45,067
8 11,767 7,266 7,266 45,266 7,984 7,984 45,984
9 13,588 8,051 8,051 46,051 8,875 8,875 46,875
10 15,499 8,805 8,805 46,805 9,738 9,738 47,738
11 17,506 9,526 9,526 47,526 10,573 10,573 48,573
12 19,614 10,213 10,213 48,213 11,379 11,379 49,379
13 21,827 10,862 10,862 48,862 12,155 12,155 50,155
14 24,151 11,470 11,470 49,470 12,899 12,899 50,899
15 26,590 12,035 12,035 50,035 13,613 13,613 51,613
16 29,152 12,558 12,558 50,558 14,289 14,289 52,289
17 31,842 13,035 13,035 51,035 14,929 14,929 52,929
18 34,666 13,468 13,468 51,468 15,530 15,530 53,530
19 37,632 13,855 13,855 51,855 16,090 16,090 54,090
20 40,746 14,192 14,192 52,192 16,605 16,605 54,605
25 58,812 14,917 14,917 52,917 18,334 18,334 56,334
30 81,870 13,458 13,458 51,458 18,015 18,015 56,015
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-9
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $38,000 AGE: 40
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 0.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 6.00% (NET RATE AT 4.540%)
----------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 1,008 $ 1,008 $39,008 $ 1,087 $ 1,087 $39,087
2 2,526 2,081 2,081 40,081 2,247 2,247 40,247
3 3,885 3,190 3,190 41,190 3,453 3,453 41,453
4 5,311 4,335 4,335 42,335 4,706 4,706 42,706
5 6,809 5,519 5,519 43,519 6,006 6,006 44,006
6 8,382 6,741 6,741 44,741 7,355 7,355 45,355
7 10,033 8,002 8,002 46,002 8,754 8,754 46,754
8 11,767 9,304 9,304 47,304 10,205 10,205 48,205
9 13,588 10,647 10,647 48,647 11,708 11,708 49,708
10 15,499 12,030 12,030 50,030 13,265 13,265 51,265
11 17,506 13,454 13,454 51,454 14,876 14,876 52,876
12 19,614 14,918 14,918 52,918 16,543 16,543 54,543
13 21,827 16,419 16,419 54,419 18,267 18,267 56,267
14 24,151 17,956 17,956 55,956 20,049 20,049 58,049
15 26,590 19,528 19,528 57,528 21,891 21,891 59,891
16 29,152 21,137 21,137 59,137 23,789 23,789 61,789
17 31,842 22,779 22,779 60,779 25,745 25,745 63,745
18 34,666 24,457 24,457 62,457 27,760 27,760 65,760
19 37,632 26,171 26,171 64,171 29,833 29,833 67,833
20 40,746 27,917 27,917 65,917 31,963 31,963 69,963
25 58,812 36,926 36,926 74,926 43,332 43,332 81,332
30 81,870 45,727 45,727 83,727 55,336 55,336 93,336
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-10
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $38,000 AGE: 40
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 0.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 12.00% (NET RATE AT 10.540%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- ------------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- ------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 1,040 $ 1,040 $ 39,040 $ 1,121 $ 1,121 $39,121
2 2,526 2,208 2,208 40,208 2,384 2,384 40,384
3 3,885 3,487 3,487 41,487 3,774 3,774 41,774
4 5,311 4,886 4,886 42,886 5,301 5,301 43,301
5 6,809 6,418 6,418 44,418 6,980 6,980 44,980
6 8,382 8,096 8,096 46,096 8,825 8,825 46,825
7 10,033 9,935 9,935 47,935 10,854 10,854 48,854
8 11,767 11,950 11,950 49,950 13,085 13,085 51,085
9 13,588 14,158 14,158 52,158 15,536 15,536 53,536
10 15,499 16,578 16,578 54,578 18,230 18,230 56,230
11 17,506 19,231 19,231 57,231 21,192 21,192 59,192
12 19,614 22,137 22,137 60,137 24,449 24,449 62,449
13 21,827 25,320 25,320 63,320 28,029 28,029 66,029
14 24,151 28,806 28,806 66,806 31,966 31,966 69,966
15 26,590 32,623 32,623 70,623 36,295 36,295 74,295
16 29,152 36,806 36,806 74,806 41,053 41,053 79,053
17 31,842 41,390 41,390 79,390 46,285 46,285 84,285
18 34,666 46,418 46,418 84,418 52,037 52,037 90,037
19 37,632 51,934 51,934 89,934 58,360 58,360 96,360
20 40,746 58,985 58,985 95,985 65,312 65,312 103,312
25 58,812 98,181 98,181 136,181 111,828 111,828 149,828
30 81,870 161,746 161,746 199,746 186,139 186,139 224,139
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-11
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $38,000 AGE: 40
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 30.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 0.00% (NET RATE AT -1.460%)
----------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 617 $ 977 $38,977 $ 693 $ 1,053 $39,053
2 2,526 1,633 1,957 39,957 1,789 2,113 40,113
3 3,885 2,622 2,910 40,910 2,863 3,151 41,151
4 5,311 3,585 3,837 41,837 3,914 4,166 42,166
5 6,809 4,521 4,737 42,737 4,942 5,158 43,158
6 8,382 5,428 5,608 43,608 5,945 6,125 44,125
7 10,033 6,308 6,452 44,452 6,923 7,067 45,067
8 11,767 7,158 7,266 45,266 7,876 7,984 45,984
9 13,588 7,979 8,051 46,051 8,803 8,875 46,875
10 15,499 8,769 8,805 46,805 9,702 9,738 47,738
11 17,506 9,526 9,526 47,526 10,573 10,573 48,573
12 19,614 10,213 10,213 48,213 11,379 11,379 49,379
13 21,827 10,862 10,862 48,862 12,155 12,155 50,155
14 24,151 11,470 11,470 49,470 12,899 12,899 50,899
15 26,590 12,035 12,035 50,035 13,613 13,613 51,613
16 29,152 12,558 12,558 50,558 14,289 14,289 52,289
17 31,842 13,035 13,035 51,035 14,929 14,929 52,929
18 34,666 13,468 13,468 51,468 15,530 15,530 53,530
19 37,632 13,855 13,855 51,855 16,090 16,090 54,090
20 40,746 14,192 14,192 52,192 16,605 16,605 54,605
25 58,812 14,917 14,917 52,917 18,334 18,334 56,334
30 81,870 13,458 13,458 51,458 18,105 18,015 56,015
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-12
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $38,000 AGE: 40
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 30.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 6.00% (NET RATE AT 4.540%)
----------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH CASH
PREM SURR CASH DEATH SURR CASH DEATH
YR AT 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 648 $ 1,008 $39,008 $ 727 $ 1,087 $39,087
2 2,526 1,757 2,081 40,081 1,923 2,247 40,247
3 3,885 2,902 3,190 41,190 3,165 3,453 41,453
4 5,311 4,083 4,335 42,335 4,454 4,706 42,706
5 6,809 5,303 5,519 43,519 5,790 6,006 44,006
6 8,382 6,561 6,741 44,741 7,175 7,355 45,355
7 10,033 7,858 8,002 46,002 8,610 8,754 46,754
8 11,767 9,196 9,304 47,304 10,097 10,205 48,205
9 13,588 10,575 10,647 48,647 11,636 11,708 49,708
10 15,499 11,994 12,030 50,030 13,229 13,265 51,265
11 17,506 13,454 13,454 51,454 14,876 14,876 52,876
12 19,614 14,918 14,918 52,918 16,543 16,543 54,543
13 21,827 16,419 16,419 54,419 18,267 18,267 56,267
14 24,151 17,956 17,956 55,956 20,049 20,049 58,049
15 26,590 19,528 19,528 57,528 21,891 21,891 59,891
16 29,152 21,137 21,137 59,137 23,789 23,789 61,789
17 31,842 22,779 22,779 60,779 25,745 25,745 63,745
18 34,666 24,457 24,457 62,457 27,760 27,760 65,760
19 37,632 26,171 26,171 64,171 29,833 29,833 67,833
20 40,746 27,917 27,917 65,917 31,963 31,963 69,963
25 58,812 36,926 36,926 74,926 43,332 43,332 81,332
30 81,870 45,727 45,727 83,727 55,336 55,336 93,336
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-13
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $38,000 AGE: 40
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 0.00% $1,200.00
CONTINGENT DEFERRED SALES CHARGE: 30.00% (Monthly Premium:
$100.00)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT A--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN AT 12.00% (NET RATE AT 10.540%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH CASH
AT SURR CASH DEATH SURR CASH DEATH
YR 5.00% VALUE VALUE BENEFIT VALUE VALUE BENEFIT
--- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,232 $ 680 $ 1,040 $ 39,040 $ 761 $ 1,121 $ 39,121
2 2,526 1,884 2,208 40,208 2,060 2,384 40,384
3 3,885 3,199 3,487 41,487 3,486 3,774 41,774
4 5,311 4,634 4,886 42,886 5,049 5,301 43,301
5 6,809 6,202 6,418 44,418 6,764 6,980 44,980
6 8,382 7,916 8,096 46,096 8,645 8,825 46,825
7 10,033 9,791 9,935 47,935 10,710 10,854 48,854
8 11,767 11,842 11,950 49,950 12,977 13,085 51,085
9 13,588 14,086 14,158 52,158 15,464 15,536 53,536
10 15,499 16,542 16,578 54,578 18,194 18,230 56,230
11 17,506 19,231 19,231 57,231 21,192 21,192 59,192
12 19,614 22,137 22,137 60,137 24,449 24,449 62,449
13 21,827 25,320 25,320 63,320 28,029 28,029 66,029
14 24,151 28,806 28,806 66,806 31,966 31,966 69,966
15 26,590 32,623 32,623 70,623 36,295 36,295 74,295
16 29,152 36,806 36,806 74,806 41,053 41,053 79,053
17 31,842 41,390 41,390 79,390 46,285 46,285 84,285
18 34,666 46,418 46,418 84,418 52,037 52,037 90,037
19 37,632 51,934 51,934 89,934 58,360 58,360 96,360
20 40,746 57,985 57,985 95,985 65,312 65,312 103,312
25 58,812 98,181 98,181 136,181 111,828 111,828 149,828
30 81,870 161,746 161,746 199,746 186,139 186,139 224,139
</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 Policy
Owner, and the investment results for the Funds. 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, the
investment management company, 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 any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy Indebtedness outstanding.
A-14
<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 provides: "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 persons 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>
REPRESENTATION CONCERNING FEES AND CHARGES
Paragon Life Insurance Company hereby represents that the fees and charges
deducted under the terms of the Contract are, in the aggregate, reasonable in
relationship to the services rendered, the expenses expected, and the risks
assumed by Paragon.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The facing sheet.
The Prospectus consisting of 84 pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484.
Representation concerning fees and charges.
The signatures.
The following exhibits:
1. The following exhibits correspond to those required by 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) Not applicable.
(3) (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
(b) Proposed form of Individual Policy and Policy Riders. 3
(c) Proposed form of Certificate and Certificate Riders. 3
(6) (a) Amended Charter and Articles of Incorporation of the Company. 2
(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. 1
II-3
<PAGE>
(b) Form of Application for Employee Insurance Guaranteed Issue
(Group Contract). 1
(c) Form of Application for Employee Insurance (Simplified Issue)
(Group Contract). 1
(d) Form of Application for Spouse Insurance (Group Contracts). 1
(e) Form of Application for Employee Insurance Guaranteed Issue
(Individual Policy). 1
(f) Form of Application for Employee Insurance (Simplified Issue)
(Individual Policy). 1
(g) Proposed Form of Application for Spouse Insurance (Individual
Policy). 1
(h) Proposed Form of Application Supplement. 2
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.
(l) See above.
(2) See Exhibit l(5).
(3) Opinion and Consent of Matthew P. McCauley, Esquire, General Counsel
of Paragon Life Insurance Company. 4
(4) No financial statements are omitted from the Prospectus pursuant to
Instruction l(b) or (c) of Part I.
(5) Not applicable.
4. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive Vice
President and Chief Actuary. 6
5. The consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants. 6
6. Written consent of Sutherland, Asbill & Brennan LLP. 6
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. 2, 5
II-4
<PAGE>
1 Incorporated by reference to the Registration Statement File No. 33-l834l.
2 Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement, File No. 33-l834l, Filed March 18, 1988.
3 Riders only are incorporated by reference to the Registration Statement,
33-l834l. Revised policy forms are incorporated by reference to the Pre-
Effective Amendment No. l to Registration Statement, File No. 33-l834l.
4 Incorporated by reference to Post-effective Amendment No. l to the
Registration Statement, File No. 33-l834l.
5 Incorporated by reference to Post-Effective Amendment No. 8 to the
Registration Statement, File 33-18341.
6 Filed herewith.
II-5
<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 of the requirements for effectiveness of this amended
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
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 30th day of April, 1999.
(Seal) PARAGON LIFE INSURANCE COMPANY
Attest:/s/ By: /s/
---------------- -------------------------
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/ 4/30/99
--------------
Carl H. Anderson President and Director
(Chief Executive Officer)
/s/ 4/30/99
--------------
Matthew K. Duffy Vice President
and Chief Financial
Officer (Principal
Accounting Officer and
Principal Financial Officer)
- -----------------
Warren J. Winer* Director
- -----------------
Richard A. Liddy* Director
/s/ 4/30/99
--------------
Matthew P. McCauley Vice President,
General Counsel,
Secretary, and Director
II-6
<PAGE>
Signature Title Date
/s/ 4/30/99
- ----------------------
Craig K. Nordyke Director
- ----------------------
Leonard M. Rubenstein* Director
- ----------------------
E. Thomas Hughes, Jr.* Director and Treasurer
- ----------------------
Bernard H. Wolzenski* Director
- ----------------------
A. Greig Woodring* Director
By:/s/ 4/30/99
----------------
Craig K. Nordyke
*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.
II-7
33-18341
<PAGE>
EXHIBIT INDEX
4. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive Vice
President and Chief Actuary.
5. Written consent of KPMG LLP, Independent Certified Public Accountants.
6. Written consent of Sutherland, Asbill, & Brennan LLP.
<PAGE>
Exhibit 4
OPINION AND CONSENT OF CRAIG K. NORDYKE, F.S.A., M.A.A.A.,
EXECUTIVE VICE PRESIDENT AND CHIEF ACTUARY
<PAGE>
RE: 33-18341
Gentlemen:
In my capacity as Executive Vice President and Chief Actuary of 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 illustrations 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 40
in the rate class illustrated than to prospective purchasers of Policies
at other ages.
2. 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. 11 to the Registration Statement and to the use of my
name under the heading "Experts" in the prospectus.
/s/
Craig K. Nordyke, FSA, MAAA
Executive Vice President and Chief Actuary
<PAGE>
Exhibit 5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
<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 to our
firm under the heading "Experts" in the Registration Statement and Prospectus
of Separate Account A of Paragon Life Insurance Company.
KPMG LLP
St. Louis, Missouri
April 30, 1999
<PAGE>
Exhibit 6
WRITTEN CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
<PAGE>
April 30, 1999
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. 11 to
the registration statement on Form S-6 for Separate Account A of Paragon Life
Insurance Company (File No. 33-18341). 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 LLP
By: /s/
-------------------------
Stephen E. Roth
