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As Filed with the Securities and Exchange Commission on March 2, 1998
REGISTRATION NO. 33-41628
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
POST-EFFECTIVE AMENDMENT NO. 9 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
AND
AMENDMENT NO. 16 TO
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
(EXACT NAME OF REGISTRANT)
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(NAME OF DEPOSITOR)
ONE SUN LIFE EXECUTIVE PARK
WELLESLEY HILLS, MASSACHUSETTS 02181
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER: (781) 237-6030
MARGARET HANKARD, SENIOR ASSOCIATE COUNSEL
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ONE COPLEY PLACE, SUITE 100
BOSTON, MASSACHUSETTS 02116
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
MICHAEL BERENSON, ESQ.
JORDEN BURT BOROS CICCHETTI BERENSON & JOHNSON LLP
1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400E
WASHINGTON, D.C. 20007
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/X/ IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE 60 DAYS AFTER
FILING PURSUANT TO PARAGRAPH (a)(1) OF RULE 485.
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SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
Post-effective Amendment No. 9 to
Registration Statement on Form N-4
Cross Reference Sheet Required by Rule 495(a) under
The Securities Act of 1933
ITEM NUMBER IN FORM N-4 LOCATION IN PROSPECTUS; CAPTION
PART A
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Cover Pages; Expense Summary
4. Condensed Financial Condensed Financial Information;
Information Performance Data
5. General Description of A Word About the Company, the
Registrant, Depositor Fixed Account, the Variable
and Portfolio Companies Account, and the Series Fund;
Additional Information
About the Company
6. Deductions and Expenses How the Contract Charges Are Assessed;
Cash Withdrawals, Withdrawal Charges and
Market Value Adjustment
7. General Description of Purchase Payments and Contract
Variable Annuity Contracts Values During Accumulation
Period; Other Contractual
Provisions
8. Annuity Period Annuity Provisions
9. Death Benefit Death Benefit
10. Purchases and Contract Purchase Payments and Contract
Value Values During Accumulation
Period
11. Redemptions Cash Withdrawals, Withdrawal
Charges and Market Value
Adjustment
12. Taxes Federal Tax Status
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Not Applicable
Statement of Additional
Information
reggold
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ITEM NUMBER IN FORM N-4 LOCATION IN PROSPECTUS; CAPTION
PART B
15. Cover Page Not Applicable
16. Table of Contents Not Applicable
17. General Information and A Word About the Company, the
History Fixed Account, the Variable
Account and the Series Fund;
Additional Information About the
Company
18. Services Other Contractual Provisions;
Administration of the Contracts
19. Purchase of Securities Purchase Payments and Contract
Being Offered Values During Accumulation Period
20. Underwriters Distribution of the Contracts
21. Calculation of Performance Performance Data
Data
22. Annuity Payments Annuity Provisions
23. Financial Statements Financial Statements
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PART A
INFORMATION REQUIRED IN A PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1,
1998.
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PROSPECTUS
MAY 1, 1998
MFS REGATTA GOLD
--------------------------------------------------
The flexible payment deferred annuity contracts (the "Contracts") offered by
this Prospectus are designed for use in connection with retirement and deferred
compensation plans, some of which may qualify as retirement programs under
Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Contracts are
issued on either a group or individual basis by Sun Life Assurance Company of
Canada (U.S.) (the "Company"), an indirect wholly-owned subsidiary of Sun Life
Assurance Company of Canada, having its Principal Executive Offices at One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181, telephone (781)
237-6030. The Contracts provide that annuity payments will begin on a selected
future date. The Contracts provide for the accumulation of values on either a
variable basis, a fixed basis, or a fixed and variable basis and provide for
fixed and variable annuity payments as elected. In some states, individual
Contracts may be made available on a variable basis only.
The issuance of an individual Contract ("Individual Contract") will be
evidenced by the Contract. Participation in a group Contract ("Group Contract")
will be evidenced by the issuance of a certificate ("Certificate") describing
the participating individual's interest under the Group Contract. Unless
otherwise expressly indicated, references in this Prospectus to "Contracts"
include Individual Contracts, Group Contracts and Certificates issued under
Group Contracts, and references to "Participants" include Individual Contract
Owners and participating individuals under Group Contracts.
The initial Purchase Payment for each Contract must be at least $10,000 and
each additional Purchase Payment must be at least $1,000, unless waived by the
Company. The prior approval of the Company is required before it will accept a
Purchase Payment in excess of $1,000,000.
A Participant may elect to have values under a Contract accumulate on a
fixed basis in the Fixed Account, which pays interest at the applicable
Guaranteed Interest Rate(s) for the duration of the particular Guarantee
Period(s) selected by the Participant, or on a variable basis in Sun Life of
Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of
the Company, or divided between the Fixed Account and the Variable Account. The
assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account
uses its assets to purchase, at their net asset value, shares of a specific
series of MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund
registered under the Investment Company Act of 1940, and advised by
Massachusetts Financial Services Company, an affiliate of the Company.
Twenty-five series are available for investment under the Contracts: (1) Money
Market Series; (2) High Yield Series; (3) Capital Appreciation Series; (4)
Government Securities Series; (5) World Governments Series; (6) Total Return
Series; (7) Managed Sectors Series; (8) Conservative Growth Series; (9)
Utilities Series; (10) World Growth Series; (11) Research Series; (12) World
Asset Allocation Series; (13) World Total Return Series; (14) Emerging Growth
Series; (15) MFS/Foreign & Colonial International Growth Series; (16)
MFS/Foreign & Colonial International Growth and Income Series; (17) MFS/Foreign
& Colonial Emerging Markets Equity Series;
(CONTINUED ON NEXT PAGE)
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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.
THIS PROSPECTUS CONTAINS THE BASIC INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN A CONTRACT AND IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS FOR
THE MFS/SUN LIFE SERIES TRUST. YOU SHOULD RETAIN THIS PROSPECTUS FOR FUTURE
REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ANNUITY SERVICE CENTER, P.O. BOX
1024, BOSTON, MASSACHUSETTS 02103.
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(18) Value Series; (19) Research Growth and Income Series; (20) Bond Series;
(21) Equity Income Series; (22) Massachusetts Investors Growth Series; (23) New
Discovery Series; (24) Research International Series; and (25) Strategic Income
Series.
The Series Fund pays its investment adviser certain fees charged against the
assets of each Series. The value of the variable portion, if any, of a
Participant's Account and the amount of variable annuity payments will vary to
reflect the investment performance of the series of the Series Fund selected by
the Participant and the deduction of the contract charges described under "How
the Contract Charges Are Assessed" on page 28. For more information about the
Series Fund, see "The Series Fund" on page 16 and the accompanying Series Fund
prospectus.
If the Participant elects to have values accumulated on a fixed basis,
Purchase Payments are allocated to one or more Guarantee Periods made available
by the Company in connection with the Fixed Account with durations of from one
to ten years, as selected by the Participant. The Fixed Account is the general
account of the Company (See "The Fixed Account" on page 13). The Company will
credit interest at a rate not less than three percent (3%) per year, compounded
annually, to amounts allocated to the Fixed Account and guarantees these amounts
at various interest rates (the "Guaranteed Interest Rates") for the duration of
the Guarantee Period elected by the Participant, subject to the imposition of
any applicable withdrawal charge, Market Value Adjustment, or account
administration fee. The Company may not change a Guaranteed Interest Rate for
the duration of the Guarantee Period; however, Guaranteed Interest Rates
applicable to subsequent Guarantee Periods cannot be predicted and will be
determined at the sole discretion of the Company (subject to the minimum
guarantee). That part of the Contract relating to the Fixed Account is
registered under the Securities Act of 1933, but the Fixed Account is not
subject to the restrictions of the Investment Company Act of 1940.
The Company does not deduct a sales charge from Purchase Payments. However,
if any part of a Participant's Account is withdrawn, a withdrawal charge
(contingent deferred sales charge) may be assessed by the Company. This charge
is intended to reimburse the Company for expenses relating to the distribution
of the Contracts. A portion (specified in the applicable Contract) of the
Participant's Account Value may be withdrawn in each Account Year without the
imposition of a withdrawal charge, and after a Purchase Payment has been held by
the Company for seven years it may be withdrawn without charge. Also, no
withdrawal charge is assessed upon annuitization or upon transfers. Other
amounts withdrawn, adjusted by any applicable Market Value Adjustment with
respect to the Fixed Account, will be subject to a withdrawal charge ranging
from 6% to 0%. In no event will the withdrawal charges assessed against a
Participant's Account exceed 6% of Purchase Payments (See "Withdrawal Charges"
on page 24).
In addition, any cash withdrawal of amounts allocated to the Fixed Account,
other than a withdrawal effective within 30 days prior to the Expiration Date of
the applicable Guarantee Period or the withdrawal of interest credited to a
Guarantee Amount during the current Account Year, will be subject to a Market
Value Adjustment. The Market Value Adjustment will reflect the relationship
between the Current Rate (which is the Guaranteed Interest Rate currently
declared by the Company for Guarantee Periods equal to the balance of the
Guarantee Period applicable to the amount being withdrawn) and the Guaranteed
Interest Rate applicable to the amount being withdrawn. Generally, if the
Guaranteed Interest Rate is lower than the Current Rate, then the application of
the Market Value Adjustment will result in a lower payment upon withdrawal.
Similarly, if the Guaranteed Interest Rate is higher than the Current Rate, the
application of the Market Value Adjustment will result in a higher payment upon
withdrawal (See "Market Value Adjustment" on page 26).
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Contracts used with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 25).
2
<PAGE>
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status"). For a discussion of cash withdrawals,
withdrawal charges and the Market Value Adjustment see "Cash Withdrawals,
Withdrawal Charges and Market Value Adjustment" beginning on page 23.
On each Account Anniversary and on surrender of a Contract for full value
the Company will deduct an annual account administration fee ("Account Fee")
from the Participant's Account. The amount of this fee is $35 in Account Years
one through five; thereafter, it may be changed annually, subject to a maximum
of $50. After the Annuity Commencement Date an Account Fee of $35 will be
deducted pro rata from each variable annuity payment made during the year. In
addition, the Company makes a deduction from the Variable Account at the end of
each Valuation Period equal to an annual rate of 0.15% of the daily net assets
of the Variable Account. These charges are to reimburse the Company for
administrative expenses related to the issuance and maintenance of the
Contracts. The Account Fee may be waived by the Company under certain
circumstances (See "Administrative Charges" on page 28).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.25% of the daily net assets
of the Variable Account for mortality and expense risks assumed by the Company
(See "Mortality and Expense Risk Charge" on page 29).
In addition, the Contracts provide that the Company may change the
withdrawal charges, Account Fee, mortality and expense risk charges,
administrative expense charges, transfer charges, the tables used in determining
the amount of the first monthly variable annuity payment and fixed annuity
payments and the formula used to calculate the Market Value Adjustment, provided
that such modification shall apply only with respect to Participant's Accounts
established after the effective date of such modification (See "Modification" on
page 36).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable except as may be provided under the Annuity Option elected (See
"Death Benefit" on page 27).
Annuity Payments will begin on the Annuity Commencement Date. The
Participant selects the Annuity Commencement Date, frequency of payments and the
Annuity Option (See "Annuity Provisions" on page 30).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes" on page 29).
Subject to certain conditions, and during the Accumulation Period, a
Participant may transfer amounts among the Sub-Accounts or Guarantee Periods
available under the Contract. Currently there is no charge for transfers.
Transfers (except of interest credited during the current Account Year to the
Guarantee Amount transferred) from or within the Fixed Account will be subject
to the Market Value Adjustment unless the transfer is effective within 30 days
prior to the Expiration Date of the amount transferred and other restrictions
may apply (See "Transfer Privilege; Telephone Transfers; Restriction on Market
Timers" on page 22).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Annuity Units of
particular Sub-Accounts then credited with respect to the particular Payee for
other Annuity Units, the value of which would be such that the dollar amount of
an annuity payment made on the date of the exchange would be unaffected by the
fact of the exchange (See "Exchange of Variable Annuity Units" on page 33).
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. Except in
the case of a particular Group Contract where the right to give voting
instructions is reserved by the Owner, the Owner or Participant is the person
having the right to give voting instructions prior to the Annuity Commencement
Date. On or after the Annuity Commencement Date the Payee is the person having
such voting rights. Any shares attributable to the Company and Series Fund
shares for which no
3
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timely voting instructions are received will be voted by the Company in the same
proportion as the shares for which instructions are received from persons having
such right (See "Voting of Series Fund Shares" on page 35).
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 35. Such reports, other than prospectuses, will not include the Company's
financial statements.
If a Participant is not satisfied with the Contract it may be returned to
the Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Participant. When the Company receives the returned Contract it
will be cancelled and the Participant's Account Value at the end of the
Valuation Period during which the Contract was received by the Company will be
refunded. However, if applicable state law so requires, the full amount of any
Purchase Payment received by the Company will be refunded, the "free look"
period may be greater than ten days and alternative methods of returning the
Contract may be acceptable.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web Site that contains reports, proxy and
information statements, and other information about the Company, which files
documents electronically with the Commission at the following address:
http://www.sec.gov.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements and exhibits thereto, and reference is
hereby made to such Registration Statements and exhibits for further information
relating to the Company and the Contracts. The Registration Statements and the
exhibits thereto may be inspected and copied, and copies can be obtained at
prescribed rates, in the manner set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1997
heretofore filed by the Company with the Commission under the 1934 Act is
incorporated by reference in this Prospectus.
Any statement contained in a document incorporated by reference herein shall
be deemed modified or superseded hereby to the extent that a statement contained
in a later-filed document or herein shall modify or supersede such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in the Prospectus). Requests for such
document should be directed to Secretary, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181,
telephone (800) 225-3950.
4
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Definitions 7
Expense Summary 9
Condensed Financial Information--Accumulation Unit Values 11
Performance Data 12
This Prospectus Is a Catalog of Facts 12
Uses of the Contract 12
A Word About the Company, the Fixed Account, the Variable
Account and the Series Fund 13
The Company 13
The Fixed Account 13
The Variable Account 15
The Series Fund 16
Purchase Payments and Contract Values During Accumulation
Period 18
Purchase Payments 18
Participant's Account 19
Variable Accumulation Value 19
Fixed Accumulation Value 20
Guarantee Periods 20
Guaranteed Interest Rates 21
Dollar Cost Averaging 21
Asset Allocation 22
Transfer Privilege; Telephone Transfers; Restriction on
Market Timers 22
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 23
Cash Withdrawals, Withdrawal Charges and Market Value
Adjustment 23
Cash Withdrawals 23
Withdrawal Charges 24
Amount of Withdrawal Charge 25
Section 403(b) Annuities 25
Market Value Adjustment 26
Death Benefit 27
Death Benefit Provided by the Contract 27
Election and Effective Date of Election 27
Payment of Death Benefit 27
Amount of Death Benefit 27
How the Contract Charges Are Assessed 28
Administrative Charges 28
Premium Taxes 29
Mortality and Expense Risk Charge 29
Withdrawal Charges 29
Annuity Provisions 30
Annuity Commencement Date 30
Election--Change of Annuity Option 30
Annuity Options 31
Determination of Annuity Payments 31
Fixed Annuity Payments 32
Variable Annuity Payments 32
Variable Annuity Unit Value 32
Exchange of Variable Annuity Units 32
</TABLE>
5
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TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Contractual Provisions 33
Payment Limits 33
Designation and Change of Beneficiary 33
Exercise of Contract Rights 33
Change of Ownership 34
Death of Participant 34
Voting of Series Fund Shares 35
Periodic Reports 35
Substituted Securities 36
Change in Operation of Variable Account 36
Splitting Units 36
Modification 36
Discontinuance of New Participants 36
Custodian 37
Right to Return 37
Federal Tax Status 37
Introduction 37
Tax Treatment of the Company and the Variable Account 37
Taxation of Annuities in General 38
Qualified Retirement Plans 39
Pension and Profit-Sharing Plans 40
Tax-Sheltered Annuities 40
Individual Retirement Accounts 40
Roth IRAs 40
Administration of the Contracts 41
Distribution of the Contracts 41
Additional Information About the Company 42
Selected Financial Data 42
Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Reinsurance 45
Reserves 45
Investments 46
Competition 46
Employees 46
Properties 46
The Company's Directors and Executive Officers 46
State Regulation 49
Legal Proceedings 50
Legal Matters 50
Accountants 50
Registration Statements 50
Financial Statements 50
Appendix A--Variable Accumulation Unit Value, Variable
Annuity Unit Value and Variable Annuity Payment
Calculations 88
Appendix B--State Premium Taxes 88
Appendix C--Withdrawals, Withdrawal Charges and the Market
Value Adjustment 89
Appendix D--Calculation of Performance Data; Advertising and
Sales Literature 92
</TABLE>
6
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DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCOUNT YEARS and ACCOUNT ANNIVERSARIES: The first Account Year shall be
the period of 12 months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Account
Anniversaries thereafter shall be 12 month periods based upon such first day of
the calendar month which follows the calendar month of coverage. If, for
example, the Date of Coverage is in March, the first Account Year will be
determined from the Date of Coverage but will end on the last day of March in
the following year; all other Account Years and all Account Anniversaries will
be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
ANNUITANT: The person or persons named in the Application and on whose life
the first annuity payment is to be made. The Participant may not designate a
"Co-Annuitant" unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the Contract which are based
on the death of the "Annuitant" will be based on the date of death of the last
survivor of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
survivor of the persons so named. Collectively, these persons are referred to in
this Contract as "Annuitants." The Participant is not permitted to name a
"Co-Annuitant" under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under a Group Contract or purchase of an
Individual Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in each Contract and, for Non-Qualified Contracts, who, in the
event of the Participant's death, is the "designated beneficiary" for purposes
of Section 72(s) of the Internal Revenue Code.
CERTIFICATE: The document for each Participant which evidences the coverage
of the Participant under a Group Contract. Unless otherwise expressly indicated,
references in this Prospectus to "Contracts" include Certificates.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for a Group Contract.
DATE OF COVERAGE: The date on which a Participant's Account becomes
effective.
DEATH BENEFIT DATE: The date on which the death benefit election is
effective or is deemed to become effective, which is the date on which the
Company receives Due Proof of Death.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
FIXED ACCOUNT: Part of the general account of the Company, consisting of
all assets of the Company other than those allocated to a separate account of
the Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Any portion of a Participant's Account Value allocated to
a particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
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*As specified in the Application, unless changed.
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GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
ISSUE DATE: The date on which a Group Contract becomes effective.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive favorable income tax treatment as an
annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k) or
Section 408(p) of the Internal Revenue Code to serve as legal owner of assets of
a retirement plan, but the term "Owner", as used herein, shall refer to the
organization entering into the Group Contract.
PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
Net Purchase Payments are credited.
PARTICIPANT'S ACCOUNT VALUE: The Variable Accumulation Value, if any, plus
the Fixed Accumulation Value, if any, of a Participant's Account for any
Valuation Period.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SERIES FUND: MFS/Sun Life Series Trust.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter; for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series or sub-series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day that the Exchange is open for trading and on
such other days on which there is a sufficient degree of trading in the
portfolio securities of the Variable Account so that the values of the Variable
Account's Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets
set aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of specified Sub-Accounts of the
Variable Account.
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*As specified in the Application, unless changed.
8
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Examples is to help Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Participants WHEN PAYMENTS ARE ALLOCATED TO THE
VARIABLE ACCOUNT. The tables reflect expenses of the Variable Account as well as
of the Series Fund. The information set forth should be considered together with
the narrative provided under the heading "How the Contract Charges Are Assessed"
in this Prospectus, and with the Series Fund's prospectus. In addition to the
expenses listed below, premium taxes may be applicable.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<CAPTION>
PARTICIPANT TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases......... $ 0
Deferred Sales Load (as a percentage of
Purchase Payments
withdrawn) (1)
Number of Complete Account Years
Purchase Payment in Account
0-1................................. 6%
2-3................................. 5%
4-5................................. 4%
6................................... 3%
7 or more........................... 0%
Exchange fee (2)........................ 0
ANNUAL ACCOUNT FEE
$35 Per Participant's Account (3)
SEPARATE ACCOUNT ANNUAL EXPENSES (as a
percentage of average separate account
assets)
Mortality and Expense Risk Fees......... 1.25%
Administrative Expense Charge........... 0.15%
Other Fees and Expenses of the Separate
Account............................... 0.00%
Total Separate Account Annual
Expenses.............................. 1.40%
</TABLE>
- ------------
(1) A portion of the Participant's Account may be withdrawn each year without
imposition of any withdrawal charge, and after a Purchase Payment has been
held by the Company for seven years it may be withdrawn free of any
withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Annual Account Fee is the lesser of $35 and 2% of the Participant's
Account Value in Account Years one through five; thereafter, the fee may be
changed annually, but it may not exceed the lesser of $50 and 2% of the
Participant's Account Value.
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF UNDERLYING FUND NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES EXPENSES EXPENSES
---------- ---------- ----------
<S> <C> <C> <C>
Money Market Series..................... 0.50 % 0.08 % 0.58 %
High Yield Series....................... 0.75 % 0.10 % 0.85 %
Capital Appreciation Series............. 0.73 % 0.06 % 0.79 %
Government Securities Series............ 0.55 % 0.09 % 0.64 %
World Governments Series................ 0.75 % 0.16 % 0.91 %
Total Return Series..................... 0.66 % 0.05 % 0.71 %
Managed Sectors Series.................. 0.74 % 0.08 % 0.82 %
Conservative Growth Series.............. 0.55 % 0.06 % 0.61 %
Utilities Series........................ 0.75 % 0.12 % 0.87 %
World Growth Series..................... 0.90 % 0.12 % 1.02 %
Research Series......................... 0.72 % 0.07 % 0.79 %
World Asset Allocation Series........... 0.75 % 0.17 % 0.92 %
World Total Return Series............... 0.75 % 0.29 % 1.04 %
Emerging Growth Series.................. 0.74 % 0.07 % 0.81 %
MFS/Foreign & Colonial International
Growth Series......................... 0.975% 0.31 %(2) 1.285%
MFS/Foreign & Colonial International
Growth and Income Series.............. 0.975% 0.245% 1.22 %
MFS/Foreign & Colonial Emerging Markets
Equity Series......................... 1.25 % 0.25 %(2) 1.50 %(3)
Value Series............................ 0.75 % 0.16 % 0.91 %
Research Growth and Income Series....... 0.75 % 0.69 %(2) 1.44 %
Bond Series.............................
Equity Income Series....................
Massachusetts Investors Growth Series...
New Discovery Series....................
Research International Series...........
Strategic Income Series.................
</TABLE>
- ------------
(1) Unless otherwise indicated, the information in the table is based on amounts
incurred during the Series Fund's most recent fiscal year. The information
relating to Fund expenses was provided by the Series Fund and has not been
independently verified by the Company. Participants should consult the
Series Fund prospectus for more information about Series Fund expenses.
(2) Other expenses of the Research Growth and Income Series and the MFS/Foreign
& Colonial International Growth Series and Emerging Markets Equity Series
are based on estimated amounts for the current fiscal year. The Adviser has
undertaken to reimburse the Emerging Markets Equity Series and the Research
Growth and Income Series for expenses that exceed 1.50% of the average daily
net assets of such series on an annualized basis, as more fully described in
the Series Fund's Prospectus. Absent such reimbursement, expenses of the
Emerging Markets Equity Series for 1997 would have been ____%.
(3) The Series Fund's investment adviser (the "Adviser") has voluntarily agreed
to bear the expenses for the MFS/Foreign & Colonial Emerging Markets Equity
Series such that "Total Fund Expenses" will not exceed 1.50% of the average
daily net assets on an annualized basis, as more fully described in the
Series Fund's prospectus. This voluntary fee reduction may be rescinded at
any time. Absent this voluntary reduction, this Series "Total Fund Expenses"
payable would have been 1.55%
9
<PAGE>
EXAMPLES
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Bond Series $ $ $ $
Capital Appreciation Series
Conservative Growth Series
Emerging Growth Series
Equity Income Series
Government Securities Series
High Yield Series
MFS/Foreign & Colonial Emerging Markets
Equity Series
MFS/Foreign & Colonial International
Growth and Income Series
MFS/Foreign & Colonial International
Growth Series
Managed Sectors Series
Massachusetts Investors Growth Series
Money Market Series
New Discovery Series
Research Series
Research Growth and Income Series
Research International Series
Strategic Income Series
Total Return Series
Utilities Series
Value Series
World Asset Allocation Series
World Governments Series
World Growth Series
World Total Return Series
</TABLE>
If you do not surrender your Contract, or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Bond Series $ $ $ $
Capital Appreciation Series
Conservative Growth Series
Emerging Growth Series
Equity Income Series
Government Securities Series
High Yield Series
MFS/Foreign & Colonial Emerging Markets
Equity Series
MFS/Foreign & Colonial International
Growth and Income Series
MFS/Foreign & Colonial International
Growth Series
Managed Sectors Series
Massachusetts Investors Growth Series
Money Market Series
New Discovery Series
Research Series
Research Growth and Income Series
Research International Series
Strategic Income Series
Total Return Series
Utilities Series
Value Series
World Asset Allocation Series
World Governments Series
World Growth Series
World Total Return Series
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
10
<PAGE>
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements appearing elsewhere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------
1991* 1992 1993 1994 1995 1996 1997
------------ ---------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period....... $10.0000 $ 11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8932
End of period............. $11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8392 $ 22.5700
Units outstanding end of
period..................... 124,454 5,131,355 13,245,142 19,909,649 27,782,739 32,796,793
CONSERVATIVE GROWTH SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344
End of period............. $10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344 $ 19.9527
Units outstanding end of
period..................... 85,141 2,557,065 6,412,270 10,979,711 16,712,586 26,199,975
EMERGING GROWTH SERIES
Unit Value:
Beginning of period -- -- -- -- $ 10.0000** $ 12.5675
End of period............. -- -- -- -- $ 12.5675 $ 14.5136
Units outstanding end of
period..................... -- -- -- -- 5,346,104 16,998,044
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981
End of period............. $10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981 $ 13.1252
Units outstanding end of
period..................... 256,848 5,447,047 13,661,303 18,784,262 18,082,586 19,714,114
HIGH YIELD SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137
End of period............. $10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137 $ 16.2674
Units outstanding end of
period..................... 6,734 1,380,530 3,599,473 4,605,818 6,880,080 8,424,289
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
Unit Value:
Beginning of period....... -- -- -- -- -- $ 10.0000**
End of period............. -- -- -- -- -- $ 9.9199
Units outstanding end of
period..................... -- -- -- -- -- 329,630
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH SERIES
Unit Value:
Beginning of period....... -- -- -- -- -- $ 10.0000**
End of period............. -- -- -- -- -- $ 9.7460
Units outstanding end of
period..................... -- -- -- -- -- 564,742
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME SERIES
Unit Value:
Beginning of period....... -- -- -- -- $ 10.0000** $ 10.0942
End of period............. -- -- -- -- $ 10.0942 $ 10.4404
Units outstanding end of
period..................... -- -- -- -- 711,179 3,360,596
MANAGED SECTORS SERIES
Unit Value:
Beginning of period....... $10.0000 $ 11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925
End of period............. $11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925 $ 18,5452
Units outstanding end of
period..................... 51,219 2,614,510 4,525,423 6,351,641 8,542,869 10,541,726
MONEY MARKET SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111
End of period............. $10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111 $ 11.3932
Units outstanding end of
period..................... 417,559 4,101,024 6,055,673 14,774,386 17,186,041 27,275,583
RESEARCH SERIES
Unit Value:
Beginning of period....... -- -- -- $ 10.0000** $ 9.8615 $ 13.3663
End of period............. -- -- -- $ 9.8615 $ 13.3663 $ 16.3209
Units outstanding end of
period..................... -- -- -- 392,528 5,341,160 19,577,745
TOTAL RETURN SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406
End of period............. $10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406 $ 16.6932
Units outstanding end of
period..................... 280,202 12,952,314 32,979,812 48,270,556 53,091,748 59,508,016
UTILITIES SERIES
Unit Value:
Beginning of period....... -- -- $ 10.0000** $ 10.0000 $ 9.3739 $ 12.2403
End of period............. -- -- $ 10.0000 $ 9.3739 $ 12.2403 $ 14.5260
Units outstanding end of
period..................... -- -- 279,796 2,273,439 3,410,047 4,671,192
VALUE SERIES
Unit Value:
Beginning of period....... -- -- -- -- -- $ 10.0000**
End of period............. -- -- -- -- -- $ 10.9234
Units outstanding end of
period..................... -- -- -- -- -- 1,520,787
WORLD ASSET ALLOCATION SERIES
Unit Value:
Beginning of period....... -- -- -- $ 10.0000** $ 10.0367 $ 12.0393
End of period............. -- -- -- $ 10.0367 $ 12.0393 $ 13.7702
Units outstanding end of
period..................... -- -- -- 299,210 2,141,041 5,539,010
WORLD GOVERNMENTS SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523
End of period............. $10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523 $ 13.6780
Units outstanding end of
period..................... 44,190 3,405,280 7,008,613 8,334,019 8,272,858 7,510,766
WORLD GROWTH SERIES
Unit Value:
Beginning of period....... -- -- $ 10.0000** $ 10.6200 $ 10.7803 $ 12.3321
End of period............. -- -- $ 10.6200 $ 10.7803 $ 12.3321 $ 13.7523
Units outstanding end of
period..................... -- -- 1,778,644 9,182,555 11,421,691 13,989,946
WORLD TOTAL RETURN SERIES
Unit Value:
Beginning of period....... -- -- -- $ 10.0000** $ 10.0195 $ 11.6516
End of period............. -- -- -- $ 10.0195 $ 11.6516 $ 13.1290
Units outstanding end of
period..................... -- -- -- 138,126 1,170,586 2,836,079
<FN>
- ----------------------------------
* From November 18, 1991 (date of commencement of issuance of the Contracts) to
December 31, 1991.
** Unit value on date of commencement of operations of the respective
Sub-Account.
</TABLE>
11
<PAGE>
PERFORMANCE DATA
From time to time the Variable Account may publish reports to shareholders,
sales literature and advertisements containing performance data relating to the
Sub-Accounts. Performance data will consist of total return quotations which
will always include quotations for the period subsequent to the date each Sub-
Account became available for investment under the Contracts, and for recent one
year and, when applicable, five and ten year periods. Such quotations for such
periods will be the average annual rates of return required for an initial
Purchase Payment of $1,000 to equal the actual variable accumulation value
attributable to such Purchase Payment on the last day of the period, after
reflection of all applicable withdrawal and Contract charges. In addition, the
Variable Account may calculate non-standardized rates of return that do not
reflect withdrawal and Contract charges. Results calculated without withdrawal
and/or Contract charges will be higher. Performance figures used by the Variable
Account are based on the actual historical performance of the Series Fund for
specified periods, and the figures are not intended to indicate future
performance. The Variable Account may also from time to time compare its
investment performance to various unmanaged indices or other variable annuities
and may refer to certain rating and other organizations in its marketing
materials. More detailed information on the computations is set forth in
Appendix D.
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group and individual
deferred annuity contracts (the "Contracts") which provide fixed benefits,
variable benefits or a combination of both. It describes their uses and
objectives, their benefits and costs, and the rights and privileges of the Owner
and the Participant, as applicable. It also contains information about the
Company, the Variable Account, the Fixed Account and the Series Fund. It has
been carefully prepared in non-technical language to help you decide whether the
purchase of a Contract will fit the needs of your retirement plan. We urge you
to read it carefully and retain it for future reference. The Contracts have
appropriate provisions relating to variable and fixed accumulation values and
variable and fixed annuity payments. A Variable Annuity and a Fixed Annuity have
certain similarities. Both provide that Purchase Payments, less certain
deductions, will be accumulated prior to the Annuity Commencement Date. After
the Annuity Commencement Date, annuity payments will be made to the Annuitant.
The Company assumes the mortality and expense risks under the Contracts, for
which it receives certain amounts. The significant difference between a Variable
Annuity and a Fixed Annuity is that under a Variable Annuity, all investment
risk is assumed by the Participant or Payee and the amounts of the annuity
payments vary with the investment performance of the Variable Account; under a
Fixed Annuity, the investment risk is assumed by the Company (except in the case
of early withdrawals (See "Cash Withdrawals" and "Market Value Adjustment")) and
the amounts of the annuity payments do not vary. However, the Participant bears
the risk that the Guaranteed Interest Rate to be credited on amounts allocated
to the Fixed Account may not exceed the minimum guaranteed rate for any
Guarantee Period.
USES OF THE CONTRACT
The Contracts are designed for use in connection with retirement plans which
meet the requirements of Section 401 (including Section 401(k)), Section 403,
Section 408(b), Section 408(c), Section 408(k) or Section 408(p) of the Internal
Revenue Code; however, the Company may discontinue offering new Contracts in
connection with certain types of qualified plans. In addition, the Company may
begin offering Participants under Contracts used in connection with individual
retirement plans under Section 408 the opportunity to convert the Contracts into
Contracts used in connection with Roth IRAs under Section 408A of the Internal
Revenue Code, and may also begin offering new Contracts for use in connection
with Roth IRAs. Certain federal tax advantages are currently available to
retirement plans which qualify as (1) self-employed individuals' retirement
plans under Section 401; (2) corporate or association retirement plans under
Section 401; (3) annuity purchase plans sponsored by certain tax exempt
organizations or public school systems under Section 403(b); or (4) individual
retirement accounts, including employer or association of employees individual
retirement accounts under Section 408(c), SEP-IRAs under Section 408(k), Simple
Retirement Accounts under Section 408(p), and Roth IRAs under Section 408A (See
"Federal Tax Status").
12
<PAGE>
The Contracts are also designed so that they may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law.
The Contracts are available on a group basis and, in certain states, may be
available on an individual basis. An Individual Contract is issued directly to
the Owner of the Contract. A Group Contract is issued to the Owner covering all
individuals participating under the Group Contract. Each such individual
receives a Certificate which evidences his or her participation under the Group
Contract. In this Prospectus, unless otherwise indicated, both the owners of
Individual Contracts and participating individuals under Group Contracts are
referred to as Participants; the term "Contracts" includes Individual Contracts,
Group Contracts and Certificates issued under Group Contracts. For the purposes
of determining benefits under both Individual Contracts and Group Contracts, a
Participant's Account is established for each Participant.
A WORD ABOUT THE COMPANY,
THE FIXED ACCOUNT, THE VARIABLE ACCOUNT AND THE SERIES FUND
THE COMPANY
The Company is a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. Its Executive Office mailing address is One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181. It has obtained
authorization to do business in forty-eight states, the District of Columbia and
Puerto Rico, and it is anticipated that the Company will be authorized to do
business in all states except New York. The Company issues life insurance
policies and individual and group annuities. The Company has formed a
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York,
which issues individual fixed and combination fixed/variable annuity contracts
and group life and long-term disability insurance in New York and which offers
in New York contracts similar to the Contracts offered by this Prospectus. The
Company's other active subsidiaries are Sun Capital Advisers, Inc., a registered
investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer
that acts as the general distributor of the Contracts and other annuity and life
insurance contracts issued by the Company and its affiliates, Sun Life of Canada
(U.S.) Distributors, Inc., a registered broker-dealer and investment adviser,
New London Trust, F.S.B., a federally chartered savings bank, Massachusetts
Casualty Insurance Company, which issues individual disability income policies,
and Sun Life Financial Services Limited which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada ("Sun Life
(Canada)").
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc. ("Life Holdco"), which, on December 18, 1997, became a
wholly-owned subsidiary of Sun Life Assurance Company of Canada -- U.S.
Operations Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned
subsidiary of Sun Life (Canada), 150 King Street West, Toronto, Ontario, Canada.
Sun Life (Canada) is a mutual life insurance company incorporated pursuant to an
Act of Parliament of Canada in 1865 and currently transacts business in all of
the Canadian provinces and territories, all U.S. states except New York, the
District of Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland,
Hong Kong, Bermuda and the Philippines.
THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase Payments will be
allocated to Guarantee Periods available in connection with the Fixed Account to
the extent elected by the Participant at the time of the establishment of a
Participant's Account or as subsequently changed. In addition, all or part of
the Participant's Account Value may be transferred to Guarantee Periods
available under the Contracts as described under "Transfer Privilege". Assets
supporting amounts allocated to Guarantee Periods become part of the Company's
general account assets and are available to fund the claims of all classes of
customers of the Company, including claims for benefits under the Contracts.
The Company will invest the assets of the Fixed Account in those assets
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
13
<PAGE>
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
The Company intends to invest the assets of the Fixed Account primarily in
debt instruments as follows: (1) 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; (2) Debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard &
Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating
service; (3) Other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and other corporations, which
obligations, although not rated by Moody's or Standard & Poor's, are deemed by
the Company's management to have an investment quality comparable to securities
which may be purchased as stated above; and (4) Other evidences of indebtedness
secured by mortgages or deeds of trust representing liens upon real estate.
Notwithstanding the foregoing, the Company may also invest a portion of the
Fixed Account in below investment grade debt instruments. Instruments rated Baa
and/or BBB or lower normally involve a higher risk of default and are less
liquid than higher rated instruments. If the rating of an investment grade debt
security held by the Company is subsequently downgraded to below investment
grade, the decision to retain or dispose of the security will be made based upon
an individual evaluation of the circumstances surrounding the downgrading and
the prospects for continued deterioration, stabilization and/or improvement.
The Company is not obligated to invest amounts allocated to the Fixed
Account according to any particular strategy, except as may be required by
applicable state insurance laws. Investment income from such Fixed Account
assets will be allocated between the Company and all contracts participating in
the Fixed Account, including the Contracts offered by this Prospectus, in
accordance with the terms of such contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contracts which cannot be changed
(except as described under "Modification" with respect to Participant's Accounts
established after the effective date of such modification). In addition, the
Company guarantees that it will not increase charges for maintenance of the
Contracts, regardless of its actual expenses (except as described under
"Modification" with respect to Participant's Accounts established after the
effective date of such modification).
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks, distribution expenses and
administrative expenses borne by the Company in connection with contracts
participating in the Fixed Account. The Company expects to derive a profit from
this compensation. The amount of investment income allocated to the Contracts
will vary from Guarantee Period to Guarantee Period in the sole discretion of
the Company. However, the Company guarantees that it will credit interest at a
minimum rate of three percent (3%) per year, compounded annually, to amounts
allocated to the Fixed Account under the Contracts. The Company may credit
interest at a rate in excess of the minimum rate; however, the Company is not
obligated to credit any interest in excess of such rate. There is no specific
formula for the determination of excess interest credits. Such credits, if any,
will be determined by the Company based on information as to expected investment
yields. Some of the factors that the Company may consider in determining whether
to credit interest to amounts allocated to the Fixed Account and the amount
thereof, are: general economic trends; rates of return currently available and
anticipated on the Company's investments; regulatory and tax requirements; and
competitive factors. The Company's general investment strategy will be to invest
amounts allocated to the Fixed Account in investment-grade debt securities and
mortgages using immunization strategies with respect to the applicable Guarantee
Periods. This includes, with respect to investments and average terms of
investments, using dedication (cash flow matching) and/or duration matching to
minimize the Company's risk of not achieving the rates it is crediting under
Guarantee Periods in volatile interest rate environments. ANY INTEREST CREDITED
TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF THREE PERCENT (3%) WILL
BE
14
<PAGE>
DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE PARTICIPANT ASSUMES THE
RISK THAT INTEREST CREDITED ON AMOUNTS ALLOCATED TO THE FIXED ACCOUNT MAY NOT
EXCEED THE MINIMUM GUARANTEE FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Board of Directors has set no limitations.
However, inherent in the Company's exercise of discretion in this regard is the
equitable allocation of distributable earnings and surplus among its various
policyholders and contract owners and to its sole stockholder.
THE VARIABLE ACCOUNT
The basic objective of a variable annuity contract is to provide variable
annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contracts are designed
to seek to accomplish this objective by providing that variable annuity payments
(1) will reflect the investment performance of the Variable Account with respect
to amounts allocated to the Variable Account before the Annuity Commencement
Date and (2) will reflect the investment performance of the Variable Account
after that date. Since the Variable Account is always fully invested in Series
Fund shares, its investment performance reflects the investment performance of
the Series Fund. Values of Series Fund shares held by the Variable Account
fluctuate and are subject to the risks of changing economic conditions as well
as the risk inherent in the ability of the Series Fund's management to make
necessary changes in its portfolios to anticipate changes in economic
conditions. Therefore, the Participant bears the entire investment risk that the
basic objectives of the Contract may not be realized, and that the adverse
effects of inflation may not be lessened and there can be no assurance that the
aggregate amount of variable annuity payments will equal or exceed the aggregate
amount of Purchase Payments made with respect to a particular Participant's
Account for the reasons described above or because of the premature death of a
Payee.
Another important feature of the Contracts related to their basic objective
is the Company's promise that the dollar amount of variable annuity payments
made during the lifetime of the Payee(s) will not be adversely affected by the
actual mortality experience of the Company or by the actual expenses incurred by
the Company in excess of expense deductions provided for in the Contracts.
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") was
established by the Company as a separate account on July 13, 1989 pursuant to a
resolution of its Board of Directors. Under Delaware insurance law and the
Contract, the income, gains or losses of the Variable Account are credited to or
charged against the assets of the Variable Account without regard to the other
income, gains, or losses of the Company. These assets are held in relation to
the Contracts described in this Prospectus and such other variable annuity
contracts issued by the Company and designated by it as providing benefits which
vary in accordance with the investment performance of the Variable Account.
Although the assets maintained in the Variable Account will not be charged with
any liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make annuity
payments, are general corporate obligations of the Company.
The Variable Account meets the definition of a separate account under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Commission does not
involve supervision of the management or investment practices or policies of the
Variable Account or of the Company by the Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific series of the Series
Fund. All amounts allocated to the Variable Account will be used to purchase
Series Fund shares as designated by the Participant at their net asset value.
Any and all distributions made by the Series Fund with respect to the shares
held by the Variable Account will be reinvested to purchase additional shares at
their net asset value. Deductions from the Variable Account for cash
withdrawals, annuity payments, death benefits, Account Fees, contract charges
against the assets of
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the Variable Account for the assumption of mortality and expense risks,
distribution expenses, administrative expenses and any applicable taxes will, in
effect, be made by redeeming the number of Series Fund shares at their net asset
value equal in total value to the amount to be deducted. The Variable Account
will be fully invested in Series Fund shares at all times.
THE SERIES FUND
MFS/Sun Life Series Trust (the "Series Fund") is an open-end investment
management company registered under the Investment Company Act of 1940.
Currently shares of the Series Fund are also sold to other separate accounts
established by the Company and Sun Life Insurance and Annuity Company of New
York in connection with individual and group variable annuity contracts and
single premium variable life insurance contracts. In the future, shares of the
Series Fund may be sold to other separate accounts established by the Company or
its affiliates to fund other variable annuity or variable life insurance
contracts. The Company and its affiliates will be responsible for reporting to
the Series Fund's Board of Trustees any potential or existing conflicts between
the interests of variable annuity contract owners/participants and the interests
of owners of variable life insurance contracts that provide for investment in
shares of the Series Fund. The Board of Trustees, a majority of whom are not
"interested persons" of the Series Fund, as that term is defined in the
Investment Company Act of 1940, also intends to monitor the Series Fund to
identify the existence of any such irreconcilable material conflicts and to
determine what action, if any, should be taken by the Series Fund and/or the
Company and its affiliates (see "Management of the Series Fund" in the Series
Fund prospectus).
The Series Fund is composed of 26 independent portfolios of securities, each
of which has separate investment objectives and policies. Shares of the Series
Fund are issued in 26 series, each corresponding to one of the portfolios;
however, the Contracts provide for investment only in shares of the 25 series of
the Series Fund described below. Additional portfolios may be added to the
Series Fund which may or may not be available for investment by the Variable
Account.
(1) MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months, including U.S. Government
securities and repurchase agreements collateralized by such securities,
obligations of the larger banks and prime commercial paper.
(2) HIGH YIELD SERIES will seek high current income and capital appreciation
by investing primarily in fixed income securities of U.S. and foreign issuers
which may be in the lower rated categories or unrated (commonly known as "junk
bonds") and which may include equity features. These securities generally
involve greater volatility of price and risk to principal and income and less
liquidity than securities in the higher rated categories. Any person
contemplating allocating Purchase Payments to the Sub-Account investing in
shares of the High Yield Series should review the risk disclosure in the Series
Fund prospectus carefully and consider the investment risks involved.
(3) CAPITAL APPRECIATION SERIES will seek capital appreciation by investing
in securities of all types, with a major emphasis on common stocks.
(4) GOVERNMENT SECURITIES SERIES will seek current income and preservation
of capital by investing in U.S. Government and Government-related Securities.
(5) WORLD GOVERNMENTS SERIES will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
foreign government securities.
(6) TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent with
prudent employment of capital; its secondary objective is to take advantage of
opportunities for growth of capital and income. Assets will be allocated and
reallocated from time to time between money market, fixed income and equity
securities. Under normal market conditions, at least 25% of the Total Return
Series' assets will be invested in fixed income securities and at least 40% and
no more than 75% of its assets will be invested in equity securities.
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(7) MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio of common stocks among certain industry sectors.
Dividend income, if any, is incidental to its objective of capital appreciation.
(8) CONSERVATIVE GROWTH SERIES will seek long-term growth of capital and
future income while providing more current dividend income than is normally
obtainable from a portfolio of only growth stocks by investing a substantial
proportion of its assets in the common stocks or securities convertible into
common stocks of companies believed to possess better than average prospects for
long-term growth and a smaller proportion of its assets in securities whose
principal characteristic is income production.
(9) UTILITIES SERIES will seek capital growth and current income (income
above that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in equity
and debt securities issued by both domestic and foreign utility companies.
(10) WORLD GROWTH SERIES will seek capital appreciation by investing in
securities of companies worldwide growing at rates expected to be well above the
growth rate of the overall U.S. economy.
(11) RESEARCH SERIES will seek to provide long-term growth of capital and
future income.
(12) WORLD ASSET ALLOCATION SERIES will seek total return over the long term
through investments in foreign and domestic equity and fixed income securities
and will also seek to have low volatility of share price (i.e. net asset value
per share) and reduced risk (compared to an aggressive equity/fixed income
portfolio).
(13) WORLD TOTAL RETURN SERIES will seek total return by investing in
securities which will provide above average current income (compared to a
portfolio invested entirely in equity securities) and opportunities for
long-term growth of capital and income. The series will invest primarily in
global equity and fixed income securities (i.e. those of U.S. and non-U.S.
issuers).
(14) EMERGING GROWTH SERIES will seek to provide long-term growth of capital
by investing primarily (i.e. at least 80% of its assets under normal
circumstances) in common stocks of emerging growth companies, including small
and medium sized companies that are early in their life cycle but which have the
potential to become major enterprises. Dividend and interest income from
portfolio securities, if any, is incidental to its objective of long-term growth
of capital.
(15), (16) AND (17) The following three series are collectively referred to
as the "MFS/Foreign & Colonial Series."
(15) MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH SERIES will seek capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in equity securities of companies whose principal activities are
outside the U.S. growing at rates expected to be well above the growth rate of
the overall U.S. economy.
(16) MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME SERIES will seek
capital appreciation and current income by investing, under normal market
conditions, at least 65% of its total assets in equity and fixed income
securities of issuers whose principal activities are outside the United States.
(17) MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in equity securities of issuers whose principal activities are
located in emerging market countries.
(18) VALUE SERIES will seek capital appreciation.
(19) RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth
of capital, current income and growth of income.
(20) BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary investment
objective is to seek to protect shareholder capital.
(21) EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securities; its secondary objective is to seek to
protect shareholder capital.
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(22) MASSACHUSETTS INVESTORS GROWTH SERIES will primarily seek to provide
long-term growth of capital and future income rather than current income.
(23) NEW DISCOVERY SERIES will seek capital appreciation by investing in
equity securities of companies of any size which the Fund's investment adviser
believes offer superior prospects for growth, and in particular, emphasizing
companies in the developmental stages of their life cycle that offer the
potential for accelerated earnings or revenue growth.
(24) RESEARCH INTERNATIONAL SERIES will seek capital appreciation by
investing in equity securities of companies whose principal activities are
located outside the United States, as well as other securities offering an
opportunity for capital appreciation.
(25) STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining a
high level of current income.
The investment adviser of the Series Fund, Massachusetts Financial Services
Company ("MFS"), is paid fees by the Series Fund for its services pursuant to
investment advisory agreements. MFS, a Delaware corporation, is an affiliate of
the Company. MFS also serves as investment adviser to each of the funds in the
MFS Family of Funds, and to certain other investment companies established by
MFS and/or the Company. MFS Institutional Advisors, Inc., a wholly-owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS operates as an autonomous organization and the obligation of
performance with respect to the investment advisory and underwriting agreements
(including supervision of the sub-advisers noted below) is solely that of MFS.
The Company undertakes no obligation in this respect.
The investment advisory agreements for the World Growth Series and the
MFS/Foreign & Colonial Series permit MFS from time to time to engage one or more
sub-advisers to assist in the performance of its services. MFS has engaged
Foreign & Colonial Management Limited ("FCM") and its subsidiary, Foreign &
Colonial Emerging Markets Limited ("FCEM"), as sub-advisers of these series.
A more detailed description of the Series Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of the Series Fund and in the Series
Fund's Statement of Additional Information, which is available by calling
1-800-752-7215.
PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
(1) PLACE, AMOUNT AND FREQUENCY
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. The amount of Purchase Payments may vary; however, the Company
will not accept an initial Purchase Payment to be allocated to a Participant's
Account which is less than $10,000, and each additional Purchase Payment must be
at least $1,000, unless waived by the Company. In addition, the prior approval
of the Company is required before it will accept a Purchase Payment which would
cause the value of a Participant's Account to exceed $1,000,000. If the value of
a Participant's Account exceeds $1,000,000, no additional Purchase Payments will
be allocated among the series without the prior approval of the Company.
A completed Application (and, in the case of a Group Contract, a completed
Contract Application, if required) and the initial Purchase Payment are
forwarded to the Company for acceptance. Upon acceptance, in the case of an
Individual Contract, the Contract is issued to the Participant, and, in the case
of a Group Contract, the Contract and Certificate(s), as applicable, are issued
to the Owner and/or Participant(s), respectively, and the initial Purchase
Payment is then credited to the Participant's Account. The initial Purchase
Payment must be applied within two business days of receipt by the Company of a
completed Application. The Company may retain the Purchase Payment for up to
five business days while attempting to complete an incomplete Application. If
the Application cannot be made complete within five business days, the
prospective Participant will be informed of the reasons for the delay and the
Purchase
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Payment will be returned immediately unless the prospective participant
specifically consents to the Company's retaining the Purchase Payment until the
Application is made complete. Thereafter, the Purchase Payment must be applied
within two business days. Subsequent Purchase Payments are applied at the end of
the Valuation Period during which they are received by the Company.
(2) ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Annuitant until the Annuity Commencement Date or
until the Participant's Account is surrendered. Purchase Payments may be made at
any time while the Participant's Account is in force.
(3) ALLOCATION OF NET PURCHASE PAYMENTS
The Net Purchase Payment is that portion of a Purchase Payment which remains
after deduction of any applicable premium or similar tax. Each Net Purchase
Payment will be allocated either to Guarantee Periods available in connection
with the Fixed Account or to Sub-Accounts of the Variable Account or to both
Sub-Accounts and the Fixed Account in accordance with the allocation factors
specified in the particular Participant's Application, or as subsequently
changed.
The allocation factors for new Payments between the Guarantee Periods and
among the Sub-Accounts may be changed by the Participant at any time by giving
written notice of the change to the Company. Any change will take effect with
the first Purchase Payment received with or after receipt of notice of the
change by the Company and will continue in effect until subsequently changed.
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account Value for any Valuation Period is
equal to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Participant's Account for that Valuation
Period.
VARIABLE ACCUMULATION VALUE
The variable accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units credited to the Participant's Account for such Valuation Period.
(1) CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment to be allocated to any Sub-Accounts in
accordance with the allocation factors will be credited to the Participant's
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to the particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is applied by the Company to the Participant's Account.
(2) VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain the same from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below. For a hypothetical example of the calculation of the value of a
Variable Accumulation Unit, see Appendix A.
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(3) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one (1); therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a Series Fund share held in the Sub-Account
determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution declared
by the Series Fund on the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present
law);
(b) is the net asset value of a Series Fund share held in the Sub-Account
determined as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the Valuation
Period to reflect the charges for assuming the mortality and expense
risks and administrative expenses.
FIXED ACCUMULATION VALUE
The fixed accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the values of all Guarantee Amounts
credited to the Participant's Account for such Valuation Period.
GUARANTEE PERIODS
The Participant may elect one or more Guarantee Period(s) with durations of
from one to ten years from among those made available by the Company. The
period(s) elected will determine the Guaranteed Interest Rate(s). A Purchase
Payment, or the portion thereof (at least $1,000) (or the amount transferred in
accordance with the Transfer Privilege) allocated to a particular Guarantee
Period, less any applicable premium or similar taxes and any amounts
subsequently withdrawn, will earn interest at the Guaranteed Interest Rate
during the Guarantee Period. Initial Guarantee Periods begin on the date the
Purchase Payment is applied, or, in the case of a transfer, on the effective
date of the transfer, and end the number of calendar years in the Guarantee
Period elected from the end of the calendar month in which the amount was
allocated to the Guarantee Period (the "Expiration Date"). Subsequent Guarantee
Periods begin on the first day following the Expiration Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) will be referred to herein as a "Guarantee Amount". Interest will be
credited daily at a rate equivalent to the compound annual rate. As a result of
additional Purchase Payments, renewals and transfers of portions of the
Participant's Account Value described under "Transfer Privilege" below, which
will begin new Guarantee Periods, Guarantee Amounts allocated to Guarantee
Periods of the same duration may have different Expiration Dates. Thus each
Guarantee Amount will be treated separately for purposes of determining any
Market Value Adjustment (See "Market Value Adjustment").
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically at the end of the previous Guarantee Period unless the
Company receives, prior to the end of such Guarantee Period, a written election
by the Participant of a
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different Guarantee Period from among those being offered by the Company at such
time, or instructions to transfer all or a portion of the Guarantee Amount to
one or more Sub-Accounts in accordance with the Transfer Privilege Provision.
Each new Guarantee Amount must be at least $1,000.
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each Guarantee Period offered by the Company. Current Guaranteed
Interest Rates may be changed by the Company frequently or infrequently
depending on interest rates available to the Company and other factors as
described below, but once established rates will be guaranteed for the duration
of the respective Guarantee Periods. However, Participant's Account Value
withdrawn from the Fixed Account will be subject to any applicable withdrawal
charge and Account Fee and may be subject to a Market Value Adjustment on
withdrawal or surrender (See "Market Value Adjustment").
The Guaranteed Interest Rate will not be less than three percent (3%),
compounded annually. The Company has no specific formula for determining the
rate of interest that it will declare as a Guaranteed Interest Rate, as such
interest rates will be reflective of interest rates available on the types of
debt instruments in which the Company intends to invest amounts allocated to the
Fixed Account (See "The Fixed Account"). In addition, the Company's management
may consider other factors in determining Guaranteed Interest Rates for a
particular duration including: regulatory and tax requirements; sales
commissions and administrative and distribution expenses borne by the Company;
general economic trends; and competitive factors. The Participant bears the risk
that the Guaranteed Interest Rate to be credited on amounts allocated to the
Fixed Account may not exceed three percent (3%) per year for any Guarantee
Period.
DOLLAR COST AVERAGING
The Participant may select, at no extra charge, a dollar cost averaging
program by allocating a minimum of $1,000 to a designated Sub-Account. Amounts
allocated to the Fixed Account under the program will earn interest at a
specified rate declared by the Company. Each month or quarter a level amount
will be transferred automatically, at no cost, to one or more Sub-Accounts
chosen by the Participant, up to a maximum of four. The program continues until
the Participant's Account Value allocated to the program is depleted or the
Participant elects to stop the program.
The Participant may also elect an available Dollar Cost Averaging Option in
connection with selected Initial Guarantee Periods (subject to a minimum amount
of $1,000). Dollar Cost Averaging Options are available monthly or quarterly as
follows:
1. Monthly Dollar Cost Averaging Option: Amounts allocated under this
option will be divided among 12 separate sequential maturing Guarantee
Periods. The first Guarantee Period ends one full calendar month
following the date the Net Purchase Payment is applied; thereafter, each
subsequent Guarantee Period shall end sequentially one full calendar
month later. The Guarantee Amount at the Expiration Date of each such
Guarantee Period will equal one-twelfth ( 1/12) of the Net Purchase
Payment applied under this Option, with the Guarantee Amount at the last
Expiration Date including all interest earned in the 12 Guarantee
Periods.
2. Quarterly Dollar Cost Averaging Option: Amounts allocated under this
option will be divided among four separate sequentially maturing
Guarantee Periods. The first Guarantee Period ends three full calendar
months following the date the New Purchase Payment is applied;
thereafter, each subsequent Guarantee Period shall end three full
calendar months later, sequentially. The Guarantee Amount at the
Expiration Date of each such Guarantee Period will equal one-fourth
( 1/4) of the Net Purchase Payment applied under this Option, with the
Guarantee Amount at the last Expiration Date including all interest
earned in the four Guarantee Periods.
Only initial and subsequent Purchase Payments may be allocated to a Dollar
Cost Averaging Option. Previously applied amounts may not be transferred to any
Dollar Cost Averaging Option.
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No Market Value Adjustment, either positive or negative, will apply to
amounts automatically transferred from the Fixed Account under the program,
except that if the program is discontinued or altered prior to completion,
amounts remaining in the Fixed Account will be liquidated and the Market Value
Adjustment will be applied. Any additions to the program will be treated as
commencing a new program.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations on a Participant's Account Value. Since
the same dollar amount is transferred to other available investment options at
set intervals, dollar cost averaging allows a Participant to purchase more
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Accumulation Units (and, indirectly, fewer Fund shares) when prices are
high. Therefore, a lower average cost per Accumulation Unit may be achieved over
the long term. A dollar cost averaging program allows Participants to take
advantage of market fluctuations. However, it is important to understand that a
dollar cost averaging program does not assure a profit or protect against loss
in a declining market.
ASSET ALLOCATION
The Company may make one or more asset allocation investment programs
available in connection with the Contracts, at no extra charge. An asset
allocation program provides for the allocation of the Participant's Account
Value among the available investment options. These programs will be fully
described in a separate brochure. Participants may elect to enter into an asset
allocation investment program, under the terms and conditions described in the
brochure.
TRANSFER PRIVILEGE; TELEPHONE TRANSFERS; RESTRICTION ON MARKET TIMERS
At any time during the Accumulation Period the Participant may, upon request
received by the Company, transfer all or part of the Participant's Account Value
to one or more Sub-Accounts or Guarantee Periods available under the Contract,
subject to the following conditions: (1) not more than 12 transfers may be made
in any Account Year (excluding transfers made pursuant to an approved dollar
cost averaging program) and a minimum of 30 days must elapse between transfers
made to or from the Fixed Account or among Guarantee Periods; (2) the amount
being transferred from a Sub-Account may not be less than $1,000, unless the
total Participant's Account Value attributable to a Sub-Account is being
transferred; (3) any Participant's Account Value remaining in a Sub-Account may
not be less than $1,000; and (4) the total Participant's Account Value
attributable to the Guarantee Amount must be transferred; however, the transfer
of interest credited to such Guarantee Amount during the current Account Year is
not subject to this restriction. In addition, transfers of a Guarantee Amount
will be subject to the Market Value Adjustment described below unless the
transfer is effective within 30 days prior to the Expiration Date applicable to
the Guarantee Amount; and transfers involving Variable Accumulation Units shall
be subject to such terms and conditions as may be imposed by the Series Fund.
Currently, there is no charge for transfers; however, the Company reserves the
right to impose a charge of up to $15 for each transfer. A transfer generally
will be effective on the date the request for transfer is received by the
Company. Under current law, there will be no tax liability to the Participant if
a Participant makes a transfer.
Transfers may be requested by the Participant either in writing or by
telephone. The telephone exchange privilege is made available to Participants
automatically without the Participant's election. The Company will employ
reasonable procedures to confirm that instructions communicated to it by
telephone are genuine. Such procedures may include one or more of the following:
requesting identifying information, such as name, Contract number, Social
Security Number, and/or personal identification number; tape recording all
telephone transactions; or providing written confirmation thereof to both the
Participant and any agent of record, at the last address of record; or such
other procedures as the Company may deem reasonable. Although the Company's
failure to follow reasonable procedures may result in the Company's liability
for any losses due to unauthorized or fraudulent telephone transfers, the
Company will not be liable for following instructions communicated by telephone
which it reasonably believed to be genuine. Any losses incurred pursuant to
actions taken by the Company in reliance on telephone instructions reasonably
believed to be genuine shall be borne by the Participant.
The Contracts are not designed for professional market timing organizations
or other entities using programmed and frequent transfers. Persons who wish to
employ such strategies should not purchase a Contract. Accordingly, transfers
may be subject to restrictions if exercised by a market timing firm or any
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other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, the Company may, among
other things, not accept (1) the transfer instructions of any agent acting under
a power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. The Company will not impose any
such restrictions or otherwise modify transfer rights unless such action is
reasonably intended to prevent the use of such rights in a manner that will
disadvantage or potentially impair the Contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of the Series Fund's investment adviser, a series would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a "market timing" strategy may be disruptive to a
series and therefore may be refused. Accordingly, the Variable Account may not
be in a position to effectuate transfers and may refuse transfer requests
without prior notice. The Company also reserves the right, for similar reasons,
to refuse or delay exchange requests involving transfers to or from the Fixed
Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
The Company may reduce or waive the withdrawal charge or Account Fee, credit
additional amounts, or grant bonus Guaranteed Interest Rates in situations where
selling and/or maintenance costs associated with the Contracts are reduced, such
as the sale of several Contracts to the same Participant, sales of large
Contracts, and certain group sales. In addition, the Company may waive the
Account Fee, may credit additional amounts, or may grant bonus Guaranteed
Interest Rates in connection with Contracts sold to officers, directors and
employees of the Company or its affiliates, registered representatives and
employees of broker-dealers with a current selling agreement with the Company
and affiliates of such representatives and broker-dealers, employees of
affiliated asset management firms, and persons who have retired from such
positions ("Eligible Employees") and immediate family members of Eligible
Employees. The Company may reduce or waive such charges and fees, may credit
additional amounts, or may grant bonus Guaranteed Interest Rates on any Contract
where, for example, expenses associated with the sale of the Contract and/or
costs or services associated with administering and maintaining the Contract are
reduced. Eligible Employees and their immediate family members may also purchase
a Contract without regard to minimum Purchase Payment requirements. For other
situations in which withdrawal charges may be waived, see "Withdrawal Charges."
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company. Any such election shall specify the amount of the withdrawal
and will be effective on the date that it is received by the Company.
The Participant may request a full surrender or partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee, plus or minus any applicable
Market Value Adjustment, and less any applicable withdrawal charge. A request
for a partial withdrawal will result in the cancellation of a portion of the
Participant's Account Value equal to the dollar amount of the cash withdrawal
payment, plus or minus any applicable Market Value Adjustment and plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the Account Fee, then such
partial withdrawal will be treated as a full surrender. The Account Fee and any
applicable Market Value Adjustment will be deducted from the Participant's
Account before the application of any withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect such withdrawal pro-rata
from each Sub-Account and Guarantee Amount in which the Participant's Account
23
<PAGE>
Value is invested at the end of the Valuation Period during which the withdrawal
becomes effective. ALL CASH WITHDRAWALS OF ANY GUARANTEE AMOUNT, EXCEPT THOSE
EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION DATE OF SUCH GUARANTEE AMOUNT
OR THE WITHDRAWAL OF INTEREST CREDITED DURING THE CURRENT ACCOUNT YEAR, WILL BE
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account at the end
of the Valuation Period during which the cash withdrawal is effective.
The Company, upon request, will advise the Participant of the amounts that
would be payable in the event of a full surrender or partial withdrawal.
Any cash withdrawal payment will be paid within seven days from the date the
election becomes effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 and applicable
state insurance law. Deferral of amounts withdrawn from the Variable Account is
currently permissible only (1) for any period (a) during which the New York
Stock Exchange is closed other than customary week-end and holiday closings or
(b) during which trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, (2) for any period during
which an emergency exists as a result of which (a) disposal of securities held
by the Series Fund is not reasonably practicable or (b) it is not reasonably
practicable to determine the value of the net assets of the Series Fund or (3)
for such other periods as the Securities and Exchange Commission may by order
permit for the protection of security holders. The Company reserves the right to
defer the payment of amounts withdrawn from the Fixed Account for a period not
to exceed six months from the date written request for such withdrawal is
received by the Company. The Company is not required to pay interest on amounts
so deferred.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Sections 401,
403, and 408 of the Internal Revenue Code, reference should be made to the terms
of the particular retirement plan for any limitations or restrictions on cash
withdrawals. For special restrictions applicable to withdrawals from Contracts
used with Tax-Sheltered Annuities established pursuant to Section 403(b) of the
Internal Revenue Code, see "Section 403(b) Annuities" below.
A cash withdrawal under either a Qualified Contract or Non-Qualified
Contract offered by this Prospectus also may result in a tax penalty. The tax
consequences of a cash withdrawal payment under both Qualified Contracts and
Non-Qualified Contracts should be carefully considered (See "Federal Tax
Status").
WITHDRAWAL CHARGES
No sales charges are deducted from Purchase Payments. However, a withdrawal
charge (contingent deferred sales charge), when applicable, will be assessed to
reimburse the Company for certain expenses relating to the distribution of the
Contracts, including commissions, costs of preparation of sales literature and
other promotional costs and acquisition expenses. Cash withdrawals may result in
a 10% tax penalty in addition to any withdrawal charge applicable under the
Contracts (See "Federal Tax Status").
A portion of the Participant's Account Value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment has
been held by the Company for seven years it may be withdrawn free of any
withdrawal charge. In addition, no withdrawal charge is assessed upon
annuitization, upon payment of the death benefit or upon the transfer of
Participant's Account Value among the Sub-Accounts or between the Sub-Accounts
and the Fixed Account or within the Fixed Account.
The withdrawal charge is not assessed with respect to a Participant's
Account established for the personal account of an employee of the Company or of
any of its affiliates, or of a licensed insurance agent engaged in distributing
the Contracts, and the Company may waive the withdrawal charge with respect to
Purchase Payments derived from the surrender of other annuity contracts and/or
certificates issued by the
24
<PAGE>
Company. In addition, if approval has been received from state regulatory
authorities having jurisdiction over the applicable Contract, the Company will
waive the withdrawal charge arising from a full surrender if: (1) at least one
year has elapsed since the Participant's Date of Coverage; and (2) the
Participant is confined to an eligible nursing home (i.e., a licensed hospital
or licensed skilled or intermediate care nursing facility at which treatment is
available on a daily basis and daily medical records are kept for each patient)
and has been confined there for the preceding 180 days or for such shorter
period as may be provided for, depending upon the jurisdiction in which the
Contract was issued. Such withdrawal may be subject to the 10% tax penalty
described above.
All other full or partial withdrawals are subject to a withdrawal charge
which will be applied in accordance with the applicable methodology described
below:
The Contracts provide for the accumulation of the 10% annual free withdrawal
amount into future years. The applicable withdrawal charge will be determined on
the following basis:
(1) Old Payments and new Payments: With respect to a particular Account
Year, "new Payments" are those Payments made in that Account Year or in the six
immediately preceding Account Years, and "old Payments" are those Payments not
defined as new Payments.
(2) Order of liquidation: To effect a full surrender or partial withdrawal,
each withdrawal is allocated first to the free withdrawal amount and then to
previously unliquidated Payments (on a first-in, first-out basis) until all
Purchase Payments have been liquidated.
(3) Free withdrawal amount: The free withdrawal amount is equal to 10% of
any new Payments, irrespective of whether these new Payments have been
liquidated. Any portion of the free withdrawal amount that is not used in the
current Account Year is cumulative into future years.
(4) Maximum withdrawal amount without a withdrawal charge: The maximum
amount that can be withdrawn without a withdrawal charge in an Account Year is
equal to the sum of (a) any previously unliquidated free withdrawal amount, and
(b) any previously unliquidated old Payments.
(5) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge is the amount of the partial withdrawal or full surrender less
the maximum withdrawal amount without a withdrawal charge, up to a maximum of
the sum of all unliquidated new Payments.
AMOUNT OF WITHDRAWAL CHARGE
The withdrawal charge percentage varies according to the number of complete
Account Years between the Account Year in which a Purchase Payment was credited
to a Participant's Account and the Account Year in which it was withdrawn. The
amount of the withdrawal charge is determined by multiplying the amount subject
to the withdrawal charge by the withdrawal charge percentage, in accordance with
the following table:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
ACCOUNT YEARS WITHDRAWAL CHARGE
------------------ -----------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed 6% of the aggregate Purchase Payments made under a
Contract (See Appendix C for examples of withdrawals, withdrawal charges and the
Market Value Adjustment). The Company may, upon notice to the Owner of a Group
Contract, modify the withdrawal charges, provided that such modification shall
apply only to Participant's Accounts established after the effective date of
such modification (See "Modification").
25
<PAGE>
SECTION 403(B) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for the Contracts to
receive tax deferred treatment, the Contracts must provide that cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988 ("Pre-1989
Account Value")) may be made only when the Participant attains age 59 1/2,
separates from service with the employer, dies or becomes disabled (within the
meaning of Section 72(m)(7) of the Code). These restrictions apply to any growth
or interest on or after January 1, 1989 on Pre-1989 Account Value, salary
reduction contributions made on or after January 1, 1989, and any growth or
interest on such contributions ("Restricted Account Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Participant must have
an immediate and heavy bona fide financial need and lack other resources
reasonably available to satisfy the need. Hardship withdrawals (as well as
certain other premature withdrawals) will be subject to a 10% tax penalty, in
addition to any withdrawal charge applicable under the Contracts (See "Federal
Tax Status").
Under the terms of a particular Section 403(b) plan, the Participant may be
entitled to transfer all or a portion of the Participant's Account Value to one
or more alternative funding options. Participants should consult the documents
governing their plan and the person who administers the plan for information as
to such investment alternatives.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status".
MARKET VALUE ADJUSTMENT
Any cash withdrawal of a Guarantee Amount, other than a withdrawal effective
within 30 days prior to the Expiration Date of the Guarantee Amount or the
withdrawal of interest credited on such Guarantee Amount during the current
Account Year, will be subject to a Market Value Adjustment ("MVA") (for this
purpose, transfers (except automatic transfers to a Sub-Account of amounts
allocated to a Guarantee Period with a one-year duration in connection with an
approved dollar cost averaging program), distributions on the death of a
Participant and amounts applied to purchase an annuity are treated as cash
withdrawals). The MVA will be applied to the amount being withdrawn which is
subject to the MVA, after deduction of any applicable Account Fee and before
deduction of any applicable withdrawal charge.
The MVA will reflect the relationship between the Current Rate (as defined
below) for the Guarantee Amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. Generally, if the Guaranteed Interest Rate is
lower than the applicable Current Rate, then the application of the MVA will
result in a lower payment upon withdrawal. Similarly, if the Guaranteed Interest
Rate is higher than the applicable Current Rate, the application of the MVA will
result in a higher payment upon withdrawal.
The Market Value Adjustment is determined by the application of the
following formula:
<TABLE>
<C> <C>
N/12
1 + I
-----
( 1 + J ) -1
+ b
</TABLE>
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the Market Value Adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the Market Value Adjustment, for current
allocations to Guarantee Periods equal to the balance of the Guarantee Period of
the Guarantee Amount subject to the Market Value Adjustment, rounded to the next
higher number of complete years (the "Current Rate"),
26
<PAGE>
b is a factor which is currently 0% but which the Company may increase up to
.25% for future Contracts, and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the Market Value Adjustment.
In the determination of J, if the Company currently does not offer the
applicable Guarantee Period, then the rate will be determined by linear
interpolation of the current rates for Guarantee Periods that are available.
See Appendix C for examples of the application of the Market Value
Adjustment.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If there is no
designated Beneficiary living on the date of death of the Annuitant, the Company
will, upon receipt of Due Proof of Death of both the Annuitant and the
designated Beneficiary, pay the death benefit in one sum to the Participant or,
if the Annuitant was the Participant, to the estate of the
Participant/Annuitant. If the death of the Annuitant occurs on or after the
Annuity Commencement Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more Annuity Options to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee after the death of the
Annuitant. If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a single cash payment;
or (b) to have the death benefit applied under one or more of the Annuity
Options (on the Annuity Commencement Date described under "Payment of Death
Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination of
both for the Beneficiary as Payee. Either election described above may be made
by filing with the Company a written election in such form as the Company may
require. Any election of a method of settlement of the death benefit by the
Participant will become effective on the date it is received by the Company. For
the purposes of the Payment of Death Benefit and Amount of Death Benefit
sections below, any election of the method of settement of the death benefit by
the Participant which is in effect on the date of death of the Annuitant will be
deemed effective on the date Due Proof of Death of the Annuitant is received by
the Company. Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company; or (b) the date Due Proof of Death of the Annuitant is
received by the Company. If an election by the Beneficiary is not received by
the Company within 60 days following the date Due Proof of Death of the
Annuitant is received by the Company, the Beneficiary will be deemed to have
elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contracts as annuity
contracts under the Internal Revenue Code. (See "Other Contractual Provisions --
Death of Participant").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the Death Benefit Date, except as the Company may
be permitted to defer any such payment of amounts derived from the Variable
Account in accordance with the Investment Company Act of 1940. If the death
benefit is to be paid in one lump sum to the Participant or, if the Annuitant
was the Participant, to the estate of the deceased Participant/Annuitant,
payment will be made within seven days of the date on which Due Proof of Death
of the Annuitant, the Participant and/or the designated Beneficiary, as
applicable, is received by the Company. If settlement under one or more of the
Annuity Options is elected the Annuity Commencement
27
<PAGE>
Date will be the first day of the second calendar month following the effective
date or the deemed effective date of the election, and the Participant's Account
will be maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the Death Benefit Date.
If the Annuitant was age 85 or younger on the Date of Coverage, the death
benefit is equal to the greatest of
(1) the Participant's Account Value for the Valuation Period in which the
Death Benefit Date occurs;
(2) the amount that would have been payable in the event of a full surrender
of the Participant's Account on the Death Benefit Date;
(3) the Participant's Account Value on the Seven Year Anniversary
immediately preceding the Death Benefit Date, adjusted for any subsequent
Purchase Payments and partial withdrawals and charges made between such Seven
Year Anniversary and the Death Benefit Date;
(4) the greatest of the Participant's Account Values on any Account
Anniversay prior to the Annuitant's 80th birthday, adjusted for any subsequent
Purchase Payments and any partial withdrawals and charges made between such
Account Anniversary and the Death Benefit Date; and
(5) the total Purchase Payments made with respect to the Participant's
Account, accumulated as indicated below, minus the sum of all partial
withdrawals.
In determining the amount payable under (5), each Purchase Payment and
amount transferred to the Participant's Variable Account will accumulate daily
at a rate equivalent to 5% per year until the first day of the month following
the Annuitant's 80th birthday. No such accumulation will apply to a Purchase
Payment or amount transferred once that Purchase Payment or amount transferred
has, as a result of such accumulation, grown to double its original amount.
Partial withdrawals and transfers will affect the amount payable under (5) on a
basis proportional to the reduction in Account Value brought about by such
withdrawal. Transfers into the Fixed Account from the Variable Account will
reduce the amounts accumulating under (5) on a basis proportional to the
reduction in the Variable Account.
If the Annuitant was age 86 or older on the Date of Coverage, the death
benefit is equal to (2) above.
If (2), (3) ,(4), or (5) is operative, the Participant's Account Value will
be increased by the excess of (2), (3) ,(4), or (5), as applicable, over (1) and
the increase will be allocated to the Sub-Accounts based on the respective
values of the Sub-Accounts on the Death Benefit Date. If no portion of the
Participant's Account is allocated to the Sub-Accounts, the entire increase will
be allocated to the Sub-Account invested in the Money Market Series of the
Series Fund.
HOW THE CONTRACT CHARGES ARE ASSESSED
As more fully described below, charges under the Contract offered by this
Prospectus are assessed in three ways: (1) as deductions for the Account Fee
and, if applicable, for premium taxes; (2) as charges against the assets of the
Variable Account for the assumption of mortality and expense risks and
administrative expenses; and (3) as withdrawal charges (contingent deferred
sales charges). In addition, certain deductions are made from the assets of the
Series Fund for investment management fees and expenses. These fees and expenses
are described in the Series Fund's prospectus and Statement of Additional
Information.
ADMINISTRATIVE CHARGES
Each year on the Account Anniversary, the Company deducts from each
Participant's Account an annual account administration fee ("Account Fee") as
partial compensation for expenses relating to the issue and maintenance of the
Contract and the Participant's Account. In Account Years one through five the
Account Fee is equal to the lesser of $35 and 2% of the Participant's Account
Value; thereafter the Account Fee may be changed annually, but in no event may
it exceed the lesser of $50 and 2% of the Participant's
28
<PAGE>
Account Value. If a Participant's Account is surrendered for its full value on
other than the Account Anniversary, the Account Fee will be deducted in full at
the time of such surrender. The Account Fee will be deducted on a pro rata basis
from amounts allocated to each Guarantee Period and each Sub-Account in which
the Participant's Account is invested at the time of such deduction. Also, the
Account Fee will be waived by the Company when: (1) the entire Participant's
Account Value has been allocated to the Fixed Account during the entire previous
Account Year, or (2) the Participant's Account Value is greater than $75,000 at
the time of such deduction. On the Annuity Commencement Date, the value of the
Participant's Account will be reduced by a proportionate amount of the Account
Fee to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date. After the Annuity Commencement Date, an
annual Account Fee of $35 will be deducted in equal amounts from each variable
annuity payment made during the year. No deduction will be made from fixed
annuity payments.
The Company makes a deduction from the Variable Account at the end of each
Valuation Period (during both the Accumulation Period and after annuity payments
begin) at an effective annual rate of 0.15% to reimburse the Company for those
administrative expenses attributable to the Contracts, the Certificates, the
Participant's Accounts and the Variable Account which exceed the revenues
received from the Account Fee. For a description of administrative services
provided see "Administration of the Contracts" on page 41 of this Prospectus.
The Contract provides that the Company may modify the Account Fee and the
administrative expense charge, provided that such modification shall apply only
with respect to Participant's Accounts established after the effective date of
such modification (See "Modification").
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes (See Appendix B). It is currently the policy of the Company to deduct the
tax from the amount applied to provide an annuity at the time annuity payments
commence; however, the Company reserves the right to deduct such taxes on or
after the date they are incurred.
MORTALITY AND EXPENSE RISK CHARGE
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless of
how long the Annuitant lives and regardless of how long all annuitants as a
group live. This assures each annuitant that neither the longevity of fellow
annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
Company assumes this mortality risk by virtue of annuity rates incorporated into
the Contract which cannot be changed except, in the case of a Group Contract
only, with respect to Participants' Accounts established after the effective
date of such change, as provided in the "Modification" section of this
Prospectus. The expense risk assumed by the Company is the risk that the
administrative charges assessed under the Contract may be insufficient to cover
the actual total administrative expenses incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the Accumulation Period
and after annuity payments begin at an effective annual rate of 1.25%. If the
deduction is insufficient to cover the actual cost of the mortality and expense
risk undertaking, the Company will bear the loss. Conversely, if the deduction
proves more than sufficient, the excess will be profit to the Company and would
be available for any proper corporate purpose including, among other things,
payment of distribution expenses. The Company will recoup its expected costs
associated with registering and distributing the Contracts by the assessment of
the withdrawal charges (contingent deferred sales charges) described below.
However, the withdrawal charges may prove to be insufficient to cover actual
distribution expenses. If this is the case, the deficiency will be met from the
Company's general corporate funds which may include amounts derived from the
mortality and expense risk charges.
29
<PAGE>
A Group Contract provides that the Company may modify the mortality and
expense risk charge; however, such modification shall apply only with respect to
Participant's Accounts established after the effective date of such modification
(See "Modification"). Mortality and expense risk and administrative expense
charges are the only expenses of the Variable Account.
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge (i.e., a contingent deferred sales charge) of up to 6% of
certain amounts withdrawn, when applicable, will be used to cover certain
expenses relating to the sale of the Contracts, including commissions paid to
sales personnel, the costs of preparation of sales literature and other
promotional costs and acquisition expenses (See "Cash Withdrawals" and
"Withdrawal Charges").
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 30 days after the date notice of the change is
received by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 90th birthday, unless
otherwise restricted, in the case of a Qualified Contract, by the particular
retirement plan or by applicable law. In most situations, current law requires
that the Annuity Commencement Date under a Qualified Contract be no later than
April 1 following the year the Annuitant reaches age 70 1/2 , and the terms of
the particular retirement plan may impose additional limitations. The Annuity
Commencement Date may also be changed by an election of an Annuity Option as
described in the Death Benefit section of this Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply, as noted under "Determination of Amount." NO PAYMENTS MAY BE REQUESTED
UNDER THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY
COMMENCEMENT DATE, AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS MAY BE
AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403 or 408 of
the Internal Revenue Code, as well as certain non-qualified plans, reference
should be made to the terms of the particular plan for any limitations or
restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect one or more of the Annuity Options described
below, or such other settlement option as may be agreed to by the Company, for
the Annuitant as Payee. The Participant may also change any election, but
written notice of any election or change of election must be received by the
Company at least 30 days prior to the Annuity Commencement Date. If no election
is in effect on the 30th day prior to the Annuity Commencement Date, Annuity
Option B, for a Life Annuity with 120 monthly payments certain, will be deemed
to have been elected. If there is no election of a sole Annuitant in effect on
the 30th day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no election is in
effect on the 30th day prior to the Annuity Commencement Date, then the portion
of the
30
<PAGE>
adjusted value of the Participant's Account to be applied to provide a Fixed
Annuity and a Variable Annuity will be determined on a pro rata basis from the
composition of the Participant's Account on the Annuity Commencement Date.
Annuity Options may also be elected by the Participant or the Beneficiary as
provided in the Death Benefit section of this Prospectus.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any limitations or restrictions on the options
which may be elected.
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT
DATE.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. The
Participant may surrender a Contract prior to the Annuity Commencement Date;
however, any applicable surrender charge will be deducted from the cash
withdrawal payment and a Market Value Adjustment, if applicable, will be
applied.
Annuity Options A, B, C and D are available to provide either a Fixed
Annuity or a Variable Annuity. Annuity Option E is available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides that if there is no designated beneficiary
entitled to the remaining payments then living, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum to the
deceased Payee's estate. In addition, any beneficiary who becomes entitled to
any remaining payments under this option may elect to receive the amounts due
under this option in one sum. The discounted value for variable annuity payments
will be based on interest compounded annually at the assumed interest rate,
which will not be less than three percent (3%) per year. The discounted value
for payments being made on a fixed basis will be based on the interest rate
initially used by the Company to determine the amount of each payment.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of election of this option of the number of each type of Annuity Unit
credited to the Contract with respect to the Payee and fixed monthly payments,
if any, will be equal to the same percentage of the fixed monthly payment
payable during the joint lifetime of the Payee and the designated second person.
* Annuity Option D. Monthly Payments for a Specified Period
Certain: Monthly payments for a specified period of time (at least five years
but not exceeding 30 years), as elected. In the event of the death of the Payee
under this option, the Contract provides that, as described under Annuity Option
B above, in certain circumstances the discounted value of the remaining
payments, if any, will be calculated and paid in one sum.
* Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times (at least over a
period of five years) as may be agreed upon with the Company and will continue
until the amount held by the Company with interest is exhausted. The final
payment will be for the balance remaining and may be less than the amount of
each preceding payment. Interest will be credited yearly on the amount remaining
unpaid at a rate which shall be determined by the Company from time to time but
which shall not be less than the minimum rate specified in the applicable
Contract and Certificate (at least
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
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3% per year), compounded annually. The rate so determined may be changed at any
time and as often as may be determined by the Company, provided, however, that
the rate may not be reduced more frequently than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide a Variable Annuity or a Fixed
Annuity or a combination of both. The adjusted value will be equal to the
Participant's Account Value at the end of the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by a proportionate
amount of the Account Fee to reflect the time elapsed between the last Account
Anniversary and the day before the Annuity Commencement Date, plus or minus any
applicable Market Value Adjustment and minus any applicable premium or similar
taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on the minimum guaranteed interest rate specified in the applicable Contract and
Certificate (at least 3% per year), or, if more favorable to the Payee(s), in
accordance with the Annuity Payment Rates published by the Company and in use on
the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the Annuity Payment Rates found in the applicable Contract
which are based on an assumed interest rate of at least 3% per year, unless
these rates are changed (See "Modification"). All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract with respect to the particular Payee. The number of Annuity Units to be
credited in respect of a particular Sub-Account is determined by dividing that
portion of the first variable annuity payment attributable to that Sub-Account
by the Annuity Unit value of that Sub-Account at the end of the Valuation Period
which ends immediately preceding the Annuity Commencement Date. The number of
Annuity Units of each particular Sub-Account credited with respect to the
particular Payee then remains fixed unless an exchange of Annuity Units is made
as described below. The dollar amount of each variable annuity payment after the
first may increase, decrease or remain constant, and is equal to the sum of the
amounts determined by multiplying the number of Annuity Units of a particular
Sub-Account credited with respect to the particular Payee by the Annuity Unit
value for the particular Sub-Account for the Valuation Period which ends
immediately preceding the due date of each subsequent payment. If the net
investment return on the assets of the Variable Account is the same as the
assumed interest rate, variable annuity payments will remain level. If the net
investment return exceeds the assumed interest rate variable annuity payments
will increase and, conversely, if it is less than the assumed interest rate the
payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
VARIABLE ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit Value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate used to establish the
Annuity Payment Rates found in the applicable Contract. For a one day Valuation
Period the factor is 0.99989255 using an assumed interest rate of 4% per year
and 0.99991902 using an assumed interest rate of 3% per year.
For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix A.
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EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Annuity
Units of particular Sub-Accounts then credited with respect to the particular
Payee into other Annuity Units, the value of which would be such that the dollar
amount of an annuity payment made on the date of the exchange would be
unaffected by the fact of the exchange. No more than 12 exchanges may be made
within each Account Year.
Exchanges may be made only between Sub-Accounts. Exchanges will be made
using the Annuity Unit values for the Valuation Period during which any request
for exchange is received by the Company.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly variable annuity payment based on the
assumed interest rate specified in the applicable Contract and Certificate (at
least 3%); and (b) the monthly fixed annuity payment, when this payment is based
on the minimum guaranteed interest rate specified in the Contract and
Certificate (at least 3% per year).These rates may be changed by the Company
with respect to Participant's Accounts established after the effective date of
such change (See "Modification").
The annuity payment rates may vary according to the Annuity Option elected
and the adjusted age of the Payee. The Contract also describes the method of
determining the adjusted age of the Payee. The mortality table used in
determining the annuity payment rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
The initial Purchase Payment credited to each Participant's Account must be
at least $10,000 and each additional Purchase Payment must be at least $1,000,
unless waived by the Company. In addition, the prior approval of the Company is
required before it will accept a Purchase Payment which would cause the value of
a Participant's Account to exceed $1,000,000. If the value of a Participant's
Account exceeds $1,000,000, no additional Purchase Payments will be accepted
without the prior approval of the Company. Purchase Payments may be made
annually, semi-annually, quarterly, monthly or at any other frequency acceptable
to the Company. The Participant may, subject to the minimum payment, increase or
decrease the amount of Purchase Payments or change the frequency of payment, but
the Participant is not obligated to continue Purchase Payments in the amount or
frequency elected. There are no penalties for failure to continue to make
Purchase Payments. While the Contract and the Participant's Account are in
force, Purchase Payments may be made at any time prior to the Annuity
Commencement Date.
DESIGNATION AND CHANGE OF BENEFICIARY
The beneficiary designation contained in the Application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant and, in the case of a Non-
Qualified Contract, the Participant as well.
Subject to the rights of an irrevocably designated Beneficiary, the
Participant may change or revoke the designation of a Beneficiary at any time
while the Annuitant is living by filing with the Company a written beneficiary
designation or revocation in such form as the Company may require. The change or
revocation will not be binding upon the Company until it is received by the
Company. When it is so received the change or revocation will be effective as of
the date on which the beneficiary designation or revocation was signed, but the
change or revocation will be without prejudice to the Company on account of any
payment made or any action taken by the Company prior to receiving the change or
revocation.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
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EXERCISE OF CONTRACT RIGHTS
An Individual Contract shall belong to the individual Participant to whom
the Contract is issued. A Group Contract shall belong to the Owner. In the case
of a Group Contract, all Contract rights and privileges may be expressly
reserved by the Owner, failing which, each Participant shall be entitled to
exercise such rights and privileges. In any case, such rights and privileges can
be exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the Participants under a Group
Contract; or (5) as otherwise permitted from time to time by laws and
regulations governing the retirement or deferred compensation plans for which a
Qualified Contract may be issued. Subject to the foregoing, a Qualified Contract
may not be sold, assigned, transferred, discounted or pledged as collateral for
a loan or as security for the performance of an obligation or for any other
purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Annuitant and prior to the last Annuity
Commencement Date; and each Participant, in like manner, may change the
ownership interest in a Contract. A change of ownership will not be binding upon
the Company until written notification is received by the Company. When such
notification is so received, the change will be effective as of the date on
which the request for change was signed by the Owner or Participant, as
appropriate, but the change will be without prejudice to the Company on account
of any payment made or any action taken by the Company prior to receiving the
change.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuitant
and before the Annuity Commencement Date, that Participant's Account Value, plus
or minus any applicable Market Value Adjustment, must be distributed to the
"designated beneficiary" (as defined below) either (1) within five years after
the date of death of the Participant, or (2) as an annuity over some period not
greater than the life or expected life of the designated beneficiary, with
annuity payments beginning within one year after the date of death of the
Participant. For this purpose (and for purposes of Section 72(s) of the Internal
Revenue Code), the person named as Beneficiary shall be considered the
designated beneficiary, and if no person then living has been so named, then the
Annuitant shall automatically be the designated beneficiary. If the designated
beneficiary is the surviving spouse of the deceased Participant, the spouse can
elect to continue the Contract in the spouse's own name as Participant, in which
case these mandatory distribution requirements will apply on the spouse's death.
When the deceased Participant was also the Annuitant, the Death Benefit
provision of the Contract controls unless the deceased Participant's surviving
spouse is the designated beneficiary and elects to continue the Contract in the
spouse's own name as both Participant and Annuitant.
If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, if any, must be distributed at
least as rapidly as the method of distribution then in effect.
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In any case in which a non-natural person constitutes a holder of the
Certificate for the purposes of Section 72(s) of the Internal Revenue Code, (1)
the distribution requirements described above shall apply upon the death of any
Annuitant, and (2) a change in any Annuitant shall be treated as the death of an
Annuitant.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code.
Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
VOTING OF SERIES FUND SHARES
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. Except in
the case of a Group Contract where the right to give voting instructions is
reserved by the Owner, the Participant is the person having the right to give
voting instructions prior to the Annuity Commencement Date. On or after the
Annuity Commencement Date the Payee is the person having such voting rights. Any
shares attributable to the Company and Series Fund shares for which no timely
voting instructions are received will be voted by the Company in the same
proportion as the shares for which instructions are received from Owners,
Participants and Payees, as applicable.
Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans which are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct the Company to vote the
Series Fund shares attributable to their contributions. Such plans may also
provide the additional extent, if any, to which the Owners shall follow voting
instructions of persons with rights under the plans. If no voting instructions
are received from any such person with respect to a particular Participant's
Account, the Owner may instruct the Company as to how to vote the number of
Series Fund shares for which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable to instruct the
voting of Series Fund shares. Except as the Variable Account or the Company has
actual knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Series Fund proxy material, together with an appropriate form to be used
to give voting instructions, will be provided to each person having the right to
give voting instructions at least ten days prior to each meeting of the
shareholders of the Series Fund. The number of Series Fund shares as to which
each such person is entitled to give instructions will be determined by the
Company on a date not more than 90 days prior to each such meeting. Prior to the
Annuity Commencement Date, the number of Series Fund shares as to which voting
instructions may be given to the Company is determined by dividing the value of
all of the Variable Accumulation Units of the particular Sub-Account credited to
the Participant's Account by the net asset value of one Series Fund share as of
the same date. On or after the Annuity Commencement Date, the number of Series
Fund shares as to which such instructions may be given by a Payee is determined
by dividing the reserve held by the Company in the Sub-Account with respect to
the particular Payee by the net asset value of a Series Fund share as of the
same date. After the Annuity Commencement Date, the number of Series Fund shares
as to which a Payee is entitled to give voting instructions will generally
decrease due to the decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period the Company will send the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the Fixed Accumulation Value of such
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account, which statement shall be accurate as of a date not more than two months
previous to the date of mailing. In addition, every person having voting rights
will receive such reports or prospectuses concerning the Variable Account and
the Series Fund as may be required by the Investment Company Act of 1940 and the
Securities Act of 1933. The Company will also send such statements reflecting
transactions in the Participant's Account as may be required by applicable laws,
rules and regulations.
Upon request, the Company will provide the Participant with information
regarding fixed and variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any or all Series of the Series Fund may not always be available
for purchase by the Sub-Accounts of the Variable Account or the Company may
decide that further investment in any such shares is no longer appropriate in
view of the purposes of the Variable Account. In either event, shares of another
registered open-end investment company or unit investment trust may be
substituted both for Series Fund shares already purchased by the Variable
Account and/or as the security to be purchased in the future provided that these
substitutions have been approved by the Commission, if required by law. In the
event of any substitution pursuant to this provision, the Company may make
appropriate endorsement to the Contract to reflect the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Series Fund
shares held by the Sub-Accounts, the Variable Account may be operated as a
management company under the Investment Company Act of 1940 or it may be
deregistered under the Investment Company Act of 1940 in the event registration
is no longer required. Deregistration of the Variable Account requires an order
by the Securities and Exchange Commission. In the event of any change in the
operation of the Variable Account pursuant to this provision, the Company may
make appropriate endorsement to the Contract to reflect the change and take such
other action as may be necessary and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (or the Payee(s)
during the annuity period), the Contract may be modified by the Company if such
modification: (i) is necessary to make the Contract or the Variable Account
comply with any law or regulation issued by a governmental agency to which the
Company or the Variable Account is subject; or (ii) is necessary to assure
continued qualification of the Contract under the Internal Revenue Code or other
federal or state laws relating to retirement annuities or annuity contracts; or
(iii) is necessary to reflect a change in the operation of the Variable Account
or the Sub-Account(s) (See "Change in Operation of Variable Account"); (iv)
provides additional Variable Account and/or fixed accumulation options; or (v)
as may otherwise be in the best interests of Owners or Participants, as
applicable. In the event of any such modification, the Company may make
appropriate endorsement in the Contract to reflect such modification.
In addition, upon notice to the Owner, a Group Contract may be modified by
the Company to change the withdrawal charges, Account Fees, mortality and
expense risk charges, administrative expense charges, the tables used in
determining the amount of the first monthly variable annuity and fixed annuity
payments and the formula used to calculate the Market Value Adjustment, provided
that such modification shall apply only to Participant's Accounts established
after the effective date of such modification. In order to exercise its
modification rights in these particular instances, the Company must notify the
Owner of such modification in writing. The notice shall specify the effective
date of such modification which must be at least 60 days following the date of
mailing of the notice of modification by the Company. All of the charges and the
annuity
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tables which are provided in the Group Contract prior to any such modification
will remain in effect permanently, unless improved by the Company, with respect
to Participant's Accounts established prior to the effective date of such
modification.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving 30 days' prior written notice to the Owner, may limit
or discontinue the acceptance of new Applications and the issuance of new
Certificates under a Group Contract. Such limitation or discontinuance shall
have no effect on rights or benefits with respect to any Participant's Accounts
established under such Group Contract prior to the effective date of such
limitation or discontinuance.
CUSTODIAN
The Company is the Custodian of the assets of the Variable Account. The
Company will purchase Series Fund shares at net asset value in connection with
amounts allocated to the Sub-Accounts in accordance with the instructions of the
Participant and redeem Series Fund shares at net asset value for the purpose of
meeting the contractual obligations of the Variable Account, paying charges
relative to the Variable Account or making adjustments for annuity reserves held
in the Variable Account.
RIGHT TO RETURN
If the Participant is not satisfied with the Contract, it may be returned by
mailing it to the Company at the Annuity Service Mailing Address on the cover of
this Prospectus within ten days after it was delivered to the Participant. When
the Company receives the returned Contract, it will be cancelled and the
Participant's Account Value at the end of the Valuation Period during which the
Contract was received by the Company will be refunded to the Participant.
However, if applicable state law so requires, the full amount of any Purchase
Payment(s) received by the Company will be refunded, the "free look" period may
be greater than ten days and alternative methods of returning the Certificate
may be acceptable.
With respect to Individual Retirement Accounts, under the Internal Revenue
Code a Participant establishing an Individual Retirement Account must be
furnished with a disclosure statement containing certain information about the
Contract and applicable legal requirements. This statement must be furnished on
or before the date the Individual Retirement Account is established. If the
Participant is furnished with such disclosure statement before the seventh day
preceding the date the Individual Retirement Account is established, the
Participant will not have any right of revocation. If the disclosure statement
is furnished after the seventh day preceding the establishment of the Individual
Retirement Account, then the Participant may give a notice of revocation to the
Company at any time within seven days after the Date of Coverage. Upon such
revocation, the Company will refund the Purchase Payment(s) made by the
Participant. The foregoing right of revocation with respect to an Individual
Retirement Account is in addition to the return privilege set forth in the
preceding paragraph. The Company will allow a participant establishing an
Individual Retirement Account a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use in
connection with personal retirement plans and by employer, association and other
group retirement plans under the provisions of Sections 401 (including Section
401(k)), 403, 408(b), 408(c), 408(k) and 408(p) of the Internal Revenue Code
(the "Code"), as well as certain non-qualified retirement plans, such as payroll
savings plans. As noted above, the Company may begin offering Participants under
Contracts used in connection with individual retirement plans under Section 408
the opportunity to convert such Contracts into Contracts used in connection with
Roth IRAs under Section 408A, and may also begin offering new Contracts for use
in connection with Roth IRAs. The ultimate effect of federal income taxes may
depend upon the type of retirement plan for which the Contract is purchased and
a number of different factors. This discussion is general in nature, is based
upon the Company's understanding of current federal income tax laws, and is not
intended as tax advice.
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Congress has the power to enact legislation affecting the tax treatment of
annuity contracts, and such legislation could be applied retroactively to
Contracts purchased before the date of enactment. Also, because the Internal
Revenue Code, as amended, is not in force in the Commonwealth of Puerto Rico,
some references in this discussion will not apply to Contracts issued in Puerto
Rico. Any person contemplating the purchase of a Contract should consult a
qualified tax adviser. THE COMPANY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING
THE CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. The
operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, but the
Variable Account is not taxable as a regulated investment company or otherwise
as an entity separate from the Company. The income of the Variable Account
(consisting primarily of interest, dividends and net capital gains) is not
taxable to the Company to the extent that it is applied to increase reserves
under contracts participating in the Variable Account.
TAXATION OF ANNUITIES IN GENERAL
Purchase Payments made under Non-Qualified Contracts are not deductible from
the Participant's income for federal income tax purposes. Participants under
Qualified Contracts should consult a tax adviser regarding the tax treatment of
Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
until a distribution occurs, either as an annuity payment or as a cash
withdrawal or lump-sum payment prior to the Annuity Commencement Date. However,
corporate Owners and Participants and other Owners and Participants that are not
natural persons are subject to current taxation on the annual increase in the
value of a Non-Qualified Contract, unless the non-natural person holds the
Contract as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement). This current taxation of
annuities held by non-natural persons does not apply to earnings accumulated
under an immediate annuity, which the Code defines as a single premium contract
with an annuity commencement date within one year of the date of purchase. Also,
the Internal Revenue Service could assert that Owners or Participants under both
Qualified and Non-Qualified Contracts annually receive and are subject to tax on
a deemed distribution equal to the cost of any life insurance benefit provided
by the Contract.
The following discussion applies both with respect to Individual Contracts
and Group Contracts. Because the Code is unclear in its application to a group
annuity contract where the owner is distinct from the individuals who receive
the contract benefits, the following discussion as applied to Group Contracts is
the Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
A partial cash withdrawal (i.e., a withdrawal of less than the entire
Participant's Account Value) under a Non-Qualified Contract before the Annuity
Commencement Date is treated as a withdrawal from the increase in the
Participant's Account Value, rather than as a return of Purchase Payments. The
amount of the withdrawal allocable to this increase will be includible in the
Participant's income and subject to tax at ordinary income rates. If part or all
of a Participant's Account Value is assigned or pledged as collateral for a
loan, the amount assigned or pledged must be treated as if it were withdrawn
from the Contract.
In the case of annuity payments under a Non-Qualified Contract after the
Annuity Commencement Date, a portion of each payment is treated as a nontaxable
return of Purchase Payments. The nontaxable portion is determined by applying to
each annuity payment an "exclusion ratio," which, in general, is the ratio that
the total amount the Participant paid for the Contract bears to the Payee's
expected return under the Contract. The remainder of the payment is taxable at
ordinary income rates.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the amount the Participant paid for the
Contract. If the Annuitant survives for his full life expectancy, so that the
Payee recovers the entire amount paid for the Contract, any subsequent annuity
payments will be fully taxable as income. Conversely, if the Annuitant dies
before the Payee recovers the entire amount paid, the Payee will be allowed a
deduction for the amount of unrecovered Purchase Payments.
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Taxable cash withdrawals and lump-sum payments from Non-Qualified Contracts
may be subject to a penalty tax equal to 10% of the amount treated as taxable
income. This 10% penalty also may apply to certain annuity payments. This
penalty will not apply in certain circumstances (such as where the distribution
is made upon the death of the Participant). The withdrawal penalty also does not
apply to distributions under an immediate annuity (as defined above).
In the case of a Qualified Contract, distributions generally are taxable and
distributions made prior to age 59 1/2 are subject to a 10% penalty tax,
although this penalty tax will not apply in certain circumstances. Certain
distributions, known as "eligible rollover distributions," if rolled over to
certain other qualified retirement plans (either directly or after being
distributed to the Participant or Payee), are not taxable until distributed from
the plan to which they are rolled over. In general, an eligible rollover
distribution is any taxable distribution other than a distribution that is part
of a series of payments made for life or for a specified period of ten years or
more. Owners, Participants, Annuitants, Payees and Beneficiaries should seek
qualified advice about the tax consequences of distributions, withdrawals,
rollovers and payments under the retirement plans in connection with which the
Certificates are purchased.
If the Participant under a Non-Qualified Certificate dies, the value of the
Contract generally must be distributed within a specified period (See "Other
Contractual Provisions -- Death of Participant"). For contracts owned by
non-natural persons, a change in the Annuitant is treated as the death of the
Participant.
A purchaser of a Qualified Contract should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
A transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the Participant's Account Value minus the total amount paid
for the Contract.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Participant or Payee provides his or her taxpayer identification
number to the Company and notifies the Company (in the manner prescribed) before
the time of the distribution that he or she chooses not to have any amounts
withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Participant or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Contract is
not an eligible rollover distribution, then the Participant or Payee can choose
not to have amounts withheld as described above for Non-Qualified Contracts and
Qualified Contracts issued for use with individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for federal income tax purposes, and
therefore the annual increase in the value of such contracts is subject to
current taxation. The Company believes that each series of the Series Fund
complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract and/or the
Variable Account) necessary to comply with the guidelines.
39
<PAGE>
THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued in connection therewith. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax adviser. In addition, Owners, Participants, Payees, Beneficiaries and
administrators of qualified retirement plans should consider and consult their
tax adviser concerning whether the death benefit payable under the Contract
affects the qualified status of their retirement plan. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers and
certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans as well as by
corporate plans. Such retirement plans may permit the purchase of the Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c) (3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. These annuity contracts are commonly referred to as
"Tax-Sheltered Annuities." Purchasers of the Qualified Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of Purchase Payments and tax consequences of distributions
(See "Section 403(b) Annuities").
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts, known as an Individual
Retirement Account ("IRA"). These IRA's are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from some other
types of retirement plans may be placed on a tax-deferred basis in an IRA. Sale
of the Contracts for use with IRA's may be subject to special requirements
imposed by the Internal Revenue Service. Purchasers of the Contracts for such
purposes will be provided with such supplementary information as may be required
by the Internal Revenue Service or other appropriate agency, and will have the
right to revoke the Contract under certain circumstances as described in the
section of this Prospectus entitled "Right to Return Contract."
40
<PAGE>
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
regular IRA under Section 408 of the Code, contributions to a Roth IRA are not
made on a tax-deductible basis, but distributions are tax-free if certain
requirements are satisfied. Like traditional IRAs, Roth IRAs are subject to
limitations on the amount that may be contributed and the time when
distributions may commence. A traditional IRA may be converted into a Roth IRA,
and the resulting income may be spread over four years if the conversion occurs
before January 1, 1999. If and when Contracts are made available for use with
Roth IRAs, they may be subject to special requirements imposed by the Internal
Revenue Service. Purchasers of the Contracts for this purpose will be provided
with such supplementary information as may be required by the Internal Revenue
Service or other appropriate agency.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, Participant Accounts, and the Variable Account. These functions
include, but are not limited to, maintaining the books and records of the
Variable Account and the Sub-Accounts; maintaining records of the name, address,
taxpayer identification number, Contract number, Participant's Account number
and type, the status of each Participant's Account and other pertinent
information necessary to the administration and operation of the Contracts;
processing Applications, Purchase Payments, transfers and full and partial
surrenders; issuing Contracts and Certificates; administering annuity payments;
furnishing accounting and valuation services; reconciling and depositing cash
receipts; providing confirmations; providing toll-free customer service lines;
and furnishing telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the General Distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181, a wholly-owned subsidiary of the Company. Clarendon
is registered with the Commission under the Securities Exchange Act of 1934 as
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. Clarendon also acts as the general distributor of certain other annuity
contracts issued by the Company and its wholly-owned subsidiary, Sun Life
Insurance and Annuity Company of New York, and variable life insurance contracts
issued by the Company. Commissions and other distribution compensation will be
paid by the Company and will not be more than 7.34% of Purchase Payments. In
addition, after the first Account Year, broker-dealers who have entered into
distribution agreements with the Company may receive an annual renewal
commission of no more than 1.00% of the Participant's Account Value. In addition
to commissions, the Company may, from time to time, pay or allow additional
promotional incentives, in the form of cash or other compensation. In some
instances, such other incentives may be offered only to certain broker-dealers
that sell or are expected to sell during specified time periods certain minimum
amounts of the Contracts or Certificates or other contracts offered by the
Company. Commissions will not be paid with respect to Participant's Accounts
established for the personal account of employees of the Company or any of its
affiliates, or of persons engaged in the distribution of the Contracts, or of
immediate family members of such employees or persons. In addition, commissions
may be waived or reduced in connection with certain transactions described under
"Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates." During
1995, 1996, and 1997 approximately $9,315,656, $18,652,927, and $ ,
respectively, was paid to and retained by Clarendon in connection with the
distribution of the Contracts.
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ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus beginning on page 68.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,513,741 $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310
Net investment income and
realized gains (losses)....... 301,524 312,870 315,966 312,583 311,322
-------------- -------------- -------------- -------------- --------------
2,815,265 2,444,809 2,199,867 2,310,108 2,754,632
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits 2,469,215 2,149,145 1,995,208 2,102,290 2,515,320
Other expenses 206,066 175,342 150,937 186,892 232,365
-------------- -------------- -------------- -------------- --------------
2,675,281 2,324,487 2,146,145 2,289,182 2,747,685
-------------- -------------- -------------- -------------- --------------
Operating gain (loss) 139,984 120,322 53,722 20,926 6,947
Federal income tax expense
(benefit) 10,742 (2,702) 17,807 19,469 3,691
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 129,242 $ 123,024 $ 35,915 $ 1,457 $ 3,256
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Assets $ 15,927,045 $ 13,759,005 $ 12,359,683 $ 10,117,822 $ 9,179,090
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes $ 565,000 $ 315,000 $ 650,000 $ 335,000 $ 335,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Note 1 to financial statements for the effect of the reinsurance agreements
on net income.
See Note 1 to financial statements for changes in accounting principles and
reporting.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FINANCIAL CONDITION
ASSETS
For management purposes it is the Company's practice to segment its general
account to facilitate the matching of assets and liabilities; however, all
general account assets stand behind all general account liabilities. A majority
of the Company's assets are income producing investments. Particular attention
is paid to the quality of these assets.
The Company's bond holdings consist of a diversified portfolio of both
public and private issues. It is the Company's policy to acquire only investment
grade securities. Private placements are rated internally with reference to the
National Association of Insurance Commissioners ("NAIC") designation issued by
the NAIC Securities Valuation Office. The overall quality of the Company's bond
portfolio remains high. At December 31, 1997, 4.6% of the Company's holdings of
bonds were rated below investment grade (i.e. below NAIC rating "1" or "2").
The Company holds real estate primarily because such investments
historically have offered better yields over the long-term than fixed income
investments. Real estate investments are used to enhance the yield of products
with long-term liability durations. Properties for which market value is lower
than cost
42
<PAGE>
adjusted for depreciation (book value) are reported at market value. During
1997, the change in the difference between the market value and book value for
properties reported at market value was $3,377,000.
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$684,035,000 at December 31, 1997, representing 19.8% of cash and invested
assets. At December 31, 1996, mortgage loans represented 26.9% of cash and
invested assets. The Company underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Company as a rule invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1997, the Company's portfolio did not contain
any mortgage loans which were 60 days or more in arrears, compared to the most
recent industry delinquency ratio published by the American Council of Life
Insurance of 1.35%. The expense in the year for the provision for losses and for
losses on foreclosures was $711,000.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1997 the Company had
outstanding mortgage commitments of $12,300,000 which will be funded during
1998.
On December 24, 1997, the Company transferred all of its outstanding shares
of MFS to its parent, Life Holdco, in the form of a dividend, valued at
$159,722,000. This dividend included an intercompany tax receivable of
$91,000,000. As a result of this transaction the Company also realized a
$21,195,000 capital gain of undistributed earnings. See "Recent Reorganization,"
below, for a discussion of the effect of this transaction on ongoing operations.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds.
CAPITAL AND SURPLUS
Total capital stock and surplus of the Company was $832,695,000 at December
31, 1997. The Company issued surplus notes during 1997 totaling $250,000,000 to
its parent, Life Holdco. The Company's management considers its surplus position
to be adequate.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income from operations after dividends to policyholders and before
federal income taxes decreased by $2.9 million for the year ending December 31,
1997 as compared to December 31, 1996. Net income associated with the
reinsurance agreements with the ultimate parent increased $2.1 million in 1997.
The net income improvement in the reinsured business results primarily from
improved investment performance. Prior to reinsurance, earnings from the life
line of business remained relatively flat. The earnings of the Company's
retirement products and services line, which markets combination fixed/variable
annuities, decreased $5.0 million. During 1997, the Company focused its
marketing efforts on its fixed/variable annuity sales and discontinued sales of
its group pension guaranteed interest contracts.
Total income increased by $347.9 million for the year ended December 31,
1997 as compared to December 31, 1996. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $527.4 million primarily due to
the introduction in late 1996, of a dollar cost averaging (DCA) sales program.
This program credits a bonus rate of interest on the fixed annuity deposit
during the first year. Purchase payments allocated to the DCA program are
deposited into the fixed account and periodically transferred to the variable
Sub-accounts during the following year. Reinsurance had the effect of increasing
income by approximately $8.9 million. Premiums and annuity considerations
decreased by $6.6 million reflecting decreased annuitizations. Sales of group
pension guaranteed interest contracts decreased by $133 million. Net investment
income decreased by $33.5 million reflecting both the decrease in the general
account invested assets and $9.2 million decrease in dividends from
subsidiaries.
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<PAGE>
Benefits and expenses increased by $346.6 million for the year ended
December 31, 1997 as compared to December 31, 1996. Reinsurance had the effect
of increasing benefits and expenses by $2.7 million. Death benefits, annuity
payments and surrender benefits and other fund withdrawals increased by $338.4
million primarily as a result of increased surrenders and withdrawals from
separate account contracts for which the surrender charge has expired. Policy
reserves decreased by $23 million, reflecting decreased annuitizations and lower
increases in reserves for minimum death benefit guarantees. The decrease in
liability for premium and other deposit funds of $55.3 reflects higher
surrenders of contracts described above. Commissions increased by $22.8 million,
reflecting the increase in total sales of combination fixed/variable annuities.
General expenses increased by $9.9 million reflecting an increase in salaries
due to staff increases associated with increased sales and non-recurring costs
associated with moving the retirement products and services facility to a new
location. Transfers to separate accounts increased by $53.9 million, reflecting
increased exchange activity out of the fixed account into the separate account,
associated with the DCA activity.
See "Recent Reorganization," below, for a discussion of the effect on
ongoing operations of the Company's transfer of its shares of MFS.
1996 COMPARED TO 1995
Net income from operations after dividends to policyholders and before
federal income taxes increased by $61.1 million for the year ending December 31,
1996 as compared to December 31, 1995. Net income associated with the
reinsurance agreements with the parent increased by $23.9 in 1996. The net
income improvement in the reinsured business results from improved mortality
experience, improved investment performance and fewer significant death claims
in 1996 as compared to 1995. Prior to reinsurance, earnings from the life line
of business remained relatively flat. The remaining $37.2 increase is
attributable to the Company's retirement products and services line of business,
which market combination fixed/variable annuities and group pension guaranteed
investment contracts. The decline in interest rates during 1995 resulted in the
split of these combination fixed/variable annuity sales to change from 45% fixed
and 55% variable in 1995 to 25% fixed and 75% variable in 1996. In addition,
total gross sales increased by $235.9 million in 1996 as compared to 1995. The
declining interest rate environment and strong market performance in 1995
resulted in unrealized gains on assets held in the separate accounts, which
generated a substantial increase in fees calculated as a percentage of the
separate account net assets, which are then transferred to the general account.
The declining interest rates also resulted in increases in reserves due to the
increase in the market value adjustment provision of certain fixed annuities.
The resultant reserve increases were in excess of the unrealized gains causing
strain on the 1995 earnings. In 1996, interest rates increased, resulting in a
reduction in the unrealized gains on assets held in the separate accounts and a
corresponding reduction in reserves and a release of some of the reserve strain
incurred in 1995. The earnings on these market value adjusted products fluctuate
as the change in the market value of the assets do not move in tandem with the
change in the market value of the liabilities.
Total income increased by $239.4 million for the year ended December 31,
1996 as compared to December 31, 1995. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $282.7 million primarily due to
an increase in variable sales held in the separate accounts. This increase in
variable sales was driven by strong performance in the stock market. Reinsurance
had the effect of increasing income by approximately $9.4 million. Premiums and
annuity considerations increased by $8.2 million reflecting increased
annuitizations. Considerations from supplementary contracts increased by $1.2
million. Sales of group pension guaranteed investment contracts decreased by $53
million as this market remains highly competitive and sensitive to small changes
in guaranteed interest rates. Net investment income decreased by $9.1 million,
reflecting a decrease in the general account invested assets.
Benefits and expenses increased by $178.3 million for the year ended
December 31, 1996 as compared to December 31, 1995. Reinsurance had the effect
of decreasing benefits and expenses by $14.5 million. Deaths, annuity payments
and surrender benefits and other funds withdrawals increased by $438.9 million
as a result of increased surrenders of fixed annuities for which interest rate
guarantee periods have expired as well as withdrawals from the separate
accounts. Policy reserves increased by $9.4 million, reflecting increased
annuitizations and increased reserves for minimum death benefit guarantees. The
44
<PAGE>
decrease in liability for premium and other deposit funds of $405.9 reflects
lower interest rates and higher surrenders of contracts described above.
Commissions increased by $21.8 million, reflecting the increase in total sales
of combination fixed/variable annuities. General expenses increased by $2.6
million reflecting an increase in salaries due to staff increases and retainer
fees. Transfers to separate accounts increased by $126.8 million, reflecting
increased exchange activity out of the general account into the separate
accounts.
LIQUIDITY
The Company's cash inflow consists primarily of premiums on insurance and
annuity products, income from investments, repayments of investment principal
and sales of investments. The Company's cash outflow is primarily to meet death
and other maturing insurance and annuity contract obligations, to pay out on
contract terminations, to fund investment commitments and to pay normal
operating expenses and taxes. Cash outflows are met from the normal net cash
inflows.
The Company segments its business internally and matches projected cash
inflows and outflows within each segment. Targets for money market holdings are
established for each segment, which in the aggregate meet the day to day cash
needs of the Company. If greater liquidity is required, government issued bonds,
which are highly liquid, are sold to provide the necessary funds. Government and
publicly traded corporate bonds comprise 58% of the Company's long-term bond
holdings.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
YEAR 2000 COMPLIANCE
The Company's business, financial condition, and results of operations could
be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to properly
operate or manage dates beyond the year 1999. However, the Company has
investigated the nature and extent of the work necessary to render its computer
systems capable of processing beyond the turn of the century ("Year 2000
compliant"), and has made substantial progress toward achieving this goal,
including upgrading and/or replacing existing systems. The Company expects that
its principal systems will be Year 2000 compliant by the end of 1998, leaving
1999 for extensive testing. While it is believed that these efforts involve
substantial costs, the Company closely monitors associated costs and continues
to evaluate associated risks based on actual expenses. Based on available
information, the Company believes that it will be able to manage its total Year
2000 transition without a material adverse effect on its business operations,
financial condition, or results of operations.
RECENT REORGANIZATION
Effective December 24, 1997, the Company and its ultimate parent, Sun Life
Assurance Company of Canada ("Sun Life of Canada"), reorganized the corporate
structure of a part of their United States business operations, by completing,
with the approval of the Delaware Insurance Department, the establishment of a
two-tier holding company structure. In connection with this reorganization,
Massachusetts Financial Services Company ("MFS"), the registered investment
adviser that serves as adviser to the MFS Family of Funds, including the MFS/Sun
Life Series Trust and the Compass Variable Accounts, is no longer a subsidiary
of the Company, but remains under the control of Sun Life of Canada through two
other wholly-owned holding company subsidiaries. On December 24, 1997. The
Company's stock in MFS was transferred via a dividend to the Company's immediate
parent, Sun Life of Canada (U.S.) Holdings, Inc. There is no change in
directors, officers, or day-to-day management of any of the companies within
this holding company system and, in the case of MFS, its executive officers
continue to report to the Chairman of Sun Life of Canada.
MFS, which was acquired by the Company in 1982, has approximately
$70,200,000,000 under management as of December 31, 1997. For the years ended
December 31, 1997, 1996 and 1995, the Company's Statutory Statements of
Operations reflect earnings attributable to the operations of MFS of $80,114,000
(which includes dividends from MFS of $33,110,000, an income tax benefit of
$25,809,000, and a realized gain of $21,195,000), $79,263,000, and $58,599,000,
respectively. The reorganization is not expected to have any significant effect
on the ongoing operations of MFS or the Company. However, future net income of
the Company will not include the results of operations of MFS.
45
<PAGE>
REINSURANCE
The Company has agreements with its parent company which provide that the
parent company will reinsure the mortality risks of the individual life
insurance contracts previously sold by the Company. Under these agreements basic
death benefits and supplementary benefits are reinsured on a yearly renewable
term basis and coinsurance basis, respectively. Reinsurance transactions under
these agreements in 1997 had the effect of decreasing net income from operations
by $1,381,000.
Effective January 1, 1991 the Company entered into an agreement with the
parent company under which certain individual life insurance contracts issued by
the parent were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with the parent
which provides that the parent will reinsure the mortality risks in excess of
$500,000 per policy for the individual life insurance contracts assumed by the
Company in the reinsurance agreement described above. Death benefits are
reinsured on a yearly renewable term basis. These agreements had the effect of
increasing income from operations by approximately $37,050,000 for the year
ended December 31, 1997.
The life reinsurance assumed agreement requires the reinsurer to withhold
funds in an amount equal to the reserves assumed.
The Company also has executed a reinsurance agreement with an unaffiliated
company which provides reinsurance of certain individual life insurance
contracts on a modified coinsurance basis and under which all deficiency
reserves are ceded.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $15.9 billion at December 31, 1997, 71.7%
consisted of unitized and non-unitized separate account assets, 12.0% were
invested in bonds and similar securities, 4.3% in mortgages, 0.7% in
subsidiaries, 0.6% in real estate, and the remaining 10.7% in cash and other
assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to the most recent Best's Review,
Life-Health Edition, as of December 31, 1996 the Company ranked 38th among all
life insurance companies in the United States based upon total assets. Its
parent company, Sun Life
Assurance Company of Canada, ranked 19th. Best's Insurance Reports, Life-Health
Edition, 1997, assigned the Company and the parent company its highest
classification, A++, as of December 31, 1996. Standard & Poor's and Duff &
Phelps have assigned the Company and the parent company their highest ratings
for claims paying ability, AAA. Moody's Investor Service, Inc. has assigned the
Company an unsolicited rating of Aa1 for financial strength. These ratings
should not be considered as bearing on the investment performance of the Fund
shares held in the Sub-Accounts of the Variable Account. However, the ratings
are relevant to the Company's ability to meet its general corporate obligations
under the Contracts.
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EMPLOYEES
The Company and Sun Life Assurance Company of Canada have entered into a
Service Agreement which provides that the latter will furnish the Company, as
required, with personnel as well as certain services and facilities on a cost
reimbursement basis. As of December 31, 1997 the Company had 317 direct
employees who are employed at its Principal Executive Office in Wellesley Hills,
Massachusetts and its Retirement Products & Services Division in Boston,
Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to its parent, Sun
Life Assurance Company of Canada, and certain unrelated parties for lease terms
not exceeding five years.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of the Company are listed below,
together with information as to their ages, dates of election and principal
business occupations during the last five years (if other than their present
business occupations). Except as otherwise indicated, the directors and officers
of the Company who are associated with Sun Life Assurance Company of Canada
and/or its subsidiaries have been associated with Sun Life Assurance Company of
Canada for more than five years either in the position shown or in other
positions.
JOHN D. MCNEIL, 64, Chairman and Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; a Director of Massachusetts
Financial Services Company; Chairman and a Trustee of MFS/Sun Life Series Trust;
Chairman and a Member of the Boards of Managers of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account; and a
Director of Shell (Canada) Limited and Canadian Pacific, Ltd.
DONALD A. STEWART, 51, President and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; and a Director of
Massachusetts Financial Services Company, Massachusetts Casualty Insurance
Company and Sun Life Financial Services Limited.
DAVID D. HORN, 56, Director (1985*)
56 Pinckney Street
Boston, Massachuetts 02114
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in November, 1997. He
is a Director of Sun Life Insurance and Annuity Company of New York; a Trustee
of MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account.
ANGUS A. MACNAUGHTON, 66, Director (1985*)
Metro Tower, Suite 1170,
950 Tower Lane
Foster City, California 94404
- ------------------------
* Year Elected Director
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<PAGE>
He is President of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Stelco, Inc. and Varian Associates, Inc.
JOHN S. LANE, 62, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Life of Canada (U.S.) Distributors, Inc., Sun
Capital Advisers, Inc. and Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 71, Director (1983*)
500 Boylston Street
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York and a
Director/Trustee of certain Funds in the MFS Family of Funds.
M. COLYER CRUM, 65, Director (1986*)
104 West Cliff Street
Weston, MA 02193
He is Professor Emeritus of the Harvard Business School; and a Director of
Sun Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of
New York, Merrill Lynch Ready Assets Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Natural Resources Trust,
Merrill Lynch U.S. Treasury Money Fund, MuniVest California Insured Fund, Inc.,
MuniVest Florida Fund, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniYield Florida
Insured Fund, MuniYield Insured Fund II, Inc., MuniYield Michigan Insured Fund,
Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund
III, Inc. and MuniYield Pennsylvania Fund. Prior to July, 1996, he was a
Professor at the Harvard Business School.
S. CAESAR RABOY, 61, Senior Vice President and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President and a Director of
Sun Life Insurance and Annuity Company of New York; and Vice President and a
Director of Sun Life Financial Services Limited and Sun Life of Canada (U.S.)
Distributors, Inc.
ROBERT A. BONNER, 53, Vice President, Pensions (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Individual Insurance for the United States, of Sun
Life Assurance Company of Canada.
C. JAMES PRIEUR, 46, Senior Vice President, General Manager and Director (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Vice President, Investments of Sun Life of
Canada (U.S.) Distributors, Inc., a Massachusetts Casualty Insurance Company and
Sun Life Insurance and Annuity Company of New York; and a Director of Sun
Capital Advisers, Inc., New London Trust, F.S.B.; Sun Canada Financial Co., and
Sun Life of Canada (U.S.) Holdings, Inc.
- ------------------------
* Year Elected Director
48
<PAGE>
L. BROCK THOMSON, 56, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Life of Canada
(U.S.) Distributors, Inc., Sun Capital Advisers, Inc., Sun Benefit Services
Company, Inc. and Sun Life Insurance and Annuity Company of New York; and
Assistant Treasurer of Massachusetts Casualty Insurance Company.
ROBERT P. VROLYK, 44, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Finance for the United States of Sun Life Assurance
Company of Canada; Vice President, Controller and Actuary of Sun Life Insurance
and Annuity Company of New York; a Director of Massachusetts Casualty Insurance
Company and Sun Life of Canada (U.S.) Holdings, Inc.; and Vice President and a
Director of Sun Canada Financial Co.
MARGARET SEARS MEAD, 47, Assistant Vice President and Secretary (1996)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
She is Assistant Vice President and Counsel for the United States of Sun
Life Assurance Company of Canada; and Assistant Vice President and Secretary of
Sun Life Insurance and Annuity Company of New York and Secretary of Sun Life of
Canada (U.S.) Holdings, Inc.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries. The allocated cash
compensation of all executive officers of the Company as a group for services
rendered in all capacities to the Company and its subsidiaries during 1997
totalled $824,000.
Directors of the Company who are also officers of Sun Life Assurance Company
of Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Messrs. Bailey, Crum and MacNaughton receive compensation in the
amount of $5,000 per year, plus $800 for each meeting attended, plus expenses.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, which
is in turn a wholly-owned subsidiary of Sun Life Assurance Company of
Canada-U.S. Operations Holdings, Inc., a wholly-owned subsidiary of Sun Life
Assurance Company of Canada.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March 1st in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices,
49
<PAGE>
licensing agents, approving policy forms, establishing reserve requirements,
fixing maximum interest rates on life insurance policy loans and minimum rates
for accumulation of surrender values, prescribing the form and content of
required financial statements and regulating the type and amounts of investments
permitted. Each insurance company is required to file detailed annual reports
with supervisory agencies in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such agencies at
regular intervals.
In addition, many states regulate affiliated groups of insurers, such as the
Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. The
Company and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, is not of material importance to their
respective total assets or material with respect to the Variable Account.
LEGAL MATTERS
The legality of the Contracts and the validity of the form of the Contracts
under Delaware law have been passed upon for the Company by Margaret Sears Mead,
Esq., Assistant Vice President and Secretary of the Company.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended December
31, 1997 and the statutory financial statements of the Company for the years
ended December 31, 1997, 1996 and 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this Prospectus. This Prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Variable Account, the
Fixed Account, the Company, the Series Fund and the Contracts. Statements found
in this Prospectus as to the terms of the Contracts and other legal instruments
are summaries, and reference is made to such instruments as filed.
50
<PAGE>
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Series Fund shares held in the Sub-Accounts of the Variable
Account. The Variable Account value of the interests of Owners, Participants,
Annuitants, Payees and Beneficiaries under the Contracts is affected primarily
by the investment results of the Series Fund. The financial statements of the
Variable Account reflect units outstanding and expenses incurred under the
Contracts and other contracts participating in the Variable Account which impose
certain contract charges that are different from those imposed under the
Contracts.
-------------------
51
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
[The financial statements for Variable Account F will be provided by
amendment.]
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
-------------- --------------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total Admitted Assets $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
-------------- --------------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total liabilities 15,094,350 13,054,809
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
-------------- --------------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
-------------- --------------
Surplus 826,795 561,243
-------------- --------------
Total capital stock and surplus 832,695 567,143
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance
reserve 1,166 1,557 1,025
Net gain from operations from
Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund
withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for
life and accident and health
policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for
premium and other deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business
only) 132,700 109,894 88,037
Commissions and expense allowances
on reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees,
excluding federal income taxes 7,790 8,431 7,685
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit)
(excluding tax on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less
capital gains tax and transfers to
the interest maintenance reserve 30,109 7,560 2,069
---------- ---------- ----------
NET INCOME $ 129,242 $ 123,024 $ 35,915
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- ----------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- ----------
Capital and surplus, end of year $ 832,695 $ 567,143 $ 792,452
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,427,554 $ 2,059,577 $ 1,826,456
Considerations for supplementary
contracts and dividend accumulations
received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
----------- ----------- -----------
Total receipts 2,834,069 2,475,126 2,227,290
----------- ----------- -----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate
Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries)
payments (excluding tax on capital
gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
----------- ----------- -----------
Total payments 3,040,385 2,608,634 1,948,393
----------- ----------- -----------
Net cash from operations (206,316) (133,508) 278,897
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
----------- ----------- -----------
Total cash provided 1,711,100 1,581,103 2,393,101
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
----------- ----------- -----------
Total cash applied 1,108,425 1,496,862 2,545,921
----------- ----------- -----------
Net change in cash and short-term
investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
----------- ----------- -----------
End of year $ 544,418 $ 148,059 $ 197,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts. The Company also underwrites
a block of individual life insurance business through a reinsurance contract
with an affiliate, Sun Life Assurance Company of Canada ("SLOC"). SLOC is a
mutual life insurance company.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of SLOC. Prior to December 18, 1997 Life
Holdco was a direct wholly-owned subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $284,078,000 in 1997 and
$232,743,000 in 1996.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited, ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), and Sun Life Finance
Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"). On December 24, 1997, the
Company transferred all of its shares of MFS to Life Holdco in the form of a
dividend valued at $159,722,000. As a result of this transaction the Company
realized a gain of $21,195,000 of undistributed earnings.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC is a life insurance company which issues only individual disability
income policies. Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank. SLFSL serves as the marketing
administrator for the distribution of the offshore products of SLOC, an
affiliate. Sun Capital is a registered investment adviser. Sunfinco and Sunbesco
are currently inactive. Clarendon is a registered broker-dealer that acts as the
general distributor of certain annuity and life insurance contracts issued by
the Company and its affiliates.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco. at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December 31,
1997 and 1996 the Company had an additional $20,000,000 in notes issued by MFS,
scheduled to mature in 2000.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
MCIC $ 2,000,000 $ 10,000,000 $ 6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------- ------------- -------------
Total net assets $ 116,985 $ 144,043 $ 138,282
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------- ------------- -------------
Net income $ 59,481 $ 50,261 $ 35,531
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. BONDS:
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
------------ ----------- ----------- ------------
Total short-term bonds 146,754 -- -- 146,754
------------ ----------- ----------- ------------
Total bonds $ 2,316,857 $ 102,730 $ (27,361) $ 2,392,226
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
------------ ------------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
------------ ------------
Total bonds $ 2,451,731 $ 2,569,199
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses were
$2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. SECURITIES LENDING (CONTINUED):
program. The total par value of securities out on loan was $0 and $51,537,000 at
December 31, 1997 and 1996 respectively. Income resulting from this program was
$200,000, $137,000 and $2,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
California $ 119,122 $ 154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
---------- ----------
$ 684,035 $ 938,932
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and $29,261,000
at December 31, 1997 and 1996, respectively, against which there are allowances
for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. INVESTMENT GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
--------- --------- ---------
$ 30,109 $ 7,560 $ 2,069
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
--------- --------- ---------
$ 1,153 $ (1,715) $ 2,009
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold. The net realized capital gains credited to the interest
maintenance reserve were $6,321,000 in 1997, $7,710,000 in 1996, and $12,714,000
in 1995. All gains and losses are transferred net of applicable income taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 188,924 $ 178,695 $ 205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
---------- ---------- ----------
Gross investment income 326,728 342,443 361,042
---------- ---------- ----------
Interest on surplus notes (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
---------- ---------- ----------
Net investment income $ 270,249 $ 303,753 $ 312,872
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over the
remaining life of the hedged assets. At December 31, 1997 and 1996 there were no
futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 70,000 693
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. LEVERAGED LEASES (CONTINUED):
the purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996
1997 -
----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
---------- ----------
16 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
---------- ----------
Investment in leveraged leases 30,842 29,666
Less fees (163) (188)
---------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
---------- ----------
---------- ----------
</TABLE>
The net investment is included as an other invested asset.
10. REINSURANCE:
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, effective January 1, 1991, the Company
entered into an agreement with SLOC which provides that SLOC will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company in the reinsurance agreement
described above. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,230,980 $ 1,858,145 $ 1,619,337
Net investment income and realized gains 300,669 312,870 315,967
------------ ------------ ------------
Subtotal 2,531,649 2,171,015 1,935,304
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
------------ ------------ ------------
Subtotal 2,428,188 2,084,251 1,891,219
------------ ------------ ------------
Income from operations $ 103,461 $ 86,764 $ 44,085
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25%
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100%
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,547,683 31%
At book value less surrender charges (surrender charge >5%) 5,626,117 48
At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100%
-------------- ---
-------------- ---
</TABLE>
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. RETIREMENT PLANS:
The Company participates with SLOC in a non contributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,316,857 $ 2,392,226
Mortgages 938,932 958,909
LIABILITIES:
Insurance reserves $ 122,606 $ 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $ 42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- --------- --------- ---------
Balance, end of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. SURPLUS NOTES AND NOTE RECEIVABLE:
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027. On May 9, 1997, the Company issued a short-term note of $600,000,000 to
Life Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest payments required
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. SURPLUS NOTES AND NOTE RECEIVABLE (CONTINUED):
the consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 also requires the consents of the Delaware
Insurance Commissioner and Canadian Office of the Superintendent of Financial
Institutions.
The Company obtained the required consents and expensed $42,481,000, $23,061,000
and $31,813,000 for interest on surplus notes for the years ended December 31,
1997, 1996 and 1995, respectively.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in 1995.
18.
RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1997
and 1996.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP - deferred policy acquisition
costs, deferred federal income taxes and statutory non-admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Duration Participating Contracts" exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
[To be provided by amendment]
72
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Series Fund share at the end of the current
valuation period is $18.38; at the end of the immediately preceding valuation
period was $18.32; the Valuation Period is one day; and no dividends or
distributions caused Series Fund shares to go "ex-dividend" during the current
Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks and the administrative expense
charge of .00003809 (the daily equivalent of the current maximum charge of 1.40%
on an annual basis) gives a net investment factor of 1.00323702. If the value of
the variable accumulation unit for the immediately preceding valuation period
had been 14.5645672, the value for the current valuation period would be
14.6117130 (14.5645672 X 1.00323702).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS:
Suppose the circumstances of the first example exist, and the value of an
annuity unit for the immediately preceding valuation period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the annuity unit
for the current valuation period would be 12.3843113 (12.3456789 X 1.00323702
(the Net Investment Factor) X 0.99989255). 0.99989255 is the factor, for a one
day Valuation Period, that neutralizes the assumed interest rate of four percent
(4%) per year used to establish the Annuity Payment Rates found in certain
Contracts. (The factor that neutralizes the assumed interest rate of three
percent (3%) per year used to establish the Annuity Payment Rates found in other
Contracts is 0.99991902.)
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 variable
accumulation units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the variable accumulation unit value and the
annuity unit value for the particular Sub-Account for the valuation period which
ends immediately preceding the annuity commencement date are 14.5645672 and
12.3456789 respectively; that the annuity payment rate for the age and option
elected is $6.78 per $1,000; and that the annuity unit value on the day prior to
the second variable annuity payment date is 12.3843113. The first variable
annuity payment would be $865.57 (8,765.4321 X 14.5645672 X 6.78 divided by
1,000). The number of annuity units credited would be 70.1112 ($865.57 divided
by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112
X 12.3843113).
APPENDIX B
STATE PREMIUM TAXES
The amount of applicable tax varies depending on the jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions
there is no tax at all. The Company believes that as of April 30, 1998 premium
taxes will be imposed with respect to Contracts offered by this Prospectus only
by the jurisdictions listed below at the rates indicated. For information
subsequent to April 30, 1998 a tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
---------------------------------------- --------- -------------
<S> <C> <C>
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Nevada -- 3.50%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming 1.00% 1.00%
</TABLE>
73
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION:
FULL SURRENDER:
Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents four examples of the withdrawal charge resulting from a
full surrender of the Participant's Account, based on hypothetical Account
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE
YEAR VALUE AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $41,000 $ 4,000(a) $37,000 6.00% $2,220
3 $52,000 $12,000(b) $40,000 5.00% $2,000
7 $80,000 $28,000(c) $40,000 3.00% $1,200
9 $98,000 $36,000(d) $40,000 0.00% $ 0
</TABLE>
- ------------------------
(a) The free withdrawal amount during an account year is equal to 10% of new
payments (those payments made in current account year or in the six
immediately preceding account years) less any prior partial withdrawals in
that account year. Any portion of the free withdrawal amount that is not
used in the current Account Year is carried forward into future years. In
the first account year 10% of new payments is $4,000. Therefore, on full
surrender $4,000 is withdrawn free of the withdrawal charge and the purchase
payment liquidated is $37,000 (account value less free withdrawal amount).
The withdrawal charge amount is determined by applying the withdrawal charge
percentage to the purchase payment liquidated.
(b) In the third account year, the free withdrawal amount is equal to $12,000
($4,000 for the current account year, plus an additional $8,000 for account
years 1 & 2 because no partial withdrawals were taken and the unused free
withdrawal amount is carried forward into future account years). The
withdrawal charge percentage is applied to the liquidated purchase payment
(account value less free withdrawal amount).
(c) In the seventh account year, the free withdrawal amount is equal to $28,000
($4,000 for the current account year, plus an additional $24,000 for account
years 1-6, $4,000 for each account year because no partial withdrawals were
taken and the unused free withdrawal amount is carried forward into future
account years). The withdrawal charge percentage is applied to the
liquidated purchase payment (account value less free withdrawal amount, but
not greater than actual purchase payments).
(d) There is no withdrawal charge on any purchase payment liquidated that has
been in the participant's account for at least seven years.
PARTIAL WITHDRAWAL:
Assume a single purchase payment of $40,000 is deposited at issue, no
additional purchase payments are made, no partial withdrawals have been taken
prior to the fifth account year, and there are a series of three partial
withdrawals made during the fifth account year of $9,000, $12,000, and $15,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE
VALUE AMOUNT AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(a) $64,000 $ 9,000 $20,000 $ 0 4.00% $ 0
(b) $56,000 $12,000 $11,000 $ 1,000 4.00% $ 40
(c) $40,000 $15,000 $ 0 $15,000 4.00% $600
</TABLE>
- ------------------------
(a) The free withdrawal amount during an account year is equal to 10% of new
payments (those payments made in current account year or in the six
immediately preceding account years) less any prior partial withdrawals in
that account year. Any portion of the free withdrawal amount that is not
used in the current account year is carried forward into future years. In
the fifth account year, the free withdrawal
74
<PAGE>
amount is equal to $20,000 ($4,000 for the current account year, plus an
additional $16,000 for account years 1-4, $4,000 for each account year
because no partial withdrawals were taken). The partial withdrawal amount
($9,000) is less than the free withdrawal amount so no purchase payments are
liquidated and no withdrawal charge applies.
(b) Since a partial withdrawal of $9,000 was taken, the remaining free
withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will
first be applied against the $11,000 free withdrawal amount, and then will
liquidate purchase payments of $1,000, incurring a withdrawal charge of $40.
(c) The free withdrawal amount is zero since the previous partial withdrawals
have already used the free withdrawal amount. The entire partial withdrawal
amount will result in purchase payments being liquidated and will incur a
withdrawal charge. At the beginning of the next account year, 10% of
purchase payments would be available for withdrawal requests during that
account year.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
<TABLE>
<C> <C>
N/12
1 + I
-----
( 1 + J ) -1
+ b
</TABLE>
These examples assume the following:
1) the Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06 (l).
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) the interest earned in the current Account Year is $674.16.
5) no transfers or partial withdrawals affecting this Guarantee Amount
have been made
6) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08 and
the b factor is zero.
<TABLE>
<C> <S> <C> <C>
N/12
1 + l
-------
The MVA factor = ( 1 + J + ) -1
b
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)2 -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X (-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would
be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA that
will be deducted from the partial withdrawal amount before the deduction of any
withdrawal charge.
75
<PAGE>
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05 and the
b factor is zero.
N/12
1 + l
-------
The MVA factor = ( 1 + J + ) -1
b
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)2 -1
= 1.019 -1
= .019
The value of the Guarantee Amount less interested credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the Guarantee
Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would
be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
76
<PAGE>
APPENDIX D
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN:
The table below shows, for various Sub-Accounts of the Variable Account, the
Average Annual Total Return for the stated periods (or shorter period indicated
in the note below), based upon a hypothetical initial Purchase Payment of
$1,000, calculated in accordance with the formula set out below the table. For
purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date such Series commenced operations ("Inception"), although the Contracts have
been offered only since November 1, 1991. No information is shown for the Bond
Series, Equity Income Series, Massachusetts Investors Growth Series, New
Discovery Series, Research International Series or Strategic Income Series as
such Series will not commence operations until 1998.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR DATE OF
PERIOD PERIOD PERIOD LIFE* INCEPTION
----------- ----------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation Series............. August 13, 1985
Conservative Growth Series.............. December 5, 1986
Emerging Growth Series.................. May 1, 1995
MFS/Foreign & Colonial Emerging Markets
Equity Series**........................ June 5, 1996
MFS/Foreign & Colonial International
Growth Series**........................ June 3, 1996
MFS/Foreign & Colonial International
Growth and Income Series............... October 2, 1995
Government Securities Series............ August 12, 1985
High Yield Series....................... August 13, 1985
Managed Sectors Series.................. May 27, 1988
Money Market Series..................... August 29, 1985
Research Series......................... November 7, 1994
Research Growth and Income Series.......
Total Return Series..................... May 16, 1988
Utilities Series........................ November 16, 1993
Value Series**.......................... June 3, 1996
World Asset Allocation Series........... November 7, 1994
World Governments Series................ May 16, 1988
World Growth Series..................... November 16, 1993
World Total Return Series............... November 7, 1994
</TABLE>
- ------------------------
*From commencement of investment operations
**Actual returns, not annualized
The length of the period and the last day of each period used in the above table
are set out in the table heading and in the footnotes above. The Average Annual
Total Return for each period was determined by finding the average annual
compounded rate of return over each period that would equate the initial amount
invested to the ending redeemable value for that period, in accordance with the
following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial Purchase Payment
of $1,000
T = average annual total return for the
period
n = number of years
ERV = redeemable value (as of the end of the
period) of a hypothetical $1,000
Purchase Payment made at the beginning
of the 1-year, 5-year, or 10-year period
(or fractional portion thereof)
77
<PAGE>
The formula assumes that: 1) all recurring fees have been deducted from the
Participant's Account; 2) all applicable non-recurring Contract charges are
deducted at the end of the period; and 3) there will be a full surrender at
the end of the period.
The $35 annual Account Fee will be allocated among the Sub-Accounts so that
each Sub-Account's allocated portion of the Account Fee is proportional to the
percentage of the number of Certificates that have amounts allocated to that
Sub-Account. Because the impact of Account Fees on a particular Certificate may
differ from those assumed in the computation due to differences between actual
allocations and the assumed ones, the total return that would have been
experienced by an actual Contract over these same time periods may have been
different from that shown above.
NON-STANDARDIZED INVESTMENT PERFORMANCE:
The Variable Account may illustrate its results over various periods and
compare its results to indices and other variable annuities in sales materials
including advertisements, brochures and reports. Such results may be computed on
a "cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit value of a Sub-Account between the first and last day of the
base period being measured, and expressing the difference as a percentage of the
Accumulation Unit value at the beginning of the base period.
"Annualized" quotations (described in the following table as "Compound
Growth Rate") are calculated by applying a formula which determines the level
rate of return which, if earned over the entire base period, would produce the
cumulative return.
78
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE
[TABLES TO BE PROVIDED BY AMENDMENT]
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA GOLD CONTRACT,
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----------------------------------------
*For purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date such Series commenced operations, although the Contracts have been offered
only since November 1, 1991. No information is shown for the Bond Series, Equity
Income Series, Massachusetts Investors Growth Series, New Discovery Series,
Research International Series or Strategic Income Series as such Series will not
commence operations until 1998. The charges imposed under the Contract against
the assets of the Variable Account for mortality and expense risks and
administrative expenses have been deducted. However, the annual Account Fee is
not reflected and these examples do not assume surrender at the end of the
period.
79
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE -- continued:
[Tables to be provided by amendment]
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA GOLD CONTRACT,
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----------------------------------------
*For purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date such Series commenced operations, although the Contracts have been offered
only since November 1, 1991. No information is shown for the Bond Series, Equity
Income Series, Massachusetts Investors Growth Series, New Discovery Series,
Research International Series or Strategic Income Series as such Series will not
commence operations until 1998. The charges imposed under the Contract against
the assets of the Variable Account for mortality and expense risks and
administrative expenses have been deducted. However, the annual Account Fee is
not reflected and these examples do not assume surrender at the end of the
period.
80
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE -- continued:
[Tables to be provided by amendment]
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA GOLD CONTRACT,
THIS MANY YEARS AGO...
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----------------------------------------
*For purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date such Series commenced operations, although the Contracts have been offered
only since November 1, 1991. No information is shown for the Bond Series, Equity
Income Series, Massachusetts Investors Growth Series, New Discovery Series,
Research International Series or Strategic Income Series as such Series will not
commence operations until 1998. The charges imposed under the Contract against
the assets of the Variable Account for mortality and expense risks and
administrative expenses have been deducted. However, the annual Account Fee is
not reflected and these examples do not assume surrender at the end of the
period.
81
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds included in variable contracts.
MOODY'S INVESTORS SERVICES, INC.'s insurance and claims-paying rating is a
system of rating an insurance company's financial strength, market leadership,
and ability to meet financial obligations. The purpose of Moody's ratings it to
provide investors with a simple system of gradation by which the relative
quality of insurance companies may be noted.
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the Variable Account
and the Series Fund, the Company intends to illustrate the advantages of the
Contracts in a number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a participant makes regular deposits to his or her
account.
DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally
discuss the price-leveling effect of making regular investments in the same
Sub-Accounts over a period of time, to take advantage of the trends in market
prices of the portfolio securities purchased by those Sub-Accounts.
SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through
which a Participant may take any distribution allowed by Code Section 401(a)(9)
in the case of Qualified Contracts, or permitted under Code Section 72 in the
case of Non-Qualified Contracts, by way of a series of partial withdrawals.
Withdrawals under this program may be fully or partially includible in income
and may be subject to a 10% penalty tax. Consult your tax adviser.
THE COMPANY'S OR MFS'S CUSTOMERS. Sales literature for the Variable Account
and the Series Fund may refer to the number of clients which they serve. As of
the date of this Prospectus, MFS was serving over ____ million investor
accounts.
82
<PAGE>
THE COMPANY'S OR MFS'S ASSETS, SIZE. The Company may discuss its general
financial condition (see, for example, the references to Standard & Poor's, Duff
& Phelps and A.M. Best Company above); it may refer to its assets; it may also
discuss its relative size and/or ranking among companies in the industry or
among any sub-classification of those companies, based upon recognized
evaluation criteria. For example, at year-end 1996 the Company was the 38th
largest U.S. life insurance company based upon overall assets and its parent
company, Sun Life Assurance Company of Canada, was the 19th largest.
83
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O SUN LIFE ANNUITY SERVICE CENTER
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
GOLD-1 5/98
<PAGE>
PROSPECTUS
MAY 1, 1998
MFS REGATTA GOLD
--------------------------------------------------
The master group flexible payment deferred annuity contracts (the
"Contracts") and related certificates offered by this Prospectus are designed
for use in connection with retirement and deferred compensation plans, some of
which may qualify as retirement programs under Sections 401, 403, 408, or 408A
of the Internal Revenue Code. The Contracts are issued by Sun Life Assurance
Company of Canada (U.S.) (the "Company"), an indirect wholly-owned subsidiary of
Sun Life Assurance Company of Canada, having its Principal Executive Offices at
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, telephone
(781) 237-6030. The Contracts provide that annuity payments will begin on a
selected future date. The Contracts provide for the accumulation of values on
either a variable basis, a fixed basis, or a fixed and variable basis and
provide for fixed and variable annuity payments as elected.
Each Participant under a Contract will receive a Certificate evidencing such
Participant's coverage under the Contract. The initial Purchase Payment for each
Certificate must be at least $5,000 and each additional Purchase Payment must be
at least $1,000, unless waived by the Company. The prior approval of the Company
is required before it will accept a Purchase Payment in excess of $1,000,000.
The Participant may elect to have values under the Certificate accumulate on
a fixed basis in the Fixed Account, which pays interest at the applicable
Guaranteed Interest Rate(s) for the duration of the particular Guarantee
Period(s) selected by the Participant, or on a variable basis in Sun Life of
Canada (U.S.) Variable Account F (the "Variable Account"), a separate account of
the Company, or divided between the Fixed Account and the Variable Account. The
assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account
uses its assets to purchase, at their net asset value, shares of a specific
series of MFS/Sun Life Series Trust (the "Series Fund"), a mutual fund
registered under the Investment Company Act of 1940, and advised by
Massachusetts Financial Services Company, an affiliate of the Company.
Twenty-five series are available for investment under the Contracts: (1) Money
Market Series; (2) High Yield Series; (3) Capital Appreciation Series; (4)
Government Securities Series; (5) World Governments Series; (6) Total Return
Series; (7) Managed Sectors Series; (8) Conservative Growth Series; (9)
Utilities Series; (10) World Growth Series; (11) Research Series; (12) World
Asset Allocation Series; (13) World Total Return Series; (14) Emerging Growth
Series; (15) MFS/Foreign & Colonial International Growth Series; (16)
MFS/Foreign & Colonial International Growth and Income Series; (17) MFS/Foreign
& Colonial Emerging Markets Equity Series; (18) Value Series; (19) Research
Growth and Income Series; (20) Bond Series; (21) Equity Income Series; (22)
Massachusetts Investors Growth Series; (23) New Discovery Series; (24) Research
International Series; and (25) Strategic Income Series. The Series Fund pays its
investment adviser certain fees charged against the assets of each Series. The
value of the variable portion, if any, of a Participant's Account and the amount
of variable annuity payments will vary to reflect the investment performance of
the series of the Series Fund selected by the Participant and the deduction of
the contract charges described under "How
(CONTINUED ON NEXT PAGE)
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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.
THIS PROSPECTUS CONTAINS THE BASIC INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN A CONTRACT AND IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
MFS/SUN LIFE SERIES TRUST. YOU SHOULD RETAIN THESE PROSPECTUSES FOR FUTURE
REFERENCE.
*ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY THE COMPANY MEANS RECEIPT AT ITS
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ANNUITY SERVICE CENTER, P.O. BOX
1024, BOSTON, MASSACHUSETTS 02103.
<PAGE>
the Contract Charges Are Assessed" on page 28. For more information about the
Series Fund, see "The Series Fund" on page 15 and the accompanying Series Fund
prospectus.
If the Participant elects to have values accumulated on a fixed basis,
Purchase Payments are allocated to one or more Guarantee Periods made available
by the Company in connection with the Fixed Account with durations of from one
to ten years, as selected by the Participant. The Fixed Account is the general
account of the Company (See "The Fixed Account" on page 13). The Company will
credit interest at a rate not less than the minimum specified in the applicable
Contract and Certificate (at least three percent (3%) per year), compounded
annually, to amounts allocated to the Fixed Account and guarantees these amounts
at various interest rates (the "Guaranteed Interest Rates") for the duration of
the Guarantee Period elected by the Participant, subject to the imposition of
any applicable withdrawal charge, Market Value Adjustment, or account
administration fee. The Company may not change a Guaranteed Interest Rate for
the duration of the Guarantee Period; however, Guaranteed Interest Rates
applicable to subsequent Guarantee Periods cannot be predicted and will be
determined at the sole discretion of the Company (subject to the minimum
guarantee). That part of the Contract relating to the Fixed Account is
registered under the Securities Act of 1933, but the Fixed Account is not
subject to the restrictions of the Investment Company Act of 1940.
The Company does not deduct a sales charge from Purchase Payments. However,
if any part of a Participant's Account is withdrawn, a withdrawal charge
(contingent deferred sales charge) may be assessed by the Company. This charge
is intended to reimburse the Company for expenses relating to the distribution
of the Contracts and Certificates. A portion (specified in the applicable
Contract and Certificate) of the Participant's Account Value may be withdrawn in
each Account Year without the imposition of a withdrawal charge, and after a
Purchase Payment has been held by the Company for seven years it may be
withdrawn without charge. Also, no withdrawal charge is assessed upon
annuitization or upon transfers. Other amounts withdrawn, adjusted by any
applicable Market Value Adjustment with respect to the Fixed Account, will be
subject to a withdrawal charge ranging from 6% to 0%. In no event will the
withdrawal charges assessed against a Participant's Account exceed 6% of
Purchase Payments (See "Withdrawal Charges" on page 24).
In addition, any cash withdrawal of amounts allocated to the Fixed Account,
other than a withdrawal effective within 30 days prior to the Expiration Date of
the applicable Guarantee Period or the withdrawal of interest credited to a
Guarantee Amount during the current Account Year, will be subject to a Market
Value Adjustment. The Market Value Adjustment will reflect the relationship
between the Current Rate (which is the Guaranteed Interest Rate currently
declared by the Company for Guarantee Periods equal to the balance of the
Guarantee Period applicable to the amount being withdrawn) and the Guaranteed
Interest Rate applicable to the amount being withdrawn. Generally, if the
Guaranteed Interest Rate is lower than the Current Rate, then the application of
the Market Value Adjustment will result in a lower payment upon withdrawal.
Similarly, if the Guaranteed Interest Rate is higher than the Current Rate, the
application of the Market Value Adjustment will result in a higher payment upon
withdrawal (See "Market Value Adjustment" on page 26).
The Company reserves the right to defer the payment of amounts withdrawn
from the Fixed Account for a period not to exceed six months from the date
written request for such withdrawal is received by the Company.
Special restrictions on withdrawals apply to Certificates used with Tax
Sheltered Annuities established pursuant to Section 403(b) of the Internal
Revenue Code (See "Section 403(b) Annuities" on page 26).
In addition, under certain circumstances withdrawals may result in tax
penalties (See "Federal Tax Status"). For a discussion of cash withdrawals,
withdrawal charges and the Market Value Adjustment see "Cash Withdrawals,
Withdrawal Charges and Market Value Adjustment" beginning on page 23.
On each Account Anniversary and on surrender of a Certificate for full value
the Company will deduct an annual account administration fee ("Account Fee")
from the Participant's Account. The amount of this fee is $30 in Account Years
one through five; thereafter, it may be changed annually, subject to a maximum
of $50. After the Annuity Commencement Date an Account Fee of $30 will be
deducted pro rata from each variable annuity payment made during the year. In
addition, the Company makes a deduction from the Variable
2
<PAGE>
Account at the end of each Valuation Period equal to an annual rate of 0.15% of
the daily net assets of the Variable Account. These charges are to reimburse the
Company for administrative expenses related to the issuance and maintenance of
the Contracts and Certificates. The Account Fee may be waived by the Company
under certain circumstances (See "Administrative Charges" on page 29).
The Company also deducts a mortality and expense risk charge at the end of
each Valuation Period equal to an annual rate of 1.25% of the daily net assets
of the Variable Account for mortality and expense risks assumed by the Company
(See "Mortality and Expense Risk Charge" on page 29).
In addition, the Contracts provide that the Company may change the
withdrawal charges, Account Fee, mortality and expense risk charges,
administrative expense charges, transfer charges, the tables used in determining
the amount of the first monthly variable annuity payment and fixed annuity
payments and the formula used to calculate the Market Value Adjustment, provided
that such modification shall apply only with respect to Participant's Accounts
established after the effective date of such modification (See "Modification" on
page 36).
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If the death of
the Annuitant occurs on or after the Annuity Commencement Date, no death benefit
will be payable except as may be provided under the Annuity Option elected (See
"Death Benefit" on page 27).
Annuity Payments will begin on the Annuity Commencement Date. The
Participant selects the Annuity Commencement Date, frequency of payments and the
Annuity Option (See "Annuity Provisions" on page 30).
Premium taxes payable to any governmental entity will be deducted from the
Participant's Account (See "Premium Taxes" on page 29).
Subject to certain conditions, and during the Accumulation Period, the
Participant may transfer amounts among the Sub-Accounts or Guarantee Periods
available under the Contract. Currently there is no charge for transfers.
Transfers (except of interest credited during the current Account Year to the
Guarantee Amount transferred) from or within the Fixed Account will be subject
to the Market Value Adjustment unless the transfer is effective within 30 days
prior to the Expiration Date of the amount transferred and other restrictions
may apply (See "Transfer Privilege; Telephone Transfers; Restriction on Market
Timers" on page 21).
After the Annuity Commencement Date, the Payee may, subject to certain
restrictions, exchange the value of a designated number of Annuity Units of
particular Sub-Accounts then credited with respect to the particular Payee for
other Annuity Units, the value of which would be such that the dollar amount of
an annuity payment made on the date of the exchange would be unaffected by the
fact of the exchange (See "Exchange of Variable Annuity Units" on page 33).
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. The Owner or
Participant is the person having the right to give voting instructions prior to
the Annuity Commencement Date. On or after the Annuity Commencement Date the
Payee is the person having such voting rights. Any shares attributable to the
Company and Series Fund shares for which no timely voting instructions are
received will be voted by the Company in the same proportion as the shares for
which instructions are received from persons having such right (See "Voting of
Series Fund Shares" on page 35).
The Company will furnish Participants and such other persons having voting
rights with certain reports and statements described under "Periodic Reports" on
page 35. Such reports, other than prospectuses, will not include the Company's
financial statements.
If a Participant is not satisfied with the Certificate it may be returned to
the Company at its Annuity Service Mailing Address within ten days after it was
delivered to the Participant. When the Company receives the returned Certificate
it will be cancelled and the Participant's Account Value at the end of the
Valuation Period during which the Certificate was received by the Company will
be refunded. However, if applicable
3
<PAGE>
state law so requires, the full amount of any Purchase Payment received by the
Company will be refunded, the "free look" period may be greater than ten days
and alternative methods of returning the Certificate may be acceptable.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. and at the Commission's Regional Offices
located at 75 Park Place, New York, New York and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web Site that contains reports, proxy and
information statements, and other information about the Company, which files
documents electronically with the Commission at the following address:
http://www.sec.gov.
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933 relating to
the Contracts offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements and exhibits thereto, and reference is
hereby made to such Registration Statements and exhibits for further information
relating to the Company and the Contracts. The Registration Statements and the
exhibits thereto may be inspected and copied, and copies can be obtained at
prescribed rates, in the manner set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1996
heretofore filed by the Company with the Commission under the 1934 Act is
incorporated by reference in this Prospectus.
Any statement contained in a document incorporated by reference herein shall
be deemed modified or superseded hereby to the extent that a statement contained
in a later-filed document or herein shall modify or supersede such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in the Prospectus). Requests for such
document should be directed to Secretary, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181,
telephone (800) 225-3950.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions 7
Expense Summary 9
Condensed Financial Information--Accumulation Unit Values 11
Performance Data 12
This Prospectus Is a Catalog of Facts 12
Uses of the Contract 12
A Word About the Company, the Fixed Account, the Variable
Account and the Series Fund 13
The Company 13
The Fixed Account 13
The Variable Account 15
The Series Fund 15
Purchase Payments and Contract Values During Accumulation
Period 18
Purchase Payments 18
Participant's Account 19
Variable Accumulation Value 19
Fixed Accumulation Value 20
Guarantee Periods 20
Guaranteed Interest Rates 21
Dollar Cost Averaging 21
Asset Allocation 21
Transfer Privilege; Telephone Transfers; Restriction on
Market Timers 22
Waivers; Reduced Charges; Credits; Bonus Guaranteed 23
Cash Withdrawals, Withdrawal Charges and Market Value
Adjustment 23
Cash Withdrawals 23
Withdrawal Charges 24
Amount of Withdrawal Charge 25
Section 403(b) Annuities 26
Market Value Adjustment 26
Death Benefit 27
Death Benefit Provided by the Contract 27
Election and Effective Date of Election 27
Payment of Death Benefit 28
Amount of Death Benefit 28
How the Contract Charges Are Assessed 28
Administrative Charges 29
Premium Taxes 29
Mortality and Expense Risk Charge 29
Withdrawal Charges 30
Annuity Provisions 30
Annuity Commencement Date 30
Election--Change of Annuity Option 30
Annuity Options 31
Determination of Annuity Payments 32
Fixed Annuity Payments 32
Variable Annuity Payments 32
Variable Annuity Unit Value 32
Exchange of Variable Annuity Units 33
Annuity Payment Rates 33
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Contractual Provisions 33
Payment Limits 33
Designation and Change of Beneficiary 33
Exercise of Contract Rights 34
Change of Ownership 34
Death of Participant 34
Voting of Series Fund Shares 35
Periodic Reports 35
Substituted Securities 36
Change in Operation of Variable Account 36
Splitting Units 36
Modification 36
Discontinuance of New Participants 37
Custodian 37
Right to Return 37
Federal Tax Status 37
Introduction 37
Tax Treatment of the Company and the Variable Account 38
Taxation of Annuities in General 38
Qualified Retirement Plans 40
Pension and Profit-Sharing Plans 40
Tax-Sheltered Annuities 40
Individual Retirement Accounts 40
Roth IRAs 41
Administration of the Contracts 41
Distribution of the Contracts 41
Additional Information About the Company 42
Selected Financial Data 42
Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Reinsurance 46
Reserves 46
Investments 46
Competition 46
Employees 46
Properties 47
The Company's Directors and Executive Officers 47
State Regulation 49
Legal Proceedings 50
Legal Matters 50
Accountants 50
Registration Statements 50
Financial Statements 50
Appendix A--Variable Accumulation Unit Value, Variable
Annuity Unit Value and Variable Annuity Payment
Calculations 73
Appendix B--State Premium Taxes 73
Appendix C--Withdrawals, Withdrawal Charges and the Market
Value Adjustment 74
Appendix D--Calculation of Performance Data; Advertising and
Sales Literature 78
</TABLE>
6
<PAGE>
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCOUNT YEARS AND ACCOUNT ANNIVERSARIES: The first Account Year shall be
the period of 12 months plus a part of a month as measured from the Date of
Coverage for each Participant to the first day of the calendar month which
follows the calendar month of coverage. All Account Years and Anniversaries
thereafter shall be 12 month periods based upon such first day of the calendar
month which follows the calendar month of coverage. If, for example, the Date of
Coverage is in March, the first Account Year will be determined from the Date of
Coverage but will end on the last day of March in the following year; all other
Account Years and all Account Anniversaries will be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant.
ANNUITANT: The person or persons named in the Application and on whose life
the first annuity payment is to be made. The Participant may not designate a
"Co-Annuitant" unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the Contract which are based
on the death of the "Annuitant" will be based on the date of death of the last
survivor of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
survivor of the persons so named. Collectively, these persons are referred to in
this Contract as "Annuitants." The Participant is not permitted to name a
"Co-Annuitant" under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Certificate is to be made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by each Participant that serves as his or
her application for participation under this Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit set forth in each Certificate and, for Non-Qualified Contracts, who is
the "designated beneficiary" for purposes of Section 72(s) of the Internal
Revenue Code in the event of the Participant's death.
CERTIFICATE: The document for each Participant which evidences the coverage
of the Participant under the Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for this Contract.
DATE OF COVERAGE: The date on which a Participant's Account becomes
effective.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
FIXED ACCOUNT: The Fixed Account consists of all assets of the Company
other than those allocated to a separate account of the Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GUARANTEE AMOUNT: Any portion of a Participant's Account Value allocated to
a particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
- ------------------------
*As specified in the Application, unless changed.
7
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ISSUE DATE: The date on which the Contract becomes effective.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan which does not receive favorable federal income tax treatment under
Sections 401, 403, 408, or 408A of the Internal Revenue Code. The Participant's
interest in the Contract must be owned by a natural person or agent for a
natural person for the Contract to receive favorable income tax treatment as an
annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in the Contract and in whose name or names the Contract is issued. The
Owner may designate a trustee or custodian of a retirement plan which meets the
requirements of Section 401, Section 408(c), Section 408(k) or Section 408(p) of
the Internal Revenue Code to serve as legal owner of assets of a retirement
plan, but the term "Owner", as used herein, shall refer to the organization
entering into the Contract.
PARTICIPANT: The person named in the Certificate who is entitled to
exercise all rights and privileges of ownership under the Certificate, except as
reserved by the Owner.
PARTICIPANT'S ACCOUNT: An account established for each Participant to which
Net Purchase Payments are credited.
PARTICIPANT'S ACCOUNT VALUE: The Variable Accumulation Value, if any, plus
the Fixed Accumulation Value, if any, of a Participant's Account for any
Valuation Period.
PAYEE: A recipient of payments under the Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by the Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which receives favorable federal income tax treatment under Sections 401, 403,
408, or 408A of the Internal Revenue Code of 1986, as amended.
RECEIPT: Receipt by the Company at its Annuity Service Mailing Address
shown on the cover of this Prospectus.
SERIES FUND: MFS/Sun Life Series Trust.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter, for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series or sub-series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day the Exchange is open for trading and on such
other days on which there is a sufficient degree of trading in the portfolio
securities of the Variable Account so that the values of the Variable Account's
Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets
set aside by the Company, the investment performance of which is kept separate
from that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
the value of the variable portion of a Participant's Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of specified Sub-Accounts of the
Variable Account.
- ------------------------
*As specified in the Application, unless changed.
8
<PAGE>
EXPENSE SUMMARY
The purpose of the following table and Example is to help Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Participants WHEN PAYMENTS ARE ALLOCATED TO THE
VARIABLE ACCOUNT. The table reflects expenses of the Variable Account as well as
of the Series Fund. The information set forth should be considered together with
the narrative provided under the heading "How the Contract Charges Are Assessed"
in this Prospectus, and with the Series Fund's prospectus. In addition to the
expenses listed below, premium taxes may be applicable.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<CAPTION>
PARTICIPANT TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases......... $ 0
Deferred Sales Load (as a percentage of
Purchase Payments
withdrawn) (1)
Number of Complete Account Years
Purchase Payment in Account
0-1................................. 6%
2-3................................. 5%
4-5................................. 4%
6................................... 3%
7 or more........................... 0%
Exchange fee (2)........................ 0
ANNUAL ACCOUNT FEE
$30 Per Participant's Account (3)
SEPARATE ACCOUNT ANNUAL EXPENSES (as a
percentage of average separate account
assets)
Mortality and Expense Risk Fees......... 1.25%
Administrative Expense Charge........... 0.15%
Other Fees and Expenses of the Separate
Account............................... 0.00%
Total Separate Account Annual
Expenses.............................. 1.40%
</TABLE>
- ------------
(1) A portion of the Participant's Account may be withdrawn each year without
imposition of any withdrawal charge, and after a Purchase Payment has been
held by the Company for seven years it may be withdrawn free of any
withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Annual Account Fee is the lesser of $30 and 2% of the Participant's
Account Value in Account Years one through five; thereafter, the fee may be
changed annually, but it may not exceed the lesser of $50 and 2% of the
Participant's Account Value.
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF UNDERLYING FUND NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES EXPENSES EXPENSES
---------- ---------- ----------
<S> <C> <C> <C>
Money Market Series..................... 0.50 % 0.08 % 0.58 %
High Yield Series....................... 0.75 % 0.10 % 0.85 %
Capital Appreciation Series............. 0.73 % 0.06 % 0.79 %
Government Securities Series............ 0.55 % 0.09 % 0.64 %
World Governments Series................ 0.75 % 0.16 % 0.91 %
Total Return Series..................... 0.,66% 0.05 % 0.71 %
Managed Sectors Series.................. 0.74 % 0.08 % 0.82 %
Conservative Growth Series.............. 0.55 % 0.06 % 0.61 %
Utilities Series........................ 0.75 % 0.12 % 0.87 %
World Growth Series..................... 0.90 % 0.12 % 1.02 %
Research Series......................... 0.72 % 0.07 % 0.79 %
World Asset Allocation Series........... 0.75 % 0.17 % 0.92 %
World Total Return Series............... 0.75 % 0.29 % 1.04 %
Emerging Growth Series.................. 0.74 % 0.07 % 0.81 %
MFS/Foreign & Colonial International
Growth Series......................... 0.975% 0.31 %(2) 1.285%
MFS/Foreign & Colonial International
Growth and Income Series.............. 0.975% 0.245% 1.22 %
MFS/Foreign & Colonial Emerging Markets
Equity Series......................... 1.25 %(3) 0.25 %(2) 1.50 %(3)
Value Series............................ 0.75 % 0.16 % 0.91 %
Research Growth and Income Series....... 0.75 % 0.69 %(2) 1.44 %
Bond Series.............................
Equity Income Series....................
Massachusetts Investors Growth Series...
New Discovery Series....................
Research International Series...........
Strategic Income Series.................
</TABLE>
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(1) Unless otherwise indicated, the information in the table is based on amounts
incurred during the Series Fund's most recent fiscal year. The information
relating to Fund expenses was provided by the Series Fund and has not been
independently verified by the Company. Participants should consult the
Series Fund prospectus for more information about Series Fund expenses.
(2) Other expenses of the Research Growth and Income Series and the MFS/Foreign
& Colonial International Growth Series and Emerging Markets Equity Series
are based on estimated amounts for the current fiscal year. The Adviser has
undertaken to reimburse the Emerging Markets Equity Series and the Research
Growth and Income Series for expenses that exceed 1.50% of the average daily
net assets of such series on an annualized basis, as more fully described in
the Series Fund's Prospectus. Absent such reimbursement, expenses of the
Emerging Markets Equity Series for 1997 would have been ____%.
(3) The Series Fund's investment adviser (the "Adviser") has voluntarily agreed
to bear the expenses for the MFS/Foreign & Colonial Emerging Markets Equity
Series such that "Total Fund Expenses" will not exceed 1.50% of the average
daily net assets on an annualized basis, as more fully described in the
Series Fund's prospectus. This voluntary fee reduction may be rescinded at
any time. Absent this voluntary reduction, this Series "Total Fund Expenses"
payable would have been 1.55%
9
<PAGE>
EXAMPLE
If you surrender your Certificate at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:*
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Bond Series $ $ $ $
Capital Appreciation Series
Conservative Growth Series
Emerging Growth Series
Equity Income Series
Government Securities Series
High Yield Series
MFS/Foreign & Colonial Emerging Markets
Equity Series
MFS/Foreign & Colonial International
Growth and Income Series
MFS/Foreign & Colonial International
Growth Series
Managed Sectors Series
Massachusetts Investors Growth Series
Money Market Series
New Discovery Series
Research Series
Research Growth and Income Series
Research International Series
Strategic Income Series
Total Return Series
Utilities Series
Value Series
World Asset Allocation Series
World Governments Series
World Growth Series
World Total Return Series
</TABLE>
- ------------------------------
* Expenses under Certificates containing the cumulative free withdrawal
provision described on page 23 of this Prospectus would be lower than those
illustrated, for the one, three and five year periods.
If you do not surrender your Certificate, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Bond Series $ $ $ $
Capital Appreciation Series
Conservative Growth Series
Emerging Growth Series
Equity Income Series
Government Securities Series
High Yield Series
MFS/Foreign & Colonial Emerging Markets
Equity Series
MFS/Foreign & Colonial International
Growth and Income Series
MFS/Foreign & Colonial International
Growth Series
Managed Sectors Series
Massachusetts Investors Growth Series
Money Market Series
New Discovery Series
Research Series
Research Growth and Income Series
Research International Series
Strategic Income Series
Total Return Series
Utilities Series
Value Series
World Asset Allocation Series
World Governments Series
World Growth Series
World Total Return Series
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
10
<PAGE>
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements appearing elsewhere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------
1991* 1992 1993 1994 1995 1996 1997
------------ ---------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period....... $10.0000 $ 11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8932
End of period............. $11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8392 $ 22.5700
Units outstanding end of
period..................... 124,454 5,131,355 13,245,142 19,909,649 27,782,739 32,796,793
CONSERVATIVE GROWTH SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344
End of period............. $10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344 $ 19.9527
Units outstanding end of
period..................... 85,141 2,557,065 6,412,270 10,979,711 16,712,586 26,199,975
EMERGING GROWTH SERIES
Unit Value:
Beginning of period -- -- -- -- $ 10.0000** $ 12.5675
End of period............. -- -- -- -- $ 12.5675 $ 14.5136
Units outstanding end of
period..................... -- -- -- -- 5,346,104 16,998,044
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981
End of period............. $10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981 $ 13.1252
Units outstanding end of
period..................... 256,848 5,447,047 13,661,303 18,784,262 18,082,586 19,714,114
HIGH YIELD SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137
End of period............. $10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137 $ 16.2674
Units outstanding end of
period..................... 6,734 1,380,530 3,599,473 4,605,818 6,880,080 8,424,289
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
Unit Value:
Beginning of period....... -- -- -- -- -- $ 10.0000**
End of period............. -- -- -- -- -- $ 9.9199
Units outstanding end of
period..................... -- -- -- -- -- 329,630
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH SERIES
Unit Value:
Beginning of period....... -- -- -- -- -- $ 10.0000**
End of period............. -- -- -- -- -- $ 9.7460
Units outstanding end of
period..................... -- -- -- -- -- 564,742
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME SERIES
Unit Value:
Beginning of period....... -- -- -- -- $ 10.0000** $ 10.0942
End of period............. -- -- -- -- $ 10.0942 $ 10.4404
Units outstanding end of
period..................... -- -- -- -- 711,179 3,360,596
MANAGED SECTORS SERIES
Unit Value:
Beginning of period....... $10.0000 $ 11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925
End of period............. $11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925 $ 18,5452
Units outstanding end of
period..................... 51,219 2,614,510 4,525,423 6,351,641 8,542,869 10,541,726
MONEY MARKET SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111
End of period............. $10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111 $ 11.3932
Units outstanding end of
period..................... 417,559 4,101,024 6,055,673 14,774,386 17,186,041 27,275,583
RESEARCH SERIES
Unit Value:
Beginning of period....... -- -- -- $ 10.0000** $ 9.8615 $ 13.3663
End of period............. -- -- -- $ 9.8615 $ 13.3663 $ 16.3209
Units outstanding end of
period..................... -- -- -- 392,528 5,341,160 19,577,745
TOTAL RETURN SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406
End of period............. $10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406 $ 16.6932
Units outstanding end of
period..................... 280,202 12,952,314 32,979,812 48,270,556 53,091,748 59,508,016
UTILITIES SERIES
Unit Value:
Beginning of period....... -- -- $ 10.0000** $ 10.0000 $ 9.3739 $ 12.2403
End of period............. -- -- $ 10.0000 $ 9.3739 $ 12.2403 $ 14.5260
Units outstanding end of
period..................... -- -- 279,796 2,273,439 3,410,047 4,671,192
VALUE SERIES
Unit Value:
Beginning of period....... -- -- -- -- -- $ 10.0000**
End of period............. -- -- -- -- -- $ 10.9234
Units outstanding end of
period..................... -- -- -- -- -- 1,520,787
WORLD ASSET ALLOCATION SERIES
Unit Value:
Beginning of period....... -- -- -- $ 10.0000** $ 10.0367 $ 12.0393
End of period............. -- -- -- $ 10.0367 $ 12.0393 $ 13.7702
Units outstanding end of
period..................... -- -- -- 299,210 2,141,041 5,539,010
WORLD GOVERNMENTS SERIES
Unit Value:
Beginning of period....... $10.0000 $ 10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523
End of period............. $10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523 $ 13.6780
Units outstanding end of
period..................... 44,190 3,405,280 7,008,613 8,334,019 8,272,858 7,510,766
WORLD GROWTH SERIES
Unit Value:
Beginning of period....... -- -- $ 10.0000** $ 10.6200 $ 10.7803 $ 12.3321
End of period............. -- -- $ 10.6200 $ 10.7803 $ 12.3321 $ 13.7523
Units outstanding end of
period..................... -- -- 1,778,644 9,182,555 11,421,691 13,989,946
WORLD TOTAL RETURN SERIES
Unit Value:
Beginning of period....... -- -- -- $ 10.0000** $ 10.0195 $ 11.6516
End of period............. -- -- -- $ 10.0195 $ 11.6516 $ 13.1290
Units outstanding end of
period..................... -- -- -- 138,126 1,170,586 2,836,079
<FN>
- ----------------------------------
* From November 18, 1991 (date of commencement of issuance of the Contracts) to
December 31, 1991.
** Unit value on date of commencement of operations of the respective
Sub-Account.
</TABLE>
11
<PAGE>
PERFORMANCE DATA
From time to time the Variable Account may publish reports to shareholders,
sales literature and advertisements containing performance data relating to the
Sub-Accounts. Performance data will consist of total return quotations which
will always include quotations for the period subsequent to the date each Sub-
Account became available for investment under the Contracts, and for recent one
year and, when applicable, five and ten year periods. Such quotations for such
periods will be the average annual rates of return required for an initial
Purchase Payment of $1,000 to equal the actual variable accumulation value
attributable to such Purchase Payment on the last day of the period, after
reflection of all applicable withdrawal and contract charges. In addition, the
Variable Account may calculate non-standardized rates of return that do not
reflect withdrawal and contract charges. Results calculated without withdrawal
and/or contract charges will be higher. Performance figures used by the Variable
Account are based on the actual historical performance of the Series Fund for
specified periods, and the figures are not intended to indicate future
performance. The Variable Account may also from time to time compare its
investment performance to various unmanaged indices or other variable annuities
and may refer to certain rating and other organizations in its marketing
materials. More detailed information on the computations is set forth in
Appendix D.
THIS PROSPECTUS IS A CATALOG OF FACTS
This Prospectus contains information about the master group deferred annuity
contract (the "Contract") which provides fixed benefits, variable benefits or a
combination of both. It describes its uses and objectives, its benefits and
costs, and the rights and privileges of the Owner and the Participant, as
applicable. It also contains information about the Company, the Variable
Account, the Fixed Account and the Series Fund. It has been carefully prepared
in non-technical language to help you decide whether the purchase of a Contract
will fit the needs of your retirement plan. We urge you to read it carefully and
retain it for future reference. The Contract has appropriate provisions relating
to variable and fixed accumulation values and variable and fixed annuity
payments. A Variable Annuity and a Fixed Annuity have certain similarities. Both
provide that Purchase Payments, less certain deductions, will be accumulated
prior to the Annuity Commencement Date. After the Annuity Commencement Date,
annuity payments will be made to the Annuitant. The Company assumes the
mortality and expense risks under the Contract, for which it receives certain
amounts. The significant difference between a Variable Annuity and a Fixed
Annuity is that under a Variable Annuity, all investment risk is assumed by the
Participant or Payee and the amounts of the annuity payments vary with the
investment performance of the Variable Account; under a Fixed Annuity, the
investment risk is assumed by the Company (except in the case of early
withdrawals (See "Cash Withdrawals" and "Market Value Adjustment")) and the
amounts of the annuity payments do not vary. However, the Participant bears the
risk that the Guaranteed Interest Rate to be credited on amounts allocated to
the Fixed Account may not exceed the minimum guaranteed rate for any Guarantee
Period.
USES OF THE CONTRACT
The Contract is designed for use in connection with retirement plans which
meet the requirements of Section 401 (including Section 401(k)), Section 403,
Section 408(b), Section 408(c), Section 408(k) or Section 408(p) of the Internal
Revenue Code; however, the Company may discontinue offering new Contracts in
connection with certain types of qualified plans. In addition, the Company may
begin offering Participants under Contracts used in connection with individual
retirement plans under Section 408 the opportunity to convert the Contracts into
Contracts used in connection with Roth IRAs under Section 408A of the Internal
Revenue Code, and may also begin offering new Contracts for use in connection
with Roth IRAs. Certain federal tax advantages are currently available to
retirement plans which qualify as (1) self-employed individuals' retirement
plans under Section 401; (2) corporate or association retirement plans under
Section 401; (3) annuity purchase plans sponsored by certain tax exempt
organizations or public school systems under Section 403(b); or (4) individual
retirement accounts, including employer or association of employees individual
retirement accounts under Section 408(c), SEP-IRAs under Section 408(k), Simple
Retirement Accounts under Section 408(p) and Roth IRAs under Section 408A (See
"Federal Tax Status").
The Contract is also designed so that it may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law.
12
<PAGE>
A Contract is issued to the Owner covering all Participants. Each
Participant receives a Certificate which evidences his or her participation
under the Contract. For the purposes of determining benefits under the Contract,
a Participant's Account is established for each Participant.
A WORD ABOUT THE COMPANY,
THE FIXED ACCOUNT, THE VARIABLE ACCOUNT AND THE SERIES FUND
THE COMPANY
The Company is a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. Its Executive Office mailing address is One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181. It has obtained
authorization to do business in forty-eight states, the District of Columbia and
Puerto Rico, and it is anticipated that the Company will be authorized to do
business in all states except New York. The Company issues life insurance
policies and individual and group annuities. The Company has formed a
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York,
which issues individual fixed and combination fixed/variable annuity contracts
and group life and long-term disability insurance in New York and which offers
in New York contracts similar to the Contract offered by this Prospectus. The
Company's other active subsidiaries are Sun Capital Advisers, Inc., a registered
investment adviser, Clarendon Insurance Agency, Inc., a registered broker-dealer
that acts as the general distributor of the Contracts and other annuity and life
insurance contracts issued by the Company and its affiliates, Sun Life of Canada
(U.S.) Distributors, Inc., a registered broker-dealer and investment adviser,
New London Trust, F.S.B., a federally chartered savings bank, Massachusetts
Casualty Insurance Company, which issues individual disability income policies,
and Sun Life Financial Services Limited which provides off-shore administrative
services to the Company and Sun Life Assurance Company of Canada "Sun Life
(Canada)".
The Company is a wholly-owned subsidiary of Sun Life of Canada (U.S.),
Holdings, Inc. ("Life Holdco"), which, on December 18, 1997 became a
wholly-owned subsidiary of Sun Life Assurance Company of Canada--U.S. Operations
Holdings, Inc. ("U.S. Holdco"). U.S. Holdco is a wholly-owned subsidiary of Sun
Life (Canada), 150 King Street West, Toronto, Ontario, Canada. Sun Life (Canada)
is a mutual life insurance company incorporated pursuant to an Act of Parliament
of Canada in 1865 and currently transacts business in all of the Canadian
provinces and territories, all U.S. states except New York, the District of
Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong,
Bermuda and the Philippines.
THE FIXED ACCOUNT
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to any separate account. Purchase Payments will be
allocated to Guarantee Periods available in connection with the Fixed Account to
the extent elected by the Participant at the time of the establishment of a
Participant's Account or as subsequently changed. In addition, all or part of
the Participant's Account Value may be transferred to Guarantee Periods
available under the Contract as described under "Transfer Privilege". Assets
supporting amounts allocated to Guarantee Periods become part of the Company's
general account assets and are available to fund the claims of all classes of
customers of the Company, including claims for benefits under Certificates.
The Company will invest the assets of the Fixed Account in those assets
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
The Company intends to invest the assets of the Fixed Account primarily in
debt instruments as follows: (1) 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; (2) Debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard &
Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating
service; (3) Other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and other corporations, which
obligations, although not rated by Moody's or Standard & Poor's, are deemed by
the Company's management to have an investment quality comparable to securities
which may be purchased as stated above; and (4) Other evidences of indebtedness
secured
13
<PAGE>
by mortgages or deeds of trust representing liens upon real estate.
Notwithstanding the foregoing, the Company may also invest a portion of the
Fixed Account in below investment grade debt instruments. Instruments rated Baa
and/or BBB or lower normally involve a higher risk of default and are less
liquid than higher rated instruments. If the rating of an investment grade debt
security held by the Company is subsequently downgraded to below investment
grade, the decision to retain or dispose of the security will be made based upon
an individual evaluation of the circumstances surrounding the downgrading and
the prospects for continued deterioration, stabilization and/or improvement.
The Company is not obligated to invest amounts allocated to the Fixed
Account according to any particular strategy, except as may be required by
applicable state insurance laws. Investment income from such Fixed Account
assets will be allocated between the Company and all contracts participating in
the Fixed Account, including the Contracts offered by this Prospectus, in
accordance with the terms of such contracts.
Fixed annuity payments made to Annuitants under the Contracts will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. The Company assumes this "mortality risk"
by virtue of annuity rates incorporated in the Contract which cannot be changed
(except as described under "Modification" with respect to Participant's Accounts
established after the effective date of such modification). In addition, the
Company guarantees that it will not increase charges for maintenance of the
Contracts, regardless of its actual expenses (except as described under
"Modification" with respect to Participant's Accounts established after the
effective date of such modification).
Investment income from the Fixed Account allocated to the Company includes
compensation for mortality and expense risks, distribution expenses and
administrative expenses borne by the Company in connection with contracts
participating in the Fixed Account. The Company expects to derive a profit from
this compensation. The amount of investment income allocated to the Contracts
will vary from Guarantee Period to Guarantee Period in the sole discretion of
the Company. However, the Company guarantees that it will credit interest at a
minimum rate specified in the Contract and Certificate (not less than 3% per
year), compounded annually, to amounts allocated to the Fixed Account under the
Contract. The Company may credit interest at a rate in excess of the minimum
rate; however, the Company is not obligated to credit any interest in excess of
such rate. There is no specific formula for the determination of excess interest
credits. Such credits, if any, will be determined by the Company based on
information as to expected investment yields. Some of the factors that the
Company may consider in determining whether to credit interest to amounts
allocated to the Fixed Account and the amount thereof, are: general economic
trends; rates of return currently available and anticipated on the Company's
investments; regulatory and tax requirements; and competitive factors. The
Company's general investment strategy will be to invest amounts allocated to the
Fixed Account in investment-grade debt securities and mortgages using
immunization strategies with respect to the applicable Guarantee Periods. This
includes, with respect to investments and average terms of investments, using
dedication (cash flow matching) and/or duration matching to minimize the
Company's risk of not achieving the rates it is crediting under Guarantee
Periods in volatile interest rate environments. ANY INTEREST CREDITED TO AMOUNTS
ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF THE MINIMUM RATE SPECIFIED IN THE
CONTRACT WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE
PARTICIPANT ASSUMES THE RISK THAT INTEREST CREDITED ON AMOUNTS ALLOCATED TO THE
FIXED ACCOUNT MAY NOT EXCEED THE MINIMUM GUARANTEE FOR ANY GIVEN YEAR.
The Company is aware of no statutory limitations on the maximum amount of
interest it may credit, and the Board of Directors has set no limitations.
However, inherent in the Company's exercise of discretion in this regard is the
equitable allocation of distributable earnings and surplus among its various
policyholders and contract owners and to its sole stockholder.
14
<PAGE>
THE VARIABLE ACCOUNT
The basic objective of a variable annuity contract is to provide variable
annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contract is designed to
seek to accomplish this objective by providing that variable annuity payments
(1) will reflect the investment performance of the Variable Account with respect
to amounts allocated to the Variable Account before the Annuity Commencement
Date and (2) will reflect the investment performance of the Variable Account
after that date. Since the Variable Account is always fully invested in Series
Fund shares, its investment performance reflects the investment performance of
the Series Fund. Values of Series Fund shares held by the Variable Account
fluctuate and are subject to the risks of changing economic conditions as well
as the risk inherent in the ability of the Series Fund's management to make
necessary changes in its portfolios to anticipate changes in economic
conditions. Therefore, the Participant bears the entire investment risk that the
basic objectives of the Contract may not be realized, and that the adverse
effects of inflation may not be lessened and there can be no assurance that the
aggregate amount of variable annuity payments will equal or exceed the aggregate
amount of Purchase Payments made with respect to a particular Participant's
Account for the reasons described above or because of the premature death of a
Payee.
Another important feature of the Contract related to its basic objective is
the Company's promise that the dollar amount of variable annuity payments made
during the lifetime of the Payee(s) will not be adversely affected by the actual
mortality experience of the Company or by the actual expenses incurred by the
Company in excess of expense deductions provided for in the Contract.
Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") was
established by the Company as a separate account on July 13, 1989 pursuant to a
resolution of its Board of Directors. Under Delaware insurance law and the
Contract, the income, gains or losses of the Variable Account are credited to or
charged against the assets of the Variable Account without regard to the other
income, gains, or losses of the Company. These assets are held in relation to
the Contracts described in this Prospectus and such other variable annuity
contracts issued by the Company and designated by it as providing benefits which
vary in accordance with the investment performance of the Variable Account.
Although the assets maintained in the Variable Account will not be charged with
any liabilities arising out of any other business conducted by the Company, all
obligations arising under the Contracts, including the promise to make annuity
payments, are general corporate obligations of the Company.
The Variable Account meets the definition of a separate account under the
federal securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940. Registration with the Commission does not
involve supervision of the management or investment practices or policies of the
Variable Account or of the Company by the Commission.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific series of the Series
Fund. All amounts allocated to the Variable Account will be used to purchase
Series Fund shares as designated by the Participant at their net asset value.
Any and all distributions made by the Series Fund with respect to the shares
held by the Variable Account will be reinvested to purchase additional shares at
their net asset value. Deductions from the Variable Account for cash
withdrawals, annuity payments, death benefits, Account Fees, contract charges
against the assets of the Variable Account for the assumption of mortality and
expense risks, distribution expenses, administrative expenses and any applicable
taxes will, in effect, be made by redeeming the number of Series Fund shares at
their net asset value equal in total value to the amount to be deducted. The
Variable Account will be fully invested in Series Fund shares at all times.
THE SERIES FUND
MFS/Sun Life Series Trust (the "Series Fund") is an open-end investment
management company registered under the Investment Company Act of 1940.
Currently shares of the Series Fund are also sold to other separate accounts
established by the Company and Sun Life Insurance and Annuity Company of New
York in connection with individual and group variable annuity contracts and
single premium variable life insurance contracts. In the future, shares of the
Series Fund may be sold to other separate accounts established by the Company or
its affiliates to fund other variable annuity or variable life insurance
contracts.
15
<PAGE>
The Company and its affiliates will be responsible for reporting to the Series
Fund's Board of Trustees any potential or existing conflicts between the
interests of variable annuity contract owners/participants and the interests of
owners of variable life insurance contracts that provide for investment in
shares of the Series Fund. The Board of Trustees, a majority of whom are not
"interested persons" of the Series Fund, as that term is defined in the
Investment Company Act of 1940, also intends to monitor the Series Fund to
identify the existence of any such irreconcilable material conflicts and to
determine what action, if any, should be taken by the Series Fund and/or the
Company and its affiliates (see "Management of the Series Fund" in the Series
Fund prospectus).
The Series Fund is composed of twenty-six independent portfolios of
securities, each of which has separate investment objectives and policies.
Shares of the Series Fund are issued in twenty-six series, each corresponding to
one of the portfolios; however, the Contracts provide for investment only in
shares of the twenty-five series of the Series Fund described below. Additional
portfolios may be added to the Series Fund which may or may not be available for
investment by the Variable Account.
(1) MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money market
instruments maturing in less than 13 months, including U.S. government
securities and repurchase agreements collateralized by such securities,
obligations of the larger banks and prime commercial paper.
(2) HIGH YIELD SERIES will seek high current income and capital appreciation
by investing primarily in fixed income securities of U.S. and foreign issuers
which may be in the lower rated categories or unrated (commonly known as "junk
bonds") and which may include equity features. These securities generally
involve greater volatility of price and risk to principal and income and less
liquidity than securities in the higher rated categories. Any person
contemplating allocating Purchase Payments to the Sub-Account investing in
shares of the High Yield Series should review the risk disclosure in the Series
Fund prospectus carefully and consider the investment risks involved.
(3) CAPITAL APPRECIATION SERIES will seek capital appreciation by investing
in securities of all types, with a major emphasis on common stocks.
(4) GOVERNMENT SECURITIES SERIES will seek current income and preservation
of capital by investing in U.S. Government and Government-related Securities.
(5) WORLD GOVERNMENTS SERIES will seek moderate current income and
preservation and growth of capital by investing in a portfolio of U.S. and
Foreign Government Securities.
(6) TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent with
prudent employment of capital; its secondary objective is to take advantage of
opportunities for growth of capital and income. Assets will be allocated and
reallocated from time to time between money market, fixed income and equity
securities. Under normal market conditions, at least 25% of the Total Return
Series' assets will be invested in fixed income securities and at least 40% and
no more than 75% of its assets will be invested in equity securities.
(7) MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio of common stocks among certain industry sectors.
Dividend income, if any, is incidental to its objective of capital appreciation.
(8) CONSERVATIVE GROWTH SERIES will seek long-term growth of capital and
future income while providing more current dividend income than is normally
obtainable from a portfolio of only growth stocks by investing a substantial
proportion of its assets in the common stocks or securities convertible into
common stocks of companies believed to possess better than average prospects for
long-term growth and a smaller proportion of its assets in securities whose
principal characteristic is income production.
(9) UTILITIES SERIES will seek capital growth and current income (income
above that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in equity
and debt securities issued by both domestic and foreign utility companies.
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(10) WORLD GROWTH SERIES will seek capital appreciation by investing in
securities of companies worldwide growing at rates expected to be well above the
growth rate of the overall U.S. economy.
(11) RESEARCH SERIES will seek to provide long-term growth of capital and
future income.
(12) WORLD ASSET ALLOCATION SERIES will seek total return over the long term
through investments in foreign and domestic equity and fixed income securities
and will also seek to have low volatility of share price (i.e. net asset value
per share) and reduced risk (compared to an aggressive equity/fixed income
portfolio).
(13) WORLD TOTAL RETURN SERIES will seek total return by investing in
securities which will provide above average current income (compared to a
portfolio invested entirely in equity securities) and opportunities for
long-term growth of capital and income. The series will invest primarily in
global equity and fixed income securities (i.e. those of U.S. and non-U.S.
issuers).
(14) EMERGING GROWTH SERIES will seek to provide long-term growth of capital
by investing primarily (i.e. at least 80% of its assets under normal
circumstances) in common stocks of emerging growth companies, including small
and medium sized companies that are early in their life cycle but which have the
potential to become major enterprises. Dividend and interest income from
portfolio securities, if any, is incidental to its objective of long-term growth
of capital.
(15), (16) AND (17) The following three series are collectively referred to
as the "MFS/Foreign & Colonial Series."
(15) MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH SERIES will seek capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in equity securities of companies whose principal activities are
outside the U.S. growing at rates expected to be well above the growth rate of
the overall U.S. economy.
(16) MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME SERIES will seek
capital appreciation and current income by investing, under normal market
conditions, at least 65% of its total assets in equity and fixed income
securities of issuers whose principal activities are outside the U.S.
(17) MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in equity securities of issuers whose principal activities are
located in emerging market countries.
(18) VALUE SERIES will seek capital appreciation.
(19) RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth
of capital, current income and growth of income.
(20) BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary investment
objective is to seek to protect shareholder capital.
(21) EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securities; its secondary objective is to seek to
protect shareholder capital.
(22) MASSACHUSETTS INVESTORS GROWTH SERIES will primarily seek to provide
long-term growth of capital and future income rather than current income.
(23) NEW DISCOVERY SERIES will seek capital appreciation by investing in
equity securities of companies of any size which the Fund's investment adviser
believes offer superior prospects for growth, and in particular, emphasizing
companies in the developmental stages of their life cycle that offer the
potential for accelerated earnings or revenue growth.
(24) RESEARCH INTERNATIONAL SERIES will seek capital appreciation by
investing in equity securities of companies whose principal activities are
located outside the United States, as well as other securities offering an
opportunity for capital appreciation.
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(25) STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining a
high level of current income.
The investment adviser of the Series Fund, Massachusetts Financial Services
Company ("MFS"), is paid fees by the Series Fund for its services pursuant to
investment advisory agreements. MFS, a Delaware corporation, is an affiliate of
the Company. MFS also serves as investment adviser to each of the funds in the
MFS Family of Funds, and to certain other investment companies established by
MFS and/or the Company. MFS Institutional Advisors, Inc., a wholly-owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS operates as an autonomous organization and the obligation of
performance with respect to the investment advisory and underwriting agreements
(including supervision of the sub-advisers noted below) is solely that of MFS.
The Company undertakes no obligation in this respect.
The investment advisory agreements for the World Growth Series and the
MFS/Foreign & Colonial Series permit MFS from time to time to engage one or more
sub-advisers to assist in the performance of its services. MFS has engaged
Foreign & Colonial Management Limited ("FCM") and its subsidiary, Foreign &
Colonial Emerging Markets Limited ("FCEM"), as sub-advisers of these series.
A more detailed description of the Series Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of the Series Fund and in the Series
Fund's Statement of Additional Information, which is available by calling
1-800-752-7215.
PURCHASE PAYMENTS AND CONTRACT VALUES DURING ACCUMULATION PERIOD
PURCHASE PAYMENTS
(1) PLACE, AMOUNT AND FREQUENCY
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. The amount of Purchase Payments may vary; however, the Company
will not accept an initial Purchase Payment to be allocated to a Participant's
Account which is less than $5,000, and each additional Purchase Payment must be
at least $1,000, unless waived by the Company. In addition, the prior approval
of the Company is required before it will accept a Purchase Payment which would
cause the value of a Participant's Account to exceed $1,000,000. If the value of
a Participant's Account exceeds $1,000,000, no additional Purchase Payments will
be allocated among the Series without the prior approval of the Company.
A completed Application and the initial Purchase Payment are forwarded to
the Company for acceptance. Upon acceptance, the Contract and Certificate(s), as
applicable, are issued to the Owner and/or Participant(s), respectively, and the
initial Purchase Payment is then credited to the Participant's Account. The
initial Purchase Payment must be applied within two business days of receipt by
the Company of a completed Application. The Company may retain the Purchase
Payment for up to five business days while attempting to complete an incomplete
Application. If the Application cannot be made complete within five business
days, the prospective participant will be informed of the reasons for the delay
and the Purchase Payment will be returned immediately unless the prospective
participant specifically consents to the Company's retaining the Purchase
Payment until the Application is made complete. Thereafter, the Purchase Payment
must be applied within two business days. Subsequent Purchase Payments are
applied at the end of the Valuation Period during which they are received by the
Company.
(2) ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Annuitant until the Annuity Commencement Date or
until the Participant's Account is surrendered. Purchase Payments may be made at
any time while the Participant's Account is in force.
(3) ALLOCATION OF NET PURCHASE PAYMENTS
The Net Purchase Payment is that portion of a Purchase Payment which remains
after deduction of any applicable premium or similar tax. Each Net Purchase
Payment will be allocated either to Guarantee Periods
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available in connection with the Fixed Account or to Sub-Accounts of the
Variable Account or to both Sub-Accounts and the Fixed Account in accordance
with the allocation factors specified in the particular Participant's
Application, or as subsequently changed.
The allocation factors for new Payments between the Guarantee Periods and
among the Sub-Accounts may be changed by the Participant at any time by giving
written notice of the change to the Company. Any change will take effect with
the first Purchase Payment received with or after receipt of notice of the
change by the Company and will continue in effect until subsequently changed.
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account Value for any Valuation Period is
equal to the sum of the variable accumulation value, if any, plus the fixed
accumulation value, if any, of the Participant's Account for that Valuation
Period.
VARIABLE ACCUMULATION VALUE
The variable accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units credited to the Participant's Account for such Valuation Period.
(1) CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment to be allocated to any Sub-Accounts in
accordance with the allocation factors will be credited to the Participant's
Account in the form of Variable Accumulation Units. The number of particular
Variable Accumulation Units to be credited is determined by dividing the dollar
amount allocated to the particular Sub-Account by the Variable Accumulation Unit
value for the particular Sub-Account for the Valuation Period during which the
Purchase Payment is applied by the Company to the Participant's Account.
(2) VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain the same from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below. For a hypothetical example of the calculation of the value of a
Variable Accumulation Unit, see Appendix A.
(3) NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore the
value of a Variable Accumulation Unit may increase, decrease or remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of a Series Fund share held in the
Sub-Account determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution
declared by the Series Fund on the shares held in the Sub-Account if the
"ex-dividend" date occurs during the Valuation Period, plus or minus
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(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Sub-Account (no federal income taxes are applicable under present law);
(b) is the net asset value of a Series Fund share held in the
Sub-Account determined as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the
Valuation Period to reflect the charges for assuming the mortality and
expense risks and administrative expenses.
FIXED ACCUMULATION VALUE
The fixed accumulation value of a Participant's Account, if any, for any
Valuation Period is equal to the sum of the values of all Guarantee Amounts
credited to the Participant's Account for such Valuation Period.
GUARANTEE PERIODS
The Participant may elect one or more Guarantee Period(s) with durations of
from one to ten years from among those made available by the Company. The
period(s) elected will determine the Guaranteed Interest Rate(s). A Purchase
Payment, or the portion thereof (at least $1,000) (or the amount transferred in
accordance with the Transfer Privilege) allocated to a particular Guarantee
Period, less any applicable premium or similar taxes and any amounts
subsequently withdrawn, will earn interest at the Guaranteed Interest Rate
during the Guarantee Period. Initial Guarantee Periods begin on the date the
Purchase Payment is applied, or, in the case of a transfer, on the effective
date of the transfer, and end the number of calendar years in the Guarantee
Period elected from the end of the calendar month in which the amount was
allocated to the Guarantee Period (the "Expiration Date"). Subsequent Guarantee
Periods begin on the first day following the Expiration Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) will be referred to herein as a "Guarantee Amount". Interest will be
credited daily at a rate equivalent to the compound annual rate. As a result of
additional Purchase Payments, renewals and transfers of portions of the
Participant's Account Value described under "Transfer Privilege" below, which
will begin new Guarantee Periods, Guarantee Amounts allocated to Guarantee
Periods of the same duration may have different Expiration Dates. Thus each
Guarantee Amount will be treated separately for purposes of determining any
Market Value Adjustment (See "Market Value Adjustment").
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically at the end of the previous Guarantee Period unless the
Company receives, prior to the end of such Guarantee Period, a written election
by the Participant of a different Guarantee Period from among those being
offered by the Company at such time, or instructions to transfer all or a
portion of the Guarantee Amount to one or more Sub-Accounts in accordance with
the Transfer Privilege Provision. Each new Guarantee Amount must be at least
$1,000.
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each Guarantee Period offered by the Company. Current Guaranteed
Interest Rates may be changed by the Company frequently or infrequently
depending on interest rates available to the Company and other factors as
described below, but once established rates will be guaranteed for the duration
of the respective Guarantee Periods. However, Participant's Account Value
withdrawn from the Fixed Account will be subject to any applicable withdrawal
charge and Account Fee and may be subject to a Market Value Adjustment on
withdrawal or surrender (See "Market Value Adjustment").
The Guaranteed Interest Rate will not be less than the minimum guaranteed
rate specified in the Contract and Certificate, compounded annually. The Company
has no specific formula for determining the rate of interest that it will
declare as a Guaranteed Interest Rate, as these rates will be reflective of
interest rates available on the types of debt instruments in which the Company
intends to invest amounts allocated to the Fixed Account (See "The Fixed
Account"). In addition, the Company's management may consider
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other factors in determining Guaranteed Interest Rates for a particular duration
including: regulatory and tax requirements; sales commissions and administrative
and distribution expenses borne by the Company; general economic trends; and
competitive factors. The Participant bears the risk that the Guaranteed Interest
Rate to be credited on amounts allocated to the Fixed Account may not exceed the
minimum guaranteed rate for any Guarantee Period.
DOLLAR COST AVERAGING
The Participant may select, at no extra charge, a dollar cost averaging
program by allocating a minimum of $5,000 to a designated Sub-Account or to the
Fixed Account. Amounts allocated to the Fixed Account under the program will
earn interest at a specified rate declared by the Company. Each month or quarter
a level amount will be transferred automatically, at no cost, to one or more
Sub-Accounts chosen by the Participant, up to a maximum of four. The program
continues until the Participant's Account Value allocated to the program is
depleted or the Participant elects to stop the program.
The Participant may also elect an available Dollar Cost Averaging Option in
connection with selected Initial Guarantee Periods (subject to a minimum amount
of $1,000). Dollar Cost Averaging Options are available monthly or quarterly as
follows:
1. Monthly Dollar Cost Averaging Option: Amounts allocated under this
option will be divided among 12 separate sequential maturing Guarantee
Periods. The first Guarantee Period ends one full calendar month
following the date the Net Purchase Payment is applied; thereafter, each
subsequent Guarantee Period shall end sequentially one full calendar
month later. The Guarantee Amount at the Expiration Date of each such
Guarantee Period will equal one-twelfth ( 1/12) of the Net Purchase
Payment applied under this Option, with the Guarantee Amount at the last
Expiration Date including all interest earned in the 12 Guarantee
Periods.
2. Quarterly Dollar Cost Averaging Option: Amounts allocated under this
option will be divided among four separate sequentially maturing
Guarantee Periods. The first Guarantee Period ends three full calendar
months following the date the New Purchase Payment is applied;
thereafter, each subsequent Guarantee Period shall end three full
calendar months later, sequentially. The Guarantee Amount at the
Expiration Date of each such Guarantee Period will equal one-fourth
( 1/4) of the Net Purchase Payment applied under this Option, with the
Guarantee Amount at the last Expiration Date including all interest
earned in the four Guarantee Periods.
Only initial and subsequent Purchase Payments may be allocated to a Dollar
Cost Averaging Option. Previously applied amounts may not be transferred to any
Dollar Cost Averaging Option.
No Market Value Adjustment, either positive or negative, will apply to
amounts automatically transferred from the Fixed Account under the program,
except that if the program is discontinued or altered prior to completion,
amounts remaining in the Fixed Account will be liquidated and the Market Value
Adjustment will be applied. Any additions to the program will be treated as
commencing a new program.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations on a Participant's Account Value. Since
the same dollar amount is transferred to other available investment options at
set intervals, dollar cost averaging allows a Participant to purchase more
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Accumulation Units (and, indirectly, fewer Fund shares) when prices are
high. Therefore, a lower average cost per Accumulation Unit may be achieved over
the long term. A dollar cost averaging program allows Participants to take
advantage of market fluctuations. However, it is important to understand that a
dollar cost averaging program does not assure a profit or protect against loss
in a declining market.
ASSET ALLOCATION
The Company may make one or more asset allocation investment programs
available in connection with the Contracts, at no extra charge. An asset
allocation program provides for the allocation of the Participant's Account
Value among the available investment options. These programs will be fully
described in a separate brochure. Participants may elect to enter into an asset
allocation investment program, under the terms and conditions described in the
brochure.
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TRANSFER PRIVILEGE; TELEPHONE TRANSFERS; RESTRICTION ON MARKET TIMERS
At any time during the Accumulation Period the Participant may, upon written
request received by the Company, transfer all or part of the Participant's
Account Value to one or more Sub-Accounts or Guarantee Periods available under
the Contract, subject to the following conditions: (1) not more than 12
transfers may be made in any Account Year (excluding transfers made pursuant to
an approved dollar cost averaging program); for Certificates issued after May 1,
1997 in states in which approval has been received, a minimum of 30 days must
elapse between transfers made to or from the Fixed Account or among Guarantee
Periods; (2) the amount being transferred from a Sub-Account may not be less
than $1,000, unless the total Participant's Account Value attributable to a
Sub-Account is being transferred; (3) any Participant's Account Value remaining
in a Sub-Account may not be less than $1,000; and (4) the total Participant's
Account Value attributable to the Guarantee Amount must be transferred; however,
the transfer of interest credited to such Guarantee Amount during the current
Account Year and automatic transfers to a Sub-Account of amounts allocated to a
Guarantee Period with a one-year duration in connection with an approved dollar
cost averaging program are not subject to this restriction. In addition,
transfers of a Guarantee Amount (except the automatic transfers described under
(4) above) will be subject to the Market Value Adjustment described below unless
the transfer is effective within 30 days prior to the Expiration Date applicable
to the Guarantee Amount; and transfers involving Variable Accumulation Units
shall be subject to such terms and conditions as may be imposed by the Series
Fund. Currently, there is no charge for transfers; however, the Company reserves
the right to impose a charge of up to $15 for each transfer. A transfer
generally will be effective on the date the request for transfer is received by
the Company. Under current law, there will not be any tax liability to the
Participant if a Participant makes a transfer.
Transfers may be requested by the Participant either in writing or by
telephone. The telephone exchange privilege is made available to Participants
automatically without the Participant's election. The Company will employ
reasonable procedures to confirm that instructions communicated to it by
telephone are genuine. Such procedures may include one or more of the following:
requesting identifying information, such as name, Contract number, Social
Security Number, and/or personal identification number; tape recording all
telephone transactions; or providing written confirmation thereof to both the
Participant and any agent of record, at the last address of record; or such
other procedures as the Company may deem reasonable. Although the Company's
failure to follow reasonable procedures may result in the Company's liability
for any losses due to unauthorized or fraudulent telephone transfers, the
Company will not be liable for following instructions communicated by telephone
which it reasonably believed to be genuine. Any losses incurred pursuant to
actions taken by the Company in reliance on telephone instructions reasonably
believed to be genuine shall be borne by the Participant.
The Contracts are not designed for professional market timing organizations
or other entities using programmed and frequent transfers. Persons who wish to
employ such strategies should not purchase a Contract. Accordingly, transfers
may be subject to restrictions if exercised by a market timing firm or any other
third party authorized to initiate transfer transactions on behalf of multiple
Participants. In imposing such restrictions, the Company may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. The Company will not impose any
such restrictions or otherwise modify transfer rights unless such action is
reasonably intended to prevent the use of such rights in a manner that will
disadvantage or potentially impair the Contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of the Series Fund's investment adviser, a series would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a "market timing" strategy may be disruptive to a
series and therefore may be refused. Accordingly, the Variable Account may not
be in a position to effectuate transfers and may refuse transfer requests
without prior notice. The Company also reserves the right, for similar reasons,
to refuse or delay exchange requests involving transfers to or from the Fixed
Account.
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WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
The Company may reduce or waive the withdrawal charge or Account Fee, credit
additional amounts, or grant bonus Guaranteed Interest Rates in situations where
selling and/or maintenance costs associated with the Contracts are reduced, such
as the sale of several Contracts to the same Participant, sales of large
Contracts, and certain group sales. In addition, the Company may waive the
Account Fee, may credit additional amounts, or may grant bonus Guaranteed
Interest Rates in connection with Contracts sold to officers, directors and
employees of the Company or its affiliates, registered representatives and
employees of broker-dealers with a current selling agreement with the Company
and affiliates of such representatives and broker-dealers, employees of
affiliated asset management firms, and persons who have retired from such
positions ("Eligible Employees") and immediate family members of Eligible
Employees. The Company may reduce or waive such charges and fees, may credit
additional amounts, or may grant bonus Guaranteed Interest Rates on any Contract
where, for example, expenses associated with the sale of the Contract and/or
costs or services associated with administering and maintaining the Contract are
reduced. Eligible Employees and their immediate family members may also purchase
a Contract without regard to minimum Purchase Payment requirements. For other
situations in which withdrawal charges may be waived, see "Withdrawal Charges."
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company. Any such election shall specify the amount of the withdrawal
and will be effective on the date that it is received by the Company.
The Participant may request a full surrender or partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the Account Fee, plus or minus any applicable
Market Value Adjustment, and less any applicable withdrawal charge. A request
for a partial withdrawal will result in the cancellation of a portion of the
Participant's Account Value equal to the dollar amount of the cash withdrawal
payment, plus or minus any applicable Market Value Adjustment and plus any
applicable withdrawal charge. If a partial withdrawal is requested which would
leave a Participant's Account Value of less than the Account Fee, then such
partial withdrawal will be treated as a full surrender. The Account Fee and any
applicable Market Value Adjustment will be deducted from the Participant's
Account before the application of any withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect such withdrawal pro-rata
from each Sub-Account and Guarantee Amount in which the Participant's Account
Value is invested at the end of the Valuation Period during which the withdrawal
becomes effective. ALL CASH WITHDRAWALS OF ANY GUARANTEE AMOUNT, EXCEPT THOSE
EFFECTIVE WITHIN 30 DAYS PRIOR TO THE EXPIRATION DATE OF SUCH GUARANTEE AMOUNT
OR THE WITHDRAWAL OF INTEREST CREDITED DURING THE CURRENT ACCOUNT YEAR, WILL BE
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account at the end
of the Valuation Period during which the cash withdrawal is effective.
The Company, upon request, will advise the Participant of the amounts that
would be payable in the event of a full surrender or partial withdrawal.
Any cash withdrawal payment will be paid within seven days from the date the
election becomes effective, except as the Company may be permitted to defer such
payment in accordance with the Investment Company Act of 1940 and applicable
state insurance law. Deferral of amounts withdrawn from
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the Variable Account is currently permissible only (1) for any period (a) during
which the New York Stock Exchange is closed other than customary week-end and
holiday closings or (b) during which trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission, (2) for any
period during which an emergency exists as a result of which (a) disposal of
securities held by the Series Fund is not reasonably practicable or (b) it is
not reasonably practicable to determine the value of the net assets of the
Series Fund or (3) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of security holders. The
Company reserves the right to defer the payment of amounts withdrawn from the
Fixed Account for a period not to exceed six months from the date written
request for such withdrawal is received by the Company. The Company is not
required to pay interest on amounts so deferred.
Since the Qualified Contracts offered by this Prospectus will be issued in
connection with retirement plans which meet the requirements of Sections 401,
403, and 408 of the Internal Revenue Code, reference should be made to the terms
of the particular retirement plan for any limitations or restrictions on cash
withdrawals. For special restrictions applicable to withdrawals from Contracts
used with Tax-Sheltered Annuities established pursuant to Section 403(b) of the
Internal Revenue Code, see "Section 403(b) Annuities" below.
A cash withdrawal under either a Qualified or Non-Qualified Contract offered
by this Prospectus also may result in a tax penalty. The tax consequences of a
cash withdrawal payment under both Qualified and Non-Qualified Contracts should
be carefully considered (See "Federal Tax Status").
WITHDRAWAL CHARGES
No sales charges are deducted from Purchase Payments. However, a withdrawal
charge (contingent deferred sales charge), when applicable, will be assessed to
reimburse the Company for certain expenses relating to the distribution of the
Contracts, including commissions, costs of preparation of sales literature and
other promotional costs and acquisition expenses. Cash withdrawals may result in
a 10% tax penalty in addition to any withdrawal charge applicable under the
Contracts (See "Federal Tax Status").
A portion of the Participant's Account Value may be withdrawn each year
without imposition of any withdrawal charge, and after a Purchase Payment has
been held by the Company for seven years it may be withdrawn free of any
withdrawal charge. In addition, no withdrawal charge is assessed upon
annuitization, upon payment of the death benefit or upon the transfer of
Participant's Account Value among the Sub-Accounts or between the Sub-Accounts
and the Fixed Account or within the Fixed Account.
The withdrawal charge is not assessed with respect to a Participant's
Account established for the personal account of an employee of the Company or of
any of its affiliates, or of a licensed insurance agent engaged in distributing
the Contracts and Certificates, and the Company may waive the withdrawal charge
with respect to Purchase Payments derived from the surrender of certificates
issued under certain single premium group combination fixed/variable annuity
contracts issued by the Company. In addition, if approval has been received from
state regulatory authorities having jurisdiction over the applicable
Certificate, Certificates issued after November 1, 1994 provide that the Company
will waive the withdrawal charge arising from a full surrender if: 1) at least
one year has elapsed since the Certificate's Date of Coverage; and 2) the
Participant is confined to an eligible nursing home (a licensed hospital or
licensed skilled or intermediate care nursing facility at which treatment is
available on a daily basis and daily medical records are kept for each patient)
and has been confined there for the preceding 180 days or for such shorter
period as may be provided for, depending upon the jurisdiction in which the
Certificate was issued. Such withdrawal may be subject to the 10% tax penalty
described above.
All other full or partial withdrawals are subject to a withdrawal charge
which will be applied in accordance with the applicable methodology described
below:
PARTICIPANTS' ACCOUNTS ESTABLISHED ON OR AFTER NOVEMBER 1, 1994 IN JURISDICTIONS
WHERE APPROVAL OF THE CUMULATIVE FREE WITHDRAWAL PROVISION HAS BEEN RECEIVED
FROM THE APPROPRIATE STATE REGULATORY AUTHORITY:
24
<PAGE>
Certificates issued in connection with these Participants' Accounts provide
for the accumulation of the 10% annual free withdrawal amount into future years.
The applicable withdrawal charge will be determined on the following basis:
(1) Old Payments and new Payments: With respect to a particular Account
Year, "new Payments" are those Payments made in that Account Year or in the six
immediately preceding Account Years, and "old Payments" are those Payments not
defined as new Payments.
(2) Order of liquidation: To effect a full surrender or partial withdrawal,
each withdrawal is allocated first to the free withdrawal amount and then to
previously unliquidated Payments (on a first-in, first-out basis) until all
Purchase Payments have been liquidated.
(3) Free withdrawal amount: The free withdrawal amount is equal to 10% of
any new Payments, irrespective of whether these new Payments have been
liquidated. Any portion of the free withdrawal amount that is not used in the
current Account Year is cumulative into future years.
(4) Maximum withdrawal amount without a withdrawal charge: The maximum
amount that can be withdrawn without a withdrawal charge in an Account Year is
equal to the sum of (a) any previously unliquidated free withdrawal amount, and
(b) any previously unliquidated old Payments.
(5) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge is the amount of the partial withdrawal or full surrender less
the maximum withdrawal amount without a withdrawal charge, up to a maximum of
the sum of all unliquidated new Payments.
PARTICIPANTS' ACCOUNTS ESTABLISHED BEFORE NOVEMBER 1, 1994 AND THOSE ESTABLISHED
AFTER THAT DATE IN JURISDICTIONS WHERE APPROVAL OF THE CUMULATIVE FREE
WITHDRAWAL PROVISION HAS NOT BEEN RECEIVED FROM THE APPROPRIATE STATE REGULATORY
AUTHORITY:
Certificates issued in connection with these Participants' Account do not
provide for the accumulation of the 10% annual free withdrawal amount into
future years.
The applicable withdrawal charge will be determined as follows:
(1) Old Payments, new Payments and accumulated value: With respect to a
particular Account Year, "new Payments" are those Payments made in that Account
Year or in the six immediately preceding Account Years; "old Payments" are those
Payments not defined as new Payments; and "accumulated value" is the
Participant's Account Value less the sum of old and new Payments.
(2) Order of liquidation: To effect a full surrender or partial withdrawal,
the oldest previously unliquidated Payment will be deemed to have been
liquidated first, then the next oldest, and so forth. Once all old and new
Payments have been withdrawn, additional amounts withdrawn will be attributed to
accumulated value.
(3) Maximum free withdrawal amount: The maximum amount that can be withdrawn
without a withdrawal charge in an Account Year is equal to the sum of (a) any
old Payments not already liquidated, and (b) 10% of any new Payments,
irrespective of whether these new Payments have been liquidated.
(4) Amount subject to withdrawal charge: The amount subject to the
withdrawal charge will be the excess, if any, of (a) amounts liquidated from old
and new Payments (as specified above) over (b) the remaining maximum free
withdrawal amount at the time of the withdrawal.
AMOUNT OF WITHDRAWAL CHARGE
The withdrawal charge percentage varies according to the number of complete
Account Years between the Account Year in which a Purchase Payment was credited
to a Participant's Account and the Account Year
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<PAGE>
in which it was withdrawn. The amount of the withdrawal charge is determined by
multiplying the amount subject to the withdrawal charge by the withdrawal charge
percentage, in accordance with the following table:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
ACCOUNT YEARS WITHDRAWAL CHARGE
------------------ -----------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
In no event shall the aggregate withdrawal charges assessed against a
Participant's Account exceed 6% of the aggregate Purchase Payments made under a
Certificate (See Appendix C for examples of withdrawals, withdrawal charges and
the Market Value Adjustment). The Company may, upon notice to the Owner, modify
the withdrawal charges, provided that such modification shall apply only to
Participant's Accounts established after the effective date of such modification
(See "Modification").
SECTION 403(B) ANNUITIES
The Internal Revenue Code imposes restrictions on cash withdrawals from
Contracts used with Section 403(b) Annuities. In order for these Contracts to
receive tax deferred treatment, the Contract must provide that cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988 ("Pre-1989
Account Value")) may be made only when the Participant attains age 59 1/2,
separates from service with the employer, dies or becomes disabled (within the
meaning of Section 72(m)(7) of the Code). These restrictions apply to any growth
or interest on or after January 1, 1989 on Pre-1989 Account Value, salary
reduction contributions made on or after January 1, 1989, and any growth or
interest on such contributions ("Restricted Account Value").
Withdrawals of Restricted Account Value are also permitted in cases of
financial hardship, but only to the extent of contributions; earnings on
contributions cannot be withdrawn for hardship reasons. While specific rules
defining hardship have not been issued by the Internal Revenue Service, it is
expected that to qualify for a hardship distribution, the Participant must have
an immediate and heavy bona fide financial need and lack other resources
reasonably available to satisfy the need. Hardship withdrawals (as well as
certain other premature withdrawals) will be subject to a 10% tax penalty, in
addition to any withdrawal charge applicable under the Contract (See "Federal
Tax Status").
Under the terms of a particular Section 403(b) plan, the Participant may be
entitled to transfer all or a portion of the Participant's Account Value to one
or more alternative funding options. Participants should consult the documents
governing their plan and the person who administers the plan for information as
to such investment alternatives.
For information on the federal income tax withholding rules that apply to
distributions from Qualified Contracts (including Section 403(b) Annuities) see
"Federal Tax Status".
MARKET VALUE ADJUSTMENT
Any cash withdrawal of a Guarantee Amount, other than a withdrawal effective
within 30 days prior to the Expiration Date of the Guarantee Amount or the
withdrawal of interest credited on such Guarantee Amount during the current
Account Year, will be subject to a Market Value Adjustment ("MVA") (for this
purpose, transfers (except automatic transfers to a Sub-Account of amounts
allocated to a Guarantee Period with a one-year duration in connection with an
approved dollar cost averaging program), distributions on the death of a
Participant and amounts applied to purchase an annuity are treated as cash
withdrawals). The MVA will be applied to the amount being withdrawn which is
subject to the MVA, after deduction of any applicable Account Fee and before
deduction of any applicable withdrawal charge.
The MVA will reflect the relationship between the Current Rate (as defined
below) for the Guarantee Amount being withdrawn and the Guaranteed Interest Rate
applicable to the amount being withdrawn. It also reflects the time remaining in
the applicable Guarantee Period. Generally, if the Guaranteed Interest
26
<PAGE>
Rate is lower than the applicable Current Rate, then the application of the MVA
will result in a lower payment upon withdrawal. Similarly, if the Guaranteed
Interest Rate is higher than the applicable Current Rate, the application of the
MVA will result in a higher payment upon withdrawal.
The Market Value Adjustment is determined by the application of the
following formula:
<TABLE>
<S> <C>
N/12
1 + I
( ----- ) -1
1 + J
</TABLE>
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the Market Value Adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the Market Value Adjustment, for current
allocations to Guarantee Periods equal to the balance of the Guarantee Period of
the Guarantee Amount subject to the Market Value Adjustment, rounded to the next
higher number of complete years (the "Current Rate"), and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the Market Value Adjustment.
In the determination of J, if the Company currently does not offer the
applicable Guarantee Period, then the rate will be determined by linear
interpolation of the current rates for Guarantee Periods that are available.
See Appendix C for examples of the application of the Market Value
Adjustment.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
In the event of the death of the Annuitant prior to the Annuity Commencement
Date, the Company will pay a death benefit to the Beneficiary. If there is no
designated Beneficiary living on the date of death of the Annuitant, the Company
will, upon receipt of Due Proof of Death of both the Annuitant and the
designated Beneficiary, pay the death benefit in one sum to the Participant or,
if the Annuitant was the Participant, to the estate of the
Participant/Annuitant. If the death of the Annuitant occurs on or after the
Annuity Commencement Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more Annuity Options to effect a Variable Annuity or a Fixed Annuity or a
combination of both for the Beneficiary as Payee after the death of the
Annuitant. If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a single cash payment;
or (b) to have the death benefit applied under one or more of the Annuity
Options (on the Annuity Commencement Date described under "Payment of Death
Benefit") to effect a Variable Annuity or a Fixed Annuity or a combination of
both for the Beneficiary as Payee. Either election described above may be made
by filing with the Company a written election in such form as the Company may
require. Any election of a method of settlement of the death benefit by the
Participant will become effective on the date it is received by the Company. For
the purposes of the Payment of Death Benefit and Amount of Death Benefit
sections below, any election of the method of settement of the death benefit by
the Participant which is in effect on the date of death of the Annuitant will be
deemed effective on the date Due Proof of Death of the Annuitant is received by
the Company. Any election of a method of settlement of the death benefit by the
Beneficiary will become effective on the later of: (a) the date the election is
received by the Company; or (b) the date Due Proof of Death of the Annuitant is
received by the Company. If an election by the Beneficiary is not received
27
<PAGE>
by the Company within 60 days following the date Due Proof of Death of the
Annuitant is received by the Company, the Beneficiary will be deemed to have
elected a cash payment as of the last day of the 60 day period.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code. (See "Other Contractual
Provisions -- Death of Participant").
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment of amounts derived from the Variable Account in accordance with the
Investment Company Act of 1940. If the death benefit is to be paid in one sum to
the Participant or, if the Annuitant was the Participant, to the estate of the
deceased Participant/Annuitant, payment will be made within seven days of the
date Due Proof of Death of the Annuitant, the Participant and/or the designated
Beneficiary, as applicable, is received by the Company. If settlement under one
or more of the Annuity Options is elected the Annuity Commencement Date will be
the first day of the second calendar month following the effective date or the
deemed effective date of the election, and the Participant's Account will be
maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the effective date or deemed effective
date of the death benefit election.
If the Annuitant was age 85 or less on the Date of Coverage, the death
benefit is equal to the greatest of (1) the Participant's Account Value for the
Valuation Period during which the death benefit election is effective or is
deemed to become effective; (2) the amount that would have been payable in the
event of a full surrender of the Participant's Account on the date the death
benefit election is effective or is deemed to become effective; (3) the
Participant's Account Value on the Seven Year Anniversary immediately preceding
the date the death benefit election is effective or is deemed to become
effective, adjusted for any subsequent Purchase Payments and partial withdrawals
and charges made between such Seven Year Anniversary and the date the election
is effective or is deemed to become effective; and (subject to state approval)
(4) the total Purchase Payments made with respect to the Participant's Account,
minus the sum of all partial withdrawals. For the purposes of determining the
amount payable under (4), each Purchase Payment and each partial withdrawal will
accumulate daily at a rate equivalent to 5% per year until the first day of the
month following the Annuitant's 80th birthday. No such accumulation will apply
to a Purchase Payment or partial withdrawal once that Purchase Payment or
partial withdrawal has, as a result of such accumulation, grown to double its
original amount.
If the Annuitant was age 86 or greater on the Date of Coverage, the death
benefit is equal to (2) above.
If (2), (3) or (4) is operative the Participant's Account Value will be
increased by the excess of (2), (3) or (4), as applicable, over (1) and the
increase will be allocated to the Sub-Accounts based on the respective values of
the Sub-Accounts on the date the amount of the death benefit is determined. If
no portion of the Participant's Account is allocated to the Sub-Accounts, the
entire increase will be allocated to the Sub-Account invested in the Money
Market Series of the Series Fund.
HOW THE CONTRACT CHARGES ARE ASSESSED
As more fully described below, charges under the Contract offered by this
Prospectus are assessed in three ways: (1) as deductions for the Account Fee
and, if applicable, for premium taxes; (2) as charges against the assets of the
Variable Account for the assumption of mortality and expense risks and
administrative expenses; and (3) as withdrawal charges (contingent deferred
sales charges). In addition, certain deductions are made from the assets of the
Series Fund for investment management fees and expenses. These fees and expenses
are described in the Series Fund's prospectus and Statement of Additional
Information.
28
<PAGE>
ADMINISTRATIVE CHARGES
Each year on the Account Anniversary, the Company deducts from each
Participant's Account an annual account administration fee ("Account Fee") as
partial compensation for expenses relating to the issue and maintenance of the
Contract, the Certificate and the Participant's Account. In Account Years one
through five the Account Fee is equal to the lesser of $30 and 2% of the
Participant's Account Value; thereafter the Account Fee may be changed annually,
but in no event may it exceed the lesser of $50 and 2% of the Participant's
Account Value. If a Participant's Account is surrendered for its full value on
other than the Account Anniversary, the Account Fee will be deducted in full at
the time of such surrender. The Account Fee will be deducted on a pro rata basis
from amounts allocated to each Guarantee Period and each Sub-Account in which
the Participant's Account is invested at the time of such deduction. Also, the
Account Fee will be waived by the Company when: (1) the entire Participant's
Account Value has been allocated to the Fixed Account during the entire previous
Account Year; or (2) the Participant's Account Value is greater than $75,000 at
the time of such deduction. On the Annuity Commencement Date, the value of the
Participant's Account will be reduced by a proportionate amount of the Account
Fee to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date. After the Annuity Commencement Date, an
annual Account Fee of $30 will be deducted in equal amounts from each variable
annuity payment made during the year. No deduction will be made from fixed
annuity payments.
The Company makes a deduction from the Variable Account at the end of each
Valuation Period (during both the Accumulation Period and after annuity payments
begin) at an effective annual rate of 0.15% to reimburse the Company for those
administrative expenses attributable to the Contracts, the Certificates, the
Participant's Accounts and the Variable Account which exceed the revenues
received from the Account Fee. For a description of administrative services
provided see "Administration of the Contracts" on Page 39 of this Prospectus.
The Contract provides that the Company may modify the Account Fee and the
administrative expense charge, provided that such modification shall apply only
with respect to Participant's Accounts established after the effective date of
such modification (See "Modification").
PREMIUM TAXES
A deduction, when applicable, is made for premium or similar state or local
taxes (See Appendix B). It is currently the policy of the Company to deduct the
tax from the amount applied to provide an annuity at the time annuity payments
commence; however, the Company reserves the right to deduct such taxes on or
after the date they are incurred.
MORTALITY AND EXPENSE RISK CHARGE
The mortality risk assumed by the Company arises from the contractual
obligation to continue to make annuity payments to each Annuitant regardless of
how long the Annuitant lives and regardless of how long all annuitants as a
group live. This assures each annuitant that neither the longevity of fellow
annuitants nor an improvement in life expectancy generally will have an adverse
effect on the amount of any annuity payment received under the Contract. The
Company assumes this mortality risk by virtue of annuity rates incorporated into
the Contract which cannot be changed except with respect to Participant's
Accounts established after the effective date of such change, as provided in the
section of this Prospectus entitled "Modification". The expense risk assumed by
the Company is the risk that the administrative charges assessed under the
Contract may be insufficient to cover the actual total administrative expenses
incurred by the Company.
For assuming these risks, the Company makes a deduction from the Variable
Account at the end of each Valuation Period during both the Accumulation Period
and after annuity payments begin at an effective annual rate of 1.25%. If the
deduction is insufficient to cover the actual cost of the mortality and expense
risk undertaking, the Company will bear the loss. Conversely, if the deduction
proves more than sufficient, the excess will be profit to the Company and would
be available for any proper corporate purpose including, among other things,
payment of distribution expenses. The Company will recoup its expected costs
associated with registering and distributing the Contracts by the assessment of
the withdrawal charges (contingent deferred sales charges) described below.
However, the withdrawal charges may prove to be
29
<PAGE>
insufficient to cover actual distribution expenses. If this is the case, the
deficiency will be met from the Company's general corporate funds which may
include amounts derived from the mortality and expense risk charges.
The Contract provides that the Company may modify the mortality and expense
risk charge; however, such modification shall apply only with respect to
Participant's Accounts established after the effective date of such modification
(See "Modification"). Mortality and expense risk and administrative expense
charges are the only expenses of the Variable Account.
WITHDRAWAL CHARGES
No deduction for sales charges is made from Purchase Payments. However, a
withdrawal charge (contingent deferred sales charge) of up to 6% of certain
amounts withdrawn, when applicable, will be used to cover certain expenses
relating to the sale of the Contract and Certificates thereunder, including
commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and acquisition expenses.
ANNUITY PROVISIONS
ANNUITY COMMENCEMENT DATE
Annuity payments will begin on the Annuity Commencement Date which is
selected by the Participant, as specified in the Application. The date selected
by the Participant may not be sooner than the first day of the second calendar
month following the Date of Coverage. This date may be changed by the
Participant from time to time by written notice to the Company, provided that
notice of each change is received by the Company at least 30 days prior to the
then current Annuity Commencement Date and the new Annuity Commencement Date is
a date which is: (1) at least 30 days after the date notice of the change is
received by the Company; (2) the first day of a month; and (3) not later than
the first day of the first month following the Annuitant's 90th birthday, unless
otherwise restricted, in the case of a Qualified Contract, by the particular
retirement plan or by applicable law. In most situations, current law requires
that the Annuity Commencement Date under a Qualified Contract be no later than
April 1 following the year the Annuitant reaches age 70 1/2 , and the terms of
the particular retirement plan may impose additional limitations. The Annuity
Commencement Date may also be changed by an election of an Annuity Option as
described in the Death Benefit section of this Prospectus.
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide an annuity under one or more
of the options described below. No withdrawal charge will be imposed upon
amounts applied to purchase an annuity. However, the Market Value Adjustment may
apply, as noted under "Determination of Amount." NO PAYMENTS MAY BE REQUESTED
UNDER THE CONTRACT'S CASH WITHDRAWAL PROVISIONS ON OR AFTER THE ANNUITY
COMMENCEMENT DATE, AND NO CASH WITHDRAWAL WILL BE PERMITTED EXCEPT AS MAY BE
AVAILABLE UNDER THE ANNUITY OPTION ELECTED.
Since the Contracts offered by this Prospectus may be issued in connection
with retirement plans which meet the requirements of Section 401, 403 or 408 of
the Internal Revenue Code, as well as certain non-qualified plans, reference
should be made to the terms of the particular plan for any limitations or
restrictions on the Annuity Commencement Date.
ELECTION--CHANGE OF ANNUITY OPTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect one or more of the Annuity Options described
below, or such other settlement option as may be agreed to by the Company, for
the Annuitant as Payee. The Participant may also change any election, but
written notice of any election or change of election must be received by the
Company at least 30 days prior to the Annuity Commencement Date. If no election
is in effect on the 30th day prior to the Annuity Commencement Date, Annuity
Option B, for a Life Annuity with 120 monthly payments certain, will be deemed
to have been elected. If there is no election of a sole Annuitant in effect on
the 30th day prior to the Annuity Commencement Date, the person designated as
"Co-Annuitant" will be the Payee under the applicable Annuity Option.
30
<PAGE>
Any election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and a Variable
Annuity. In the event the election does not so specify, or if no election is in
effect on the 30th day prior to the Annuity Commencement Date, then the portion
of the adjusted value of the Participant's Account to be applied to provide a
Fixed Annuity and a Variable Annuity will be determined on a pro rata basis from
the composition of the Participant's Account on the Annuity Commencement Date.
Annuity Options may also be elected by the Participant or the Beneficiary as
provided in the Death Benefit section of this Prospectus.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any limitations or restrictions on the options
which may be elected.
NO CHANGE OF ANNUITY OPTION IS PERMITTED AFTER THE ANNUITY COMMENCEMENT
DATE.
ANNUITY OPTIONS
No lump sum settlement option is available under the Contract. The
Participant may surrender a Certificate prior to the Annuity Commencement Date;
however, any applicable surrender charge will be deducted from the cash
withdrawal payment and a Market Value Adjustment, if applicable, will be
applied.
Annuity Options A, B, C and D are available to provide either a Fixed
Annuity or a Variable Annuity. Annuity Option E is available only to provide a
Fixed Annuity.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of
the Payee. This option offers a higher level of monthly payments than Annuity
Options B or C because no further payments are payable after the death of the
Payee and there is no provision for a death benefit payable to a Beneficiary.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
60, 120, 180 or 240 months certain as elected. The election of a longer period
certain results in smaller monthly payments than would be the case if a shorter
period certain were elected. In the event of the death of the Payee under this
option, the Contract provides that if there is no designated beneficiary
entitled to the remaining payments then living, the discounted value of the
remaining payments, if any, will be calculated and paid in one sum to the
deceased Payee's estate. In addition, any beneficiary who becomes entitled to
any remaining payments under this option may elect to receive the amounts due
under this option in one sum. The discounted value for variable annuity payments
will be based on interest compounded annually at the assumed interest rate
specified in the applicable Contract and Certificate. The discounted value for
payments being made on a fixed basis will be based on the interest rate
initially used by the Company to determine the amount of each payment.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor, variable
monthly payments, if any, will be determined using the percentage chosen at the
time of election of this option of the number of each type of Annuity Unit
credited to the Contract with respect to the Payee and fixed monthly payments,
if any, will be equal to the same percentage of the fixed monthly payment
payable during the joint lifetime of the Payee and the designated second person.
* Annuity Option D. Monthly Payments for a Specified Period
Certain: Monthly payments for a specified period of time (at least five years
but not exceeding 30 years), as elected. In the event of the death of the Payee
under this option, the Contract provides that, as described under Annuity Option
B above, in certain circumstances the discounted value of the remaining
payments, if any, will be calculated and paid in one sum.
* Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this option will be held by the Company at interest.
Fixed payments will be made in such amounts and at such times (at least over a
period of five years) as may be agreed upon with the Company and will continue
until the amount held by the Company with interest is exhausted. The final
payment will be for the balance remaining and may be less than the amount of
each preceding payment. Interest will be credited yearly on
- ------------------------
* The election of this annuity option may result in the imposition of a penalty
tax.
31
<PAGE>
the amount remaining unpaid at a rate which shall be determined by the Company
from time to time but which shall not be less than the minimum rate specified in
the applicable Contract and Certificate (at least 3% per year), compounded
annually. The rate so determined may be changed at any time and as often as may
be determined by the Company, provided, however, that the rate may not be
reduced more frequently than once during each calendar year.
DETERMINATION OF ANNUITY PAYMENTS
On the Annuity Commencement Date the Participant's Account will be cancelled
and its adjusted value will be applied to provide a Variable Annuity or a Fixed
Annuity or a combination of both. The adjusted value will be equal to the
Participant's Account Value at the end of the Valuation Period which ends
immediately preceding the Annuity Commencement Date, reduced by a proportionate
amount of the Account Fee to reflect the time elapsed between the last Account
Anniversary and the day before the Annuity Commencement Date, plus or minus any
applicable Market Value Adjustment and minus any applicable premium or similar
taxes.
If the amount to be applied under any annuity option is less than $2,000, or
if the first annuity payment payable in accordance with such option is less than
$20, the Company will pay the amount to be applied in a single payment to the
Payee.
FIXED ANNUITY PAYMENTS
The dollar amount of each fixed annuity payment will be determined in
accordance with the Annuity Payment Rates found in the Contract which are based
on the minimum guaranteed interest rate specified in the applicable Contract and
Certificate (at least 3% per year), or, if more favorable to the Payee(s), in
accordance with the Annuity Payment Rates published by the Company and in use on
the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment will be determined
in accordance with the Annuity Payment Rates found in the applicable Contract
which are based on an assumed interest rate of at least 3% per year, unless
these rates are changed (See "Modification"). All variable annuity payments
other than the first are determined by means of Annuity Units credited to the
Contract with respect to the particular Payee. The number of Annuity Units to be
credited in respect of a particular Sub-Account is determined by dividing that
portion of the first variable annuity payment attributable to that Sub-Account
by the Annuity Unit value of that Sub-Account at the end of the Valuation Period
which ends immediately preceding the Annuity Commencement Date. The number of
Annuity Units of each particular Sub-Account credited with respect to the
particular Payee then remains fixed unless an exchange of Annuity Units is made
as described below. The dollar amount of each variable annuity payment after the
first may increase, decrease or remain constant, and is equal to the sum of the
amounts determined by multiplying the number of Annuity Units of a particular
Sub-Account credited with respect to the particular Payee by the Annuity Unit
value for the particular Sub-Account for the Valuation Period which ends
immediately preceding the due date of each subsequent payment. If the net
investment return on the assets of the Variable Account is the same as the
assumed interest rate, variable annuity payments will remain level. If the net
investment return exceeds the assumed interest rate variable annuity payments
will increase and, conversely, if it is less than the assumed interest rate the
payments will decrease.
For a hypothetical example of the calculation of a Variable Annuity Payment,
see Appendix A.
VARIABLE ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit Value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor (See
"Variable Accumulation Value, Net Investment Factor") for the particular
Sub-Account for the current Valuation Period and then multiplying that product
by a factor to neutralize the assumed interest rate used to establish the
Annuity Payment Rates found in the applicable Contract. For a one day Valuation
Period the factor is 0.99989255 using an assumed interest rate of 4% per year
and 0.99991902 using an assumed interest rate of 3% per year.
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For a hypothetical example of the calculation of the value of a Variable
Annuity Unit, see Appendix A.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company, exchange the value of a designated number of Annuity
Units of particular Sub-Accounts then credited with respect to the particular
Payee into other Annuity Units, the value of which would be such that the dollar
amount of an annuity payment made on the date of the exchange would be
unaffected by the fact of the exchange. No more than twelve (12) exchanges may
be made within each Account Year.
Exchanges may be made only between Sub-Accounts. Exchanges will be made
using the Annuity Unit values for the Valuation Period during which any request
for exchange is received by the Company.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly variable annuity payment based on the
assumed interest rate specified in the applicable Contract and Certificate (at
least 3%); and (b) the monthly fixed annuity payment, when this payment is based
on the minimum guaranteed interest rate specified in the Contract and
Certificate (at least 3% per year).These rates may be changed by the Company
with respect to Participant's Accounts established after the effective date of
such change (See "Modification").
The annuity payment rates may vary according to the Annuity Option elected
and the adjusted age of the Payee. The Contract also describes the method of
determining the adjusted age of the Payee. The mortality table used in
determining the annuity payment rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
OTHER CONTRACTUAL PROVISIONS
PAYMENT LIMITS
The initial Purchase Payment credited to each Participant's Account must be
at least $5,000 and each additional Purchase Payment must be at least $1,000,
unless waived by the Company. In addition, the prior approval of the Company is
required before it will accept a Purchase Payment which would cause the value of
a Participant's Account to exceed $1,000,000. If the value of a Participant's
Account exceeds $1,000,000, no additional Purchase Payments will be accepted
without the prior approval of the Company. Purchase Payments may be made
annually, semi-annually, quarterly, monthly or at any other frequency acceptable
to the Company. The Participant may, subject to the minimum payment, increase or
decrease the amount of Purchase Payments or change the frequency of payment, but
the Participant is not obligated to continue Purchase Payments in the amount or
frequency elected. There are no penalties for failure to continue to make
Purchase Payments. While the Contract and the Participant's Account are in
force, Purchase Payments may be made at any time prior to the Annuity
Commencement Date.
DESIGNATION AND CHANGE OF BENEFICIARY
The beneficiary designation contained in the Application will remain in
effect until changed. The interest of any Beneficiary is subject to the
particular Beneficiary surviving the Annuitant and, in the case of a Non-
Qualified Contract, the Participant as well.
Subject to the rights of an irrevocably designated Beneficiary, the
Participant may change or revoke the designation of a Beneficiary at any time
while the Annuitant is living by filing with the Company a written beneficiary
designation or revocation in such form as the Company may require. The change or
revocation will not be binding upon the Company until it is received by the
Company. When it is so received the change or revocation will be effective as of
the date on which the beneficiary designation or revocation was signed, but the
change or revocation will be without prejudice to the Company on account of any
payment made or any action taken by the Company prior to receiving the change or
revocation.
Reference should be made to the terms of a particular retirement plan and
any applicable legislation for any restrictions on the beneficiary designation.
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EXERCISE OF CONTRACT RIGHTS
The Contract shall belong to the Owner. All Contract rights and privileges
may be expressly reserved by the Owner, failing which, each Participant shall be
entitled to exercise such rights and privileges in connection with such
Participant's Certificate. In any case, such rights and privileges can be
exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the lifetime of the Annuitant and prior to the Annuity
Commencement Date, except as otherwise provided in the Contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1) the
Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant provided that the Qualified Contract after transfer is
maintained under the terms of a retirement plan qualified under Section 403(a)
of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee
of an individual retirement account plan qualified under Section 408 of the
Internal Revenue Code for the benefit of the Owner; or (5) as otherwise
permitted from time to time by laws and regulations governing the retirement or
deferred compensation plans for which a Qualified Contract may be issued.
Subject to the foregoing, a Qualified Contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Annuitant and prior to the last Annuity
Commencement Date; and each Participant, in like manner, may change the
ownership interest in a Contract evidenced by that Participant's Certificate. A
change of ownership will not be binding upon the Company until written
notification is received by the Company. When such notification is so received,
the change will be effective as of the date on which the request for change was
signed by the Owner or Participant, as appropriate, but the change will be
without prejudice to the Company on account of any payment made or any action
taken by the Company prior to receiving the change.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified Contract dies prior to the Annuitant
and before the Annuity Commencement Date, that Participant's Account Value, plus
or minus any applicable Market Value Adjustment, must be distributed to the
"designated beneficiary" (as defined below) either (1) within five years after
the date of death of the Participant, or (2) as an annuity over some period not
greater than the life or expected life of the designated beneficiary, with
annuity payments beginning within one year after the date of death of the
Participant. For this purpose (and for purposes of Section 72(s) of the Internal
Revenue Code), the person named as Beneficiary shall be considered the
designated beneficiary, and if no person then living has been so named, then the
Annuitant shall automatically be the designated beneficiary. If the designated
beneficiary is the surviving spouse of the deceased Participant, the spouse can
elect to continue the Certificate in the spouse's own name as Participant, in
which case these mandatory distribution requirements will apply on the spouse's
death.
When the deceased Participant was also the Annuitant, the Death Benefit
provision of the Contract controls unless the deceased Participant's surviving
spouse is the designated beneficiary and elects to continue the Certificate in
the spouse's own name as both Participant and Annuitant.
If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, if any, must be distributed at
least as rapidly as the method of distribution then in effect.
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In any case in which a non-natural person constitutes a holder of the
Certificate for the purposes of Section 72(s) of the Internal Revenue Code, (1)
the distribution requirements described above shall apply upon the death of any
Annuitant, and (2) a change in any Annuitant shall be treated as the death of an
Annuitant.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the Contract as an
annuity contract under the Internal Revenue Code.
Any distributions upon the death of a Participant under a Qualified Contract
will be subject to the laws and regulations governing the particular retirement
or deferred compensation plan in connection with which the Qualified Contract
was issued.
VOTING OF SERIES FUND SHARES
The Company will vote Series Fund shares held by the Sub-Accounts at
meetings of shareholders of the Series Fund, but will follow voting instructions
received from persons having the right to give voting instructions. The Owner or
Participant is the person having the right to give voting instructions prior to
the Annuity Commencement Date. On or after the Annuity Commencement Date the
Payee is the person having such voting rights. Any shares attributable to the
Company and Series Fund shares for which no timely voting instructions are
received will be voted by the Company in the same proportion as the shares for
which instructions are received from Owners, Participants and Payees.
Owners of Qualified Contracts may be subject to other voting provisions of
the particular plan and of the Investment Company Act of 1940. Employees who
contribute to plans which are funded by the Contracts may be entitled to
instruct the Owners as to how to instruct the Company to vote the Series Fund
shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant's Account, the
Owner may instruct the Company as to how to vote the number of Series Fund
shares for which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, nor any duty to inquire as to the instructions received or the
authority of Owners, Participants or others to instruct the voting of Series
Fund shares. Except as the Variable Account or the Company has actual knowledge
to the contrary, the instructions given by Owners and Payees will be valid as
they affect the Variable Account, the Company and any others having voting
instruction rights with respect to the Variable Account.
All Series Fund proxy material, together with an appropriate form to be used
to give voting instructions, will be provided to each person having the right to
give voting instructions at least ten days prior to each meeting of the
shareholders of the Series Fund. The number of Series Fund shares as to which
each such person is entitled to give instructions will be determined by the
Company on a date not more than 90 days prior to each such meeting. Prior to the
Annuity Commencement Date, the number of Series Fund shares as to which voting
instructions may be given to the Company is determined by dividing the value of
all of the Variable Accumulation Units of the particular Sub-Account credited to
the Participant's Account by the net asset value of one Series Fund share as of
the same date. On or after the Annuity Commencement Date, the number of Series
Fund shares as to which such instructions may be given by a Payee is determined
by dividing the reserve held by the Company in the Sub-Account with respect to
the particular Payee by the net asset value of a Series Fund share as of the
same date. After the Annuity Commencement Date, the number of Series Fund shares
as to which a Payee is entitled to give voting instructions will generally
decrease due to the decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period the Company will send the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the Fixed Accumulation Value of such account,
which statement shall be accurate as of a date not more than two months previous
to the date of mailing. In addition, every person having voting rights will
receive such reports or prospectuses concerning
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the Variable Account and the Series Fund as may be required by the Investment
Company Act of 1940 and the Securities Act of 1933. The Company will also send
such statements reflecting transactions in the Participant's Account as may be
required by applicable laws, rules and regulations.
Upon request, the Company will provide the Participant with information
regarding fixed and variable accumulation values.
SUBSTITUTED SECURITIES
Shares of any or all Series of the Series Fund may not always be available
for purchase by the Sub-Accounts of the Variable Account or the Company may
decide that further investment in any such shares is no longer appropriate in
view of the purposes of the Variable Account. In either event, shares of another
registered open-end investment company or unit investment trust may be
substituted both for Series Fund shares already purchased by the Variable
Account and/or as the security to be purchased in the future provided that these
substitutions have been approved by the Securities and Exchange Commission, if
required by law. In the event of any substitution pursuant to this provision,
the Company may make appropriate endorsement to the Contract to reflect the
substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At the Company's election and subject to any necessary vote by persons
having the right to give instructions with respect to the voting of Series Fund
shares held by the Sub-Accounts, the Variable Account may be operated as a
management company under the Investment Company Act of 1940 or it may be
deregistered under the Investment Company Act of 1940 in the event registration
is no longer required. Deregistration of the Variable Account requires an order
by the Securities and Exchange Commission. In the event of any change in the
operation of the Variable Account pursuant to this provision, the Company may
make appropriate endorsement to the Contract to reflect the change and take such
other action as may be necessary and appropriate to effect the change.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Owner and Participant(s) (or the Payee(s) during the
annuity period), the Contract may be modified by the Company if such
modification: (i) is necessary to make the Contract or the Variable Account
comply with any law or regulation issued by a governmental agency to which the
Company or the Variable Account is subject; or (ii) is necessary to assure
continued qualification of the Contract under the Internal Revenue Code or other
federal or state laws relating to retirement annuities or annuity contracts; or
(iii) is necessary to reflect a change in the operation of the Variable Account
or the Sub-Account(s) (See "Change in Operation of Variable Account"); or (iv)
provides additional Variable Account and/or fixed accumulation options. In the
event of any such modification, the Company may make appropriate endorsement in
the Contract to reflect such modification.
In addition, upon notice to the Owner the Contract may be modified by the
Company to change the withdrawal charges, Account Fees, mortality and expense
risk charges, administrative expense charges, the tables used in determining the
amount of the first monthly variable annuity and fixed annuity payments and the
formula used to calculate the Market Value Adjustment, provided that such
modification shall apply only to Participant's Accounts established after the
effective date of such modification. In order to exercise its modification
rights in these particular instances, the Company must notify the Owner of such
modification in writing. The notice shall specify the effective date of such
modification which must be at least 60 days following the date of mailing of the
notice of modification by the Company. All of the charges and the annuity tables
which are provided in the Contract prior to any such modification will remain in
effect permanently, unless improved by the Company, with respect to
Participant's Accounts established prior to the effective date of such
modification.
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DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving 30 days' prior written notice to the Owner, may limit
or discontinue the acceptance of new Applications and the issuance of new
Certificates under a Contract. Such limitation or discontinuance shall have no
effect on rights or benefits with respect to any Participant's Accounts
established prior to the effective date of such limitation or discontinuance.
CUSTODIAN
The Company is the Custodian of the assets of the Variable Account. The
Company will purchase Series Fund shares at net asset value in connection with
amounts allocated to the Sub-Accounts in accordance with the instructions of the
Participant and redeem Series Fund shares at net asset value for the purpose of
meeting the contractual obligations of the Variable Account, paying charges
relative to the Variable Account or making adjustments for annuity reserves held
in the Variable Account.
RIGHT TO RETURN
If the Participant is not satisfied with the Certificate it may be returned
by mailing it to the Company at the Annuity Service Mailing Address on the cover
of this Prospectus within ten days after it was delivered to the Participant.
When the Company receives the returned Certificate it will be cancelled and the
Participant's Account Value at the end of the Valuation Period during which the
Certificate was received by the Company will be refunded to the Participant.
However, if applicable state law so requires, the full amount of any Purchase
Payment(s) received by the Company will be refunded, the "free look" period may
be greater than ten days and alternative methods of returning the Certificate
may be acceptable.
With respect to Individual Retirement Accounts, under the Internal Revenue
Code a Participant establishing an Individual Retirement Account must be
furnished with a disclosure statement containing certain information about the
Contract and applicable legal requirements. This statement must be furnished on
or before the date the Individual Retirement Account is established. If the
Participant is furnished with such disclosure statement before the seventh day
preceding the date the Individual Retirement Account is established, the
Participant will not have any right of revocation. If the disclosure statement
is furnished after the seventh day preceding the establishment of the Individual
Retirement Account, then the Participant may give a notice of revocation to the
Company at any time within seven days after the Date of Coverage. Upon such
revocation, the Company will refund the Purchase Payment(s) made by the
Participant. The foregoing right of revocation with respect to an Individual
Retirement Account is in addition to the return privilege set forth in the
preceding paragraph. The Company will allow a participant establishing an
Individual Retirement Account a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
FEDERAL TAX STATUS
INTRODUCTION
The Contracts and related Certificates described in this Prospectus are
designed for use by employer, association and other group retirement plans under
the provisions of Sections 401 (including Section 401(k)), 403, 408(b), 408(c),
408(k) and 408(p) of the Internal Revenue Code (the "Code"), as well as certain
non-qualified retirement plans, such as payroll savings plans. As noted above,
the Company may begin offering Participants under Contracts used in connection
with individual retirement plans under Section 408 the opportunity to convert
such Contracts into Contracts used in connection with Roth IRAs under Section
408A, and may also begin offering new Contracts for use in connection with Roth
IRAs. The ultimate effect of federal income taxes may depend upon the type of
retirement plan for which the Contract or Certificate is purchased and a number
of different factors. This discussion is general in nature, is based upon the
Company's understanding of current federal income tax laws, and is not intended
as tax advice. Congress has the power to enact legislation affecting the tax
treatment of annuity contracts, and such legislation could be applied
retroactively to Contracts purchased before the date of enactment. Also, because
the Internal Revenue Code, as amended, is not in force in the Commonwealth of
Puerto Rico, some references in this discussion will not apply to Contracts or
Certificates issued in Puerto Rico. Any person
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contemplating the purchase of a Contract or Certificate should consult a
qualified tax adviser. THE COMPANY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX
STATUS, FEDERAL, STATE OR LOCAL, OF ANY CONTRACT OR CERTIFICATE OR ANY
TRANSACTION INVOLVING THE CONTRACTS OR CERTIFICATES.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. The
operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, but the
Variable Account is not taxable as a regulated investment company or otherwise
as an entity separate from the Company. The income of the Variable Account
(consisting primarily of interest, dividends and net capital gains) is not
taxable to the Company to the extent that it is applied to increase reserves
under contracts participating in the Variable Account.
TAXATION OF ANNUITIES IN GENERAL
Purchase Payments made under Non-Qualified Contracts are not deductible from
the Participant's income for federal income tax purposes. Participants under
Qualified Contracts should consult a tax adviser regarding the tax treatment of
Purchase Payments.
Generally, no taxes are imposed on the increase in the value of a Contract
or Certificate until a distribution occurs, either as an annuity payment or as a
cash withdrawal or lump-sum payment prior to the Annuity Commencement Date.
However, corporate Owners and Participants and other Owners and Participants
that are not natural persons are subject to current taxation on the annual
increase in the value of a Non-Qualified Contract, unless the non-natural person
holds the Contract as agent for a natural person (such as where a bank or other
entity holds a Contract as trustee under a trust agreement). This current
taxation of annuities held by non-natural persons does not apply to earnings
accumulated under an immediate annuity, which the Code defines as a single
premium contract with an annuity commencement date within one year of the date
of purchase. Also, the Internal Revenue Service could assert that Owners or
Participants under both Qualified and Non-Qualified Contracts annually receive
and are subject to tax on a deemed distribution equal to the cost of any life
insurance benefit provided by the Contract.
The Code is unclear in its application to a group annuity contract where the
Owner is distinct from the individuals who receive the Contract benefits (the
Participants). The following discussion is the Company's best understanding of
the operation of the Code in the context of group contracts. However, Owners and
Participants should consult a qualified tax adviser.
A partial cash withdrawal (that is, a withdrawal of less than the entire
Participant's Account Value) from a Certificate issued under a Non-Qualified
Contract (a "Non-Qualified Certificate") before the Annuity Commencement Date is
treated first as a withdrawal from the increase in the Participant's Account
Value, rather than as a return of Purchase Payments. The amount of the
withdrawal allocable to this increase will be includible in the Participant's
income and subject to tax at ordinary income rates. If part or all of a
Participant's Account Value is assigned or pledged as collateral for a loan, the
amount assigned or pledged must be treated as if it were withdrawn from the
Certificate.
In the case of annuity payments under a Non-Qualified Certificate after the
Annuity Commencement Date, a portion of each payment is treated as a nontaxable
return of Purchase Payments. The nontaxable portion is determined by applying to
each annuity payment an "exclusion ratio," which, in general, is the ratio that
the total amount the Participant paid for the Certificate bears to the Payee's
expected return under the Certificate. The remainder of the payment is taxable
at ordinary income rates.
The total amount that a Payee may exclude from income through application of
the "exclusion ratio" is limited to the amount the Participant paid for the
Certificate. If the Annuitant survives for his full life expectancy, so that the
Payee recovers the entire amount paid for the Certificate, any subsequent
annuity payments will be fully taxable as income. Conversely, if the Annuitant
dies before the Payee recovers the entire amount paid, the Payee will be allowed
a deduction for the amount of unrecovered Purchase Payments.
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Taxable cash withdrawals and lump-sum payments from Non-Qualified
Certificates may be subject to a penalty tax equal to 10% of the amount treated
as taxable income. This 10% penalty also may apply to certain annuity payments.
This penalty will not apply in certain circumstances (such as where the
distribution is made upon the death of the Participant). The withdrawal penalty
also does not apply to distributions under an immediate annuity (as defined
above).
In the case of a Certificate issued under a Qualified Contract (a "Qualified
Certificate"), distributions generally are taxable and distributions made prior
to age 59 1/2 are subject to a 10% penalty tax, although this penalty tax will
not apply in certain circumstances. Certain distributions, known as "eligible
rollover distributions," if rolled over to certain other qualified retirement
plans (either directly or after being distributed to the Participant or Payee),
are not taxable until distributed from the plan to which they are rolled over.
In general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten years or more. Owners, Participants, Annuitants, Payees
and Beneficiaries should seek qualified advice about the tax consequences of
distributions, withdrawals, rollovers and payments under the retirement plans in
connection with which the Certificates are purchased.
If the Participant under a Non-Qualified Certificate dies, the value of the
Certificate generally must be distributed within a specified period (See "Other
Contractual Provisions -- Death of Participant"). For contracts owned by
non-natural persons, a change in the Annuitant is treated as the death of the
Participant.
A purchaser of a Qualified Certificate should refer to the terms of the
applicable retirement plan and consult a tax adviser regarding distribution
requirements upon the death of the Participant.
A transfer of a Non-Qualified Certificate by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the Participant's Account Value minus the total amount paid
for the Certificate.
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Non-Qualified Certificate or
under a Qualified Certificate issued for use with an individual retirement
account unless the Participant or Payee provides his or her taxpayer
identification number to the Company and notifies the Company (in the manner
prescribed) before the time of the distribution that he or she chooses not to
have any amounts withheld.
In the case of distributions from a Qualified Certificate (other than
distributions from a Certificate issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Participant or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Certificate
is not an eligible rollover distribution, then the Participant or Payee can
choose not to have amounts withheld as described above for Non-Qualified
Certificates and Qualified Certificates issued for use with individual
retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for federal income tax purposes, and
therefore the annual increase in the value of such contracts is subject to
current taxation. The Company believes that each series of the Series Fund
complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which a variable contract will not be treated as an
annuity for tax purposes if the owner has excessive control over the investments
underlying the contract. It is not known whether such guidelines, if in fact
promulgated, would have retroactive effect. If guidelines are promulgated, the
Company will take any action (including modification of the Contract, the
Certificate and/or the Variable Account) necessary to comply with the
guidelines.
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THE FOLLOWING INFORMATION SHOULD BE CONSIDERED ONLY WHEN AN IMMEDIATE
ANNUITY CONTRACT AND A DEFERRED ANNUITY CONTRACT ARE PURCHASED TOGETHER: The
Company understands that the Treasury Department is in the process of
reconsidering the tax treatment of annuity payments under an immediate annuity
contract (as defined above) purchased together with a deferred annuity contract.
The Company believes that any adverse change in the existing tax treatment of
such immediate annuity contracts is likely to be prospective, that is, it would
not apply to contracts issued before such a change is announced. However, there
can be no assurance that any such change, if adopted, would not be applied
retroactively.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans as well as Owners, Annuitants, Payees and Beneficiaries are cautioned that
the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Qualified Contracts issued in connection therewith. Any person
contemplating the purchase of a Qualified Contract should consult a qualified
tax adviser. In addition, Owners, Participants, Payees, Beneficiaries and
administrators of qualified retirement plans should consider and consult their
tax adviser concerning whether the death benefit payable under the Contract
affects the qualified status of their retirement plan. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers and
certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans as well as by
corporate plans. Such retirement plans may permit the purchase of the Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c) (3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. These annuity contracts are commonly referred to as
"Tax-Sheltered Annuities." Purchasers of the Qualified Contracts for such
purposes should seek qualified advice as to eligibility, limitations on
permissible amounts of Purchase Payments and tax consequences of distributions
(See "Section 403(b) Annuities").
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts, known as an Individual
Retirement Account ("IRA"). These IRA's are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from some other
types of retirement plans may be placed on a tax-deferred basis in an IRA. Sale
of the Contracts for use with IRA's may be subject to special requirements
imposed by the Internal Revenue Service. Purchasers of the Contracts for such
purposes will be provided with such supplementary information as may be required
by the Internal Revenue Service or other appropriate agency, and will have the
right to revoke the Contract under certain circumstances as described in the
section of this Prospectus entitled "Right to Return Contract."
40
<PAGE>
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
regular IRA under Section 408 of the Code, contributions to a Roth IRA are not
made on a tax-deductible basis, but distributions are tax-free if certain
requirements are satisfied. Like traditional IRAs, Roth IRAs are subject to
limitations on the amount that may be contributed and the time when
distributions may commence. A traditional IRA may be converted into a Roth IRA,
and the resulting income may be spread over four years if the conversion occurs
before January 1, 1999. If and when Contracts are made available for use with
Roth IRAs, they may be subject to special requirements imposed by the Internal
Revenue Service. Purchasers of the Contracts for this purpose will be provided
with such supplementary information as may be required by the Internal Revenue
Service or other appropriate agency.
ADMINISTRATION OF THE CONTRACTS
The Company performs certain administrative functions relating to the
Contracts, the Participant's Accounts, and the Variable Account. These functions
include, but are not limited to, maintaining the books and records of the
Variable Account and the Sub-Accounts; maintaining records of the name, address,
taxpayer identification number, Contract number, Participant's Account number
and type, the status of each Participant's Account and other pertinent
information necessary to the administration and operation of the Contracts;
processing Applications, Purchase Payments, transfers and full and partial
surrenders; issuing Contracts and Certificates; administering annuity payments;
furnishing accounting and valuation services; reconciling and depositing cash
receipts; providing confirmations; providing toll-free customer service lines;
and furnishing telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
The offering of the Contracts is continuous. The Contracts will be sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the General Distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181, a wholly-owned subsidiary of the Company, which in
turn is a wholly-owned subsidiary of the Company. Clarendon is registered with
the Securities and Exchange Commission under the Securities Exchange Act of 1934
as broker-dealer and is a member of the National Association of Securities
Dealers, Inc. Clarendon also acts as the general distributor of certain other
annuity contracts issued by the Company and its wholly-owned subsidiary, Sun
Life Insurance and Annuity Company of New York, and variable life insurance
contracts issued by the Company. Commissions and other distribution compensation
will be paid by the Company and will not be more than 7.34% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 0.70% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. In
some instances, such other incentives may be offered only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of the Contracts or Certificates or other contracts
offered by the Company. Commissions will not be paid with respect to
Participant's Accounts established for the personal account of employees of the
Company or any of its affiliates, or of persons engaged in the distribution of
the Contracts, or of immediate family members of such employees or persons. In
addition, commissions may be waived or reduced in connection with certain
transactions described under "Waivers; Reduced Charges; Credits; Bonus
Guaranteed Interest Rates." During 1995, 1996 and 1997 approximately $9,315,656,
$18,652,927, and $ , respectively, was paid to and retained by Clarendon
in connection with the distribution of the Contracts.
41
<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus beginning on page 53.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(IN 000'S)
Revenues
Premiums, annuity deposits and
other revenue................. $ 2,513,741 $ 2,131,939 $ 1,883,901 $ 1,997,525 $ 2,443,310
Net investment income and
realized gains (losses)....... 301,524 312,870 315,966 312,583 311,322
-------------- -------------- -------------- -------------- --------------
2,815,265 2,444,809 2,199,867 2,310,108 2,754,632
-------------- -------------- -------------- -------------- --------------
Benefits and expenses
Policyholder benefits 2,469,215 2,149,145 1,995,208 2,102,290 2,515,320
Other expenses 206,066 175,342 150,937 186,892 232,365
-------------- -------------- -------------- -------------- --------------
2,675,281 2,324,487 2,146,145 2,289,182 2,747,685
-------------- -------------- -------------- -------------- --------------
Operating gain (loss) 139,984 120,322 53,722 20,926 6,947
Federal income tax expense
(benefit) 10,742 (2,702) 17,807 19,469 3,691
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 129,242 $ 123,024 $ 35,915 $ 1,457 $ 3,256
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Assets $ 15,927,045 $ 13,759,005 $ 12,359,683 $ 10,117,822 $ 9,179,090
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Surplus notes $ 565,000 $ 315,000 $ 650,000 $ 335,000 $ 335,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Note 1 to financial statements for the effect of the reinsurance agreements
on net income.
See Note 1 to financial statements for changes in accounting principles and
reporting.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FINANCIAL CONDITION
ASSETS
For management purposes it is the Company's practice to segment its general
account to facilitate the matching of assets and liabilities; however, all
general account assets stand behind all general account liabilities. A majority
of the Company's assets are income producing investments. Particular attention
is paid to the quality of these assets.
The Company's bond holdings consist of a diversified portfolio of both
public and private issues. It is the Company's policy to acquire only investment
grade securities. Private placements are rated internally with reference to the
National Association of Insurance Commissioners ("NAIC") designation issued by
the NAIC Securities Valuation Office. The overall quality of the Company's bond
portfolio remains high. At December 31, 1997, 4.6% of the Company's holdings of
bonds were rated below investment grade (i.e. below NAIC rating "1" or "2").
The Company holds real estate primarily because such investments
historically have offered better yields over the long-term than fixed income
investments. Real estate investments are used to enhance the yield of products
with long-term liability durations. Properties for which market value is lower
than cost
42
<PAGE>
adjusted for depreciation (book value) are reported at market value. During
1997, the change in the difference between the market value and book value for
properties reported at market value was $3,377,000.
Significant attention has been given to insurance companies' exposure to
mortgage loans secured by real estate. The Company had a mortgage portfolio of
$684,035,000 at December 31, 1997, representing 19.8% of cash and invested
assets. At December 31, 1996, mortgage loans represented 26.9% of cash and
invested assets. The Company underwrites commercial mortgages with a maximum
loan to value ratio of 75%. The Company as a rule invests only in properties
that are almost fully leased. The portfolio is diversified by region and by
property type. The level of arrears in the portfolio is substantially below the
industry average. At December 31, 1997, the Company's portfolio did not contain
any mortgage loans which were 60 days or more in arrears, compared to the most
recent industry delinquency ratio published by the American Council of Life
Insurance of 1.35%. The expense in the year for the provision for losses and for
losses on foreclosures was $711,000.
In the normal course of business, the Company makes commitments to purchase
investments at a future date. As of December 31, 1997 the Company had
outstanding mortgage commitments of $12,300,000 which will be funded during
1998.
On December 24, 1997, the Company transferred all of its outstanding shares
of MFS to its parent, Life Holdco, in the form of a dividend, valued at
$159,722,000. This dividend included an intercompany tax receivable of
$91,000,000. As a result of this transaction the Company also realized a
$21,195,000 capital gain of undistributed earnings. See "Recent Reorganization,"
below, for a discussion of the effect of this transaction on ongoing operations.
LIABILITIES
The majority of the Company's liabilities consist of reserves for life
insurance and annuity contracts and deposit funds.
CAPITAL AND SURPLUS
Total capital stock and surplus of the Company was $832,695,000 at December
31, 1997. The Company issued surplus notes during 1997 totaling $250,000,000 to
its parent, Life Holdco. The Company's management considers its surplus position
to be adequate.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income from operations after dividends to policyholders and before
federal income taxes decreased by $2.9 million for the year ending December 31,
1997 as compared to December 31, 1996. Net income associated with the
reinsurance agreements with the ultimate parent increased $2.1 million in 1997.
The net income improvement in the reinsured business results primarily from
improved investment performance. Prior to reinsurance, earnings from the life
line of business remained relatively flat. The earnings of the Company's
retirement products and services line, which markets combination fixed/variable
annuities, decreased $5.0 million. During 1997, the Company focused its
marketing efforts on its fixed/variable annuity sales and discontinued sales of
its group pension guaranteed interest contracts.
Total income increased by $347.9 million for the year ended December 31,
1997 as compared to December 31, 1996. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $527.4 million primarily due to
the introduction in late 1996, of a dollar cost averaging (DCA) sales program.
This program credits a bonus rate of interest on the fixed annuity deposit
during the first year. Purchase payments allocated to the DCA program are
deposited into the fixed account and periodically transferred to the variable
Sub-accounts during the following year. Reinsurance had the effect of increasing
income by approximately $8.9 million. Premiums and annuity considerations
decreased by $6.6 million reflecting decreased annuitizations. Sales of group
pension guaranteed interest contracts decreased by $133 million. Net investment
income decreased by $33.5 million reflecting both the decrease in the general
account invested assets and $9.2 million decrease in dividends from
subsidiaries.
43
<PAGE>
Benefits and expenses increased by $346.6 million for the year ended
December 31, 1997 as compared to December 31, 1996. Reinsurance had the effect
of increasing benefits and expenses by $2.7 million. Death benefits, annuity
payments and surrender benefits and other fund withdrawals increased by $338.4
million primarily as a result of increased surrenders and withdrawals from
separate account contracts for which the surrender charge has expired. Policy
reserves decreased by $23 million, reflecting decreased annuitizations and lower
increases in reserves for minimum death benefit guarantees. The decrease in
liability for premium and other deposit funds of $55.3 reflects higher
surrenders of contracts described above. Commissions increased by $22.8 million,
reflecting the increase in total sales of combination fixed/variable annuities.
General expenses increased by $9.9 million reflecting an increase in salaries
due to staff increases associated with increased sales and non-recurring costs
associated with moving the retirement products and services facility to a new
location. Transfers to separate accounts increased by $53.9 million, reflecting
increased exchange activity out of the fixed account into the separate account,
associated with the DCA activity.
See "Recent Reorganization," below, for a discussion of the effect on
ongoing operations of the Company's transfer of its shares of MFS.
1996 COMPARED TO 1995
Net income from operations after dividends to policyholders and before
federal income taxes increased by $61.1 million for the year ending December 31,
1996 as compared to December 31, 1995. Net income associated with the
reinsurance agreements with the parent increased by $23.9 in 1996. The net
income improvement in the reinsured business results from improved mortality
experience, improved investment performance and fewer significant death claims
in 1996 as compared to 1995. Prior to reinsurance, earnings from the life line
of business remained relatively flat. The remaining $37.2 increase is
attributable to the Company's retirement products and services line of business,
which market combination fixed/variable annuities and group pension guaranteed
investment contracts. The decline in interest rates during 1995 resulted in the
split of these combination fixed/variable annuity sales to change from 45% fixed
and 55% variable in 1995 to 25% fixed and 75% variable in 1996. In addition,
total gross sales increased by $235.9 million in 1996 as compared to 1995. The
declining interest rate environment and strong market performance in 1995
resulted in unrealized gains on assets held in the separate accounts, which
generated a substantial increase in fees calculated as a percentage of the
separate account net assets, which are then transferred to the general account.
The declining interest rates also resulted in increases in reserves due to the
increase in the market value adjustment provision of certain fixed annuities.
The resultant reserve increases were in excess of the unrealized gains causing
strain on the 1995 earnings. In 1996, interest rates increased, resulting in a
reduction in the unrealized gains on assets held in the separate accounts and a
corresponding reduction in reserves and a release of some of the reserve strain
incurred in 1995. The earnings on these market value adjusted products fluctuate
as the change in the market value of the assets do not move in tandem with the
change in the market value of the liabilities.
Total income increased by $239.4 million for the year ended December 31,
1996 as compared to December 31, 1995. Sales of combination fixed/variable
annuities (net of annuitizations) increased by $282.7 million primarily due to
an increase in variable sales held in the separate accounts. This increase in
variable sales was driven by strong performance in the stock market. Reinsurance
had the effect of increasing income by approximately $9.4 million. Premiums and
annuity considerations increased by $8.2 million reflecting increased
annuitizations. Considerations from supplementary contracts increased by $1.2
million. Sales of group pension guaranteed investment contracts decreased by $53
million as this market remains highly competitive and sensitive to small changes
in guaranteed interest rates. Net investment income decreased by $9.1 million,
reflecting a decrease in the general account invested assets.
Benefits and expenses increased by $178.3 million for the year ended
December 31, 1996 as compared to December 31, 1995. Reinsurance had the effect
of decreasing benefits and expenses by $14.5 million. Deaths, annuity payments
and surrender benefits and other funds withdrawals increased by $438.9 million
as a result of increased surrenders of fixed annuities for which interest rate
guarantee periods have expired as well as withdrawals from the separate
accounts. Policy reserves increased by $9.4 million, reflecting increased
annuitizations and increased reserves for minimum death benefit guarantees. The
44
<PAGE>
decrease in liability for premium and other deposit funds of $405.9 reflects
lower interest rates and higher surrenders of contracts described above.
Commissions increased by $21.8 million, reflecting the increase in total sales
of combination fixed/variable annuities. General expenses increased by $2.6
million reflecting an increase in salaries due to staff increases and retainer
fees. Transfers to separate accounts increased by $126.8 million, reflecting
increased exchange activity out of the general account into the separate
accounts.
LIQUIDITY
The Company's cash inflow consists primarily of premiums on insurance and
annuity products, income from investments, repayments of investment principal
and sales of investments. The Company's cash outflow is primarily to meet death
and other maturing insurance and annuity contract obligations, to pay out on
contract terminations, to fund investment commitments and to pay normal
operating expenses and taxes. Cash outflows are met from the normal net cash
inflows.
The Company segments its business internally and matches projected cash
inflows and outflows within each segment. Targets for money market holdings are
established for each segment, which in the aggregate meet the day to day cash
needs of the Company. If greater liquidity is required, government issued bonds,
which are highly liquid, are sold to provide the necessary funds. Government and
publicly traded corporate bonds comprise 58% of the Company's long-term bond
holdings.
Management believes that the Company's sources of liquidity are more than
adequate to meet its anticipated needs.
YEAR 2000 COMPLIANCE
The Company's business, financial condition, and results of operations could
be materially and adversely affected by the failure of its systems and
applications (or those either provided or operated by third-parties) to properly
operate or manage dates beyond the year 1999. However, the Company has
investigated the nature and extent of the work necessary to render its computer
systems capable of processing beyond the turn of the century ("Year 2000
compliant"), and has made substantial progress toward achieving this goal,
including upgrading and/or replacing existing systems. The Company expects that
its principal systems will be Year 2000 compliant by the end of 1998, leaving
1999 for extensive testing. While it is believed that these efforts involve
substantial costs, the Company closely monitors associated costs and continues
to evaluate associated risks based on actual expenses. Based on available
information, the Company believes that it will be able to manage its total Year
2000 transition without a material adverse effect on its business operations,
financial condition, or results of operations.
RECENT REORGANIZATION
Effective December 24, 1997, the Company and its ultimate parent, Sun Life
Assurance Company of Canada ("Sun Life of Canada"), reorganized the corporate
structure of a part of their United States business operations, by completing,
with the approval of the Delaware Insurance Department, the establishment of a
two-tier holding company structure. In connection with this reorganization,
Massachusetts Financial Services Company ("MFS"), the registered investment
adviser that serves as adviser to the MFS Family of Funds, including the MFS/Sun
Life Series Trust and the Compass Variable Accounts, is no longer a subsidiary
of the Company, but remains under the control of Sun Life of Canada through two
other wholly-owned holding company subsidiaries. On December 24, 1997. The
Company's stock in MFS was transferred via a dividend to the Company's immediate
parent, Sun Life of Canada (U.S.) Holdings, Inc. There is no change in
directors, officers, or day-to-day management of any of the companies within
this holding company system and, in the case of MFS, its executive officers
continue to report to the Chairman of Sun Life of Canada.
MFS, which was acquired by the Company in 1982, has approximately
$70,200,000,000 under management as of December 31, 1997. For the years ended
December 31, 1997, 1996 and 1995, the Company's Statutory Statements of
Operations reflect earnings attributable to the operations of MFS of $80,114,000
(which includes dividends from MFS of $33,110,000, an income tax benefit of
$25,809,000, and a realized gain of $21,195,000), $79,263,000, and $58,599,000,
respectively. The reorganization is not expected to have any significant effect
on the ongoing operations of MFS or the Company. However, future net income of
the Company will not include the results of operations of MFS.
45
<PAGE>
REINSURANCE
The Company has agreements with its parent company which provide that the
parent company will reinsure the mortality risks of the individual life
insurance contracts previously sold by the Company. Under these agreements basic
death benefits and supplementary benefits are reinsured on a yearly renewable
term basis and coinsurance basis, respectively. Reinsurance transactions under
these agreements in 1997 had the effect of decreasing net income from operations
by $1,381,000.
Effective January 1, 1991 the Company entered into an agreement with the
parent company under which certain individual life insurance contracts issued by
the parent were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with the parent
which provides that the parent will reinsure the mortality risks in excess of
$500,000 per policy for the individual life insurance contracts assumed by the
Company in the reinsurance agreement described above. Death benefits are
reinsured on a yearly renewable term basis. These agreements had the effect of
increasing income from operations by approximately $37,050,000 for the year
ended December 31, 1997.
The life reinsurance assumed agreement requires the reinsurer to withhold
funds in an amount equal to the reserves assumed.
The Company also has executed a reinsurance agreement with an unaffiliated
company which provides reinsurance of certain individual life insurance
contracts on a modified coinsurance basis and under which all deficiency
reserves are ceded.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $15.9 billion at December 31, 1997, 71.7%
consisted of unitized and non-unitized separate account assets, 12.0% were
invested in bonds and similar securities, 4.3% in mortgages, 0.7% in
subsidiaries, 0.6% in real estate, and the remaining 10.7% in cash and other
assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to the most recent Best's Review,
Life-Health Edition, as of December 31, 1996 the Company ranked 38th among all
life insurance companies in the United States based upon total assets. Its
parent company, Sun Life
Assurance Company of Canada, ranked 19th. Best's Insurance Reports, Life-Health
Edition, 1997, assigned the Company and the parent company its highest
classification, A++, as of December 31, 1996. Standard & Poor's and Duff &
Phelps have assigned the Company and the parent company their highest ratings
for claims paying ability, AAA. Moody's Investor Service, Inc. has assigned the
Company an unsolicited rating of Aa1 for financial strength. These ratings
should not be considered as bearing on the investment performance of the Fund
shares held in the Sub-Accounts of the Variable Account. However, the ratings
are relevant to the Company's ability to meet its general corporate obligations
under the Contracts.
EMPLOYEES
The Company and Sun Life Assurance Company of Canada have entered into a
Service Agreement which provides that the latter will furnish the Company, as
required, with personnel as well as certain services and facilities on a cost
reimbursement basis. As of December 31, 1997 the Company had 317 direct
employees who are employed at its Principal Executive Office in Wellesley Hills,
Massachusetts and its Retirement Products & Services Division in Boston,
Massachusetts.
46
<PAGE>
PROPERTIES
The Company occupies office space owned by it and leased to its parent, Sun
Life Assurance Company of Canada, and certain unrelated parties for lease terms
not exceeding five years.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and principal officers of the Company are listed below,
together with information as to their ages, dates of election and principal
business occupations during the last five years (if other than their present
business occupations). Except as otherwise indicated, the directors and officers
of the Company who are associated with Sun Life Assurance Company of Canada
and/or its subsidiaries have been associated with Sun Life Assurance Company of
Canada for more than five years either in the position shown or in other
positions.
JOHN D. MCNEIL, 64, Chairman and Director (1982*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is Chairman and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; a Director of Massachusetts
Financial Services Company; Chairman and a Trustee of MFS/Sun Life Series Trust;
Chairman and a Member of the Boards of Managers of Money Market Variable
Account, High Yield Variable Account, Capital Appreciation Variable Account,
Government Securities Variable Account, World Governments Variable Account,
Total Return Variable Account and Managed Sectors Variable Account; and a
Director of Shell (Canada) Limited and Canadian Pacific, Ltd.
DONALD A. STEWART, 51, President and Director (1996*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
He is President and a Director of Sun Life Assurance Company of Canada and
Sun Life Insurance and Annuity Company of New York; and a Director of
Massachusetts Financial Services Company, Massachusetts Casualty Insurance
Company and Sun Life Financial Services Limited.
DAVID D. HORN, 56, Director (1985*)
56 Pinckney Street
Boston, Massachuetts 02114
He was formerly Senior Vice President and General Manager for the United
States of Sun Life Assurance Company of Canada, retiring in November, 1997. He
is a Director of Sun Life Insurance and Annuity Company of New York; a Trustee
of MFS/Sun Life Series Trust; and a Member of the Boards of Managers of Money
Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account.
ANGUS A. MACNAUGHTON, 66, Director (1985*)
Metro Tower, Suite 1170,
950 Tower Lane
Foster City, California 94404
He is President of Genstar Investment Corporation and a Director of Sun Life
Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York,
Canadian Pacific, Ltd., Stelco, Inc. and Varian Associates, Inc.
JOHN S. LANE, 62, Director (1991*)
150 King Street West
Toronto, Ontario, Canada M5H 1J9
- ------------------------
* Year Elected Director
47
<PAGE>
He is Senior Vice President, Investments of Sun Life Assurance Company of
Canada; and a Director of Sun Life of Canada (U.S.) Distributors, Inc., Sun
Capital Advisers, Inc. and Sun Life Insurance and Annuity Company of New York.
RICHARD B. BAILEY, 71, Director (1983*)
500 Boylston Street
Boston, Massachusetts 02116
He is a Director of Sun Life Insurance and Annuity Company of New York and a
Director/Trustee of certain Funds in the MFS Family of Funds.
M. COLYER CRUM, 65, Director (1986*)
104 West Cliff Street
Weston, MA 02193
He is Professor Emeritus of the Harvard Business School; and a Director of
Sun Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of
New York, Merrill Lynch Ready Assets Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Natural Resources Trust,
Merrill Lynch U.S. Treasury Money Fund, MuniVest California Insured Fund, Inc.,
MuniVest Florida Fund, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniYield Florida
Insured Fund, MuniYield Insured Fund II, Inc., MuniYield Michigan Insured Fund,
Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund
III, Inc. and MuniYield Pennsylvania Fund. Prior to July, 1996, he was a
Professor at the Harvard Business School.
S. CAESAR RABOY, 61, Senior Vice President and Deputy General Manager and
Director (1996*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and Deputy General Manager for the United States
of Sun Life Assurance Company of Canada; Senior Vice President and a Director of
Sun Life Insurance and Annuity Company of New York; and Vice President and a
Director of Sun Life Financial Services Limited and Sun Life of Canada (U.S.)
Distributors, Inc.
ROBERT A. BONNER, 53, Vice President, Pensions (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Individual Insurance for the United States, of Sun
Life Assurance Company of Canada.
C. JAMES PRIEUR, 46, Senior Vice President, General Manager and Director (1998*)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Senior Vice President and General Manager for the United States of Sun
Life Assurance Company of Canada; Vice President, Investments of Sun Life of
Canada (U.S.) Distributors, Inc., a Massachusetts Casualty Insurance Company and
Sun Life Insurance and Annuity Company of New York; and a Director of Sun
Capital Advisers, Inc., New London Trust, F.S.B.; Sun Canada Financial Co., and
Sun Life of Canada (U.S.) Holdings, Inc.
L. BROCK THOMSON, 56, Vice President and Treasurer (1974)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Portfolio Management for the United States of Sun Life
Assurance Company of Canada; Vice President and Treasurer of Sun Life of Canada
(U.S.) Distributors, Inc., Sun Capital Advisers, Inc., Sun Benefit Services
Company, Inc. and Sun Life Insurance and Annuity Company of New York; and
Assistant Treasurer of Massachusetts Casualty Insurance Company.
- ------------------------
* Year Elected Director
48
<PAGE>
ROBERT P. VROLYK, 44, Vice President and Actuary (1986)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
He is Vice President, Finance for the United States of Sun Life Assurance
Company of Canada; Vice President, Controller and Actuary of Sun Life Insurance
and Annuity Company of New York; a Director of Massachusetts Casualty Insurance
Company and Sun Life of Canada (U.S.) Holdings, Inc.; and Vice President and a
Director of Sun Canada Financial Co.
MARGARET SEARS MEAD, 47, Assistant Vice President and Secretary (1996)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
She is Assistant Vice President and Counsel for the United States of Sun
Life Assurance Company of Canada; and Assistant Vice President and Secretary of
Sun Life Insurance and Annuity Company of New York and Secretary of Sun Life of
Canada (U.S.) Holdings, Inc.
The directors, officers and employees of the Company are covered under a
commercial blanket bond and a liability policy. The directors, officers and
employees of Massachusetts Financial Services Company and Clarendon Insurance
Agency, Inc. are covered under a fidelity bond and errors and omissions policy.
EXECUTIVE COMPENSATION
All of the executive officers of the Company also serve as officers of Sun
Life Assurance Company of Canada and receive no compensation directly from the
Company. Allocations have been made as to such officers' time devoted to duties
as executive officers of the Company and its subsidiaries. The allocated cash
compensation of all executive officers of the Company as a group for services
rendered in all capacities to the Company and its subsidiaries during 1997
totalled $824,000.
Directors of the Company who are also officers of Sun Life Assurance Company
of Canada or its affiliates receive no compensation in addition to their
compensation as officers of Sun Life Assurance Company of Canada or its
affiliates. Messrs. Bailey, Crum and MacNaughton receive compensation in the
amount of $5,000 per year, plus $800 for each meeting attended, plus expenses.
No shares of the Company are owned by any executive officer or director. The
Company is a wholly-owned subsidiary of Sun Life Assurance Company of Canada,
150 King Street West, Toronto, Ontario, Canada M5H 1J9.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March 1st in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
49
<PAGE>
In addition, many states regulate affiliated groups of insurers, such as the
Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. The
Company and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, is not of material importance to their
respective total assets or material with respect to the Variable Account.
LEGAL MATTERS
The organization of the Company, its authority to issue the Contracts and
the validity of the form of the Contracts have been passed upon by Margaret
Sears Mead, Esq., Senior Vice President and Secretary of the Company.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended December
31, 1997 and the statutory financial statements of the Company for the years
ended December 31, 1997, 1996 and 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this Prospectus. This Prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Variable Account, the
Fixed Account, the Company, the Series Fund, the Contract and the Certificates.
Statements found in this Prospectus as to the terms of the Contracts, the
Certificates and other legal instruments are summaries, and reference is made to
such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Series Fund shares held in the Sub-Accounts of the Variable
Account. The Variable Account value of the interests of Owners, Participants,
Annuitants, Payees and Beneficiaries under the Contracts is affected primarily
by the
50
<PAGE>
investment results of the Series Fund. The financial statements of the Variable
Account reflect units outstanding and expenses incurred under the Contracts and
other contracts participating in the Variable Account which impose certain
contract charges that are different from those imposed under the Contracts.
-------------------
51
<PAGE>
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT F
[THE FINANCIAL STATEMENTS FOR VARIABLE ACCOUNT F WILL BE PROVIDED BY AMENDMENT]
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,910,699 $ 2,170,103
Common stocks 117,229 144,043
Mortgage loans on real estate 684,035 938,932
Properties acquired in satisfaction of debt 22,475 23,391
Investment real estate 78,426 76,995
Policy loans 40,348 40,554
Cash and short-term investments 544,418 148,059
Other invested assets 55,716 51,378
Premiums and annuity considerations due and uncollected 9,203 11,282
Investment income due and accrued 39,279 68,191
Receivable from parent, subsidiaries and affiliates 28,825 40,829
Funds withheld on reinsurance assumed 982,653 878,798
Other assets 1,841 1,343
-------------- --------------
General account assets 4,515,147 4,593,898
Separate account assets
Unitized 9,068,021 6,919,219
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total Admitted Assets $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 2,188,243 $ 2,099,980
Supplementary contracts 2,247 2,205
Policy and contract claims 2,460 2,108
Policyholders' dividends and coupons payable 32,500 27,500
Liability for premium and other deposit funds 1,450,705 1,898,309
Surrender values on cancelled policies 215 72
Interest maintenance reserve 33,830 28,675
Commissions to agents due or accrued 2,826 3,245
General expenses due or accrued 7,202 4,654
Transfers from Separate Accounts due or accrued (284,078) (232,743)
Taxes, licenses and fees accrued, excluding federal income taxes 105 342
Federal income taxes due or accrued 58,073 49,479
Unearned investment income 34 19
Amounts withheld or retained by company as agent or trustee 47 27
Remittances and items not allocated 1,363 1,359
Borrowed money 110,142 58,000
Asset valuation reserve 47,605 53,911
Payable for securities 27,104 22,177
Other liabilities 1,959 7,561
-------------- --------------
General account liabilities 3,682,582 4,026,880
Separate account liabilities
Unitized 9,067,891 6,919,094
Non-unitized 2,343,877 2,108,835
-------------- --------------
Total liabilities 15,094,350 13,054,809
-------------- --------------
CAPITAL STOCK AND SURPLUS
Capital stock par value $1,000; Authorized, 10,000 shares;
issued and outstanding, 5,900 shares 5,900 5,900
-------------- --------------
Surplus notes 565,000 315,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 62,440 46,888
-------------- --------------
Surplus 826,795 561,243
-------------- --------------
Total capital stock and surplus 832,695 567,143
-------------- --------------
Total Liabilities, Capital Stock and Surplus $ 15,927,045 $ 13,621,952
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 270,700 $ 282,466 $ 279,407
Deposit-type funds 2,155,298 1,775,230 1,545,542
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 1,615 2,340 1,088
Net investment income 270,249 303,753 312,872
Amortization of interest maintenance
reserve 1,166 1,557 1,025
Net gain from operations from
Separate Accounts 5 -- --
Other income 86,123 71,903 57,864
---------- ---------- ----------
Total 2,785,156 2,437,249 2,197,798
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 17,284 12,394 15,317
Annuity benefits 148,135 146,654 140,497
Surrender benefits and other fund
withdrawals 1,854,004 1,507,263 1,074,396
Interest on policy or contract funds 699 2,205 739
Payments on supplementary contracts
without life contingencies and of
dividend accumulations 1,687 2,120 1,888
Increase in aggregate reserves for
life and accident and health
policies and contracts 127,278 162,678 171,975
Increase (decrease) in liability for
premium and other deposit funds (447,603) (392,348) 13,553
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for dividend
and coupon accumulations 42 327 (663)
---------- ---------- ----------
Total 1,701,526 1,441,293 1,417,702
Commissions on premiums and annuity
considerations (direct business
only) 132,700 109,894 88,037
Commissions and expense allowances
on reinsurance assumed 17,951 18,910 22,012
General insurance expenses 47,102 37,206 34,580
Insurance taxes, licenses and fees,
excluding federal income taxes 7,790 8,431 7,685
Increase (decrease) in loading on
and cost of collection in excess of
loading on deferred and uncollected
premiums 523 901 (1,377)
Net transfers to separate accounts 734,373 678,663 551,784
---------- ---------- ----------
Total 2,641,965 2,295,298 2,120,423
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
federal income taxes 143,191 141,951 77,375
Dividends to policyholders 33,316 29,189 25,722
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before federal income taxes 109,875 112,762 51,653
Federal income tax expense (benefit)
(excluding tax on capital gains) 10,742 (2,702) 17,807
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 99,133 115,464 33,846
Net realized capital gains less
capital gains tax and transfers to
the interest maintenance reserve 30,109 7,560 2,069
---------- ---------- ----------
NET INCOME $ 129,242 $ 123,024 $ 35,915
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus, beginning of year $ 567,143 $ 792,452 $ 455,489
---------- ---------- ----------
Net income 129,242 123,024 35,915
Change in net unrealized capital gains 1,153 (1,715) 2,009
Change in non-admitted assets and related items (463) 67 (2,270)
Change in reserve on account of change in valuation basis 39,016 -- --
Change in asset valuation reserve 6,306 (11,812) (13,690)
Other changes in surplus in Separate Accounts Statement -- 100 (4,038)
Change in surplus notes 250,000 (335,000) 315,000
Dividends to stockholder (159,722) -- --
Miscellaneous gains in surplus 20 27 4,037
---------- ---------- ----------
Net change in capital and surplus for the year 265,552 (225,309) 336,963
---------- ---------- ----------
Capital and surplus, end of year $ 832,695 $ 567,143 $ 792,452
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN 000'S)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided
Premiums, annuity considerations and
deposit funds received $ 2,427,554 $ 2,059,577 $ 1,826,456
Considerations for supplementary
contracts and dividend accumulations
received 1,615 2,340 1,088
Net investment income received 323,199 324,914 374,398
Other income received 81,701 88,295 25,348
----------- ----------- -----------
Total receipts 2,834,069 2,475,126 2,227,290
----------- ----------- -----------
Benefits paid (other than dividends) 2,020,615 1,671,483 1,231,936
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 203,650 172,015 150,463
Net cash transferred to Separate
Accounts 785,708 755,605 568,188
Dividends paid to policyholders 28,316 22,689 17,722
Federal income tax (recoveries)
payments (excluding tax on capital
gains) 1,397 (15,363) (20,655)
Other--net 699 2,205 739
----------- ----------- -----------
Total payments 3,040,385 2,608,634 1,948,393
----------- ----------- -----------
Net cash from operations (206,316) (133,508) 278,897
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$750,449, $1,554,873 and $8,610,951) 1,343,803 1,768,147 1,658,655
Issuance of surplus notes 250,000 (335,000) 315,000
Other cash provided 117,297 147,956 419,446
----------- ----------- -----------
Total cash provided 1,711,100 1,581,103 2,393,101
----------- ----------- -----------
Cash Applied
Cost of long-term investments acquired 773,721 1,318,880 1,749,714
Other cash applied 334,704 177,982 796,207
----------- ----------- -----------
Total cash applied 1,108,425 1,496,862 2,545,921
----------- ----------- -----------
Net change in cash and short-term
investments 396,359 (49,267) 126,077
Cash and short term investments
Beginning of year 148,059 197,326 71,249
----------- ----------- -----------
End of year $ 544,418 $ 148,059 $ 197,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts. The Company also underwrites
a block of individual life insurance business through a reinsurance contract
with an affiliate, Sun Life Assurance Company of Canada ("SLOC"). SLOC is a
mutual life insurance company.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of SLOC. Prior to December 18, 1997 Life
Holdco was a direct wholly-owned subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
19 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS AND RELATED RESERVES
Bonds are carried at cost adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in insurance subsidiaries are carried at their statutory
surplus values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities and general account assets are available to fund liabilities
of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $284,078,000 in 1997 and
$232,743,000 in 1996.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
Prior to 1996, dividends paid to the Company by its subsidiaries and the
undistributed gains (losses) of those subsidiaries were included in net income
of the Company. For Annual Statement reporting, dividends were (and continue to
be) reported in net income while undistributed gains (losses) are reported
directly to surplus (as a separate component of unassigned surplus). As a
result, net income as reported in these financial statements is $2.5 million
less than net income reported in the Annual Statement in 1995. Effective for
1996, the Company changed its method of accounting for investments in
subsidiaries to conform with a preferable prescribed statutory accounting
practices used in the preparation of its Annual Statement. As a result of the
change, $5.7 million in undistributed losses of subsidiaries are reported
directly as a separate component of unassigned surplus rather than being
included in net income for the year ended December 31, 1996. The amounts as
reported in prior years have not been restated.
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
2. INVESTMENTS IN SUBSIDIARIES:
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited, ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), and Sun Life Finance
Corporation ("Sunfinco").
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, Sun Life of Canada (U.S.) SPE 97-1, Inc. (SPE 97-1). SPE 97-1 was
organized for the purpose of engaging in activities incidental to securitizing
mortgage loans.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"). On December 24, 1997, the
Company transferred all of its shares of MFS to Life Holdco in the form of a
dividend valued at $159,722,000. As a result of this transaction the Company
realized a gain of $21,195,000 of undistributed earnings.
On December 31, 1997, the Company purchased all of the outstanding shares of
Clarendon Insurance Agency, Inc. ("Clarendon") from MFS.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York. MCIC is a life insurance company which issues only individual disability
income policies. Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank. SLFSL serves as the marketing
administrator for the distribution of the offshore products of SLOC, an
affiliate. Sun Capital is a registered investment adviser. Sunfinco and Sunbesco
are currently inactive. Clarendon is a registered broker-dealer that acts as the
general distributor of certain annuity and life insurance contracts issued by
the Company and its affiliates.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco. at an
interest rate of 5.80%, which is scheduled for repayment on March 1, 1998, and
is included in borrowed money. A $110,000,000 note was also issued by MFS on
December 23, 1997 to the Company at an interest rate of 5.85% due on March 1,
1998 and is included in cash and short-term investments.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC which was
repaid on February 10, 1997 at an interest rate of 5.70%. Also on December 31,
1996, the Company was issued a $58,000,000 note by MFS at an interest rate of
5.76%. This note was repaid to the Company on February 10, 1997. On December 31,
1997 and 1996 the Company had an additional $20,000,000 in notes issued by MFS,
scheduled to mature in 2000.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
During 1997, 1996, and 1995, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ------------
<S> <C> <C> <C>
MCIC $ 2,000,000 $ 10,000,000 $ 6,000,000
SLFSL 1,000,000 1,500,000 --
SPE 97-1 20,377,000 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1997, 1996 and 1995 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN 000'S)
<S> <C> <C> <C>
Intangible assets $ 0 $ 9,646 $ 12,174
Other assets 1,190,951 1,376,014 1,233,372
Liabilities (1,073,966) (1,241,617) (1,107,264)
------------- ------------- -------------
Total net assets $ 116,985 $ 144,043 $ 138,282
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 750,364 $ 717,280 $ 570,794
Operating expenses (646,896) (624,199) (504,070)
Income tax expense (43,987) (42,820) (31,193)
------------- ------------- -------------
Net income $ 59,481 $ 50,261 $ 35,531
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. BONDS:
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. BONDS (CONTINUED):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
(IN 000'S)
Long-term bonds:
United States government and government agencies and
authorities $ 267,756 $ 12,272 $ (8,927) $ 271,101
States, provinces and political subdivisions 2,253 20 -- 2,273
Foreign governments 18,812 1,351 -- 20,163
Public utilities 415,641 24,728 (1,223) 439,146
Transportation 167,937 14,107 (2,243) 179,801
Finance 290,024 7,914 (472) 297,466
All other corporate bonds 1,007,680 42,338 (14,496) 1,035,522
------------ ----------- ----------- ------------
Total long-term bonds 2,170,103 102,730 (27,361) 2,245,472
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 88,754 -- -- 88,754
Affiliates 58,000 -- -- 58,000
------------ ----------- ----------- ------------
Total short-term bonds 146,754 -- -- 146,754
------------ ----------- ----------- ------------
Total bonds $ 2,316,857 $ 102,730 $ (27,361) $ 2,392,226
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated fair value of bonds at December 31, 1997 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(IN 000'S)
Maturities:
Due in one year or less $ 699,548 $ 700,280
Due after one year through five years 533,901 541,382
Due after five years through ten years 270,607 286,651
Due after ten years 735,624 821,002
------------ ------------
2,239,680 2,349,315
Mortgage-backed securities 212,051 219,884
------------ ------------
Total bonds $ 2,451,731 $ 2,569,199
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1997, 1996, and 1995 were $980,264,000, $1,554,016,000, and $1,510,553,000,
gross gains were $10,732,000, $16,975,000, and $24,757,000 and gross losses were
$2,446,000, $10,885,000, and $5,742,000, respectively.
Bonds included above with an amortized cost of approximately $2,578,000 and
$2,060,000 at December 31, 1997 and 1996, respectively, were on deposit with
governmental authorities as required by law.
4. SECURITIES LENDING:
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chemical Bank of New York. The custodian has
indemnified the Company against losses arising from this
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. SECURITIES LENDING (CONTINUED):
program. The total par value of securities out on loan was $0 and $51,537,000 at
December 31, 1997 and 1996 respectively. Income resulting from this program was
$200,000, $137,000 and $2,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
5. MORTGAGE LOANS:
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
California $ 119,122 $ 154,272
Massachusetts 58,981 79,929
Michigan 42,912 57,119
New York 45,696 67,742
Ohio 51,862 75,405
Pennsylvania 97,949 115,584
Washington 54,948 75,819
All other 212,565 313,062
---------- ----------
$ 684,035 $ 938,932
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $26,284,000 and $29,261,000
at December 31, 1997 and 1996, respectively, against which there are allowances
for losses of $3,026,000 and $5,893,000, respectively.
Mortgage loans from Sun Life (U.S.)'s portfolio with an approximate book value
of $53,188,000 were included in a transaction also involving loans from the
portfolios of other SLOC entities with an aggregate book value of $256 million,
whereby such loans were securitized for sale to the public markets.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $12,300,000
and $9,800,000 at December 31, 1997 and 1996, respectively.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. INVESTMENT GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN 000'S)
<S> <C> <C> <C>
Net realized gains (losses)
Bonds $ 2,882 $ 5,631 $ 3,935
Common stock of affiliates 21,195 -- --
Mortgage loans 3,837 763 292
Real estate 2,912 599 391
Other invested assets (717) 567 (2,549)
--------- --------- ---------
$ 30,109 $ 7,560 $ 2,069
--------- --------- ---------
--------- --------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (2,894) $ (5,739) $ --
Mortgage loans 1,524 (600) (1,574)
Real estate 3,377 4,624 3,583
Other invested assets (854) -- --
--------- --------- ---------
$ 1,153 $ (1,715) $ 2,009
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold. The net realized capital gains credited to the interest
maintenance reserve were $6,321,000 in 1997, $7,710,000 in 1996, and $12,714,000
in 1995. All gains and losses are transferred net of applicable income taxes.
7. NET INVESTMENT INCOME:
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN 000'S)
<S> <C> <C> <C>
Interest income from bonds $ 188,924 $ 178,695 $ 205,445
Income from investment in common stock of affiliates 41,181 50,408 35,403
Interest income from mortgage loans 76,073 92,591 99,766
Real estate investment income 17,161 16,249 14,979
Interest income from policy loans 3,582 2,790 2,777
Other (193) 1,710 2,672
---------- ---------- ----------
Gross investment income 326,728 342,443 361,042
---------- ---------- ----------
Interest on surplus notes (42,481) (23,061) (31,813)
Investment expenses (13,998) (15,629) (16,357)
---------- ---------- ----------
Net investment income $ 270,249 $ 303,753 $ 312,872
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. DERIVATIVES:
The Company uses derivative instruments for interest risk management purposes,
including hedges against specific interest rate risk and to minimize the
Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains (losses) to specific hedged
assets or liabilities, gains (losses) are deferred in IMR and amortized over the
remaining life of the hedged assets. At December 31, 1997 and 1996 there were no
futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in IMR and amortized over the shorter of the remaining life of the
hedged asset or the remaining term of the swap contract. The net differential to
be paid or received on interest rate swaps is recorded monthly as interest rates
change.
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 70,000 693
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1996
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN 000'S)
<S> <C> <C>
Conventional interest rate swaps $ 429,000 $ (2,443)
Foreign currency swap 2,100 70
Forward spread lock swaps 50,000 (50)
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of non-performance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES:
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. LEVERAGED LEASES (CONTINUED):
the purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
(IN 000'S)
<S> <C> <C>
Lease contracts receivable $ 92,605 $ 101,244
Less non-recourse debt (92,589) (101,227)
---------- ----------
16 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (10,324) (11,501)
---------- ----------
Investment in leveraged leases 30,842 29,666
Less fees (163) (188)
---------- ----------
Net investment in leveraged leases $ 30,679 $ 29,478
---------- ----------
---------- ----------
</TABLE>
The net investment is included as an other invested asset.
10. REINSURANCE:
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $1,381,000, $1,603,000 and $2,184,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, effective January 1, 1991, the Company
entered into an agreement with SLOC which provides that SLOC will reinsure the
mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company in the reinsurance agreement
described above. Such death benefits are reinsured on a yearly renewable term
basis. These agreements had the effect of increasing income from operations by
approximately $37,050,000, $35,161,000 and $11,821,000 for the years ended
December 31, 1997,1996 and 1995, respectively. The life reinsurance assumed
agreement requires the reinsurer to withhold funds in amounts equal to the
reserves assumed.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1997, 1996 and 1995 before the effect of
reinsurance transactions with SLOC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN 000'S)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,230,980 $ 1,858,145 $ 1,619,337
Net investment income and realized gains 300,669 312,870 315,967
------------ ------------ ------------
Subtotal 2,531,649 2,171,015 1,935,304
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,240,597 1,928,720 1,760,917
Other expenses 187,591 155,531 130,302
------------ ------------ ------------
Subtotal 2,428,188 2,084,251 1,891,219
------------ ------------ ------------
Income from operations $ 103,461 $ 86,764 $ 44,085
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of decreasing income from operations by $2,658,000 in 1997, $46,000 in
1996, and by $1,599,000 in 1995.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES:
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25%
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100%
-------------- ---
-------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
AMOUNT % OF TOTAL
-------------- -------------
(IN 000'S)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,547,683 31%
At book value less surrender charges (surrender charge >5%) 5,626,117 48
At book value (minimal or no charge or adjustment) 1,264,586 11
Not subject to discretionary withdrawal provision 1,218,157 10
-------------- ---
Total annuity actuarial reserves and deposit liabilities $ 11,656,543 100%
-------------- ---
-------------- ---
</TABLE>
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. RETIREMENT PLANS:
The Company participates with SLOC in a non contributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost at December 31, 1997,
1996 and 1995 was $593,000, $446,000 and $420,000, respectively. The Company's
share of net periodic pension cost was $146,000, $27,000 and $3,000, for 1997,
1996 and 1995, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $259,000, $233,000 and $185,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post- retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN 000'S)
<S> <C> <C>
ASSETS:
Bonds $ 2,316,857 $ 2,392,226
Mortgages 938,932 958,909
LIABILITIES:
Insurance reserves $ 122,606 $ 122,606
Individual annuities 373,488 367,878
Pension products 1,911,284 1,922,602
Derivatives -- (2,423)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
14. STATUTORY INVESTMENT VALUATION RESERVES:
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The tables shown below present changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 53,911 $ 28,675 $ 42,099 $ 25,218
Net realized investment gains, net of tax 17,400 6,321 3,160 5,011
Amortization of net investment gains -- (1,166) -- (1,557)
Unrealized investment gains (losses) (2,340) -- 1,502 --
Required by formula (21,366) -- 7,150 3
--------- --------- --------- ---------
Balance, end of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. FEDERAL INCOME TAXES:
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $31,000,000, $19,264,000 and
$12,429,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
16. SURPLUS NOTES AND NOTE RECEIVABLE:
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027. On May 9, 1997, the Company issued a short-term note of $600,000,000 to
Life Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
The Company had issued and outstanding surplus notes to SLOC with an aggregate
carrying value of $335,000,000, during the period 1982 through January 16, 1996
at interest rates between 7.25% and 10%. The Company repaid all principal and
interest associated with these surplus notes on January 16, 1996.
On December 19, 1995 the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semi-annually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner. In addition, with regard to
surplus notes outstanding through January 16, 1996, subsequent to December 31,
1994 interest payments required
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. SURPLUS NOTES AND NOTE RECEIVABLE (CONTINUED):
the consent of the Delaware Insurance Commissioner. Payment of principal and
interest on the notes issued in 1995 also requires the consents of the Delaware
Insurance Commissioner and Canadian Office of the Superintendent of Financial
Institutions.
The Company obtained the required consents and expensed $42,481,000, $23,061,000
and $31,813,000 for interest on surplus notes for the years ended December 31,
1997, 1996 and 1995, respectively.
17. MANAGEMENT AND SERVICE CONTRACTS:
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $15,997,000 in 1997, $20,192,000 in 1996, and $20,293,000 in 1995.
18. RISK-BASED CAPITAL:
Effective December 31, 1993 the NAIC adopted risk-based capital requirements for
life insurance companies. The risk-based capital requirements provide a method
for measuring the minimum acceptable amount of adjusted capital that a life
insurer should have, as determined under statutory accounting practices, taking
into account the risk characteristics of its investments and products. The
Company has met the minimum risk-based capital requirements at December 31, 1997
and 1996.
19. ACCOUNTING POLICIES AND PRINCIPLES:
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP - deferred policy acquisition
costs, deferred federal income taxes and statutory non- admitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
life and investment type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
19. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
Duration Participating Contracts" exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
[To be provided by amendment]
72
<PAGE>
APPENDIX A
ILLUSTRATIVE EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATIONS:
Suppose the net asset value of a Series Fund share at the end of the current
valuation period is $18.38; at the end of the immediately preceding valuation
period was $18.32; the Valuation Period is one day; and no dividends or
distributions caused Series Fund shares to go "ex-dividend" during the current
Valuation Period. $18.38 divided by $18.32 is 1.00327511. Subtracting the one
day risk factor for mortality and expense risks and the administrative expense
charge of .00003809 (the daily equivalent of the current maximum charge of 1.40%
on an annual basis) gives a net investment factor of 1.00323702. If the value of
the variable accumulation unit for the immediately preceding valuation period
had been 14.5645672, the value for the current valuation period would be
14.6117130 (14.5645672 X 1.00323702).
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY UNIT VALUE CALCULATIONS:
Suppose the circumstances of the first example exist, and the value of an
annuity unit for the immediately preceding valuation period had been 12.3456789.
If the first variable annuity payment is determined by using an annuity payment
based on an assumed interest rate of 4% per year, the value of the annuity unit
for the current valuation period would be 12.3843113 (12.3456789 X 1.00323702
(the Net Investment Factor) X 0.99989255). 0.99989255 is the factor, for a one
day Valuation Period, that neutralizes the assumed interest rate of four percent
(4%) per year used to establish the Annuity Payment Rates found in certain
Contracts. (The factor that neutralizes the assumed interest rate of three
percent (3%) per year used to establish the Annuity Payment Rates found in other
Contracts is 0.99991902.)
ILLUSTRATIVE EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATIONS:
Suppose that a Participant's Account is credited with 8,765.4321 variable
accumulation units of a particular Sub-Account but is not credited with any
fixed accumulation units; that the variable accumulation unit value and the
annuity unit value for the particular Sub-Account for the valuation period which
ends immediately preceding the annuity commencement date are 14.5645672 and
12.3456789 respectively; that the annuity payment rate for the age and option
elected is $6.78 per $1,000; and that the annuity unit value on the day prior to
the second variable annuity payment date is 12.3843113. The first variable
annuity payment would be $865.57 (8,765.4321 X 14.5645672 X 6.78 divided by
1,000). The number of annuity units credited would be 70.1112 ($865.57 divided
by 12.3456789) and the second variable annuity payment would be $868.28 (70.1112
X 12.3843113).
APPENDIX B
STATE PREMIUM TAXES
The amount of applicable tax varies depending on the jurisdiction and is
subject to change by the legislature or other authority. In many jurisdictions
there is no tax at all. The Company believes that as of April 30, 1998 premium
taxes will be imposed with respect to Contracts offered by this Prospectus only
by the jurisdictions listed below at the rates indicated. For information
subsequent to April 30, 1998 a tax adviser should be consulted.
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
---------------------------------------- --------- -------------
<S> <C> <C>
California .50% 2.35%
District of Columbia 2.25% 2.25%
Kentucky 2.00% 2.00%
Maine -- 2.00%
Nevada -- 3.50%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming 1.00% 1.00%
</TABLE>
73
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION FOR CERTIFICATES WITH DATE OF COVERAGE ON OR AFTER
NOVEMBER 1, 1994 WHICH CONTAIN THE CUMULATIVE WITHDRAWAL PROVISION:
FULL SURRENDER:
Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents four examples of the withdrawal charge resulting from a
full surrender of the Participant's Account, based on hypothetical Account
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE
YEAR VALUE AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $41,000 $ 4,000(a) $37,000 6.00% $2,220
3 $52,000 $12,000(b) $40,000 5.00% $2,000
7 $80,000 $28,000(c) $40,000 3.00% $1,200
9 $98,000 $36,000(d) $40,000 0.00% $ 0
</TABLE>
- ------------------------
(a) The free withdrawal amount during an account year is equal to 10% of new
payments (those payments made in current account year or in the six
immediately preceding account years) less any prior partial withdrawals in
that account year. Any portion of the free withdrawal amount that is not
used in the current Account Year is carried forward into future years. In
the first account year 10% of new payments is $4,000. Therefore, on full
surrender $4,000 is withdrawn free of the withdrawal charge and the purchase
payment liquidated is $37,000 (account value less free withdrawal amount).
The withdrawal charge amount is determined by applying the withdrawal charge
percentage to the purchase payment liquidated.
(b) In the third account year, the free withdrawal amount is equal to $12,000
($4,000 for the current account year, plus an additional $8,000 for account
years 1 & 2 because no partial withdrawals were taken and the unused free
withdrawal amount is carried forward into future account years). The
withdrawal charge percentage is applied to the liquidated purchase payment
(account value less free withdrawal amount).
(c) In the seventh account year, the free withdrawal amount is equal to $28,000
($4,000 for the current account year, plus an additional $24,000 for account
years 1-6, $4,000 for each account year because no partial withdrawals were
taken and the unused free withdrawal amount is carried forward into future
account years). The withdrawal charge percentage is applied to the
liquidated purchase payment (account value less free withdrawal amount, but
not greater than actual purchase payments).
(d) There is no withdrawal charge on any purchase payment liquidated that has
been in the participant's account for at least seven years.
PARTIAL WITHDRAWAL:
Assume a single purchase payment of $40,000 is deposited at issue, no
additional purchase payments are made, no partial withdrawals have been taken
prior to the fifth account year, and there are a series of three partial
withdrawals made during the fifth account year of $9,000, $12,000, and $15,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE
VALUE AMOUNT AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(a) $64,000 $ 9,000 $20,000 $ 0 4.00% $ 0
(b) $56,000 $12,000 $11,000 $ 1,000 4.00% $ 40
(c) $40,000 $15,000 $ 0 $15,000 4.00% $600
</TABLE>
- ------------------------
(a) The free withdrawal amount during an account year is equal to 10% of new
payments (those payments made in current account year or in the six
immediately preceding account years) less any prior partial withdrawals in
that account year. Any portion of the free withdrawal amount that is not
used in the
74
<PAGE>
current account year is carried forward into future years. In the fifth
account year, the free withdrawal amount is equal to $20,000 ($4,000 for the
current account year, plus an additional $16,000 for account years 1-4,
$4,000 for each account year because no partial withdrawals were taken). The
partial withdrawal amount ($9,000) is less than the free withdrawal amount
so no purchase payments are liquidated and no withdrawal charge applies.
(b) Since a partial withdrawal of $9,000 was taken, the remaining free
withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will
first be applied against the $11,000 free withdrawal amount, and then will
liquidate purchase payments of $1,000, incurring a withdrawal charge of $40.
(c) The free withdrawal amount is zero since the previous partial withdrawals
have already used the free withdrawal amount. The entire partial withdrawal
amount will result in purchase payments being liquidated and will incur a
withdrawal charge. At the beginning of the next account year, 10% of
purchase payments would be available for withdrawal requests during that
account year.
WITHDRAWAL CHARGE CALCULATION FOR CERTIFICATES WITH DATE OF COVERAGE BEFORE
NOVEMBER 1, 1994 AND CERTIFICATES ISSUED AFTER THAT DATE WHICH DO NOT CONTAIN
THE CUMULATIVE WITHDRAWAL PROVISION.
This example assumes that the date of the full surrender or partial
withdrawal is during the 9th Account Year.
<TABLE>
<CAPTION>
1 2 3 4 5 6
--- ------- ------ ------- -- -------
<S> <C> <C> <C> <C>
1 $ 1,000 $1,000 $ 0 0% $ 0
2 1,200 1,200 0 0 0
3 1,400 1,280 120 3 3.60
4 1,600 0 1,600 4 64.00
5 1,800 0 1,800 4 72.00
6 2,000 0 2,000 5 100.00
7 2,000 0 2,000 5 100.00
8 2,000 0 2,000 6 120.00
9 2,000 0 2,000 6 120.00
------- ------ ------- -------
$15,000 $3,480 $11,520 $579.60
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
EXPLANATION OF COLUMNS IN TABLE
COLUMNS 1 AND 2:
Represent Purchase Payments ("Payments") and amounts of Payments. Each
Payment was made on the first day of each Account Year.
COLUMN 3:
Represents the amounts that may be withdrawn without the imposition of
withdrawal charges, as follows:
a) Payments 1 and 2, $1,000 and $1,200, respectively, have been
credited to the Certificate for more than seven years.
b) $1,280 of Payment 3 represents 10% of Payments that have been
credited to the Certificate for less than seven years. The 10% amount is
applied to the oldest unliquidated Payment, then the next oldest and so
forth.
COLUMN 4:
Represents the amount of each Payment that is subject to a withdrawal
charge. It is determined by subtracting the amount in Column 3 from the Payment
in Column 2.
COLUMN 5:
Represents the withdrawal charge percentages imposed on the amounts in
Column 4.
75
<PAGE>
COLUMN 6:
Represents the withdrawal charge imposed on each Payment. It is determined
by multiplying the amount in Column 4 by the percentage in Column 5.
For example, the withdrawal charge imposed on Payment 8
= Payment 8 Column 4 X Payment 8 Column 5
= $2,000 X 6%
= $120
FULL SURRENDER:
The total of Column 6, $579.60, represents the total amount of withdrawal
charges imposed on Payments in this example.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 6 for as many Payments as are liquidated
reflects the withdrawal charges imposed in the case of a partial withdrawal.
For example, if $7,000 of Payments (Payments 1, 2, 3, 4, and 5) were
withdrawn, the amount of the withdrawal charges imposed would be the sum of
amounts in Column 6 for Payments 1, 2, 3, 4 and 5 which is $139.60.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
<TABLE>
<S> <C>
N/12
1 + I
( ----- ) -1
1 + J
</TABLE>
These examples assume the following:
1) the Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06 (l).
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) the interest earned in the current Account Year is $674.16.
5) no transfers or partial withdrawals affecting this Guarantee Amount
have been made
6) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08.
<TABLE>
<C> <S> <C> <C>
N/12
1 + l
The MVA factor = ( ------ ) -1
1 + J
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)2 -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X (-.037) = -$415.73
76
<PAGE>
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would
be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA that
will be deducted from the partial withdrawal amount before the deduction of any
withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05.
N/12
1 + l
The MVA factor = ( ------ ) -1
1 + J
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)2 -1
= 1.019 -1
= .019
The value of the Guarantee Amount less interested credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the Guarantee
Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA would
be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
77
<PAGE>
APPENDIX D
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN:
The table below shows, for various Sub-Accounts of the Variable Account, the
Average Annual Total Return for the stated periods (or shorter period indicated
in the note below), based upon a hypothetical initial Purchase Payment of
$1,000, calculated in accordance with the formula set out below the table. For
purposes of determining these investment results, the actual investment
performance of each Series of MFS/Sun Life Series Trust is reflected from the
date such Series commenced operations ("Inception"), although the Contracts have
been offered only since November 1, 1991. No information is shown for the Bond
Series, Equity Income Series, Massachusetts Investors Growth Series, New
Discovery Series, Research International Series or Strategic Income Series, as
such Series will not commence operations until 1998.
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR DATE OF
PERIOD PERIOD PERIOD LIFE* INCEPTION
----------- ----------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation Series............. August 13, 1985
Conservative Growth Series.............. December 5, 1986
Emerging Growth Series.................. May 1, 1995
MFS/Foreign & Colonial Emerging Markets
Equity Series**........................ June 5, 1996
MFS/Foreign & Colonial International
Growth Series**........................ June 3, 1996
MFS/Foreign & Colonial International
Growth and Income Series............... October 2, 1995
Government Securities Series............ August 12, 1985
High Yield Series....................... August 13, 1985
Managed Sectors Series.................. May 27, 1988
Money Market Series..................... August 29, 1985
Research Series......................... November 7, 1994
Research Growth and Income Series.......
Total Return Series..................... May 16, 1988
Utilities Series........................ November 16, 1993
Value Series**.......................... June 3, 1996
World Asset Allocation Series........... November 7, 1994
World Governments Series................ May 16, 1988
World Growth Series..................... November 16, 1993
World Total Return Series............... November 7, 1994
</TABLE>
- ------------------------
*From commencement of investment operations
**Actual returns, not annualized
The length of the period and the last day of each period used in the above
table are set out in the table heading and in the footnotes above. The Average
Annual Total Return for each period was determined by finding the average annual
compounded rate of return over each period that would equate the initial amount
invested to the ending redeemable value for that period, in accordance with the
following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial Purchase Payment
of $1,000
T = average annual total return for the
period
n = number of years
ERV = redeemable value (as of the end of the
period) of a hypothetical $1,000
Purchase Payment made at the beginning
of the 1-year, 5-year, or 10-year period
(or fractional portion thereof)
78
<PAGE>
The formula assumes that: 1) all recurring fees have been deducted from the
Participant's Account; 2) all applicable non-recurring Contract charges are
deducted at the end of the period; and 3) there will be a full surrender at
the end of the period.
The $30 annual Account Fee will be allocated among the Sub-Accounts so that
each Sub-Account's allocated portion of the Account Fee is proportional to the
percentage of the number of Certificates that have amounts allocated to that
Sub-Account. Because the impact of Account Fees on a particular Certificate may
differ from those assumed in the computation due to differences between actual
allocations and the assumed ones, the total return that would have been
experienced by an actual Certificate over these same time periods may have been
different from that shown above.
NON-STANDARDIZED INVESTMENT PERFORMANCE:
The Variable Account may illustrate its results over various periods and
compare its results to indices and other variable annuities in sales materials
including advertisements, brochures and reports. Such results may be computed on
a "cumulative" and/or "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change in the
Accumulation Unit value of a Sub-Account between the first and last day of the
base period being measured, and expressing the difference as a percentage of the
Accumulation Unit value at the beginning of the base period.
"Annualized" quotations (described in the following table as "Compound
Growth Rate") are calculated by applying a formula which determines the level
rate of return which, if earned over the entire base period, would produce the
cumulative return.
79
<PAGE>
NON-STANDARDIZED INVESTMENT PERFORMANCE
[TO BE PROVIDED BY AMENDMENT]
$10,000 INVESTED IN ...WOULD HAVE GROWN TO THIS AMOUNT ON
THIS SUB-ACCOUNT UNDER A DECEMBER 31, 1997*
REGATTA GOLD CONTRACT,
THIS MANY YEARS AGO...
80
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, the Company may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors
affecting the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability to
meet its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS CREDIT RATING COMPANY's Insurance Company Claims Paying
Ability Rating is an independent evaluation by a nationally accredited rating
organization of an insurance company's ability to meet its future obligations
under the contracts and products it sells. The rating takes into account both
quantitative and qualitative factors.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a
publisher of statistical data covering the investment company industry in the
United States and overseas. Lipper is recognized as the leading source of data
on open-end and closed-end funds. Lipper currently tracks the performance of
over 5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
STANDARD & POOR's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations of its
insurance policies in accordance with their terms.
VARDS (Variable Annuity Research Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds included in variable contracts.
MOODY'S INVESTORS SERVICES, INC.'s insurance and claims-paying rating is a
system of rating an insurance company's financial strength, market leadership,
and ability to meet financial obligations. The purpose of Moody's ratings it to
provide investors with a simple system of gradation by which the relative
quality of insurance companies may be noted.
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corporation, a financial advisory, securities rating, and publishing firm. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
NASDAQ-OTC Price Index--this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA)--price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but including American Express
Company and American Telephone and Telegraph Company. Prepared and Published by
Dow Jones & Company, it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the Variable Account
and the Series Fund, the Company intends to illustrate the advantages of the
Contracts in a number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a participant makes regular deposits to his or her
account.
DOLLAR COST AVERAGING ILLUSTRATIONS. These illustrations will generally
discuss the price-leveling effect of making regular investments in the same
Sub-Accounts over a period of time, to take advantage of the trends in market
prices of the portfolio securities purchased by those Sub-Accounts.
SYSTEMATIC WITHDRAWAL PROGRAM. A service provided by the Company, through
which a Participant may take any distribution allowed by Code Section 401(a)(9)
in the case of Qualified Contracts, or permitted under Code Section 72 in the
case of Non-Qualified Contracts, by way of a series of partial withdrawals.
Withdrawals under this program may be fully or partially includible in income
and may be subject to a 10% penalty tax. Consult your tax adviser.
THE COMPANY'S OR MFS'S CUSTOMERS. Sales literature for the Variable Account
and the Series Fund may refer to the number of clients which they serve. As of
the date of this Prospectus, MFS was serving over million investor accounts.
81
<PAGE>
THE COMPANY'S OR MFS'S ASSETS, SIZE. The Company may discuss its general
financial condition (see, for example, the references to Standard & Poor's, Duff
& Phelps and A.M. Best Company above); it may refer to its assets; it may also
discuss its relative size and/or ranking among companies in the industry or
among any sub-classification of those companies, based upon recognized
evaluation criteria. For example, at year-end 1997 the Company was the ____
largest U.S. life insurance company based upon overall assets and its parent
company, Sun Life Assurance Company of Canada, was the ____ largest.
82
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O SUN LIFE ANNUITY SERVICE CENTER
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
GOLD-1 5/98
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
The information required in a Statement of Additional Information is
contained in the Prospectus included in Part A of this Amendment to the
Registration Statement.
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following Financial Statements are included in the Registration
Statement:
Included in Part A:
A. Condensed Financial Information - Accumulation Unit Values.
B. Financial Statements of the Registrant (To be provided by amendment):
1. Statement of Condition, December 31, 1997;
2. Statement of Operations, Year Ended December 31, 1997;
3. Statements of Changes in Net Assets, Years Ended December 31, 1997 and
December 31, 1996;
4. Notes to Financial Statements; and
5. Independent Auditors' Report.
C. Financial Statements of the Depositor:
1. Statutory Statements of Admitted Assets, Liabilities and Capital
Stock and Surplus, December 31, 1997 and 1996;
2. Statutory Statements of Operations, Years Ended December 31, 1997,
1996 and 1995;
3. Statutory Statements of Changes in Capital Stock and Surplus, Years
Ended December 31, 1997, 1996 and 1995;
4. Statutory Statements of Cash Flow, Years Ended December 31, 1997,
1996 and 1995;
5. Notes to Statutory Financial Statements; and
6. Independent Auditors' Report (To be filed by amendment).
<PAGE>
(b) The following Exhibits are incorporated in the Registration
Statement by reference unless otherwise indicated:
(1) Resolution of Board of Directors of the depositor dated
December 3, 1985 authorizing the establishment of the Registrant
(Incorporated herein by reference to Exhibit 1 to the Registration Statement
of the Registrant on Form N-4, File No. 333-37907, filed on October 14, 1997);
(2) Not Applicable;
(3) (a) Distribution Agreement between the depositor,
Massachusetts Financial Services Company and Clarendon Insurance Agency, Inc.
(Incorporated herein by reference to Exhibit 3 (a) to the Registration
Statement of the Registrant on Form N-4, File No. 333-37907, filed on January
16, 1998);
(b)(i) Specimen Sales Operations and General Agent
Agreement (Incorporated herein by reference to Exhibit 3 (b)(i) to the
Registration Statement of the Registrant on Form N-4, File No. 333-37907,
filed on January 16, 1998);
(b)(ii) Specimen Broker-Dealer Supervisory and Service
Agreement (Incorporated herein by reference to Exhibit 3 (b)(ii) to the
Registration Statement of the Registrant on Form N-4, File No. 333-37907,
filed on January 16, 1998); and
(b)(iii) Specimen Registered Representatives Agent
Agreement (Incorporated herein by reference to Exhibit 3 (b)(iii) to the
Registration Statement of the Registrant on Form N-4, File No. 333-37907,
filed on January 16, 1998);
(4) (a) Form of Flexible Payment Combination Fixed/Variable
Group Annuity Contract;
(b) Form of Certificate to be issued in connection with
Contract filed as Exhibit 4(a);
(5) (a) Form of Application to be used with the annuity
contract filed as Exhibit 4(a) (Incorporated herein by reference to Exhibit
5(a) to Post-Effective Amendment No. 7 to the Registration Statement of the
Registrant on Form N-4, File No. 333-37907, filed on October 14, 1997);
(b) Form of Application to be used with the Certificate
filed as Exhibit 4(b) (Incorporated herein by reference to Exhibit 5(b) to
Post-Effective Amendment No. 7 to the Registration Statement of the
Registrant on Form N-4, File 333-37907, filed on October 14, 1997);
(6) Certificate of Incorporation and By-laws of the depositor
(Incorporated herein by reference to Exhibits 3(a) and 3(b), respectively, to
the Registration Statement of the Depositor on Form S-1, File No. 333-37907,
filed on October 14, 1997);
(7) Not Applicable;
(8) None;
<PAGE>
(9) Opinion of Counsel and Consent to its use as to the legality of the
securities being registered (Filed with Pre-effective Amendment No. 1 to the
Registration Statement of the Registrant on Form N-4, File No. 33-41628);
(10) (a) Consent of Deloitte & Touche, LLP (To be filed by
amendment); and
(b) Consent of Margaret S. Mead, Esq. (To be filed by
amendment);
(11) None;
(12) Not Applicable;
(13) Schedule for Computation of Performance Quotations (To be
filed by amendment); and
(14) Financial Data Schedule meeting the requirements of
Rule 483 under the Securities Act of 1933 (To be filed by amendment).
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name and Principal Positions and Offices
Business Address with Depositor
- ------------------ ----------------------
John D. McNeil Chairman and Director
150 King Street West
Toronto, Ontario
Canada M5H 1J9
Donald A. Stewart President and Director
150 King Street West
Toronto, Ontario
Canada M5H 1J9
David D. Horn Director
56 Pinckney Street
Boston, MA 02114
John S. Lane Director
150 King Street West
Toronto, Ontario
Canada M5H 1J9
Richard B. Bailey Director
500 Boylston Street
Boston, MA 02116
<PAGE>
Name and Principal Positions and Offices
Business Address with Depositor
- ------------------ ---------------------
M. Colyer Crum Director
104 West Cliff Street
Weston, Massachusetts 02193
Angus A. MacNaughton Director
950 Tower Lane
Metro Tower, Suite 1170
Foster City, CA 94404
S. Caesar Raboy Senior Vice President and Deputy
One Sun Life Executive Park General Manager and a Director
Wellesley Hills, MA 02181
Robert A. Bonner Vice President, Pensions
One Sun Life Executive Park
Wellesley Hills, MA 02181
C. James Prieur Senior Vice President, General
One Sun Life Executive Park Manager and Director
Wellesley Hills, MA 02181
L. Brock Thomson Vice President
One Sun Life Executive Park and Treasurer
Wellesley Hills, MA 02181
Robert P. Vrolyk Vice President and Actuary
One Sun Life Executive Park
Wellesley Hills, MA 02181
Margaret Sears Mead Assistant Vice President and
One Sun Life Executive Park Secretary
Wellesley Hills, MA 02181
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of Sun Life Assurance Company of Canada
(U.S.), a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., a wholly-owned subsidiary of Sun Life Assurance Company of Canada -
U.S. Operations Holdings, Inc., which is in turn a wholly-owned subsidiary of
Sun Life Assurance Company of Canada.
The following is a list of all corporations directly or indirectly
controlled by or under common control with Sun Life Assurance Company of Canada,
showing the state or other sovereign power under the laws of which each is
organized and the percentage ownership of voting securities giving rise to the
control relationship:
<PAGE>
Percent of
State or Country Ownership
or Jurisdiction of Voting
of Incorporation Securities
---------------- ----------
Sun Life Assurance Company of Canada.........Canada
..........................................................................
Sun Life Assurance Company of Canada -
U.S. Operations Holdings, Inc.............Delaware 100%
Sun Life Assurance Company of Canada
(U.K.) Limited ........................... United Kingdom 100%
Sun Life of Canada Investment Management
Limited .................................. Canada 100%
Sun Life of Canada Benefit Management
Limited .................................. Canada 100%
Spectrum United Holdings, Inc............... Canada 100%
Sun Canada Financial Co..................... Delaware 100%
Sun Life of Canada (U.S.) Holdings,
Inc.......................................Delaware 0%*
Sun Life of Canada (U.S.) Financial
Services Holdings, Inc.................... Delaware 0%*
Sun Life Assurance Company of Canada
(U.S.) -.................................. Delaware 0%**
Sun Life Insurance and Annuity Company of
New York ................................. New York 0%****
Sun Life of Canada (U.S.)
Distributors, Inc......................... Delaware 0%****
Sun Benefit Services Company, Inc. ......... Delaware 0%****
Massachusetts Financial Services Company ... Delaware 0%***
New London Trust, F.S.B..................... Federally Chartered 0%****
Massachusetts Casualty Insurance Company.... Massachusetts 0%****
Clarendon Insurance Agency, Inc. ........... Massachusetts 0%****
MFS Service Center, Inc..................... Delaware 0%*****
MFS/Sun Life Series Trust .................. Massachusetts 0%******
Sun Capital Advisers, Inc. ................. Delaware 0%****
MFS International, Ltd. .................... Ireland 0%*****
MFS Institutional Advisors, Inc. ........... Delaware 0%*****
MFS Fund Distributors, Inc. ................ Delaware 0%*****
MFS Retirement Services, Inc. .............. Delaware 0%*****
Sun Life Financial Services Limited......... Bermuda 0%****
- --------
* 100% of the issued and outstanding voting securities of Sun Life
of Canada (U.S.) Holdings, Inc. and Sun Life of Canada (U.S.)
Financial Services Holdings, Inc. is owned by Sun Life Assurance
Company of Canada - U.S. Operations Holdings, Inc.
** 100% of the issued and outstanding voting securities of Sun Life
Assurance Company of Canada (U.S.) is owned by Sun Life of Canada
(U.S.) Holdings, Inc.
*** 93.6% of the issued and outstanding voting securities of Massachusetts
Financial Services Company is owned by Sun Life of Canada (U.S.)
Financial Services Holdings, Inc.
**** 100% of the issued and outstanding voting securities of New London
Trust, F.S.B., Sun Life Insurance and Annuity Company of New York,
Sun Life of Canada (U.S.) Distributors, Inc., Sun Benefit Services
Company, Inc., Sun Capital Advisers, Inc., Sun Life Financial Services
Limited, Clarendon Insurance Agency, Inc., and Massachusetts Casualty
Insurance Company is owned by Sun Life Assurance Company of Canada
(U.S.).
***** 100% of the issued and outstanding voting securities of MFS Service
Center, Inc., MFS International, Ltd., MFS Institutional Advisors,
Inc., MFS Fund Distributors, Inc., and MFS Retirement Services, Inc.
is owned by Massachusetts Financial Services Company.
****** 100% of the issued and outstanding voting securities of MFS/Sun Life
Series Trust is owned by separate accounts of Sun Life Assurance
Company of Canada (U.S.) and Sun Life Insurance and Annuity Company
of New York.
<PAGE>
Omitted from the list are subsidiaries of Sun Life Assurance Company of
Canada which, considered in the aggregate, would not constitute a "significant
subsidiary" (as that term is defined in Rule 8b-2 under Section 8 of the
Investment Company Act of 1940) of Sun Life Assurance Company of Canada.
None of the companies listed is a subsidiary of the Registrant; therefore,
the only financial statements being filed are those of Sun Life Assurance
Company of Canada (U.S.).
Item 27. NUMBER OF CONTRACT OWNERS:
As of February 28, 1998 there were _______ qualified and _______
non-qualified Contracts issued by the Registrant participating in the
investment experience of the Variable Account.
Item 28. INDEMNIFICATION
Pursuant to Section 145 of the Delaware Corporation Law, Article 8 of the
By-laws of Sun Life Assurance Company of Canada (U.S.), a copy of which was
filed as Exhibit 3(b) to the Registration Statement of the Depositor on Form S-
1, File No. 33-29851, provides for the indemnification of directors, officers
and employees of Sun Life Assurance Company of Canada (U.S.).
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of Sun Life Assurance Company of Canada (U.S.) pursuant to the certificate of
incorporation, by-laws, or otherwise, Sun Life (U.S.) 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 Sun Life (U.S.) of expenses incurred
or paid by a director, officer, controlling person of Sun Life (U.S.) 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, Sun Life (U.S.) will submit to a court of appropriate
jurisdiction the question whether such indemnification by them is against
public policy as expressed in the Act, unless in the opinion of their counsel
the matter has been settled by controlling precedent, and will be governed by
the final adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITERS
(a) Clarendon Insurance Agency, Inc., a wholly-owned subsidiary of the
Registrant, acts as general distributor for the Registrant, Sun Life of
Canada (U.S.) Variable Accounts C, D,and E, Sun Life (N.Y.) Variable Accounts
A, B and C and Money Market Variable Account, High Yield Variable Account,
Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account
and Managed Sectors Variable Account.
<PAGE>
Name and Principal Positions and Offices
Business Address* with Underwriter
- ------------------ ---------------------
Jane Mancini....................... President and Director
Robert P. Vrolyk................... Director
Donald E. Kaufman.................. Vice President
S. Caesar Raboy.................... Director
C. James Prieur.................... Director
L. Brock Thompson.................. Vice President and Treasurer
Roy P. Creedon..................... Secretary
Cindy Orcutt....................... Vice President
Laurie Lennox...................... Vice President
- ------------------
* The principal business address of all directors and officers of the
principal underwriter is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
(c) Inapplicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained, in whole or in part, by Sun Life Assurance Company
of Canada (U.S.) at its executive office at One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181, at the offices of the Sun Life Annuity
Service Center at One Copley Place, Boston, Massachusetts 02116 or at the
offices of Massachusetts Financial Services Company at 500 Boylston Street,
Boston, Massachusetts 02116.
Item 31. MANAGEMENT SERVICES
Not Applicable.
Item 32. UNDERTAKINGS
Representation with respect to Section 26(a) of the Investment Company
Act of 1940.
Sun Life Assurance Company of Canada (U.S.) represents that the fees
and charges deducted under the Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by the insurance company.
The registrant is relying on the no-action letter issued by the
Division of Investment Management of the Securities and Exchange Commission
to the American Council of Life Insurance, Ref. No. IP-6-88, dated November
28, 1988, the requirements for which have been complied with by the
Registrant.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant has caused this Post-effective Amendment No. 9 to
its Registration Statement to be signed on its behalf in the Town of
Wellesley and Commonwealth of Massachusetts on the 26th day of February, 1998.
Sun Life of Canada (U.S.)
Variable Account F
(Registrant)
Sun Life Assurance Company of
Canada (U.S.)
(Depositor)
By:* /s/ JOHN D. McNEIL
---------------------
John D. McNeil
Chairman
Attest: /s/ BONNIE S. ANGUS
-----------------------
Bonnie S. Angus
Assistant Vice President
As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities with the Depositor, Sun Life Assurance Company of Canada (U.S.), and
on the dates indicated.
Signatures Title Date
---------- ----- ----
Chairman and
Director
(Principal
* /s/ JOHN D. McNEIL Executive Officer) February 26, 1998
- --------------------------
John D. McNeil
Vice President
and Actuary
(Principal Financial
and Accounting
* /s/ ROBERT P. VROLYK Officer) February 26, 1998
- --------------------------
Robert P. Vrolyk
- -------------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-Effective
Amendment No. 5 to the Registration Statement of the Registrant on Form N-
4, File No. 33-41628.
<PAGE>
Signatures Title Date
---------- ----- ----
* /s/ RICHARD B. BAILEY Director February 26, 1998
- -------------------------------
Richard B. Bailey
* /s/ M. COLYER CRUM Director February 26, 1998
- -------------------------------
M. Colyer Crum
President and
- ------------------------------- Director
Donald A. Stewart
* /s/ DAVID D. HORN Director February 26, 1998
- -------------------------------
David D. Horn
* /s/ JOHN S. LANE Director February 26, 1998
- -------------------------------
John S. Lane
* /s/ ANGUS A. MacNAUGHTON Director February 26, 1998
- -------------------------------
Angus A. MacNaughton
Senior Vice President
- ------------------------------- and Deputy General
S. Caesar Raboy Manager and
Director
Director February 26, 1998
- -------------------------------
C. James Prieur
- ---------------------------
* By Bonnie S. Angus pursuant to Power of Attorney filed with Post-Effective
Amendment No. 5 to the Registration Statement of the Registrant on Form
N-4, File No. 33-41628.
<PAGE>
[LOGO]
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
A Wholly-Owned Subsidiary of Sun Life Assurance Company of Canada
<TABLE>
<S> <C> <C>
EXECUTIVE OFFICE: HOME OFFICE: ANNUITY SERVICE MAILING ADDRESS:
One Sun Life Executive Park Wilmington, Delaware Sun Life Annuity Service Center
Wellesley Hills, Massachusetts 02181 P.O. Box 1024
Boston, Massachusetts 02103
</TABLE>
This certificate evidences the interest of the Participant named in the
Certificate Specifications page in the Combination Variable and Fixed Group
Annuity contract ("contract") issued by Sun Life Assurance Company of Canada
(U.S.) ("the Company").
The contract is the legal contract. This certificate is merely a summary of
the rights, duties and benefits of that contract. A copy of the contract may be
obtained by requesting it in writing from the Company. If there is any conflict
between the provisions of the contract and those of this certificate, the
contract is the controlling document.
The Company will pay an annuity commencing on the Annuity Commencement Date
to the Annuitant if then living, by applying the adjusted value of the
Participant's Account in accordance with the settlement provisions.
If the Annuitant dies while the contract is in effect and this certificate
is in force and before the Annuity Commencement Date, the Company will pay a
death benefit to the Beneficiary upon receipt of Due Proof of Death of the
Annuitant. Under certain circumstances, if the Participant dies prior to the
Annuitant and before the Annuity Commencement Date, a distribution is required
by law.
All payments will be made to the persons and in the manner set forth in the
contract.
Signed by the Company at its Executive Office, Wellesley Hills,
Massachusetts on the Date of Coverage.
<TABLE>
<S> <C>
Donald A.
Stewart Margaret Sears Mead
President Secretary
</TABLE>
CERTIFICATE FOR
FLEXIBLE PAYMENT DEFERRED COMBINATION VARIABLE AND FIXED GROUP ANNUITY CONTRACT
NONPARTICIPATING
ALL PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT WHEN BASED ON THE INVESTMENT
EXPERIENCE OF THE VARIABLE ACCOUNT ARE VARIABLE AND ARE NOT GUARANTEED AS TO
DOLLAR AMOUNT.
PAYMENTS AND VALUES BASED ON THE FIXED ACCOUNT ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN UPWARD AND DOWNWARD
ADJUSTMENTS IN AMOUNTS PAYABLE TO A PARTICIPANT, INCLUDING WITHDRAWALS,
TRANSFERS, AMOUNTS APPLIED TO PURCHASE AN ANNUITY, AND DISTRIBUTIONS RESULTING
FROM THE DEATH OF THE PARTICIPANT. PAYMENTS MADE FROM GUARANTEE AMOUNTS WHICH
ARE WITHIN 30 DAYS PRIOR TO THE END OF A GUARANTEE PERIOD OR THE WITHDRAWAL OF
INTEREST CREDITED TO GUARANTEE AMOUNTS DURING THE CURRENT ACCOUNT YEAR ARE NOT
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
RIGHT TO RETURN CERTIFICATE. Please read this certificate. If not satisfied with
it, the Participant may, within 10 days after its receipt, return it by
delivering or mailing it to the Annuity Service Mailing Address indicated above.
Immediately upon receipt of the certificate by the Company, the certificate will
be deemed void as though it had never been applied for, and the Participant's
Account Value at the end of the Valuation Period during which the certificate is
received by the Company will be refunded to the Participant.
IMPORTANT NOTICE:
It is not necessary to employ any person to collect any payment or benefit
provided by the contract. When you require help or advice, write directly to the
Company at its Annuity Service Mailing Address.
The contract contains many benefits. In your own best interest you should
consult the Company if anyone advises you to surrender this certificate or to
replace it with a new contract or certificate.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
CERTIFICATE SPECIFICATIONS PAGE 4
- ----------------------------------------------------------------------------
DEFINITIONS 5
- ----------------------------------------------------------------------------
FIXED AND VARIABLE ACCOUNTS 7
Fixed Account 7
Variable Account and Sub-Accounts 7
Ownership of Assets 7
Investments of the Sub-Accounts 7
- ----------------------------------------------------------------------------
PURCHASE PAYMENTS 7
Payments 7
Account Continuation 7
Allocation of Net Purchase Payments 7
- ----------------------------------------------------------------------------
CERTIFICATE VALUES DURING ACCUMULATION PERIOD 8
Participant's Account 8
Variable Account Value 8
Crediting Variable Accumulation Units 8
Variable Accumulation Unit Value 8
Variable Accumulation Value 8
Net Investment Factor 8
Fixed Account Value 9
Guarantee Periods 9
Guaranteed Interest Rates 9
Fixed Accumulation Value 10
Transfer Privilege 10
Account Fee 10
- ----------------------------------------------------------------------------
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT 11
Cash Withdrawals 11
Withdrawal Charges 11
Nursing Home Withdrawal Privilege 12
Market Value Adjustment 12
- ----------------------------------------------------------------------------
DEATH BENEFIT 13
Death Benefit Provided by the Contract 13
Election and Effective Date of Election 13
Payment of Death Benefit 13
Amount of Death Benefit 14
- ----------------------------------------------------------------------------
SETTLEMENT PROVISIONS 15
General 15
Election and Effective Date of Election 15
Determination of Amount 15
Effect of Annuity Commencement Date on Participant's Account 15
Annuity Commencement Date 16
Fixed Annuity Payments 16
Variable Annuity Payments 16
Annuity Unit Value 16
Exchange of Variable Annuity Units 16
Account Fee 17
Description of Annuity Options 17
Amounts Payable on Death of Payee 17
Annuity Payment Rates 18
- ----------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
OWNERSHIP PROVISIONS 19
Exercise of Contract Rights 19
Change of Ownership 19
Death of Participant 19
Voting of Fund Shares 20
Periodic Reports 20
- ----------------------------------------------------------------------------
BENEFICIARY PROVISION 21
Designation and Change of Beneficiary 21
- ----------------------------------------------------------------------------
GENERAL PROVISIONS 21
Age and Sex Misstatement 21
This Certificate 21
Currency 21
Determination of Values 21
Governing Law 21
Guarantees 21
Incontestability 22
Modification 22
Nonparticipating 22
Payments by the Company 22
Proof of Age 22
Proof of Survival 22
Splitting Units 22
Rights Reserved by the Company 22
- ----------------------------------------------------------------------------
QUALIFIED CERTIFICATE PROVISIONS
</TABLE>
3
<PAGE>
CERTIFICATE SPECIFICATIONS
<TABLE>
<S> <C>
PARTICIPANT AND ANNUITANT [ENTER NAME]
CERTIFICATE NUMBER [ENTER NUMBER]
AGE OF ANNUITANT [ENTER AGE]
SEX OF ANNUITANT [ENTER GENDER]
DATE OF COVERAGE XX/XX/XX
ACCOUNT ANNIVERSARY DATE XX/XX/XX
MINIMUM INITIAL PURCHASE PAYMENT [$10,000]
INITIAL PURCHASE PAYMENT [ENTER AMOUNT]
MINIMUM ADDITIONAL PURCHASE PAYMENT [$1,000]
MAXIMUM INITIAL PURCHASE PAYMENT WITHOUT COMPANY
APPROVAL [$1,000,000]
BENEFICIARY AS SPECIFIED IN THE APPLICATION
ANNUITY COMMENCEMENT DATE XX/XX/XX
ANNUITY OPTION DEFERRED
MINIMUM ANNUITY APPLICATION AMOUNT [$2,000]
MINIMUM INITIAL ANNUITY PAYMENT AMOUNT [$20]
ACCOUNT FEE AFTER ANNUITY COMMENCEMENT DATE [$35]
ACCOUNT FEE [ACCOUNT YEARS 1-5 - $35
ACCOUNT YEARS 6 + - $50 maximum]
MAXIMUM ACCOUNT FEE [$50]
MINIMUM ACCOUNT VALUE FOR WAIVER OF ACCOUNT FEE [$75,000]
FRONT-END SALES LOAD [NONE]
</TABLE>
<TABLE>
<CAPTION>
[Number of Complete Withdrawal
WITHDRAWAL CHARGES Account Years Charges
-------------------- ---------------
<S> <C> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 OR MORE 0%]
</TABLE>
<TABLE>
<S> <C>
MINIMUM GUARANTEE PERIOD AMOUNT [$1,000]
INITIAL GUARANTEE PERIOD(S) [ENTER PERIOD(S)]
GUARANTEED INTEREST RATE [x%]
MINIMUM GUARANTEED INTEREST RATE [3%]
MARKET VALUE ADJUSTMENT ("b factor") [0%]
MAXIMUM b FACTOR 0.25%
MAXIMUM TRANSFER FEE PER TRANSFER [NONE]
MAXIMUM NUMBER OF TRANSFERS PER YEAR [12]
MINIMUM TRANSFER AMOUNT [$1,000]
MINIMUM AMOUNT REMAINING IN SUBACCOUNT AFTER
TRANSFER [$1,000]
ASSET CHARGE (FOR THE VARIABLE ACCOUNT ONLY) [1.40%]
AVAILABLE FUND OPTIONS:
[ENTER FUND OPTIONS]
[ENTER FORM NUMBER]
</TABLE>
4
<PAGE>
DEFINITIONS
Any reference in this certificate to "RECEIPT" and "RECEIVED" by the Company
means receipt at the Company's Annuity Service Mailing Address shown on the
first page of this certificate.
ACCOUNT YEARS AND ACCOUNT ANNIVERSARIES: The first Account Year shall be the
period of 12 months plus a part of a month as measured from the Date of Coverage
to the first day of the calendar month which follows the calendar month of
coverage. All Account Years and Account Anniversaries thereafter shall be 12
month periods based upon such first day of the calendar month which follows the
calendar month of coverage. If, for example, the Date of Coverage occurs in
March, the first Account Year will be determined from the Date of Coverage but
will end on the last day of March in the following year; all other Account Years
and all Account Anniversaries will be measured from April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and during
the lifetime of the Annuitant.
ANNUITANT: The person or persons named in the Application, if any, and on whose
life the first annuity payment is to be made. The Participant may not designate
a co-annuitant unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the contract which are based
on the death of the Annuitant will be based on the date of death of the last
surviving of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
surviving of the persons so named. Collectively, these persons are referred to
in the contract as Annuitants. The Participant is not permitted to name a
co-annuitant under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment is to be
made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of the
second and each subsequent variable annuity payment from the Variable Account.
APPLICATION: The document, if any, signed by each Participant that serves as his
or her application for participation under the contract, a copy of which is
attached to this certificate.
*BENEFICIARY: The person or entity having the right to receive the death benefit
set forth in this certificate and, for a certificate issued under a
Non-Qualified Contract, who, in the event of the Participant's death, is the
DESIGNATED BENEFICIARY for purposes of Section 72(s) of the Code.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for the contract.
DATE OF COVERAGE: The date on which this certificate becomes effective.
DEATH BENEFIT DATE: The date on which the death benefit election is effective or
is deemed to become effective, which is the date on which the Company receives
Due Proof of Death.
DUE PROOF OF DEATH: An original certified copy of an official death certificate,
an original certified copy of a decree of a court of competent jurisdiction as
to the finding of death, or any other proof satisfactory to the Company.
EXPIRATION DATE: The last day of a Guarantee Period.
FIXED ACCOUNT: Part of the general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount.
FUND(S): One or more open-end management investment companies or "mutual funds"
registered under the Investment Company Act of 1940.
GUARANTEE AMOUNT: Any portion of a Participant's Account Value allocated to a
particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is credited.
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
- ------------------------
*As specified in the Application, if any, unless changed.
5
<PAGE>
NET INVESTMENT FACTOR: An index applied by the Company to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater than, less than, or equal to one (1).
NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains after the
deduction of any applicable front-end sales load or premium or similar tax, if
any.
NON-QUALIFIED CONTRACT: A contract used in connection with a retirement plan
which does not receive favorable federal income tax treatment under Sections
401, 403, 408, or 408A of the Code. The Participant's interest in the contract
evidenced by this certificate must be owned by a natural person or agent for a
natural person for the contract to receive favorable income tax treatment as an
annuity.
*OWNER: The person, persons or entity entitled to the ownership rights stated in
the contract and in whose name or names the contract is issued. The Owner may
designate a trustee or custodian of a retirement plan which meets the
requirements of Section 401, Section 408(c), Section 408(k), or Section 408 (p)
of the Code to serve as legal owner of assets of a retirement plan, but the term
Owner, as used herein, refers to the organization entering into the contract.
PARTICIPANT: The person named in this certificate who is entitled to exercise
all rights and privileges of ownership under the certificate, except as reserved
by the Owner.
PARTICIPANT'S ACCOUNT: An account to which Net Purchase Payments are credited.
PARTICIPANT'S ACCOUNT VALUE: The variable accumulation value, if any, plus the
fixed accumulation value, if any, of a Participant's Account for any Valuation
Period.
PAYEE: A recipient of payments relating to this certificate. The term includes
an Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): The amount paid to the Company as consideration for
the benefits provided by the contract.
QUALIFIED CONTRACT: A contract used in connection with a retirement plan which
may receive favorable federal income tax treatment under Sections 401, 403, 408
or 408A of the Code.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter; for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares of
specific series or sub-series of a Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day that the Exchange is open for trading and on
such other days on which there is a sufficient degree of trading in the
portfolio securities of the Variable Account so that the values of the Variable
Account's Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets set
aside by the Company, the investment performance of which is kept separate from
that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of the
value of the variable portion of a Participant's Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the Variable
Account.
- ------------------------
*As specified in the Application, if any, unless changed.
6
<PAGE>
FIXED AND VARIABLE ACCOUNTS
FIXED ACCOUNT
The Fixed Account consists of all assets of the Company other than those
allocated to any separate account of the Company. Any portion of a Net Purchase
Payment allocated by a Participant to a Guarantee Period(s) will become part of
the Fixed Account.
VARIABLE ACCOUNT AND SUB-ACCOUNTS
The Variable Account to which the variable accumulation values and Variable
Annuity payments, if any, under the contract relate was established by the
Company pursuant to a resolution of its Board of Directors. The Company has
registered the Variable Account as a unit investment trust under the Investment
Company Act of 1940. That portion of the assets of the Variable Account equal to
the reserves and other contract liabilities with respect to the Variable Account
shall not be chargeable with liabilities arising out of any other business the
Company may conduct.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a designated series or sub-series
of a Fund. The values of the Variable Accumulation Units and the Annuity Units
described in the contract reflect the investment performance of the
Sub-Accounts.
OWNERSHIP OF ASSETS
The Company shall have exclusive and absolute ownership and control of its
assets, including all assets of the Sub-Accounts. The Company reserves the right
to transfer the assets of a Sub-Account, in excess of the reserves and other
policy liabilities with respect to that Sub-Account, to another Sub-Account or
to the Company's general account.
INVESTMENTS OF THE SUB-ACCOUNTS
All amounts allocated to a Sub-Account will be used to purchase shares of a
specific series or sub-series of a Fund. The Fund shares available on the Date
of Coverage are shown on the Certificate Specifications page; more series and/or
Funds may be subsequently added or deleted. Each Fund is an open-end investment
company ("mutual fund") registered under the Investment Company Act of 1940. Any
and all distributions made by a Fund with respect to shares held by a
Sub-Account will be reinvested to purchase additional shares of that series at
net asset value. Deductions from the Sub-Accounts will, in effect, be made by
reducing the number of Accumulation Units attributable to a Participant's
Account. Each Sub-Account will be fully invested in Fund shares at all times.
PURCHASE PAYMENTS
PAYMENTS
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. The amount of Purchase Payments may vary; however, the Company
will not accept an initial Purchase Payment for any Certificate which is less
than the minimum amount specified on the Certificate Specifications page, and
each additional Purchase Payment must be at least the minimum additional amount
specified on the Certificate Specifications page. In addition, the prior
approval of the Company is required before it will accept a Purchase Payment
which would cause the value to exceed the maximum Purchase Payment amount
specified on the Certificate Specifications page. If the value exceeds such
maximum amount, no additional Purchase Payments will be allocated without the
prior approval of the Company.
ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Annuitant until the Annuity Commencement Date or
until the Participant's Account is surrendered.
ALLOCATION OF NET PURCHASE PAYMENTS
The Net Purchase Payment is that portion of a Purchase Payment which remains
after deduction of any applicable front-end sales load and premium or similar
tax. Each Net Purchase Payment will, upon receipt
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by the Company, be allocated to the Participant's Account, either to the
Sub-Accounts or to the Fixed Account or to both the Sub-Accounts and the Fixed
Account in accordance with the allocation factors specified in the Application,
or as subsequently changed by the Participant.
The allocation factors for new Purchase Payments among the Guarantee Periods
and the Sub-Accounts may be changed by the Participant at any time by giving
notice of the change to the Company, in accordance with the Company's procedures
then in effect. The Participant may effect such change directly, or through an
authorized third party, subject to the Company's approval given in its sole
discretion, and further subject to adherence to such Company procedures as may
be adopted from time to time. Any change will take effect with the first
Purchase Payment received with or after receipt of notice of the change by the
Company and will continue in effect until subsequently changed.
CERTIFICATE VALUES DURING ACCUMULATION PERIOD
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under the contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account Value for any Valuation Period is
equal to the variable accumulation value, if any, plus the fixed accumulation
value, if any, of the Participant's Account for that Valuation Period.
VARIABLE ACCOUNT VALUE
CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment to be allocated to the Sub-Accounts will be
credited to the Participant's Account in the form of Variable Accumulation
Units. The number of particular Variable Accumulation Units to be credited is
determined by dividing the dollar amount allocated to the particular Sub-Account
by the Variable Accumulation Unit value of the particular Sub-Account for the
Valuation Period during which the Purchase Payment is received by the Company.
VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain constant from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below.
VARIABLE ACCUMULATION VALUE
The variable accumulation value, if any, of a Participant's Account for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units of each Sub-Account credited to the Participant's Account for such
Valuation Period. The variable accumulation value of each Sub-Account is
determined by multiplying the number of Variable Accumulation Units, if any,
credited to each Sub-Account by the Variable Accumulation Unit value of the
particular Sub-Account for such Valuation Period
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater than, less than, or equal to one (1);
therefore, the value of a Variable Accumulation Unit may increase, decrease or
remain the same.
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
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(a) is the net result of:
1) the net asset value of a Fund share held in the Sub-Account determined as
of the end of the Valuation Period, plus
2) the per share amount of any dividend or other distribution declared by
the Fund on the shares held in the Sub-Account if the ex-dividend date
occurs during the Valuation Period, plus or minus
3) a per share credit or charge with respect to any taxes paid or reserved
for by the Company during the Valuation Period which are determined by
the Company to be attributable to the operation of the Sub-Account;
(b) is the net asset value of a Fund share held in the Sub-Account determined
as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the Valuation
Period to reflect the charges for assuming the mortality and expense risks and
administrative expense risks.
The asset charge factor for any Valuation Period is equal to the daily asset
charge factor multiplied by the number of 24 hour periods in the Valuation
Period. The daily asset charge factor will be determined by the Company
annually, but in no event will it exceed the maximum daily asset charge factor
specified on the Certificate Specifications page.
FIXED ACCOUNT VALUE
GUARANTEE PERIODS
The Participant elects one or more Guarantee Period(s) from among those made
available by the Company. The period(s) elected will determine the Guaranteed
Interest Rate(s). A Purchase Payment or the portion (at least equal to the
minimum Guarantee Period amount set forth on the Certificate Specifications
page) thereof (or amount transferred in accordance with the Transfer Privilege
provision described below) allocated to a particular Guarantee Period will earn
interest at the Guaranteed Interest Rate in effect during the Guarantee Period.
Initial Guarantee Periods begin on the date a Net Purchase Payment is applied
(or, in the case of a transfer, on the effective date of the transfer) and end
when the number of calendar years in the Guarantee Period elected (measured from
the end of the calendar month in which the amount was allocated to the Guarantee
Period) has elapsed. The last day of a Guarantee Period is the Expiration Date.
Subsequent Guarantee Periods begin on the first day following the Expiration
Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) is referred to as a Guarantee Amount. As a result of additional
Purchase Payments, renewals and transfers of portions of the Participant's
Account Value, Guarantee Amounts allocated to Guarantee Periods of the same
duration may have different Expiration Dates, and each Guarantee Amount will be
treated separately for purposes of determining any market value adjustment.
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically at the end of the previous Guarantee Period unless the
Company receives, in writing [within days] prior to the end of such
Guarantee Period, an election by the Participant of a different Guarantee Period
from among those being offered by the Company at such time, or instructions to
transfer all or a portion of the Guarantee Amount to one or more Sub-Accounts in
accordance with the Transfer Privilege provision. Each new Guarantee Amount must
be at least the amount set forth on the Certificate Specifications page unless
it is equal to the entire Guarantee Amount being transferred.
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each Guarantee Period offered by the Company. These rates will be
guaranteed for the duration of the respective Guarantee Periods.
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No Guaranteed Interest Rate will be less than the minimum rate per year set
forth on the Certificate Specifications page, compounded annually.
FIXED ACCUMULATION VALUE
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment which is allocated to the Fixed Account will be
credited to the Participant's Account and allocated to the Guarantee Period(s)
selected by the Participant. The fixed accumulation value, if any, of a
Participant's Account for any Valuation Period is equal to the sum of the values
of all Guarantee Amounts credited to the Participant's Account for such
Valuation Period.
TRANSFER PRIVILEGE
At any time during the Accumulation Period the Participant may transfer all
or part of the Participant's Account Value to one or more Sub-Accounts or
Guarantee Periods, subject to the conditions set forth below. A transfer will
generally be effective on the date the request for transfer is received by the
Company, however, the Company reserves the right in its sole discretion to delay
the effective date of any transfer to or from the Fixed Account.
Transfers involving Sub-Accounts will reflect the purchase or cancellation
of Variable Accumulation Units having an aggregate value equal to the dollar
amount being transferred to or from a particular Sub-Account. The purchase or
cancellation of such units shall be made using Variable Accumulation Unit values
of the applicable Sub-Account for the Valuation Period during which the transfer
is effective. Transfers to a Guarantee Period will result in a new Guarantee
Period for the amount being transferred, Any such Guarantee Period will begin on
the effective date of the transfer and end on the Expiration Date. The amount
transferred into such Guarantee Period will earn interest at the Guaranteed
Interest Rate declared by the Company for that Guarantee Period as of the
effective date of the transfer.
Transfers will be subject to the following conditions: (1) not more than 12
transfers may be made in any Account Year; (2) the amount being transferred from
a Sub-Account may not be less than the amount set forth on the Certificate
Specifications page unless the total Participant's Account Value attributable to
a Sub-Account is being transferred; (3) any Participant's Account Value
remaining in a Sub-Account may not be less than the amount set forth on the
Certificate Specifications page; and (4) the total Participant's Account Value
attributable to the Guarantee Amount must be transferred, except for an
"interest out" transfer (I.E. the entire amount of interest credited to all
Guarantee Amounts during the current Account Year is transferred to one or more
Sub-Accounts). In addition, transfers of a Guarantee Amount (except interest
credited to such Guarantee Amount during the current Account Year) will be
subject to the market value adjustment described below unless the transfer is
effective within 30 days prior to the Expiration Date applicable to the
Guarantee Amount. Transfers involving Variable Accumulation Units shall be
subject to such terms and conditions as may be imposed by the Funds. Similarly,
the Company reserves the right in its sole discretion to delay transfers of a
Guarantee Amount for reasons similar to those underlying delays of transfers
among Sub-Accounts. The Company also reserves the right in its sole discretion
to refuse or delay all transfer requests initiated on behalf of a Participant by
any third party authorized by the Participants to make such transfer requests.
Currently, there is no charge for transfers; however, the Company reserves the
right to impose a charge for each transfer as shown on the Certificate
Specifications page. The Company reserves the right to limit the amount which
may be transferred from the Sub-Accounts to the Fixed Account.
ACCOUNT FEE
Prior to the Annuity Commencement Date, on each Account Anniversary the
Company will deduct from the value of each Participant's Account an annual
account fee to reimburse the Company for administrative expenses relating to the
contract and the Participant's Account. In Account Years one through five the
account fee is equal to the lesser of the amount specified on the Certificate
Specifications page or 2% of the Participant's Account Value; thereafter the
account fee may be changed annually, but in no event may it exceed the lesser of
the maximum amount specified on the Certificate Specifications page or 2% of the
Participant's Account Value. The account fee will be deducted on a PRO RATA
basis from amounts allocated to each Guarantee Period and each Sub-Account in
which the Participant's Account is invested at the time of such deduction. If a
Participant's Account is surrendered for its full value on other than an Account
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Anniversary, the account fee will be deducted in full at the time of such
surrender. The Company will waive the account fee when either (a) the entire
Participant's Account Value has been allocated to the Fixed Account during the
entire previous Account Year, or (b) the Participant's Account Value is greater
than the amount specified on the Certificate Specifications page on the Account
Anniversary. On the Annuity Commencement Date the value of the Participant's
Account will be reduced by a proportionate amount of the account fee to reflect
the time elapsed between the last Account Anniversary and the day before the
Annuity Commencement Date.
After the Annuity Commencement Date an annual account fee in an amount
specified on the Certificate Specifications page will be deducted in equal
amounts from each Variable Annuity payment made during the year. No such
deduction is made from Fixed Annuity payments.
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company by filing with the Company at its Annuity Service Mailing
Address, a written election in such form as the Company may require. Any such
election shall specify the amount of the withdrawal and will be effective on the
date that it is received by the Company. Any cash withdrawal payment will be
paid within seven days from the date the election becomes effective, except as
the Company may be permitted to defer such payment in accordance with the
Investment Company Act of 1940. The Company reserves the right to defer the
payment of amounts withdrawn from the Fixed Account for a period not to exceed
six months from the date written request for such withdrawal is received by the
Company,
The Participant may request a full surrender or a partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the account fee, plus or minus any applicable
market value adjustment, and less any applicable withdrawal charge. A partial
withdrawal (I.E., a payment of an amount less than that paid under a full
surrender) will result in the cancellation of a portion of the Participant's
Account Value with an aggregate dollar value equal to the dollar amount of the
cash withdrawal payment, plus or minus any applicable market value adjustment
and plus any applicable withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect the partial withdrawal PRO
RATA from each Sub-Account and Guarantee Amount in which the Participant's
Account Value is invested at the end of the Valuation Period during which the
withdrawal becomes effective. If a partial withdrawal is requested which would
leave a Participant's Account Value less than the account fee, then such partial
withdrawal will be treated as a full surrender.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit value(s) of the Sub-Account(s) for
the Valuation Period during which the cash withdrawal is effective.
All cash withdrawals of any Guarantee Amount, except those effective within
30 days prior to the Expiration Date of such Guarantee Amount or the withdrawal
of interest credited to such Guarantee Amount during the current Account Year,
will be subject to the market value adjustment described below.
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WITHDRAWAL CHARGES
If a cash withdrawal is made, a withdrawal charge may be assessed by the
Company. The amount of any withdrawal charge is determined as follows:
Old Payments, and new Payments: With respect to a particular Account
Year, new Payments are those Payments made in that Account Year or in the
six immediately preceding Account Years; and old Payments are those Payments
not defined as new Payments.
Order of liquidation: For purposes of a full surrender or partial
withdrawal, each withdrawal is allocated first to the free withdrawal amount
and then to previously unliquidated Payments (on a first-in, first-out
basis) until all Purchase Payments have been liquidated.
Free withdrawal amount: The free withdrawal amount is equal to 10% of
any new Payments, irrespective of whether such new Payments have been
liquidated. Any portion of the free withdrawal amount that is not used in
the current Account Year is cumulative into future years.
Maximum withdrawal amount without a withdrawal charge: The maximum
amount that can be withdrawn without a withdrawal charge in an Account Year
is equal to the sum of: (a) any previously unliquidated free withdrawal
amount, and (b) any previously unliquidated old Payments.
Amount subject to withdrawal charge: For any partial withdrawal or full
surrender, the amount subject to withdrawal charge is the amount of the
partial withdrawal or full surrender less the maximum withdrawal amount
without a withdrawal charge, up to a maximum of the sum of all unliquidated
new Payments.
Withdrawal charge percentage: The withdrawal charge percentage varies
according to the number of complete Account Years between the Account Year
in which a Purchase Payment was credited to the Participant's Account and
the Account Year in which it is withdrawn.
Amount of withdrawal charge: The amount of the withdrawal charge is
determined by multiplying the amount subject to a withdrawal charge by the
withdrawal charge percentage(s) set forth on the Certificate Specifications
page.
No withdrawal charge is imposed upon amounts applied to purchase an annuity.
NURSING HOME WITHDRAWAL PRIVILEGE
The Company will waive the withdrawal charge arising from a full surrender
if: (1) at least one year has elapsed since the Certificate's Date of Coverage,
and (2) the Participant is confined to an eligible nursing home and has been
confined there for at least the preceding one hundred eighty (180) days. Proof
of the Participant's confinement to an eligible nursing home must be provided to
the Company at its Annuity Service Mailing Address in such form as the Company
may require.
For purposes of this section, an eligible nursing home is a licensed
hospital or licensed skilled or intermediate care nursing facility at which
medical treatment is available on a daily basis and daily medical records are
kept for each patient.
MARKET VALUE ADJUSTMENT
Any cash withdrawal (which for purposes of this section includes transfers,
distributions on the death of a Participant, and amounts applied to purchase an
annuity) of a Guarantee Amount, other than a withdrawal effective within 30 days
prior to the Expiration Date of the Guarantee Amount, or the withdrawal of
interest credited on such Guarantee Amount during the current Account Year, will
be subject to a market value adjustment.
The market value adjustment will reflect the relationship between the
current rate (as described in the formula below) for the amount being withdrawn
and the Guaranteed Interest Rate applicable to the amount being withdrawn. It
also reflects the time remaining in the applicable Guarantee Period.
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The market value adjustment will be determined by multiplying the amount
being withdrawn after the deduction of any applicable account fee and before
deduction of any applicable withdrawal charge by the market value adjustment
factor. The market value adjustment factor is:
[(1 + I)/(1 + J + b)]N/12 -1
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the market value adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the market value adjustment, for current
allocations to Guarantee Periods equal to the balance of the Guarantee Period of
the Guarantee Amount subject to the market value adjustment, rounded to the next
higher number of complete years (the current rate),
b is a factor which the Company will determine for each Certificate and
which is set forth on the Certificate Specifications page and which will not
exceed .25%, and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the market value adjustment.
In the determination of J, if the Company does not currently offer the
applicable Guarantee Period, then the rate will be determined by linear
interpolation of the current rates for Guarantee Periods that are available.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
If the Annuitant dies while the contract and this certificate are in effect
and before the Annuity Commencement Date, the Company, upon receipt of Due Proof
of Death of the Annuitant, will pay a death benefit to the Beneficiary in
accordance with this Death Benefit provision. If there is no designated
Beneficiary living on the date of death of the Annuitant, the Company will pay
the death benefit upon receipt of Due Proof of Death of both the Annuitant and
the designated Beneficiary in one sum to the Participant or, if the Annuitant
was the Participant, to the estate of the deceased Participant/Annuitant. If the
death of the Annuitant occurs on or after the Annuity Commencement Date, no
death benefit will be payable under the contract except as may be provided under
the form of annuity elected,
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more of the Annuity Options in accordance with the contract's settlement
provisions to effect a Variable Annuity or a Fixed Annuity or a combination of
both for the Beneficiary as Payee after the death of the Annuitant. This
election may be made or subsequently revoked by filing with the Company at its
Annuity Service Mailing Address, a written election or revocation of an election
in such form as the Company may require. Any election or revocation of an
election of a method of settlement of the death benefit by the Participant will
become effective on the date it is received by the Company. For the purposes of
the Payment of Death Benefit section below, any election of the method of
settlement of the death benefit by the Participant which is in effect on the
date of death of the Annuitant will be deemed effective on the date Due Proof of
Death of the Annuitant is received by the Company.
If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a cash payment, in
which event the Participant's Account will be cancelled; or (b) to have the
death benefit applied under one or more of the Annuity Options in accordance
with the settlement provisions to effect, on the Annuity Commencement Date
determined in the Payment of Death Benefit section below, a Variable Annuity or
a Fixed Annuity or a combination of both for the Beneficiary as Payee. This
election may be made by filing with the Company at its Annuity Service Mailing
Address, a written election in such form as the Company
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may require. Any written election of a method of settlement of the death benefit
by the Beneficiary will become effective on the later of: (a) the date the
election is received by the Company; or (b) the date Due Proof of Death of the
Annuitant is received by the Company. If a written election by the Beneficiary
is not received by the Company within 60 days following the date Due Proof of
Death of the Annuitant is received by the Company, the Beneficiary shall be
deemed to have elected a cash payment as of the last day of such 60 day period.
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment in accordance with the Investment Company Act of 1940. It the death
benefit is to be paid in one sum to the Participant, or, in the event the
Annuitant was the Participant, to the estate of the deceased
Participant/Annuitant, payment will be made within seven days of the date Due
Proof of Death of the Annuitant, the Participant, and/or the designated
Beneficiary, as applicable, is received by the Company. If settlement under one
or more of the Annuity Options is elected, the Annuity Commencement Date will be
the first day of the second calendar month following the effective date or the
deemed effective date of the election and the Participant's Account will be
maintained in effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the Death Benefit Date.
If the Annuitant was age 85 or less on the Date of Coverage, the death
benefit is equal to the greatest of:
(1) the Participant's Account Value for the Valuation Period in which the Death
Benefit Date occurs;
(2) the amount which would have been payable in the event of a full surrender of
the Participant's Account on the Death Benefit Date;
(3) the Participant's Account Value on the Seven Year Anniversary immediately
preceding the Death Benefit Date, adjusted for any subsequent Purchase
Payments and partial withdrawals and charges made between such Seven Year
Anniversary and the Death Benefit Date;
(4) the greatest of the Participant's Account Values on any Account Anniversary
prior to the Annuitant's 80th birthday, adjusted for any subsequent Purchase
Payments and partial withdrawals and charges made between such Account
Anniversary and the Death Benefit Date; and
(5) the total Purchase Payments made with respect to the Participant's Account,
adjusted for any partial withdrawals, accumulated as indicated below.
In determining the amount payable under (5), each Purchase Payment applied
to and amount transferred to the Participant's Variable Account will accumulate
daily at a rate equivalent to 5% per year until the first day of the month
following the Annuitant's 80th birthday. No such accumulation will apply to a
Purchase Payment or amount transferred once that Purchase Payment or amount so
transferred has, as a result of such accumulation, grown to double its original
amount. Partial withdrawals and transfers will affect the amount payable under
(5) on a basis proportional to the reduction in Participant's Account Value
brought about by such withdrawal. Transfers between the Fixed Account and the
Variable Account will shift the amounts accumulating under (5) on a basis
proportional to the reduction in the Participant's Account from which the
transfer was made.
If the Annuitant was age 86 or older on the Date of Coverage, the death
benefit will be equal to (2) above.
If (2), (3), (4), or (5) is operative, the Participant's Account Value will
be increased by the excess of (2), (3), (4), or (5), as applicable, over (1),
and the increase will be allocated to the Sub-Accounts based on the respective
values of the Sub-Accounts on the Death Benefit Date. If no portion of the
Participant's Account is allocated to the Sub-Accounts, the entire increase will
be allocated to the Sub-Account invested in either a money market Fund, if
available, or the Company's general account.
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SETTLEMENT PROVISIONS
GENERAL
On the Annuity Commencement Date, the adjusted value of the Participant's
Account as determined in accordance with the Determination of Amount provision
below will be applied, as specified by the Participant, under one or more of the
Annuity Options provided in the contract or under such other settlement options
as may be agreed to by the Company. However, if the amount to be applied under
any Annuity Option is less than the "Minimum Annuity Application Amount" set
forth on the Certificate Specifications page, or if the first annuity payment
payable in accordance with such option is less than the "Minimum Initial Annuity
Payment Amount" set forth on the Certificate Specifications page, the Company
will pay the amount to be applied in a single payment to the Payee.
After the Annuity Commencement Date, no change of Annuity Option is
permitted and no payments may be requested under the Cash Withdrawals provision
of the contract. Exchanges of Variable Annuity Units are permitted.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the adjusted value of the Participant's
Account applied on the Annuity Commencement Date under one or more of the
Annuity Options provided in the contract; if more than one person is named as
Annuitant, due to the designation of a co-annuitant, the Participant may elect
to name one of such persons to be the sole Annuitant as of the Annuity
Commencement Date. The Participant may also change any election but any election
or change of election must be effective at least 30 days prior to the Annuity
Commencement Date. This election or change of election may be made by filing
with the Company at its Annuity Service Mailing Address, a written election or
change of election in such form as the Company may require. Any such election or
change of election will become effective on the date it is received by the
Company. If no such election is in effect on the 30th day prior to the Annuity
Commencement Date, the adjusted value of the Participant's Account will be
applied under Annuity Option B, for a life annuity with 120 monthly payments
certain. If there is no election of a sole Annuitant in effect on the 30th day
prior to the Annuity Commencement Date, the person designated as co-annuitant
will be the Payee under the applicable Annuity Option.
Any such election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and/or a Variable
Annuity. In the event the election does not so specify, then the portion of the
adjusted value of the Participant's Account to be applied to provide a Fixed
Annuity and/or a Variable Annuity will be determined on a PRO RATA basis from
the composition of the Participant's Account on the Annuity Commencement Date.
The Annuity Options in the contract may also be elected as provided in the
Death Benefit section of the contract.
DETERMINATION OF AMOUNT
The adjusted value of the Participant's Account is applied to provide a
Variable Annuity or a Fixed Annuity or a combination of both. This value shall
be equal to the Participant's Account Value for the Valuation Period which ends
immediately preceding the Annuity Commencement Date, minus a proportionate
amount of the account fee to reflect the time elapsed between the last Account
Anniversary and the day before the Annuity Commencement Date, plus or minus any
applicable market value adjustment and minus any applicable premium or similar
tax.
EFFECT OF ANNUITY COMMENCEMENT DATE ON PARTICIPANT'S ACCOUNT
The Participant's Account will be cancelled on the Annuity Commencement
Date.
ANNUITY COMMENCEMENT DATE
The Annuity Commencement Date is set forth on the Certificate Specifications
page. This date may be changed from time to time by the Participant provided
that each change is effective at least 30 days prior to
15
<PAGE>
the then current Annuity Commencement Date and the new Annuity Commencement Date
is a date which is: (1) at least 30 days after the effective date of the change;
(2) the first day of a month; and (3) not later than the first day of the first
month following the Annuitant's 90th birthday. Any change of the Annuity
Commencement Date may be made by filing with the Company at its Annuity Service
Mailing Address, a written designation of a new Annuity Commencement Date in
such form as the Company may require. Any such change will become effective on
the date the designation is received by the Company.
The Annuity Commencement Date may also be changed by an election of a
settlement option as provided in the Death Benefit section of the contract.
FIXED ANNUITY PAYMENTS
The dollar amount of each Fixed Annuity payment shall be determined in
accordance with the annuity payment rates shown on page __, which are based on
the minimum guaranteed interest rate of 3% per year or, if more favorable to the
Payee(s), in accordance with the annuity payment rates published by the Company
and in use on the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first Variable Annuity payment shall be determined
in accordance with the annuity payment rates shown on page __, which are based
on an assumed interest rate of 3% per year.
All Variable Annuity payments other than the first are determined by means
of Annuity Units credited with respect to the particular Payee. The number of
Annuity Units to be credited in respect of a particular Sub-Account is
determined by dividing that portion of the first Variable Annuity payment
attributable to that Sub-Account by the Annuity Unit value of that Sub-Account
for the Valuation Period which ends immediately preceding the Annuity
Commencement Date. The resulting number of Annuity Units of each Sub-Account
credited with respect to the Payee remains fixed unless an exchange of Annuity
Units is made pursuant to the Exchange of Variable Annuity Units section below.
The dollar amount of each Variable Annuity payment after the first may increase,
decrease or remain constant, and is equal to the sum of the amounts determined
by multiplying the number of Annuity Units of a particular Sub-Account credited
with respect to the Payee by the Annuity Unit value for the particular
Sub-Account for the Valuation Period which ends immediately preceding the due
date of each subsequent Variable Annuity payment.
ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor for the
particular Sub-Account for the current Valuation Period and then multiplying
that product by a factor to neutralize the assumed interest rate of 3% per year
used to establish the annuity payment rates found in the contract. The factor is
[0.99991902] for a one day Valuation Period.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company at its Annuity Service Mailing Address, exchange the
value of a designated number of Annuity Units of particular Sub-Accounts then
credited with respect to such Payee for other Annuity Units, the value of which
would be such that the dollar amount of an annuity payment made on the date of
the exchange would be unaffected by such exchange. The maximum number of
exchanges that may be made in any Account Year is set forth on the Certificate
Specifications page.
Exchanges may be made among the Sub-Accounts only. Exchanges shall be made
using the Annuity Unit values for the Valuation Period during which the request
for exchange is received by the Company.
ACCOUNT FEE
After the Annuity Commencement Date an annual account fee equal to the
amount specified on the Certificate Specifications page will be deducted in
equal amounts from each Variable Annuity payment made during the year. No such
deduction is made from Fixed Annuity payments.
16
<PAGE>
DESCRIPTION OF ANNUITY OPTIONS
Annuity Options A, B, C and D are available on either a Fixed Annuity or a
Variable Annuity basis. Annuity Option E is available on a Fixed Annuity basis
only.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of the
Payee.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
sixty (60), one hundred twenty (120), one hundred eighty (180) or two hundred
forty (240) months certain as elected.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor variable
monthly payments, if any, will be determined using the percentage chosen at the
time of the election of this option of the number of each type of Annuity Unit
credited with respect to the Payee, and each fixed monthly payment, if any, will
be equal to the same percentage of the fixed monthly payment payable during the
joint lifetime of the Payee and the designated second person.
Annuity Option D. Monthly Payments for a Specified Period Certain: Monthly
payments for any specified period of time (at least (5) years but not exceeding
thirty (30) years), as elected.
Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with this Annuity Option will be held by the Company at
interest. Fixed payments will be made in such amounts and at such times (at
least over a period of five (5) years) as may be agreed upon with the Company
and will continue until the amount held by the Company with interest Is
exhausted. The final payment will be for the balance remaining and may be less
than the amount of each preceding payment. Interest will be credited on an
annual basis on the amount remaining unpaid at a rate which shall be determined
by the Company from time to time but which shall not be less than 3% per year
compounded annually. The rate so determined may be changed at any time and as
often as may be determined by the Company, provided, however, that the rate may
not be reduced more frequently than once during each calendar year.
AMOUNTS PAYABLE ON DEATH OF PAYEE
In the event of the death of the Payee on or after the Annuity Commencement
Date, the Company will pay any remaining payments under any Annuity Option then
in effect to the Payee's designated beneficiary as they become due. If there is
no designated beneficiary entitled to these remaining payments then living, the
Company will pay the amount specified in the schedule below for any Annuity
Option then in effect, in one sum to the deceased Payee's estate. Any
beneficiary who becomes entitled to any remaining payments under any Annuity
Option may elect to receive the amount specified in the schedule below for such
option in one sum. In the event of the death of a beneficiary who has become
entitled to receive any remaining payments under any Annuity Option, the Company
will pay the amount specified for such option in the schedule below in one sum
to the deceased beneficiary's estate. All payments made in one lump sum by the
Company, as provided in this paragraph, are made in lieu of paying any remaining
payments under the Annuity Option then in effect.
<TABLE>
<CAPTION>
Option Amount
- --------- --------------------------------------------------------------------------
<C> <S>
B The discounted value of the remaining payments, if any, for the certain
period.
D The discounted value of the remaining payments, if any, for the certain
period.
E The unpaid balance of the proceeds and interest.
</TABLE>
In the case of Options B and D the discounted value will be based, for
payments being made on a variable basis, on interest compounded annually at the
assumed interest rate and on the assumptions that the particular Annuity Unit
values applicable to the remaining payments will be the particular Annuity Unit
values for the Valuation Period which ends on the day before the date of the
determination and that the discounted value will remain unchanged thereafter.
17
<PAGE>
ANNUITY PAYMENT RATES
The annuity payment rate tables below show, for each $1,000 applied, the
dollar amount of both (a) the first monthly Variable Annuity payment based on
the assumed interest rate of 3% and (b) the monthly Fixed Annuity payment, when
the payment is based on the minimum guaranteed interest rate of 3% per year.
The mortality table used in determining the annuity payment rates for
Annuity Options A, B and C is the 1983 Individual Annuitant Mortality Table A.
In using this mortality table, ages of Annuitants will be reduced by one year
for Annuity Commencement Dates occurring during the 1990s reduced by two years
for Annuity Commencement Dates occurring during the decade 2000-2009, and so on.
The annuity payment rates in the tables shown below reflect rates of
mortality appropriate for Annuity Commencement Dates occurring during the 1980s,
Thus, for Annuity Commencement Dates occurring during the 1990s the term
ADJUSTED AGE as used in the tables below, means actual age less one year.
ADJUSTED AGE shall mean actual age less two year for Annuity Commencement Dates
occurring in the decade 2000-2009, and so on.
ADJUSTED AGES will be determined based on the actual age(s) of the
Annuitant(s), in completed years and months, as of the Annuity Commencement
Date. The tables below show annuity payment rates for exact ADJUSTED AGES, rates
for ADJUSTED AGES expressed in completed years and months will be based on
straight line interpolation between the appropriate annuity payment rates.
The dollar amount of each annuity payment for any adjusted age or
combination of adjusted ages not shown below or for any other form of Annuity
Option agreed to by the Company will be quoted by the Company upon request.
AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT PER $1,000
SINGLE LIFE ANNUITY
<TABLE>
<CAPTION>
OPTION B
LIFE ANNUITY WITH PAYMENTS CERTAIN
--------------------------------------------------
60 Payments 120 Payments 180 Payments 240 Payments
OPTION A
LIFE ANNUITY
- -----------------------
Adjusted ----------------------------------------------------------
Age Male Female Male Female Male Female Male Female Male Female
- -------- ----- ------ ----- ------ ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20 3.04 2.93 3.03 2.93 3.03 2.93 3.03 2.93 3.03 2.93
25 3.14 3.02 3.14 3.02 3.14 3.02 3.14 3.02 3.13 3.01
30 3.28 3.13 3.28 3.13 3.27 3.12 3.27 3.12 3.26 3.12
35 3.44 3.26 3.44 3.26 3.44 3.26 3.43 3.25 3.41 3.24
40 3.66 3.42 3.65 3.42 3.64 3.42 3.63 3.41 3.60 3.40
45 3.93 3.63 3.92 3.63 3.90 3.63 3.87 3.61 3.82 3.59
50 4.27 3.90 4.26 3.90 4.22 3.89 4.17 3.86 4.08 3.82
55 4.70 4.25 4.68 4.25 4.62 4.22 4.53 4.18 4.39 4.11
60 5.28 4.72 5.25 4.70 5.14 4.66 4.96 4.57 4.71 4.44
65 6.10 5.35 6.03 5.32 5.81 5.22 5.46 5.05 5.02 4.79
70 7.23 6.25 7.07 6.18 6.61 5.96 5.96 5.60 5.27 5.12
75 8.82 7.56 8.44 7.39 7.49 6.89 6.38 6.14 5.42 5.35
80 11.06 9.53 10.17 9.07 8.33 7.89 6.66 6.55 5.49 5.47
85 14.16 12.48 12.12 11.19 8.97 8.74 6.81 6.77 5.51 5.50
</TABLE>
OPTION C
JOINT AND SURVIVOR ANNUITY
(Assumed election of Joint and Two-Thirds Survivor)
<TABLE>
<CAPTION>
Adjusted Age of Female
Adjusted Age -----------------------------------------------------
of Male 55 60 65 70 75
- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
55 4.25 4.47 4.72 4.99 5.29
60 4.44 4.71 5.01 5.34 5.71
65 4.65 4.97 5.33 5.75 6.23
70 4.88 5.24 5.68 6.20 6.81
75 5.11 5.52 6.04 6.68 7.45
</TABLE>
18
<PAGE>
OPTION D
PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
<TABLE>
<CAPTION>
Years Amount Years Amount Years Amount Years Amount
- --------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
5 17.91 12 8.24 19 5.73 26 4.59
6 15.14 13 7.71 20 5.51 27 4.47
7 13.16 14 7.26 21 5.32 28 4.37
8 11.68 15 6.87 22 5.15 29 4.27
9 10.53 16 6.53 23 4.99 30 4.18
10 9.61 17 6.23 24 4.84
11 8.86 18 5.96 25 4.71
</TABLE>
OWNERSHIP PROVISIONS
EXERCISE OF CONTRACT RIGHTS
The contract shall belong to the Owner. Unless any rights and privileges
have been expressly reserved by the Owner, the Participant shall be entitled to
exercise all rights and privileges in connection with this certificate. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocable Beneficiary) or any other person. Such
rights and privileges may be exercised only during the lifetime of the Annuitant
and prior to the Annuity Commencement Date, except as otherwise provided in the
contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified contract dies prior to the Annuitant
and before the Annuity Commencement Date, that Participant's Account Value, plus
or minus any applicable market value adjustment, must be distributed to the
"designated beneficiary" (as defined below) either (1) within five years after
the date of death of the Participant, or (2) as an annuity over some period not
greater than the life or expected life of the designated beneficiary, with
annuity payment beginning within one year after the date of death of the
Participant. For this purpose (and for purposes of Section 72(s) of the Code),
the person named as Beneficiary shall be considered the designated beneficiary,
and if no person then living has been so named, then the Annuitant shall
automatically be the designated beneficiary. If the designated beneficiary is
the surviving spouse of the deceased Participant, the spouse can elect to
continue the certificate in the spouse's own name as Participant, in which case
the mandatory distribution requirements will apply on the spouse's death.
If the deceased Participant was also the Annuitant, the Death Benefit
provision of the contract controls unless the deceased Participant's surviving
spouse is the designated beneficiary and elects to continue the Certificate in
the spouse's own name as both Participant and Annuitant.
If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, it any, must be distributed as
least as rapidly as the method of distribution then in effect.
In any case in which a non-natural person constitutes a holder of the
certificate for the purposes of Section 72(s) of the Code, (1) the distribution
requirements described above shall apply upon the death of any Annuitant, and
(2) a change in any Annuitant shall be treated as the death of such Annuitant.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the contract as an
annuity contract under the Code.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds, but will follow voting instructions received from
persons having the right to give voting instructions.
19
<PAGE>
The Owner or Participant, as the case may be, is the person having the right to
give voting instructions prior to the Annuity Commencement Date. On or after the
Annuity Commencement Date the Payee is the person having such voting rights. Any
shares attributable to the Company and any Fund shares for which no timely
voting instructions have been received will be voted by the Company in the same
proportion as the shares for which instructions are received from persons have
such voting rights.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under retirement or deferred compensation plans, other than rights
afforded by the Investment Company Act of 1940, nor do they have any duty to
inquire as to the instructions received or the authority of Owners,
Participants, or others to instruct on the voting of Fund shares. Except as the
Variable Account or the Company has actual knowledge to the contrary, the
instructions given by Owners, Participants and Payees will be valid as they
affect the Variable Account, the Company and any others having voting
instruction rights with respect to the Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each Owner, each Participant and
each Payee having the right to give voting instructions at least ten days prior
to each meeting of the shareholders of the Fund. The number of particular Fund
shares as to which each such person Is entitled to give instructions will be
determined by the Company as of a date not more than 90 days prior to each such
meeting. Prior to the Annuity Commencement Date, the number of Fund shares as to
which voting instructions may be given to the Company is determined by dividing
the value of all the Variable Accumulation Units of the particular Sub-Account
credited to the Participant's Account by the net asset value of one Fund share
as of the same date. On or after the Annuity Commencement Date, the number of
Fund shares as to which such instructions may be given by a Payee is determined
by dividing the reserve held by the Company in the particular Sub-Account with
respect to the particular Payee by the net asset value of a Fund share as of the
same date.
PERIODIC REPORTS
During the Accumulation Period the Company will send to the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the fixed accumulation value of such account,
which statement shall be accurate as of a date not more than two months previous
to the date of mailing. In addition, every person having voting rights will
receive such reports or prospectuses concerning the Variable Account and each
Fund as may be required by the Investment Company Act of 1940 and the Securities
Act of 1933. The Company will also send such statements reflecting transactions
in the Participant's Account as may be required by applicable laws, rules and
regulations.
BENEFICIARY PROVISION
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in the Application, if any, will
remain in effect until changed. The interest of any Beneficiary is subject to
the Beneficiary surviving the Annuitant and, in the case of a certificate issued
under a Non-Qualified Contract, to the Beneficiary surviving the Participant as
well.
Subject to the rights of an irrevocable Beneficiary, the Participant may
change or revoke the designation of a Beneficiary at any time while the
Annuitant is living. To do so, the Participant must file the change or
revocation with the Company at its Annuity Service Mailing Address in such form
as the Company may require. The change or revocation will not be binding upon
the Company until it is received by the Company. When it is so received the
change or revocation will be effective as of the date on which the Beneficiary
designation or revocation was signed, but the change or revocation will be
without prejudice to the Company on account of any payment made or any action
taken by the Company before the Company receives and acknowledges the change or
revocation.
20
<PAGE>
GENERAL PROVISIONS
AGE AND SEX MISSTATEMENT
If any date of birth or sex, or both, has been misstated in the Application,
if any, or elsewhere, the amounts payable pursuant to the contract under this
certificate will be the amounts which would have been provided using the correct
age or sex, or both. Any deficiency in payments already made by the Company
shall be paid promptly and any excess in the payments already made by the
Company shall be charged against the benefits falling due after the adjustment.
THIS CERTIFICATE
This certificate is issued in consideration of the Application, if any, and
payment of the initial Purchase Payment. All statements made in the Application,
if any, will be deemed representations and not warranties, and no statement will
void the certificate or be used in defense to a claim unless it is contained in
the Application and a copy is attached to the certificate at issue. Only the
President, a Vice President, the Actuary or the Secretary of the Company has
authority to agree on behalf of the Company to any alteration of the contract or
any certificate, or to any waiver of the rights or requirements of the Company.
CURRENCY
All amounts due under the contract are payable in U.S. dollars, lawful money
of the United States of America.
DETERMINATION OF VALUES
The method of determination by the Company of the Net Investment Factor and
the number and value of Accumulation Units and Annuity Units shall be conclusive
upon the Owner, the Participant, any Payee and any Beneficiary.
GOVERNING LAW
The contract and this certificate will be governed by the laws of the
jurisdiction where the Contract Application is signed.
GUARANTEES
Subject to the Net Investment Factor provision, the Company guarantees that
the dollar amount of Variable Annuity payments made during the lifetime of the
Payee(s) will not be adversely affected by the actual mortality experience of
the Company or by the actual expenses incurred by the Company in excess of the
expense deductions provided for in the contract and other contracts providing
benefits which vary in accordance with the investment performance of the
Sub-Accounts.
INCONTESTABILITY
The contract and this certificate are incontestable, subject to the Age and
Sex Misstatement, Proof of Age and Proof of Survival provisions contained
herein.
MODIFICATION
Upon notice to the Owner, the Participant(s) or the Payee(s) during the
annuity period, the contract and this certificate may be modified by the
Company, but only if such modification (a) is necessary to make the contract,
certificate or the Variable Account comply with any law or regulation issued by
a governmental agency to which the Company or the Variable Account is subject;
or (b) is necessary to assure continued qualification of the contract and/or
certificate under the Code or other federal or state laws relating to retirement
annuities or annuity contracts; or (c) is necessary to reflect a change in the
operation of the Variable Account or the Sub-Accounts; (d) provides additional
Variable Account and/or Fixed Account options; or (e) as may otherwise be in the
best interests of Owners or Participants, as applicable. In the event of any
such modification, the Company may make appropriate endorsement in the contract
and this certificate to reflect such modification.
NONPARTICIPATING
The contract is nonparticipating and will not share in any profits or
surplus earnings of the Company, and therefore, no dividends are payable.
21
<PAGE>
PAYMENTS BY THE COMPANY
All sums payable by the Company pursuant to this certificate are payable
only at its Executive Office or such other place as may be designated by the
Company. The Company may require surrender of the certificate upon final payment
of all sums payable by the Company pursuant to the certificate.
PROOF OF AGE
The Company shall have the right to require evidence of the age of any Payee
under Annuity Options A, B, and C prior to the Annuity Commencement Date.
PROOF OF SURVIVAL
The Company shall have the right to require evidence of the survival of any
Payee under Annuity Options A, B and C at the time any payment payable to such
Payee is due.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Annuity Unit or any of them. In effecting any such change of
unit values, strict equity will be preserved and no change will have a material
effect on the benefits or other provisions of this certificate.
RIGHTS RESERVED BY THE COMPANY
The Company reserves the right, to the extent permitted by law, to: (1)
deregister the Variable Account under the Investment Company Act of 1940; (2)
combine any two or more variable accounts; (3) operate the Variable Account as a
management investment company or any other form permitted by law; (4) substitute
shares of a Fund for shares of another investment company if shares of such Fund
are not available, or if, in the Company's judgment, further investment in such
Fund's shares is no longer appropriate; (5) add or delete Funds, or series or
sub-series thereof, and corresponding Sub-Accounts; (6) to add or remove
Guarantee Periods available at any time for election by a Participant; and (7)
restrict or eliminate any of the voting rights of Participants (or Owners) or
other persons who have voting rights as to the Variable Account.
22
<PAGE>
[LOGO]
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
A Wholly-Owned Subsidiary of Sun Life Assurance Company of Canada
<TABLE>
<S> <C> <C>
EXECUTIVE OFFICE: HOME OFFICE: ANNUITY SERVICE MAILING ADDRESS:
One Sun Life Executive Park Wilmington, Delaware Sun Life Annuity Service Center
Wellesley Hills, Massachusetts 02181 P.O. Box 1024
Boston, Massachusetts 02103
</TABLE>
CERTIFICATE FOR
FLEXIBLE PAYMENT DEFERRED COMBINATION VARIABLE AND FIXED GROUP ANNUITY CONTRACT
NONPARTICIPATING
ALL PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT WHEN BASED ON THE INVESTMENT
EXPERIENCE OF THE VARIABLE ACCOUNT ARE VARIABLE AND ARE NOT GUARANTEED AS TO
DOLLAR AMOUNT.
PAYMENTS AND VALUES BASED ON THE FIXED ACCOUNT ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN UPWARD AND DOWNWARD
ADJUSTMENTS IN AMOUNTS PAYABLE TO A PARTICIPANT, INCLUDING WITHDRAWALS,
TRANSFERS, AMOUNTS APPLIED TO PURCHASE AN ANNUITY, AND DISTRIBUTIONS RESULTING
FROM THE DEATH OF THE PARTICIPANT. PAYMENTS MADE FROM GUARANTEE AMOUNTS WHICH
ARE WITHIN 30 DAYS PRIOR TO THE END OF A GUARANTEE PERIOD OR THE WITHDRAWAL OF
INTEREST CREDITED TO GUARANTEE AMOUNTS DURING THE CURRENT ACCOUNT YEAR ARE NOT
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
<PAGE>
[LOGO]
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
A Wholly-Owned Subsidiary of Sun Life Assurance Company of Canada
<TABLE>
<S> <C> <C>
ANNUITY SERVICE MAILING
EXECUTIVE OFFICE: HOME OFFICE: ADDRESS:
Sun Life Annuity Service
One Sun Life Executive Park Wilmington, Delaware Center
Wellesley Hills, Massachusetts 02181 P.O. Box 1024
Boston, Massachusetts 02103
</TABLE>
Sun Life Assurance Company of Canada (U.S.) ("the Company") will pay an
annuity commencing on the Annuity Commencement Date to the Annuitant if then
living, by applying the adjusted value of the Participant's Account in
accordance with the settlement provisions. If the Annuitant dies while the
contract is in effect and before the Annuity Commencement Date, the Company will
pay a death benefit to the Beneficiary upon receipt of Due Proof of Death of the
Annuitant. Under certain circumstances, if the Participant dies prior to the
Annuitant and before the Annuity Commencement Date, a distribution is required
by law.
All payments will be made to the persons and in the manner set forth in this
contract. Provisions and endorsements printed or written by the Company on the
following pages form part of the contract.
Signed by the Company at its Executive Office, Wellesley Hills,
Massachusetts on the Issue Date.
<TABLE>
<S> <C>
Donald A.
Stewart Margaret Sears Mead
President Secretary
</TABLE>
FLEXIBLE PAYMENT DEFERRED COMBINATION VARIABLE AND FIXED GROUP ANNUITY CONTRACT
NONPARTICIPATING
ALL PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT WHEN BASED ON THE INVESTMENT
EXPERIENCE OF THE VARIABLE ACCOUNT ARE VARIABLE AND ARE NOT GUARANTEED AS TO
DOLLAR AMOUNT.
PAYMENTS AND VALUES BASED ON THE FIXED ACCOUNT ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN UPWARD AND DOWNWARD
ADJUSTMENTS IN AMOUNTS PAYABLE TO A PARTICIPANT, INCLUDING WITHDRAWALS,
TRANSFERS, AMOUNTS APPLIED TO PURCHASE AN ANNUITY, AND DISTRIBUTIONS RESULTING
FROM THE DEATH OF THE PARTICIPANT. PAYMENTS FROM GUARANTEE AMOUNTS WHICH ARE
MADE WITHIN 30 DAYS PRIOR TO THE END OF A GUARANTEE PERIOD OR THE WITHDRAWAL OF
INTEREST CREDITED TO GUARANTEE AMOUNTS DURING THE CURRENT ACCOUNT YEAR ARE NOT
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
DEFINITIONS 4
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FIXED AND VARIABLE ACCOUNTS 6
Fixed Account 6
Variable Account and Sub-Accounts 6
Ownership of Assets 6
Investments of the Sub-Accounts 6
- ----------------------------------------------------------------------------
PURCHASE PAYMENTS 6
Payments 6
Account Continuation 6
Allocation of Net Purchase Payments 6
- ----------------------------------------------------------------------------
CONTRACT VALUES DURING ACCUMULATION PERIOD 7
Participant's Account 7
Variable Account Value 7
Crediting Variable Accumulation Units 7
Variable Accumulation Unit Value 7
Variable Accumulation Value 7
Net Investment Factor 7
Fixed Account Value 8
Guarantee Periods 8
Guaranteed Interest Rates 8
Fixed Accumulation Value 9
Transfer Privilege 9
Account Fee 9
- ----------------------------------------------------------------------------
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT 10
Cash Withdrawals 10
Withdrawal Charges 11
Nursing Home Withdrawal Privilege 11
Market Value Adjustment 11
- ----------------------------------------------------------------------------
DEATH BENEFIT 12
Death Benefit Provided by the Contract 12
Election and Effective Date of Election 12
Payment of Death Benefit 13
Amount of Death Benefit 13
- ----------------------------------------------------------------------------
SETTLEMENT PROVISIONS 14
General 14
Election and Effective Date of Election 14
Determination of Amount 14
Effect of Annuity Commencement Date on Participant's Account 14
Annuity Commencement Date 14
Fixed Annuity Payments 15
Variable Annuity Payments 15
Annuity Unit Value 15
Exchange of Variable Annuity Units 15
Account Fee 15
Description of Annuity Options 16
Amounts Payable on Death of Payee 16
Annuity Payment Rates 17
- ----------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
OWNERSHIP PROVISIONS 18
Exercise of Contract Rights 18
Change of Ownership 18
Death of Participant 18
Voting of Fund Shares 19
Periodic Reports 19
- ----------------------------------------------------------------------------
BENEFICIARY PROVISION 20
Designation and Change of Beneficiary 20
- ----------------------------------------------------------------------------
GENERAL PROVISIONS 20
Age and Sex Misstatement 20
Contract 20
Currency 20
Determination of Values 20
Discontinuance of New Participants 20
Governing Law 21
Guarantees 21
Incontestability 21
Modification 21
Nonparticipating 21
Payments by the Company 21
Proof of Age 21
Proof of Survival 21
Splitting Units 21
Rights Reserved by the Company 22
- ----------------------------------------------------------------------------
QUALIFIED CONTRACT PROVISIONS
</TABLE>
3
<PAGE>
DEFINITIONS
Any reference in this certificate to "RECEIPT" and "RECEIVED" by the Company
means receipt at the Company's Annuity Service Mailing Address shown on the
first page of this Contract.
ACCOUNT YEARS AND ACCOUNT ANNIVERSARIES: The first Account Year shall be the
period of 12 months plus a part of a month as measured from the Date of Coverage
for each Participant to the first day of the calendar month which follows the
calendar month of coverage. All Account Years and Account Anniversaries
thereafter shall be 12 month periods based upon such first day of the calendar
month which follows the calendar month of coverage. If, for example, the Date of
Coverage occurs in March, the first Account Year will be determined from the
Date of Coverage but will end on the last day of March in the following year;
all other Account Years and all Account Anniversaries will be measured from
April 1.
ACCUMULATION PERIOD: The period before the Annuity Commencement Date and during
the lifetime of the Annuitant.
ANNUITANT: The person or persons named in the Application, if any, and on whose
life the first annuity payment is to be made. The Participant may not designate
a co-annuitant unless the Participant and Annuitant are different persons. If
more than one person is so named, all provisions of the contract which are based
on the death of the Annuitant will be based on the date of death of the last
surviving of the persons so named. By example, the death benefit will become due
only upon the death, prior to the Annuity Commencement Date, of the last
surviving of the persons so named. Collectively, these persons are referred to
in the contract as Annuitants. The Participant is not permitted to name a
co-annuitant under a Qualified Contract.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment is to be
made.
*ANNUITY OPTION: The method for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of the
second and each subsequent variable annuity payment from the Variable Account.
APPLICATION: The document, if any, signed by each Participant that serves as his
or her application for participation under this contract.
*BENEFICIARY: The person or entity having the right to receive the death benefit
set forth in each certificate and, for Non-Qualified Contracts, who, in the
event of the Participant's death, is the DESIGNATED BENEFICIARY for purposes of
Section 72(s) of the Code.
CERTIFICATE: The document for each Participant which evidences the coverage of
the Participant under this contract.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT APPLICATION: The document signed by the Owner that evidences the
Owner's application for this contract.
DATE OF COVERAGE: The date on which a Participant's Account becomes effective.
DEATH BENEFIT DATE: The date on which the death benefit election is effective or
is deemed to become effective, which is the date on which the Company receives
Due Proof of Death.
DUE PROOF OF DEATH: An original certified copy of an official death certificate,
an original certified copy of a decree of a court of competent jurisdiction as
to the finding of death, or any other proof satisfactory to the Company.
EXPIRATION DATE: The last day of a Guarantee Period.
FIXED ACCOUNT: Part of the general account of the Company consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount.
FUND(S): One or more open-end management investment companies or "mutual funds"
registered under the Investment Company Act of 1940.
- ------------------------
*As specified in the Application, if any, unless changed.
4
<PAGE>
GUARANTEE AMOUNT: Any portion of a Participant's Account Value allocated to a
particular Guarantee Period with a particular Expiration Date (including
interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is credited.
GUARANTEED INTEREST RATE: The rate of interest credited by the Company on a
compound annual basis during any Guarantee Period.
ISSUE DATE: The date on which the contract becomes effective.
NET INVESTMENT FACTOR: An index applied by the Company to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater than, less than, or equal to one (1).
NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains after the
deduction of any applicable front-end sales load or premium or similar tax, if
any.
NON-QUALIFIED CONTRACT: A contract used in connection with a retirement plan
which does not receive favorable federal income tax treatment under Sections
401, 403, 408 or 408A of the Code. The Participant's interest in the contract
must be owned by a natural person or agent for a natural person for the contract
to receive favorable income tax treatment as an annuity.
*OWNER: The person, persons or entity entitled to the ownership rights stated in
the contract and in whose name or names the contract is issued. The Owner may
designate a trustee or custodian of a retirement plan which meets the
requirements of Section 401, Section 408(c), Section 408(k), or Section 408(p)
of the Code to serve as legal owner of assets of a retirement plan, but the term
Owner, as used herein, refers to the organization entering into the contract.
PARTICIPANT: The person named in the Certificate who is entitled to exercise all
rights and privileges of ownership under the Certificate, except as reserved by
the Owner.
PARTICIPANT'S ACCOUNT: An account to which Net Purchase Payments are credited.
PARTICIPANT'S ACCOUNT VALUE: The variable accumulation value, if any, plus the
fixed accumulation value, if any, of a Participant's Account for any Valuation
Period.
PAYEE: A recipient of payments under the contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Annuitant.
PURCHASE PAYMENT (PAYMENT): The amount paid to the Company as consideration for
the benefits provided by the contract.
QUALIFIED CONTRACT: A contract used in connection with a retirement plan which
may receive favorable federal income tax treatment under Sections 401, 403, 408
or 408A of the Code.
SEVEN YEAR ANNIVERSARY: The seventh Account Anniversary and each succeeding
Account Anniversary occurring at any seven year interval thereafter; for
example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares of
specific series or sub-series of a Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit and Annuity Unit values to the next subsequent determination
of these values. Such determination shall be made as of the close of the New
York Stock Exchange on each day that the Exchange is open for trading and on
such other days on which there is a sufficient degree of trading in the
portfolio securities of the Variable Account so that the values of the Variable
Account's Accumulation Units and Annuity Units might be materially affected.
VARIABLE ACCOUNT: A separate account of the Company consisting of assets set
aside by the Company, the investment performance of which is kept separate from
that of the general assets of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of the
value of the variable portion of a Participant's Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in
relation to the investment performance of specified Sub-Accounts of the Variable
Account.
- ------------------------
*As specified in the Application, if any, unless changed.
5
<PAGE>
FIXED AND VARIABLE ACCOUNTS
FIXED ACCOUNT
The Fixed Account consists of all assets of the Company other than those
allocated to any separate account of the Company. Any portion of a Net Purchase
Payment allocated by a Participant to a Guarantee Period(s) will become part of
the Fixed Account.
VARIABLE ACCOUNT AND SUB-ACCOUNTS
The Variable Account to which the variable accumulation values and Variable
Annuity payments, if any, under the contract relate was established by the
Company pursuant to a resolution of its Board of Directors. The Company has
registered the Variable Account as a unit investment trust under the Investment
Company Act of 1940. That portion of the assets of the Variable Account equal to
the reserves and other contract liabilities with respect to the Variable Account
shall not be chargeable with liabilities arising out of any other business the
Company may conduct.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a designated series or sub-series
of a Fund. The values of the Variable Accumulation Units and the Annuity Units
described in the contract reflect the investment performance of the
Sub-Accounts.
OWNERSHIP OF ASSETS
The Company shall have exclusive and absolute ownership and control of its
assets, including all assets of the Sub-Accounts. The Company reserves the right
to transfer assets of a Sub-Account, in excess of the reserves and other policy
liabilities with respect to that Sub-Account, to another Sub-Account or to the
Company's general account.
INVESTMENTS OF THE SUB-ACCOUNTS
All amounts allocated to a Sub-Account will be used to purchase shares of a
specific series or sub-series of a Fund. The Fund shares available on the Issue
Date are shown on the Contract Specifications page; more series and/or Funds may
be subsequently added or deleted. Each Fund is an open-end management investment
company ("mutual fund") registered under the Investment Company Act of 1940. Any
and all distributions made by a Fund with respect to shares held by a
Sub-Account will be reinvested to purchase additional shares of that Fund at net
asset value. Deductions from the Sub-Accounts will, in effect, be made by
reducing the number of Accumulation Units attributable to a Participant's
Account. Each Sub-Account will be fully invested in Fund shares at all times.
PURCHASE PAYMENTS
PAYMENTS
All Purchase Payments are to be paid to the Company at its Annuity Service
Mailing Address. The amount of Purchase Payments may vary; however, the Company
will not accept an initial Purchase Payment for any Certificate which is less
than the minimum amount set forth on the Certificate Specifications page, and
each additional Purchase Payment must be at least equal to the minimum
additional amount specified on the Certificate Specifications page. In addition,
the prior approval of the Company is required before it will accept a Purchase
Payment which would cause the value of a Participant's Account to exceed the
maximum Purchase Payment amount specified on the Certificate Specifications
page. If the value of a Participant's Account exceeds such maximum amount, no
additional Purchase Payments will be allocated without the prior approval of the
Company.
ACCOUNT CONTINUATION
A Participant's Account shall be continued automatically in full force
during the lifetime of the Annuitant until the Annuity Commencement Date or
until the Participant's Account is surrendered.
ALLOCATION OF NET PURCHASE PAYMENTS
The Net Purchase Payment is that portion of a Purchase Payment with remains
after deduction of any applicable front-end sales load and premium or similar
tax. Each Net Purchase Payment will, upon receipt
6
<PAGE>
by the Company, be allocated to the Participant's Account, either to the
Sub-Accounts or to the Fixed Account or to both the Sub-Accounts and the Fixed
Account in accordance with the allocation factors specified in the Application,
or as subsequently changed by the Participant.
The allocation factors for new Purchase Payments among the Guarantee Periods
and the Sub-Accounts may be changed by the Participant at any time by giving
notice of the change to the Company, in accordance with the Company's procedures
then in effect. The Participant may effect such change directly, or it may
effect such change through an authorized third party, subject to the Company's
approval given in its sole discretion, and further subject to adherence to such
Company procedures as may be adopted from time to time. Any change will take
effect with the first Purchase Payment received with or after receipt of notice
of the change by the Company and will continue in effect until subsequently
changed.
CONTRACT VALUES DURING ACCUMULATION PERIOD
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under this contract and will maintain the Participant's Account during the
Accumulation Period. The Participant's Account Value for any Valuation Period is
equal to the variable accumulation value, if any, plus the fixed accumulation
value, if any, of the Participant's Account for that Valuation Period.
VARIABLE ACCOUNT VALUE
CREDITING VARIABLE ACCUMULATION UNITS
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment to be allocated to the Sub-Accounts will be
credited to the Participant's Account in the form of Variable Accumulation
Units. The number of particular Variable Accumulation Units to be credited is
determined by dividing the dollar amount allocated to the particular Sub-Account
by the Variable Accumulation Unit value of the particular Sub-Account for the
Valuation Period during which the Purchase Payment is received by the Company.
VARIABLE ACCUMULATION UNIT VALUE
The Variable Accumulation Unit value for each Sub-Account was established at
$10.00 for the first Valuation Period of the particular Sub-Account. The
Variable Accumulation Unit value for the particular Sub-Account for any
subsequent Valuation Period is determined by methodology which is the
mathematical equivalent of multiplying the Variable Accumulation Unit value for
the particular Sub-Account for the immediately preceding Valuation Period by the
Net Investment Factor for the particular Sub-Account for such subsequent
Valuation Period. The Variable Accumulation Unit value for each Sub-Account for
any Valuation Period is the value determined as of the end of the particular
Valuation Period and may increase, decrease or remain constant from Valuation
Period to Valuation Period in accordance with the Net Investment Factor
described below.
VARIABLE ACCUMULATION VALUE
The variable accumulation value, if any, of a Participant's Account for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units of each Sub-Account credited to the Participant's Account for such
Valuation Period. The variable accumulation value of each Sub-Account is
determined by multiplying the number of Variable Accumulation Units, if any,
credited to each Sub-Account by the Variable Accumulation Unit value of the
particular Sub-Account for such Valuation Period.
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater than, less than, or equal to one (1);
therefore, the value of a Variable Accumulation Unit may increase, decrease or
remain the same.
7
<PAGE>
The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
1) the net asset value of a Fund share held in the Sub-Account determined as
of the end of the Valuation Period, plus
2) the per share amount of any dividend or other distribution declared by
the Fund on the shares held in the Sub-Account if the ex-dividend date
occurs during the Valuation Period, plus or minus
3) a per share credit or charge with respect to any taxes paid or reserved
for by the Company during the Valuation Period which are determined by
the Company to be attributable to the operation of the Sub-Account;
(b) is the net asset value of a Fund share held in the Sub-Account determined
as of the end of the preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the Valuation
Period to reflect the charges for assuming the mortality and expense risks
and administrative expense risks.
The asset charge factor for any Valuation Period is equal to the daily asset
charge factor multiplied by the number of 24 hour periods in the Valuation
Period. The daily asset charge factor will be determined by the Company
annually, but in no event will it exceed the maximum daily asset charge factor
specified on the Certificate Specifications page.
FIXED ACCOUNT VALUE
GUARANTEE PERIODS
The Participant elects one or more Guarantee Period(s) from among those made
available by the Company. The period(s) elected will determine the Guaranteed
Interest Rate(s). A Purchase Payment or the portion (at least equal to the
minimum Guarantee Period amount set forth on the Certificate Specifications
page) thereof (or amount transferred in accordance with the Transfer Privilege
provision described below) allocated to a particular Guarantee Period will earn
interest at the Guaranteed Interest Rate in effect during the Guarantee Period.
Initial Guarantee Periods begin on the date a Net Purchase Payment is applied
(or, in the case of a transfer, on the effective date of the transfer) and end
when the number of calendar years in the Guaranteed Period elected (measured
from the end of the calendar month in which the amount was allocated to the
Guaranteed Period) has elapsed. The last day of a Guarantee Period is the
Expiration Date. Subsequent Guarantee Periods begin on the first day following
the Expiration Date.
Any portion of a Participant's Account Value allocated to a particular
Guarantee Period with a particular Expiration Date (including interest earned
thereon) is referred to as a Guarantee Amount. As a result of additional
Purchase Payments, renewals and transfers of portions of the Participant's
Account Value, Guarantee Amounts allocated to Guarantee Periods of the same
duration may have different Expiration Dates, and each Guarantee Amount will be
treated separately for purposes of determining any market value adjustment.
The Company will notify the Participant in writing at least 45 and no more
than 75 days prior to the Expiration Date for any Guarantee Amount. A new
Guarantee Period of the same duration as the previous Guarantee Period will
commence automatically at the end of the previous Guarantee Period unless the
Company receives, in writing [within ____ days] prior to the end of such
Guarantee Period, an election by the Participant of a different Guarantee Period
from among those being offered by the Company at such time, or instructions to
transfer all or a portion of the Guarantee Amount to one or more Sub-Accounts in
accordance with the Transfer Privilege provision. Each new Guarantee Amount must
be at least the amount set forth on the Certificate Specifications page unless
it is equal to the entire Guarantee Amount being transferred.
8
<PAGE>
GUARANTEED INTEREST RATES
The Company periodically will establish an applicable Guaranteed Interest
Rate for each Guarantee Period offered by the Company. These rates will be
guaranteed for the duration of the respective Guarantee Periods.
No Guaranteed Interest Rate will be less than the minimum rate per year set
forth on the Certificate Specifications page, compounded annually.
FIXED ACCUMULATION VALUE
Upon receipt of a Purchase Payment by the Company, all or that portion, if
any, of the Net Purchase Payment which is allocated to the Fixed Account will be
credited to the Participant's Account and allocated to the Guarantee Period(s)
selected by the Participant. The fixed accumulation value, if any, of a
Participant's Account for any Valuation Period is equal to the sum of the values
of all Guarantee Amounts credited to the Participant's Account for such
Valuation Period.
TRANSFER PRIVILEGE
At any time during the Accumulation Period the Participant may transfer all
or part of the Participant's Account Value to one or more Sub-Accounts or
Guarantee Periods, subject to the conditions set forth below. A transfer will
generally be effective on the date the request for transfer is received by the
Company, however, the Company reserves the right in its sole discretion to delay
the effective date of any transfer to or from the Fixed Account.
Transfers involving Sub-Accounts will reflect the purchase or cancellation
of Variable Accumulation Units having an aggregate value equal to the dollar
amount being transferred to or from a particular Sub-Account. The purchase or
cancellation of such units shall be made using Variable Accumulation Unit values
of the applicable Sub-Account for the Valuation Period during which the transfer
is effective. Transfers to a Guarantee Period will result in a new Guarantee
Period for the amount being transferred. Any such Guarantee Period will begin on
the effective date of the transfer and end on the Expiration Date. The amount
transferred into such Guarantee Period will earn interest at the Guaranteed
Interest Rate declared by the Company for that Guarantee Period as of the
effective date of the transfer.
Transfers will be subject to the following conditions: (1) not more than 12
transfers may be made in any Account Year; (2) the amount being transferred from
a Sub-Account may not be less than the amount set forth on the Certificate
Specifications page unless the total Participant's Account Value attributable to
a Sub-Account is being transferred; (3) any Participant's Account Value
remaining in a Sub-Account may not be less than the amount set forth on the
Certificate Specifications page; and (4) the total Participant's Account Value
attributable to the Guarantee Amount must be transferred, except for an
"interest out" transfer (I.E., the entire amount of interest credited to all
Guarantee Amounts during the current Account Year is transferred to one or more
Sub-Accounts). In addition, transfers of a Guarantee Amount (except interest
credited to such Guarantee Amount during the current Account Year) will be
subject to the market value adjustment described below unless the transfer is
effective within 30 days prior to the Expiration Date applicable to the
Guarantee Amount. Transfers involving Variable Accumulation Units shall be
subject to such terms and conditions as may be imposed by the Funds. Similarly,
the Company reserves the right in its sole discretion to delay transfers of a
Guarantee Amount for reasons similar to those underlying delays of transfers
among Sub-Accounts. The Company also reserves the right in its sole discretion
to refuse or delay all transfer requests initiated on behalf of a Participant by
any third party authorized to make such requests. Currently, there is no charge
for transfers; however, the Company reserves the right to impose a charge for
each transfer as shown on the Certificate Specifications page. The Company
reserves the right to limit the amount which may be transferred from the
Sub-Accounts to the Fixed Account.
ACCOUNT FEE
Prior to the Annuity Commencement Date, on each Account Anniversary the
Company will deduct from the value of each Participant's Account an annual
account fee to reimburse the Company for administrative expenses relating to the
contract and the Participant's Account. In Account Years one through five the
9
<PAGE>
account fee is equal to the lesser of the amount specified on the Certificate
Specifications page or 2% of the Participant's Account Value; thereafter the
account fee may be changed annually, but in no event may it exceed the lesser of
the maximum amount specified on the Certificate Specifications page or 2% of the
Participant's Account Value. The account fee will be deducted on a PRO RATA
basis from amounts allocated to each Guarantee Period and each Sub-Account in
which the Participant's Account is invested at the time of such deduction. If a
Participant's Account is surrendered for its full value on other than an Account
Anniversary, the account fee will be deducted in full at the time of such
surrender. The Company will waive the account fee when either (a) the entire
Participant's Account Value has been allocated to the Fixed Account during the
entire previous Account Year, or (b) the Participant's Account Value is greater
than the amount specified on the Certificate Specifications page on the Account
Anniversary. On the Annuity Commencement Date the value of the Participant's
Account will be reduced by a proportionate amount of the account fee to reflect
the time elapsed between the last Account Anniversary and the day before the
Annuity Commencement Date.
After the Annuity Commencement Date an annual account fee in an amount
specified on the Certificate Specifications page will be deducted in equal
amounts from each Variable Annuity payment made during the year. No such
deduction is made from Fixed Annuity payments.
CASH WITHDRAWALS, WITHDRAWAL CHARGES AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
At any time before the Annuity Commencement Date and during the lifetime of
the Annuitant, the Participant may elect to receive a cash withdrawal payment
from the Company by filing with the Company at its Annuity Service Mailing
Address, a written election in such form as the Company may require. Any such
election shall specify the amount of the withdrawal and will be effective on the
date that it is received by the Company. Any cash withdrawal payment will be
paid within seven days from the date the election becomes effective, except as
the Company may be permitted to defer such payment in accordance with the
Investment Company Act of 1940. The Company reserves the right to defer the
payment of amounts withdrawn from the Fixed Account for a period not to exceed
six months from the date written request for such withdrawal is received by the
Company.
The Participant may request a full surrender or a partial withdrawal. A full
surrender will result in a cash withdrawal payment equal to the value of the
Participant's Account at the end of the Valuation Period during which the
election becomes effective less the account fee, plus or minus any applicable
market value adjustment, and less any applicable withdrawal charge. A partial
withdrawal (I.E., a payment of an amount less than that paid under a full
surrender) will result in the cancellation of a portion of the Participant's
Account Value with an aggregate dollar value equal to the dollar amount of the
cash withdrawal payment, plus or minus any applicable market value adjustment
and plus any applicable withdrawal charge.
In the case of a partial withdrawal, the Participant may instruct the
Company as to the amounts to be withdrawn from each Sub-Account and/or Guarantee
Amount. If not so instructed, the Company will effect the partial withdrawal PRO
RATA from each Sub-Account and Guarantee Amount in which the Participant's
Account Value is invested at the end of the Valuation Period during which the
withdrawal becomes effective. If a partial withdrawal is requested which would
leave a Participant's Account Value less than the account fee, then such partial
withdrawal will be treated as a full surrender.
Cash withdrawals from a Sub-Account will result in the cancellation of
Variable Accumulation Units attributable to the Participant's Account with an
aggregate value on the effective date of the withdrawal equal to the total
amount by which the Sub-Account is reduced. The cancellation of such units will
be based on the Variable Accumulation Unit values of the Sub-Account for the
Valuation Period during which the cash withdrawal is effective.
All cash withdrawals of any Guarantee Amount, except those effective within
30 days prior to the Expiration Date of such Guarantee Amount or the withdrawal
of interest credited to such Guarantee Amount during the current Account Year,
will be subject to the market value adjustment described below.
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WITHDRAWAL CHARGES
If a cash withdrawal is made, a withdrawal charge may be assessed by the
Company. The amount of any withdrawal charge is determined as follows:
Old Payments and new Payments: With respect to a particular Account
Year, new Payments are those Payments made in that Account Year or in the
six immediately preceding Account Years; and old Payments are those Payments
not defined as new Payments.
Order of liquidation: For purposes of a full surrender or partial
withdrawal, each withdrawal is allocated first to the free withdrawal amount
and then to previously unliquidated Payments (on a first-in, first-out
basis) until all Purchase Payments have been liquidated.
Free withdrawal amount: The free withdrawal amount is equal to 10% of
any new Payments, irrespective of whether such new Payments have been
liquidated. Any portion of the free withdrawal amount that is not used in
the current Account Year is cumulative into future years.
Maximum withdrawal amount without a withdrawal charge: The maximum
amount that can be withdrawn without a withdrawal charge in an Account Year
is equal to the sum of: (a) any previously unliquidated free withdrawal
amount, and (b) any previously unliquidated old Payments.
Amount subject to withdrawal charge: For any partial withdrawal or full
surrender, the amount subject to withdrawal charge is the amount of the
partial withdrawal or full surrender less the maximum withdrawal amount
without a withdrawal charge, up to a maximum of the sum of all unliquidated
new Payments.
Withdrawal charge percentage: The withdrawal charge percentage varies
according to the number of complete Account Years between the Account Year
in which a Purchase Payment was credited to the Participant's Account and
the Account Year in which it is withdrawn.
Amount of withdrawal charge: The amount of the withdrawal charge is
determined by multiplying the amount subject to a withdrawal charge by the
withdrawal charge percentages(s) set forth on the Certificate Specifications
page.
No withdrawal charge is imposed upon amounts applied to purchase an annuity.
NURSING HOME WITHDRAWAL PRIVILEGE
The Company will waive the withdrawal charge arising from a full surrender
if: (1) at least one year has elapsed since the Certificate's Date of Coverage,
and (2) the Participant is confined to an eligible nursing home and has been
confined there for at least the preceding one hundred eighty (180) days. Proof
of the Participant's confinement to an eligible nursing home must be provided to
the Company at its Annuity Service Mailing Address in such form as the Company
may require.
For purposes of this section, an eligible nursing home is a licensed
hospital or licensed skilled or intermediate care nursing facility at which
medical treatment is available on a daily basis and daily medical records are
kept for each patient.
MARKET VALUE ADJUSTMENT
Any cash withdrawal (which for purposes of this section includes transfers,
distributions on the death of a Participant, and amounts applied to purchase an
annuity) of a Guarantee Amount, other than a withdrawal effective within 30 days
prior to the Expiration Date of the Guarantee Amount, or the withdrawal of
interest credited on such Guarantee Amount during the current Account Year, will
be subject to a market value adjustment.
The market value adjustment will reflect the relationship between the
current rate (as described in the formula below) for the amount being withdrawn
and the Guaranteed Interest Rate applicable to the amount being withdrawn. It
also reflects the time remaining in the applicable Guarantee Period.
11
<PAGE>
The market value adjustment will be determined by multiplying the amount
being withdrawn after the deduction of any applicable account fee and before
deduction of any applicable withdrawal charge by the market value adjustment
factor. The market value adjustment factor is:
[(1 + I)/(1 + J+b)]N/12 -1
where,
I is the Guaranteed Interest Rate being credited to the Guarantee Amount
subject to the market value adjustment,
J is the Guaranteed Interest Rate declared by the Company, as of the
effective date of the application of the market value adjustment, for current
allocations to Guarantee Periods equal to the balance of the Guarantee Period of
the Guarantee Amount subject to the market value adjustment, rounded to the next
higher number of complete years (the current rate),
b is a factor which the Company will determine for each Certificate and
which is set forth on the Certificate Specifications page and which will not
exceed .25%, and
N is the number of complete months remaining in the Guarantee Period of the
Guarantee Amount subject to the market value adjustment.
In the determination of J, if the Company does not currently offer the
applicable Guarantee Period, then the rate will be determined by linear
interpolation of the current rates for Guarantee Periods that are available.
DEATH BENEFIT
DEATH BENEFIT PROVIDED BY THE CONTRACT
If the Annuitant dies while this contract and the applicable Certificate are
in effect and before the Annuity Commencement Date, the Company, upon receipt of
Due Proof of Death of the Annuitant, will pay a death benefit to the Beneficiary
in accordance with this Death Benefit provision. If there is no designated
Beneficiary living on the date of death of the Annuitant, the Company will pay
the death benefit upon receipt of Due Proof of Death of both the Annuitant and
the designated Beneficiary in one sum to the Participant or, if the Annuitant
was the Participant, to the estate of the deceased Participant/Annuitant. If the
death of the Annuitant occurs on or after the Annuity Commencement Date, no
death benefit will be payable under the contract except as may be provided under
the form of annuity elected.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the death benefit applied under one or
more of the Annuity Options in accordance with the contract's settlement
provisions to effect a Variable Annuity or a Fixed Annuity or a combination of
both for the Beneficiary as Payee after the death of the Annuitant. This
election may be made or subsequently revoked by filing with the Company at its
Annuity Service Mailing Address, a written election or revocation of an election
in such form as the Company may require. Any election or revocation of an
election of a method of settlement of the death benefit by the Participant will
become effective on the date it is received by the Company. For the purposes of
the Payment of Death Benefit section below, any election of the method of
settlement of the death benefit by the Participant which is in effect on the
date of death of the Annuitant will be deemed effective on the date Due Proof of
Death of the Annuitant is received by the Company.
If no election of a method of settlement of the death benefit by the
Participant is in effect on the date of death of the Annuitant, the Beneficiary
may elect (a) to receive the death benefit in the form of a cash payment, in
which event the Participant's Account will be cancelled; or (b) to have the
death benefit applied under one or more of the Annuity Options in accordance
with the settlement provisions to effect, on the Annuity Commencement Date
determined in the Payment of Death Benefit section below, a Variable Annuity or
a Fixed Annuity or a combination of both for the Beneficiary as Payee. This
election may be made by filing with the Company at its Annuity Service Mailing
Address, a written election in such form as the Company
12
<PAGE>
may require. Any written election of a method of settlement of the death benefit
by the Beneficiary will become effective on the later of: (a) the date the
election is received by the Company; or (b) the date Due Proof of Death of the
Annuitant is received by the Company. If a written election by the Beneficiary
is not received by the Company within 60 days following the date Due Proof of
Death of the Annuitant is received by the Company, the Beneficiary shall be
deemed to have elected a cash payment as of the last day of such 60 day period.
PAYMENT OF DEATH BENEFIT
If the death benefit is to be paid in cash to the Beneficiary, payment will
be made within seven days of the date the election becomes effective or is
deemed to become effective, except as the Company may be permitted to defer any
such payment in accordance with the Investment Company Act of 1940. If the death
benefit is to be paid in one sum to the Participant, or, in the event the
Annuitant was the Participant, to the estate of the deceased
Participant/Annuitant, payment will be made within seven days of the date Due
Proof of Death of the Annuitant, the Participant, and/or designated Beneficiary,
as applicable, is received by the Company. If settlement under one or more of
the Annuity Options is elected, the Annuity Commencement Date will be the first
day of the second calendar month following the effective date or the deemed
effective date of the election and the Participant Account will be maintained in
effect until the Annuity Commencement Date.
AMOUNT OF DEATH BENEFIT
The death benefit is determined as of the Death Benefit Date.
If the Annuitant was age 85 or less on the Date of Coverage, the death
benefit is equal to the greatest of:
(1) the Participant's Account Value for the Valuation Period in which the Death
Benefit Date occurs;
(2) the amount which would have been payable in the event of a full surrender of
the Participant's Account on the Death Benefit Date;
(3) the Participant's Account Value on the Seven Year Anniversary immediately
preceding the Death Benefit Date, adjusted for any subsequent Purchase
Payments and partial withdrawals and charges made between such Seven Year
Anniversary and the Death Benefit Date;
(4) the greatest of the Participant's Account Values on any Account Anniversary
prior to the Annuitant's 80th birthday, adjusted for any subsequent Purchase
Payments and partial withdrawals and charges made between such Account
Anniversary and the Death Benefit Date; and
(5) the total Purchase Payments made with respect to the Participant's Account,
adjusted for any partial withdrawals, accumulated as indicated below.
In determining the amount payable under (5), each Purchase Payment and
amount transferred to the Participant's Variable Account will accumulate daily
at a rate equivalent to 5% per year until the first day of the month following
the Annuitant's 80th birthday. No such accumulation will apply to a Purchase
Payment or amount transferred once that Purchase Payment or amount so
transferred has, as a result of such accumulation, grown to double its original
amount. Partial withdrawals will affect the amount payable under (5) on a basis
proportional to the reduction in the Participant's Account Value brought about
by such withdrawal. Transfers between the Fixed Account and the Variable Account
will shift the amounts accumulating under (5) on a basis proportional to the
reduction in the Participant's Account from which the transfer was made.
If the Annuitant was age 86 or older on the Date of Coverage, the death
benefit will be equal to (2) above.
If (2), (3), (4), or (5) is operative, the Participant's Account Value will
be increased by the excess of (2), (3), (4), or (5), as applicable, over (1),
and the increase will be allocated to the Sub-Accounts based on the respective
values of the Sub-Accounts on the Death Benefit Date. If no portion of the
Participant's Account is allocated to the Sub-Accounts, the entire increase will
be allocated to the Sub-Account invested in either a money market Fund, if
available, or in the Company's general account.
13
<PAGE>
SETTLEMENT PROVISIONS
GENERAL
On the Annuity Commencement Date, the adjusted value of the Participant's
Account as determined in accordance with the Determination of Amount provision
below will be applied, as specified by the Participant, under one or more of the
Annuity Options provided in the contract or under such other settlement options
as may be agreed to by the Company. However, if the amount to be applied under
any Annuity Option is less than the "Minimum Annuity Application Amount," set
forth on the Certificate Specifications page, or if the first annuity payment
payable in accordance with such option is less than the "Minimum Initial Annuity
Payment Amount" set forth on the Certificate Specifications page, the Company
will pay the amount to be applied in a single payment to the Payee.
After the Annuity Commencement Date, no change of Annuity Option is
permitted and no payments may be requested under the Cash Withdrawals provision
of the contract. Exchanges of Variable Annuity Units are permitted.
ELECTION AND EFFECTIVE DATE OF ELECTION
During the lifetime of the Annuitant and prior to the Annuity Commencement
Date, the Participant may elect to have the adjusted value of the Participant's
Account applied on the Annuity Commencement Date under one or more of the
Annuity Options provided in the contract; if more than one person is named as
Annuitant, due to the designation of a co-annuitant, the Participant may elect
to name one of such persons to be the sole Annuitant as of the Annuity
Commencement Date. The Participant may also change any election but any election
or change of election must be effective at least 30 days prior to the Annuity
Commencement Date. This election or change of election may be made by filing
with the Company as its Annuity Service Mailing Address, a written election or
change of election in such form as the Company may require. Any such election or
change of election will become effective on the date it is received by the
Company. If no such election is in effect on the 30th day prior to the Annuity
Commencement Date, the adjusted value of the Participant's Account will be
applied under Annuity Option B, for a life annuity with 120 monthly payments
certain. If there is no election of a sole Annuitant in effect on the 30th day
prior to the Annuity Commencement Date, the person designated as co-annuitant
will be the Payee under the applicable Annuity Option.
Any such election may specify the proportion of the adjusted value of the
Participant's Account to be applied to provide a Fixed Annuity and/or a Variable
Annuity. In the event the election does not so specify, then the portion of the
adjusted value of the Participant's Account to be applied to provide a Fixed
Annuity and/or a Variable Annuity will be determined on a PRO RATA basis from
the composition of the Participant's Account on the Annuity Commencement Date.
The Annuity Options in the contract may also be elected as provided in the
Death Benefit section of the contract.
DETERMINATION OF AMOUNT
The adjusted value of the Participant's Account is applied to provide a
Variable Annuity or a Fixed Annuity or a combination of both. This value shall
be equal to the Participant's Account Value for the Valuation Period which ends
immediately preceding the Annuity Commencement Date, minus a proportionate
amount of the account fee to reflect the time elapsed between the last Account
Anniversary and the day before the Annuity Commencement Date, plus or minus any
applicable market value adjustment and minus any applicable premium or similar
tax.
EFFECT OF ANNUITY COMMENCEMENT DATE ON PARTICIPANT'S ACCOUNT
The Participant's Account will be cancelled on the Annuity Commencement
Date.
ANNUITY COMMENCEMENT DATE
The Annuity Commencement Date is set forth on the Certificate Specifications
page. This date may be changed from time to time by the Participant provided
that each change is effective at least 30 days prior to the then current Annuity
Commencement Date and the new Annuity Commencement Date is a date which
14
<PAGE>
is: (1) at least 30 days after the effective date of the change; (2) the first
day of a month; and (3) not later than the first day of the first month
following the Annuitant's 90th birthday. Any change of the Annuity Commencement
Date may be made by filing with the Company at its Annuity Service Mailing
Address, a written designation of a new Annuity Commencement Date in such form
as the Company may require. Any such change will become effective on the date
the designation is received by the Company.
The Annuity Commencement Date may also be changed by an election of a
settlement option as provided in the Death Benefit section of this contract.
FIXED ANNUITY PAYMENTS
The dollar amount of each Fixed Annuity payment shall be determined in
accordance with the annuity payment rates shown on pages 17 and 18, which are
based on the minimum guaranteed interest rate of 3% per year or, if more
favorable to the Payee(s), in accordance with the annuity payment rates
published by the Company and in use on the Annuity Commencement Date.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first Variable Annuity payment shall be determined
in accordance with the annuity payment rates shown on pages 17 and 18, which are
based on an assumed interest rate of 3% per year.
All Variable Annuity payments other than the first are determined by means
of Annuity Units credited with respect to the particular Payee. The number of
Annuity Units to be credited in respect of a particular Sub-Account is
determined by dividing that portion of the first Variable Annuity payment
attributable to that Sub-Account by the Annuity Unit value of that Sub-Account
for the Valuation Period which ends immediately preceding the Annuity
Commencement Date. The resulting number of Annuity Units of each Sub-Account
credited with respect to the Payee remains fixed unless an exchange of Annuity
Units is made pursuant to the Exchange of Variable Annuity Units section below.
The dollar amount of each Variable Annuity payment after the first may increase,
decrease or remain constant, and is equal to the sum of the amounts determined
by multiplying the number of Annuity Units of a particular Sub-Account credited
with respect to the Payee by the Annuity Unit value for the particular
Sub-Account for the Valuation Period which ends immediately preceding the due
date of each subsequent Variable Annuity payment.
ANNUITY UNIT VALUE
The Annuity Unit value for each Sub-Account was established at $10.00 for
the first Valuation Period of the particular Sub-Account. The Annuity Unit value
for the particular Sub-Account for any subsequent Valuation Period is determined
by multiplying the Annuity Unit value for the particular Sub-Account for the
immediately preceding Valuation Period by the Net Investment Factor for the
particular Sub-Account for the current Valuation Period and then multiplying
that product by a factor to neutralize the assumed interest rate of 3% per year
used to establish the annuity payment rates found in the contract. The factor is
[0.99991902] for a one day Valuation Period.
EXCHANGE OF VARIABLE ANNUITY UNITS
After the Annuity Commencement Date the Payee may, by filing a written
request with the Company at its Annuity Service Mailing Address, exchange the
value of a designated number of Annuity Units of particular Sub-Accounts then
credited with respect to such Payee for other Annuity Units, the value of which
would be such that the dollar amount of an annuity payment made on the date of
the exchange would be unaffected by such exchange. The maximum number of
exchanges that may be made in any Account Year is set forth on the Certificate
Specifications page.
Exchanges may be made among the Sub-Accounts only. Exchange shall be made
using the Annuity Unit values for the Valuation Period during which the request
for exchange is received by the Company.
15
<PAGE>
ACCOUNT FEE
After the Annuity Commencement Date an annual account fee equal to the
amount specified on the Certificate Specifications page will be deducted in
equal amounts from each Variable Annuity payment made during the year as
provided in the Contract Values During Accumulation Period section of this
contract. No such deduction is made from Fixed Annuity payments.
DESCRIPTION OF ANNUITY OPTIONS
Annuity Options A, B, C and D are available on either a Fixed Annuity or a
Variable Annuity basis. Annuity Option E is available on a Fixed Annuity basis
only.
Annuity Option A. Life Annuity: Monthly payments during the lifetime of the
Payee.
Annuity Option B. Life Annuity with 60, 120, 180 or 240 Monthly Payments
Certain: Monthly payments during the lifetime of the Payee and in any event for
sixty (60), one hundred twenty (120), one hundred eighty (180) or two hundred
forty (240) months certain as elected.
Annuity Option C. Joint and Survivor Annuity: Monthly payments payable
during the joint lifetime of the Payee and a designated second person and during
the lifetime of the survivor. During the lifetime of the survivor variable
monthly payments, if any, will be determined using the percentage chosen at the
time of the election of this option of the number of each type of Annuity Unit
credited with respect to the Payee, and each fixed monthly payment, if any, will
be equal to the same percentage of the Fixed Monthly payment payable during the
joint lifetime of the Payee and designated second person.
Annuity Option D. Monthly Payments for a Specified Period Certain: Monthly
payments for any specified period of time (at least (5) years but not exceeding
thirty (30) years), as elected.
Annuity Option E. Fixed Payments: The amount applied to provide fixed
payments in accordance with the Annuity Option will be held by the Company at
interest. Fixed payments will be made in such amounts and at such times (at
least over a period of five (5) years) as may be agreed upon with the Company
and will continue until the amount held by the Company with interest is
exhausted. The final payment will be for the balance remaining and may be les
than the amount of each preceding payment. Interest will be credited on an
annual basis on the amount remaining unpaid at a rate which shall be determined
by the Company from time to time but which shall not be less than 3% per year
compounded annually. The rate so determined may be changed at any time and as
often as may be determined by the Company, provided, however, that the rate may
not be reduced more frequently than once during each calendar year.
AMOUNTS PAYABLE ON DEATH OF PAYEE
In the event of the death of the Payee on or after the Annuity Commencement
Date, the Company will pay any remaining payments under any Annuity Option then
in effect to the Payee's designated beneficiary as they become due. If there is
no designated beneficiary entitled to these remaining payments then living, the
Company will pay the amount specified in the schedule below for any Annuity
Option then in effect in one sum to the deceased Payee's estate. Any beneficiary
who becomes entitled to any remaining payments under any Annuity Option may
elect to receive the amount specified in the schedule below for such option in
one sum. In the event of the death of a beneficiary who has become entitled to
receive any remaining payments under any Annuity Option, the Company will pay
the amount specified for such option in the schedule below in one sum to the
deceased beneficiary's estate. All payments made in one lump sum by the Company,
as provided in this paragraph, are made in lieu of paying any remaining payments
under the Annuity Option then in effect.
<TABLE>
<CAPTION>
Option Amount
- --------- --------------------------------------------------------------------------
<C> <S>
B The discounted value of the remaining payments, if any, for the certain
period.
D The discounted value of the remaining payments, if any, for the certain
period.
E The unpaid balance of the proceeds and interest.
</TABLE>
In the case of Options B and D the discounted value will be based, for
payments being made on a variable basis, on interest conpounded annually at the
assumed interest rate and on the assumptions that
16
<PAGE>
the particular Annuity Unit values applicable to the remaining payments will be
the particular Annuity Unit values for the Valuation Period which ends on the
day before the date of the determination and that the discounted value will
remain unchanged thereafter.
ANNUITY PAYMENT RATES
The annuity payment rate tables below show, for each $1,000 applied, the
dollar amount of both (a) the first monthly Variable Annuity payment based on
the assumed interest rate of 3% and (b) the monthly Fixed Annuity payment, when
the payment is based on the minimum guaranteed interest rate of 3% per year.
The mortality table used in determining the annuity payment rates for
Annuity Options A, B and C is the 1983 Individual Annuitant Mortality Table A.
In using this mortality table, ages of Annuitants will be reduced by one year
for Annuity Commencement Dates occurring during the 1990s, reduced by two years
for Annuity Commencement Dates occurring during the decade 2000-2009, and so on.
The annuity payment rates in the tables shown below reflect rates of
mortality appropriate for Annuity Commencement Dates occurring during the 1980s.
Thus, for Annuity Commencement Dates occurring during the 1990s the term
ADJUSTED AGE as used in the tables below, means actual age less one year.
ADJUSTED AGE shall mean actual age less two year for Annuity Commencement Dates
occurring during the decade 2000-2009, and so on.
ADJUSTED AGES will be determined based on the actual age(s) of the
Annuitant(s), in completed years and months, as of the Annuity Commement Date.
The tables below show annuity payment rates for exact ADJUSTED AGES; rates for
ADJUSTED AGES expressed in completed years and months will be based on straight
line interpolation between the appropriate annuity payment rates.
The dollar amount of each annuity payment for any adjusted age or
conbination of adjusted ages not shown below or for any other form of Annuity
Option agreed to by the Company will be quoted by the Company on request.
AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT PER $1,000
SINGLE LIFE ANNUITY
<TABLE>
<CAPTION>
OPTION B
LIFE ANNUITY WITH PAYMENTS CERTAIN
--------------------------------------------------
60 Payments 120 Payments 180 Payments 240 Payments
OPTION A
LIFE ANNUITY
- -----------------------
Adjusted ----------------------------------------------------------
Age Male Female Male Female Male Female Male Female Male Female
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20 3.04 2.93 3.03 2.93 3.03 2.93 3.03 2.93 3.03 2.93
25 3.14 3.02 3.14 3.02 3.14 3.02 3.14 3.02 3.13 3.01
30 3.28 3.13 3.28 3.13 3.27 3.12 3.27 3.12 3.26 3.12
35 3.44 3.26 3.44 3.26 3.44 3.26 3.43 3.25 3.41 3.24
40 3.66 3.42 3.65 3.42 3.64 3.42 3.63 3.41 3.60 3.40
45 3.93 3.63 3.92 3.63 3.90 3.63 3.87 3.61 3.82 3.59
50 4.27 3.90 4.26 3.90 4.22 3.89 4.17 3.86 4.08 3.82
55 4.70 4.25 4.68 4.25 4.62 4.22 4.53 4.18 4.39 4.11
60 5.28 4.72 5.25 4.70 5.14 4.66 4.96 4.57 4.71 4.44
65 6.10 5.35 6.03 5.32 5.81 5.22 5.46 5.05 5.02 4.79
70 7.23 6.25 7.07 6.18 6.61 5.96 5.96 5.60 5.27 5.12
75 8.82 7.56 8.44 7.39 7.49 6.89 6.38 6.14 5.42 5.35
80 11.06 9.53 10.17 9.07 8.33 7.89 6.66 6.55 5.49 5.47
85 14.16 12.48 12.12 11.19 8.97 8.74 6.81 6.77 5.51 5.50
</TABLE>
17
<PAGE>
OPTION C
JOINT AND SURVIVOR ANNUITY
(Assumed election of Joint and Two-Thirds Survivor)
<TABLE>
<CAPTION>
Adjusted Age of Female
Adjusted Age -----------------------------------------------------
of Male 55 60 65 70 75
- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
55 4.25 4.47 4.72 4.99 5.29
60 4.44 4.71 5.01 5.34 5.71
65 4.65 4.97 5.33 5.75 6.23
70 4.88 5.24 5.68 6.20 6.81
75 5.11 5.52 6.04 6.68 7.45
</TABLE>
OPTION D
PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
<TABLE>
<CAPTION>
Years Amount Years Amount Years Amount Years Amount
- --------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
5 17.91 12 8.24 19 5.73 26 4.59
6 15.14 13 7.71 20 5.51 27 4.47
7 13.16 14 7.26 21 5.32 28 4.37
8 11.68 15 6.87 22 5.15 29 4.27
9 10.53 16 6.53 23 4.99 30 4.18
10 9.61 17 6.23 24 4.84
11 8.86 18 5.96 25 4.71
</TABLE>
[PLEASE CONFIRM TABLES]
OWNERSHIP PROVISIONS
EXERCISE OF CONTRACT RIGHTS
The contract shall belong to the Owner. Unless any contract rights and
privileges have been expressly reserved by the Owner, the Participant shall be
entitled to exercise all rights and privileges in connection with such
Participant's Certificate. In any case, such rights and privileges can be
exercised without the consent of the Beneficiary (other than an irrevocable
Beneficiary) or any other person. Such rights and privileges may be exercised
only during the lifetime of the Annuitant and prior to the Annuity Commencement
Date, except as otherwise provided in the contract.
The Annuitant becomes the Payee on and after the Annuity Commencement Date.
The Beneficiary becomes the Payee on the death of the Annuitant. Such Payees may
thereafter exercise such rights and privileges, if any, of ownership which
continue.
DEATH OF PARTICIPANT
If a Participant under a Non-Qualified contract dies prior to the Annuitant
and before the Annuity Commencement Date, that Participant's Account Value, plus
or minus any applicable market value adjustment must be distributed to the
"designated beneficiary" (as defined below) either (1) within five years after
the date of death of the Participant, or (2) as an annuity over some period not
greater than the life or expected life of the designated beneficiary, with
annuity payment beginning within one year after the date of death of the
Participant. For this purpose (and for purposes of Section 72(s) of the Code),
the person named as Beneficiary shall be considered the designated beneficiary,
and if no person then living has been so named, then the Annuitant shall
automatically be the designated beneficiary. If the designated beneficiary is
the surviving spouse of the deceased Participant, the spouse can elect to
continue the Certificate in the spouse's own name as Participant, in which case
the mandatory distribution requirements will apply on the spouse's death.
If the deceased Participant was also the Annuitant, the Death Benefit
provision of the contract controls unless the deceased Participant's surviving
spouse is the designated beneficiary and elects to continue the Certificate in
the spouse's own name as both Participant and Annuitant.
18
<PAGE>
If the Payee dies on or after the Annuity Commencement Date and before the
entire accumulation under such Participant's Account has been distributed, the
remaining portion of such Participant's Account, if any, must be distributed as
least as rapidly as the method of distribution then in effect.
In any case in which a non-natural person constitutes a holder of the
Certificate for the purposes of Section 72(s) of the Code, (1) the distribution
requirements described above shall apply upon the death of any Annuitant, and
(2) a change in any Annuitant shall be treated as the death of such Annuitant.
In all cases, no Participant or Beneficiary shall be entitled to exercise
any rights that would adversely affect the treatment of the contract as an
annuity contract under the Code.
VOTING OF FUND SHARES
The Company will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds, but will follow voting instructions received from
persons having the right to give voting instructions. The Owner or Participant,
as the case may be, is the person having the right to give voting instructions
prior to the Annuity Commencement Date. On or after the Annuity Commencement
Date the Payee is the person having such voting rights. Any shares attributable
to the Company and any Fund shares for which no timely voting instructions have
been received will be voted by the Company in the same proportion as the shares
for which instructions are received from persons have such voting rights.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under retirement or deferred compensation plans, other than rights
afforded by the Investment Company Act of 1940, nor do they have any duty to
inquire as to the instructions received or the authority of Owners,
Participants, or others to instruct on the voting of Fund shares. Except as the
Variable Account or the Company has actual knowledge to the contrary, the
instructions given by Owners, Participants and Payees will be valid as they
affect the Variable Account, the Company and any others having voting
instruction rights with respect to the Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each Owner, each Participant and
each Payee having the right to give voting instructions at least 10 days prior
to each meeting of the shareholders of the Fund. The number of particular Fund
shares as to which each such person is entitled to give instructions will be
determined by the Company as of a date not more than 90 days prior to each such
meeting. Prior to the Annuity Commencement Date, the number of Fund shares as to
which voting instructions may be given to the Company is determined by dividing
the value of all the Variable Accumulation Units of the particular Sub-Account
credited to the Participant's Account by the net asset value of one Fund share
as of the same date. On or after the Annuity Commencement Date, the number of
Fund shares as to which such instructions may be given by a Payee is determined
by dividing the reserve held by the Company in the particular Sub-Account with
respect to the particular Payee by the net asset value of a Fund share as of the
same date.
PERIODIC REPORTS
During the Accumulation Period the Company will send to the Participant, or
such other person having voting rights, at least once during each Account Year,
a statement showing the number, type and value of Accumulation Units credited to
the Participant's Account and the fixed accumulation value of such account,
which statement shall be accurate as of a date not more than two months previous
to the date of mailing. In addition, every person having voting rights will
receive such reports or prospectuses concerning the Variable Account and each
Fund as may be required by the Investment Company Act of 1940 and the Securities
Act of 1933. The Company will also send such statements reflecting transactions
in the Participant's Account as may be required by applicable laws, rules and
regulations.
BENEFICIARY PROVISION
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary designation contained in the Application, if any, will
remain in effect until changed. The interest of any Beneficiary is subject to
the Beneficiary surviving the Annuitant and, in the case of a Non-Qualified
Contract, to the Beneficiary surviving the Participant as well.
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Subject to the rights of an irrevocable Beneficiary, the Participant may
change or revoke the designation of a Beneficiary at any time while the
Annuitant is living. To do so, the Participant must file the change or
revocation with the Company at its Annuity Service Mailing Address in such form
as the Company may require. The change or revocation will not be binding upon
the Company until it is received by the Company. When it is so received the
change or revocation will be effective as of the date on which the Beneficiary
designation or revocation was signed, but the change or revocation will be
without prejudice to the Company on account of any payment made or any action
taken by the Company before the Company receives and acknowledges the change or
revocation.
GENERAL PROVISIONS
AGE AND SEX MISSTATEMENT
If any date of birth or sex, or both, has been misstated in the Application,
if any, or elsewhere, the amounts payable pursuant to the contract will be the
amounts which would have been provided using the correct age or sex, or both.
Any deficiency in payments already made by the Company shall be paid promptly
and any excess in the payments already made by the Company shall be charged
against the benefits falling due after the adjustment.
CONTRACT
The contract is issued in consideration of the Contract Application and
payment of the Purchase Payment(s). This contract and the Contract Application,
a copy of which is attached, constitute the entire contract. All statements made
in the Contract Application and each Participant's Application will be deemed
representations and not warranties, and no statement will void the contract or a
Participant's interest therein or be used in defense to a claim unless it is
contained in the Contract Application or the Application of that Participant and
a copy is attached to the contract or Certificate, as applicable, at issue. Only
the President, a Vice President, the Actuary or the Secretary of the Company has
authority to agree on behalf of the Company to any alteration of the contract or
any Certificate, or to any waiver of the rights or requirements of the Company.
CURRENCY
All amounts due under the contract are payable in U.S. dollars, lawful money
of the United States of America.
DETERMINATION OF VALUES
The method of determination by the Company of the Net Investment Factor and
the number and value of Accumulation Units and Annuity Units shall be conclusive
upon the Owner, the Participant, any Payee and any Beneficiary.
DISCONTINUANCE OF NEW PARTICIPANTS
The Company, by giving 30 days' prior written notice to the Owner, may limit
or discontinue the acceptance of new Applications and the issuance of new
Certificates under this contract. Such limitation or discontinuance shall have
no effect on rights or benefits with respect to any Participant's Account
established prior to the effective date of such limitation or discontinuance.
GOVERNING LAW
This contract and all Certificates issued in connection with it will be
governed by the laws of the jurisdiction where the Contract Application is
signed.
GUARANTEES
Subject to the Net Investment Factor provision, the Company guarantees that
the dollar amount of Variable Annuity payments made during the lifetime of the
Payee(s) will not be adversely affected by the actual mortality experience of
the Company or by the actual expenses incurred by the Company in excess of the
expense deductions provided for in the contract and other contracts providing
benefits which vary in accordance with the investment performance of the
Sub-Accounts.
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INCONTESTABILITY
This contract is incontestable, subject to the Age and Sex Misstatements,
Proof of Age and Proof of Survival provisions contained herein.
MODIFICATION
Upon notice to the Owner, the Participant(s) or the Payee(s) during the
annuity period, this contract may be modified by the Company, but only if such
modification (a) is necessary to make the contract or the Variable Account
comply with any law or regulation issued by a governmental agency to which the
Company or the Variable Account is subject; or (b) is necessary to assure
continued qualification of the contract under the Code or other federal or state
laws relating to retirement annuities or annuity contracts; or (c) is necessary
to reflect a change in the operation of the Variable Account or the
Sub-Accounts; (d) provides additional Variable Account and/or Fixed Account
options; or (e) as may otherwise be in the best interests of Owners or
Participants, as applicable. In the event of any such modification, the Company
may make appropriate endorsement to the contract to reflect such modification.
In addition, upon 60 days' prior written notice to the Owner, the contract
may be modified by the Company to change the withdrawal charges, account fees,
mortality and expense risk charges, administrative expense charges, the tables
used in determining the amount of the first monthly Variable Annuity and Fixed
Annuity payments and the formula used to calculate the market value adjustment,
provided that any such modification shall apply only to Participant's Accounts
established after the effective date of the modification. All of the charges and
the annuity tables which are provided in the contract prior to any such
modification will remain in effect permanently, unless improved by the Company,
with respect to Participant's Accounts established prior to the effective date
of such modification,
NONPARTICIPATING
The contract is nonparticipating and will not share in any profits or
surplus earnings of the Company and therefore, no dividends are payable.
PAYMENTS BY THE COMPANY
All sums payable by the Company pursuant to the contract are payable only at
its Executive Office or such other place as may be designated by the Company.
The Company may require surrender of the contract upon final payment of all sums
payable by the Company pursuant to the contract.
PROOF OF AGE
The Company shall have the right to require evidence of the age of any Payee
under Annuity Options A, B, and C prior to the Annuity Commencement Date.
PROOF OF SURVIVAL
The Company shall have the right to require evidence of the survival of any
Payee under Annuity Options A, B and C at the time any payment payable to such
Payee is due.
SPLITTING UNITS
The Company reserves the right to split or combine the value of Variable
Accumulation Units, Annuity Unit or any of them. In effecting any such change of
unit values, strict equity will be preserved and no change will have a material
effect on the benefits or other provisions of this contract.
RIGHTS RESERVED BY THE COMPANY
The Company reserves the right, to the extent permitted by law, to: (1)
deregister the Variable Account under the Investment Company Act of 1940; (2)
combine any two or more variable accounts; (3) operate the Variable Account as a
management investment company or any other form permitted by law; (4) substitute
shares of a Fund for shares of another investment company if shares of such Fund
are not available, or if, in the Company's judgment, further investment in such
Fund's shares is no longer appropriate; (5) add or delete Funds, or series or
sub-series thereof, and corresponding Sub-Accounts; (6) to add or remove
Guarantee Periods available at any time for election by a Participant; and (7)
restrict or eliminate any of the voting rights of Participants (or Owners) or
other persons who have voting rights as to the Variable Account.
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[LOGO]
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
A Wholly-Owned Subsidiary of Sun Life Assurance Company of Canada
<TABLE>
<S> <C> <C>
EXECUTIVE OFFICE: HOME OFFICE: ANNUITY SERVICE MAILING ADDRESS:
One Sun Life Executive Park Wilmington, Delaware Sun Life Annuity Service Center
Wellesley Hills, Massachusetts 02181 P.O. Box 1024
Boston, Massachusetts 02103
</TABLE>
FLEXIBLE PAYMENT DEFERRED COMBINATION VARIABLE AND FIXED GROUP ANNUITY CONTRACT
NONPARTICIPATING
ALL PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT WHEN BASED ON THE INVESTMENT
EXPERIENCE OF THE VARIABLE ACCOUNT ARE VARIABLE AND ARE NOT GUARANTEED AS TO
DOLLAR AMOUNT.
PAYMENTS AND VALUES BASED ON THE FIXED ACCOUNT ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN UPWARD AND DOWNWARD
ADJUSTMENTS IN AMOUNTS PAYABLE TO A PARTICIPANT, INCLUDING WITHDRAWALS,
TRANSFERS, AMOUNTS APPLIED TO PURCHASE AN ANNUITY, AND DISTRIBUTIONS RESULTING
FROM THE DEATH OF THE PARTICIPANT. PAYMENTS MADE FROM GUARANTEE AMOUNTS WHICH
ARE WITHIN 30 DAYS PRIOR TO THE END OF A GUARANTEE PERIOD OR THE WITHDRAWAL OF
INTEREST CREDITED TO GUARANTEE AMOUNTS DURING THE CURRENT ACCOUNT YEAR ARE NOT
SUBJECT TO THE MARKET VALUE ADJUSTMENT.
