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PROSPECTUS
NOVEMBER 17, 1997
RATEMAX (SM)
SINGLE PREMIUM MODIFIED GUARANTEED ANNUITY CONTRACT
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
Home Office: Little Rock, Arkansas 72201
Service Center: P.O. Box 44222, Jacksonville, Florida 32231-4222
4804 Deer Lake Drive East, Jacksonville, Florida 32246
Phone: (800) 535-5549
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
The contract described in this Prospectus (the "Contract") is issued by Merrill
Lynch Life Insurance Company ("Merrill Lynch Life") and is designed to provide
annuity payments in connection with retirement plans that may or may not qualify
for special federal income tax treatment under the Internal Revenue Code. The
Contract permits owners to make a single premium payment to be accumulated at a
guaranteed rate or rates of interest depending upon the guarantee period or
periods selected by the owner. Guarantee periods of three and five years are
currently available. At the end of any guarantee period, the subaccount value
may be reinvested for one or more new guarantee periods at the interest rates
then offered by Merrill Lynch Life. A WITHDRAWAL MADE PRIOR TO THE END OF A
GUARANTEE PERIOD WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT, WHICH COULD HAVE
THE EFFECT OF EITHER INCREASING OR DECREASING THE OWNER'S ACCOUNT VALUE, AND A
WITHDRAWAL CHARGE. AS A GENERAL RULE, IF INTEREST RATES GO UP, THE MARKET VALUE
ADJUSTMENT WILL OPERATE TO DECREASE SUBACCOUNT VALUE; IF INTEREST RATES GO DOWN,
THE MARKET VALUE ADJUSTMENT WILL OPERATE TO INCREASE SUBACCOUNT VALUE.
THE PURCHASE OF THIS CONTRACT INVOLVES CERTAIN RISKS. BECAUSE IT IS A MODIFIED
GUARANTEED ANNUITY, THE CONTRACT IS SUBJECT TO A MARKET VALUE ADJUSTMENT IF,
PRIOR TO THE END OF A SELECTED GUARANTEE PERIOD, FUNDS ARE WITHDRAWN OR THE
CONTRACT IS SURRENDERED, THE CONTRACT IS ANNUITIZED, OR A DEATH BENEFIT BECOMES
PAYABLE. EXCEPT IN CONNECTION WITH PAYMENT OF A DEATH BENEFIT, A MARKET VALUE
ADJUSTMENT COULD HAVE THE EFFECT OF DECREASING THE ACCOUNT VALUE. THEREFORE,
UNDER ANY OF THE CONDITIONS DESCRIBED ABOVE, OWNERS COULD LOSE A SUBSTANTIAL
PORTION OF THE MONEY THEY HAVE INVESTED. PROSPECTIVE INVESTORS SHOULD CONSIDER
THEIR INCOME NEEDS BEFORE PURCHASING A CONTRACT.
ALL WITHDRAWALS FROM AND SURRENDERS OF A CONTRACT ARE SUBJECT TO INCOME TAX, AND
IF TAKEN BEFORE AGE 59 1/2, MAY ALSO BE SUBJECT TO A 10% FEDERAL PENALTY TAX.
OWNERS SHOULD NOTE THAT THIS IS AN INTEGRATED ANNUITY CONTRACT FOR INTERNAL
REVENUE CODE PURPOSES. THEREFORE, IN DETERMINING THE EXTENT TO WHICH A
WITHDRAWAL IS SUBJECT TO TAX, THE ENTIRE ACCOUNT VALUE, NOT JUST THE VALUE OF
THE SUBACCOUNT FROM WHICH THE WITHDRAWAL IS MADE, WILL BE TAKEN INTO
CONSIDERATION.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Merrill Lynch Life's Annual Report on Form 10-K for the year ended December 31,
1996, and its Quarterly Reports on Form 10-Q for the periods ended March 31,
1997, June 30, 1997, and September 30, 1997, are incorporated herein by
reference.
All documents or reports filed by Merrill Lynch Life pursuant to Section 13(a),
13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") after the date hereof and prior to the termination of the
offering of the securities offered hereby shall be deemed to be incorporated by
reference in this prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
and superseded, to constitute a part of this prospectus. Merrill Lynch Life
files its Exchange Act documents and reports, including its annual and quarterly
reports on Form 10-K and Form 10-Q, electronically pursuant to EDGAR under CIK
No. 0000845091. The SEC maintains a web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the SEC. The address of the site is http://www.sec.gov.
Merrill Lynch Life will provide without charge to each person to whom this
prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than exhibits not specifically incorporated by reference into the text of such
documents). Requests for such documents should be directed to Merrill Lynch
Life's Service Center.
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS............................................................................. 4
CAPSULE SUMMARY OF THE CONTRACT......................................................... 5
MERRILL LYNCH LIFE INSURANCE COMPANY.................................................... 7
DESCRIPTION OF THE CONTRACT............................................................. 7
A. GENERAL........................................................................ 7
B. PREMIUMS....................................................................... 7
C. SELECTING THE GUARANTEE PERIOD................................................. 7
D. SUBACCOUNT AND ACCOUNT VALUES.................................................. 8
E. SUBACCOUNT TRANSFERS........................................................... 8
F. DETERMINING GUARANTEED INTEREST RATES.......................................... 8
G. WITHDRAWALS.................................................................... 9
H. MARKET VALUE ADJUSTMENT........................................................ 9
I. WITHDRAWAL CHARGE.............................................................. 10
J. PAYMENT ON DEATH............................................................... 11
K. ANNUITY PROVISIONS............................................................. 12
L. OTHER PROVISIONS............................................................... 13
DISTRIBUTION OF THE CONTRACTS........................................................... 14
FEDERAL TAX CONSIDERATIONS.............................................................. 15
PREMIUM TAXES........................................................................... 19
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS.............................. 19
LEGAL PROCEEDINGS....................................................................... 19
LEGAL MATTERS........................................................................... 20
EXPERTS................................................................................. 20
REGISTRATION STATEMENT.................................................................. 20
APPENDIX A.............................................................................. A-1
APPENDIX B.............................................................................. B-1
</TABLE>
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No person has been authorized to give any information or to make any
representation other than that contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any Contracts thereunder offered by this Prospectus in any jurisdiction
to anyone to whom it is unlawful to make such an offer or solicitation in such
jurisdiction.
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DEFINITIONS
account value: The sum of all subaccount values.
annuitant: The person whose age determines when the Contract must be
annuitized, and for certain life annuity options, when payments stop.
annuity date: The date on which annuity payments under the Contract will
commence.
beneficiary: The person to whom payment is to be made upon the death of the
owner.
business day: A day that Merrill Lynch Life is open for business.
Contract: The Contract described in and offered by this Prospectus.
contract anniversary: Each anniversary of the issue date.
contract year: The year starting on the issue date or a contract anniversary
and ending on the day immediately prior to the next contract anniversary.
guarantee period: The period of years for which a rate of interest is
guaranteed to be credited to a subaccount.
issue date: The date on which a Contract is issued.
market value adjustment: A positive or negative adjustment made to subaccount
value. It is applied on withdrawal of all or part of the subaccount value prior
to the end of the guarantee period. If the annuity date is prior to the end of a
guarantee period, the market value adjustment is also applied upon
annuitization. In addition, a market value adjustment is applied in the event of
payment on the death of the owner prior to the annuity date, unless the combined
market value adjustments of all affected subaccounts would reduce the account
value. (See "Market Value Adjustment.")
MVA interest rates: The interest rates used in the calculation of any market
value adjustment. (See "Market Value Adjustment.")
net account value: The sum of all net subaccount values.
net subaccount value: The subaccount value after adjustment for any market
value adjustment and withdrawal charge applied in connection with a withdrawal,
annuitization, or the payment of death benefits on the death of the owner prior
to the annuity date.
nonqualified contract: A Contract issued in connection with a nonqualified
plan.
nonqualified plan: A retirement plan other than a qualified plan.
owner: The individual to whom a Contract has been issued and who is entitled to
exercise all rights under the Contract.
qualified contract: A Contract issued in connection with a qualified plan.
qualified plan: A retirement plan that receives favorable tax treatment under
Section 401, 403, 404, 408, 457, or any similar provision of the Internal
Revenue Code.
renewal date: The contract anniversary immediately following the last day of
the guarantee period of a subaccount.
subaccount: An account maintained for an owner corresponding to a specified
interest rate and guarantee period selected by the owner.
subaccount value: An amount equal to that part of a single premium or account
value allocated or transferred to a subaccount, plus credited interest, as
adjusted for any prior withdrawals, market value adjustments, and withdrawal
charges.
withdrawal charge: A charge deducted from the subaccount value upon a
withdrawal made prior to the end of a guarantee period.
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CAPSULE SUMMARY OF THE CONTRACT
THE CONTRACT
This Prospectus describes a single premium modified guaranteed annuity contract
(the "Contract") issued by Merrill Lynch Life. Values and benefits provided
under the Contract, including annuity payments, are funded by the general
account assets of Merrill Lynch Life.
The Contract may be issued pursuant to nonqualified retirement plans or plans
qualifying for special tax treatment as Individual Retirement Annuities or
Individual Retirement Accounts ("IRAs") or Simplified Employee Pensions
("SEPs").
APPLICATION AND PREMIUMS
To apply for a contract, an applicant must provide certain information to a
Merrill Lynch Life Financial Consultant for submission to Merrill Lynch Life. In
certain circumstances, an applicant may be required to complete and return a
written Contract application. Merrill Lynch Life reserves the right to reject
any application. The minimum single premium is $25,000.
THE SUBACCOUNTS
One or more subaccounts are maintained for each owner. The minimum which may be
allocated to a subaccount is $5,000. A subaccount is established for each
specified guaranteed interest rate and guarantee period selected by the owner. A
guarantee period is the period of years for which a rate of interest is
guaranteed. Currently, the owner may select guarantee periods of three and five
years (a one year guarantee period is also available at renewal only). Merrill
Lynch Life, at its discretion, may offer additional guarantee periods not to
exceed ten years.
On the renewal date, the subaccount value for a maturing subaccount will be
transferred to one or more subaccounts designated by the owner. If Merrill Lynch
Life does not receive timely notice from the owner designating the subaccounts
to which the subaccount value is to be transferred, the subaccount value will be
transferred automatically to a subaccount with a one year guarantee period.
Under current administrative policy, Merrill Lynch Life provides owners with a
five business day period after the renewal date to designate the subaccount or
subaccounts to which subaccount value is to be transferred. Subaccount values
may not be transferred to another subaccount in full or in part prior to the end
of the guarantee period.
CHARGES
Merrill Lynch Life makes no deductions from each single premium. Except for the
market value adjustment described below, the only charge made is a withdrawal
charge in the event all or part of a net subaccount value is withdrawn. However,
no withdrawal charge is made for a withdrawal at the end of a guarantee period
if Merrill Lynch Life receives written notice of the withdrawal prior to (or,
under current administrative policy, within five business days after) the
renewal date. The withdrawal charge is equal to the withdrawal rate of six
percent multiplied by the amount of the withdrawal being taken from a subaccount
(if part of net subaccount value is withdrawn), or the net subaccount value
multiplied by the withdrawal charge rate (if the contract is being surrendered).
No withdrawal charge is imposed in the event of payment upon the death of the
owner or, currently, upon annuitization. Premium taxes, if any, will be deducted
from the net account value at the annuity date. In those jurisdictions that do
not allow an insurance company to reduce its current taxable premium income by
the amount of any withdrawal, surrender, or death benefit paid, Merrill Lynch
Life will also deduct a charge for these taxes on any withdrawal, surrender, or
death benefit effected under a Contract.
MARKET VALUE ADJUSTMENT
A market value adjustment is applied to any withdrawal from a subaccount prior
to the end of its guarantee period. It will also be applied upon annuitization
if the annuity date is prior to the end of the guarantee period for that
subaccount. In addition, a market value adjustment will be applied in the event
of payment upon the
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death of the owner prior to the annuity date, unless the combined effect of the
market value adjustments of all affected subaccounts would reduce the account
value. The amount of the market value adjustment is determined in accordance
with the formula set forth on page 9 and may be positive or negative.
ANNUITY PAYMENTS
Annuity payments will start on the annuity date. For nonqualified contracts, at
issue, the annuity date is the date of the annuitant's 85th birthday and the
annuity payment option is a life annuity with a 10 year guarantee. For qualified
contracts, at issue, the annuity date is the date the annuitant attains age
70 1/2 and the payment option is a life annuity with a 10 year guarantee. AN
OWNER MAY CHANGE THE ANNUITY PAYMENT OPTION OR THE ANNUITY DATE AT ANY TIME
PRIOR TO ANNUITIZATION.
On the annuity date, the net account value, less any applicable premium taxes,
is multiplied by Merrill Lynch Life's then current annuity purchase rates to
determine the amount of annuity payments. Currently, withdrawal charges do not
apply upon annuitization. However, Merrill Lynch Life reserves the right to
apply the withdrawal charge to any subaccount on annuitization if the annuity
date is prior to the end of the guarantee period for that subaccount. The net
account value is the sum of all net subaccount values. In determining net
subaccount value, a market value adjustment will be applied if the annuity date
is prior to the end of the guarantee period for that subaccount. If the net
account value on the annuity date is less than $5,000, Merrill Lynch Life may
pay the net account value in a lump sum in lieu of annuity payments. For tax
consequences of a lump sum payment, see "Federal Tax Considerations--Partial
Withdrawals and Surrenders." If any annuity payment would be less than $50,
Merrill Lynch Life may change the frequency of payments to intervals that will
result in payments of at least $50.
PAYMENT ON DEATH
If an owner dies prior to the annuity date, Merrill Lynch Life will pay to the
beneficiary the account value plus any positive market value adjustment as of
the date of payment. If the annuitant dies prior to the annuity date and the
owner is not the annuitant, the owner may designate a new annuitant.
If the annuitant dies after the annuity date and the annuitant is not also the
owner, the owner may choose either to have any unpaid guaranteed amounts
remaining continue to be paid for the amount or period guaranteed or to receive
the present value of the remaining guaranteed payments in a lump sum. If an
owner dies after the annuity date and while guaranteed amounts remain unpaid,
the present value may be paid in a lump sum to the beneficiary, if the
beneficiary so elects.
WITHDRAWALS
The owner may withdraw all or part of the net account value upon notice to
Merrill Lynch Life received prior to the earlier of the annuity date or the
death of the owner. For partial withdrawals, the withdrawal must be at least
$500, the remaining subaccount value of each subaccount, after adjustment for
any market value adjustment and withdrawal charge, must be at least $5,000, and
the remaining account value must be at least $15,000. Withdrawals from qualified
plans may be restricted. (See "Qualified Plans.") Withdrawals are subject to
income tax, and prior to age 59 1/2 may also be subject to a 10% federal penalty
tax. (See "Federal Tax Considerations--Penalty Tax on Certain Withdrawals.")
REPORTS TO OWNERS
At least once each year prior to the annuity date, owners will be sent a report
outlining their account value, subaccount values, and current guaranteed
interest rates for the subaccounts. The report will not include Merrill Lynch
Life financial statements.
FREE LOOK RIGHT
When the owner receives the Contract, it should be reviewed carefully to make
sure it is what the owner intended to purchase. Generally, within ten days after
the owner receives the Contract, he or she may return it
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for a refund. Some states allow a longer period of time to return the Contract.
For a refund to be made, the Contract must be delivered to Merrill Lynch Life's
Service Center or to the Financial Consultant who sold it. Merrill Lynch Life
will then refund to the owner all premiums paid into the Contract. The Contract
will then be deemed void from the beginning.
MERRILL LYNCH LIFE INSURANCE COMPANY
Merrill Lynch Life Insurance Company ("Merrill Lynch Life") is a stock life
insurance company organized under the laws of the State of Washington in 1986
and redomesticated under the laws of the State of Arkansas in 1991. Merrill
Lynch Life is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"), a corporation whose common stock is traded on the New York
Stock Exchange.
Merrill Lynch Life's home office is in Little Rock, Arkansas. The Service
Center's address and phone number are P.O. Box 44222, Jacksonville, Florida
32231-4222, (800) 535-5549.
All communications concerning the Contract should be addressed to Merrill Lynch
Life's Service Center.
DESCRIPTION OF THE CONTRACT
A. GENERAL
The Contract is a single premium modified guaranteed annuity contract. The
Contract may be issued in connection with either qualified or nonqualified
plans. Qualified plans include IRAs and SEPs.
A prospective purchaser may become an owner by providing certain information and
forwarding payment of a single premium to Merrill Lynch Life's Service Center.
(Purchasers will be asked to confirm in writing the information provided.)
Applicants may be required to complete and return a written Contract application
in certain circumstances, such as when the Contract is being issued to replace,
or in exchange for, another annuity contract. An application is subject to
Merrill Lynch Life's acceptance. The rights and benefits of an owner are
summarized in the Contract.
B. PREMIUMS
A Contract will be issued in exchange for a single premium of at least $25,000.
If the amount of any single premium is more than $500,000, Merrill Lynch Life
reserves the right to limit the amount of the premium. The premium will be
allocated to one or more subaccounts as selected by the owner. The minimum
allocation to a subaccount is $5,000. Merrill Lynch Life will confirm its
receipt of the payment and the subaccounts established for the payment. The
Contract does not permit the payment of additional premiums.
C. SELECTING THE GUARANTEE PERIOD
The owner may select one or more guarantee periods for the single premium or
portion thereof. Merrill Lynch Life has discretion to determine the number of
guarantee periods it will offer.
Currently, it offers guarantee periods of three and five years (a one year
guarantee period is also available at renewal only). Merrill Lynch Life will
establish a subaccount corresponding to each guarantee period selected and
applicable specified interest rate. Once a guarantee period has been selected,
it cannot be changed. Amounts cannot be transferred from one subaccount to
another prior to the end of the guarantee period. The owner may, however,
withdraw amounts from a subaccount, subject to certain restrictions, a market
value adjustment, and a withdrawal charge. (See "Withdrawals," "Market Value
Adjustment," and "Withdrawal Charge.") Withdrawals may have federal income tax
consequences, including a 10% penalty on amounts withdrawn. (See "Federal Tax
Considerations--In General.")
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D. SUBACCOUNT AND ACCOUNT VALUES
An owner's account value is the sum of all of his or her subaccount values. Each
subaccount value is equal to the amount the owner allocated or transferred to
the subaccount (either as part of the single premium or as part of the
reinvestment of subaccount value at the end of a guarantee period), plus the
interest credited at the guaranteed rate, as adjusted for any prior withdrawals,
market value adjustments, and withdrawal charges. Merrill Lynch Life offers a
guaranteed interest rate for each subaccount. The owner is credited with the
guaranteed interest rate in effect on the date Merrill Lynch Life receives his
or her premium or on the renewal date, as applicable. The daily simple interest
rate will be computed by dividing the applicable guaranteed interest rate for a
subaccount by 365. This rate will be applied to the last contract anniversary
subaccount value with adjustments for subsequent withdrawals and credited to the
subaccount daily (except on a February 29th) to yield the quoted guaranteed
interest rate. Through this formula, interest will be compounded only annually
on each contract anniversary.
E. SUBACCOUNT TRANSFERS
On each subaccount's renewal date, the owner may transfer amounts in that
subaccount to one or more subaccounts with guarantee periods of any length then
offered by Merrill Lynch Life. The amount transferred will be credited with the
interest rate in effect on the renewal date for the subaccount to which the
amount is transferred. The guaranteed interest rate for transferred subaccount
value may not be the same as the guaranteed interest rate available for initial
allocation of a single premium for a guarantee period of the same duration.
Merrill Lynch Life will notify the owner of his or her right to transfer amounts
to new subaccounts at least 30 days, but not more than 60 days, prior to the
renewal date of a subaccount. Prior to the renewal date, the owner may advise
Merrill Lynch Life of the new subaccount or subaccounts to which the subaccount
value is to be transferred at the end of the guarantee period. TRANSFERS CANNOT
BE MADE TO A GUARANTEE PERIOD WITH A DURATION THAT WILL EXTEND BEYOND THE
ANNUITY DATE. The minimum amount that can be transferred to any one subaccount
is the lesser of (i) $5,000 or (ii) the total subaccount value at the time of
transfer. No withdrawal charge or market value adjustment is applied in
connection with such transfers. SUBACCOUNT VALUES MAY NOT BE TRANSFERRED TO
ANOTHER SUBACCOUNT IN FULL OR IN PART PRIOR TO THE END OF THE GUARANTEE PERIOD.
Under current administrative procedures, if instructions are not received prior
to the renewal date, then on the renewal date, Merrill Lynch Life will transfer
the subaccount value to a new subaccount with a one-year guarantee period.
However, if instructions are received by the fifth business day after the
renewal date, then as of the renewal date, Merrill Lynch Life will transfer the
subaccount value to the subaccount or subaccounts selected by the owner. If
instructions have not been received by the fifth business day after the renewal
date, the subaccount value will remain in the subaccount with a one-year
guarantee period. Subject to contractual and federal tax restrictions, the owner
may change his or her annuity date so that the guarantee period of the new
subaccount will end on or prior to the annuity date. (See "Annuity
Provisions--Change of Annuity Date or Annuity Option.")
F. DETERMINING GUARANTEED INTEREST RATES
Merrill Lynch Life has no specific formula for establishing the guaranteed
interest rates for the different guarantee periods. The determination made will
be influenced by, but not necessarily correspond to, interest rates available on
fixed income investments which Merrill Lynch Life may acquire with the amounts
it receives as premiums under the Contracts. These amounts will be invested
primarily in investment-grade fixed income securities including: securities
issued by the United States Government or its agencies or instrumentalities,
which issues may or may not be guaranteed by the United States Government; debt
securities that have an investment grade, at the time of purchase, within the
four highest grades assigned by Moody's Investor Services, Inc. (Aaa, Aa, A or
Baa), Standard & Poor's Corporation (AAA, AA, A or BBB), or any other nationally
recognized rating service; mortgage-backed securities collateralized by real
estate mortgage loans, or securities collateralized by other assets, that are
insured or guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association, or the Government National Mortgage Association,
or that have an investment grade at the time of purchase within the four highest
grades described
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above; other debt instruments; commercial paper; and cash or cash equivalents.
Owners will have no direct or indirect interest in these investments. Merrill
Lynch Life will also consider other factors in determining the guaranteed rates,
including regulatory and tax requirements, sales commissions and administrative
expenses borne by Merrill Lynch Life, general economic trends, and competitive
factors. MERRILL LYNCH LIFE'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION OF
THE GUARANTEED RATES IT DECLARES. MERRILL LYNCH LIFE CANNOT PREDICT OR GUARANTEE
THE LEVEL OF FUTURE INTEREST RATES.
G. WITHDRAWALS
Subject to certain conditions, an owner may withdraw all or part of his or her
net account value prior to the earlier of the annuity date or the death of the
owner, upon written notice received at Merrill Lynch Life's Service Center
before the annuity date. Withdrawals are subject to income tax, and prior to age
59 1/2 may also be subject to a 10% federal penalty tax. (See "Federal Tax
Considerations--In General.") For full withdrawals, the withdrawal notice must
be accompanied by the Contract.
Partial withdrawals must be at least $500, and each net subaccount value
remaining after the withdrawal must be at least $5,000, unless the entire
subaccount value is withdrawn. The remaining account value must be at least
$15,000. Otherwise, the partial withdrawal will not be permitted. The owner must
specify the subaccounts from which the partial withdrawal is to be made. If the
owner does not specify, the partial withdrawal will be made from the subaccount
with the shortest period of time remaining in its guarantee period until that
subaccount has been depleted, from the subaccount with the next shortest period
of time remaining in its guarantee period until that subaccount has been
depleted, and so forth, continuing until the amount of the partial withdrawal
has been reached.
The amount of the withdrawal will be paid to the owner, and any market value
adjustment will be made to, and any withdrawal charge will be deducted from, the
subaccounts from which the withdrawal is made. Immediately after a partial
withdrawal, the value of the subaccount from which a withdrawal is taken will
equal the subaccount value prior to the withdrawal, plus or minus any applicable
market value adjustment, minus any applicable withdrawal charge, and minus the
amount withdrawn. In the case of a request to withdraw the entire amount from a
subaccount, the owner receives the net subaccount value (which reflects any
adjustments to the subaccount value for the withdrawal charge and market value
adjustment applied in connection with such withdrawal). On a full withdrawal,
the subaccount value is reduced by the amount withdrawn as well as any
applicable withdrawal charge, and the market value adjustment is applied,
thereby reducing the subaccount value to zero. (See "Market Value Adjustment"
and "Withdrawal Charge.") See Appendix A and Appendix B for examples showing the
effect of the withdrawal charge and market value adjustment on the amount of
withdrawals.
H. MARKET VALUE ADJUSTMENT
The Contract provides for the imposition of a market value adjustment,
determined by application of the formula described below, in three
circumstances:
- Whenever the owner makes a withdrawal from a subaccount, other than
one made at, and for which Merrill Lynch Life has received written
notice prior to, the end of the guarantee period for that subaccount;
- To subaccount value upon annuitization, if the annuity date is prior
to the end of the guarantee period for that subaccount; and
- In the event of payment upon the death of the owner prior to the
annuity date, unless the combined market value adjustments of all
affected subaccounts would reduce the account value.
The amount of the market value adjustment is determined from the following
formula:
n/365
1 + B
A X [1 - (-----) ]
1 + C
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<TABLE>
<C> <S>
where "A" is (i) the amount withdrawn from the net subaccount value, in the case of a
partial withdrawal; or (ii) the net subaccount value, in the case of a full
withdrawal, death benefit payment, or annuitization;
"B" is the MVA interest rate in effect at the time the market value adjustment is
being applied for a subaccount with a guarantee period for a duration of years
represented by "n/365," whether or not those durations are currently offered
under the Contract. "n/365" is determined by straight-line interpolation if
n/365 is not a whole number (if n/365 is less than 1, we will assume "B" is
equal to the MVA interest rate for a one-year guarantee period);
"C" is the MVA interest rate in effect for the subaccount on the issue date or the
last renewal date; and
"n" is the remaining number of days in the guaranteed period of the subaccount from
which the withdrawal is made or to which the adjustment is applied.
</TABLE>
MVA Interest Rates. The MVA interest rate for each subaccount to which premium
or account value is allocated will be specified in notices sent to contract
owners at issue and renewal, respectively. Like guaranteed interest rates, MVA
interest rates will be declared by Merrill Lynch Life's management in its sole
discretion, and Merrill Lynch Life cannot predict or guarantee the level of
future MVA interest rates, which may be greater or less than guaranteed interest
rates declared concurrently for the same guarantee period duration. Merrill
Lynch Life determines MVA interest rates based on rates on Treasury bonds with
durations appropriate to effectuate Merrill Lynch Life's asset-liability
matching program with respect to its obligations under the Contracts. In
general, the use of MVA interest rates by Merrill Lynch Life to calculate any
market value adjustment is intended to preclude certain factors not related to
market interest rates per se, such as changes in mortality assumptions, or the
use of increased current rates for competitive or other non-market related
factors, from affecting the size or direction of any market value adjustment.
The market value adjustment will depend on the relationship, at the time the
market value adjustment is being applied, between (i) the MVA interest rate
established at issue or renewal for the subaccount from which a withdrawal or
payment is being made, to (ii) the MVA interest rate in effect for a time period
equal to the remaining duration of the guarantee period of the subaccount from
which the withdrawal or payment is being made.
AS A GENERAL RULE, IF INTEREST RATES GO UP, THE MARKET VALUE ADJUSTMENT WILL
OPERATE TO DECREASE YOUR SUBACCOUNT VALUE; IF INTEREST RATES GO DOWN, THE MARKET
VALUE ADJUSTMENT WILL OPERATE TO INCREASE YOUR SUBACCOUNT VALUE.
Because of the market value adjustment provision of the Contract, the owner
bears the investment risk that the MVA interest rates in effect at the time the
owner makes a withdrawal from a subaccount or starts receiving annuity payments
may be higher than the MVA interest rate of the subaccount to which the market
value adjustment is applied. The result is that the owner's subaccount value may
be substantially reduced.
NEITHER THE GUARANTEED INTEREST RATE FOR THE SUBACCOUNT FROM WHICH A WITHDRAWAL
OR PAYMENT IS BEING MADE, NOR ANY GUARANTEED INTEREST RATE IN EFFECT AT THE TIME
OF WITHDRAWAL OR PAYMENT, IS USED TO DETERMINE THE MARKET VALUE ADJUSTMENT.
Appendix A contains additional information about the operation of the market
value adjustment, including examples illustrating the application of the market
value adjustment in the context of full withdrawals from a hypothetical
subaccount.
I. WITHDRAWAL CHARGE
A withdrawal charge is imposed if the owner makes a withdrawal from a subaccount
other than at the end of a subaccount's guarantee period. No withdrawal charge
is imposed if a withdrawal is made at the end of the guarantee period for a
subaccount where written notice was received at Merrill Lynch Life's Service
Center prior to (or, under current administrative procedures, within five
business days after) the renewal date. Currently, withdrawal charges do not
apply upon annuitization. However, Merrill Lynch Life reserves the
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right to apply the withdrawal charge on annuitization to any subaccount if the
annuity date is prior to the end of the guarantee period for that subaccount.
The withdrawal charge rate is equal to six percent for the duration of each
initial and renewal guarantee period. For partial withdrawals from a subaccount,
withdrawal charges are determined by multiplying the amount of the withdrawal
being taken from a subaccount by the withdrawal charge rate applicable to the
guarantee period for that subaccount, or six percent. For a full withdrawal of a
subaccount, the amount received is the net subaccount value, which reflects
adjustments for the withdrawal charge and any market value adjustment. For a
partial withdrawal, the withdrawal charge will be deducted from the remaining
value of the subaccounts from which the withdrawal was made. Withdrawal charges
do not apply to annuity payments or to any payment made due to the death of the
owner. Withdrawal charges apply when a full withdrawal occurs on an annuity date
which does not correspond to the renewal date of a guarantee period. Appendix B
contains examples which illustrate the calculation of withdrawal charges for a
hypothetical subaccount.
J. PAYMENT ON DEATH
Death Prior to the Annuity Date. Subject to the rights of an owner's surviving
spouse in certain circumstances (described below), if an owner dies prior to the
annuity date, Merrill Lynch Life will pay the death benefit to the beneficiary.
The death benefit is equal to the sum of each subaccount value after market
value adjustment; but if the combined effect of the market value adjustments
applied to each subaccount would not be positive, no market value adjustment is
made. No withdrawal charge will be applied. Payment will be made upon receipt by
Merrill Lynch Life of proof of the death of an owner (e.g., a certified copy of
the death certificate), and, subject to the special rules applicable to any
owner's death (discussed below), will be made in a lump sum unless an annuity
option is chosen. If no annuity option is chosen by the 60th day following
receipt of the certified death certificate, Merrill Lynch Life reserves the
right to automatically pay the death benefit in a lump sum.
In the event of an owner's death, the death benefit generally must be
distributed within five years of the death of the owner. The beneficiary may,
however, elect to receive the death benefit pursuant to an annuity option under
which payments commence within one year of the owner's death and do not extend
beyond the life or life expectancy of the beneficiary. If the beneficiary is the
surviving spouse of the deceased owner, he or she may choose to receive payments
under any of the annuity options of the Contract. (See "Annuity Provisions.")
For IRAs, any annuity option chosen by a beneficiary must meet the requirements
of the Internal Revenue Code. If the surviving spouse of a deceased owner is the
beneficiary, the spouse may choose to become the owner and to continue the
Contract in force on the same terms as before the owner's death, in which event
no death benefit is paid upon the death of the deceased owner, and the spouse
thereafter shall be the owner and the beneficiary, until a new beneficiary is
named. If the Contract has more than one owner, the date of death of the owner
will be deemed to occur when the first owner dies.
If the annuitant dies prior to the annuity date and the owner is not the
annuitant, the owner may designate a new annuitant. If a new annuitant is not
designated, the owner will be the annuitant, provided the owner is an
individual. If the owner is not an individual, the death of the annuitant will
be treated as the death of the owner.
If a beneficiary does not survive the owner, the estate or heirs of the
beneficiary have no rights under the Contract. If no beneficiary survives the
owner, payment will be made to the owner's estate.
If the owner is not an individual, the annuitant as determined in accordance
with Section 72(s) of the Internal Revenue Code (i.e., the individual the events
in the life of whom are of primary importance in affecting the timing or amount
of distributions under the Contract) will be treated as the owner for purposes
of these distribution requirements, and the death of the annuitant will be
treated as the death of the owner.
Death After the Annuity Date. If the annuitant dies after the annuity date and
the annuitant is not also the owner, the owner may choose either to have any
guaranteed amounts remaining unpaid continue to be paid for the amount or period
guaranteed or to receive the present value of the remaining guaranteed payments
in a lump sum. If an owner dies after the annuity date and while guaranteed
amounts remain unpaid, the present
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value may be paid in a lump sum to the beneficiary, if the beneficiary so
elects. Present values will be computed at the interest rate that was used to
compute the amount of the initial annuity payment.
K. ANNUITY PROVISIONS
General. Annuity payments will be paid to the annuitant and will commence on
the annuity date. The owner may or may not be the annuitant. The owner
designates the annuitant when purchasing the Contract, and may later change the
annuitant upon written notice to Merrill Lynch Life, unless the owner is not an
individual.
The amount of annuity payments, other than payments made pursuant to the
qualified plan option, will be determined by applying the net account value at
the annuity date, less any premium taxes, to the annuity option chosen using
Merrill Lynch Life's then current annuity rates. Currently, withdrawal charges
do not apply upon annuitization. However, Merrill Lynch Life reserves the right
to apply the withdrawal charge on annuitization to any subaccount if the annuity
date is prior to the end of the guarantee period for that subaccount. Current
annuity rates are guaranteed to be no less favorable than the minimum guaranteed
annuity rates shown in the annuity tables contained in the Contract and will not
be based on an interest rate of less than three percent. Premium taxes imposed
by states and local jurisdictions currently range from 0% to 5% depending on the
tax treatment of the Contract. In determining the net account value, a market
value adjustment will be applied to any subaccount if the annuity date is prior
to the end of the guarantee period for that subaccount.
Annuity Date and Annuity Options. For nonqualified contracts, at issue, the
annuity date will be the annuitant's 85th birthday and the annuity option will
be a life annuity with a 10 year guarantee. For qualified contracts, at issue,
the annuity date will be the date the annuitant attains age 70 1/2 and the
annuity option will be a life annuity with a 10 year guarantee. THE OWNER MAY
CHANGE THE ANNUITY DATE OR THE ANNUITY OPTION ON WRITTEN NOTICE RECEIVED AT
MERRILL LYNCH LIFE'S SERVICE CENTER (OR BY TELEPHONE, ONCE A PROPER
AUTHORIZATION FORM IS SUBMITTED TO THE SERVICE CENTER) AT ANY TIME PRIOR TO THE
ANNUITY DATE. Merrill Lynch Life currently permits owners to select an annuity
date that is any day of a calendar month. It may not be later than the
annuitant's 85th birthday. Changes of the annuity date are subject to federal
tax restrictions. (See "Federal Tax Considerations.")
Annuity Options. The owner may select any one of the following annuity options
or any other option satisfactory to the owner and Merrill Lynch Life. For
qualified contracts, certain restrictions may apply.
PAYMENTS OF A FIXED AMOUNT: Equal payments in the amount chosen will be
made until the net account value applied under this option, adjusted for
interest credits and prior annuity payments, is exhausted. The period over
which payments are made must be at least five years.
PAYMENTS FOR A FIXED PERIOD: Payments will be made for the period chosen.
The period must be at least five years.
*LIFE ANNUITY: Payments will be made for the life of the annuitant.
Payments will cease with the last payment due prior to the annuitant's
death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS: Payments will be
made for the guaranteed period chosen (10 or 20 years) and as long
thereafter as the annuitant lives.
LIFE ANNUITY WITH GUARANTEED RETURN OF NET ACCOUNT VALUE: Payments will be
made until the sum of the annuity payments equals the net account value
applied under this option, and as long thereafter as the annuitant lives.
*JOINT AND SURVIVOR LIFE ANNUITY: Payments will be made during the
lifetimes of the annuitant and a designated second person. Payments will
continue as long as either is living.
QUALIFIED PLAN OPTION: This option is available only under qualified
contracts. Payments may be based on (a) the life expectancy of the
annuitant, (b) the joint life expectancy of the annuitant and his or her
spouse, or (c) the life expectancy of the surviving spouse if the annuitant
dies before the annuity date. Payments will be made annually. Each payment
will be equal to the net account value on the first day of the calendar
year divided by applicable current life expectancy based on Internal
Revenue Service regulations. Each subsequent payment will be made on the
anniversary of the annuity date. Interest will be credited at Merrill Lynch
Life's then current rate for this option. The rate will not be less than
three
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percent. On the death of the measuring life or lives, any unpaid net
account value will be paid to the beneficiary in a lump sum.
*THESE OPTIONS ARE LIFE ANNUITIES UNDER WHICH IT IS POSSIBLE FOR THE ANNUITANT
TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE ANNUITANT (OR THE ANNUITANT AND A
DESIGNATED SECOND PERSON) DIES AFTER THE FIRST PAYMENT, OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF THE ANNUITANT (OR THE ANNUITANT AND A DESIGNATED SECOND
PERSON) DIES AFTER THE SECOND PAYMENT, AND SO ON. ACCORDINGLY, YOU SHOULD
CAREFULLY CONSIDER WHETHER THESE OPTIONS WILL MEET YOUR FINANCIAL NEEDS.
Minimum Annuity Payments. Annuity payments will be made monthly beginning on
the annuity date unless the owner chooses less frequent payments or the
qualified plan option, provided that if any payment would be less than $50,
Merrill Lynch Life may change the frequency so payments are at least $50 each.
If the net account value to be applied at the annuity date is less than $5,000,
Merrill Lynch Life may elect to pay that amount in a lump sum. (For tax
consequences of a lump sum payment, see "Federal Tax Considerations.")
Annuity Rates. Annuity rates will be no less favorable than those shown in the
annuity tables contained in the Contract and will not be based on an interest
rate of less than three percent. Those tables show the minimum guaranteed amount
of each monthly payment for each $1,000 applied according to the age and sex of
the annuitant at the annuity date. The tables are based on the 1983 Table "a"
projected forward to 1995 for Individual Annuity Valuation, set back one year,
with interest at three percent. When required by law, Merrill Lynch Life will
use annuity tables that do not differentiate on the basis of sex.
The Contract contains a formula for adjusting the age of the annuitant based on
the annuity date for purposes of determining minimum monthly annuity payments.
If the annuity date is prior to the year 2000, there is no age adjustment. If
the annuity date is between the years 2000 and 2009, the annuitant's age is
reduced by one year. For each decade thereafter, the annuitant's age is reduced
one additional year. The maximum age adjustment is four years.
An age adjustment results in a reduction in the minimum monthly annuity payments
that would otherwise be made. Therefore, if the rates Merrill Lynch Life is
using are the minimum rates shown in the annuity tables contained in the
Contract, it may be advantageous for the owner to designate an annuity date that
immediately precedes the date on which an age adjustment would occur under the
Contract. For example, the annuity payment rates in the annuity tables for an
annuitant with an annuity date in the year 2010 are the same as those for an
annuity date twelve months earlier, even though the annuitant is one year older,
because the new decade results in the annuitant's age being reduced by an
additional year. Current annuity rates, unlike the guaranteed rates, do not
involve any age adjustment.
Proof of Age, Sex and Survival. Merrill Lynch Life may require satisfactory
proof of the age, sex, or survival of any person on whose continued life any
payment under the Contract depends.
Misstatement of Age or Sex. If the age or sex of an annuitant is misstated,
annuity payments will be adjusted to reflect the correct age and sex. Any amount
overpaid as the result of such misstatement will be deducted from subsequent
payments until recovered. Any amount underpaid will be paid in full with the
next payment due. Interest on the overpayment will be charged at the rate of
four percent per year. Interest on an underpayment will be paid at the rate of
four percent per year.
L. OTHER PROVISIONS
Beneficiary. The beneficiary is the person or persons to whom payment is to be
made upon the death of the owner. Unless a beneficiary has been irrevocably
designated, the beneficiary may be changed while the owner is alive. The change
of a beneficiary who was named by the owner irrevocably may only be made with
the written consent of the beneficiary. The beneficiary has no ownership rights
under the Contract. The estate or heirs of a beneficiary who dies prior to the
owner have no rights under the Contract. However, if a beneficiary survives the
owner but dies before the Contract's proceeds are distributed, the estate or
heirs of such beneficiary are entitled to that portion of the Contract's
proceeds that would otherwise have been paid to such
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beneficiary. If no beneficiary survives the owner, payment will be made to the
owner's estate. Certain restrictions may apply in the case of qualified
contracts.
Assignment. Upon notice to Merrill Lynch Life, the owner may make a collateral
assignment of his or her rights under the Contract by transferring the Contract
to a creditor as a security for a debt. If the Contract is issued pursuant to a
qualified plan, the owner's rights under the Contract may not be assigned,
pledged, or transferred, unless permitted by law. A collateral assignment does
not change ownership of the Contract. The rights of a collateral assignee have
priority over the rights of a beneficiary. No amounts payable under the Contract
to a payee other than the owner may be assigned by that payee, nor will they be
subject to the claims of creditors or to legal process, except to the extent
permitted by law. A collateral assignment may have federal income tax
consequences. (See "Federal Tax Considerations--Transfers, Assignments, or
Exchanges of a Contract.")
Notices and Elections. Generally, to be effective, all notices, changes, and
choices the owner makes under the Contract must be in writing, signed by the
proper party, and received at Merrill Lynch Life's Service Center. However, an
owner (and, once a proper authorization form is submitted to Merrill Lynch
Life's Service Center, an owner's Financial Consultant) may select by telephone
the subaccounts to which the subaccount value at the end of a guarantee period
is to be transferred and may also select by telephone the subaccounts from
which any partial withdrawals are to be made. In addition, choices regarding
changes of annuity date may also be made by telephone. Notices, changes, and
choices relating to beneficiaries, ownership, and the annuitant will take
effect as of the date signed unless Merrill Lynch Life has already acted in
reliance on the prior status. Changes relating to annuity date will take effect
as of the date received, unless Merrill Lynch Life has already acted in
reliance on the prior status.
Amendment of the Contract. Merrill Lynch Life may amend the Contracts at any
time as may be necessary to conform to any applicable law, regulation, or ruling
issued by a government agency or court.
Deferral of Payments. All sums payable by Merrill Lynch Life are payable at its
Service Center. Merrill Lynch Life may require return of a Contract prior to
making payment. Merrill Lynch Life may defer payments of partial or full
withdrawals for up to six months.
Free Look Right. When the owner receives the Contract, it should be reviewed
carefully to make sure it is what the owner intended to purchase. Generally,
within ten days after the owner receives the Contract, he or she may return it
for a refund. Some states allow a longer period of time to return the Contract.
The Contract must be delivered to Merrill Lynch Life's Service Center or to the
Financial Consultant who sold it for a refund to be made. Merrill Lynch Life
will then refund to the owner all premiums paid into the Contract. The Contract
will then be deemed void from the beginning. If an owner exercises his or her
free look right, that owner may not submit another application with the same
annuitant for ninety days.
Guarantee of Contracts. The federal government or its instrumentalities do not
guarantee the Contracts. Merrill Lynch Life backs the guarantees associated with
the Contracts.
DISTRIBUTION OF THE CONTRACTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the principal
underwriter of the Contract. It was organized in 1958 under the laws of the
state of Delaware and is registered as a broker-dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc. ("NASD"). MLPF&S' principal business address is World Financial
Center, 250 Vesey Street, New York, New York 10281.
Contracts are sold by registered representatives (Financial Consultants) of
MLPF&S who are also licensed through various Merrill Lynch Life Agencies
("MLLA") as insurance agents for Merrill Lynch Life. Merrill Lynch Life has
entered into a distribution agreement with MLPF&S and companion sales agreements
with MLLA through which agreements the Contracts are sold and the Financial
Consultants are compensated by MLLA and/or MLPF&S. The maximum commission paid
to a Financial Consultant in connection with sale of a contract is 1.13% of each
premium. In addition, the maximum compensation paid to a Financial
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Consultant for each renewal is 0.23% of account value reinvested, payable
annually. Commissions may be paid in the form of non-cash compensation, in
accordance with any applicable NASD guidelines.
The maximum commission Merrill Lynch Life will pay to the applicable insurance
agency to be used to pay commissions to Financial Consultants is 2.5% of each
premium. In addition, the maximum compensation Merrill Lynch Life will pay to
the applicable insurance agency to be used to pay compensation to Financial
Consultants for reinvestment is 0.4% of subaccount value reinvested, payable
annually.
MLPF&S may arrange for sales of the Contract by other broker-dealers who are
registered under the Securities Exchange Act of 1934 and are members of the
NASD.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following discussion is general and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon Merrill Lynch Life'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 the
continuation of the present federal income tax laws or of the current
interpretation by the Internal Revenue Service. Moreover, no attempt has been
made to consider any applicable state or other tax laws.
MERRILL LYNCH LIFE DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
The Contract may be purchased on a nonqualified tax basis ("nonqualified
contract") or purchased and used in connection with certain plans qualifying for
favorable tax treatment ("qualified contract"). The qualified contracts are
designed for use by individuals whose premium payment is comprised solely of
contributions under Individual Retirement Annuities or Accounts (IRAs) and
Simplified Employee Pensions (SEPs) under Sections 408(a), 408(b), and 408(k) of
the Internal Revenue Code, and/or proceeds from retirement plans which are
intended to qualify as plans entitled to special income tax treatment under
Sections 401, 403, 404, 408, or 457 of the Internal Revenue Code. The ultimate
effect of federal income taxes on the amounts held under a Contract, on annuity
payments, and on the economic benefit to the owner, the annuitant, or the
beneficiary depends on the type of retirement plan, on the tax and employment
status of the individual concerned, and on Merrill Lynch Life's tax status. In
addition, certain requirements must be satisfied in purchasing a qualified
contract with proceeds from a tax qualified plan and receiving distributions
from a qualified contract in order to continue receiving favorable tax
treatment. Therefore, purchasers of qualified contracts should seek competent
legal and tax advice regarding the suitability of a Contract for their
situation, the applicable requirements, and the tax treatment of the rights and
benefits of a Contract. The following discussion assumes that qualified
contracts are purchased with proceeds from and/or contributions under retirement
plans that qualify for the intended special federal income tax treatment.
TAXATION OF MERRILL LYNCH LIFE
Merrill Lynch Life is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code. The assets underlying the Contracts
will be owned by Merrill Lynch Life. The income earned on such assets will be
income to Merrill Lynch Life.
TAX STATUS OF THE CONTRACT
Merrill Lynch Life believes that the Contract will be treated as an annuity
contract and that Merrill Lynch Life will be treated as owning the assets
supporting the Contract for federal income tax purposes. Merrill
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Lynch Life, however, reserves the right to modify the Contract as necessary to
prevent the contract owner from being considered the owner of the assets
supporting the Contract for federal tax purposes.
Furthermore, in order to be treated as an annuity contract for federal income
tax purposes, Section 72(s) of the Internal Revenue Code requires any
nonqualified contract to provide that (a) if any owner dies on or after the
annuity commencement date but prior to the time the entire interest in the
Contract has been distributed, the remaining portion of such interest will be
distributed at least as rapidly as under the method of distribution being used
as of the date of that owner's death; and (b) if any owner dies prior to the
annuity commencement date, the entire interest in the Contract will be
distributed within five years after the date of the owner's death. These
requirements will be considered satisfied as to any portion of the owner's
interest which is payable to or for the benefit of a "designated beneficiary"
and which is distributed over the life of such "designated beneficiary" or over
a period not extending beyond the life expectancy of that beneficiary, provided
that such distributions begin within one year of that owner's death. The owner's
"designated beneficiary" (referred to herein as the "beneficiary") is the person
designated by such owner as a beneficiary and to whom the owner's interest in
the Contract passes by reason of death and must be a natural person. However, if
the beneficiary is the surviving spouse of the owner, the Contract may be
continued with the surviving spouse as the new owner. Solely for purposes of
applying the provisions of Section 72(s) of the Code, when nonqualified
contracts are held by other than a natural person, the death of the annuitant is
treated as the death of the owner.
The nonqualified contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Internal Revenue Code, although no
regulations interpreting these requirements have yet been issued. Merrill Lynch
Life intends to review such provisions and modify them if necessary to assure
that they comply with the requirements of Internal Revenue Code Section 72(s)
when clarified by regulation or otherwise.
Other rules may apply to qualified contracts.
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
FEDERAL TAXES
a. In General
Section 72 of the Internal Revenue Code governs taxation of annuities in
general. Merrill Lynch Life believes that an owner who is a natural person
generally is not taxed on increases in the value of a Contract until
distribution occurs by withdrawing all or part of the account value (e.g.,
partial withdrawals and surrenders) or as annuity payments under the annuity
option elected. For this purpose, the assignment, pledge, or agreement to assign
or pledge any portion of the account value (and in the case of a qualified
contract, any portion of an interest in the qualified plan) generally will be
treated as a distribution. The taxable portion of a distribution (in the form of
a single sum payment or an annuity) is taxable as ordinary income. Additionally,
certain transfers of a Contract for less than full and adequate consideration,
such as a gift, will generate tax on the excess of the net account value over
the owner's "investment in the contract" (discussed below).
An owner in any annuity contract who is not a natural person generally must
include in income any increase in the excess of the Contract's account value
over the "investment in the contract" during the taxable year. There are some
exceptions to this rule and a prospective owner that is not a natural person may
wish to discuss these with a competent tax adviser.
The following discussion generally applies to Contracts whose owners are natural
persons.
b. Partial Withdrawals and Surrenders
In the case of a partial withdrawal or surrender under a qualified contract,
under Section 72(e) of the Internal Revenue Code a ratable portion of the amount
received is taxable, generally based on the ratio of the "investment in the
contract" to the owner's total accrued benefit or balance under the retirement
plan. The "investment in the contract" generally equals the portion, if any, of
any premium payments paid by or on behalf of any individual under a Contract
which was not excluded from the individual's gross income. For
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Contracts issued in connection with qualified plans, an owner's "investment in
the contract" can be zero. Special tax rules may be available for certain
distributions under qualified contracts.
In the case of a partial withdrawal under a nonqualified contract before the
annuity date, under Internal Revenue Code Section 72(e) amounts received are
generally first treated as taxable income to the extent that the account value
immediately before the partial withdrawal (increased by the net excess, if any,
of the sum of all market value adjustments that increase any subaccount value
over the sum of all market value adjustments that decrease any subaccount value
which result from the partial withdrawal) exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
IT IS IMPORTANT TO NOTE THAT THE CONTRACT IS AN INTEGRATED ANNUITY CONTRACT AND
THAT THEREFORE IN DETERMINING THE EXTENT TO WHICH A WITHDRAWAL FROM ONE
SUBACCOUNT IS TAXABLE, THE ACCOUNT VALUE AND "INVESTMENT IN THE CONTRACT" FOR
THE ENTIRE CONTRACT, NOT JUST THE SUBACCOUNT FROM WHICH THE WITHDRAWAL IS MADE,
WILL BE TAKEN INTO ACCOUNT.
In the case of a surrender under a nonqualified contract, under Section 72(e)
amounts received are generally treated as taxable income to the extent the net
amount received exceeds the "investment in the contract" at that time.
c. Annuity Payments
Although tax consequences may vary depending on the annuity option elected under
the Contract, under Internal Revenue Code Section 72(b), generally gross income
does not include that part of any amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity date. In this respect
(prior to recovery of the investment in the contract), there is generally no tax
on the amount of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each income
payment is taxable. In all cases, after the "investment in the contract" is
recovered, the full amount of any additional annuity payments is taxable.
d. Penalty Tax on Certain Withdrawals
In the case of a distribution under a nonqualified contract, there may be
imposed a federal penalty tax equal to 10% of the amount treated as taxable
income. In general, however, there is no penalty tax on distributions: (1) made
on or after the date on which the owner attains age 59 1/2; (2) made as a result
of death or disability of the owner; (3) received in substantially equal
periodic payments over the life or life expectancy of the owner (or joint life
or life expectancy of the owner and a designated beneficiary). In certain
circumstances, other exceptions may apply. Other tax penalties may apply to
certain distributions under a qualified contract.
e. Taxation of Death Benefit Proceeds
Amounts may be distributed from a Contract because of the death of the owner or,
if the owner is not an individual, the annuitant. Generally, such amounts are
includable in the income of the recipient as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a full surrender of the Contract,
as described above, or (2) if distributed under an annuity option, they are
taxed in the same manner as annuity payments, as described above.
f. Transfers, Assignments, or Exchanges of a Contract
A transfer of ownership of a Contract, the designation of an annuitant, payee or
other beneficiary who is not also the owner, or the exchange of a Contract (or
this Contract along with one or more other annuity contracts) for one or more
new annuity contracts may result in certain tax consequences to the owner that
are not discussed herein. An owner contemplating any such transfer, assignment,
or exchange of a Contract should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
g. Multiple Contracts
All nonqualified annuity contracts that are issued by Merrill Lynch Life (or its
affiliates) to the same owner during any calendar year are treated as one
annuity Contract for purposes of determining the amount
17
<PAGE> 18
includable in gross income under Section 72(e) of the Internal Revenue Code. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of Section 72(e) through the serial purchase of
annuity Contracts or otherwise. Congress has also indicated that the Treasury
Department may have authority to treat the combination purchase of an immediate
annuity Contract and a separate deferred annuity Contract as a single annuity
Contract under its general authority to prescribe rules as may be necessary to
enforce the income tax laws.
h. Withholding
Unless the owner elects to the contrary, the taxable portion of any amounts
received under the Contract will be subject to withholding to meet federal and
state income tax obligations. The rate of withholding on annuity payments will
generally be determined on the basis of the withholding certificate filed by the
owner with Merrill Lynch Life. If no such certificate is filed, the owner will
be treated, for purposes of determining the withholding rate, as a married
person with three exemptions.
The rate of withholding on all other payments made under the Contract, such as
amounts received upon withdrawals, will generally be 10%. Thus, if the owner
fails to elect that there be no withholding, Merrill Lynch Life will withhold
from every withdrawal or annuity payment the appropriate percentage of the
amount of the payment that is taxable. Merrill Lynch Life will provide the owner
with forms and instructions concerning the right to elect that no amount be
withheld from payments. Generally, there will be no withholding for taxes until
payments are actually received under the Contract.
i. Possible Changes in Taxation
In past years, legislation has been proposed that would have adversely modified
the federal taxation of certain annuities. For example, one such proposal would
have changed the tax treatment of nonqualified annuities that did not have
"substantial life contingencies" by taxing income as it is credited to the
annuity. Although, as of the date of this Prospectus, Congress is not actively
considering any legislation regarding the taxation of annuities, there is always
the possibility that the tax treatment of annuities could change by legislation
or other means (such as Internal Revenue Service regulation, revenue rulings,
judicial decisions, etc.). Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change).
j. Other Tax Consequences
As noted above, the foregoing discussion of the federal income tax consequences
under the Contract is not exhaustive and special rules are provided with respect
to other tax situations not discussed in this Prospectus. Further, the federal
income tax consequences discussed herein reflect Merrill Lynch Life's
understanding of current law and the law, or its interpretation by the Internal
Revenue Service, may change. Federal estate and state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each owner or
recipient of the distribution. A competent tax adviser should be consulted for
further information.
QUALIFIED PLANS
The Contract is designed for use with several types of qualified plans. These
retirement plans, described briefly below, may permit the purchase of the
Contracts to accumulate retirement savings under the plans. Adverse tax or other
legal consequences to the plan, to the owner, or to both may result if the
Contract is assigned or transferred to any individual as a means to provide
benefit payments, unless the plan complies with all legal requirements
applicable to such benefits prior to transfer of the Contract. The tax rules
applicable to owners in qualified plans, including restrictions on contributions
and benefits, taxation of distributions, and any tax penalties, vary according
to the type of plan and the terms and conditions of the plan itself. Various tax
penalties may apply to: contributions in excess of specified limits; aggregate
distributions in excess of $150,000 annually (except in 1997, 1998, and 1999),
as increased from time to time to reflect increases in the cost of living;
distributions that do not satisfy specified requirements; and certain other
transactions with respect to qualified plans. Therefore, no attempt is made to
provide more than general information about the use of the Contracts with the
various types of qualified plans. Owners, annuitants, and beneficiaries are
cautioned that the rights of any person to any benefits under qualified plans
may be subject to the terms and conditions of the
18
<PAGE> 19
plans themselves, regardless of the terms and conditions of the Contract. Some
retirement plans are subject to distribution and other requirements that are not
incorporated into Merrill Lynch Life's administration procedures. Owners and
beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
When issued in connection with a qualified plan, a Contract will be amended as
necessary to conform to the requirements of the Internal Revenue Code.
Section 408 of the Internal Revenue Code permits eligible individuals to
contribute to individual retirement programs known as an IRAs. Employers may
establish SEPs to provide IRA contributions on behalf of their employees. Also,
distributions from certain other types of qualified plans may be "rolled over"
on a tax-deferred basis into an IRA. Sales of the Contracts for use with or as
IRAs may be subject to special disclosure requirements of the Internal Revenue
Service. Purchasers of the Contract for use with or as IRAs will be provided
with supplemental information required by the Internal Revenue Service or other
appropriate agency. Such purchasers will have the right to revoke their purchase
within 7 days of the earlier of the establishment of the IRA or their purchase.
Purchasers should seek competent advice as to the suitability of the Contract
for use with or as IRAs.
Restrictions under Qualified Contracts
Other restrictions with respect to the election, commencement, or distribution
of benefits may apply under qualified contracts or under the terms of the plans
in respect of which qualified contracts are issued.
PREMIUM TAXES
Various states, municipalities and jurisdictions impose a premium tax on annuity
premiums when they are received by an insurance company. In other jurisdictions,
a premium tax is paid on the account value on the annuity date.
Merrill Lynch Life will pay these taxes when due, and a charge for any premium
taxes imposed by a state, local government or jurisdiction will be deducted from
account value on the annuity date. Premium tax rates vary from jurisdiction to
jurisdiction and currently range from 0% to 5%. Premium tax rates are subject to
change by law, administrative interpretations, or court decisions. Premium tax
amounts will depend on, among other things, the owner's state or jurisdiction of
residence, Merrill Lynch Life's status within that state or jurisdiction, and
the premium tax laws of that state or jurisdiction.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes fiduciary, prohibited transaction, and other requirements with respect
to employee benefit plans to which it applies. In certain circumstances these
requirements may be applicable to the management of an insurance company
account. Merrill Lynch Life believes that the account established for the
Contracts is a guaranteed contract separate account within the meaning of
Prohibited Transaction Class Exemption 81-82 and that assets attributed to the
account will not be treated as "plan assets" under regulations promulgated by
the Department of Labor. Prior to purchasing a Contract, however, the fiduciary
responsible for investments of a plan subject to ERISA should become fully
informed regarding the relevant terms of the Contract, including the market
value adjustment and withdrawal charge, and should take account of the
anticipated liquidity needs of the plan in determining whether to purchase the
Contract.
LEGAL PROCEEDINGS
There is no material pending litigation to which Merrill Lynch Life is a party
or of which any of its property is the subject, and there are no legal
proceedings contemplated by any governmental authorities against Merrill Lynch
Life of which it has any knowledge.
19
<PAGE> 20
LEGAL MATTERS
The organization of Merrill Lynch Life, its authority to issue the Contracts,
and the validity of the form of the Contracts have been passed upon by Barry G.
Skolnick, Merrill Lynch Life's Senior Vice President and General Counsel.
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to federal securities laws.
EXPERTS
The financial statements of Merrill Lynch Life as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996
incorporated by reference into this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing therein,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing. Deloitte & Touche
LLP's principal business address is Two World Financial Center, New York, New
York 10281-1420. Other financial statements incorporated by reference into this
Prospectus are unaudited.
REGISTRATION STATEMENT
The registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 that relate to the Contract. This
Prospectus does not contain all of the information in the registration statement
as permitted by Securities and Exchange Commission regulations. The omitted
information can be obtained from the Securities and Exchange Commission's
principal office in Washington, D.C., upon payment of a prescribed fee.
20
<PAGE> 21
APPENDIX A
MARKET VALUE ADJUSTMENT ILLUSTRATIONS
A. DISCUSSION
Relationship Between MVA Interest Rates. The market value adjustment may result
in either an increase or decrease in subaccount value, and depends on the
relationship, at the time the market value adjustment is being applied, between
(i) the MVA interest rate established at issue or renewal for the subaccount
from which a withdrawal or payment is being made, to (ii) the MVA interest rate
in effect for a time period equal to the remaining duration of the guarantee
period of the subaccount from which the withdrawal or payment is being made. If
(i) above is lower than (ii), application of the market value adjustment will
result in an decrease in subaccount value; if (i) is higher than (ii),
application of the market value adjustment will result in an increase in
subaccount value. NEITHER THE GUARANTEED INTEREST RATE FOR THE SUBACCOUNT FROM
WHICH A WITHDRAWAL OR PAYMENT IS BEING MADE, NOR ANY GUARANTEED INTEREST RATE IN
EFFECT AT THE TIME OF WITHDRAWAL OR PAYMENT, IS USED TO DETERMINE THE MARKET
VALUE ADJUSTMENT.
Remaining Period of Time in a Guarantee Period. In order to determine (ii)
above, if the remaining period of time in the guarantee period is a whole number
of years, Merrill Lynch Life uses the current MVA interest rate in effect for
that time period. If the remaining period of time in the guarantee period is not
a whole number of years, the current MVA interest rate is derived by straight
line interpolation (see below). If the remaining period of time is less than one
year, Merrill Lynch Life uses the current MVA interest rate in effect for a
guarantee period of one year. For example, if the remaining period is 4.75
years, the interpolated MVA interest rate will be equal to the sum of one-fourth
of the four year rate and three-fourths of the five year rate. If the four year
MVA interest rate were 5.8% and the five year MVA interest rate were 6.0%, the
interpolated rate would be 5.95% (5.8% times 0.25 plus 6.0% times 0.75).
B. MARKET VALUE ADJUSTMENT FORMULA
As discussed in the prospectus, the market value adjustment is determined by the
following formula:
n/365
1 + B
A x [1 - (-----) ]
1 + C
<TABLE>
<C> <S>
where "n" is the remaining number of days in the guaranteed period of the subaccount from
which the withdrawal is made or to which the adjustment is applied;
"A" is (i) the amount withdrawn from the net subaccount value, in the case of a
partial withdrawal; or (ii) the net subaccount value, in the case of a full
withdrawal, death benefit payment, or annuitization;
"B" is the MVA interest rate in effect at the time the market value adjustment is
being applied for a subaccount with a guarantee period for a duration of years
represented by "n/365," whether or not those durations are currently offered
under the Contract ("n/365" is determined as described above if "n/365" is not
a whole number); and
"C" is the MVA interest rate in effect for the subaccount on the issue date or the
last renewal date.
</TABLE>
C. EXAMPLES
1. MVA Interest Rates Increase. Assume a $10,000 partial withdrawal is made
from a five year guarantee period subaccount with three years (1,095 days)
remaining in its guarantee period and an MVA interest rate at issue of 6.2%.
Assume that the MVA interest rate currently in effect (at the time of the
withdrawal) for a three year guarantee period is 8.2%. Based on these facts,
the following values would be assigned to the market value adjustment
formula described above:
n = 1,095 B = .082
A = $10,000 C = .062
A-1
<PAGE> 22
Using these assigned values, the market value adjustment would equal -$575.68
(as calculated below). Since this figure is a negative number, it is
subtracted from the remaining subaccount value, together with any applicable
withdrawal charge.
1,095/365
1 + .082
$10,000 x [1 - (--------) ] = -$575.68
1 + .062
2. MVA Interest Rates Decrease. Based on the same facts as example one, assume
instead that the MVA interest rate currently in effect (at the time of the
withdrawal) for a three year guarantee period is 4.2%. Based on these facts,
the following values would be assigned to the market value adjustment
formula described above:
n = 1,095 B = .042
A = $10,000 C = .062
Using these assigned values, the market value adjustment would equal $554.40
(as calculated below). Since this figure is a positive number, it is added to
the remaining subaccount value. The subaccount value, however, will be
reduced by any applicable withdrawal charge.
1,095/365
1 + .042
$10,000 x [1 - (--------) ] = $554.40
1 + .062
D. IMPACT ON ACCOUNT VALUE
The tables below are designed to show the impact of the market value adjustment
and withdrawal charge on a single premium of $25,000, assuming a full withdrawal
at the end of each year shown. Table 1 assumes the premium is allocated to a
subaccount with a 5 year guarantee period with a guaranteed rate of interest of
5.4% and an MVA interest rate at issue of 6.0%. Table 2 assumes premium is
allocated to a subaccount with a 3 year guarantee period with a guaranteed rate
of interest of 5.1% and an MVA interest rate at issue of 5.9%. The market value
adjustments are based on interpolated current MVA interest rates ("B" in the
market value adjustment formula) of 4.0%, 6.0%, and 8.0% in the 5 year guarantee
period table (see Table 1 below) and 3.9%, 5.9%, and 7.9% in the 3 year
guarantee period table (see Table 2 below). The net subaccount values shown in
the tables are the maximum amounts available as cash withdrawals. Although the
withdrawal charge is in each case a fixed percentage of the amount withdrawn,
the actual amount of the withdrawal charge that would apply for full withdrawals
at the end of each year would vary as a result of the market value adjustment,
which is imposed before the withdrawal charge on full withdrawals. Values shown
in the tables have been rounded to the nearest dollar. As a result, the figures
under the net subaccount value columns may not precisely equal amounts set forth
in the subaccount value, plus the market value adjustment, less the withdrawal
charge columns.
A-2
<PAGE> 23
TABLE 1
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
ASSUMED GUARANTEED INTEREST RATE = 5.4%
ASSUMED ISSUE MVA INTEREST RATE = 6.0%
----------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT MVA RATES OF:
----------------------------------------------------------------------------------------------------
4.0% 6.0% 8.0%
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET NET MARKET NET MARKET NET
END OF SUB- VALUE WITH- SUB- VALUE WITH- SUB- VALUE WITH- SUB-
CONTRACT ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT
YEAR VALUE MENT CHARGE VALUE MENT CHARGE VALUE MENT CHARGE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,350 1,959 1,602 26,707 -0- 1,492 24,858 (1,798) 1,390 23,162
2 27,773 1,536 1,659 27,650 -0- 1,572 26,201 (1,433) 1,491 24,849
3 29,273 1,070 1,718 28,625 -0- 1,657 27,616 (1,015) 1,599 26,658
4 30,853 559 1,778 29,634 -0- 1,746 29,107 (540) 1,716 28,598
5 32,519 -0- -0- 32,519 -0- -0- 32,519 -0- -0- 32,519
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 2
[CAPTION]
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
ASSUMED GUARANTEED INTEREST RATE = 5.1%
ASSUMED ISSUE MVA INTEREST RATE = 5.9%
----------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT MVA RATES OF:
----------------------------------------------------------------------------------------------------
3.9% 5.9% 7.9%
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET NET MARKET NET MARKET NET
END OF SUB- VALUE WITH- SUB- VALUE WITH- SUB- VALUE WITH- SUB-
CONTRACT ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT
YEAR VALUE MENT CHARGE VALUE MENT CHARGE VALUE MENT CHARGE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,275 961 1,542 25,695 -0- 1,487 24,788 (912) 1,436 23,927
2 27,615 501 1,591 26,524 -0- 1,563 26,052 (483) 1,536 25,596
3 29,023 -0- -0- 29,023 -0- -0- 29,023 -0- -0- 29,023
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The formulas used in determining the amounts shown in the above tables are as
follows:
(1) Net subaccount value = Subaccount Value
------------------------------------------
n/365
1 + Current MVA Interest Rate
0.06 + (-----------------------------)
1 + Issue MVA Interest Rate
Where "n" is the number of days remaining in the guaranteed period of
the subaccount, but not less than 365.
(2) Withdrawal Charge = Net Subaccount Value x 0.06
(3) Market Value Adjustment =
n/365
1 + Current MVA Interest Rate
Net Subaccount Value x [1 -(-----------------------------) ]
1 + Issue MVA Interest Rate
(4) "n" is the number of days remaining in the guarantee period of
the subaccount, but not less than 365.
A-3
<PAGE> 24
APPENDIX B
EXAMPLES OF WITHDRAWAL CHARGE CALCULATION
The two examples below assume that a single premium of $25,000 has been paid
under the Contract. The premium is allocated to a subaccount with a 5 year
guarantee period with a guaranteed rate of interest of 6.0% and an MVA interest
rate at issue of 6.2%. Example 1 assumes a partial withdrawal of $5,000 is taken
at the end of the third Contract year. Example 2 assumes a full withdrawal is
taken at the end of the third Contract year. The MVA interest rate at the time
of the withdrawal for a subaccount with the appropriate duration ("B" in the
market value adjustment formula) is assumed to be 8.2% in both examples.
EXAMPLE 1: PARTIAL WITHDRAWAL
Because of interest earned at the guaranteed rate of 6.0%, at the end of the
third Contract year the subaccount value will be equal to $29,775.40. For a
$5,000 partial withdrawal, the withdrawal charge would be equal to the
withdrawal charge rate multiplied by the partial withdrawal amount:
0.06 X $5,000 = $300.00
The $300.00 withdrawal charge would be deducted from the remaining subaccount
value. In addition to a withdrawal charge, a market value adjustment of $190.10
would be deducted from the remaining subaccount value. Therefore, after the
partial withdrawal, the remaining subaccount value would be $24,285.30
($29,775.40 - $5,000 - $300 - $190.10). For more information on the market value
adjustment, see Appendix A.
EXAMPLE 2: FULL WITHDRAWAL
As before, because of interest earned at the guaranteed rate of 6.0%, at the end
of the third Contract year the subaccount value will be equal to $29,775.40. In
order to determine the withdrawal charge on a full withdrawal of subaccount
value, the net subaccount value must first be calculated. In this example, the
net subaccount value will be equal to:
Subaccount Value 29,775.40
- ------------------------------------------ = ----------------- = $27,117.37
n/365 2
1 + Current MVA Interest Rate 1 + .082
0.06 + (-----------------------------) 0.06 + (--------)
1 + Issue MVA Interest Rate 1 + .062
The withdrawal charge would then be equal to the withdrawal charge rate
multiplied by the net subaccount value:
0.06 X $27,117.37 = $1,627.04
On a full withdrawal, the withdrawal charge would be deducted from the amount
withdrawn. In addition to a withdrawal charge, a market value adjustment of
$1,030.99 would be deducted from the withdrawal amount. Therefore, the net
subaccount value of $ 27,117.37 would be paid on a full withdrawal ($29,775.40 -
$1,627.04 - $1,030.99). For more information on the market value adjustment, see
Appendix A.
B-1
