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PROSPECTUS
May 1, 1998
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
FLEXIBLE PREMIUM VARIABLE
UNIVERSAL LIFE INSURANCE CONTRACT
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
HOME OFFICE: LITTLE ROCK, ARKANSAS 72201
SERVICE CENTER: P.O. BOX 9025
SPRINGFIELD, MASSACHUSETTS 01102-9025
1414 MAIN STREET, THIRD FLOOR
SPRINGFIELD, MASSACHUSETTS 01104-1007
PHONE: (800) 354-5333
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This Prospectus is for a flexible premium variable universal life insurance
contract (the "Contract") offered by Merrill Lynch Life Insurance Company
("Merrill Lynch Life"), a subsidiary of Merrill Lynch & Co., Inc.
Through the first 14 days following the in force date, the initial payment less
contract loading will be invested only in the division investing in the Money
Reserve Portfolio. Thereafter, the investment base may be reallocated to any
five of the 37 investment divisions of Merrill Lynch Variable Life Separate
Account (the "Separate Account"), the Merrill Lynch Life separate investment
account available under the Contract. The investments available through the
investment divisions include ten mutual fund portfolios of the Merrill Lynch
Series Fund, Inc.; seven mutual fund portfolios of the Merrill Lynch Variable
Series Funds, Inc.; two mutual fund portfolios of the AIM Variable Insurance
Funds, Inc.; one mutual fund portfolio of the Alliance Variable Products Series
Fund, Inc.; two mutual fund portfolios of the MFS Variable Insurance Trust; and
fifteen unit investment trusts in The Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities. Currently, the contract owner may change his or her
investment allocation as many times as desired.
The Contract provides an estate benefit through life insurance coverage on the
life of the insured. The Contract offers two death benefit options. At the
election of the contract owner, the death benefit may include the Contract's
cash value. Contract owners may purchase additional insurance through an
additional insurance rider, the amount of which may be increased or decreased
subject to certain conditions. Subject to certain conditions, Merrill Lynch Life
guarantees that the coverage will remain in force for the guarantee period. Each
payment will extend the guarantee period until such time as the guarantee period
extends to the insured's attained age 100. During this guarantee period, Merrill
Lynch Life will terminate the Contract only if the debt exceeds certain contract
values. After the guarantee period, the Contract will remain in force as long as
there is not excessive debt and as long as the cash value is sufficient to cover
the charges due. While the Contract is in force, the death benefit may vary to
reflect the investment results of the investment divisions chosen, but will
generally never be less than the current face amount or, after the insured's
attained age 100, the post 100 death benefit.
The Contract allows for additional payments. Contract owners may also borrow up
to the total loan value of the Contract, make partial withdrawals or turn in the
Contract for its net cash surrender value. The net cash surrender value will
vary with the investment results of the investment divisions chosen. Merrill
Lynch Life does not guarantee any minimum net cash surrender value.
It may not be advantageous to replace existing insurance with the Contract.
Within certain limits the Contract may be converted to a contract with benefits
that do not vary with the investment results of a separate account.
THE PURCHASE OF THIS CONTRACT INVOLVES CERTAIN RISKS. BECAUSE IT IS A VARIABLE
LIFE INSURANCE CONTRACT, THE VALUE OF THE CONTRACT REFLECTS THE INVESTMENT
PERFORMANCE OF THE SELECTED INVESTMENT OPTIONS. INVESTMENT RESULTS CAN VARY BOTH
UP AND DOWN AND CAN EVEN DECREASE THE VALUE OF PREMIUM PAYMENTS. THEREFORE,
CONTRACT OWNERS COULD LOSE ALL OR PART OF THE MONEY THEY HAVE INVESTED. MERRILL
LYNCH LIFE DOES NOT GUARANTEE THE VALUE OF THE CONTRACT. RATHER, CONTRACT OWNERS
BEAR ALL INVESTMENT RISKS.
LIFE INSURANCE IS INTENDED TO BE A LONG-TERM INVESTMENT. CONTRACT OWNERS SHOULD
EVALUATE THEIR INSURANCE NEEDS AND THE CONTRACT'S LONG-TERM INVESTMENT POTENTIAL
AND RISKS BEFORE PURCHASING THE CONTRACT.
PARTIAL WITHDRAWALS AND SURRENDER OF THE CONTRACT ARE SUBJECT TO TAX, AND IF
TAKEN BEFORE THE CONTRACT OWNER ATTAINS AGE 59 1/2 MAY ALSO BE SUBJECT TO A 10%
FEDERAL PENALTY TAX. LOANS MAY BE TAXABLE IF THE CONTRACT BECOMES A "MODIFIED
ENDOWMENT CONTRACT."
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT MUST BE
ACCOMPANIED BY CURRENT PROSPECTUSES FOR THE MERRILL LYNCH SERIES FUND, INC.; THE
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.; THE AIM VARIABLE INSURANCE FUNDS,
INC.; THE ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.; THE MFS VARIABLE
INSURANCE TRUST; AND THE MERRILL LYNCH FUND OF STRIPPED ("ZERO") U.S. TREASURY
SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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IMPORTANT TERMS............................................. 4
SUMMARY OF THE CONTRACT
Purpose of the Contract................................... 5
Availability and Payments................................. 6
CMA(R) Insurance Service.................................. 6
The Investment Divisions.................................. 6
How the Death Benefit Varies.............................. 6
How the Investment Base Varies............................ 7
Net Cash Surrender Value.................................. 7
Illustrations............................................. 7
Replacement of Existing Coverage.......................... 7
Rights to Cancel ("Free Look" Period) or Convert.......... 7
How Death Benefit and Cash Value Increases are Taxed...... 8
Loans..................................................... 8
Partial Withdrawals....................................... 8
Fees and Charges.......................................... 8
FACTS ABOUT THE SEPARATE ACCOUNT, THE FUNDS, THE ZERO TRUSTS
AND MERRILL LYNCH LIFE
The Separate Account...................................... 9
The Series Fund........................................... 10
The Variable Series Funds................................. 11
The AIM V.I. Funds........................................ 11
The Alliance Fund......................................... 12
The MFS Trust............................................. 12
Certain Risks of the Funds................................ 13
The Zero Trusts........................................... 14
Merrill Lynch Life and MLPF&S............................. 14
FACTS ABOUT THE CONTRACT
Who May be Covered........................................ 14
Purchasing a Contract..................................... 15
Additional Insurance Rider................................ 16
Additional Payments....................................... 16
Effect of Additional Payments............................. 16
Investment Base........................................... 17
Charges Deducted from the Investment Base................. 18
Contract Loading.......................................... 19
Charges to the Separate Account........................... 19
Charges to Fund Assets.................................... 20
Guarantee Period.......................................... 21
Cash Value................................................ 22
Loans..................................................... 22
Partial Withdrawals....................................... 23
Death Benefit Proceeds.................................... 24
Payment of Death Benefit Proceeds......................... 27
Accelerated Benefit Rider................................. 27
Rights to Cancel or Convert............................... 27
Reports to Contract Owners................................ 28
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MORE ABOUT THE CONTRACT
Using the Contract........................................ 28
Some Administrative Procedures............................ 29
Other Contract Provisions................................. 30
Income Plans.............................................. 31
Group or Sponsored Arrangements........................... 32
Unisex Legal Considerations for Employers................. 32
Selling the Contracts..................................... 32
Tax Considerations........................................ 33
Merrill Lynch Life's Income Taxes......................... 37
Reinsurance............................................... 37
MORE ABOUT THE SEPARATE ACCOUNT AND ITS DIVISIONS
About the Separate Account................................ 37
Changes Within the Account................................ 37
Net Rate of Return for an Investment Division............. 38
The Funds................................................. 38
The Zero Trusts........................................... 40
ILLUSTRATIONS
Illustrations of Death Benefits, Investment Base, Net Cash
Surrender Values and Accumulated Payments.............. 40
EXAMPLES
Additional Payments....................................... 46
Partial Withdrawals....................................... 47
Changing the Death Benefit Option......................... 48
Reduction in Face Amount.................................. 49
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
Directors and Executive Officers.......................... 50
Services Arrangement...................................... 50
State Regulation.......................................... 51
Year 2000................................................. 51
Legal Proceedings......................................... 51
Experts................................................... 51
Legal Matters............................................. 51
Registration Statements................................... 52
Financial Statements...................................... 52
Financial Statements of Merrill Lynch Variable Life
Separate Account....................................... S-1
Financial Statements of Merrill Lynch Life Insurance
Company................................................ G-1
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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IMPORTANT TERMS
additional payment: is a payment which may be made after the "free look"
period. Additional payments do not require evidence of insurability.
adjusted face amount: is equal to the lesser of the face amount at the
insured's attained age 100, and the cash value as of the date of death plus the
net amount at risk at the insured's attained age 100. The adjusted face amount
is used to determine the death benefit under option 1 at and after the insured's
attained age 100.
attained age: is the issue age of the insured plus the number of full years
since the contract date.
base premium: is the amount equal to the level annual premium which would be
necessary for the face amount of the Contract to endow on the contract
anniversary nearest the insured's age 100. Merrill Lynch Life assumes death
benefit option 1 is elected and further assumes a 5% annual rate of return on
the base premium less contract loading and a maximum cost of insurance charge.
Once determined, the base premium will not change.
cash value: is equal to the investment base plus any unearned charges for cost
of insurance and rider costs plus any debt less any accrued net loan cost since
the last contract anniversary (or since the contract date during the first
contract year).
cash value corridor factor: is used to determine the amount of death benefit
purchased by $1.00 of cash value. Merrill Lynch Life uses this factor in the
calculation of the variable insurance amount to make sure that the Contract
always meets the requirements of what constitutes a life insurance contract
under the Internal Revenue Code.
contract anniversary: is the same date of each year as the contract date.
contract date: is used to determine processing dates, contract years and
anniversaries. It is usually the business day next following the receipt of the
initial payment at the Service Center. It is also referred to as the policy
date.
contract loading: is chargeable to all payments for sales load, federal tax and
premium tax charges.
death benefit: prior to the insured's attained age 100, if option 1 is elected,
it is the larger of the face amount or the variable insurance amount; if option
2 is elected, it is the larger of the face amount plus the cash value or the
variable insurance amount. At and after the insured's attained age 100, the post
100 death benefit will apply.
death benefit proceeds: are equal to the death benefit plus the amount of any
insurance provided by a rider less any debt.
debt: is the sum of all outstanding loans on a Contract plus accrued interest.
excess sales load: a portion of the sales load calculated during the first two
policy years that may be refunded in the event of lapse or surrender during the
first two policy years. After policy year two, the excess sales load is zero.
face amount: is the minimum death benefit prior to the insured's attained age
100, as long as the Contract remains in force. The face amount will change if a
change in death benefit option is made or if a partial withdrawal is taken, and
can be reduced subject to certain conditions.
fixed base: is calculated in the same manner as the cash value except that 4.5%
is substituted for the net rate of return, the guaranteed maximum cost of
insurance rates and guaranteed maximum rider costs are substituted for current
rates and loans and repayments are not taken into account. After the end of the
guarantee period, the fixed base is zero.
guarantee period: is the time guaranteed that the Contract will remain in force
regardless of investment experience, unless the debt exceeds certain values. It
is the period that a comparable fixed life insurance contract (same face amount,
payments made, guaranteed mortality table, contract loading and guaranteed
maximum rider costs) would remain in force if credited with 4.5% interest per
year.
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in force date: is the date when the underwriting process is complete, the
initial payment is received and outstanding contract amendments (if any) are
received at the Service Center.
initial payment: is the payment required to put the Contract into effect.
investment base: is the amount available under a Contract for investment in the
Separate Account at any time. A contract owner's investment base is the sum of
the amounts invested in each of the selected investment divisions.
investment division: is any division in the Separate Account.
issue age: is the insured's age as of his or her birthday nearest the contract
date.
issue date: is the date that the Contract is issued. The contestable and
suicide periods are measured from this date.
net amount at risk: is the excess, as of a processing date, of the death
benefit (adjusted for interest at an annual rate of 4.5%) over the cash value,
but before the deduction for cost of insurance. The net amount at risk at the
insured's attained age 100 is used to determine the death benefit under option 1
at and after the insured's attained age 100.
net cash surrender value: is equal to the cash value less debt.
processing dates: are the contract date and the first day of each contract
quarter thereafter. Processing dates are the days when Merrill Lynch Life
deducts certain charges from the investment base.
processing period: is the period between consecutive processing dates.
target premium: is equal to 75% of the base premium.
variable insurance amount: is computed daily by multiplying the cash value
(plus certain excess sales load during the first 24 months after the Contract is
issued) by the cash value corridor factor for the insured at his or her attained
age.
SUMMARY OF THE CONTRACT
PURPOSE OF THE CONTRACT
This flexible premium variable universal life insurance contract offers a choice
of investments and an opportunity for the Contract's investment base, cash value
and death benefit to grow based on investment results.
Merrill Lynch Life does not guarantee that contract values will increase.
Depending on the investment results of selected investment divisions, the
investment base, cash value and death benefit may increase or decrease on any
day. The contract owner bears the investment risk. Merrill Lynch Life guarantees
to keep the Contract in force during the guarantee period subject to the effect
of any debt.
Life insurance is not a short-term investment. The contract owner should
evaluate the need for insurance and the Contract's long-term investment
potential and risks before purchasing a Contract.
The Contract should be purchased as a long-term investment designed to provide a
death benefit. The Contract's net cash surrender value, as well as its death
benefit, may be used to provide proceeds for various individual and business
planning purposes. However, loans and partial withdrawals will affect the net
cash surrender value and death benefit proceeds, and may cause the Contract to
lapse; in addition, partial withdrawals may be currently taxable. If the
performance of the investment divisions to which investment base is allocated is
not sufficient to provide funds for the specific planning purpose contemplated,
or if insufficient payments are made or Contract values maintained, then the
purchaser may not be able to utilize the Contract to achieve the purposes for
which it was purchased. Because the Contract is designed to provide benefits on
a long-term basis, before purchasing a Contract in connection with a specialized
purpose, a purchaser should consider whether the long-term nature of the
Contract, and the potential impact of any contemplated loans
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and partial withdrawals, are consistent with the purposes for which the Contract
is being considered. Using a Contract for a specialized purpose may have tax
consequences. (See "Tax Considerations" on page 33.)
AVAILABILITY AND PAYMENTS
The Contract is available in most jurisdictions in which Merrill Lynch Life does
business. A Contract may be issued for an insured from age 20 through age 85.
Merrill Lynch Life will not accept an initial payment that provides a guarantee
period of less than three months. The guarantee period is the period of time
Merrill Lynch Life guarantees that the Contract will remain in force regardless
of investment experience unless the debt exceeds certain values.
Contract owners may make additional payments. Contract owners may specify an
additional payment amount on the application to be paid on a monthly (for
payments from a CMA account only), quarterly, semi-annual or annual basis. For
additional payments not being withdrawn from a CMA account, Merrill Lynch Life
will send reminder notices for such amounts.
The Contract is not available to insure residents of certain municipalities in
Kentucky where premium taxes in excess of a certain level are imposed.
CMA(R) INSURANCE SERVICE
Contract owners who subscribe to the Merrill Lynch Cash Management Account(R)
financial service ("CMA account") may elect to have their Contract linked to
their CMA account electronically. Certain transactions will be reflected in
monthly CMA account statements. Payments may be transferred to and from the
Contract through a CMA account.
THE INVESTMENT DIVISIONS
Through the first 14 days following the in force date, the initial payment less
contract loading will be invested in the investment division of the Separate
Account investing in the Money Reserve Portfolio. Thereafter, the investment
base may be reallocated to up to five of the 37 investment divisions in the
Separate Account. (See "Changing the Allocation" on page 18.)
Payments are invested in investment divisions of the Separate Account. Ten
investment divisions of the Separate Account invest exclusively in shares of
designated mutual fund portfolios of the Merrill Lynch Series Fund, Inc. (the
"Series Fund"). Seven investment divisions of the Separate Account invest
exclusively in Class A shares of designated mutual fund portfolios of the
Merrill Lynch Variable Series Funds, Inc. (the "Variable Series Funds"). Two
investment divisions of the Separate Account invest exclusively in shares of
designated mutual fund portfolios of the AIM Variable Insurance Funds, Inc. (the
"AIM V.I. Funds"). One investment division of the Separate Account invests
exclusively in shares of a designated mutual fund portfolio of the Alliance
Variable Products Series Fund, Inc. (the "Alliance Fund"). Two investment
divisions of the Separate Account invest exclusively in shares of designated
mutual fund portfolios of the MFS Variable Insurance Trust (the "MFS Trust").
Each mutual fund portfolio has a different investment objective. The other
fifteen investment divisions invest in units of designated unit investment
trusts in The Merrill Lynch Fund of Stripped ("Zero") U.S. Treasury Securities
(the "Zero Trusts"). The contract owner's payments are not invested directly in
the Series Fund, the Variable Series Funds, the AIM V.I. Funds, the Alliance
Fund, or the MFS Trust (each, a "Fund"; collectively, the "Funds"); or in the
Zero Trusts.
HOW THE DEATH BENEFIT VARIES
Contract owners elect a death benefit option on the application. Under option 1,
the death benefit equals the larger of the face amount or the variable insurance
amount. Under option 2, the death benefit equals the larger of the sum of the
face amount plus the cash value or the variable insurance amount. Subject to
certain
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Cash Management Account and CMA are registered trademarks of Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
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conditions, contract owners may change the death benefit option and reduce the
face amount. The death benefit may increase or decrease on any day depending on
the investment results of the investment divisions chosen by the contract owner.
Death benefit proceeds equal the death benefit reduced by any debt and increased
by any rider benefits payable. (See "Death Benefit Proceeds" on page 24.) If the
insured dies at or after the insured's attained age 100, the post-100 death
benefit proceeds will be paid. (See "Post-100 Death Benefit Proceeds" on page
26.)
HOW THE INVESTMENT BASE VARIES
A Contract's investment base is the amount available for investment at any time.
On the contract date(usually the business day next following receipt of the
initial payment at the Service Center), the investment base is equal to the
initial payment less contract loading and charges for cost of insurance and
rider costs. Afterwards, it varies daily based on investment performance of the
investment divisions chosen. The contract owner bears the risk of poor
investment performance and receives the benefit of favorable investment
performance. Contract owners may wish to consider diversifying their investment
in the Contract by allocating the investment base to two or more investment
divisions.
NET CASH SURRENDER VALUE
Contract owners may surrender their Contracts at any time and receive the net
cash surrender value. The net cash surrender value varies daily based on
investment performance of the investment divisions chosen. Merrill Lynch Life
doesn't guarantee any minimum net cash surrender value. If the Contract is
surrendered within 24 months after issue, the contract owner will receive
certain excess sales load. (See "Contract Loading -- Excess Sales Load" on page
19.)
ILLUSTRATIONS
Illustrations in this Prospectus or used in connection with the purchase of the
Contract are based on hypothetical investment rates of return. These rates are
not guaranteed. They are illustrative only and should not be deemed a
representation of past or future performance. Actual rates of return may be more
or less than those reflected in the illustrations and, therefore, actual values
will be different than those illustrated.
REPLACEMENT OF EXISTING COVERAGE
Before purchasing a Contract, the contract owner should ask his or her Merrill
Lynch registered representative if changing, or adding to, current insurance
coverage would be advantageous. Generally, it is not advisable to purchase
another contract as a replacement for existing coverage. In particular,
replacement should be carefully considered if the decision to replace existing
coverage is based solely on a comparison of contract illustrations.
RIGHTS TO CANCEL ("FREE LOOK" PERIOD) OR CONVERT
Once the contract owner receives the Contract, he or she should review it
carefully to make sure it is what he or she intended to purchase. Generally, a
Contract may be returned for a refund within the later of ten days after the
contract owner receives it, 45 days after the contract owner completes the
application, or ten days after Merrill Lynch Life mails or personally delivers
the Notice of Withdrawal Right to the contract owner. If the Contract is
returned during the "free look" period, Merrill Lynch Life will refund the
initial payment without interest.
Once the Contract is issued, a contract owner may also convert the Contract
within 24 months after issue to a contract with benefits that do not vary with
the investment results of a separate account. (See "Converting the Contract" on
page 27.)
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HOW DEATH BENEFIT AND CASH VALUE INCREASES ARE TAXED
Under current federal tax law, life insurance contracts receive tax-favored
treatment. The death benefit is generally excludable from the beneficiary's
gross income for federal income tax purposes, according to Section 101(a)(1) of
the Internal Revenue Code. An owner of a life insurance contract is not taxed on
any increase in the cash value while the contract remains in force.
A Contract may be a "modified endowment contract" under federal tax law
depending upon the amount of payments made in relation to the death benefit
provided under the Contract. If the Contract is a modified endowment contract,
certain distributions made during the insured's lifetime, such as loans, partial
withdrawals, collateral assignments, capitalized interest, and complete
surrenders, are includable in gross income on an income-first basis. A 10%
penalty tax may also be imposed on distributions made before the contract owner
attains age 59 1/2. Contracts that are not modified endowment contracts under
federal tax law receive preferential tax treatment with respect to certain
distributions.
For a discussion of the tax issues associated with this Contract, see "Tax
Considerations" on page 33.
LOANS
Contract owners may borrow up to the total loan value of their Contracts, which
is 90% of the cash value. The maximum amount which may be borrowed at any time
is the difference between the total loan value and debt. (See "Loans" on page
22.)
Debt is deducted from the amount payable on surrender of the Contract and is
also subtracted from any death benefit payable. Loan interest accrues daily and,
IF IT IS NOT PAID EACH YEAR, IT IS CAPITALIZED AND ADDED TO THE OUTSTANDING LOAN
AMOUNT. If the Contract is a modified endowment contract, the amount of
capitalized interest will be treated as a taxable distribution. Depending upon
investment performance of the divisions and the amounts borrowed, loans may
cause a Contract to lapse. If the Contract lapses with a loan outstanding,
adverse tax consequences may result. Policy debt is considered part of total
cash value which is used to calculate gain. (See "Tax Considerations -- Tax
Treatment of Loans and Other Distributions" on page 34.)
PARTIAL WITHDRAWALS
Contract owners may make partial withdrawals beginning in the second contract
year, subject to certain conditions. (See "Partial Withdrawals" on page 23.)
FEES AND CHARGES
Contract Loading. Merrill Lynch Life deducts certain charges from all payments
before they are invested in the investment divisions. These charges are:
- Sales load equal to 46.25% of each payment through the second base
premium and 1.25% of each payment thereafter.
- State and local premium tax charge of 2.5% of each payment.
- A charge for federal taxes of 1.25% of each payment.
(See "Contract Loading" on page 19.)
Investment Base Charges. Merrill Lynch Life deducts certain charges from the
investment base. The charges deducted are as follows:
- On the contract date and on all processing dates after the contract date,
Merrill Lynch Life makes deductions for cost of insurance (see "Cost of
Insurance" on page 18) and any rider costs (see "Additional Insurance
Rider" on page 16).
- On each contract anniversary, Merrill Lynch Life makes deductions for the
net loan cost if there has been any debt during the prior year. It equals
a maximum of 2% of the debt per year.
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Separate Account Charges. There are certain charges deducted daily from the
investment results of the investment divisions in the Separate Account. These
charges are:
- an asset charge designed to cover mortality and expense risks deducted
from all investment divisions which is equivalent to .90% annually at the
beginning of the year; and
- a trust charge deducted from only those investment divisions investing in
the Zero Trusts, which is currently equivalent to .34% annually at the
beginning of the year and will never exceed .50% annually.
Advisory Fees. The portfolios in the Funds pay monthly advisory fees and other
expenses. (See "Charges to Fund Assets" on page 20.)
This summary is intended to provide only a very brief overview of the more
significant aspects of the Contract. Further detail is provided in this
Prospectus and in the Contract. The Contract together with its attached
applications, medical exam(s), amendments, riders and endorsements constitutes
the entire agreement between the contract owner and Merrill Lynch Life and
should be retained.
For the definition of certain terms used in this Prospectus, see "Important
Terms" on page 4.
FACTS ABOUT THE SEPARATE ACCOUNT, THE FUNDS,
THE ZERO TRUSTS AND MERRILL LYNCH LIFE
THE SEPARATE ACCOUNT
The Separate Account is a separate investment account established by Merrill
Lynch Life on November 16, 1990. It is registered with the Securities and
Exchange Commission as a unit investment trust pursuant to the Investment
Company Act of 1940. This registration does not involve any supervision by the
Securities and Exchange Commission over the investment policies or practices of
the Separate Account. It meets the definition of a separate account under the
federal securities laws. The Separate Account is used to support the Contract as
well as to support other variable life insurance contracts issued by Merrill
Lynch Life.
Merrill Lynch Life owns all of the assets in the Separate Account. The assets of
the Separate Account are kept separate from Merrill Lynch Life's general account
and any other separate accounts it may have. Arkansas insurance law provides
that the Separate Account's assets, to the extent of its reserves and
liabilities, may not be charged with liabilities arising out of any other
business Merrill Lynch Life conducts.
Obligations to contract owners and beneficiaries that arise under the Contract
are obligations of Merrill Lynch Life. Income, gains, and losses, whether or not
realized, from assets allocated are, in accordance with the Contracts, credited
to or charged against the Separate Account without regard to other income, gains
or losses of Merrill Lynch Life. As required, the assets in the Separate Account
will always be at least equal to the reserves and other liabilities of the
Separate Account. If the assets exceed the required reserves and other Contract
liabilities (which will always be at least equal to the aggregate contract value
allocated to the Separate Account under the Contracts), Merrill Lynch Life may
transfer the excess to its general account.
There are currently 37 investment divisions in the Separate Account. Ten invest
in shares of a specific portfolio of the Series Fund. Seven invest in Class A
shares of a specific portfolio of the Variable Series Funds. Two invest in
shares of a specific portfolio of the AIM V.I. Funds. One invests in shares of a
specific portfolio of the Alliance Fund. Two invest in shares of a specific
portfolio of the MFS Trust. Fifteen invest in units of a specific Zero Trust.
Complete information about the Funds and the Zero Trusts, including the risks
associated with each portfolio (including specific risks associated with
investment in the High Yield Portfolio of the Series Fund) can be found in the
accompanying prospectuses. They should be read in conjunction with this
Prospectus.
The investment objectives and policies of certain of the underlying portfolios
may be similar to the investment objectives and policies of other portfolios
that may be managed by the same investment adviser or manager. The investment
results of the underlying portfolios, however, may be higher or lower than the
results of such other portfolios. There can be no assurance, and no
representation is made, that the investment results of any
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of the underlying portfolios will be comparable to the investment results of any
other portfolio, even if the other portfolio has the same investment adviser or
manager.
THE SERIES FUND
The Series Fund is registered with the Securities and Exchange Commission as an
open-end management investment company and its investment adviser is Merrill
Lynch Asset Management, L.P. ("MLAM"). All of its ten mutual fund portfolios are
currently available through the Separate Account. The investment objectives and
certain investment policies of the Series Fund portfolios are described below.
There is no guarantee that any portfolio will be able to meet its investment
objective.
Money Reserve Portfolio seeks to preserve capital, maintain liquidity and
achieve the highest possible current income consistent with those objectives by
investing in short-term money market securities.
Intermediate Government Bond Portfolio seeks to obtain the highest level of
current income consistent with the protection of capital afforded by investing
in intermediate-term debt securities issued or guaranteed by the U.S. Government
or its agencies. The Portfolio will invest in such securities with a maximum
maturity of 15 years.
Long-Term Corporate Bond Portfolio primarily seeks to provide as high a level of
current income as is believed to be consistent with prudent investment risk. In
addition, the Portfolio seeks the preservation of capital. In seeking to achieve
these objectives, under normal circumstances the Portfolio invests at least 80%
of the value of its total assets in debt securities that have a rating within
the three highest grades of Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's").
High Yield Portfolio primarily seeks as high a level of current income as is
believed to be consistent with prudent management. Secondarily, the Portfolio
seeks capital appreciation when consistent with its primary objective. The
Portfolio seeks to achieve its investment objective by investing principally in
fixed income securities rated in the lower categories of the established rating
services or in unrated securities of comparable quality (including securities
commonly known as "junk bonds").
Capital Stock Portfolio seeks long-term growth of capital and income, plus
moderate current income. It generally invests in equity securities considered to
be of good or improving quality or considered to be undervalued based on
criteria such as historical price/book value and price/earnings ratios.
Growth Stock Portfolio seeks long-term growth of capital by investing in a
diversified portfolio of securities, primarily common stocks, of aggressive
growth companies considered to have special investment value.
Multiple Strategy Portfolio seeks a high total investment return consistent with
prudent risk through a fully managed investment policy utilizing equity
securities, intermediate and long-term debt securities and money market
securities.
Natural Resources Portfolio seeks long-term growth of capital and protection of
the purchasing power of shareholders' capital by investing primarily in equity
securities of domestic and foreign companies with substantial natural resource
assets.
Global Strategy Portfolio seeks high total investment return by investing
primarily in a portfolio of equity and fixed-income securities, including
convertible securities, of U.S. and foreign issuers.
Balanced Portfolio seeks a level of current income and a degree of stability of
principal not normally available from an investment solely in equity securities
and the opportunity for capital appreciation greater than that normally
available from an investment solely in debt securities by investing in a
balanced portfolio of fixed-income and equity securities.
MLAM is indirectly owned and controlled by Merrill Lynch & Co., Inc. and is a
registered adviser under the Investment Advisers Act of 1940. The Series Fund,
as part of its operating expenses, pays an investment advisory fee to MLAM. (See
"Charges to Fund Assets" on page 20.)
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THE VARIABLE SERIES FUNDS
The Variable Series Funds is registered with the Securities and Exchange
Commission as an open-end management investment company and its investment
adviser is MLAM. Seven of its 18 mutual fund portfolios are currently available
through the Separate Account. The investment objectives and certain investment
policies of the seven available Variable Series Funds portfolios are described
below. There is no guarantee that any portfolio will be able to meet its
investment objective.
Basic Value Focus Fund seeks capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value. The
Fund seeks special opportunities in securities that are selling at a discount,
either from book value or historical price-earnings ratios, or seem capable of
recovering from temporarily out of favor considerations. Particular emphasis is
placed on securities that provide an above-average dividend return and sell at a
below-average price/earnings ratio.
Global Bond Focus Fund (formerly the World Income Focus Fund) seeks to provide
high total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational currency
units. The Fund will invest in fixed income securities that have a credit rating
of A or better by Standard & Poor's or by Moody's or commercial paper rated A-1
by Standard & Poor's or Prime-1 by Moody's or obligations that MLAM has
determined to be of similar creditworthiness.
Global Utility Focus Fund seeks both capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the opinion of
MLAM, primarily engaged in the ownership or operation of facilities used to
generate, transmit or distribute electricity, telecommunications, gas or water.
International Equity Focus Fund seeks capital appreciation and, secondarily,
income by investing in a diversified portfolio of equity securities of issuers
located in countries other than the United States. Under normal conditions, at
least 65% of the Fund's net assets will be invested in such equity securities
and at least 65% of the Fund's total assets will be invested in the securities
of issuers from at least three different foreign countries.
Developing Capital Markets Focus Fund seeks long-term capital appreciation by
investing in securities, principally equities, of issuers in countries having
smaller capital markets. For purposes of its investment objective, the Fund
considers countries having smaller capital markets to be all countries other
than the four countries having the largest equity market capitalizations.
Special Value Focus Fund (formerly the Equity Growth Fund) seeks long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Variable Series Funds believes have special investment value, and of emerging
growth companies regardless of size. Companies are selected by management on the
basis of their long-term potential for expanding their size and profitability or
for gaining increased market recognition for their securities. Current income is
not a factor in the selection of securities.
Index 500 Fund seeks to provide investment results that, before expenses,
correspond to the aggregate price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index").
The Variable Series Funds, as part of its operating expenses, pays an investment
advisory fee to MLAM. (See "Charges to Fund Assets" on page 20.)
THE AIM V.I. FUNDS
The AIM V.I. Funds is registered with the Securities and Exchange Commission as
an open-end, series, management investment company and its investment adviser is
A I M Advisors, Inc. ("AIM"). Two of its mutual fund portfolios are currently
available through the Separate Account. The investment objectives of the two
available AIM V.I. Funds portfolios are described below. There is no guarantee
that any portfolio will be able to meet its investment objective.
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AIM V.I. Capital Appreciation Fund seeks capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller emerging
growth companies. The portfolio is primarily comprised of securities of two
basic categories of companies: (1) "core" companies, which AIM considers to have
experienced above-average and consistent long-term growth in earnings with
excellent prospects for outstanding future growth, and (2) "earnings
acceleration" companies which AIM believes are currently enjoying a dramatic
increase in profits.
AIM V.I. Value Fund seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by AIM to be undervalued relative to the
current or projected earnings of the companies issuing the securities, or
relative to current market values of assets owned by the companies issuing the
securities or relative to the equity markets generally. Income is a secondary
objective. The investment division corresponding to this Fund should not be
selected by contract owners who seek income as their primary investment
objective.
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173, is a wholly owned
subsidiary of A I M Management Group Inc., a holding company engaged in the
financial services business and an indirect wholly owned subsidiary of AMVESCAP
PLC. AIM is a registered adviser under the Investment Advisers Act of 1940. AIM
was organized in 1976, and, together with its subsidiaries, manages or advises
over 50 investment company portfolios (including the AIM V.I. Funds)
encompassing a broad range of investment objectives. The AIM V.I. Funds, as part
of its operating expenses, pays an investment advisory fee to AIM. (See "Charges
to Fund Assets" on page 20.)
THE ALLIANCE FUND
The Alliance Fund is registered with the Securities and Exchange Commission as
an open-end management investment company and its investment adviser is Alliance
Capital Management L.P. ("Alliance"). One of its mutual fund portfolios is
currently available through the Separate Account. The investment objective of
the available Alliance Fund portfolio is described below. There is no guarantee
that this portfolio will be able to meet its investment objective.
Premier Growth Portfolio seeks growth of capital by pursuing aggressive
investment policies. Since investments will be made based upon their potential
for capital appreciation, current income will be incidental to the objective of
capital growth. Because of the market risks inherent in any investment, the
selection of securities on the basis of their appreciation possibilities cannot
ensure against possible loss in value.
Alliance, a Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105, is a registered adviser under the
Investment Advisers Act of 1940. Alliance Capital Management Corporation
("ACMC"), the sole general partner of Alliance, is an indirect wholly-owned
subsidiary of The Equitable Life Assurance Society of the United States, which
is in turn a wholly-owned subsidiary of the Equitable Companies Incorporated, a
holding company which is controlled by AXA, a French insurance holding company.
The Alliance Fund, as part of its operating expenses, pays an investment
advisory fee to Alliance. (See "Charges to Fund Assets" on page 20.)
THE MFS TRUST
The MFS Trust is registered with the Securities and Exchange Commission as an
open-end management investment company and its investment adviser is
Massachusetts Financial Services Company ("MFS"). Two of its mutual fund
portfolios are currently available through the Separate Account. The investment
objectives of the available MFS Trust portfolios are described below. There is
no guarantee that any portfolio will be able to meet its investment objective.
MFS Emerging Growth Series seeks 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. Emerging growth
companies include companies that MFS believes 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 the Fund's objective
of long-term growth of capital.
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MFS Research Series seeks to provide long-term growth of capital and future
income. The portfolio securities of the MFS Research Series are selected by a
committee of investment research analysts. This committee includes investment
analysts employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of MFS. The Series' assets are allocated
among industries by the analysts acting together as a group. Individual analysts
are then responsible for selecting what they view as the securities best suited
to meet the Series' investment objective within their assigned industry
responsibility.
MFS, a Delaware corporation, 500 Boylston Street, Boston, Massachusetts 02116,
is a subsidiary of Sun Life of Canada (U.S.), which, in turn, is a wholly-owned
subsidiary of Sun Life Assurance Company of Canada, and is a registered adviser
under the Investment Advisers Act of 1940. MFS is America's oldest mutual fund
organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund in the
United States, Massachusetts Investors Trust. The MFS Trust, as part of its
operating expenses, pays an investment advisory fee to MFS. (See "Charges to
Fund Assets" on page 20.)
CERTAIN RISKS OF THE FUNDS
Investment in lower-rated debt securities, such as those in which the High Yield
Portfolio of the Series Fund, and the Developing Capital Markets Focus and
International Equity Focus Funds of the Variable Series Funds, expect to invest,
entails relatively greater risk of loss of income or principal. The Developing
Capital Markets Focus Fund of the Variable Series Funds has no established
rating criteria for the debt securities in which it may invest, and will rely on
the investment adviser's judgment in evaluating the creditworthiness of an
issuer of such securities. In an effort to minimize risk, these portfolios will
diversify holdings among many issuers. However, there can be no assurance that
diversification will protect these portfolios from widespread defaults during
periods of sustained economic downturn.
In seeking to protect the purchasing power of capital, the Natural Resources
Portfolio of the Series Fund reserves the right, when management anticipates
significant economic, political, or financial instability, such as high
inflationary pressures or upheaval in foreign currency exchange markets, to
invest a majority of its assets in companies that explore for, extract, process
or deal in gold or in asset-based securities indexed to the value of gold
bullion. The Natural Resources Portfolio will not concentrate its investments in
such securities until it has been advised that the Contracts' federal tax status
will not be adversely affected as a result.
In selecting investments for the AIM V.I. Capital Appreciation Fund, AIM is
particularly interested in companies that are likely to benefit from new or
innovative products, services or processes that should enhance such companies'
prospects for future growth in earnings. As a result of this policy, the market
prices of many of the securities purchased and held by this portfolio may
fluctuate widely. Any income received from securities held by the portfolio will
be incidental, and a contract owner should not consider a purchase of shares of
the portfolio as equivalent to a complete investment program.
For the MFS Emerging Growth Series, the nature of investing in emerging growth
companies involves greater risk than is customarily associated with investments
in more established companies. Emerging growth companies often have limited
product lines, markets or financial resources, and they may be dependent on
one-person management. In addition, there may be less research available on many
promising small and medium sized emerging growth companies, making it more
difficult to find and analyze these companies. The securities of emerging growth
companies may have limited marketability and may be subject to abrupt or erratic
market movements than securities of larger, more established growth companies or
the market averages in general. Shares of the MFS Emerging Growth Series,
therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks.
Investment in these portfolios entails relatively greater risk of loss of income
or principal. In addition, as described in the accompanying prospectus for the
portfolios, many portfolios should be considered a long-term investment and a
vehicle for diversification, and not as a balanced investment program. It may
not be appropriate to allocate all payments and investment base to a single
investment division.
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THE ZERO TRUSTS
The Zero Trusts was formed to provide safety of capital and a high yield to
maturity. It seeks this through U.S. Government-backed investments which make no
periodic interest payments and, therefore, are purchased at a deep discount.
When held to maturity the investments should receive approximately a fixed
yield. The value of Zero Trust units before maturity varies more than it would
if the Zero Trusts contained interest-bearing U.S. Treasury securities of
comparable maturities.
The Zero Trust portfolios consist mainly of:
- bearer debt obligations issued by the U.S. Government stripped of their
unmatured interest coupons;
- coupons stripped from U.S. debt obligations; and
- receipts and certificates for such stripped debt obligations and coupons.
The Zero Trusts currently available have maturity dates in years 1999 through
2011, 2013 and 2014.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of
Merrill Lynch & Co., Inc., is the sponsor for the Zero Trusts. The sponsor will
sell units of the Zero Trusts to the Separate Account and has agreed to
repurchase units when Merrill Lynch Life needs to sell them to pay benefits and
make reallocations. Merrill Lynch Life pays the sponsor a fee for these
transactions and is reimbursed through the trust charge assessed to the
divisions investing in the Zero Trusts. (See "Charges to Divisions Investing in
the Zero Trusts" on page 20.)
MERRILL LYNCH LIFE AND MLPF&S
Merrill Lynch Life is a stock life insurance company organized under the laws of
the State of Washington in 1986 and redomesticated under the laws of the State
of Arkansas in 1991. It is an indirect wholly owned subsidiary of Merrill Lynch
& Co., Inc. Merrill Lynch Life is authorized to sell life insurance and
annuities in 49 states, Guam, the U.S. Virgin Islands and the District of
Columbia. It is also authorized to offer variable life insurance and variable
annuities in most jurisdictions.
MLPF&S is a wholly owned subsidiary of Merrill Lynch & Co., Inc. and provides a
broad range of securities brokerage and investment banking services in the
United States. It provides marketing services for Merrill Lynch Life and is the
principal underwriter of the Contracts issued through the Separate Account.
Merrill Lynch Life retains MLPF&S to provide services relating to the Contracts
under a distribution agreement. (See "Selling the Contracts" on page 32.)
FACTS ABOUT THE CONTRACT
WHO MAY BE COVERED
The Contract is available in most jurisdictions in which Merrill Lynch Life does
business. Merrill Lynch Life will issue a Contract on the life of the insured
provided the relationship between the applicant and the insured meets Merrill
Lynch Life's insurable interest requirements and provided the insured is not
over age 85 or under age 20. The insured's issue age will be determined using
the insured's age as of his or her birthday nearest the contract date. The
insured must also meet Merrill Lynch Life's medical and other underwriting
requirements, which will include undergoing a medical examination.
Merrill Lynch Life assigns insureds to underwriting classes which determine the
cost of insurance rates used in calculating cost of insurance deductions.
Contracts may be issued on insureds in standard, non-smoker or preferred
non-smoker underwriting classes. Contracts may also be issued on insureds in a
substandard underwriting class. For a discussion of the effect of underwriting
classification on deductions for cost of insurance, see "Cost of Insurance" on
page 18.
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PURCHASING A CONTRACT
To purchase a Contract, the contract owner must complete an application and make
a payment. The payment is required to put the Contract into effect. In the
application, the contract owner selects the face amount of the Contract. The
amount of the minimum initial payment for a given Contract depends on the face
amount selected and the issue age, sex and underwriting class of the insured.
Merrill Lynch Life will not accept an initial payment for a specified face
amount that will provide a guarantee period of less than three months. (See
"Selecting the Initial Face Amount" and "Initial Guarantee Period" below).
Merrill Lynch Life also will not accept an initial payment that would cause the
Contract to fail to qualify as life insurance under federal tax law as
interpreted by Merrill Lynch Life.
Insurance coverage generally begins as of the contract date, which is usually
the next business day following receipt of the initial payment at Merrill Lynch
Life's Service Center. Temporary life insurance coverage may be provided prior
to the contract date under the terms of a temporary insurance agreement. In
accordance with Merrill Lynch Life's underwriting rules, temporary life
insurance coverage may not exceed $300,000 and may not be in effect for more
than 90 days. As provided for under state insurance law, the contract owner, to
preserve insurance age, may be permitted to backdate the Contract. In no case
may the contract date be more than six months prior to the date the application
was completed. Charges for cost of insurance and rider costs for the backdated
period are deducted on the contract date.
If Merrill Lynch Life determines that, based on the contract owner's initial
payment and face amount, the Contract will be a modified endowment contract,
Merrill Lynch Life will issue the Contract provided the contract owner signs a
statement acknowledging that the Contract is a modified endowment contract or
agrees either to reduce the initial payment or to increase the face amount to a
level at which the Contract will not be a modified endowment contract. For a
discussion of the tax consequences of purchasing a modified endowment contract,
see "Tax Considerations" on page 33.
Selecting the Initial Face Amount. The minimum initial face amount is $250,000.
The maximum face amount that may be specified for a given initial payment is the
amount which will provide an initial guarantee period of at least three months.
For the same initial payment amount, the larger the face amount requested, the
shorter the guarantee period. The initial face amount will change if the
contract owner changes the death benefit option or takes a partial withdrawal.
Subject to certain conditions, the contract owner may purchase additional
insurance coverage through an additional insurance rider, or reduce the face
amount. (See "Additional Insurance Rider" on page 16 and "Death Benefit
Proceeds -- Reducing the Face Amount" on page 26.)
Initial Guarantee Period. The initial guarantee period for a Contract will be
determined by the initial payment, face amount and any additional insurance
rider face amount. The guarantee period will be adjusted each time an additional
payment is made, when a partial withdrawal is taken, when a death benefit option
change or face amount reduction results in a change in or reduction of face
amount, and when the additional insurance rider face amount is increased or
decreased.
The guarantee period is the period of time Merrill Lynch Life guarantees that
the Contract will remain in force regardless of investment experience unless the
debt exceeds certain values. The guarantee period is based on the guaranteed
maximum cost of insurance rates in the Contract, guaranteed maximum rider costs
(if an additional insurance rider is elected), the contract loading and a 4.5%
interest assumption. This means that for a given initial payment and face
amount, different insureds will have different guarantee periods depending on
the age, sex and underwriting class of the insureds. For example, an older
insured will have a shorter guarantee period than a younger insured in the same
underwriting class.
The maximum guarantee period is until the insured's attained age 100.
(See "More About the Contract -- Other Contract Provisions -- State Variations"
on page 31 for information about certain variations in determining the guarantee
period that may apply to the Contract.)
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ADDITIONAL INSURANCE RIDER
The contract owner may purchase additional insurance coverage payable to the
beneficiary on the death of the insured. Additional insurance coverage may be
purchased through an additional insurance rider when the Contract is purchased.
Under Merrill Lynch Life's current procedures, the maximum additional insurance
rider face amount at the time the Contract is purchased is three times the face
amount of the Contract. The rider can also be added on any contract anniversary
thereafter, as long as an application is completed, satisfactory evidence of
insurability of the insured is provided, and the insured has not attained the
age of 86. The minimum additional insurance rider face amount at any time is
$100,000. A cost of insurance charge for the rider ("rider charge") will be
deducted from the Contract's investment base on each processing date. The rider
charge will be based on the same cost of insurance rates as the Contract. (See
"Cost of Insurance" on page 18.) Because insurance coverage through an
additional insurance rider is purchased through deductions from the Contract's
investment base that are not taken into account in determining the base premium,
there is no additional contract loading associated with this coverage.
Beginning in contract year 2, the additional insurance rider face amount may be
increased (subject to evidence of insurability of the insured) or decreased once
each year; however, any change in the additional insurance rider face amount
must be elected prior to the insured's attained age 86 and must be at least
$100,000. The effective date of the change will be the contract anniversary next
following underwriting approval of the change. As of the effective date of the
increase or decrease in the additional insurance rider face amount, Merrill
Lynch Life uses the existing fixed base and the face amount of the Contract plus
the new additional insurance rider face amount to calculate a new guarantee
period. A decrease in the additional insurance rider face amount will increase
the guarantee period. An increase in the additional insurance rider face amount
will decrease the guarantee period. Unless in connection with a termination of
the rider, Merrill Lynch Life will not allow a decrease in rider face amount if
the resulting face amount would be less than $100,000; if the resulting
guarantee period would extend beyond the insured's attained age 100; or if the
decrease would cause the Contract to fail to qualify as life insurance under
federal income tax laws as interpreted by us.
A decrease in the additional insurance rider face amount can cause a Contract
which is not a modified endowment contract to become a modified endowment
contract. In such a case, Merrill Lynch Life will not process the decrease until
the contract owner confirms in writing his or her intent to convert the Contract
to a modified endowment contract. For a discussion of the tax consequences of
increasing or decreasing the additional insurance rider face amount, see "Tax
Considerations" on page 33.
Any additional insurance rider coverage terminates on the earlier of the date
the Contract terminates or lapses, or at the insured's attained age 100.
ADDITIONAL PAYMENTS
After the "free look" period and prior to the insured's attained age 100,
contract owners may make additional payments while the insured is living.
Additional payments must be submitted with an additional payment form. The
minimum Merrill Lynch Life will accept for these payments is $100. For Contracts
that are not modified endowment contracts, making an additional payment may
cause them to become modified endowment contracts. (See "Tax Considerations" on
page 33.) Merrill Lynch Life will return that portion of any additional payment
beyond that necessary to extend the guarantee period to the insured's attained
age 100. Merrill Lynch Life will also return that portion of any additional
payment that would cause the Contract to fail to qualify as life insurance under
federal tax law as interpreted by Merrill Lynch Life.
Contract owners may specify an additional payment amount on the application to
be paid on an annual, semi-annual, quarterly, or monthly (for payments from a
CMA account only) basis. For additional payments not being withdrawn from a CMA
account, Merrill Lynch Life will send reminder notices. If a contract owner has
the CMA Insurance Service, such additional payments may be withdrawn
automatically from his or her CMA account and transferred to his or her
Contract. The withdrawals will continue under the selected plan until Merrill
Lynch Life is notified otherwise.
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EFFECT OF ADDITIONAL PAYMENTS
Generally, any additional payments will be accepted the day they are received at
the Service Center. However, if acceptance of any portion of the payment would
cause a Contract which is not a modified endowment contract to become a modified
endowment contract, to the extent feasible, Merrill Lynch Life will not accept
that portion of the payment unless the contract owner confirms in writing his or
her intent to convert the Contract to a modified endowment contract. Merrill
Lynch Life may return that portion of the payment pending receipt of
instructions from the contract owner.
On the date Merrill Lynch Life receives and accepts an additional payment,
Merrill Lynch Life will:
- increase the Contract's investment base by the amount of the payment less
contract loading applicable to the payment;
- reflect the payment in the calculation of the variable insurance amount
(see "Variable Insurance Amount" on page 25); and
- increase the fixed base by the amount of the payment less contract
loading applicable to the payment (see "The Contract's Fixed Base" on
page 21).
As of the processing date on or next following receipt and acceptance of an
additional payment, Merrill Lynch Life will increase the guarantee period if the
guarantee period prior to receipt and acceptance of an additional payment does
not extend beyond the insured's attained age 100.
Merrill Lynch Life will determine the increase in the guarantee period by taking
the immediate increase in the cash value resulting from the additional payment
and adding to that interest at the annual rate of 4.5% for the period from the
date Merrill Lynch Life receives and accepts the payment to the contract
processing date on or next following such date. This is the guarantee adjustment
amount. The guarantee adjustment amount is added to the fixed base and the
resulting new fixed base is used to calculate a new guarantee period. For a
discussion of the effect of additional payments on a Contract's guarantee
period, see "Additional Payments" in the Examples on page 46.
If any excess sales load has been applied to keep the Contract in force, any
additional payment, less contract loading, will first be applied to recover such
excess sales load (see "Excess Sales Load" on page 19). Next, unless specified
otherwise, if there is any debt, any payment made will be applied as a loan
repayment, with any excess applied as an additional payment. (See "Loans" on
page 22.)
INVESTMENT BASE
A Contract's investment base is the amount available for investment at any time.
It is the sum of the amounts invested in each of the investment divisions. On
the contract date, the investment base equals the initial payment less contract
loading and charges for cost of insurance and rider costs. Merrill Lynch Life
adjusts the investment base daily to reflect the investment performance of the
investment divisions the contract owner has selected. (See "Net Rate of Return
for an Investment Division" on page 38.) The investment performance reflects the
deduction of Separate Account charges. (See "Charges to the Separate Account" on
page 19.)
Partial withdrawals, loans and deductions for cost of insurance, rider costs and
net loan cost decrease the investment base. (See "Charges Deducted from the
Investment Base" on page 18, "Partial Withdrawals" on page 23, and "Loans" on
page 22.) Loan repayments and additional payments increase it. Contract owners
may elect from which investment divisions loans and partial withdrawals are
taken and to which investment divisions repayments and additional payments are
added. If an election is not made, Merrill Lynch Life will allocate increases
and decreases proportionately to the contract owner's investment base as then
allocated in the investment divisions.
Initial Investment Allocation and Preallocation. Through the first 14 days
following the in force date, the initial payment less contract loading will
remain in the division investing in the Money Reserve Portfolio. Thereafter, the
investment base will be reallocated to the investment divisions selected by the
contract owner on the application, if different. The contract owner may select
up to five of the 37 investment divisions in the Separate Account.
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Changing the Allocation. After the first 14 days following the in force date, a
contract owner's investment base may be invested in up to five investment
divisions at any one time. Currently, investment allocations may be changed as
often as desired. Merrill Lynch Life reserves the right to charge up to $25 for
each change in excess of six each year. In order to change their investment base
allocation, contract owners must call or write to the Service Center. (See "Some
Administrative Procedures" on page 29.)
Zero Trust Allocations. Merrill Lynch Life will notify contract owners 30 days
before a Zero Trust in which they have invested matures. Contract owners must
notify Merrill Lynch Life by calling or writing at least seven days before the
maturity date how to reinvest their funds in the division investing in that Zero
Trust. If Merrill Lynch Life is not notified, it will move the contract owner's
investment base in that division to the investment division investing in the
Money Reserve Portfolio.
Units of a specific Zero Trust may no longer be available when a request for
allocation is received. Should this occur, Merrill Lynch Life will attempt to
notify the contract owner immediately so that the request can be changed.
Allocation to the Division Investing in the Natural Resources
Portfolio. Merrill Lynch Life and the Separate Account reserve the right to
suspend the sale of units of the investment division investing in the Natural
Resources Portfolio in response to conditions in the securities markets or
otherwise.
CHARGES DEDUCTED FROM THE INVESTMENT BASE
Merrill Lynch Life deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular Contract. For example, the contract loading may
not fully cover all of the sales and distribution expenses actually incurred by
Merrill Lynch Life, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
The charges described below are deducted pro-rata from the investment base on
processing dates.
Cost of Insurance. Merrill Lynch Life deducts the cost of insurance from the
investment base on the contract date and on each processing date thereafter
prior to the insured's attained age 100. This charge compensates Merrill Lynch
Life for the cost of providing life insurance coverage for the insured. It is
based on the underwriting class, sex (except where unisex rates are required by
state law) and attained age of the insured and the Contract's net amount at
risk.
To determine the cost of insurance, Merrill Lynch Life multiplies the current
cost of insurance rate by the Contract's net amount at risk. The net amount at
risk is the difference, as of a processing date, between the death benefit
(adjusted for interest at an annual rate of 4.5%) and the cash value, but before
the deduction for cost of insurance. (See "More About the Contract -- Other
Contract Provisions -- State Variations" on page 31 for information about
certain variations in determining the cost of insurance that may apply to the
Contract.)
Current cost of insurance rates may be equal to or less than the guaranteed cost
of insurance rates depending on the underwriting class, sex (except where unisex
rates are required by state law) and attained age of the insured. Current cost
of insurance rates are lower for insureds in a preferred non-smoker underwriting
class than for insureds of the same age in a non-smoker underwriting class and
are lower for insureds in a non-smoker underwriting class than for insureds of
the same age and sex in a standard underwriting class.
Merrill Lynch Life guarantees that the current cost of insurance rates will
never exceed the maximum guaranteed rates shown in the Contract. The maximum
guaranteed rates for Contracts (other than those issued on a substandard basis)
do not exceed the rates based on the 1980 Commissioners Standard Ordinary
Mortality Table (CSO Table). Merrill Lynch Life may use rates that are equal to
or less than these rates, but never greater. The maximum rates for Contracts
issued on a substandard basis are based on a multiple of the 1980 CSO Table. Any
change in the cost of insurance rates will apply to all insureds of the same
age, sex and underwriting class whose Contracts have been in force for the same
length of time.
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Net Loan Cost. The net loan cost is explained under "Loans" on page 22.
Rider Charges. Rider charges are deducted on the contract date and on each
processing date thereafter. These charges are explained under "Additional
Insurance Rider" on page 16.
CONTRACT LOADING
Chargeable to each payment is an amount called the contract loading. The
contract loading equals 50% of each payment made until cumulative payments have
been made in an amount equal to two base premiums, and 5% of each payment
thereafter. This charge consists of a sales load, a charge for federal taxes and
a state and local premium tax charge.
The sales load, equal to 46.25% of each payment through the second base premium
and 1.25% of each payment thereafter, compensates Merrill Lynch Life for sales
expenses and the costs for underwriting and issuing the Contract. The sales load
may be reduced in certain group or sponsored arrangements as described on page
32.
The charge for federal taxes is equal to 1.25% of each payment.
The state and local premium tax charge is equal to 2.5% of each payment.
Excess Sales Load. Excess sales load is equal to any sales load deducted from
the first two base premiums in excess of 30% of premiums paid up to an amount
equal to the first base premium, and then 10% of the premiums paid up to an
amount equal to the second base premium. It is calculated and applied in the
following situations only during the first 24 months after the Contract is
issued:
- It is refunded if the Contract is surrendered or lapses during the first
24 months after issue except to the extent that it has been previously
applied to keep the Contract in force.
- It is added to the cash value so as to keep the Contract in force if debt
exceeds the larger of (i) cash value plus any excess sales load not
previously applied to keep the Contract in force and (ii) the fixed base
during the first 24 months after issue.
- It is added to the cash value in determining the variable insurance
amount during the first 24 months after issue.
In the event that certain Contract changes resulting in a reduction in face
amount occur prior to the end of the first two policy years, Merrill Lynch Life
may adjust the amount of excess sales load under a Contract if and to the extent
deemed necessary to comply with applicable regulations under the Investment
Company Act of 1940.
CHARGES TO THE SEPARATE ACCOUNT
Each day Merrill Lynch Life deducts an asset charge from each division of the
Separate Account. The total amount of this charge is computed at .90% annually
at the beginning of the year. Of this amount, .75% is for
- the risk assumed by Merrill Lynch Life that insureds as a group will live
for a shorter time than actuarial tables predict. As a result, Merrill
Lynch Life would be paying more in death benefits than planned; and
- the risk assumed by Merrill Lynch Life that it will cost more to issue
and administer the Contracts than expected.
The remaining amount, .15%, is for
- the risk assumed by Merrill Lynch Life with respect to potentially
unfavorable investment results. This risk is that the Contract's cash
value cannot cover the charges due during the guarantee period.
If the asset charge is inadequate to cover the actual expenses of mortality,
maintenance, and administration, Merrill Lynch Life will bear the loss. If the
charge exceeds the actual expenses, the excess will be added to Merrill Lynch
Life's profit and may be used to finance distribution expenses. The total asset
charge may not be increased.
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Charges to Divisions Investing in the Zero Trusts. Merrill Lynch Life assesses
a daily trust charge against the assets of each division investing in the Zero
Trusts. This charge reimburses Merrill Lynch Life for the transaction charge
paid to MLPF&S when units are sold to the Separate Account.
The trust charge is currently equivalent to .34% annually at the beginning of
the year. It may be increased, but will not exceed .50% annually at the
beginning of the year. The charge is based on cost (taking into account loss of
interest) with no expected profit.
Tax Charges. Merrill Lynch Life has the right under the Contract to impose a
charge against Separate Account assets for any taxes imposed on the Separate
Account's investment earnings. (See "Merrill Lynch Life's Income Taxes" on page
37.)
CHARGES TO FUND ASSETS
Charges to Series Fund Assets. The Series Fund incurs operating expenses and
pays a monthly advisory fee to MLAM. This fee equals an annual rate of:
- .50% of the first $250 million of the aggregate average daily net assets
of the Series Fund;
- .45% of the next $50 million of such assets;
- .40% of the next $100 million of such assets;
- .35% of the next $400 million of such assets; and
- .30% of such assets over $800 million.
One or more of the insurance companies investing in the Series Fund has agreed
to reimburse the Series Fund so that the ordinary expenses of each portfolio
(which include the monthly advisory fee) do not exceed .50% of the portfolio's
average daily net assets. These companies have also agreed to reimburse MLAM for
any amounts it pays under the investment advisory agreement, as described below.
These reimbursement obligations will remain in effect so long as the advisory
agreement remains in effect and cannot be amended or terminated without Series
Fund approval.
Charges to Variable Series Funds Assets. The Variable Series Funds incurs
operating expenses and pays a monthly advisory fee to MLAM. This fee equals an
annual rate of .60% of the average daily net assets of the Basic Value Focus
Fund, Global Bond Focus Fund and Global Utility Focus Fund. This fee equals an
annual rate of .30%, .75%, 1.00%, and .75% of the average daily net assets of
the Index 500 Fund, the International Equity Focus Fund, the Developing Capital
Markets Focus Fund and the Special Value Focus Fund, respectively.
MLAM and Merrill Lynch Life Agency, Inc. have entered into agreements which
limit the operating expenses, exclusive of any distribution fees imposed on
Class B shares, paid by each fund in a given year to 1.25% of its average daily
net assets. These reimbursement agreements provide that any such expenses in
excess of 1.25% of average daily net assets will be reimbursed to the fund by
MLAM which, in turn, will be reimbursed by Merrill Lynch Life Agency, Inc.
Charges to AIM V.I. Funds Assets. The AIM V.I. Funds incurs operating expenses
and pays a monthly advisory fee to AIM, which serves as the investment adviser
to each fund of the AIM V.I. Funds. As the investment adviser, AIM receives from
the AIM V.I. Capital Appreciation Fund and the AIM V.I. Value Fund an advisory
fee at an annual rate of .65% of the first $250 million of each fund's average
daily net assets and .60% of each fund's average daily net assets in excess of
$250 million.
Effective May 1, 1998, the AIM V.I. Funds reimburse AIM in an amount up to 0.25%
of the average net asset value of each fund, for expenses incurred in providing,
or assuring that participating insurance companies provide, certain
administrative services. Currently the fee only applies to the average net asset
value of each fund in excess of the net asset value of each fund as calculated
on April 30, 1998.
Charges to Alliance Fund Assets. The Alliance Fund incurs operating expenses
and pays a monthly advisory fee to Alliance, which serves as the investment
adviser to each fund of the Alliance Fund. As the investment
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<PAGE> 21
adviser, Alliance receives from the Alliance Premier Growth Portfolio an
advisory fee at an annual rate of 1.00% of the fund's average daily net assets.
Charges to MFS Trust Assets. The MFS Trust incurs operating expenses and pays a
monthly advisory fee to MFS, which serves as the investment adviser to each of
the funds of MFS Trust. As the investment adviser, MFS receives from the MFS
Emerging Growth Series and MFS Research Series an advisory fee, computed and
paid monthly, at an annual rate of .75% of the average daily net assets of the
respective fund.
GUARANTEE PERIOD
Merrill Lynch Life guarantees that the Contract will stay in force for the
guarantee period unless the debt exceeds certain contract values. (See "Loans"
on page 22.) Additional payments will extend the guarantee period until such
time as it extends to the insured's attained age 100. The guarantee period will
be affected by partial withdrawals, by changes in death benefit options, by
reductions of face amount and by increases and decreases in the face amount of
the additional insurance rider. A reserve is held in Merrill Lynch Life's
general account to support this guarantee. The guarantee period never extends
beyond the insured's attained age 100.
When the Guarantee Period Does not Extend to the Insured's Attained Age
100. After the end of the guarantee period, Merrill Lynch Life may cancel the
Contract if the cash value plus certain excess sales load on a processing date
is insufficient to cover charges due on that date. (See "Charges Deducted from
the Investment Base" on page 18 and "Contract Loading -- Excess Sales Load" on
page 19.)
Merrill Lynch Life will notify the contract owner at the owner's last known
address before cancelling the Contract. The contract owner will then have 61
days to pay an amount which, after deducting contract loading, equals at least
three times the charges that were due (and not deducted) on the processing date
when the cash value was determined to be insufficient, plus any excess sales
load previously applied to keep the Contract in force. If this amount is paid,
Merrill Lynch Life will deduct the charges due on the processing date and will
apply the balance to the investment base. Merrill Lynch Life will cancel the
Contract at the end of this grace period if payment has not yet been received.
At that time, Merrill Lynch Life will deduct any charges for cost of insurance
and rider costs that were applicable to the grace period and refund any unearned
charges for cost of insurance, rider costs and any excess sales load not
previously applied to keep the Contract in force.
Subject to state regulation, if Merrill Lynch Life cancels a Contract, it may be
reinstated prior to the insured's attained age 100 and while the insured is
still living if:
- the reinstatement is requested within three years after the end of the
grace period;
- Merrill Lynch Life receives satisfactory evidence of the insured's
insurability; and
- the reinstatement payment is made. The reinstatement payment is the
minimum payment for which Merrill Lynch Life would then issue a Contract
for the minimum guarantee period with the same face amount as the
original Contract, based on the insured's attained age and underwriting
class as of the effective date of the reinstated Contract.
A reinstated Contract will be effective on the processing date on or next
following the date the reinstatement application is approved.
The Contract's Fixed Base. On the contract date, the fixed base equals the cash
value. From then on, the fixed base is calculated in the same manner as the cash
value except that the calculation substitutes 4.5% for the net rate of return,
the guaranteed maximum cost of insurance rates and guaranteed maximum rider
costs are substituted for the current rates and it is calculated as though there
had been no loans or repayments. The fixed base is equivalent to the cash value
for a comparable fixed benefit contract with the same face amount and guarantee
period. After the end of the guarantee period the fixed base is zero. The fixed
base is used to limit Merrill Lynch Life's right to cancel the Contract during
the guarantee period. (See "More About the Contract -- Other Contract
Provisions -- State Variations" on page 31 for information about certain
variations in determining the fixed base that may apply to the Contract.)
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Automatic Adjustment. On any contract anniversary, if the cash value is greater
than the fixed base necessary to cause the guarantee period to extend until the
insured's attained age 100, the guarantee period will be extended to the
insured's attained age 100.
CASH VALUE
A Contract's cash value fluctuates daily with the investment results of the
investment divisions selected. Merrill Lynch Life does not guarantee any minimum
cash value. The cash value on any date equals the total investment base plus
debt plus unearned charges for cost of insurance and rider costs less any
accrued net loan cost since the last contract anniversary (or since the contract
date during the first contract year).
Cancelling the Contract. A contract owner may cancel the Contract at any time
while the insured is living. The request must be in writing in a form
satisfactory to Merrill Lynch Life. All rights to death benefits will end on the
date the written request is sent to Merrill Lynch Life.
The contract owner will then receive the net cash surrender value. The contract
owner may elect to receive this amount either in a single payment or under one
or more income plans described on page 31. The net cash surrender value will be
determined as of the date of receipt of the written request at the Service
Center.
If the Contract is cancelled during the first 24 months after the issue date of
the Contract, excess sales load, as described above, will be refunded except to
the extent previously applied to keep the Contract in force. (See "Contract
Loading -- Excess Sales Load" on page 19.)
LOANS
At any time after the "free look" period and prior to the insured's attained age
100, contract owners may use the Contract as collateral to borrow funds from
Merrill Lynch Life. The minimum loan is $1,000. Preferred loans are available
beginning on the later of the tenth contract anniversary or the insured's
attained age 55. See "Net Loan Cost" on page 23. Contract owners may repay all
or part of the loan at any time during the insured's lifetime. Each repayment
must be for at least $1,000 or the amount of the debt, if less. Certain states
won't permit establishing a minimum amount that can be borrowed or repaid. If
any excess sales load was previously applied to keep the Contract in force, any
loan repayment will first be applied to repay such excess sales load.
When a loan is taken, Merrill Lynch Life transfers a portion of the contract
owner's investment base equal to the amount borrowed out of the investment
divisions and holds it as collateral in its general account. When a loan
repayment is made, Merrill Lynch Life transfers an amount equal to the repayment
from the general account to the investment divisions. The contract owner may
select from which divisions borrowed amounts should be taken and which divisions
should receive repayments (including interest payments). Otherwise, Merrill
Lynch Life will take the borrowed amounts proportionately from and make
repayments proportionately to the contract owner's investment base as then
allocated in the investment divisions.
If a contract owner has the CMA Insurance Service, loans may be transferred to
and loan repayments transferred from his or her CMA account.
For a discussion of the tax consequences associated with a loan, see "Tax
Considerations" on page 33.
Effect on Death Benefit and Cash Value. Whether or not a loan is repaid, taking
a loan will have a permanent effect on a Contract's cash value and may have a
permanent effect on its death benefit. This is because the collateral for a loan
does not participate in the performance of the investment divisions while the
loan is outstanding. If the amount credited to the collateral is more than what
is earned in the investment divisions, the cash value may be higher as a result
of the loan, as may be the death benefit. Conversely, if the amount credited is
less, the cash value will be lower, as may be the death benefit. In that case,
the lower cash value may cause the Contract to lapse sooner than if no loan had
been taken.
Loan Value. The total loan value of a Contract equals 90% of its cash value.
Once available, the preferred loan value is calculated on each contract
anniversary. The preferred loan value for the contract year is equal to 12% of
the cash value less existing debt on the contract anniversary. This amount is
available each contract
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year, and is applied (i) first, to convert any existing debt to preferred loan
status; and (ii) then, is available for new loans. The sum of all outstanding
loan amounts plus accrued interest is called debt. The maximum amount that can
be borrowed at any time is the difference between the total loan value and the
debt.
Interest. While a loan is outstanding, Merrill Lynch Life may charge interest
at a maximum rate of 6% annually, subject to state regulation. Currently Merrill
Lynch Life charges interest of 5.25% annually. Interest accrues each day and
payments are due at the end of each contract year. If the interest isn't paid
when due, it is added to the outstanding loan amount. Interest paid on a loan
generally is not tax deductible.
The amount held in Merrill Lynch Life's general account as collateral for a loan
earns interest at a minimum of 4% annually. Currently the preferred loan
collateral amount earns interest at an annual rate of 5.25%. The loan collateral
amount in excess of the preferred loan collateral amount earns interest at an
annual rate of 4.50%.
Merrill Lynch Life may change the interest rates currently charged on loans and
the rates of interest earned on the loan collateral amounts. Any such changes
will be effective on the contract anniversary following the date such rates are
declared.
(See "More About the Contract -- Other Contract Provisions -- State Variations"
on page 31 for information about certain variations in loan interest charged,
and interest credited to collateral amounts, that may apply to the Contract.)
Net Loan Cost. Whether or not loan interest is paid when due, on the contract
anniversary, Merrill Lynch Life reduces the investment base by the net loan cost
(the difference between the interest charged and the earnings on the amount held
as collateral in the general account). Since the interest charged on preferred
loans is 5.25% and the preferred loan collateral amount earns interest at an
annual rate of 5.25%, the current net loan cost on preferred loan amounts is
zero. Since the interest charged on loans in excess of the preferred loan amount
is 5.25%, and the loan collateral amount in excess of the preferred loan
collateral amount earns interest at an annual rate of 4.50%, the current net
loan cost on such loans is .75%. The net loan cost is taken into account in
determining the net cash surrender value of the Contract if the date of
surrender is not a contract anniversary.
Cancellation Due to Excess Debt. If on a processing date the debt exceeds the
larger of (i) cash value plus certain excess sales load, and less charges due on
that date, and (ii) the fixed base (if any), Merrill Lynch Life will cancel the
Contract 61 days after a notice of intent to terminate the Contract is mailed to
the contract owner unless Merrill Lynch Life has received at least the minimum
repayment amount specified in the notice. During the first 24 months after the
Contract is issued, Merrill Lynch Life will add excess sales load to the cash
value as necessary to keep the Contract in force if debt exceeds the larger of
the cash value less charges due and the fixed base. (See "Contract
Loading -- Excess Sales Load" on page 19.) Upon termination, Merrill Lynch Life
will deduct any charges for cost of insurance and rider costs that may be
applicable to the 61-day period and refund any unearned charges for cost of
insurance, rider costs and any excess sales load not previously applied to keep
the Contract in force. If the Contract lapses with a loan outstanding, adverse
tax consequences may result. (See "Tax Considerations -- Tax Treatment of Loans
and Other Distributions" on page 34.)
PARTIAL WITHDRAWALS
Beginning in the second contract year and prior to the insured's attained age
100, and subject to state regulation, a contract owner may make partial
withdrawals by submitting a request in a form satisfactory to Merrill Lynch
Life. The effective date of the withdrawal is the date a withdrawal request is
received at the Service Center. Contract owners will receive the withdrawal
amount in a single payment.
Contract owners may make one partial withdrawal each contract year. The minimum
amount for each partial withdrawal is $1,000. Following a partial withdrawal,
the remaining cash value less debt must equal or exceed $5,000 and the remaining
face amount must be at least $250,000. The amount of any partial withdrawal may
not exceed the total loan value as of the effective date of the partial
withdrawal less any debt. A partial
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withdrawal may not be repaid. A partial withdrawal will not be permitted if
after the withdrawal the guarantee period would extend beyond the insured's
attained age 100.
Effect on Investment Base, Fixed Base, Cash Value and Death Benefit. As of the
effective date of the withdrawal, the investment base, fixed base, cash value
and, if the contract owner has elected death benefit option 1, the face amount
of the Contract will each be reduced by the amount of the partial withdrawal.
Merrill Lynch Life allocates this reduction proportionately to the investment
base in each of the contract owner's investment divisions unless notified
otherwise. The variable insurance amount will also reflect the partial
withdrawal as of the effective date.
Effect on Guarantee Period. As of the processing date on or next following the
effective date of a partial withdrawal, Merrill Lynch Life calculates a new
guarantee period. This is done by taking the immediate decrease in cash value
resulting from the partial withdrawal and adding to that amount interest at an
annual rate of 4.5% for the period from the date of the withdrawal to the
contract processing date on or next following such date. This is the guarantee
adjustment amount. The guarantee adjustment amount is subtracted from the fixed
base and the resulting new fixed base is used to calculate a new guarantee
period. For a discussion of the effect of partial withdrawals on a Contract's
guarantee period, see "Partial Withdrawals" in the Examples on page 47.
A partial withdrawal will not be permitted if after the withdrawal, the Contract
would not qualify as life insurance under federal tax law. A partial withdrawal
may cause a Contract which is not a modified endowment contract to become a
modified endowment contract. In such a case, Merrill Lynch Life will not process
the partial withdrawal until the contract owner confirms in writing his or her
intent to convert the Contract to a modified endowment contract. For a
discussion of the tax issues associated with a partial withdrawal, see "Tax
Considerations" on page 33.
DEATH BENEFIT PROCEEDS
Merrill Lynch Life will pay the death benefit proceeds to the beneficiary upon
receipt of all information needed to process the payment, including due proof of
the death of the insured. When Merrill Lynch Life is first provided reliable
notification of the insured's death by a representative of the owner of the
insured, investment base may be transferred to the division investing in the
Money Reserve Portfolio, pending payment of death benefit proceeds.
If the insured should die within two years from the Contract's issue date,
within two years from the effective date of any requested change in the death
benefit option requiring evidence of insurability, or within two years of an
increase in the additional insurance rider face amount, due proof of the
insured's death should be sent promptly to the Service Center since Merrill
Lynch Life may pay only a limited benefit or contest the Contract. (See
"Incontestability" and "Payment in Case of Suicide" on page 30.)
Death Benefit Proceeds. The death benefit payable depends on the death benefit
option in effect on the date of death.
- Under option 1, the death benefit is equal to the larger of the face
amount or the variable insurance amount.
- Under option 2, the death benefit is equal to the larger of the face
amount plus the cash value or the variable insurance amount.
Contract owners who wish to have investment experience reflected in insurance
coverage should choose option 2. Contract owners who wish to have insurance
coverage that generally does not vary in amount should choose option 1.
The death benefit will never be less than the amount required to keep the
Contract qualified as life insurance under federal income tax laws.
To determine the death benefit proceeds, Merrill Lynch Life will subtract from
the death benefit any debt and add to the death benefit any rider benefits
payable.
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The values used in calculating the death benefit proceeds are as of the date of
death. If the insured dies during the grace period, the death benefit proceeds
equal the death benefit proceeds in effect immediately prior to the grace period
reduced by any overdue charges. (See "When the Guarantee Period Does Not Extend
to the Insured's Attained Age 100" on page 21.)
If the insured dies at or after the insured's attained age 100, we will instead
pay the beneficiary the post-100 death benefit proceeds (see "Post-100 Death
Benefit Proceeds" on page 26).
Variable Insurance Amount. Merrill Lynch Life determines the variable insurance
amount daily by:
- calculating the cash value (plus excess sales load during the first 24
months after the Contract is issued); and
- multiplying it by the cash value corridor factor (explained below) for
the insured at his or her attained age.
The variable insurance amount will never be less than required by federal tax
law.
Cash Value Corridor Factor. The cash value corridor factor is used to determine
the amount of death benefit purchased by $1.00 of cash value. It is based on the
attained age of the insured on the date of calculation. It decreases daily as
the insured's age increases. As a result, the variable insurance amount as a
multiple of the cash value will decrease over time. A table of cash value
corridor factors as of each anniversary is included in the Contract.
Table of Illustrative Cash Value Corridor Factors
on Anniversaries
<TABLE>
<CAPTION>
ATTAINED AGE FACTOR
------------ --------
<S> <C>
40 and under 250%
45 215%
55 150%
65 120%
75-90 105%
95 and over 100%
</TABLE>
Changing the Death Benefit Option. On each contract anniversary beginning with
the first and provided that the insured has not attained age 86, the contract
owner may change the death benefit option. The effective date of the change will
be the contract anniversary next following approval of the change. Merrill Lynch
Life will change the face amount in order to keep the death benefit constant on
the effective date of the change. Therefore, if the change is from option 1 to
option 2, the face amount of the Contract will be decreased by the cash value on
the date of the change. A change in the death benefit option will not be
permitted if it would result in a face amount of less than $250,000 or if the
resulting guarantee period would extend beyond the insured's attained age 100.
If the change is from option 2 to option 1, the face amount of the Contract will
be increased by the cash value on the date of the change. For a discussion of
the effect of a change in the death benefit option on a Contract, see "Changing
the Death Benefit Option" in the Examples on page 48.
If the contract owner requests a change in the death benefit option from option
1 to option 2, evidence of insurability in a form satisfactory to Merrill Lynch
Life that the insured is insurable may be required. In no event will a change be
permitted if, after the change, the Contract would not qualify as life insurance
under federal tax laws as interpreted by Merrill Lynch Life.
As of the effective date of a change in the death benefit option which results
in a change in the face amount, Merrill Lynch Life calculates a new guarantee
period using the new face amount (plus the additional insurance rider face
amount) and the fixed base on that date.
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A change in the death benefit option may cause a Contract which is not a
modified endowment contract to become a modified endowment contract. In such a
case, Merrill Lynch Life will not process the change until the contract owner
confirms in writing his or her intent to convert the Contract to a modified
endowment contract. For a discussion of the tax issues associated with a change
in the death benefit option, see "Tax Considerations" on page 33.
Reducing the Face Amount. Beginning in contract year four and after two base
premiums have been paid, and provided that the insured has not attained age 86,
the contract owner may elect to reduce the face amount once each contract year.
The effective date of the change will be the contract anniversary next following
approval of the change. The minimum amount for each face amount reduction is
$100,000. A reduction in face amount will not be permitted if it would result in
a face amount of less than $250,000 or if the resulting guarantee period would
extend beyond the insured's attained age 100.
Merrill Lynch Life will not effect a requested face amount reduction to the
extent that, after the reduction, the Contract would not qualify as life
insurance under federal tax laws as interpreted by Merrill Lynch Life.
As of the effective date of a reduction in face amount, Merrill Lynch Life
calculates a new guarantee period using the new face amount (plus the additional
insurance rider face amount) and the fixed base on that date.
A reduction in face amount may cause a Contract which is not a modified
endowment contract to become a modified endowment contract. In such a case,
Merrill Lynch Life will not process the reduction until the contract owner
confirms in writing his or her intent to convert the Contract to a modified
endowment contract. For a discussion of the tax issues associated with a
reduction in face amount, see "Tax Considerations" on page 33.
Post-100 Death Benefit Proceeds. The death benefit proceeds at and after the
insured's attained age 100 depend upon the death benefit option in effect on the
date of death.
If option 1 is in effect, the post-100 death benefit is calculated based on the
cash value and the adjusted face amount where:
- the adjusted face amount equals the lesser of:
(1) the face amount at the insured's attained age 100, and
(2) the cash value as of the date of death plus the net amount at risk
at the insured's attained age 100.
- the net amount at risk at the insured's attained age 100 equals the face
amount at the insured's attained age 100 less the cash value at that time.
- the death benefit equals the greater of:
(1) the cash value as of the date of death, and
(2) the adjusted face amount.
If option 2 is in effect, the post-100 death benefit is equal to the face amount
at the insured's attained age 100 plus the cash value as of the date of death.
To determine the post-100 death benefit proceeds under either option, Merrill
Lynch Life will subtract from the death benefit any debt.
Benefits at the Insured's Attained Age 100. At the insured's attained age 100,
the guarantee period, if any, ends. Cash value will continue to increase or
decrease depending on the investment experience of the investment divisions to
which the Contract's investment base is allocated. Upon the death of the
insured, Merrill Lynch Life will pay the beneficiary the post-100 death benefit
proceeds.
At and after the insured's attained age 100, cost of insurance charges will no
longer be deducted. Loan repayments will be accepted. Net loan cost will
continue to be deducted and loan interest charges will continue
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<PAGE> 27
to accrue. Additional payments, partial withdrawals and additional loans will
not be permitted. Any additional insurance rider coverage terminates.
The tax treatment of post-100 benefits is unclear. A contract owner should
consult a tax advisor about the tax consequences associated with such benefits.
PAYMENT OF DEATH BENEFIT PROCEEDS
Merrill Lynch Life will generally pay the death benefit proceeds to the
beneficiary within seven days after all the information needed to process the
payment is received at its Service Center. Merrill Lynch Life will add interest
from the date of the insured's death to the date of payment at an annual rate of
at least 4%. The beneficiary may elect to receive the proceeds either in a
single payment or under one or more income plans described on page 31.
Payment may be delayed if the Contract is being contested or under the
circumstances described in "Using the Contract" on page 28 and "Other Contract
Provisions" on page 30. If a delay is necessary and death of the insured occurs
prior to the end of the guarantee period, Merrill Lynch Life may delay payment
of any excess of the death benefit over the face amount. After the guarantee
period has expired, Merrill Lynch Life may delay payment of the entire death
benefit.
ACCELERATED BENEFIT RIDER
In the future, Merrill Lynch Life may offer an Accelerated Benefit Rider (an
"ABR") that would be added to the Contract at the time the Contract is issued.
If an ABR is offered, it is expected to permit the contract owner to receive,
upon request and subject to approval by Merrill Lynch Life, accelerated payment
of part of the Contract's death benefit, adjusted to reflect current value, if
the insured develops a non-correctable illness or physical condition which with
reasonable medical certainty is expected to result in his or her death within 12
months, subject to certain conditions. Certain administrative charges may be
imposed in connection with payments under an ABR.
Pursuant to the recently enacted Health Insurance Portability and Accountability
Act of 1996 ("HIPAA"), Merrill Lynch Life believes that, for federal income tax
purposes, accelerated benefit payments should be fully excludable from the gross
income of the beneficiary, as long as the beneficiary is the insured under the
Contract. However, a contract owner should consult a tax advisor before adding
the ABR or requesting an accelerated benefit payment under the ABR.
RIGHTS TO CANCEL OR CONVERT
"Free Look" Period. A contract owner may cancel his or her Contract during the
"free look" period by returning it for a refund. Generally, the "free look"
period ends the later of ten days after the Contract is received, 45 days after
the contract owner completes the application or ten days after Merrill Lynch
Life mails or personally delivers to the contract owner the Notice of Withdrawal
Right. To cancel the Contract during the "free look" period, the contract owner
must mail or deliver the Contract to Merrill Lynch Life's Service Center or to
the registered representative who sold it. Merrill Lynch Life will refund the
payment made without interest. If cancelled, Merrill Lynch Life may require the
contract owner to wait six months before applying again.
Converting the Contract. A contract owner may convert the Contract for a
contract with benefits that do not vary with the investment results of a
separate account. Once a contract owner exercises this right, the investment
base and additional payments may not be allocated to the Separate Account. A
request to convert must be made in writing within 24 months after the issue date
of the Contract while the insured is living. The conversion will not require
evidence of insurability.
The conversion will be accomplished by adding an endorsement to the Contract and
transferring, without charge, the investment base in the Separate Account to the
guaranteed interest division ("GID"). Assets in the guaranteed interest division
are held in Merrill Lynch Life's general account. The investment base at the
time of conversion and any additional payments will remain in the guaranteed
interest division and be credited
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with interest at a rate declared by Merrill Lynch Life. A declared interest rate
for any amount allocated to the guaranteed interest division will be in effect
for at least one year. After conversion, the Contract will not be subject to
charges to the Separate Account. For a discussion of the tax consequences of
converting the Contract, see "Tax Considerations" on page 33.
REPORTS TO CONTRACT OWNERS
After the end of each processing period, contract owners will be sent a
statement of the allocation of their investment base, death benefit, cash value,
any debt and, if there has been a change, the face amount, the guarantee period
and the additional insurance rider face amount. All figures will be as of the
end of the immediately preceding processing period. The statement will show the
amounts deducted from or added to the investment base during the processing
period. The statement will also include any other information that may be
currently required by a contract owner's state.
Contract owners will receive confirmation of all financial transactions. Such
confirmations will show the price per unit of each of the contract owner's
investment divisions, the number of units a contract owner has in the investment
division and the value of the investment division computed by multiplying the
quantity of units by the price per unit. (See "Net Rate of Return for an
Investment Division" on page 38.) The sum of the values in each investment
division is a contract owner's investment base.
Contract owners will also be sent an annual and a semi-annual report containing
financial statements and a list of portfolio securities of the Funds, as
required by the Investment Company Act of 1940.
CMA Account Reporting. Contract owners who have the CMA Insurance Service will
have certain Contract information included as part of their regular monthly CMA
account statement. It will list the investment base allocation, death benefit,
cash value, debt and any CMA account activity affecting the Contract during the
month.
MORE ABOUT THE CONTRACT
USING THE CONTRACT
Ownership. The contract owner is usually the insured, unless another owner has
been named in the application. The contract owner has all rights and options
described in the Contract.
The contract owner may want to name a contingent owner. If the contract owner
dies before the insured, the contingent owner will own the contract owner's
interest in the Contract and have all of the contract owner's rights. If the
contract owner doesn't name a contingent owner, the contract owner's estate will
own the contract owner's interest in the Contract upon the owner's death.
If there is more than one contract owner, Merrill Lynch Life will treat the
owners as joint tenants with rights of survivorship unless the ownership
designation provides otherwise. The owners must exercise their rights and
options jointly, except that any one of the owners may reallocate the Contract's
investment base by telephone if the owner provides the personal identification
number as well as the Contract number. One contract owner must be designated, in
writing, to receive all notices, correspondence and tax reporting to which
contract owners are entitled under the Contract.
Changing the Owner. During the insured's lifetime, with the consent of any
irrevocable beneficiary, the contract owner has the right to transfer ownership
of the Contract. The new owner will have all rights and options described in the
Contract. The change will be effective as of the day the notice is signed, but
will not affect any payment made or action taken by Merrill Lynch Life before
receipt of the notice of the change at the Service Center. Changing the owner
may have tax consequences. (See "Tax Considerations" on page 33.)
Assigning the Contract as Collateral. Contract owners may assign the Contract
as collateral security for a loan or other obligation. This does not change the
ownership. However, the contract owner's rights and any beneficiary's rights are
subject to the terms of the assignment. Contract owners must give satisfactory
written
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notice at the Service Center in order to make or release an assignment. Merrill
Lynch Life is not responsible for the validity of any assignment.
For a discussion of the tax issues associated with a collateral assignment, see
"Tax Considerations" on page 33.
Naming Beneficiaries. Merrill Lynch Life will pay the primary beneficiary the
death benefit proceeds of the Contract on the insured's death. If the primary
beneficiary has died, Merrill Lynch Life will pay the contingent beneficiary. If
no contingent beneficiary is living, Merrill Lynch Life will pay the estate of
the insured.
A contract owner may name more than one person as primary or contingent
beneficiaries. Merrill Lynch Life will pay proceeds in equal shares to the
surviving beneficiaries unless the beneficiary designation provides otherwise.
A contract owner has the right to change beneficiaries during the insured's
lifetime, unless the primary beneficiary designation has been made irrevocable.
If the designation is irrevocable, the primary beneficiary must consent when
certain rights and options are exercised under this Contract. If the beneficiary
is changed, the change will take effect as of the day the notice is signed, but
will not affect any payment made or action taken by Merrill Lynch Life before
receipt of the notice of the change at the Service Center.
How Merrill Lynch Life Makes Payments. Merrill Lynch Life generally pays death
benefit proceeds, partial withdrawals, loans and net cash surrender value on
cancellation from the Separate Account within seven days after the Service
Center receives all the information needed to process the payment.
However, it may delay payment from the Separate Account if it isn't practical
for Merrill Lynch Life to value or dispose of Trust units, Series Fund shares or
Variable Series Funds shares because:
- the New York Stock Exchange is closed, other than for a customary weekend
or holiday; or
- trading on the New York Stock Exchange is restricted by the Securities
and Exchange Commission; or
- the Securities and Exchange Commission declares that an emergency exists
such that it is not reasonably practical to dispose of securities held in
the Separate Account or to determine the value of their assets; or
- the Securities and Exchange Commission by order so permits for the
protection of contract owners.
SOME ADMINISTRATIVE PROCEDURES
Described below are certain administrative procedures. Merrill Lynch Life
reserves the right to modify them or to eliminate them. For administrative and
tax purposes, Merrill Lynch Life may from time to time require that specific
forms be completed in order to accomplish certain transactions, including
surrenders.
Personal Identification Number. Merrill Lynch Life will send each contract
owner a four-digit personal identification number ("PIN") shortly after the
Contract is placed in force and before the end of the "free look" period. This
number must be given when the contract owner calls the Service Center to get
information about the Contract, to make a loan (if an authorization is on file),
or to make other requests. Each PIN will be accompanied by a notice reminding
the contract owner that all of the investment base is in the division investing
in the Money Reserve Portfolio, and will be reallocated to the investment
divisions selected at the time of application. The notice sent to contract
owners who did not choose to preallocate investment base will indicate that the
allocation to the Money Reserve Portfolio may be changed by calling or writing
to the Service Center. (See "Changing the Allocation" on page 18.)
Reallocating the Investment Base. Contract owners can reallocate their
investment base either in writing in a form satisfactory to Merrill Lynch Life
or by telephone. If the reallocation is requested by telephone, contract owners
must give their personal identification number as well as their Contract number.
Merrill Lynch Life will give a confirmation number over the telephone and then
follow up in writing.
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Requesting a Loan. A loan may be requested in writing in a form satisfactory to
Merrill Lynch Life or, if all required authorization forms are on file, by
telephone. Once the authorization has been received at the Service Center,
contract owners can call the Service Center, give their Contract number, name
and personal identification number, and tell Merrill Lynch Life the loan amount
and from which divisions the loan should be transferred.
Upon request, Merrill Lynch Life will wire the funds to the contract owner's
account at the financial institution named on the contract owner's
authorization. Merrill Lynch Life will generally wire the funds within two
working days of receipt of the request. If the contract owner has the CMA
Insurance Service, funds may be transferred directly to that CMA account.
Requesting Partial Withdrawals. Beginning in the second contract year, partial
withdrawals may be requested in writing in a form satisfactory to Merrill Lynch
Life. A contract owner may request a partial withdrawal by telephone if all
required telephone authorization forms are on file. Once the authorization has
been received at the Service Center, contract owners can call the Service
Center, give their Contract number, name and personal identification number, and
tell Merrill Lynch Life how much to withdraw and from which investment
divisions.
Upon request, Merrill Lynch Life will wire the funds to the contract owner's
account at the financial institution named on the contract owner's
authorization. Merrill Lynch Life will generally wire the funds within two
working days of receipt of the request. If the contract owner has the CMA
Insurance Service, funds may be transferred directly to that CMA account.
Telephone Requests. A telephone request for a loan, partial withdrawal or a
reallocation received before 4 p.m. (ET) generally will be processed the same
day. A request received at or after 4 p.m. (ET) will be processed the following
business day. Merrill Lynch Life reserves the right to change or discontinue
telephone transfer procedures.
Merrill Lynch Life will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These procedures may
include, but are not limited to, possible recording of telephone calls and
obtaining appropriate identification before effecting any telephone
transactions. Merrill Lynch Life will not be liable for following telephone
instructions that it reasonably believes to be genuine.
OTHER CONTRACT PROVISIONS
In Case of Errors in the Application. If an age or sex given in the application
is wrong, it could mean that the face amount or any other Contract benefit is
wrong. Merrill Lynch Life will pay what the payments made would have bought for
the guarantee period at the true age or sex.
Incontestability. Merrill Lynch Life will rely on statements made in the
applications. Legally, they are considered representations, not warranties.
Merrill Lynch Life can contest the validity of a Contract if any material
misstatements are made in the initial application or any application for
reinstatement. Merrill Lynch Life can also contest the validity of any change in
face amount due to a change in death benefit option or any increase in the
additional insurance rider face amount requested if any material misstatements
are made in any application required for the change or increase.
Subject to state regulation, Merrill Lynch Life will not contest the validity of
a Contract after it has been in effect during the lifetime of the insured for
two years from the date of issue or the date of any reinstatement. A change in
face amount due to a change in the death benefit option or any increase in the
additional insurance rider face amount won't be contested after the change or
increase has been in effect during the lifetime of the insured for two years
from the date of the change.
Payment in Case of Suicide. Subject to state regulation, if the insured commits
suicide within two years from the Contract's issue date or the date of any
reinstatement, Merrill Lynch Life will pay only a limited death benefit and then
terminate the Contract. The benefit will be equal to the amount of the payments
made, reduced by any debt and partial withdrawals.
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Subject to state regulation, if the insured commits suicide within two years of
the effective date of a change in the death benefit option requiring evidence of
insurability or of the effective date of an increase in the additional insurance
rider face amount, any amount of death benefit which would not be payable except
for the fact that the face amount was increased will be limited to the amount of
cost of insurance deductions made for the increase.
Contract Changes -- Applicable Federal Tax Law. To receive the tax treatment
accorded to life insurance under federal income tax law, the Contract must
qualify initially and continue to qualify as life insurance under the Internal
Revenue Code or successor law. Therefore, to maintain this qualification to the
maximum extent of the law, Merrill Lynch Life reserves the right to return any
additional payments that would cause the Contract to fail to qualify as life
insurance under applicable tax law as interpreted by Merrill Lynch Life.
Further, Merrill Lynch Life reserves the right to make changes in the Contract
or its riders or to make distributions from the Contract to the extent it is
necessary to continue to qualify the Contract as life insurance. Any changes
will apply uniformly to all Contracts that are affected and contract owners will
be given advance written notice of such changes.
State Variations. Certain Contract features, including the "free look" right,
are subject to state variation. The contract owner should read his or her
Contract carefully to determine whether any variations apply in the state in
which the Contract is issued.
Contracts issued prior to certain state approvals having been obtained use a 5%,
rather than a 4 1/2%, assumed interest rate for purposes of determining the
contract's guarantee period, fixed base, and cost of insurance charges. These
contracts also use a 4%, rather than a 3%, assumed interest rate for purposes of
calculating income plan payment amounts.
In addition, under these contracts, the interest charged on loans is 5.75%,
rather than 5.25%; however, preferred loan collateral earns interest at an
annual rate of 5.75%, and the loan collateral amount in excess of the preferred
loan collateral amount earns interest at an annual rate of 5%. Accordingly, the
net loan cost under these contracts is 0% for preferred loan amounts, and 0.75%
for loans in excess of the preferred loan amount.
INCOME PLANS
Merrill Lynch Life offers several income plans to provide for payment of the
death benefit proceeds to the beneficiary. The contract owner may choose one or
more income plans at any time during the lifetime of the insured. If no plan has
been chosen when the insured dies, the beneficiary has one year to apply the
death benefit proceeds either paid or payable to that beneficiary to one or more
of the plans. The contract owner may also choose one or more income plans if the
Contract is cancelled. Merrill Lynch Life's approval is needed for any plan
where any income payment would be less than $100. Payments under these plans do
not depend on the investment results of a separate account.
Income plans include:
Annuity Plan. An amount can be used to purchase a single premium immediate
annuity.
Interest Payment. Amounts can be left with Merrill Lynch Life to earn
interest at an annual rate of at least 3%. Interest payments can be made
annually, semi-annually, quarterly or monthly.
Income for a Fixed Period. Payments are made in equal installments for a
fixed number of years.
Income for Life. Payments are made in equal monthly installments until
death of a named person or end of a designated period, whichever is later.
The designated period may be for 10 or 20 years. Other designated periods
and payment schedules may be available on request.
Income of a Fixed Amount. Payments are made in equal installments until
proceeds applied under the option and interest on unpaid balance at not
less than 3% per year are exhausted.
Joint Life Income. Payments are made in monthly installments as long as at
least one of two named persons is living. Other payment schedules may be
available on request. While both are living, full
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payments are made. If one dies, payments of at least two-thirds of the full
amount are made. Payments end completely when both named persons die.
Once in effect, some of the plans may not provide any surrender rights.
(See "More About the Contract--Other Contract Provisions--State Variations" on
page 31 for information about certain variations in income plans that may apply
to the Contract.)
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, Merrill Lynch Life may reduce the
sales load, cost of insurance rates and the minimum payment and may modify
underwriting classifications and requirements.
Group arrangements include those in which a trustee or an employer, for example,
purchases Contracts covering a group of individuals on a group basis. Sponsored
arrangements include those in which an employer allows Merrill Lynch Life to
sell Contracts to its employees on an individual basis. Costs for sales,
administration and mortality generally vary with the size and stability of the
group and the reasons the Contracts are purchased, among other factors. Merrill
Lynch Life takes all these factors into account when reducing charges. To
qualify for reduced charges, a group or sponsored arrangement must meet certain
requirements, including requirements for size and number of years in existence.
Group or sponsored arrangements that have been set up solely to buy Contracts or
that have been in existence less than six months will not qualify for reduced
charges.
Merrill Lynch Life makes any reductions according to rules in effect when an
application for a Contract or additional payment is approved. It may change
these rules from time to time. However, reductions in charges will not
discriminate unfairly against any person.
UNISEX LEGAL CONSIDERATIONS FOR EMPLOYERS
In 1983 the Supreme Court held in Arizona Governing Committee v. Norris that
optional annuity benefits provided under an employee's deferred compensation
plan could not, under Title VII of the Civil Rights Act of 1964, vary between
men and women. In addition, legislative, regulatory or decisional authority of
some states may prohibit use of sex-distinct mortality tables under certain
circumstances.
Generally, the Contracts offered by this Prospectus are based on mortality
tables that distinguish between men and women. As a result, the Contract pays
different benefits to men and women of the same age. Employers and employee
organizations should check with their legal advisers before purchasing
Contracts; specifically, the addition of a unisex rider to such contracts may be
required.
Some states prohibit the use of actuarial tables that distinguish between men
and women in determining payments and contract benefits for contracts issued on
the lives of their residents. Therefore, Contracts offered in this Prospectus to
insure residents of these states will have unisex payments and benefits which
are based on actuarial tables that do not differentiate on the basis of sex.
SELLING THE CONTRACTS
MLPF&S is the principal underwriter of the Contract. It was organized in 1958
under the laws of the state of Delaware and is registered as a broker dealer
under the Securities Exchange Act of 1934. It is a member of the National
Association of Securities Dealers, Inc. ("NASD"). The principal business address
of MLPF&S is World Financial Center, 250 Vesey Street, New York, New York 10281.
MLPF&S also acts as principal underwriter of other variable life insurance and
variable annuity contracts issued by Merrill Lynch Life, as well as variable
life insurance and variable annuity contracts issued by ML Life Insurance
Company of New York, an affiliate of Merrill Lynch Life. MLPF&S also acts as
principal underwriter of certain mutual funds managed by MLAM, the investment
adviser for the Series Fund and the Variable Series Funds.
Contracts are sold by registered representatives of MLPF&S who are also licensed
through various Merrill Lynch Life Agencies as insurance agents for Merrill
Lynch Life. Merrill Lynch Life has entered into a distribution agreement with
MLPF&S and companion sales agreements with the Merrill Lynch Life Agencies
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through which agreements the Contracts and other variable life insurance
contracts issued through the Separate Account are sold and the registered
representatives are compensated by Merrill Lynch Life Agencies and/or MLPF&S.
The maximum commissions Merrill Lynch Life will pay to the applicable insurance
agency to be used to pay commissions to registered representatives are as
follows: 95% of the target premium under the Contract; plus 3% of payments
thereafter. In addition, an amount equal to .11% of persisting investment base
under a Contract may be paid on an annual basis. Commissions may be paid in the
form of non-cash compensation.
The amounts paid under the distribution and sales agreements for the Separate
Account for the years ended December 31, 1997, December 31, 1996, and December
31, 1995 were $15,107,535, $10,059,108, and $8,375,065, respectively.
MLPF&S may arrange for sales of the Contract by other broker-dealers who are
registered under the Securities Exchange Act of 1934 and are members of the
NASD. Registered representatives of these other broker-dealers may be
compensated on a different basis than MLPF&S registered representatives.
TAX CONSIDERATIONS
Definition of Life Insurance. In order to qualify as a life insurance contract
for federal tax purposes, the Contract must meet the definition of a life
insurance contract which is set forth in Section 7702 of the Internal Revenue
Code of 1986, as amended (the "Code"). The manner in which Section 7702 should
be applied to certain features of the Contract offered in this Prospectus is not
directly addressed by Section 7702. Nevertheless, Merrill Lynch Life believes
that the Contract will meet the Section 7702 definition of a life insurance
contract. This means that:
- the death benefit should be fully excludable from the gross income of the
beneficiary under Section 101(a)(1) of the Code; and
- the contract owner should not be considered in constructive receipt of
the cash value, including any increases, until actual cancellation of the
Contract (see "Tax Treatment of Loans and Other Distributions" below).
In the absence of final regulations or other pertinent interpretations of
Section 7702, however, there is necessarily some uncertainty as to whether a
substandard risk Contract will meet the statutory life insurance contract
definition. There may also be some uncertainty with respect to a Contract with
an additional insurance rider attached. If a Contract were determined not to be
a life insurance contract for purposes of Section 7702, such Contract would not
provide most of the tax advantages normally provided by a life insurance
contract.
Merrill Lynch Life thus reserves the right to make changes in the Contract if
such changes are deemed necessary to attempt to assure its qualification as a
life insurance contract for tax purposes. (See "Contract Changes -- Applicable
Federal Tax Law" on page 31.)
Diversification. Section 817(h) of the Code provides that separate account
investments (or the investments of a mutual fund, the shares of which are owned
by separate accounts of insurance companies) underlying the Contract must be
"adequately diversified" in accordance with Treasury regulations in order for
the Contract to qualify as life insurance. The Treasury Department has issued
regulations prescribing the diversification requirements in connection with
variable contracts. The Separate Account, through the Funds, intends to comply
with these requirements. Each Fund is obligated to comply with the
diversification requirements prescribed by the Treasury Department.
In connection with the issuance of the diversification regulations, the Treasury
Department stated that it anticipates the issuance of regulations or rulings
prescribing the circumstances in which an owner's control of the investments of
a separate account may cause the owner, rather than the insurance company, to be
treated as the owner of the assets in the account. If the contract owner is
considered the owner of the assets of the Separate Account, income and gains
from the account would be included in the owner's gross income.
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The ownership rights under the Contract offered in this Prospectus are similar
to, but different in certain respects from, those described by the Internal
Revenue Service in rulings in which it determined that the owners were not
owners of separate account assets. For example, the owner of the Contract has
additional flexibility in allocating payments and cash values. These differences
could result in the owner being treated as the owner of the assets of the
Separate Account. In addition, Merrill Lynch Life does not know what standards
will be set forth in the regulations or rulings which the Treasury has stated it
expects to be issued. Merrill Lynch Life therefore reserves the right to modify
the Contract as necessary to attempt to prevent the contract owner from being
considered an owner of the assets of the Separate Account.
Tax Treatment of Loans and Other Distributions. Federal tax law establishes a
class of life insurance contracts referred to as modified endowment contracts. A
modified endowment contract is any contract which satisfies the definition of
life insurance set forth in Section 7702 of the Code but fails to meet the 7-pay
test. This test applies a cumulative limit on the amount of payments that can be
made into a contract each year in the first seven contract years in order to
avoid modified endowment treatment. In effect, compliance with the 7-pay test
requires that contracts be purchased with a higher face amount for a given
initial payment than would otherwise be required, at a minimum, to meet the
definition of life insurance. Contracts that do not satisfy the 7-pay test,
including contracts which initially satisfied the 7-pay test but later failed
the test, will be considered modified endowment contracts subject to the
following distribution rules. Loans and partial withdrawals from, as well as
collateral assignments of, modified endowment contracts will be treated as
distributions to the contract owner. Furthermore, if the loan interest is
capitalized by adding the amount due to the balance of the loan, the amount of
the capitalized interest will be treated as a distribution which may be subject
to income tax, to the extent of the income in the contract. All pre-death
distributions (including loans, capitalized interest, partial withdrawals,
collateral assignments and complete surrenders) from these contracts will be
included in gross income on an income-first basis to the extent of any income in
the contract (the cash value less the contract owner's investment in the
contract) immediately before the distribution.
The law also imposes a 10% penalty tax on pre-death distributions (including
loans, capitalized interest, collateral assignments, partial withdrawals and
complete surrenders) from modified endowment contracts to the extent they are
included in income, unless such amounts are distributed on or after the taxpayer
attains age 59 1/2, because the taxpayer is disabled, or as substantially equal
periodic payments over the taxpayer's life (or life expectancy) or over the
joint lives (or joint life expectancies) of the taxpayer and his or her
beneficiary.
Contracts that comply with the 7-pay test will not be classified as modified
endowment contracts. Loans from contracts that are not modified endowment
contracts generally will be considered indebtedness of an owner and no part of a
loan generally will constitute income to the owner. (The treatment of a
preferred loan is unclear; such a loan may be considered a withdrawal instead of
an indebtedness of the contract owner.) In addition, pre-death distributions
from these contracts will generally not be included in gross income to the
extent that the amount received does not exceed the owner's investment in the
contract. An exception to this general rule may occur in the case of a decrease
in the death benefit provided in respect of a contract (possibly resulting from
a partial withdrawal) or any other change that reduces benefits under the
contract in the first 15 years after the contract is issued and that results in
a cash distribution to the contract owner in order for the contract to continue
complying with the Section 7702 definitional limits. Such a cash distribution
may be taxed in whole or in part as ordinary income (to the extent of any gain
in the contract) under rules prescribed in Section 7702.
A lapse of a contract that is not a modified endowment contract with an
outstanding loan will result in the treatment of the loan cancellation
(including the accrued interest) as a distribution under the contract and may be
taxable.
Compliance with the 7-pay test does not imply or guarantee that only seven
payments will be required for the initial death benefit to be guaranteed for
life. Making additional payments or reducing the benefits (for example, through
a partial withdrawal, a change in death benefit option, a decrease in face
amount of the base policy or an additional insurance rider, or terminating
additional benefits under a rider) may violate the 7-pay test or, at a minimum,
reduce the amount that may be paid in the future under the 7-pay test. Further,
reducing the death benefit during the first seven contract years will require
retroactive retesting and may well
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result in a failure of the 7-pay test regardless of any efforts by Merrill Lynch
Life to provide a payment schedule that will not violate the 7-pay test.
Any contract received in an exchange for a modified endowment contract will be
considered a modified endowment contract and will be subject to the tax
treatment accorded to modified endowment contracts that is described in the
Prospectus. A contract that is not originally classified as a modified endowment
contract can become so classified if there is a reduction in benefits during the
first seven contract years (including, for example, by a decrease in the face
amount or a change in death benefit option) or if a material change is made in
the contract at any time. (A material change includes, but is not limited to, a
change in the benefits that was not reflected in a prior 7-pay test computation,
such as a change in death benefit option.) This could result from additional
payments made after 7-pay test calculations done at the time of the contract
exchange. Contract owners may choose not to exercise their right to make
additional payments, in order to preserve their contract's current tax
treatment.
If a contract becomes a modified endowment contract, distributions that occur
during the contract year it becomes a modified endowment contract and any
subsequent contract year will be taxed as distributions from a modified
endowment contract. In addition, distributions from a contract within two years
before it becomes a modified endowment contract will be taxed in this manner.
This means that a distribution made from a contract that is not a modified
endowment contract could later become taxable as a distribution from a modified
endowment contract.
Special Treatment of Loans on the Contract. If there is any borrowing against
the Contract, whether a modified endowment contract or not, the interest paid on
loans generally is not tax deductible.
Aggregation of Modified Endowment Contracts. In the case of a pre-death
distribution (including a loan, partial withdrawal, collateral assignment,
complete surrender, or capitalized interest) from a contract that is treated as
a modified endowment contract under the rules described above, a special
aggregation requirement may apply for purposes of determining the amount of the
income on the contract. Specifically, if Merrill Lynch Life or any of its
affiliates issues to the same contract owner more than one modified endowment
contract within a calendar year, then for purposes of measuring the income on
the contract with respect to a distribution from any of those contracts, the
income on the contract for all those contracts will be aggregated and attributed
to that distribution.
Tax Treatment of Policy Split. The Contract may be issued upon exercise of
rights provided by a policy split rider under certain joint and last survivor
contracts issued by Merrill Lynch Life. (For more information about this rider
and the conditions and rules relating to the exercise of any rights under the
rider, the contract owner should call the Service Center.) A policy split could
have adverse tax consequences; for example, it is not clear whether a policy
split will be treated as a nontaxable exchange under Sections 1031 through 1043
of the Code. If a policy split is not treated as a nontaxable exchange, a split
could result in the recognition of taxable income in an amount up to any gain in
the joint and last survivor contract at the time of the split. In addition, it
is not clear whether the individual contracts that result from a policy split
would in all circumstances be treated as life insurance contracts for federal
income tax purposes and, if so treated, whether the contracts would be
classified as modified endowment contracts. (See "Tax Treatment of Loans and
Other Distributions" on page 34.) Before the contract owner exercises rights
provided by a policy split rider in order to obtain this Contract, it is
important that he or she consult with a competent tax advisor regarding the
possible consequences of a policy split.
Accelerated Benefit Rider. Pursuant to HIPAA, Merrill Lynch Life believes that,
for federal income tax purposes, an accelerated benefit payment made under the
ABR should be fully excludable from the gross income of the beneficiary, as long
as the beneficiary is the insured under the Contract. However, a contract owner
should consult a tax advisor before adding the ABR or requesting an accelerated
benefit payment under the ABR.
Other Tax Considerations. The transfer of the Contract or the designation of a
beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate and generation skipping
transfer taxes. For example, the transfer of the Contract to, or the designation
as
35
<PAGE> 36
beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation assignment of
the contract owner, may have generation skipping transfer tax considerations
under Section 2601 of the Code.
The individual situation of each contract owner or beneficiary will determine
the extent, if any, to which federal, state and local transfer taxes may be
imposed. The contract owner should consult with a tax advisor for specific
information in connection with these taxes.
The particular situation of each contract owner or beneficiary will determine
how ownership or receipt of contract proceeds will be treated for purpose of
federal or state tax, as well as state and local estate, inheritance, generation
skipping and other taxes.
Other Transactions. Changing the contract owner or the face amount of the base
policy or an additional insurance rider may have tax consequences. Exchanging
this Contract for another involving the same insured should have no federal
income tax consequences if there is no debt and no cash or other property is
received, according to Section 1035(a)(1) of the Code. In addition, exchanging
this Contract for more than one contract, or exchanging this Contract and one or
more other contracts for a single contract, in certain circumstances, may be
treated as an exchange under Section 1035, as long as all such contracts involve
the same insured. Any new contract would have to satisfy the 7-pay test from the
date of the exchange to avoid characterization as a modified endowment contract.
An exchange for a new contract(s) may, however, result in a loss of
grandfathering status for statutory changes made after the old contract(s) was
issued. Changing the insured under this Contract may not be treated as an
exchange under Section 1035, but rather as a taxable exchange. A tax advisor
should be consulted before effecting any exchange, since even if an exchange is
within Section 1035(a), the exchange may have tax consequences other than
immediate recognition of income.
In addition, the Contract may be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a contract in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Ownership of This Contract by Non-Natural Persons. The above discussion of the
tax consequences arising from the purchase, ownership and transfer of the
Contract has assumed that the owner of the Contract consists of one or more
individuals. Organizations exempt from taxation under Section 501(a) of the Code
may be subject to additional or different tax consequences with respect to
transactions such as contract loans. In recent years, moreover, Congress has
adopted new rules relating to life insurance owned by businesses. Any business
should consult a tax advisor regarding possible tax consequences associated with
a Contract prior to the acquisition of this Contract and also before entering
into any subsequent changes to or transactions under this Contract.
Possible Changes in Taxation. Although the likelihood of legislative change is
uncertain, there is always the possibility that the tax treatment of the
Contracts could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted, would
adversely modify the federal taxation of the Contracts. It is also possible that
any change could be retroactive (that is, effective prior to the date of the
change). A tax advisor should be consulted with respect to legislative
developments and their effect on the Contract.
Merrill Lynch Life does not make any guarantee regarding the tax status of any
Contract or any transaction regarding the Contract.
The above discussion is not intended as tax advice. For tax advice contract
owners should consult a competent tax advisor. Although this tax discussion is
based on Merrill Lynch Life's understanding of federal income tax laws as they
are currently interpreted, it can't guarantee that those laws or interpretations
will remain unchanged.
36
<PAGE> 37
MERRILL LYNCH LIFE'S INCOME TAXES
Insurance companies are generally required to capitalize and amortize certain
policy acquisition expenses over a ten-year period rather than currently
deducting such expenses. This treatment applies to the deferred acquisition
expenses of a Contract and results in a significantly higher corporate income
tax liability for Merrill Lynch Life in early contract years. Merrill Lynch Life
makes a charge to compensate Merrill Lynch Life for the anticipated higher
corporate income taxes that result from the receipt of payments under a
Contract. (See "Contract Loading" on page 19.)
Currently, Merrill Lynch Life makes no charges to the Separate Account for any
federal, state or local taxes that it incurs that may be attributable to the
Separate Account or to the Contracts. Merrill Lynch Life, however, reserves the
right to make a charge for assessments of federal premium taxes or federal,
state or local excise, profits or income taxes measured by or attributable to
the receipt of premiums.
REINSURANCE
Merrill Lynch Life intends to reinsure some of the risks assumed under the
Contracts.
MORE ABOUT THE SEPARATE ACCOUNT AND ITS DIVISIONS
ABOUT THE SEPARATE ACCOUNT
The Separate Account is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as a unit investment trust. This
registration does not involve any supervision by the Securities and Exchange
Commission of Merrill Lynch Life's management or the management of the Separate
Account. The Separate Account is also governed by the laws of the State of
Arkansas, Merrill Lynch Life's state of domicile.
Merrill Lynch Life owns all of the assets of the Separate Account. These assets
are held separate and apart from all of Merrill Lynch Life's other assets.
Merrill Lynch Life maintains records of all purchases and redemptions of shares
of the Funds and units of the Zero Trusts by each of the investment divisions.
CHANGES WITHIN THE ACCOUNT
Merrill Lynch Life may from time to time make additional investment divisions
available to contract owners. These divisions will invest in investment
portfolios Merrill Lynch Life finds suitable for the Contracts. Merrill Lynch
Life also has the right to eliminate investment divisions from the Separate
Account, to combine two or more investment divisions, or to substitute a new
portfolio for the portfolio in which an investment division invests. A
substitution may become necessary if, in Merrill Lynch Life's judgment, a
portfolio no longer suits the purposes of the Contracts. This may happen due to
a change in laws or regulations or in a portfolio's investment objectives or
restrictions, or because the portfolio is no longer available for investment, or
for some other reason. Merrill Lynch Life would get any required prior approval
from the Arkansas State Insurance Department and the Securities and Exchange
Commission before making such a substitution. It would also get any other
required approvals before making such a substitution.
Subject to any required regulatory approvals, Merrill Lynch Life reserves the
right to transfer assets of the Separate Account or of any of the investment
divisions to another separate account or investment division.
When permitted by law, Merrill Lynch Life reserves the right to:
- deregister the Separate Account under the Investment Company Act of 1940;
- operate the Separate Account as a management company under the Investment
Company Act of 1940;
- restrict or eliminate any voting rights of contract owners, or other
persons who have voting rights as to the Separate Account; and
- combine the Separate Account with other separate accounts.
37
<PAGE> 38
NET RATE OF RETURN FOR AN INVESTMENT DIVISION
Each investment division has a distinct unit value (also referred to as "price"
or "separate account index" in reports furnished to the contract owner by
Merrill Lynch Life). When payments or other amounts are allocated to an
investment division, a number of units are purchased based on the value of a
unit of the investment division as of the end of the valuation period during
which the allocation is made. When amounts are transferred out of, or deducted
from, an investment division, units are redeemed in a similar manner. A
valuation period is each business day together with any non-business days before
it. A business day for an investment division is any day the New York Stock
Exchange is open or the SEC requires that the net asset value of an investment
division be determined.
For each investment division, the separate account index was initially set at
$10.00. The separate account index for each subsequent valuation period
fluctuates based upon the net rate of return for that period. Merrill Lynch Life
determines the net rate of return of an investment division at the end of each
valuation period. The net rate of return reflects the investment performance of
the division for the valuation period and is net of the charges to the Separate
Account described on page 19.
For divisions investing in the Funds, shares are valued at net asset value and
reflect reinvestment of any dividends or capital gains distributions declared by
the Funds.
For divisions investing in the Zero Trusts, units of each Zero Trust are valued
at the sponsor's repurchase price, as explained in the prospectus for the Zero
Trusts.
THE FUNDS
Buying and Redeeming Shares. The Funds sell and redeem their shares at net
asset value. Any dividend or capital gain distribution will be reinvested at net
asset value in shares of the same portfolio.
Voting Rights. Merrill Lynch Life is the legal owner of all Fund shares held in
the Separate Account. As the owner, Merrill Lynch Life has the right to vote on
any matter put to vote at the Funds' shareholder meetings. However, Merrill
Lynch Life will vote all Fund shares attributable to Contracts according to
instructions received from contract owners. Shares attributable to Contracts for
which no voting instructions are received will be voted in the same proportion
as shares in the respective investment divisions for which instructions are
received. Shares not attributable to Contracts will also be voted in the same
proportion as shares in the respective divisions for which instructions are
received. If any federal securities laws or regulations, or their present
interpretation, change to permit Merrill Lynch Life to vote Fund shares in its
own right, it may elect to do so.
Merrill Lynch Life determines the number of shares that contract owners have in
an investment division by dividing their Contract's investment base in that
division by the net asset value of one share of the portfolio. Fractional votes
will be counted. Merrill Lynch Life will determine the number of shares for
which a contract owner may give voting instructions 90 days or less before each
Fund meeting. Merrill Lynch Life will request voting instructions by mail at
least 14 days before the meeting.
Under certain circumstances, Merrill Lynch Life may be required by state
regulatory authorities to disregard voting instructions. This may happen if
following the instructions would mean voting to change the sub-classification or
investment objectives of the portfolios, or to approve or disapprove an
investment advisory contract.
Merrill Lynch Life may also disregard instructions to vote for changes in the
investment policy or the investment adviser if it disapproves of the proposed
changes. Merrill Lynch Life would disapprove a proposed change only if it was:
- contrary to state law;
- prohibited by state regulatory authorities; or
- decided by management that the change would result in overly speculative
or unsound investments.
38
<PAGE> 39
If Merrill Lynch Life disregards voting instructions, it will include a summary
of its actions in the next semi-annual report.
Resolving Material Conflicts. Shares of the Series Fund are available for
investment by Merrill Lynch Life, ML Life Insurance Company of New York (an
indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.) and Monarch Life
Insurance Company (an insurance company not affiliated with Merrill Lynch Life
or Merrill Lynch & Co., Inc.). Shares of the Variable Series Funds, the AIM V.I.
Funds, the Alliance Fund, and the MFS Trust are sold to separate accounts of
Merrill Lynch Life, ML Life Insurance Company of New York, and insurance
companies not affiliated with Merrill Lynch Life or Merrill Lynch & Co., Inc. to
fund benefits under variable life insurance and variable annuity contracts, and
may be sold to certain qualified plans.
It is possible that differences might arise between Merrill Lynch Life's
Separate Account and one or more of the other separate accounts which invest in
the Funds. In some cases, it is possible that the differences could be
considered "material conflicts". Such a "material conflict" could also arise due
to changes in the law (such as state insurance law or federal tax law) which
affect these different variable life insurance and variable annuity separate
accounts. It could also arise by reason of difference in voting instructions
from Merrill Lynch Life's contract owners and those of the other insurance
companies, or for other reasons. Merrill Lynch Life will monitor events to
determine how to respond to such conflicts. If a conflict occurs, Merrill Lynch
Life may be required to eliminate one or more investment divisions of the
Separate Account which invest in the Funds or substitute a new portfolio for a
portfolio in which a division invests. In responding to any conflict, Merrill
Lynch Life will take the action which it believes necessary to protect its
contract owners, consistent with applicable legal requirements.
Administration Services Arrangements. MLAM has entered into an agreement with
Merrill Lynch Insurance Group, Inc. ("MLIG"), Merrill Lynch Life's parent, with
respect to administration services for the Series Fund and the Variable Series
Funds in connection with the Contracts and other variable life insurance and
variable annuity contracts issued by Merrill Lynch Life. Under this agreement,
MLAM pays compensation to MLIG in an amount equal to a portion of the annual
gross investment advisory fees paid by the Series Fund and the Variable Series
Funds to MLAM attributable to variable contracts issued by Merrill Lynch Life.
AIM V.I. Funds has entered into an Administrative Services Agreement with AIM,
pursuant to which AIM has agreed to provide certain accounting and other
administrative services to the AIM V.I. Funds, including the services of a
principal financial officer and related staff. As compensation to AIM for its
services under the Administrative Services Agreement, the AIM V.I. Funds
reimburse AIM for expenses incurred by AIM or its affiliates in connection with
such services. AIM has entered into an agreement with Merrill Lynch Life with
respect to administrative services for the AIM V.I. Funds in connection with the
Contracts. Under this agreement, AIM pays compensation to Merrill Lynch Life in
an amount equal to a percentage of the average net assets of the AIM V.I. Funds
attributable to the Contracts.
Alliance Fund Distributors, Inc. ("AFD"), an affiliate of Alliance, has entered
into an agreement with Merrill Lynch Life with respect to administrative
services for the Alliance Fund in connection with the Contracts. Under this
agreement, AFD pays compensation to Merrill Lynch Life in an amount equal to a
percentage of the average net assets of the Alliance Fund attributable to the
Contracts.
MFS has entered into an agreement with MLIG with respect to administrative
services for the MFS Trust in connection with the Contracts and certain
contracts issued by ML Life Insurance Company of New York. Under this agreement,
MFS pays compensation to MLIG in an amount equal to a percentage of the average
net assets of the MFS Trust attributable to such contracts.
39
<PAGE> 40
THE ZERO TRUSTS
The 15 Zero Trusts:
<TABLE>
<CAPTION>
TARGETED RATE OF RETURN
TO MATURITY AS OF
ZERO TRUST MATURITY DATE APRIL 17, 1998
- ---------- ------------- -----------------------
<C> <S> <C>
1999 February 15, 1999 4.06%
2000 February 15, 2000 4.12%
2001 February 15, 2001 4.10%
2002 February 15, 2002 4.25%
2003 August 15, 2003 4.30%
2004 February 15, 2004 4.38%
2005 February 15, 2005 4.26%
2006 February 15, 2006 4.08%
2007 February 15, 2007 4.19%
2008 February 15. 2008 4.47%
2009 February 15, 2009 4.51%
2010 February 15, 2010 4.63%
2011 February 15, 2011 4.57%
2013 February 15, 2013 4.66%
2014 February 15, 2014 4.75%
</TABLE>
Targeted Rate of Return to Maturity
Because the underlying securities in the Zero Trusts will grow to their face
value on the maturity date, it is possible to estimate a compound rate of growth
to maturity for the Zero Trust units.
But because the units are held in the Separate Account, the asset charge and the
trust charge (described in "Charges to the Separate Account" on page 19) must be
taken into account in estimating a targeted rate of return for the Separate
Account. The targeted rate of return to maturity for the Separate Account
depends on the compound rate of growth adjusted for these charges. It does not,
however, represent the actual return on a payment Merrill Lynch Life might
receive under the Contract on that date, since it does not reflect the charges
for contract loading deducted from payments to a Contract, charges for cost of
insurance and rider costs and any net loan cost deducted from a Contract's
investment base.
Since the value of the Zero Trust units will vary daily to reflect the market
value of the underlying securities, the compound rate of growth to maturity for
the Zero Trust units and the targeted rate of return to maturity for the
Separate Account will vary correspondingly.
ILLUSTRATIONS
ILLUSTRATIONS OF DEATH BENEFITS, INVESTMENT BASE, NET CASH SURRENDER VALUES AND
ACCUMULATED PAYMENTS
The tables on pages 42 through 45 demonstrate the way in which the Contract
works. The tables are based on the following ages, face amounts, payments and
guarantee periods and show values based upon both current and maximum mortality
charges.
1. The illustration on page 42 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$9,576 through contract year 51, an initial face amount of $500,000, an
initial guarantee period of 2.75 years and coverage under death benefit
option 1. It assumes current mortality charges.
2. The illustration on page 43 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$9,576 through contract year 51, an initial face amount of $500,000, an
initial guarantee period of 2.75 years and coverage under death benefit
option 1. It assumes maximum mortality charges.
40
<PAGE> 41
3. The illustration on page 44 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$31,268 through contract year 43, an initial face amount of $500,000, an
initial guarantee period of 10.75 years and coverage under death benefit
option 2. It assumes current mortality charges.
4. The illustration on page 45 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$31,268 through contract year 43, an initial face amount of $500,000, an
initial guarantee period of 10.75 years and coverage under death benefit
option 2. It assumes maximum mortality charges.
The tables show how the death benefit, investment base and net cash surrender
value may vary over an extended period of time assuming hypothetical rates of
return (i.e., investment income and capital gains and losses, realized or
unrealized) equivalent to constant gross annual rates of 0%, 6% and 12%.
The death benefit, investment base and net cash surrender value for a Contract
would be different from those shown if the actual rates of return averaged 0%,
6% and 12% over a period of years, but also fluctuated above or below those
averages for individual contract years.
The amounts shown for the death benefit, investment base and net cash surrender
value as of the end of each contract year take into account the daily asset
charge in the Separate Account equivalent to .90% (annually at the beginning of
the year) of assets attributable to the Contracts at the beginning of the year.
The amounts shown in the tables also assume an additional charge of .52%. This
charge assumes that investment base is allocated equally among all investment
divisions and is based on the 1997 expenses (including monthly advisory fees)
for the Funds, and the current trust charge. This charge also reflects expense
reimbursements made in 1997 to certain portfolios by the investment adviser to
the respective portfolio. These reimbursements amounted to .17% and .09% of the
average daily net assets of the Developing Capital Markets Focus Fund and the
Natural Resources Portfolio, respectively. (See "Charges to Fund Assets" on page
20.) The actual charge under a Contract for Fund expenses and the trust charge
will depend on the actual allocation of the investment base and may be higher or
lower depending on how the investment base is allocated.
Taking into account the .90% asset charge in the Separate Account and the .52%
charge described above, the gross annual rates of investment return of 0%, 6%
and 12% correspond to net annual rates of -1.42%, 4.53%, and 10.48%,
respectively. The gross returns are before any deductions and should not be
compared to rates which are after deduction of charges.
The hypothetical returns shown on the tables are without any income tax charges
that may be attributable to the Separate Account in the future, although they do
reflect the charge for federal taxes included in the contract loading. (See
"Contract Loading" on page 19.) In order to produce after tax returns of 0%, 6%
and 12%, the Funds would have to earn a sufficient amount in excess of 0% or 6%
or 12% to cover any tax charges attributable to the Separate Account.
The second column of the tables shows the amount which would accumulate if an
amount equal to the payments were invested to earn interest (after taxes) at 5%
compounded annually.
Merrill Lynch Life will furnish upon request a personalized illustration
reflecting the proposed insured's age, face amount and the payment amounts
requested. The illustration will show both current and guaranteed cost of
insurance rates and will assume that the proposed insured is in a standard
non-smoker underwriting class.
41
<PAGE> 42
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $9,576 THROUGH CONTRACT YEAR 51
FACE AMOUNT(1) : $500,000 INITIAL GUARANTEE PERIOD: 2.75 YEARS
DEATH BENEFIT OPTION 1
BASED ON CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS -------------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
1.................................... 9,576 10,055 500,000 500,000 500,000
2.................................... 9,576 20,612 500,000 500,000 500,000
3.................................... 9,576 31,697 500,000 500,000 500,000
4.................................... 9,576 43,337 500,000 500,000 500,000
5.................................... 9,576 55,559 500,000 500,000 500,000
6.................................... 9,576 68,392 500,000 500,000 500,000
7.................................... 9,576 81,866 500,000 500,000 500,000
8.................................... 9,576 96,014 500,000 500,000 500,000
9.................................... 9,576 110,870 500,000 500,000 500,000
10.................................... 9,576 126,468 500,000 500,000 500,000
15.................................... 9,576 216,968 500,000 500,000 500,000
20.................................... 9,576 332,471 500,000 500,000 511,743
30.................................... 9,576 668,029 500,000 500,000 1,184,042
55.................................... 0 2,698,733 500,000 1,038,459 12,553,583
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
--------------------------------- ---------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1................................... 4,057 4,317 4,578 4,057 4,317 4,578
2................................... 8,291 9,085 9,911 8,291 9,085 9,911
3................................... 16,056 17,883 19,840 16,056 17,883 19,840
4................................... 23,580 26,947 30,677 23,580 26,947 30,677
5................................... 30,902 36,329 42,561 30,902 36,329 42,561
6................................... 38,039 46,060 55,622 38,039 46,060 55,622
7................................... 45,002 56,167 69,999 45,002 56,167 69,999
8................................... 51,835 66,712 85,880 51,835 66,712 85,880
9................................... 58,511 77,691 103,405 58,511 77,691 103,405
10................................... 64,981 89,074 122,707 64,981 89,074 122,707
15................................... 92,403 151,076 252,250 92,403 151,076 252,250
20................................... 111,028 223,722 419,461 111,028 223,722 419,461
30................................... 106,612 378,187 1,106,582 106,612 378,187 1,106,582
55................................... 0 1,038,459 12,553,583 0 1,038,459 12,553,583
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered or lapses within 24 months after
issue, the contract owner will also receive any excess sales load previously
deducted, except to the extent it is applied to keep the Contract in force.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At annual rates of return of 6% and 12% and current
mortality charges, the guarantee period extends until the insured's attained
age 100 in contract years 26 and 16, respectively. Once the guarantee
extends until the insured's attained age 100, no more payments would be
accepted. Values shown at annual rates of return of 0%, 6% and 12% do not
reflect any payments shown after the guarantee period extends until the
insured's attained age 100.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
42
<PAGE> 43
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $9,576 THROUGH CONTRACT YEAR 51
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 2.75 YEARS
DEATH BENEFIT OPTION 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS --------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1..................................... 9,576 10,055 500,000 500,000 500,000
2..................................... 9,576 20,612 500,000 500,000 500,000
3..................................... 9,576 31,697 500,000 500,000 500,000
4..................................... 9,576 43,337 500,000 500,000 500,000
5..................................... 9,576 55,559 500,000 500,000 500,000
6..................................... 9,576 68,392 500,000 500,000 500,000
7..................................... 9,576 81,866 500,000 500,000 500,000
8..................................... 9,576 96,014 500,000 500,000 500,000
9..................................... 9,576 110,870 500,000 500,000 500,000
10..................................... 9,576 126,468 500,000 500,000 500,000
15..................................... 9,576 216,968 500,000 500,000 500,000
20..................................... 9,576 332,471 500,000 500,000 500,000
30..................................... 9,576 668,029 500,000 500,000 1,004,680
55..................................... 0 2,698,733 500,000 584,289 10,032,202
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
---------------------------------- --------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1...................................... 3,094 3,319 3,544 3,094 3,319 3,544
2...................................... 6,488 7,156 7,853 6,488 7,156 7,853
3...................................... 13,504 15,064 16,737 13,504 15,064 16,737
4...................................... 20,300 23,211 26,434 20,300 23,211 26,434
5...................................... 26,865 31,594 37,019 26,865 31,594 37,019
6...................................... 33,194 40,222 48,588 33,194 40,222 48,588
7...................................... 39,265 49,080 61,226 39,265 49,080 61,226
8...................................... 45,051 58,158 75,030 45,051 58,158 75,030
9...................................... 50,535 67,448 90,119 50,535 67,448 90,119
10...................................... 55,686 76,933 106,616 55,686 76,933 106,616
15...................................... 75,686 127,109 216,534 75,686 127,109 216,534
20...................................... 82,717 180,946 363,726 82,717 180,946 363,726
30...................................... 9,825 289,877 938,953 9,825 289,877 938,953
55...................................... 0 584,289 10,032,202 0 584,289 10,032,202
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered or lapses within 24 months after
issue, the contract owner will also receive any excess sales load previously
deducted, except to the extent it is applied to keep the Contract in force.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At annual rates of return of 6% and 12% and maximum
mortality charges, the guarantee period extends until the insured's attained
age 100 in contract years 44 and 17, respectively. Once the guarantee period
extends until the insured's attained age 100, no more payments would be
accepted. Values shown at annual rates of return of 0%, 6% and 12% do not
reflect any payments shown after the guarantee period extends until the
insured's attained age 100.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
43
<PAGE> 44
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $31,268 THROUGH CONTRACT YEAR 43
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 10.75 YEARS
DEATH BENEFIT OPTION 2
BASED ON CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS ----------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1.................................. 31,268 32,831 520,582 521,839 523,097
2.................................. 31,268 67,304 548,665 552,937 557,361
3.................................. 31,268 103,501 576,134 585,221 594,984
4.................................. 31,268 141,507 603,057 618,806 636,383
5.................................. 31,268 181,414 629,478 653,787 681,991
6.................................. 31,268 223,316 655,413 690,239 732,262
7.................................. 31,268 267,313 680,877 728,236 787,691
8.................................. 31,268 313,510 705,919 767,891 848,864
9.................................. 31,268 362,017 730,514 809,248 916,351
10.................................. 31,268 412,949 754,603 852,317 990,744
15.................................. 31,268 708,453 865,278 1,093,492 1,491,507
20.................................. 31,268 1,085,600 958,726 1,383,396 2,193,908
30.................................. 31,268 2,181,276 1,075,677 2,133,157 4,927,820
55.................................. 0 8,430,939 500,000 3,662,187 49,768,517
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
--------------------------------- ---------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1................................... 20,582 21,839 23,097 20,582 21,839 23,097
2................................... 48,665 52,937 57,361 48,665 52,937 57,361
3................................... 76,134 85,221 94,984 76,134 85,221 94,984
4................................... 103,057 118,806 136,383 103,057 118,806 136,383
5................................... 129,478 153,787 181,991 129,478 153,787 181,991
6................................... 155,413 190,239 232,262 155,413 190,239 232,262
7................................... 180,877 228,236 287,691 180,877 228,236 287,691
8................................... 205,919 267,891 348,864 205,919 267,891 348,864
9................................... 230,514 309,248 416,351 230,514 309,248 416,351
10................................... 254,603 352,317 490,744 254,603 352,317 490,744
15................................... 365,278 593,492 991,507 365,278 593,492 991,507
20................................... 458,726 883,396 1,693,908 458,726 883,396 1,693,908
30................................... 575,677 1,633,157 4,427,820 575,677 1,633,157 4,427,820
55................................... 0 3,162,187 49,268,517 0 3,162,187 49,268,517
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered or lapses within 24 months after
issue, the contract owner will also receive any excess sales load previously
deducted, except to the extent it is applied to keep the Contract in force.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At annual rates of return of 6% and 12% and current
mortality charges, the guarantee period extends until the insured's attained
age 100 in contract years 34 and 17, respectively. Once the guarantee period
extends until the insured's attained age 100, no more payments would be
accepted. Values shown at annual rates of return of 0%, 6% and 12% do not
reflect any payments shown after the guarantee period extends until the
insured's attained age 100.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
44
<PAGE> 45
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $31,268 THROUGH CONTRACT YEAR 43
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 10.75 YEARS
DEATH BENEFIT OPTION 2
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS ---------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
1.................................... 31,268 32,831 519,612 520,833 522,055
2.................................... 31,268 67,304 546,844 550,988 555,280
3.................................... 31,268 103,501 573,546 582,362 591,834
4.................................... 31,268 141,507 599,716 614,998 632,055
5.................................... 31,268 181,414 625,342 648,933 676,306
6.................................... 31,268 223,316 650,422 684,217 724,999
7.................................... 31,268 267,313 674,928 720,875 778,563
8.................................... 31,268 313,510 698,835 758,932 837,471
9.................................... 31,268 362,017 722,121 798,422 902,252
10.................................... 31,268 412,949 744,749 839,363 973,474
15.................................... 31,268 708,453 847,138 1,066,913 1,451,021
20.................................... 31,268 1,085,600 927,751 1,334,035 2,108,732
30.................................... 31,268 2,181,276 990,221 1,968,684 4,584,787
55.................................... 0 8,430,939 500,000 559,334 41,256,721
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
--------------------------------- ---------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1................................... 19,612 20,833 22,055 19,612 20,833 22,055
2................................... 46,844 50,988 55,280 46,844 50,988 55,280
3................................... 73,546 82,362 91,834 73,546 82,362 91,834
4................................... 99,716 114,998 132,055 99,716 114,998 132,055
5................................... 125,342 148,933 176,306 125,342 148,933 176,306
6................................... 150,422 184,217 224,999 150,422 184,217 224,999
7................................... 174,928 220,875 278,563 174,928 220,875 278,563
8................................... 198,835 258,932 337,471 198,835 258,932 337,471
9................................... 222,121 298,422 402,252 222,121 298,422 402,252
10................................... 244,749 339,363 473,474 244,749 339,363 473,474
15................................... 347,138 566,913 951,021 347,138 566,913 951,021
20................................... 427,751 834,035 1,608,732 427,751 834,035 1,608,732
30................................... 480,221 1,468,684 4,084,787 480,221 1,468,684 4,084,787
55................................... 0 59,334 40,756,721 0 59,334 40,756,721
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered or lapses within 24 months after
issue, the contract owner will also receive any excess sales load previously
deducted, except to the extent it is applied to keep the Contract in force.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At annual rates of return of 6% and 12% and maximum
mortality charges, the guarantee period extends until the insured's attained
age 100 in contract years 43 and 17, respectively. Once the guarantee period
extends until the insured's attained age 100, no more payments would be
accepted. Values shown at annual rates of return of 0%, 6% and 12% do not
reflect any payments shown after the guarantee period extends until the
insured's attained age 100.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
45
<PAGE> 46
EXAMPLES
ADDITIONAL PAYMENTS
As of the processing date on or next following receipt and acceptance of an
additional payment, Merrill Lynch Life will increase the guarantee period if the
guarantee period prior to receipt and acceptance of an additional payment does
not extend to the insured's attained age 100.
Merrill Lynch Life will determine the increase in the guarantee period by taking
the immediate increase in the cash value resulting from the additional payment
and adding to that interest at the annual rate of 4.5% for the period from the
date Merrill Lynch Life receives and accepts the payment to the contract
processing date on or next following such date. This is the guarantee adjustment
amount. The guarantee adjustment amount is added to the fixed base and the
resulting new fixed base is used to calculate a new guarantee period.
The amount of the increase in the guarantee period will depend on the amount of
the additional payment and the contract year in which it is received and
accepted. If additional payments of different amounts were made at the same time
to equivalent Contracts, the Contract to which the larger payment is applied
would have a larger increase in the guarantee period.
Example 1 shows the effect on the guarantee period of a $9,576 additional
payment received and accepted at the beginning of contract year five. Example 2
shows the effect of a $19,152 additional payment received and accepted at the
beginning of contract year five. Example 3 shows the effect of a $9,576
additional payment received and accepted at the beginning of contract year six.
All three examples assume that death benefit option 1 has been elected, that
annual payments of $9,576 have been made up to the contract year reflected in
the example and that no other contract transactions have been made.
MALE ISSUE AGE 45
INITIAL PAYMENT PLUS ANNUAL PAYMENTS OF $9,576
FACE AMOUNT: $500,000
INITIAL GUARANTEE PERIOD: 2.75 YEARS
DEATH BENEFIT OPTION: 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
EXAMPLE 1
----------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
-------- ---------- ----------------
<S> <C> <C> <C>
5 $9,576 2.75 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 2
----------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
-------- ---------- ----------------
<S> <C> <C> <C>
5 $19,152 5.25 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 3
----------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
-------- ---------- ----------------
<S> <C> <C> <C>
6 $9,576 2.25 years
</TABLE>
46
<PAGE> 47
PARTIAL WITHDRAWALS
As of the processing date on or next following the effective date of a partial
withdrawal, Merrill Lynch Life calculates a new guarantee period. This is done
by taking the immediate decrease in cash value resulting from the partial
withdrawal and adding to that amount interest at an annual rate of 4.5% for the
period from the date of the withdrawal to the contract processing date on or
next following such date. This is the guarantee adjustment amount. The guarantee
adjustment amount is subtracted from the fixed base and the resulting new fixed
base is used to calculate a new guarantee period.
The amount of the reduction in the guarantee period will depend on the amount of
the withdrawal, the face amount at the time of the withdrawal and the contract
year in which the withdrawal is made. If made at the same time to equivalent
Contracts, a larger withdrawal would result in a greater reduction in the
guarantee period than a smaller withdrawal. The same partial withdrawal made at
the same time from Contracts with the same guarantee periods but with different
face amounts would result in a greater reduction in the guarantee period for the
Contract with the smaller face amount.
Examples 1 and 2 show the effect on the guarantee period of partial withdrawals
for $5,000 and $10,000 taken at the beginning of contract year fifteen. Example
3 shows the effect on the guarantee period of a $10,000 partial withdrawal taken
at the beginning of contract year twenty. All three examples assume that death
benefit option 1 has been elected, that annual payments of $9,576 have been made
up to the contract year reflected in the example and that no other contract
transactions have been made.
MALE ISSUE AGE 45
INITIAL PAYMENT PLUS ANNUAL PAYMENTS OF $9,576
FACE AMOUNT: $500,000
INITIAL GUARANTEE PERIOD: 2.75 YEARS
DEATH BENEFIT OPTION: 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
EXAMPLE 1
----------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
-------- ---------- ----------------
<S> <C> <C> <C>
15 $5,000 .5 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 2
----------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
-------- ---------- ----------------
<S> <C> <C> <C>
15 $10,000 1 year
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 3
----------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
-------- ---------- ----------------
<S> <C> <C> <C>
20 $10,000 .5 years
</TABLE>
47
<PAGE> 48
CHANGING THE DEATH BENEFIT OPTION
On each contract anniversary beginning with the first, the contract owner may
change the death benefit option by switching from option 1 to option 2 or from
option 2 to option 1. Merrill Lynch Life will change the face amount of the
Contract in order to keep the death benefit constant on the effective date of
the change. Therefore, if the change is from option 1 to option 2, the face
amount of the Contract will be decreased by the cash value on the date of the
change. If the change is from option 2 to option 1, the face amount of the
Contract will be increased by the cash value on the date of the change.
Example 1 shows the effect on the face amount of a change from option 1 to
option 2 and Example 2 shows the effect on the face amount of a change from
option 2 to option 1. The face amount before each change is $500,000.
EXAMPLE 1
------------------------------------------------------------
Before Option Change
Death Benefit under Option 1: $500,000
Face Amount: $500,000
Cash Value: $40,000
After Option Change
Death Benefit under Option 2: $500,000
Face Amount: $460,000
Cash Value: $40,000
EXAMPLE 2
------------------------------------------------------------
Before Option Change
Death Benefit under Option 2: $540,000
Face Amount: $500,000
Cash Value: $40,000
After Option Change
Death Benefit under Option 1: $540,000
Face Amount: $540,000
Cash Value: $40,000
48
<PAGE> 49
REDUCTION IN FACE AMOUNT
As of the contract anniversary next following approval of a reduction in face
amount, Merrill Lynch Life calculates a new guarantee period using the new lower
face amount (plus any additional insurance rider face amount) and the fixed base
on that date.
The amount of the increase in the guarantee period will depend on the amount of
the reduction in face amount, the face amount at the time of the reduction and
the contract year in which it is effective. If face amount reductions of
different amounts were made at the same time to equivalent contracts, the
contract to which the larger face amount reduction is applied would have a
larger increase in the guarantee period.
Example 1 shows the effect on the guarantee period of a $100,000 reduction in
face amount effective at the beginning of contract year five. Example 2 shows
the effect on the guarantee period of a $150,000 reduction in face amount
effective at the beginning of contract year five. Example 3 shows the effect on
the guarantee period of a $150,000 reduction in face amount effective at the
beginning of contract year six. All three examples assume that death benefit
option 1 has been elected, that annual payments have been made up to the
contract year reflected in the example and that no other contract transactions
have been made.
MALE ISSUE AGE 45
INITIAL PAYMENT PLUS ANNUAL PAYMENTS OF $9,576
FACE AMOUNT: $500,000
INITIAL GUARANTEE PERIOD: 2.75 YEARS
DEATH BENEFIT OPTION: 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
EXAMPLE 1
- -----------------------------------------------------------
CONTRACT FACE AMOUNT INCREASE IN
YEAR REDUCTION GUARANTEE PERIOD
- -------- ----------- ----------------
<S> <C> <C>
5 $100,000 2.00 yrs
EXAMPLE 2
- -----------------------------------------------------------
CONTRACT FACE AMOUNT INCREASE IN
YEAR REDUCTION GUARANTEE PERIOD
- -------- ----------- ----------------
5 $150,000 3.25 yrs
EXAMPLE 3
- -----------------------------------------------------------
CONTRACT FACE AMOUNT INCREASE IN
YEAR REDUCTION GUARANTEE PERIOD
- -------- ----------- ----------------
6 $150,000 3.5 yrs
</TABLE>
The reduction will not be permitted if the face amount would be less than
$250,000 or if the resulting guarantee period would extend beyond the insured's
attained age 100.
49
<PAGE> 50
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Merrill Lynch Life's directors and executive officers and their positions with
Merrill Lynch Life are as follows:
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE COMPANY
---- ----------------------------
<S> <C>
Anthony J. Vespa Chairman of the Board, President, and
Chief Executive Officer
Joseph E. Crowne, Jr. Director, Senior Vice President,
Chief Financial Officer, Chief
Actuary, and Treasurer
Barry G. Skolnick Director, Senior Vice President,
General Counsel, and Secretary
David M. Dunford Director, Senior Vice President,
and Chief Investment Officer
Gail R. Farkas Director and Senior Vice President
Robert J. Boucher Senior Vice President, Variable Life
Administration
</TABLE>
Each director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and shall have qualified. Each has held
various executive positions with insurance company subsidiaries of Merrill Lynch
Life's indirect parent, Merrill Lynch & Co., Inc. The principal positions of
Merrill Lynch Life's directors and executive officers for the past five years
are listed below:
Mr. Vespa joined Merrill Lynch Life in January 1994. Since February 1994, he has
held the position of Senior Vice President of MLPF&S. From February 1991 to
February 1994, he held the position of District Director and First Vice
President of MLPF&S.
Mr. Crowne joined Merrill Lynch Life in June 1991.
Mr. Skolnick joined Merrill Lynch Life in November 1990. Since May 1992, he has
held the position of Assistant General Counsel of Merrill Lynch & Co., Inc. and
First Vice President and Assistant General Counsel of MLPF&S.
Mr. Dunford joined Merrill Lynch Life in July 1990.
Ms. Farkas joined Merrill Lynch Life in August 1995. Prior to August 1995 she
held the position of Director of Market Planning of MLPF&S.
Mr. Boucher joined Merrill Lynch Life in May 1992.
No shares of Merrill Lynch Life are owned by any of its officers or directors,
as it is a wholly owned subsidiary of MLIG. The officers and directors of
Merrill Lynch Life, both individually and as a group, own less than one percent
of the outstanding shares of common stock of Merrill Lynch & Co., Inc.
SERVICES ARRANGEMENT
Merrill Lynch Life and MLIG are parties to a service agreement pursuant to which
MLIG has agreed to provide certain data processing, legal, actuarial,
management, advertising and other services to Merrill Lynch Life including
services related to the Separate Account and the Contracts. Expenses incurred by
MLIG in relation to this service agreement are reimbursed by Merrill Lynch Life
on an allocated cost basis. Charges billed to Merrill Lynch Life by MLIG
pursuant to the agreement were $43.0 million for the year ended December 31,
1997.
50
<PAGE> 51
STATE REGULATION
Merrill Lynch Life is subject to the laws of the State of Arkansas and to the
regulations of the Arkansas Insurance Department (the "Insurance Department"). A
detailed financial statement in the prescribed form (the "Annual Statement") is
filed with the Insurance Department each year covering Merrill Lynch Life's
operations for the preceding year and its financial condition as of the end of
that year. Regulation by the Insurance Department includes periodic examination
to determine contract liabilities and reserves so that the Insurance Department
may certify that these items are correct. Merrill Lynch Life's books and
accounts are subject to review by the Insurance Department at all times. A full
examination of Merrill Lynch Life's operations is conducted periodically by the
Insurance Department and under the auspices of the National Association of
Insurance Commissioners. Merrill Lynch Life is also subject to the insurance
laws and regulations of all jurisdictions in which it is licensed to do
business.
YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment companies and
financial and business organizations, the Separate Account could be adversely
affected if the computer systems used by Merrill Lynch Life or the other service
providers do not properly address this problem prior to January 1, 2000. Merrill
Lynch & Co., Inc. has established a dedicated group to analyze these issues and
to implement any systems modifications necessary to prepare for the Year 2000.
The resources that are being devoted to this effort are substantial. It is
difficult to predict with precision whether the amount of resources ultimately
devoted, or the outcome of these efforts, will have any negative impact on
Merrill Lynch Life. Currently, Merrill Lynch Life does not anticipate that the
transition to the 21st century will have any material impact on its ability to
continue to service the Contracts at current levels. In addition, Merrill Lynch
Life has sought assurances from the other service providers that they are taking
all necessary steps to ensure that their computer systems will accurately
reflect the Year 2000, and Merrill Lynch Life will continue to monitor the
situation. At this time, however, no assurance can be given that the other
service providers have anticipated every step necessary to avoid any adverse
effect on the Separate Account attributable to the Year 2000 Problem.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. Merrill Lynch Life and
MLPF&S are engaged in various kinds of routine litigation that, in the Company's
judgment, is not material to Merrill Lynch Life's total assets or to MLPF&S.
EXPERTS
The financial statements of Merrill Lynch Life as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 and of the
Separate Account as of December 31, 1997 and for the periods presented, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and have been so included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing. Deloitte & Touche LLP's principal business address
is Two World Financial Center, New York, New York 10281-1433.
Actuarial matters included in this Prospectus have been examined by Joseph E.
Crowne, Jr., F.S.A., Chief Actuary and Chief Financial Officer of Merrill Lynch
Life, as stated in his opinion filed as an exhibit to the registration
statement.
LEGAL MATTERS
The organization of the Company, its authority to issue the Contract, and the
validity of the form of the Contract have been passed upon by Barry G. Skolnick,
Merrill Lynch Life's Senior Vice President and General Counsel. Sutherland,
Asbill & Brennan LLP of Washington, D.C. has provided advice on certain matters
relating to federal securities and tax laws.
51
<PAGE> 52
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 and the Investment Company Act of
1940 that relate to the Contract and its investment options. This Prospectus
does not contain all of the information in the registration statements as
permitted by Securities and Exchange Commission regulations. The omitted
information can be obtained from the Securities and Exchange Commission's
principal office in Washington, D.C., upon payment of a prescribed fee.
FINANCIAL STATEMENTS
The financial statements of Merrill Lynch Life, included herein, should be
distinguished from the financial statements of the Separate Account and should
be considered only as bearing upon the ability of Merrill Lynch Life to meet its
obligations under the Contracts.
52
<PAGE> 53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying statement of net assets of
Merrill Lynch Variable Life Separate Account (the "Account")
as of December 31, 1997 and the related statements of
operations and changes in net assets for each of the three
years in the period then ended. These financial statements
are the responsibility of the management of Merrill Lynch
Life Insurance Company. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of mutual fund and unit investment trust securities owned at
December 31, 1997. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Account
at December 31, 1997 and the results of its operations and
the changes in its net assets for the above periods in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole.
The supplemental schedules included herein are presented for
the purpose of additional analysis and are not a required
part of the basic financial statements. These schedules are
the responsibility of the Company's management. Such
schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects
when considered in relation to the basic financial
statements taken as a whole.
January 30, 1998
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS: Cost Shares Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in Merrill Lynch Series Fund, Inc. (Note 1):
Money Reserve Portfolio $ 63,548,989 63,548,989 $ 63,548,989
Intermediate Government Bond Portfolio 16,287,173 1,499,605 16,615,628
Long-Term Corporate Bond Portfolio 14,688,340 1,286,854 15,081,929
Capital Stock Portfolio 31,767,842 1,432,533 38,377,551
Growth Stock Portfolio 31,877,145 1,299,502 42,649,668
Multiple Strategy Portfolio 23,862,232 1,462,641 27,746,299
High Yield Portfolio 24,354,668 2,683,014 24,656,900
Natural Resources Portfolio 2,458,404 274,536 2,229,229
Global Strategy Portfolio 35,197,639 2,253,795 39,306,193
Balanced Portfolio 11,034,733 781,572 12,333,202
--------------------- ---------------------
255,077,165 282,545,588
--------------------- ---------------------
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Global Utility Focus Fund 1,558,534 130,418 1,935,402
International Equity Focus Fund 11,156,709 974,056 10,519,807
Global Bond Focus Fund 1,025,067 107,954 1,006,132
Basic Value Focus Fund 35,554,181 2,579,307 40,856,227
Developing Capital Markets Focus Fund 6,278,665 620,296 5,719,129
Special Value Focus Fund 3,373,872 127,997 3,551,930
Index 500 Fund 4,171,380 331,379 4,466,348
--------------------- ---------------------
63,118,408 68,054,975
--------------------- ---------------------
Investments in Alliance Variable Products Series Funds, Inc. (Note 1):
Premier Growth Portfolio 5,998,849 295,092 6,193,975
--------------------- ---------------------
5,998,849 6,193,975
--------------------- ---------------------
Investments in MFS Variable Insurance Trust (Note 1):
MFS Emerging Growth Series 3,249,675 205,369 3,314,658
MFS Research Series 3,500,889 225,966 3,568,009
--------------------- ---------------------
6,750,564 6,882,667
--------------------- ---------------------
Investments in AIM Variable Insurance Funds, Inc. (Note 1):
AIM V.I. Value Fund 4,009,482 188,947 3,935,762
AIM V.I. Capital Appreciation Fund 1,397,918 61,976 1,347,969
--------------------- ---------------------
5,407,400 5,283,731
--------------------- ---------------------
</TABLE>
(continued)
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
Units
-------------------
<S> <C> <C> <C>
Investments in the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities, Series A through K (Note 1):
1998 Trust 839,634 1,014,604 1,009,270
1999 Trust 1,011,110 1,300,432 1,222,783
2000 Trust 781,003 1,051,825 936,408
2001 Trust 275,431 353,946 298,380
2002 Trust 623,381 895,700 711,490
2003 Trust 306,347 482,014 351,393
2004 Trust 1,035,942 1,774,066 1,253,773
2005 Trust 645,329 1,134,921 763,564
2006 Trust 247,754 461,086 297,451
2007 Trust 155,638 299,730 181,444
2008 Trust 358,569 750,730 419,335
2009 Trust 59,970 154,854 81,380
2010 Trust 530,796 1,107,010 541,904
2011 Trust 122,023 363,895 169,517
2013 Trust 160,468 493,562 202,637
2014 Trust 2,895,201 9,692,115 3,711,886
--------------------- ---------------------
10,048,596 12,152,615
--------------------- ---------------------
TOTAL ASSETS $ 346,400,982 381,113,551
===================== =====================
LIABILITIES:
Payable to Merrill Lynch Life Insurance Company 13,766,872
---------------------
TOTAL LIABILITIES 13,766,872
---------------------
NET ASSETS $ 367,346,679
=====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 18,534,136 $ 12,043,745 $ 7,040,646
Mortality and Expense Charges (Note 3) (2,791,171) (1,751,522) (1,098,797)
Transaction Charges (Note 4) (36,928) (28,838) (18,263)
--------------------- --------------------- ---------------------
Net Investment Income 15,706,037 10,263,385 5,923,586
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,063,224 (45,179) (309,482)
Net Unrealized Gains 18,236,659 8,986,838 10,659,883
--------------------- --------------------- ---------------------
Net Realized and Unrealized Gains 20,299,883 8,941,659 10,350,401
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Operations 36,005,920 19,205,044 16,273,987
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 99,960,767 70,164,840 57,600,863
Transfers of Policy Loading, Net (Note 3) 4,809,499 3,408,619 2,992,695
Transfers Due to Deaths (1,185,686) (813,683) (1,461,703)
Transfers Due to Other Terminations (3,656,934) (2,808,710) (2,139,618)
Transfers Due to Policy Loans (2,605,297) (2,600,351) (1,721,984)
Transfers of Cost of Insurance (4,830,049) (3,101,640) (2,101,569)
Transfers of Loan Processing Charges (75,863) (50,705) (28,928)
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Principal Transactions 92,416,437 64,198,370 53,139,756
--------------------- --------------------- ---------------------
Increase in Net Assets 128,422,357 83,403,414 69,413,743
Net Assets Beginning Balance 238,924,322 155,520,908 86,107,165
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 367,346,679 $ 238,924,322 $ 155,520,908
===================== ===================== =====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
Notes to Financial Statements
1. Merrill Lynch Variable Life Separate Account ("Account"),
a separate account of Merrill Lynch Life Insurance
Company ("Merrill Lynch Life") was established to support
the operations with respect to certain variable life
insurance contracts ("Contracts"). The Account is
governed by Arkansas State Insurance Law. Merrill Lynch
Life is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill"). The Account is registered
as a unit investment trust under the Investment Company
Act of 1940 and consists of thirty-eight investment
divisions (thirty-nine during the year). At any point in
time, the Account may or may not be invested in all
available divisions. Ten of the investment divisions each
invest in the securities of a single mutual fund
portfolio of the Merrill Lynch Series Fund, Inc. Seven of
the investment divisions each invest in the securities of
a single mutual fund portfolio of the Merrill Lynch
Variable Series Funds, Inc. One of the investment
divisions invests in the securities of a single mutual
fund portfolio of the Alliance Variable Products Series
Fund, Inc. Two of the investments divisions each invest
in the securities of a single mutual fund portfolio of
the MFS Variable Insurance Trust. Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the AIM Variable Insurance
Funds, Inc. Sixteen of the investment divisions
(seventeen during the year) each invest in the securities
of a single trust of the Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities, Series A through K
("Zero Trusts"). Each trust of the Zero Trusts consists
of Stripped Treasury Securities with a fixed maturity
date and a Treasury Note deposited to provide income to
pay expenses of the trust.
The assets of the Account are registered in the name of
Merrill Lynch Life. The portion of the Account's assets
attributable to the Contracts are not chargeable with
liabilities arising out of any other business Merrill
Lynch Life may conduct.
The change in net assets accumulated in the Account
provides the basis for the periodic determination of the
amount of increased or decreased benefits under the
Contracts.
The net assets may not be less than the amount required
under Arkansas State Insurance Law to provide for death
benefits (without regard to the minimum death benefit
guarantee) and other Contract benefits.
The financial statements included herein have been
prepared in accordance with generally accepted accounting
principles for variable life separate accounts registered
as unit investment trusts. The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. The following is a summary of significant accounting
policies of the Account:
Investments in the divisions are included in the
statement of net assets at the net asset value of the
shares and units held.
Dividend income is recognized on the ex-dividend date.
All dividends are automatically reinvested.
Realized gains and losses on the sales of investments are
computed on the first in first out method.
The operations of the Account are included in the Federal
income tax return of Merrill Lynch Life. Under the
provisions of the Contracts, Merrill Lynch Life has the
right to charge the Account for any Federal income tax
attributable to the Account. No charge is currently being
made against the Account for such tax since, under
current tax law, Merrill Lynch Life pays no tax on
investment income and capital gains reflected in variable
life insurance contract reserves. However, Merrill Lynch
Life retains the right to charge for any Federal income
tax incurred which is attributable to the Account if the
law is changed. Contract loading, however, includes a
charge for a significantly higher Federal income tax
liability of Merrill Lynch Life (see Note 3). Charges for
state and local taxes, if any, attributable to the
Account may also be made.
3. Merrill Lynch Life assumes mortality and expense risks
related to Contracts investing in the Account and deducts
daily charges at a rate of .9% (on an annual basis) of
the net assets of the Account to cover these risks.
Merrill Lynch Life makes certain deductions from each
premium. For certain Contracts, the deductions are made
before the premium is allocated to the Account. For other
Contracts, the deductions are taken in equal installments
on the first through tenth Contract anniversaries. The
deductions are for (1) sales load, (2) Federal income
taxes, and (3) state and local premium taxes.
In addition, the cost of providing life insurance
coverage for the insureds will be deducted on the dates
specified by the Contract. This cost will vary dependent
upon the insured's underwriting class, sex (except where
unisex rates are required by state law), attained age of
each insured and the Contract's net amount at risk.
4. Merrill Lynch Life pays all transaction charges to
Merrill Lynch, Pierce, Fenner & Smith Inc., a subsidiary
of Merrill and sponsor of the Zero Trusts, on the sale of
Zero Trust units to the Account. Merrill Lynch Life
deducts a daily asset charge against the assets of each
trust for the reimbursement of these transaction charges.
The asset charge is equivalent to an effective annual
rate of .34% (annually at the beginning of the year) of
net assets for Contract owners.
5. Effective following the close of business on August 15,
1997,the Equity Growth Fund was renamed the Special Value
Focus Fund. The Fund's investment objective was not
modified.
Effective following the close of business on December 6,
1996, the International Bond Fund was merged with and
into the former World Income Focus Fund; the World Income
Focus Fund was renamed the Global Bond Focus Fund; and
the Fund's investment objective was modified.
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 18,534,136 $ 3,061,142 $ 1,024,278 $ 853,881
Mortality and Expense Charges (2,791,171) (432,030) (139,164) (116,107)
Transaction Charges (36,928) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 15,706,037 2,629,112 885,114 737,774
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,063,224 0 28,903 (129,911)
Net Unrealized Gains (Losses) 18,236,659 0 202,623 399,513
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 20,299,883 0 231,526 269,602
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 36,005,920 2,629,112 1,116,640 1,007,376
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 99,960,767 80,752,279 309,156 618,629
Transfers of Policy Loading, Net 4,809,499 5,431,651 (94,415) (65,801)
Transfers Due to Deaths (1,185,686) (211,759) (34,457) (48,608)
Transfers Due to Other Terminations (3,656,934) (527,652) (199,221) (257,966)
Transfers Due to Policy Loans (2,605,297) (661,570) (19,762) (84,885)
Transfers of Cost of Insurance (4,830,049) (961,359) (186,799) (177,136)
Transfers of Loan Processing Charges (75,863) (14,418) (2,364) (2,193)
Transfers Among Investment Divisions 0 (79,759,226) 988,023 3,327,999
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 92,416,437 4,047,946 760,161 3,310,039
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 128,422,357 6,677,058 1,876,801 4,317,415
Net Assets Beginning Balance 238,924,322 44,182,360 14,833,421 10,756,980
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 367,346,679 $ 50,859,418 $ 16,710,222 $ 15,074,395
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 1,534,321 $ 2,954,096 $ 1,430,984 $ 1,815,929
Mortality and Expense Charges (304,549) (317,291) (222,898) (175,173)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 1,229,772 2,636,805 1,208,086 1,640,756
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 177,958 519,115 (43,217) 66,054
Net Unrealized Gains (Losses) 4,630,014 6,064,599 2,796,441 (5,499)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 4,807,972 6,583,714 2,753,224 60,555
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 6,037,744 9,220,519 3,961,310 1,701,311
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,655,250 3,002,127 1,618,485 1,133,832
Transfers of Policy Loading, Net 23,121 23,716 (122,374) (57,681)
Transfers Due to Deaths (93,442) (110,623) (132,745) (97,350)
Transfers Due to Other Terminations (484,772) (324,025) (390,645) (204,648)
Transfers Due to Policy Loans (235,369) (485,892) (84,527) (113,971)
Transfers of Cost of Insurance (486,711) (543,329) (360,114) (275,393)
Transfers of Loan Processing Charges (7,416) (9,043) (4,636) (5,844)
Transfers Among Investment Divisions 5,273,125 6,858,211 2,873,888 9,318,948
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 6,643,786 8,411,142 3,397,332 9,697,893
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 12,681,530 17,631,661 7,358,642 11,399,204
Net Assets Beginning Balance 25,862,344 24,989,798 20,376,299 13,166,433
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 38,543,874 $ 42,621,459 $ 27,734,941 $ 24,565,637
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 16,971 $ 1,984,898 $ 1,063,388 $ 48,805
Mortality and Expense Charges (22,152) (322,626) (95,480) (13,670)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (5,181) 1,662,272 967,908 35,135
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 111,013 196,560 49,619 49,962
Net Unrealized Gains (Losses) (413,042) 1,050,704 545,849 269,176
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) (302,029) 1,247,264 595,468 319,138
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (307,210) 2,909,536 1,563,376 354,273
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 171,332 3,285,567 747,249 111,780
Transfers of Policy Loading, Net (10,221) (115,769) (66,625) (4,198)
Transfers Due to Deaths 0 (138,684) (45,737) 0
Transfers Due to Other Terminations (44,526) (511,741) (94,509) (11,478)
Transfers Due to Policy Loans 362 (258,709) (63,906) (14,092)
Transfers of Cost of Insurance (32,834) (576,387) (156,716) (19,823)
Transfers of Loan Processing Charges (319) (10,810) (2,576) (130)
Transfers Among Investment Divisions 212,353 6,664,342 1,705,254 374,103
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 296,147 8,337,809 2,022,434 436,162
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (11,063) 11,247,345 3,585,810 790,435
Net Assets Beginning Balance 2,239,532 28,040,964 8,573,557 1,144,485
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 2,228,469 $ 39,288,309 $ 12,159,367 $ 1,934,920
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic Developing
Equity Bond Value Capital
Focus Focus Focus Markets Focus
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 214,325 $ 61,646 $ 2,148,291 $ 92,408
Mortality and Expense Charges (92,275) (8,564) (280,173) (58,702)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 122,050 53,082 1,868,118 33,706
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 193,102 (8,217) 319,132 87,634
Net Unrealized Gains (Losses) (1,033,706) (32,725) 2,665,523 (718,388)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) (840,604) (40,942) 2,984,655 (630,754)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (718,554) 12,140 4,852,773 (597,048)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,097,659 112,341 2,539,207 796,454
Transfers of Policy Loading, Net (9,101) (502) (81,910) 1,174
Transfers Due to Deaths (108,221) 0 (98,994) (37,303)
Transfers Due to Other Terminations (55,367) (9,771) (200,584) (63,117)
Transfers Due to Policy Loans (19,024) (11,222) (322,540) (63,397)
Transfers of Cost of Insurance (169,695) (15,333) (502,869) (93,497)
Transfers of Loan Processing Charges (2,465) (14) (5,680) (1,150)
Transfers Among Investment Divisions 2,569,724 (20,382) 15,311,530 779,810
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,303,510 55,117 16,638,160 1,318,974
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,584,956 67,257 21,490,933 721,926
Net Assets Beginning Balance 7,794,744 938,559 19,345,706 4,934,396
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 10,379,700 $ 1,005,816 $ 40,836,639 $ 5,656,322
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Special MFS
Value Index Premier Emerging
Focus 500 Growth Growth
Fund Fund Portfolio Series
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 85,609 $ 0 $ 888 $ 0
Mortality and Expense Charges (25,040) (15,755) (16,038) (10,636)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 60,569 (15,755) (15,150) (10,636)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 25,948 4,833 17,322 31,933
Net Unrealized Gains (Losses) 139,551 294,968 195,126 64,983
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 165,499 299,801 212,448 96,916
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 226,068 284,046 197,298 86,280
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 132,757 53,563 201,131 68,836
Transfers of Policy Loading, Net (4,099) (2,313) 7,645 3,043
Transfers Due to Deaths 0 (15,178) 0 0
Transfers Due to Other Terminations (5,437) (2,863) (1,986) (4,728)
Transfers Due to Policy Loans (4,230) (395) (18,646) (10,611)
Transfers of Cost of Insurance (31,479) (19,968) (30,555) (30,261)
Transfers of Loan Processing Charges (311) (626) (1,029) (518)
Transfers Among Investment Divisions 1,570,344 4,154,793 5,681,005 3,187,612
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,657,545 4,167,013 5,837,565 3,213,373
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 1,883,613 4,451,059 6,034,863 3,299,653
Net Assets Beginning Balance 1,667,274 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,550,887 $ 4,451,059 $ 6,034,863 $ 3,299,653
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
AIM V.I.
MFS AIM V.I. Capital
Research Value Appreciation 1997
Series Fund Fund Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 124,894 $ 17,382 $ 0
Mortality and Expense Charges (10,708) (9,699) (4,667) (356)
Transaction Charges 0 0 0 (129)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (10,708) 115,195 12,715 (485)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 14,825 7,233 18,270 32,599
Net Unrealized Gains (Losses) 67,120 (73,720) (49,949) (30,951)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 81,945 (66,487) (31,679) 1,648
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 71,237 48,708 (18,964) 1,163
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 86,976 56,856 55,299 0
Transfers of Policy Loading, Net 2,776 (53) 1,870 (1,313)
Transfers Due to Deaths 0 (11,341) 0 0
Transfers Due to Other Terminations (2,421) (3,980) (150) 216
Transfers Due to Policy Loans (25,774) 24 (11,453) 0
Transfers of Cost of Insurance (19,326) (18,707) (8,800) (331)
Transfers of Loan Processing Charges (542) (664) (191) 44
Transfers Among Investment Divisions 3,299,288 3,432,485 1,329,926 (353,324)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,340,977 3,454,620 1,366,501 (354,708)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 3,412,214 3,503,328 1,347,537 (353,545)
Net Assets Beginning Balance 0 0 0 353,545
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,412,214 $ 3,503,328 $ 1,347,537 $ 0
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (8,966) (10,685) (8,105) (2,038)
Transaction Charges (3,384) (4,034) (3,061) (772)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (12,350) (14,719) (11,166) (2,810)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 5,521 9,645 14,192 3,810
Net Unrealized Gains (Losses) 49,493 61,471 45,718 14,238
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 55,014 71,116 59,910 18,048
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 42,664 56,397 48,744 15,238
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,016 3,172 9,609 3,327
Transfers of Policy Loading, Net (7,846) (9,449) (6,592) (5,055)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations 59 55 (29,935) (79)
Transfers Due to Policy Loans (1,787) 2,400 (6,763) (20,654)
Transfers of Cost of Insurance (7,118) (13,088) (10,007) (2,772)
Transfers of Loan Processing Charges (50) (812) (234) (48)
Transfers Among Investment Divisions 4,943 22,918 135,012 143,929
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (9,783) 5,196 91,090 118,648
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance 32,881 61,593 139,834 133,886
975,982 1,160,676 796,195 164,361
Net Assets Ending Balance --------------------- --------------------- --------------------- ---------------------
$ 1,008,863 $ 1,222,269 $ 936,029 $ 298,247
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (6,076) (2,431) (9,680) (6,524)
Transaction Charges (2,295) (920) (3,658) (2,463)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (8,371) (3,351) (13,338) (8,987)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 6,813 5,427 38,160 10,438
Net Unrealized Gains (Losses) 48,467 22,626 73,112 69,622
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 55,280 28,053 111,272 80,060
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 46,909 24,702 97,934 71,073
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 6,610 28,786 18,132
Transfers of Policy Loading, Net (4,924) (992) (60) (4,530)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations 1 (75) 3,305 (8,291)
Transfers Due to Policy Loans (9,150) (15,991) (28,232) 0
Transfers of Cost of Insurance (7,559) (3,882) (11,795) (8,283)
Transfers of Loan Processing Charges (37) (415) (109) (19)
Transfers Among Investment Divisions 65,946 130,100 208,675 (13,957)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 44,277 115,355 200,570 (16,948)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 91,186 140,057 298,504 54,125
Net Assets Beginning Balance 620,003 211,188 954,766 709,126
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 711,189 $ 351,245 $ 1,253,270 $ 763,251
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (2,228) (1,059) (2,939) (705)
Transaction Charges (842) (402) (1,111) (266)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (3,070) (1,461) (4,050) (971)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,717 801 3,163 9,593
Net Unrealized Gains (Losses) 27,825 19,338 47,651 (248)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 29,542 20,139 50,814 9,345
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 26,472 18,678 46,764 8,374
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 39,168 1,717 38,579 16,681
Transfers of Policy Loading, Net (919) (845) (1,053) (1,800)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (14) (93) (80) (30,350)
Transfers Due to Policy Loans 0 0 (4,900) 0
Transfers of Cost of Insurance (1,902) (1,181) (3,846) (1,535)
Transfers of Loan Processing Charges (5) (18) (338) 1
Transfers Among Investment Divisions 79 130,235 100,294 (20)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 36,407 129,815 128,656 (17,023)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 62,879 148,493 175,420 (8,649)
Net Assets Beginning Balance 234,452 32,876 243,741 90,000
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 297,331 $ 181,369 $ 419,161 $ 81,351
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ $ 0 $ 0
Mortality and Expense Charges (4,808) (1,691) (1,378) (28,105)
Transaction Charges (1,815) (637) (521) (10,618)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (6,623) (2,328) (1,899) (38,723)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 85,341 73,982 479 23,472
Net Unrealized Gains (Losses) (3,039) 49,240 31,648 651,287
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 82,302 123,222 32,127 674,759
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 75,679 120,894 30,228 636,036
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 5,603 2,413 46,077 132,112
Transfers of Policy Loading, Net 7,604 (8,160) 3,553 (8,054)
Transfers Due to Deaths (1,244) 0 0 0
Transfers Due to Other Terminations 375 (190,109) (33) (299)
Transfers Due to Policy Loans 0 0 0 (10,631)
Transfers of Cost of Insurance (4,517) (2,471) (1,587) (31,084)
Transfers of Loan Processing Charges (81) 13 (51) (765)
Transfers Among Investment Divisions (100,379) (75,903) 6,517 461,780
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (92,639) (274,217) 54,476 543,059
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (16,960) (153,323) 84,704 1,179,095
Net Assets Beginning Balance 558,584 322,763 117,834 2,531,378
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 541,624 $ 169,440 $ 202,538 $ 3,710,473
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 12,043,745 $ 2,259,703 $ 882,178 $ 625,900
Mortality and Expense Charges (1,751,522) (338,561) (118,016) (83,645)
Transaction Charges (28,838) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 10,263,385 1,921,142 764,162 542,255
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (45,179) 0 18,190 (69,537)
Net Unrealized Gains (Losses) 8,986,838 0 (494,507) (262,935)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 8,941,659 0 (476,317) (332,472)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 19,205,044 1,921,142 287,845 209,783
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 70,164,840 57,111,336 274,240 441,258
Transfers of Policy Loading, Net 3,408,619 3,817,075 (65,305) (45,661)
Transfers Due to Deaths (813,683) (279,751) (18,739) (40,588)
Transfers Due to Other Terminations (2,808,710) (380,432) (76,682) (101,534)
Transfers Due to Policy Loans (2,600,351) (1,084,294) (52,385) (42,333)
Transfers of Cost of Insurance (3,101,640) (629,669) (140,278) (119,430)
Transfers of Loan Processing Charges (50,705) (10,186) (1,605) (1,801)
Transfers Among Investment Divisions 0 (49,154,498) 2,922,480 2,331,559
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 64,198,370 9,389,581 2,841,726 2,421,470
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 83,403,414 11,310,723 3,129,571 2,631,253
Net Assets Beginning Balance 155,520,908 32,871,637 11,703,850 8,125,727
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 238,924,322 $ 44,182,360 $ 14,833,421 $ 10,756,980
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 2,849,273 $ 474,609 $ 2,134,807 $ 991,648
Mortality and Expense Charges (189,168) (168,016) (161,312) (93,784)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 2,660,105 306,593 1,973,495 897,864
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (192,580) 76,061 (205,247) (38,619)
Net Unrealized Gains (Losses) 677,575 2,799,507 511,360 263,711
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 484,995 2,875,568 306,113 225,092
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 3,145,100 3,182,161 2,279,608 1,122,956
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,079,423 1,942,040 1,309,262 764,317
Transfers of Policy Loading, Net (43,754) (21,164) (65,905) (51,806)
Transfers Due to Deaths (92,681) (8,492) (75,789) (3,979)
Transfers Due to Other Terminations (321,383) (260,142) (312,254) (358,814)
Transfers Due to Policy Loans (145,225) (397,438) (171,503) (204,029)
Transfers of Cost of Insurance (328,889) (333,742) (276,061) (163,545)
Transfers of Loan Processing Charges (5,535) (6,120) (4,502) (4,660)
Transfers Among Investment Divisions 4,872,794 7,878,892 1,654,189 4,143,862
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 6,014,750 8,793,834 2,057,437 4,121,346
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,159,850 11,975,995 4,337,045 5,244,302
Net Assets Beginning Balance 16,702,494 13,013,803 16,039,254 7,922,131
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 25,862,344 $ 24,989,798 $ 20,376,299 $ 13,166,433
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 35,904 $ 658,077 $ 339,821 $ 26,694
Mortality and Expense Charges (18,240) (216,109) (61,936) (6,067)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 17,664 441,968 277,885 20,627
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 88,450 51,512 16,557 6,978
Net Unrealized Gains (Losses) 143,526 2,581,792 341,710 68,172
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 231,976 2,633,304 358,267 75,150
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 249,640 3,075,272 636,152 95,777
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 181,972 2,473,052 553,126 47,855
Transfers of Policy Loading, Net (3,920) (44,092) (27,821) 40
Transfers Due to Deaths 0 (158,560) (1,125) 0
Transfers Due to Other Terminations (55,127) (514,227) (209,048) (554)
Transfers Due to Policy Loans (22,880) (192,425) (60,254) (5,578)
Transfers of Cost of Insurance (28,415) (421,815) (118,014) (10,007)
Transfers of Loan Processing Charges (167) (6,017) (2,108) (145)
Transfers Among Investment Divisions 291,252 3,487,282 2,554,987 650,138
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 362,715 4,623,198 2,689,743 681,749
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 612,355 7,698,470 3,325,895 777,526
Net Assets Beginning Balance 1,627,177 20,342,494 5,247,662 366,959
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 2,239,532 $ 28,040,964 $ 8,573,557 $ 1,144,485
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic
Equity Bond Value International
Focus Focus Focus Bond
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 58,526 $ 29,074 $ 596,893 $ 19,027
Mortality and Expense Charges (55,091) (3,779) (118,246) (2,285)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 3,435 25,295 478,647 16,742
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,353 347 54,169 (2,241)
Net Unrealized Gains (Losses) 266,897 7,902 1,807,802 (796)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 268,250 8,249 1,861,971 (3,037)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 271,685 33,544 2,340,618 13,705
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 756,559 40,516 1,276,821 44,422
Transfers of Policy Loading, Net (3,515) 509 (5,302) 902
Transfers Due to Deaths (33,903) 0 (68,358) (877)
Transfers Due to Other Terminations (41,605) (552) (123,456) 1,893
Transfers Due to Policy Loans (64,171) 0 (76,540) (988)
Transfers of Cost of Insurance (114,440) (5,978) (241,687) (4,818)
Transfers of Loan Processing Charges (1,964) (147) (2,269) (41)
Transfers Among Investment Divisions 2,803,185 284,230 7,975,786 218,985
Transfer of Merged Funds 0 367,255 0 (367,255)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,300,146 685,833 8,734,995 (107,777)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 3,571,831 719,377 11,075,613 (94,072)
Net Assets Beginning Balance 4,222,913 219,182 8,270,093 94,072
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 7,794,744 $ 938,559 $ 19,345,706 $ 0
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Developing Special
Capital Value
Markets Focus Focus 1996 1997
Fund Fund Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 61,179 $ 432 $ 0 $ 0
Mortality and Expense Charges (36,040) (4,712) (249) (2,858)
Transaction Charges 0 0 (91) (1,075)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 25,139 (4,280) (340) (3,933)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (20,703) (914) 10,567 1,373
Net Unrealized Gains (Losses) 250,904 38,506 (9,400) 14,566
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 230,201 37,592 1,167 15,939
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 255,340 33,312 827 12,006
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 610,043 25,818 0 3,518
Transfers of Policy Loading, Net 11,064 1,255 (728) (2,396)
Transfers Due to Deaths (30,841) 0 0 0
Transfers Due to Other Terminations (31,692) (1,214) 159 (67)
Transfers Due to Policy Loans (57,503) 0 0 1,090
Transfers of Cost of Insurance (64,681) (7,114) (210) (3,936)
Transfers of Loan Processing Charges (863) (221) 23 (46)
Transfers Among Investment Divisions 1,835,923 1,615,438 (222,425) 65,390
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,271,450 1,633,962 (223,181) 63,553
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,526,790 1,667,274 (222,354) 75,559
Net Assets Beginning Balance 2,407,606 0 222,354 277,986
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 4,934,396 $ 1,667,274 $ 0 $ 353,545
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (8,548) (9,461) (6,622) (967)
Transaction Charges (3,218) (3,562) (2,493) (365)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (11,766) (13,023) (9,115) (1,332)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 6,017 5,854 12,442 700
Net Unrealized Gains (Losses) 37,385 37,303 12,222 4,215
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 43,402 43,157 24,664 4,915
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 31,636 30,134 15,549 3,583
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,729 2,079 11,888 1,320
Transfers of Policy Loading, Net (7,282) (9,924) (4,276) (634)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (17,187) 13,021 (80) (9,468)
Transfers Due to Policy Loans (34) 3,211 (12,327) 0
Transfers of Cost of Insurance (6,841) (12,333) (7,564) (930)
Transfers of Loan Processing Charges (90) (606) (122) (44)
Transfers Among Investment Divisions 151,070 136,353 52,712 114,790
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 122,365 131,801 40,231 105,034
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 154,001 161,935 55,780 108,617
Net Assets Beginning Balance 821,981 998,741 740,415 55,744
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 975,982 $ 1,160,676 $ 796,195 $ 164,361
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (4,865) (1,249) (7,310) (7,624)
Transaction Charges (1,836) (471) (2,753) (2,871)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (6,701) (1,720) (10,063) (10,495)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 3,431 936 17,968 48,027
Net Unrealized Gains (Losses) 10,227 4,471 (10,934) (65,787)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 13,658 5,407 7,034 (17,760)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 6,957 3,687 (3,029) (28,255)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 9,067 24,881 21,785
Transfers of Policy Loading, Net (2,544) (127) (5,811) (3,031)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (335) (86) 17,456 (23,693)
Transfers Due to Policy Loans (3,280) 0 (3,357) (2,263)
Transfers of Cost of Insurance (6,687) (2,134) (11,301) (8,848)
Transfers of Loan Processing Charges (65) (369) (254) (38)
Transfers Among Investment Divisions 429,537 95,804 127,953 115,644
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 416,626 102,155 149,567 99,556
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 423,583 105,842 146,538 71,301
Net Assets Beginning Balance 196,420 105,346 808,228 637,825
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 620,003 $ 211,188 $ 954,766 $ 709,126
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (1,207) (282) (1,849) (689)
Transaction Charges (456) (107) (697) (259)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (1,663) (389) (2,546) (948)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 655 202 2,072 542
Net Unrealized Gains (Losses) 3,403 (764) (4,484) (1,142)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 4,058 (562) (2,412) (600)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 2,395 (951) (4,958) (1,548)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 1,301 33,415 0
Transfers of Policy Loading, Net (506) (218) 556 (158)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (15) (2) (65) (22)
Transfers Due to Policy Loans 0 0 1,630 0
Transfers of Cost of Insurance (1,015) (385) (2,980) (1,195)
Transfers of Loan Processing Charges (23) (1) (304) (4)
Transfers Among Investment Divisions 162,335 2 22,434 20,781
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 160,776 697 54,686 19,402
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 163,171 (254) 49,728 17,854
Net Assets Beginning Balance 71,281 33,130 194,013 72,146
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 234,452 $ 32,876 $ 243,741 $ 90,000
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (3,648) (2,818) (822) (15,447)
Transaction Charges (1,376) (1,061) (310) (5,837)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (5,024) (3,879) (1,132) (21,284)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (1,501) 3,521 2,269 55,970
Net Unrealized Gains (Losses) 5,242 (124,824) (1,550) 75,563
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 3,741 (121,303) 719 131,533
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (1,283) (125,182) (413) 110,249
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,719 2,406 47,499 68,173
Transfers of Policy Loading, Net 4,058 (1,867) 4,531 (13,624)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (218) (13) 26 (1,298)
Transfers Due to Policy Loans (7,845) 0 370 0
Transfers of Cost of Insurance (3,366) (3,609) (1,853) (17,870)
Transfers of Loan Processing Charges (48) (6) (69) (288)
Transfers Among Investment Divisions 266,394 108,244 120 1,986,378
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 261,694 105,155 50,624 2,021,471
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 260,411 (20,027) 50,211 2,131,720
Net Assets Beginning Balance 298,173 342,790 67,623 399,658
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 558,584 $ 322,763 $ 117,834 $ 2,531,378
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 7,040,646 $ 2,042,506 $ 590,260 $ 471,729
Mortality and Expense Charges (1,098,797) (276,122) (77,890) (60,109)
Transaction Charges (18,263) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 5,923,586 1,766,384 512,370 411,620
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (309,482) 0 (161,089) (84,296)
Net Unrealized Gains (Losses) 10,659,883 0 967,267 831,382
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 10,350,401 0 806,178 747,086
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 16,273,987 1,766,384 1,318,548 1,158,706
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 57,600,863 48,585,875 237,242 206,770
Transfers of Policy Loading, Net 2,992,695 3,263,562 (47,077) (58,349)
Transfers Due to Deaths (1,461,703) (89,375) (242,713) (243,177)
Transfers Due to Other Terminations (2,139,618) (281,643) (15,301) (159,890)
Transfers Due to Policy Loans (1,721,984) (662,050) (21,269) (22,813)
Transfers of Cost of Insurance (2,101,569) (539,265) (95,544) (78,535)
Transfers of Loan Processing Charges (28,928) (4,005) (2,139) (1,110)
Transfers Among Investment Divisions 0 (45,681,956) 5,740,096 2,729,204
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 53,139,756 4,591,143 5,553,295 2,372,100
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 69,413,743 6,357,527 6,871,843 3,530,806
Net Assets Beginning Balance 86,107,165 26,514,110 4,832,007 4,594,921
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 155,520,908 $ 32,871,637 $ 11,703,850 $ 8,125,727
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 702,946 $ 332,737 $ 1,029,923 $ 530,868
Mortality and Expense Charges (109,563) (73,632) (120,845) (48,511)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 593,383 259,105 909,078 482,357
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (57,970) (58,237) (148,847) (47,719)
Net Unrealized Gains (Losses) 1,648,314 2,148,543 1,270,564 250,744
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 1,590,344 2,090,306 1,121,717 203,025
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 2,183,727 2,349,411 2,030,795 685,382
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,137,847 1,068,231 1,066,156 579,214
Transfers of Policy Loading, Net (62,080) 6,422 (44,104) 3,154
Transfers Due to Deaths (306,000) (10,301) (65,938) (2,080)
Transfers Due to Other Terminations (273,101) (97,817) (337,461) (42,371)
Transfers Due to Policy Loans (216,960) (102,930) (92,141) (72,558)
Transfers of Cost of Insurance (192,230) (159,365) (203,001) (105,754)
Transfers of Loan Processing Charges (2,660) (2,120) (2,802) (2,953)
Transfers Among Investment Divisions 7,075,715 5,643,336 3,815,780 4,138,536
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 7,160,531 6,345,456 4,136,489 4,495,188
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,344,258 8,694,867 6,167,284 5,180,570
Net Assets Beginning Balance 7,358,236 4,318,936 9,871,970 2,741,561
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 16,702,494 $ 13,013,803 $ 16,039,254 $ 7,922,131
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 23,752 $ 808,709 $ 274,872 $ 7,374
Mortality and Expense Charges (12,008) (159,374) (37,964) (1,669)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 11,744 649,335 236,908 5,705
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 47,638 56,413 (36,077) 2,396
Net Unrealized Gains (Losses) 74,639 917,790 540,526 41,816
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 122,277 974,203 504,449 44,212
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 134,021 1,623,538 741,357 49,917
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 173,219 2,484,243 437,292 12,013
Transfers of Policy Loading, Net (227) (1,635) (32,229) (1,185)
Transfers Due to Deaths 0 (257,767) (244,352) 0
Transfers Due to Other Terminations (27,497) (449,161) (88,275) (305)
Transfers Due to Policy Loans (11,517) (299,628) (12,334) 0
Transfers of Cost of Insurance (25,805) (358,387) (80,463) (3,959)
Transfers of Loan Processing Charges (319) (4,268) (1,398) (34)
Transfers Among Investment Divisions 365,584 3,046,233 1,511,909 246,773
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 473,438 4,159,630 1,490,150 253,303
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 607,459 5,783,168 2,231,507 303,220
Net Assets Beginning Balance 1,019,718 14,559,326 3,016,155 63,739
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 1,627,177 $ 20,342,494 $ 5,247,662 $ 366,959
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic
Equity Bond Value International
Focus Focus Focus Bond
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 87,517 $ 8,615 $ 106,693 $ 8,339
Mortality and Expense Charges (23,269) (756) (34,416) (909)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 64,248 7,859 72,277 7,430
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (50,146) 23 2,816 1,587
Net Unrealized Gains (Losses) 207,950 6,982 824,592 1,447
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 157,804 7,005 827,408 3,034
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 222,052 14,864 899,685 10,464
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 484,768 18,466 527,518 12,428
Transfers of Policy Loading, Net (7,642) 825 (2,243) (784)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (123,171) (121) (59,804) (2,748)
Transfers Due to Policy Loans (98,219) 9,020 (13,838) 7,037
Transfers of Cost of Insurance (67,572) (1,412) (88,195) (3,757)
Transfers of Loan Processing Charges (704) (83) (1,106) (86)
Transfers Among Investment Divisions 1,625,203 125,435 5,642,607 (13,353)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,812,663 152,130 6,004,939 (1,263)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,034,715 166,994 6,904,624 9,201
Net Assets Beginning Balance 2,188,198 52,188 1,365,469 84,871
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 4,222,913 $ 219,182 $ 8,270,093 $ 94,072
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Developing
Capital
Markets Focus 1995 1996 1997
Fund Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 13,806 $ 0 $ 0 $ 0
Mortality and Expense Charges (13,411) (1,483) (1,358) (1,725)
Transaction Charges 0 (558) (514) (652)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 395 (2,041) (1,872) (2,377)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (43,247) 12,157 789 310
Net Unrealized Gains (Losses) 31,160 (1,196) 8,972 16,365
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) (12,087) 10,961 9,761 16,675
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (11,692) 8,920 7,889 14,298
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 446,742 0 6,557 2,609
Transfers of Policy Loading, Net 6,365 (1,240) 186 237
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (24,891) (5,133) (118) (168)
Transfers Due to Policy Loans (17,128) 0 (9,116) 0
Transfers of Cost of Insurance (39,732) (1,291) (1,698) (2,572)
Transfers of Loan Processing Charges (2,002) 10 (40) (26)
Transfers Among Investment Divisions 567,104 (117,487) 178,394 231,794
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 936,458 (125,141) 174,165 231,874
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 924,766 (116,221) 182,054 246,172
Net Assets Beginning Balance 1,482,840 116,221 40,300 31,814
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 2,407,606 $ 0 $ 222,354 $ 277,986
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (7,049) (7,718) (5,481) (915)
Transaction Charges (2,664) (2,917) (2,070) (345)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (9,713) (10,635) (7,551) (1,260)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 12,007 9,541 1,741 12,302
Net Unrealized Gains (Losses) 83,423 113,158 98,041 4,321
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 95,430 122,699 99,782 16,623
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 85,717 112,064 92,231 15,363
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,898 3,995 23,896 1,194
Transfers of Policy Loading, Net (17,373) (3,399) (2,494) (381)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (132,812) (540) 110 3
Transfers Due to Policy Loans 7 (60,000) (2,825) (3,268)
Transfers of Cost of Insurance (7,052) (9,302) (7,926) (1,541)
Transfers of Loan Processing Charges (95) (243) (205) (1)
Transfers Among Investment Divisions 777,277 802,185 350,856 (5,671)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 621,850 732,696 361,412 (9,665)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 707,567 844,760 453,643 5,698
Net Assets Beginning Balance 114,414 153,981 286,772 50,046
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 821,981 $ 998,741 $ 740,415 $ 55,744
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (1,352) (911) (6,222) (4,063)
Transaction Charges (511) (344) (2,348) (1,537)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (1,863) (1,255) (8,570) (5,600)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 385 6,784 30,917 1,337
Net Unrealized Gains (Losses) 29,570 17,905 150,791 113,569
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 29,955 24,689 181,708 114,906
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 28,092 23,434 173,138 109,306
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 0 30,500 10,212
Transfers of Policy Loading, Net (831) 217 (3,307) 460
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (63) (59) (226) 245
Transfers Due to Policy Loans 0 0 (10,000) 0
Transfers of Cost of Insurance (1,137) (1,521) (8,914) (4,000)
Transfers of Loan Processing Charges (10) (9) (204) (54)
Transfers Among Investment Divisions 72,433 77,361 219,263 491,998
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 70,392 75,989 227,112 498,861
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 98,484 99,423 400,250 608,167
Net Assets Beginning Balance 97,936 5,923 407,978 29,658
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 196,420 $ 105,346 $ 808,228 $ 637,825
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (540) (221) (614) (898)
Transaction Charges (204) (83) (233) (338)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (744) (304) (847) (1,236)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 293 163 3,614 20,240
Net Unrealized Gains (Losses) 17,073 7,219 17,580 16,726
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 17,366 7,382 21,194 36,966
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 16,622 7,078 20,347 35,730
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 1,010 20,456 5,576
Transfers of Policy Loading, Net (472) (226) 735 (225)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (10) (17) (122) 48
Transfers Due to Policy Loans 0 0 (7,000) 0
Transfers of Cost of Insurance (468) (401) (1,408) (719)
Transfers of Loan Processing Charges (2) (3) (19) 7
Transfers Among Investment Divisions 4,258 24,705 154,313 (120,220)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,306 25,068 166,955 (115,533)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 19,928 32,146 187,302 (79,803)
Net Assets Beginning Balance 51,353 984 6,711 151,949
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 71,281 $ 33,130 $ 194,013 $ 72,146
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (2,316) (2,403) (525) (2,555)
Transaction Charges (875) (907) (198) (965)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (3,191) (3,310) (723) (3,520)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 87,387 2,349 12,386 52,571
Net Unrealized Gains (Losses) 5,161 98,680 14,348 84,461
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 92,548 101,029 26,734 137,032
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 89,357 97,719 26,011 133,512
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,682 0 105 12,149
Transfers of Policy Loading, Net (1,327) (1,656) (847) 1,865
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (16,958) (81) 2 (162)
Transfers Due to Policy Loans 0 0 (2,454) 0
Transfers of Cost of Insurance (1,969) (2,650) (1,359) (2,665)
Transfers of Loan Processing Charges (18) (13) (189) (25)
Transfers Among Investment Divisions 67,414 92,008 (25,040) 145,953
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 49,824 87,608 (29,782) 157,115
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 139,181 185,327 (3,771) 290,627
Net Assets Beginning Balance 158,992 157,463 71,394 109,031
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 298,173 $ 342,790 $ 67,623 $ 399,658
===================== ===================== ===================== =====================
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill
Lynch Life Insurance Company (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Insurance Group, Inc., as of
December 31, 1997 and 1996, and the related statements of
earnings, comprehensive income, stockholder's equity, and cash
flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted
accounting principles.
February 23, 1998
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1997 - $2,927,562; 1996 - $3,232,643) $ 3,008,608 $ 3,301,588
Equity securities, at estimated fair value
(cost: 1997 - $72,599; 1996 - $32,988) 73,612 35,977
Trading account securities, at estimated fair value 15,625 -
Mortgage loans - 70,503
Real estate held-for-sale 31,805 28,851
Policy loans on insurance contracts 1,118,139 1,092,071
-------------- --------------
Total Investments 4,247,789 4,528,990
-------------- --------------
CASH AND CASH EQUIVALENTS 86,388 94,991
ACCRUED INVESTMENT INCOME 78,224 86,186
DEFERRED POLICY ACQUISITION COSTS 365,105 366,461
REINSURANCE RECEIVABLES 1,617 2,642
AFFILIATED RECEIVABLES - NET 166 -
RECEIVABLES FROM SECURITIES SOLD 75,820 -
OTHER ASSETS 49,353 42,861
SEPARATE ACCOUNTS ASSETS 9,149,119 7,615,362
-------------- --------------
TOTAL ASSETS $ 14,053,581 $ 12,737,493
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,188,110 $ 4,480,048
Claims and claims settlement expenses 50,574 39,666
-------------- --------------
Total policy liabilities and accruals 4,238,684 4,519,714
OTHER POLICYHOLDER FUNDS 27,160 19,420
LIABILITY FOR GUARANTY FUND ASSESSMENTS 15,374 18,773
FEDERAL INCOME TAXES - DEFERRED 1,183 6,714
FEDERAL INCOME TAXES - CURRENT 24,438 20,968
AFFILIATED PAYABLES - NET - 6,164
PAYABLES FOR SECURITIES PURCHASED 95,135 13,483
OTHER LIABILITIES 54,434 37,243
SEPARATE ACCOUNTS LIABILITIES 9,149,119 7,605,194
-------------- --------------
Total Liabilities 13,605,527 12,247,673
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 402,937
Retained earnings 80,735 79,387
Accumulated other comprehensive income 17,995 5,496
-------------- --------------
Total Stockholder's Equity 448,054 489,820
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,053,581 $ 12,737,493
============== ==============
</TABLE>
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 308,702 $ 336,661 $ 376,166
Net realized investment gains 13,289 8,862 4,525
Policy charge revenue 178,933 158,829 141,722
-------------- -------------- --------------
Total Revenues 500,924 504,352 522,413
-------------- -------------- --------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 209,542 235,255 261,760
Market value adjustment expense 4,079 6,071 5,805
Policy benefits (net of reinsurance recoveries: 1997 - $10,439;
1996 - $8,317; 1995 - $6,482) 27,029 21,052 19,374
Reinsurance premium ceded 17,879 15,582 13,896
Amortization of deferred policy acquisition costs 72,111 62,036 58,669
Insurance expenses and taxes 49,105 47,077 44,124
------------- -------------- --------------
Total Benefits and Expenses 379,745 387,073 403,628
------------- -------------- --------------
Earnings Before Federal Income Tax Provision 121,179 117,279 118,785
------------- -------------- --------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 52,705 22,814 38,335
Deferred (12,261) 15,078 3,968
-------------- -------------- --------------
Total Federal Income Tax Provision 40,444 37,892 42,303
-------------- -------------- --------------
NET EARNINGS $ 80,735 $ 79,387 $ 76,482
============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NET EARNINGS $ 80,735 $ 79,387 $ 76,482
-------------- -------------- --------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period 22,347 (79,749) 310,981
Reclassification adjustment for gains included in net earnings (12,390) (8,622) (4,351)
-------------- -------------- --------------
Net unrealized gains (losses) on investment securities 9,957 (88,371) 306,630
Adjustments for:
Policyholder liabilities 10,094 58,415 (123,856)
Deferred policy acquisition costs (822) 12,411 (89,261)
Income tax (expense) benefit related to items of
other comprehensive income (6,730) 6,141 (32,729)
-------------- -------------- --------------
Other comprehensive income, net of tax 12,499 (11,404) 60,784
-------------- -------------- --------------
COMPREHENSIVE INCOME $ 93,234 $ 67,983 $ 137,266
============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common paid-in Retained Comprehensive stockholder's
stock capital earnings Income equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 2,000 $ 535,450 $ 66,005 $ (43,884) $ 559,571
Dividend to Parent (33,995) (66,005) (100,000)
Net earnings 76,482 76,482
Other comprehensive income, net of tax 60,784 60,784
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1995 2,000 501,455 76,482 16,900 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Other comprehensive income, net of tax (11,404) (11,404)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 489,820
Dividend to Parent (55,613) (79,387) (135,000)
Net earnings 80,735 80,735
Other comprehensive income, net of tax 12,499 12,499
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 $ 2,000 $ 347,324 $ 80,735 $ 17,995 $ 448,054
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 80,735 $ 79,387 $ 76,482
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 72,111 62,036 58,669
Capitalization of policy acquisition costs (71,577) (43,668) (54,014)
Amortization, (accretion) and depreciation of investments (4,672) (4,836) (6,763)
Net realized investment gains (13,289) (8,862) (4,525)
Interest credited to policyholders' account balances 209,542 235,255 261,760
Provision (benefit) for deferred Federal income tax (12,261) 15,078 3,968
Changes in operating assets and liabilities:
Accrued investment income 7,962 5,756 3,191
Claims and claims settlement expenses 10,908 9,854 3,635
Federal income taxes - current 3,470 13,935 4,759
Other policyholder funds 7,740 5,813 (7,614)
Liability for guaranty fund assessments (3,399) (2,371) (3,630)
Affiliated payables (6,330) 3,735 5,542
Policy loans on insurance contracts (26,068) (52,804) (54,054)
Trading account securities (14,928) - -
Other, net 11,721 (2,393) (12,280)
-------------- -------------- --------------
Net cash and cash equivalents provided
by operating activities 251,665 315,915 275,126
-------------- -------------- ---------------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 846,041 847,091 620,853
Maturities of available-for-sale securities 595,745 536,449 570,923
Purchases of available-for-sale securities (1,156,222) (956,840) (816,564)
Mortgage loans principal payments received 68,864 22,789 30,767
Purchases of mortgage loans (5,375) - (3,608)
Sales of real estate held-for-sale 6,060 5,407 9,710
Improvements to real estate held-for-sale - - (683)
Recapture of investment in Separate Accounts 11,026 8,829 6,559
Investment in Separate Accounts (21) (10,063) (377)
-------------- -------------- ---------------
Net cash and cash equivalents provided
by investing activities 366,118 453,662 417,580
-------------- -------------- ---------------
</TABLE>
See notes to financial statements. (Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Concluded) (Dollars In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ (135,000) $ (175,000) $ (100,000)
Policyholders' account balances:
Deposits 1,101,934 542,062 567,430
Withdrawals (including transfers to/from Separate Accounts) (1,593,320) (1,090,572) (1,250,299)
-------------- -------------- --------------
Net cash and cash equivalents used
by financing activities (626,386) (723,510) (782,869)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (8,603) 46,067 (90,163)
CASH AND CASH EQUIVALENTS
Beginning of year 94,991 48,924 139,087
-------------- ------------- -------------
End of year $ 86,388 $ 94,991 $ 48,924
============== ============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal Federal iincome taxes $ 49,235 $ 8,880 $ 33,576
Interest 842 988 1,310
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance
Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: Merrill Lynch Life Insurance Company (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch & Co.").
The Company sells non-participating life insurance and annuity
products which comprise one business segment. The primary
products that the Company currently markets are variable life
insurance, variable annuities, market value adjusted annuities,
and immediate annuities. The Company is currently licensed to
sell insurance in forty-nine states, the District of Columbia,
the U.S. Virgin Islands and Guam. The Company markets its
products solely through the retail network of Merrill Lynch,
Pierce, Fenner & Smith, Incorporated ("MLPF&S"), a wholly-owned
broker-dealer subsidiary of Merrill Lynch & Co.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles and
prevailing industry practices, both of which require
management to make estimates that affect the reported amounts
and disclosure of contingencies in the financial statements.
Actual results could differ from those estimates.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance
and annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest-crediting rates for
the Company's fixed-rate products are as follows:
Interest-sensitive life products 4.00% - 5.70%
Interest-sensitive deferred annuities 3.55% - 8.77%
Immediate annuities 3.00% - 10.00%
These rates may be changed at the option of the Company, subject
to minimum guarantees, after initial guaranteed rates expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are unreported
as of the valuation date.
Reinsurance: In the normal course of business, the Company seeks
to limit its exposure to loss on any single insured life and to
recover a portion of benefits paid by ceding reinsurance to
other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
Indemnity reinsurance agreements do not relieve the Company from
its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company. The
Company regularly evaluates the financial condition of its
reinsurers so as to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under
reinsurance agreements in the form of letters of credit and
funds withheld totaling $635 that can be drawn upon for
delinquent reinsurance recoverables.
As of December 31, 1997, the Company had life insurance inforce
that was ceded to other life insurance companies of $2,879,306.
The Company entered into an indemnity reinsurance agreement with
an unaffiliated insurer whereby the Company coinsures, on a
modified coinsurance basis, 50% of the unaffiliated insurer's
variable annuity premiums sold through the Merrill Lynch & Co.
distribution system. At December 31, 1997, the Company's quota
share of variable annuity premiums related to this agreement was
$35 million.
Deferred Policy Acquisition Costs: Policy acquisition costs for
life and annuity contracts are deferred and amortized based on
the estimated future gross profits for each group of contracts.
These future gross profit estimates are subject to periodic
evaluation by the Company, with necessary revisions applied
against amortization to date. It is reasonably possible that
estimates of future gross profits could be reduced in the
future, resulting in a material reduction in the carrying amount
of deferred policy acquisition costs.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, that are primarily
related to and vary with the production of new business. Certain
costs and expenses reported in the statements of earnings are
net of amounts deferred. Policy acquisition costs can also arise
from the acquisition or reinsurance of existing in-force
policies from other insurers. These costs include ceding
commissions and professional fees related to the reinsurance
assumed. The deferred costs are amortized in proportion to the
estimated future gross profits over the anticipated life of the
acquired insurance contracts utilizing an interest methodology.
The Company has entered into an assumption reinsurance agreement
with an unaffiliated insurer. The acquisition costs relating to
this agreement are being amortized over a twenty-year period
using an effective interest rate of 9.01%. This
reinsurance agreement provides for payment of contingent ceding
commissions based upon the persistency and mortality experience
of the insurance contracts assumed. Any payments made for the
contingent ceding commissions are capitalized and amortized
using an identical methodology as that used for the initial
acquisition costs. The following is a reconciliation of the
acquisition costs related to the reinsurance agreement for the
years ended December 31:
1997 1996 1995
------------ ------------ ------------
Beginning balance $ 112,249 $ 124,833 $ 133,388
Capitalized amounts 5,077 5,077 13,708
Interest accrued 9,653 10,669 11,620
Amortization (24,727) (28,330) (33,883)
------------ ------------ ------------
Ending balance $ 102,252 $ 112,249 $ 124,833
============ ============ ============
The following table presents the expected amortization, net of
interest accrued, of these deferred acquisition costs over the next
five years. The amortization may be adjusted based on periodic
evaluation of the expected gross profits on the reinsured policies.
1998 11,030
1999 9,927
2000 8,935
2001 8,041
2002 7,237
Investments: The Company's investments in debt and equity securities
are classified as either available-for-sale or trading and are
reported at estimated fair value. Unrealized gains and losses on
available-for-sale securities are included in stockholder's equity,
net of tax. Unrealized gains and losses on trading account
securities are included in net realized investment gains. If a
decline in value of a security is determined by management to be
other-than-temporary, the carrying value is adjusted to the estimated
fair value at the date of this determination and recorded as net realized
investment gains (losses).
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted to
the maturity date, and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of specific identification.
Certain fixed maturity securities are considered non-investment
grade. The Company defines non-investment grade fixed maturity
securities as unsecured debt obligations that do not have a
rating equivalent to Standard and Poor's (or similar rating
agency) BBB- or higher.
During the first quarter 1997, the Company terminated its
interest rate swap contracts that were carried at estimated fair
value and recorded as a component of fixed maturity securities.
Interest income and realized and unrealized gains and losses
were recorded on the same basis as fixed maturity securities
available-for-sale.
As of December 31, 1997, the Company had no mortgage loans
outstanding. Mortgage loans were stated at unpaid principal
balances, net of valuation allowances. Such valuation allowances
were based on the decline in value expected to be realized on
mortgage loans that may not be collectible in full. In
establishing valuation allowances, management considered, among
other things, the estimated fair value of the underlying collateral.
The Company recognized income from mortgage loans based on the
cash payment interest rate of the loan, which may be different
from the accrual interest rate of the loan for certain
outstanding mortgage loans. The Company recognized a realized
gain at the date of the satisfaction of the loan at contractual
terms for loans where there was a difference between the cash
payment interest rate and the accrual interest rate. For all
loans the Company stopped accruing income when an interest
payment default either occurred or was probable. Impairments of
mortgage loans were established as valuation allowances and
recorded to net realized investment gains or losses.
Real estate held-for-sale, is stated at estimated fair value
less estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Investments in limited partnerships are carried at cost.
Income Taxes: The results of operations of the Company are
included in the consolidated Federal income tax return of
Merrill Lynch & Co. The Company has entered into a tax-sharing
agreement with Merrill Lynch & Co. whereby the Company will
calculate its current tax provision based on its operations.
Under the agreement, the Company periodically remits to Merrill
Lynch & Co. its current Federal tax liability.
The Company uses the asset and liability method in providing
income taxes on all transactions that have been recognized in
the financial statements. The asset and liability method
requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or
realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums
and in substantially all states are exempt from state income
taxes.
Separate Accounts: Separate Accounts are established in
conformity with Arkansas State Insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to general claims of the
Company only to the extent the value of such assets exceeds
Separate Accounts liabilities.
Assets and liabilities of Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
Statements of Comprehensive Income: During 1997, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 defines comprehensive income as all non-
owner changes in equity during a period. Comprehensive
income is reported in the Statements of Comprehensive Income
included in the financial statements for the years ended
December 31, 1997, 1996 and 1995.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that
approximate fair value. The carrying value of financial
instruments as of December 31 were:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities:
Securities (1) $ 3,008,608 $ 3,301,858
Interest rate swaps (2) - (270)
-------------- -------------
Total fixed maturity securities 3,008,608 3,301,588
-------------- -------------
Equity securities (1) 73,612 35,977
Trading account securities (1) 15,625 -
Mortgage loans (3) - 70,503
Policy loans on insurance contracts (4) 1,118,139 1,092,071
Cash and cash equivalents (5) 86,388 94,991
Separate Accounts assets (6) 9,149,119 7,615,362
-------------- --------------
Total financial instruments recorded as assets $ 13,451,491 $ 12,210,492
============== ==============
</TABLE>
(1) For publicly traded securities, the estimated fair value
is determined using quoted market prices. For securities
without a readily ascertainable market value, the Company
has determined an estimated fair value using a discounted
cash flow model, including provision for credit risk, based
upon the assumption that such securities will be held to
maturity. Such estimated fair values do not necessarily
represent the values for which these securities could have
been sold at the dates of the balance sheets. At December
31, 1997 and 1996, securities without a readily
ascertainable market value, having an amortized cost of
$389,728 and $338,515, had an estimated fair value of
$396,253 and $348,066, respectively.
(2) Estimated fair values for the Company's interest rate swaps
are based on a discounted cash flow model.
(3) The estimated fair value of mortgage loans approximates
the carrying value.
(4) The Company estimates the fair value of policy loans as
equal to the book value of the loans. Policy loans are
fully collateralized by the account value of the associated
insurance contracts, and the spread between the policy loan
interest rate and the interest rate credited to the account
value held as collateral is fixed.
(5) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(6) Assets held in Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity securities and equity securities (excluding
trading account securities) as of December 31 were:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,412,171 $ 73,318 $ 6,963 $ 2,478,526
Mortgage-backed securities 339,015 12,320 224 351,111
U.S. Government and agencies 119,107 2,767 111 121,763
Foreign governments 36,585 198 1,125 35,658
Municipals 20,684 866 - 21,550
------------- ------------- ------------- -------------
Total fixed maturity securities $ 2,927,562 $ 89,469 $ 8,423 $ 3,008,608
============= ============= ============= =============
Equity securities:
Non-redeemable preferred stocks $ 67,845 $ 1,187 $ 185 $ 68,847
Common stocks 4,754 11 - 4,765
------------- ------------- ------------- -------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============= ============= ============= =============
1996
-------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Fixed maturity securities:
Corporate debt securities $ 2,652,225 $ 67,590 $ 11,765 $ 2,708,050
Mortgage-backed securities 503,997 12,447 1,948 514,496
U.S. Government and agencies 54,386 2,303 158 56,531
Foreign governments 18,111 182 140 18,153
Municipals 3,924 434 - 4,358
------------- ------------- ------------- -------------
Total fixed maturity securities $ 3,232,643 $ 82,956 $ 14,011 $ 3,301,588
============= ============= ============= =============
Equity securities:
Non-redeemable preferred stocks $ 30,554 $ 2,983 $ 85 $ 33,452
Common stocks 2,434 91 - 2,525
------------- ------------- ------------- -------------
Total equity securities $ 32,988 $ 3,074 $ 85 $ 35,977
============= ============= ============= =============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------- --------------
Fixed maturity securities:
Due in one year or less $ 224,663 $ 225,887
Due after one year through five years 1,343,383 1,380,248
Due after five years through ten years 740,784 764,272
Due after ten years 279,717 287,090
------------- --------------
2,588,547 2,657,497
Mortgage-backed securities 339,015 351,111
------------- --------------
Total fixed maturity securities $ 2,927,562 $ 3,008,608
============= ==============
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------- -------------
AAA $ 623,503 $ 642,188
AA 169,805 172,454
A 926,398 950,610
BBB 1,046,614 1,080,036
Non-investment grade 161,242 163,320
------------- -------------
Total fixed maturity securities $ 2,927,562 $ 3,008,608
============= =============
<PAGE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with investments classified as available-for-sale. The Company
adjusts those assets and liabilities as if the unrealized investment gains
or losses from securities classified as available-for-sale had actually
been realized, with corresponding credits or charges reported directly to
stockholder's equity. The following reconciles the net unrealized
investment gain on investment securities classified as available- for-
sale as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities $ 81,046 $ 68,945
Equity securities 1,013 2,989
Deferred policy acquisition costs (5,452) (4,630)
Separate Accounts assets - 168
-------------- --------------
76,607 67,472
-------------- --------------
Liabilities:
Policyholders' account balances 48,923 59,017
Federal income taxes - deferred 9,689 2,959
-------------- --------------
58,612 61,976
-------------- --------------
Stockholder's equity:
Net unrealized investment gain on investment securities $ 17,995 $ 5,496
============== ==============
</TABLE>
During the third quarter 1997, the Company provided $15,000
initial funding for a trading portfolio, composed of
convertible debt and equity securities. The net unrealized
holdings gains on trading account securities earned as of
December 31, 1997, and included in net realized investment gains
are $520.
During the first quarter 1997, the Company terminated its
interest rate swap contracts which it held for the purpose of
minimizing exposure to fluctuations in interest rates related
to specific investment securities held. The notional
amount of such swaps outstanding at December 31 1996 was
approximately $9,000. The swaps were transacted with
investment grade counterparties. As of December 31, 1996, the
Company's interest rate swap contracts were in a $270
unrealized loss position. During 1997, 1996
and 1995, there were no realized investment gains or losses
recorded.
<PAGE>
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1997 1996 1995
----------- ----------- -----------
Proceeds $ 846,041 $ 847,091 $ 620,853
Gross realized investment gains 16,783 19,078 14,196
Gross realized investment losses 7,193 10,749 10,813
The Company had investment securities with a carrying value
of $26,508 and $27,726 that were deposited with insurance
regulatory authorities at December 31, 1997 and 1996,
respectively.
During 1997, the Company realized a $1,005 gain on the sale of
its remaining investment in the Separate Accounts. At December
31, 1996, the Company had invested $10,168 in Separate Accounts,
including $168 of unrealized gains. The investments in Separate
Accounts are for the purpose of providing original funding of
certain mutual fund portfolios available as investment options to
variable life and annuity policyholders.
At December 31, 1997, the Company held no mortgage loans on real
estate. The carrying value and established valuation allowances
of impaired mortgage loans on real estate as of December 31,
1996 were $44,239 and $17,652, respectively.
Additional information on impaired loans for the years ended
December 31 follows:
1997 1996 1995
----------- ----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668 $ 124,089
Interest income recognized (cash-basis) 2,830 4,848 5,482
For the years ended December 31, 1997, 1996 and 1995, $7,891,
$28,555 and $1,300, respectively, of real estate held-for-sale
was acquired in satisfaction of debt.
<PAGE>
Net investment income arose from the following sources for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity securities $ 236,325 $ 266,916 $ 305,648
Equity securities 3,020 1,876 1,329
Mortgage loans 4,627 9,764 12,250
Real estate held-for-sale 1,939 563 153
Policy loans on insurance contracts 57,998 56,512 53,576
Cash and cash equivalents 9,570 6,710 8,463
Other 709 899 1,753
------------ ------------ ------------
Gross investment income 314,188 343,240 383,172
Less investment expenses (5,486) (6,579) (7,006)
------------ ------------ ------------
Net investment income $ 308,702 $ 336,661 $ 376,166
============ ============ ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity securities $ 6,149 $ 4,690 $ 1,908
Equity securities 3,441 3,639 1,475
Trading account securities 697 - -
Investment in Separate Accounts 1,005 106 (369)
Mortgage loans 6,252 599 334
Real estate held-for-sale (4,252) (171) 1,177
Cash and cash equivalents (3) (1) -
------------ ------------ ------------
Net realized investment gains $ 13,289 $ 8,862 $ 4,525
============ ============ ============
</TABLE>
<PAGE>
The following is a reconciliation of the change in valuation
allowances that have been recorded to reflect other-than-
temporary declines in estimated fair value of mortgage loans
for the years ended December 31:
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ------------ ----------- -----------
Mortgage loans:
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
1995 40,070 - 4,189 35,881
The Company held no investments at December 31, 1997 which have
been non-income producing for the preceding twelve months.
The Company has committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1997, $4,744 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income
taxes based on earnings before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 42,413 $ 41,048 $ 41,575
Increase (decrease) in income taxes resulting
from:
Dividend received deduction (1,969) (3,135) (532)
Release of policyholders' surplus - - 1,991
Tax deductible interest - - (718)
Other - (21) (13)
---------- ---------- ----------
Federal income tax provision $ 40,444 $ 37,892 $ 42,303
========== ========== ==========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1997 was 35%.
The Company provides for deferred income taxes resulting from
temporary differences that arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (2,422) $ (5,770) $ (2,179)
Policyholders' account balances (16,099) 15,004 66
Liability for guaranty fund assessments 1,190 760 249
Investment adjustments 5,070 5,122 5,563
Other - (38) 269
-------------- -------------- --------------
Deferred Federal income tax
provision (benefit) $ (12,261) $ 15,078 $ 3,968
============== ============== ==============
</TABLE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 95,182 $ 79,083
Investment adjustments 601 5,671
Liability for guaranty fund assessments 5,381 6,571
-------------- --------------
Total deferred tax assets 101,164 91,325
-------------- --------------
Deferred tax liabilities:
Deferred policy acquisition costs 88,670 91,092
Net unrealized investment gain on investment securities 9,689 2,959
Other 3,988 3,988
-------------- --------------
Total deferred tax liabilities 102,347 98,039
-------------- --------------
Net deferred tax liability $ 1,183 $ 6,714
================ ==============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
<PAGE>
NOTE 5. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain accounting, data processing,
legal, actuarial, management, advertising and other services to
the Company. Expenses incurred by MLIG in relation to this
service agreement are reimbursed by the Company on an allocated
cost basis. Charges billed to the Company by MLIG pursuant to
the agreement were $43,028, $43,515 and $41,729 for the years
ended December 31, 1997, 1996 and 1995, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG which approximates the daily Federal funds rate. Total
intercompany interest paid was $842, $988 and $1,310 for 1997,
1996 and 1995, respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM")
are parties to a service agreement whereby MLAM has agreed to
provide certain invested asset management services to the
Company. The Company pays a fee to MLAM for these services
through the MLIG service agreement. Charges attributable to
this agreement and allocated to the Company by MLIG were
$1,913, $2,279 and $2,635 for 1997, 1996 and 1995,
respectively.
MLAM and MLIG have entered into an agreement with respect to
administrative services for the Merrill Lynch Series Fund, Inc.
("Series Fund") and Merrill Lynch Variable Series Funds, Inc.
("Variable Series Funds"). The Company invests in the various
mutual fund portfolios of the Series Fund and the Variable
Series Funds in connection with the variable life and annuities
the Company has in-force. Under this agreement, MLAM pays
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Series Fund
and the Variable Series Funds to MLAM. The Company received
from MLIG its allocable share of such compensation in the
amount of $19,057, $16,514 and $13,293 during 1997, 1996 and
1995, respectively.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S, who are the Company's licensed insurance agents,
solicit applications for contracts to be issued by the Company.
MLLA is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were $72,729, $42,639 and $43,984 for
1997, 1996 and 1995, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisition
costs and are being amortized in accordance with the policy
discussed in Note 1.
During the first quarter 1997, the Company terminated its
interest rate swap contracts which it entered into with Merrill
Lynch Capital Services, Inc. ("MLCS") with a guarantee from
Merrill Lynch & Co. At December 31, 1996, the notional amount
of such interest rate swap contracts outstanding was $9,000.
Net interest received from these interest rate swap contracts
was $4, ($117), and $256 for 1997, 1996 and 1995, respectively.
Affiliated agreements generally contain reciprocal indemnity
provisions pertaining to each party's representations and
contractual obligations thereunder.
During 1997, the Company sold its investment in 2141 E.
Camelback, Corp. to Merrill Lynch Mortgage Capital, Inc. The
investment was sold at its carrying value of $5,375.
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1997, 1996, and 1995 the Company paid dividends of
$135,000, $175,000, and $100,000, respectively, to MLIG. Of
these stockholder's dividends, $110,030, $175,000 and $73,757,
respectively, were extraordinary dividends as defined by
Arkansas Insurance Law and were paid pursuant to approval
granted by the Arkansas Insurance Commissioner.
At December 31, 1997 and 1996, approximately $24,304 and
$24,970, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1997 and 1996, was $245,042 and $251,697,
respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial
statements by charging policy acquisition costs to expense as
incurred, establishing future policy benefit reserves using
different actuarial assumptions, not providing for deferred
income taxes, and valuing securities on a different basis. The
Company's statutory net income for 1997, 1996 and 1995 was
$81,963, $93,532 and $121,451, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital which
a life insurance company should have based upon that company's
risk profile. As of December 31, 1997 and 1996, based on the
RBC formula, the Company's total adjusted capital level was
394% and 403%, respectively, of the minimum amount of capital
required to avoid regulatory action.
NOTE 7. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result of
the insolvency of an insurer. At the time an insolvency occurs,
the guaranty association assesses the remaining members of the
association an amount sufficient to satisfy the insolvent
insurer's policyholder obligations (within specified limits).
During 1991, and to a lesser extent 1992, there were certain
highly publicized life insurance insolvencies. The Company has
utilized public information to estimate what future assessments
it will incur as a result of these insolvencies. At December 31,
1997 and 1996, the Company has established an estimated
liability for future guaranty fund assessments of $15,374 and
$18,773, respectively. The Company regularly monitors public
information regarding insurer insolvencies and adjusts its
estimated liability as appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
<PAGE>
<PAGE> 54
PROSPECTUS
May 1, 1998
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
FLEXIBLE PREMIUM VARIABLE
UNIVERSAL LIFE INSURANCE CONTRACT
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
HOME OFFICE: LITTLE ROCK, ARKANSAS 72201
SERVICE CENTER: P.O. BOX 9025
SPRINGFIELD, MASSACHUSETTS 01102-9025
1414 MAIN STREET, THIRD FLOOR
SPRINGFIELD, MASSACHUSETTS 01104-1007
PHONE: (800) 354-5333
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This Prospectus is for a flexible premium variable universal life insurance
contract (the "Contract"). As of the date of this Prospectus, the Contract is
only offered by Merrill Lynch Life Insurance Company ("Merrill Lynch Life"), a
subsidiary of Merrill Lynch & Co., Inc., in Massachusetts, Pennsylvania, and
Vermont.
During the first 14 days following the in force date, the initial payment less
contract loading will be invested only in the division investing in the Money
Reserve Portfolio. After the first 14 days following the in force date, the
contract owner may invest in up to any five of the 37 investment divisions of
Merrill Lynch Variable Life Separate Account (the "Separate Account"), the
Merrill Lynch Life separate investment account available under the Contract. The
investments available through the investment divisions include ten mutual fund
portfolios of the Merrill Lynch Series Fund, Inc.; seven mutual fund portfolios
of the Merrill Lynch Variable Series Funds, Inc.; two mutual fund portfolios of
the AIM Variable Insurance Funds, Inc.; one mutual fund portfolio of the
Alliance Variable Products Series Fund, Inc.; two mutual fund portfolios of the
MFS Variable Insurance Trust; and fifteen unit investment trusts in The Merrill
Lynch Fund of Stripped ("Zero") U.S. Treasury Securities. Currently, the
contract owner may change his or her investment allocation as many times as
desired.
The Contract provides an estate benefit through life insurance coverage on the
life of the insured. The Contract offers two death benefit options. At the
election of the contract owner, the death benefit may include the Contract's
cash value. Contract owners may purchase additional insurance through an
additional insurance rider, the amount of which may be increased or decreased
subject to certain conditions. Subject to certain conditions, Merrill Lynch Life
guarantees that the coverage will remain in force for the guarantee period. Each
payment will extend the guarantee period until such time as the guarantee period
is established for the whole of life of the insured. During this guarantee
period, Merrill Lynch Life will terminate the Contract only if the debt exceeds
certain contract values. After the guarantee period, the Contract will remain in
force as long as there is not excessive debt and as long as the cash value is
sufficient to cover the charges due. While the Contract is in force, the death
benefit may vary to reflect the investment results of the investment divisions
chosen, but will generally never be less than the current face amount.
The Contract allows for additional payments. Contract owners may also borrow up
to the loan value of the Contract, make partial withdrawals or turn in the
Contract for its net cash surrender value. The net cash surrender value will
vary with the investment results of the investment divisions chosen. Merrill
Lynch Life does not guarantee any minimum net cash surrender value.
It may not be advantageous to replace existing insurance with the Contract.
Within certain limits the Contract may be converted to a contract with benefits
that do not vary with the investment results of a separate account.
THE PURCHASE OF THIS CONTRACT INVOLVES CERTAIN RISKS. BECAUSE IT IS A VARIABLE
LIFE INSURANCE CONTRACT, THE VALUE OF THE CONTRACT REFLECTS THE INVESTMENT
PERFORMANCE OF THE SELECTED INVESTMENT OPTIONS. INVESTMENT RESULTS CAN VARY BOTH
UP AND DOWN AND CAN EVEN DECREASE THE VALUE OF PREMIUM PAYMENTS. THEREFORE,
CONTRACT OWNERS COULD LOSE ALL OR PART OF THE MONEY THEY HAVE INVESTED. MERRILL
LYNCH LIFE DOES NOT GUARANTEE THE VALUE OF THE CONTRACT. RATHER, CONTRACT OWNERS
BEAR ALL INVESTMENT RISKS.
LIFE INSURANCE IS INTENDED TO BE A LONG-TERM INVESTMENT. CONTRACT OWNERS SHOULD
EVALUATE THEIR INSURANCE NEEDS AND THE CONTRACT'S LONG-TERM INVESTMENT POTENTIAL
AND RISKS BEFORE PURCHASING THE CONTRACT.
PARTIAL WITHDRAWALS AND SURRENDER OF THE CONTRACT ARE SUBJECT TO TAX, AND IF
TAKEN BEFORE THE CONTRACT OWNER ATTAINS AGE 59 1/2 MAY ALSO BE SUBJECT TO A 10%
FEDERAL PENALTY TAX. LOANS MAY BE TAXABLE IF THE CONTRACT BECOMES A "MODIFIED
ENDOWMENT CONTRACT."
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT MUST BE
ACCOMPANIED BY CURRENT PROSPECTUSES FOR THE MERRILL LYNCH SERIES FUND, INC.; THE
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.; THE AIM VARIABLE INSURANCE FUNDS,
INC.; THE ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.; THE MFS VARIABLE
INSURANCE TRUST; AND THE MERRILL LYNCH FUND OF STRIPPED ("ZERO") U.S. TREASURY
SECURITIES.
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.
<PAGE> 55
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IMPORTANT TERMS............................................. 4
SUMMARY OF THE CONTRACT
Purpose of the Contract................................... 5
Availability and Payments................................. 5
CMA(R) Insurance Service.................................. 6
The Investment Divisions.................................. 6
How the Death Benefit Varies.............................. 6
How the Investment Base Varies............................ 6
Net Cash Surrender Value.................................. 7
Illustrations............................................. 7
Replacement of Existing Coverage.......................... 7
Rights to Cancel ("Free Look" Period) or Convert.......... 7
How Death Benefit and Cash Value Increases are Taxed...... 7
Loans..................................................... 8
Partial Withdrawals....................................... 8
Fees and Charges.......................................... 8
FACTS ABOUT THE SEPARATE ACCOUNT, THE FUNDS, THE ZERO TRUSTS
AND MERRILL LYNCH LIFE
The Separate Account...................................... 9
The Series Fund........................................... 9
The Variable Series Funds................................. 10
The AIM V.I. Funds........................................ 11
The Alliance Fund......................................... 12
The MFS Trust............................................. 12
Certain Risks of the Funds................................ 13
The Zero Trusts........................................... 13
Merrill Lynch Life and MLPF&S............................. 14
FACTS ABOUT THE CONTRACT
Who May be Covered........................................ 14
Purchasing a Contract..................................... 14
Additional Insurance Rider................................ 15
Additional Payments....................................... 16
Effect of Additional Payments............................. 16
Investment Base........................................... 17
Charges Deducted from the Investment Base................. 17
Contract Loading.......................................... 18
Charges to the Separate Account........................... 19
Charges to Fund Assets.................................... 19
Guarantee Period.......................................... 20
Cash Value................................................ 21
Loans..................................................... 21
Partial Withdrawals....................................... 23
Death Benefit Proceeds.................................... 23
Payment of Death Benefit Proceeds......................... 25
Rights to Cancel or Convert............................... 25
Reports to Contract Owners................................ 25
</TABLE>
2
<PAGE> 56
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MORE ABOUT THE CONTRACT
Using the Contract........................................ 26
Some Administrative Procedures............................ 27
Other Contract Provisions................................. 28
Income Plans.............................................. 29
Group or Sponsored Arrangements........................... 29
Unisex Legal Considerations for Employers................. 29
Selling the Contracts..................................... 30
Tax Considerations........................................ 30
Merrill Lynch Life's Income Taxes......................... 34
Reinsurance............................................... 34
MORE ABOUT THE SEPARATE ACCOUNT AND ITS DIVISIONS
About the Separate Account................................ 34
Changes Within the Account................................ 34
Net Rate of Return for an Investment Division............. 35
The Funds................................................. 35
The Zero Trusts........................................... 37
ILLUSTRATIONS
Illustrations of Death Benefits, Investment Base, Net Cash
Surrender Values and Accumulated Payments.............. 38
EXAMPLES
Additional Payments....................................... 44
Partial Withdrawals....................................... 45
Changing the Death Benefit Option......................... 46
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
Directors and Executive Officers.......................... 47
Services Arrangement...................................... 47
State Regulation.......................................... 47
Year 2000................................................. 48
Legal Proceedings......................................... 48
Experts................................................... 48
Legal Matters............................................. 48
Registration Statements................................... 49
Financial Statements...................................... 49
Financial Statements of Merrill Lynch Variable Life
Separate Account....................................... S-1
Financial Statements of Merrill Lynch Life Insurance
Company................................................ G-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
3
<PAGE> 57
IMPORTANT TERMS
additional payment: is a payment which may be made after the "free look"
period. Additional payments do not require evidence of insurability.
attained age: is the issue age of the insured plus the number of full years
since the contract date.
base premium: is the amount equal to the level annual premium necessary for the
face amount of the Contract to endow at the insured's age 100. Merrill Lynch
Life assumes death benefit option 1 is elected and further assumes a 5% annual
rate of return on the base premium less contract loading and a maximum cost of
insurance charge. Once determined, the base premium will not change.
cash value: is equal to the investment base plus any unearned charges for cost
of insurance and rider costs plus any debt less any accrued net loan cost since
the last contract anniversary (or since the contract date during the first
contract year).
cash value corridor factor: is used to determine the amount of death benefit
purchased by $1.00 of cash value. Merrill Lynch Life uses this factor in the
calculation of the variable insurance amount to make sure that the Contract
always meets the requirements of what constitutes a life insurance contract
under the Internal Revenue Code.
contract anniversary: is the same date of each year as the contract date.
contract date: is used to determine processing dates, contract years and
anniversaries. It is usually the business day next following the receipt of the
initial payment at the Service Center. It is also referred to as the policy
date.
contract loading: is chargeable to all payments for sales load, federal tax and
premium tax charges.
death benefit: if option 1 is elected, it is the larger of the face amount or
the variable insurance amount; if option 2 is elected, it is the larger of the
face amount plus the cash value or the variable insurance amount.
death benefit proceeds: are equal to the death benefit plus the amount of any
insurance provided by a rider less any debt.
debt: is the sum of all outstanding loans on a Contract plus accrued interest.
excess sales load: a portion of the sales load calculated during the first two
policy years that may be refunded in the event of surrender during the first two
policy years. After policy year two, the excess sales load is zero.
face amount: is the minimum death benefit as long as the Contract remains in
force. The face amount will change if a change in death benefit option is made
or if a partial withdrawal is taken.
fixed base: is calculated in the same manner as the cash value except that 5%
is substituted for the net rate of return, the guaranteed maximum cost of
insurance rates and guaranteed maximum rider costs are substituted for current
rates and loans and repayments are not taken into account. After the end of the
guarantee period, the fixed base is zero.
guarantee period: is the time guaranteed that the Contract will remain in force
regardless of investment experience, unless the debt exceeds certain values. It
is the period that a comparable fixed life insurance contract (same face amount,
payments made, guaranteed mortality table, contract loading and guaranteed
maximum rider costs) would remain in force if credited with 5% interest per
year.
in force date: is the date when the underwriting process is complete, the
initial payment is received and outstanding contract amendments (if any) are
received at the Service Center.
initial payment: is the payment required to put the Contract into effect.
investment base: is the amount available under a Contract for investment in the
Separate Account at any time. A contract owner's investment base is the sum of
the amounts invested in each of the selected investment divisions.
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investment division: is any division in the Separate Account.
issue age: is the insured's age as of his or her birthday nearest the contract
date.
issue date: is the date that the Contract is issued. The contestable and
suicide periods are measured from this date.
net amount at risk: is the excess, as of a processing date, of the death
benefit (adjusted for interest at an annual rate of 5%) over the cash value, but
before the deduction for cost of insurance.
net cash surrender value: is equal to the cash value less debt.
processing dates: are the contract date and the first day of each contract
quarter thereafter. Processing dates are the days when Merrill Lynch Life
deducts certain charges from the investment base.
processing period: is the period between consecutive processing dates.
target premium: is equal to 75% of the base premium.
variable insurance amount: is computed daily by multiplying the cash value
(plus certain excess sales load during the first 24 months after the Contract is
issued) by the cash value corridor factor for the insured at his or her attained
age.
SUMMARY OF THE CONTRACT
PURPOSE OF THE CONTRACT
This flexible premium variable universal life insurance contract offers a choice
of investments and an opportunity for the Contract's investment base, cash value
and death benefit to grow based on investment results.
Merrill Lynch Life does not guarantee that contract values will increase.
Depending on the investment results of selected investment divisions, the
investment base, cash value and death benefit may increase or decrease on any
day. The contract owner bears the investment risk. Merrill Lynch Life guarantees
to keep the Contract in force during the guarantee period subject to the effect
of any debt.
Life insurance is not a short-term investment. The contract owner should
evaluate the need for insurance and the Contract's long-term investment
potential and risks before purchasing a Contract.
The Contract should be purchased as a long-term investment designed to provide a
death benefit. The Contract's net cash surrender value, as well as its death
benefit, may be used to provide proceeds for various individual and business
planning purposes. However, loans and partial withdrawals will affect the net
cash surrender value and death benefit proceeds, and may cause the Contract to
lapse; in addition, partial withdrawals may be currently taxable. If the
performance of the investment divisions to which the investment base is
allocated is not sufficient to provide funds for the specific planning purpose
contemplated, or if insufficient payments are made or Contract values
maintained, then the purchaser may not be able to utilize the Contract to
achieve the purposes for which it was purchased. Because the Contract is
designed to provide benefits on a long-term basis, before purchasing a Contract
in connection with a specialized purpose, a purchaser should consider whether
the long-term nature of the Contract, and the potential impact of any
contemplated loans and partial withdrawals, are consistent with the purposes for
which the Contract is being considered. Using a Contract for a specialized
purpose may have tax consequences. (See "Tax Considerations" on page 30.)
AVAILABILITY AND PAYMENTS
The Contract is available in Massachusetts, Pennsylvania, and Vermont. A
Contract may be issued for an insured from age 20 through age 85. The minimum
initial payment is 75% of the base premium.
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Merrill Lynch Life will not accept an initial payment that provides a guarantee
period of less than two years. The guarantee period is the period of time
Merrill Lynch Life guarantees that the Contract will remain in force regardless
of investment experience unless the debt exceeds certain values.
Contract owners may make additional payments. Contract owners may specify an
additional payment amount on the application to be paid on a monthly (for
payments from a CMA account only), quarterly, semi-annual, or annual basis. For
additional payments not being withdrawn from a CMA account, Merrill Lynch Life
will send reminder notices for such amounts beginning in the second contract
year.
CMA(R) INSURANCE SERVICE
Contract owners who subscribe to the Merrill Lynch Cash Management Account(R)
financial service ("CMA account") may elect to have their Contract linked to
their CMA account electronically. Certain transactions will be reflected in
monthly CMA account statements. Payments may be transferred to and from the
Contract through a CMA account.
THE INVESTMENT DIVISIONS
During the first 14 days following the in force date, the initial payment less
contract loading will be invested in the investment division of the Separate
Account investing in the Money Reserve Portfolio. After the first 14 days
following the in force date, the contract owner may select up to five of the 37
investment divisions in the Separate Account. (See "Changing the Allocation" on
page 17.)
Payments are invested in investment divisions of the Separate Account. Ten
investment divisions of the Separate Account invest exclusively in shares of
designated mutual fund portfolios of the Merrill Lynch Series Fund, Inc. (the
"Series Fund"). Seven investment divisions of the Separate Account invest
exclusively in Class A shares of designated mutual fund portfolios of the
Merrill Lynch Variable Series Funds, Inc. (the "Variable Series Funds"). Two
investment divisions of the Separate Account invest exclusively in shares of
designated mutual fund portfolios of the AIM Variable Insurance Funds, Inc. (the
"AIM V.I. Funds"). One investment division of the Separate Account invests
exclusively in shares of a designated mutual fund portfolio of the Alliance
Variable Products Series Fund, Inc. (the "Alliance Fund"). Two investment
divisions of the Separate Account invest exclusively in shares of designated
mutual fund portfolios of the MFS Variable Insurance Trust (the "MFS Trust").
Each mutual fund portfolio has a different investment objective. The other
fifteen investment divisions invest in units of designated unit investment
trusts in The Merrill Lynch Fund of Stripped ("Zero") U.S. Treasury Securities
(the "Zero Trusts"). The contract owner's payments are not invested directly in
the Series Fund, the Variable Series Funds, the AIM V.I. Funds, the Alliance
Fund, or the MFS Trust (each, a "Fund"; collectively, the "Funds"); or in the
Zero Trusts.
HOW THE DEATH BENEFIT VARIES
Contract owners elect a death benefit option on the application. Under option 1,
the death benefit equals the larger of the face amount or the variable insurance
amount. Under option 2, the death benefit equals the larger of the sum of the
face amount plus the cash value or the variable insurance amount. Subject to
certain conditions, contract owners may change the death benefit option. The
death benefit may increase or decrease on any day depending on the investment
results of the investment divisions chosen by the Contract owner. Death benefit
proceeds equal the death benefit reduced by any debt and increased by any rider
benefits payable. (See "Death Benefit Proceeds" on page 23.)
HOW THE INVESTMENT BASE VARIES
A Contract's investment base is the amount available for investment at any time.
On the contract date(usually the business day next following receipt of the
initial payment at the Service Center), the investment base is equal to the
initial payment less contract loading and charges for cost of insurance and
rider costs. Afterwards,
- ---------------
Cash Management Account and CMA are registered trademarks of Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
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it varies daily based on investment performance of the investment divisions
chosen. The contract owner bears the risk of poor investment performance and
receives the benefit of favorable investment performance. Contract owners may
wish to consider diversifying their investment in the Contract by allocating the
investment base to two or more investment divisions.
NET CASH SURRENDER VALUE
Contract owners may surrender their Contracts at any time and receive the net
cash surrender value. The net cash surrender value varies daily based on
investment performance of the investment divisions chosen. Merrill Lynch Life
doesn't guarantee any minimum net cash surrender value. If the Contract is
surrendered within 24 months after issue, the contract owner will receive
certain excess sales load. (See "Contract Loading -- Excess Sales Load" on page
18.)
ILLUSTRATIONS
Illustrations in this Prospectus or used in connection with the purchase of the
Contract are based on hypothetical investment rates of return. These rates are
not guaranteed. They are illustrative only and should not be deemed a
representation of past or future performance. Actual rates of return may be more
or less than those reflected in the illustrations and, therefore, actual values
will be different than those illustrated.
REPLACEMENT OF EXISTING COVERAGE
Before purchasing a Contract, the contract owner should ask his or her Merrill
Lynch registered representative if changing, or adding to, current insurance
coverage would be advantageous. Generally, it is not advisable to purchase
another contract as a replacement for existing coverage. In particular,
replacement should be carefully considered if the decision to replace existing
coverage is based solely on a comparison of contract illustrations.
RIGHTS TO CANCEL ("FREE LOOK" PERIOD) OR CONVERT
Once the contract owner receives the Contract, he or she should review it
carefully to make sure it is what he or she intended to purchase. Generally, a
Contract may be returned for a refund within the later of ten days after the
contract owner receives it, 45 days after the contract owner completes the
application, or ten days after Merrill Lynch Life mails or personally delivers
the Notice of Withdrawal Right to the contract owner. If the Contract is
returned during the "free look" period, Merrill Lynch Life will refund the
initial payment without interest.
Once the Contract is issued, a contract owner may also convert the Contract
within 24 months after issue to a contract with benefits that do not vary with
the investment results of a separate account. (See "Converting the Contract" on
page 25.)
HOW DEATH BENEFIT AND CASH VALUE INCREASES ARE TAXED
Under current federal tax law, life insurance contracts receive tax-favored
treatment. The death benefit is generally excludable from the beneficiary's
gross income for federal income tax purposes, according to Section 101(a)(1) of
the Internal Revenue Code. An owner of a life insurance contract is not taxed on
any increase in the cash value while the contract remains in force.
A Contract may be a "modified endowment contract" under federal tax law
depending upon the amount of payments made in relation to the death benefit
provided under the Contract. If the Contract is a modified endowment contract,
certain distributions made during the insured's lifetime, such as loans, partial
withdrawals, collateral assignments, capitalized interest, and complete
surrenders, are includable in gross income on an income-first basis. A 10%
penalty tax may also be imposed on distributions made before the contract owner
attains age 59 1/2. Contracts that are not modified endowment contracts under
federal tax law receive preferential tax treatment with respect to certain
distributions.
For a discussion of the tax issues associated with this Contract, see "Tax
Considerations" on page 30.
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LOANS
Contract owners may borrow up to the loan value of their Contracts, which is 90%
of the cash value. The maximum amount which may be borrowed at any time is the
difference between the loan value and debt. (See "Loans" on page 21.)
Debt is deducted from the amount payable on surrender of the Contract and is
also subtracted from any death benefit payable. Loan interest accrues daily and,
IF IT IS NOT PAID EACH YEAR, IT IS CAPITALIZED AND ADDED TO THE OUTSTANDING LOAN
AMOUNT. If the Contract is a modified endowment contract, the amount of
capitalized interest will be treated as a taxable distribution. Depending upon
investment performance of the divisions and the amounts borrowed, loans may
cause a Contract to lapse. If the Contract lapses with a loan outstanding,
adverse tax consequences may result. Policy debt is considered part of total
cash value which is used to calculate gain. (See "Tax Considerations -- Tax
Treatment of Loans and Other Distributions" on page 31.)
PARTIAL WITHDRAWALS
Contract owners may make partial withdrawals beginning in contract year sixteen,
subject to certain conditions. (See "Partial Withdrawals" on page 23.)
FEES AND CHARGES
Contract Loading. Merrill Lynch Life deducts certain charges from all payments
before they are invested in the investment divisions. These charges are:
- Sales load equal to 46.25% of each payment through the second base
premium and 1.25% of each payment thereafter.
- State and local premium tax charge of 2.5% of each payment.
- A charge for federal taxes of 1.25% of each payment.
(See "Contract Loading" on page 18.)
Investment Base Charges. Merrill Lynch Life deducts certain charges from the
investment base. The charges deducted are as follows:
- On the contract date and on all processing dates after the contract date,
Merrill Lynch Life makes deductions for cost of insurance (see "Cost of
Insurance" on page 18) and any rider costs (see "Additional Insurance
Rider" on page 15).
- On each contract anniversary, Merrill Lynch Life makes deductions for the
net loan cost if there has been any debt during the prior year. It equals
a maximum of 2% of the debt per year.
Separate Account Charges. There are certain charges deducted daily from the
investment results of the investment divisions in the Separate Account. These
charges are:
- an asset charge designed to cover mortality and expense risks deducted
from all investment divisions which is equivalent to .90% annually at the
beginning of the year; and
- a trust charge deducted from only those investment divisions investing in
the Zero Trusts, which is currently equivalent to .34% annually at the
beginning of the year and will never exceed .50% annually.
Advisory Fees. The portfolios in the Funds pay monthly advisory fees and other
expenses. (See "Charges to Fund Assets" on page 19.)
This summary is intended to provide only a very brief overview of the more
significant aspects of the Contract. Further detail is provided in this
Prospectus and in the Contract. The Contract together with its attached
applications, medical exam(s), amendments, riders and endorsements constitutes
the entire agreement between the contract owner and Merrill Lynch Life and
should be retained.
For the definition of certain terms used in this Prospectus, see "Important
Terms" on page 4.
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FACTS ABOUT THE SEPARATE ACCOUNT, THE FUNDS,
THE ZERO TRUSTS AND MERRILL LYNCH LIFE
THE SEPARATE ACCOUNT
The Separate Account is a separate investment account established by Merrill
Lynch Life on November 16, 1990. It is registered with the Securities and
Exchange Commission as a unit investment trust pursuant to the Investment
Company Act of 1940. This registration does not involve any supervision by the
Securities and Exchange Commission over the investment policies or practices of
the Separate Account. It meets the definition of a separate account under the
federal securities laws. The Separate Account is used to support the Contract as
well as to support other variable life insurance contracts issued by Merrill
Lynch Life.
Merrill Lynch Life owns all of the assets in the Separate Account. The assets of
the Separate Account are kept separate from Merrill Lynch Life's general account
and any other separate accounts it may have. Arkansas insurance law provides
that the Separate Account's assets, to the extent of its reserves and
liabilities, may not be charged with liabilities arising out of any other
business Merrill Lynch Life conducts.
Obligations to contract owners and beneficiaries that arise under the Contract
are obligations of Merrill Lynch Life. Income, gains, and losses, whether or not
realized, from assets allocated are, in accordance with the Contracts, credited
to or charged against the Separate Account without regard to other income, gains
or losses of Merrill Lynch Life. As required, the assets in the Separate Account
will always be at least equal to the reserves and other liabilities of the
Separate Account. If the assets exceed the required reserves and other Contract
liabilities (which will always be at least equal to the aggregate contract value
allocated to the Separate Account under the Contracts), Merrill Lynch Life may
transfer the excess to its general account.
There are currently 37 investment divisions in the Separate Account. Ten invest
in shares of a specific portfolio of the Series Fund. Seven invest in Class A
shares of a specific portfolio of the Variable Series Funds. Two invest in
shares of a specific portfolio of the AIM V.I. Funds. One invests in shares of a
specific portfolio of the Alliance Fund. Two invest in shares of a specific
portfolio of the MFS Trust. Fifteen invest in units of a specific Zero Trust.
Complete information about the Funds and the Zero Trusts, including the risks
associated with each portfolio (including specific risks associated with
investment in the High Yield Portfolio of the Series Fund) can be found in the
accompanying prospectuses. They should be read in conjunction with this
Prospectus.
The investment objectives and policies of certain of the underlying portfolios
may be similar to the investment objectives and policies of other portfolios
that may be managed by the same investment adviser or manager. The investment
results of the underlying portfolios, however, may be higher or lower than the
results of such other portfolios. There can be no assurance, and no
representation is made, that the investment results of any of the underlying
portfolios will be comparable to the investment results of any other portfolio,
even if the other portfolio has the same investment adviser or manager.
THE SERIES FUND
The Series Fund is registered with the Securities and Exchange Commission as an
open-end management investment company and its investment adviser is Merrill
Lynch Asset Management, L.P. ("MLAM"). All of its ten mutual fund portfolios are
currently available through the Separate Account. The investment objectives and
certain investment policies of the Series Fund portfolios are described below.
There is no guarantee that any portfolio will be able to meet its investment
objective.
Money Reserve Portfolio seeks to preserve capital, maintain liquidity and
achieve the highest possible current income consistent with those objectives by
investing in short-term money market securities.
Intermediate Government Bond Portfolio seeks to obtain the highest level of
current income consistent with the protection of capital afforded by investing
in intermediate-term debt securities issued or guaranteed by the U.S. Government
or its agencies. The Portfolio will invest in such securities with a maximum
maturity of 15 years.
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Long-Term Corporate Bond Portfolio primarily seeks to provide as high a level of
current income as is believed to be consistent with prudent investment risk. In
addition, the Portfolio seeks the preservation of capital. In seeking to achieve
these objectives, under normal circumstances the Portfolio invests at least 80%
of the value of its total assets in debt securities that have a rating within
the three highest grades of Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's").
High Yield Portfolio primarily seeks as high a level of current income as is
believed to be consistent with prudent management. Secondarily, the Portfolio
seeks capital appreciation when consistent with its primary objective. The
Portfolio seeks to achieve its investment objective by investing principally in
fixed income securities rated in the lower categories of the established rating
services or in unrated securities of comparable quality (including securities
commonly known as "junk bonds").
Capital Stock Portfolio seeks long-term growth of capital and income, plus
moderate current income. It generally invests in equity securities considered to
be of good or improving quality or considered to be undervalued based on
criteria such as historical price/book value and price/earnings ratios.
Growth Stock Portfolio seeks long-term growth of capital by investing in a
diversified portfolio of securities, primarily common stocks, of aggressive
growth companies considered to have special investment value.
Multiple Strategy Portfolio seeks a high total investment return consistent with
prudent risk through a fully managed investment policy utilizing equity
securities, intermediate and long-term debt securities and money market
securities.
Natural Resources Portfolio seeks long-term growth of capital and protection of
the purchasing power of shareholders' capital by investing primarily in equity
securities of domestic and foreign companies with substantial natural resource
assets.
Global Strategy Portfolio seeks high total investment return by investing
primarily in a portfolio of equity and fixed-income securities, including
convertible securities, of U.S. and foreign issuers.
Balanced Portfolio seeks a level of current income and a degree of stability of
principal not normally available from an investment solely in equity securities
and the opportunity for capital appreciation greater than that normally
available from an investment solely in debt securities by investing in a
balanced portfolio of fixed-income and equity securities.
MLAM is indirectly owned and controlled by Merrill Lynch & Co., Inc. and is a
registered adviser under the Investment Advisers Act of 1940. The Series Fund,
as part of its operating expenses, pays an investment advisory fee to MLAM. (See
"Charges to Fund Assets" on page 19).
THE VARIABLE SERIES FUNDS
The Variable Series Funds is registered with the Securities and Exchange
Commission as an open-end management investment company and its investment
adviser is MLAM. Seven of its 18 mutual fund portfolios are currently available
through the Separate Account. The investment objectives and certain investment
policies of the seven available Variable Series Funds portfolios are described
below. There is no guarantee that any portfolio will be able to meet its
investment objective.
Basic Value Focus Fund seeks capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value. The
Fund seeks special opportunities in securities that are selling at a discount,
either from book value or historical price-earnings ratios, or seem capable of
recovering from temporarily out of favor considerations. Particular emphasis is
placed on securities that provide an above-average dividend return and sell at a
below-average price/earnings ratio.
Global Bond Focus Fund (formerly the World Income Focus Fund) seeks to provide
high total investment return by investing in a global portfolio of fixed income
securities denominated in various currencies, including multinational currency
units. The Fund will invest in fixed income securities that have a credit rating
of A or
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better by Standard & Poor's or by Moody's or commercial paper rated A-1 by
Standard & Poor's or Prime-1 by Moody's or obligations that MLAM has determined
to be of similar creditworthiness.
Global Utility Focus Fund seeks both capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the opinion of
MLAM, primarily engaged in the ownership or operation of facilities used to
generate, transmit or distribute electricity, telecommunications, gas or water.
International Equity Focus Fund seeks capital appreciation and, secondarily,
income by investing in a diversified portfolio of equity securities of issuers
located in countries other than the United States. Under normal conditions, at
least 65% of the Fund's net assets will be invested in such equity securities
and at least 65% of the Fund's total assets will be invested in the securities
of issuers from at least three different foreign countries.
Developing Capital Markets Focus Fund seeks long-term capital appreciation by
investing in securities, principally equities, of issuers in countries having
smaller capital markets. For purposes of its investment objective, the Fund
considers countries having smaller capital markets to be all countries other
than the four countries having the largest equity market capitalizations.
Special Value Focus Fund (formerly the Equity Growth Fund) seeks long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Variable Series Funds believes have special investment value, and of emerging
growth companies regardless of size. Companies are selected by management on the
basis of their long-term potential for expanding their size and profitability or
for gaining increased market recognition for their securities. Current income is
not a factor in the selection of securities.
Index 500 Fund seeks to provide investment results that, before expenses,
correspond to the aggregate price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index").
The Variable Series Funds, as part of its operating expenses, pays an investment
advisory fee to MLAM. (See "Charges to Fund Assets" on page 19.)
THE AIM V.I. FUNDS
The AIM V.I. Funds is registered with the Securities and Exchange Commission as
an open-end management, series, investment company and its investment adviser is
A I M Advisors, Inc. ("AIM"). Two of its mutual fund portfolios are currently
available through the Separate Account. The investment objectives of the two
available AIM V.I. Funds portfolios are described below. There is no guarantee
that any portfolio will be able to meet its investment objective.
AIM V.I. Capital Appreciation Fund seeks to provide capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller emerging
growth companies. The portfolio is primarily comprised of securities of two
basic categories of companies: (1) "core" companies, which AIM considers to have
experienced above-average and consistent long-term growth in earnings with
excellent prospects for outstanding future growth, and (2) "earnings
acceleration" companies which AIM believes are currently enjoying a dramatic
increase in profits.
AIM V.I. Value Fund seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by AIM to be undervalued relative to the
current or projected earnings of the companies issuing the securities, or
relative to current market values of assets owned by the companies issuing the
securities or relative to the equity markets generally. Income is a secondary
objective. The investment division corresponding to this Fund should not be
selected by contract owners who seek income as their primary investment
objective.
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173, is a wholly owned
subsidiary of A I M Management Group Inc., a holding company engaged in the
financial services business and an indirect wholly owned subsidiary of AMVESCAP
PLC. AIM is a registered adviser under the Investment Advisers Act of 1940. AIM
was organized in 1976, and, together with its subsidiaries, manages or advises
over 50 investment
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company portfolios (including the AIM V.I. Funds) encompassing a broad range of
investment objectives. The AIM V.I. Funds, as part of its operating expenses,
pays an investment advisory fee to AIM. (See "Charges to Fund Assets" on page
19.)
THE ALLIANCE FUND
The Alliance Fund is registered with the Securities and Exchange Commission as
an open-end management investment company and its investment adviser is Alliance
Capital Management L.P. ("Alliance"). One of its mutual fund portfolios is
currently available through the Separate Account. The investment objective of
the available Alliance Fund portfolio is described below. There is no guarantee
that this portfolio will be able to meet its investment objective.
Premier Growth Portfolio seeks growth of capital by pursuing aggressive
investment policies. Since investments will be made based upon their potential
for capital appreciation, current income will be incidental to the objective of
capital growth. Because of the market risks inherent in any investment, the
selection of securities on the basis of their appreciation possibilities cannot
ensure against possible loss in value.
Alliance, a Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105, is a registered adviser under the
Investment Advisers Act of 1940. Alliance Capital Management Corporation
("ACMC"), the sole general partner of Alliance, is an indirect wholly-owned
subsidiary of The Equitable Life Assurance Society of the United States, which
is in turn a wholly-owned subsidiary of the Equitable Companies Incorporated, a
holding company which is controlled by AXA, a French insurance holding company.
The Alliance Fund, as part of its operating expenses, pays an investment
advisory fee to Alliance. (See "Charges to Fund Assets" on page 19.)
THE MFS TRUST
The MFS Trust is registered with the Securities and Exchange Commission as an
open-end management investment company and its investment adviser is
Massachusetts Financial Services Company ("MFS"). Two of its mutual fund
portfolios are currently available through the Separate Account. The investment
objectives of the available MFS Trust portfolios are described below. There is
no guarantee that any portfolio will be able to meet its investment objective.
MFS Emerging Growth Series seeks 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. Emerging growth
companies include companies that MFS believes 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 the Fund's objective
of long-term growth of capital.
MFS Research Series seeks to provide long-term growth of capital and future
income. The portfolio securities of the MFS Research Series are selected by a
committee of investment research analysts. This committee includes investment
analysts employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly-owned subsidiary of MFS. The Series' assets are allocated
among industries by the analysts acting together as a group. Individual analysts
are then responsible for selecting what they view as the securities best suited
to meet the Series' investment objective within their assigned industry
responsibility.
MFS, a Delaware corporation, 500 Boylston Street, Boston, Massachusetts 02116,
is a subsidiary of Sun Life of Canada (U.S.), which, in turn, is a wholly-owned
subsidiary of Sun Life Assurance Company of Canada, and is a registered adviser
under the Investment Advisers Act of 1940. MFS is America's oldest mutual fund
organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund in the
United States, Massachusetts Investors Trust. The MFS Trust, as part of its
operating expenses, pays an investment advisory fee to MFS. (See "Charges to
Fund Assets" on page 19.)
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CERTAIN RISKS OF THE FUNDS
Investment in lower-rated debt securities, such as those in which the High Yield
Portfolio of the Series Fund, and the Developing Capital Markets Focus and
International Equity Focus Funds of the Variable Series Funds, expect to invest,
entails relatively greater risk of loss of income or principal. The Developing
Capital Markets Focus Fund of the Variable Series Funds has no established
rating criteria for the debt securities in which it may invest, and will rely on
the investment adviser's judgment in evaluating the creditworthiness of an
issuer of such securities. In an effort to minimize risk, these portfolios will
diversify holdings among many issuers. However, there can be no assurance that
diversification will protect these portfolios from widespread defaults during
periods of sustained economic downturn.
In seeking to protect the purchasing power of capital, the Natural Resources
Portfolio of the Series Fund reserves the right, when management anticipates
significant economic, political, or financial instability, such as high
inflationary pressures or upheaval in foreign currency exchange markets, to
invest a majority of its assets in companies that explore for, extract, process
or deal in gold or in asset-based securities indexed to the value of gold
bullion. The Natural Resources Portfolio will not concentrate its investments in
such securities until it has been advised that the Contracts' federal tax status
will not be adversely affected as a result.
In selecting investments for the AIM V.I. Capital Appreciation Fund, AIM is
particularly interested in companies that are likely to benefit from new or
innovative products, services or processes that should enhance such companies'
prospects for future growth in earnings. As a result of this policy, the market
prices of many of the securities purchased and held by this portfolio may
fluctuate widely. Any income received from securities held by the portfolio will
be incidental, and a contract owner should not consider a purchase of shares of
the portfolio as equivalent to a complete investment program.
For the MFS Emerging Growth Series, the nature of investing in emerging growth
companies involves greater risk than is customarily associated with investments
in more established companies. Emerging growth companies often have limited
product lines, markets or financial resources, and they may be dependent on
one-person management. In addition, there may be less research available on many
promising small and medium sized emerging growth companies, making it more
difficult to find and analyze these companies. The securities of emerging growth
companies may have limited marketability and may be subject to abrupt or erratic
market movements than securities of larger, more established growth companies or
the market averages in general. Shares of the MFS Emerging Growth Series,
therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks.
Investment in these portfolios entails relatively greater risk of loss of income
or principal. In addition, as described in the accompanying prospectus for the
portfolios, many portfolios should be considered a long-term investment and a
vehicle for diversification, and not as a balanced investment program. It may
not be appropriate to allocate all payments and investment base to a single
investment division.
THE ZERO TRUSTS
The Zero Trusts was formed to provide safety of capital and a high yield to
maturity. It seeks this through U.S. Government-backed investments which make no
periodic interest payments and, therefore, are purchased at a deep discount.
When held to maturity the investments should receive approximately a fixed
yield. The value of Zero Trust units before maturity varies more than it would
if the Zero Trusts contained interest-bearing U.S. Treasury securities of
comparable maturities.
The Zero Trust portfolios consist mainly of:
- bearer debt obligations issued by the U.S. Government stripped of their
unmatured interest coupons;
- coupons stripped from U.S. debt obligations; and
- receipts and certificates for such stripped debt obligations and coupons.
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The Zero Trusts currently available have maturity dates in years 1999 through
2011, 2013 and 2014.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of
Merrill Lynch & Co., Inc., is the sponsor for the Zero Trusts. The sponsor will
sell units of the Zero Trusts to the Separate Account and has agreed to
repurchase units when Merrill Lynch Life needs to sell them to pay benefits and
make reallocations. Merrill Lynch Life pays the sponsor a fee for these
transactions and is reimbursed through the trust charge assessed to the
divisions investing in the Zero Trusts. (See "Charges to Divisions Investing in
the Zero Trusts" on page 19.)
MERRILL LYNCH LIFE AND MLPF&S
Merrill Lynch Life is a stock life insurance company organized under the laws of
the State of Washington in 1986 and redomesticated under the laws of the State
of Arkansas in 1991. It is an indirect wholly owned subsidiary of Merrill Lynch
& Co., Inc. Merrill Lynch Life is authorized to sell life insurance and
annuities in 49 states, Guam, the U.S. Virgin Islands and the District of
Columbia. It is also authorized to offer variable life insurance and variable
annuities in most jurisdictions.
MLPF&S is a wholly owned subsidiary of Merrill Lynch & Co., Inc. and provides a
broad range of securities brokerage and investment banking services in the
United States. It provides marketing services for Merrill Lynch Life and is the
principal underwriter of the Contracts issued through the Separate Account.
Merrill Lynch Life retains MLPF&S to provide services relating to the Contracts
under a distribution agreement. (See "Selling the Contracts" on page 30.)
FACTS ABOUT THE CONTRACT
WHO MAY BE COVERED
The Contract is available in Massachusetts, Pennsylvania, and Vermont. Merrill
Lynch Life will issue a Contract on the life of the insured provided the
relationship between the applicant and the insured meets Merrill Lynch Life's
insurable interest requirements and provided the insured is not over age 85 or
under age 20. The insured's issue age will be determined using the insured's age
as of his or her birthday nearest the contract date. The insured must also meet
Merrill Lynch Life's medical and other underwriting requirements, which will
include undergoing a medical examination.
Merrill Lynch Life assigns insureds to underwriting classes which determine the
current cost of insurance rates used in calculating cost of insurance
deductions. Contracts may be issued on insureds in standard, non-smoker or
preferred non-smoker underwriting classes. Contracts may also be issued on
insureds in a substandard underwriting class. For a discussion of the effect of
underwriting classification on deductions for cost of insurance, see "Cost of
Insurance" on page 18.
PURCHASING A CONTRACT
To purchase a Contract, the contract owner must complete an application and make
a payment. The payment is required to put the Contract into effect. In the
application, the contract owner selects the face amount of the Contract. The
amount of the minimum initial payment for a given Contract depends on the face
amount selected and the issue age, sex and underwriting class of the insured.
The minimum initial payment for any Contract is 75% of the base premium. Merrill
Lynch Life will not accept an initial payment for a specified face amount that
will provide a guarantee period of less than two years. (See "Selecting the
Initial Face Amount" and "Initial Guarantee Period" on page 15). Merrill Lynch
Life also will not accept an initial payment that would cause the Contract to
fail to qualify as life insurance under federal tax law as interpreted by
Merrill Lynch Life.
Insurance coverage generally begins as of the contract date, which is usually
the next business day following receipt of the initial payment at Merrill Lynch
Life's Service Center. Temporary life insurance coverage may be provided prior
to the contract date under the terms of a temporary insurance agreement. In
accordance with Merrill Lynch Life's underwriting rules, temporary life
insurance coverage may not exceed $300,000 and may
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not be in effect for more than 90 days. As provided for under state insurance
law, the contract owner, to preserve insurance age, may be permitted to backdate
the Contract. In no case may the contract date be more than six months prior to
the date the application was completed. Charges for cost of insurance and rider
costs for the backdated period are deducted on the contract date.
If Merrill Lynch Life determines that, based on the contract owner's initial
payment and face amount, the Contract will be a modified endowment contract,
Merrill Lynch Life will issue the Contract provided the contract owner signs a
statement acknowledging that the Contract is a modified endowment contract or
agrees either to reduce the initial payment or to increase the face amount to a
level at which the Contract will not be a modified endowment contract. For a
discussion of the tax consequences of purchasing a modified endowment contract,
see "Tax Considerations" on page 30.
Selecting the Initial Face Amount. The minimum initial face amount is $250,000
or that face amount which generates a $4,000 base premium, if larger. The
maximum face amount that may be specified for a given initial payment is the
amount which will provide an initial guarantee period of at least two years. For
the same initial payment amount, the larger the face amount requested, the
shorter the guarantee period. The initial face amount will change if the
contract owner changes the death benefit option or takes a partial withdrawal.
Subject to certain conditions, the contract owner may purchase additional
insurance coverage through an additional insurance rider. (See "Additional
Insurance Rider" below.)
Initial Guarantee Period. The initial guarantee period for a Contract will be
determined by the initial payment, face amount and any additional insurance
rider face amount. The guarantee period will be adjusted each time an additional
payment is made, when a partial withdrawal is taken, when a death benefit option
change results in a change in face amount, and when the additional insurance
rider face amount is increased or decreased.
The guarantee period is the period of time Merrill Lynch Life guarantees that
the Contract will remain in force regardless of investment experience unless the
debt exceeds certain values. The guarantee period is based on the guaranteed
maximum cost of insurance rates in the Contract, guaranteed maximum rider costs
(if an additional insurance rider is elected), the contract loading and a 5%
interest assumption. This means that for a given initial payment and face
amount, different insureds will have different guarantee periods depending on
the age, sex and underwriting class of the insureds. For example, an older
insured will have a shorter guarantee period than a younger insured in the same
underwriting class.
The maximum guarantee period is for the whole of life of the insured.
ADDITIONAL INSURANCE RIDER
The contract owner may purchase additional insurance coverage payable to the
beneficiary on the death of the insured. Additional insurance coverage may be
purchased through an additional insurance rider when the Contract is purchased.
Under Merrill Lynch Life's current procedures, the maximum additional insurance
rider face amount at the time the Contract is purchased is three times the face
amount of the Contract. The rider can also be added on any contract anniversary
thereafter, as long as an application is completed, satisfactory evidence of
insurability of the insured is provided, and the insured has not attained the
age of 85. The minimum additional insurance rider face amount at any time is
$100,000. A cost of insurance charge for the rider ("rider charge") will be
deducted from the Contract's investment base on each processing date. The rider
charge will be based on the same cost of insurance rates as the Contract. (See
"Cost of Insurance" on page 18.) Because insurance coverage through an
additional insurance rider is purchased through deductions from the Contract's
investment base that are not taken into account in determining the base premium,
there is no additional contract loading associated with this coverage.
Once each year, the additional insurance rider face amount may be increased
(subject to evidence of insurability of the insured) or decreased (after the
seventh contract anniversary); however, any change in the additional insurance
rider face amount must be at least $100,000. The effective date of the change
will be the contract anniversary next following underwriting approval of the
change. As of the effective date of the increase or decrease in the additional
insurance rider face amount, Merrill Lynch Life uses the existing fixed
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base and the face amount of the Contract plus the new additional insurance rider
face amount to calculate a new guarantee period. A decrease in the additional
insurance rider face amount will increase the guarantee period. An increase in
the additional insurance rider face amount will decrease the guarantee period.
An increase will not be allowed on the first contract anniversary if the face
amount of the Contract plus the new rider face amount provide a guarantee period
of less than one year from the effective date of the increase.
A decrease in the additional insurance rider face amount can cause a Contract
which is not a modified endowment contract to become a modified endowment
contract. In such a case, Merrill Lynch Life will not process the decrease until
the contract owner confirms in writing his or her intent to convert the Contract
to a modified endowment contract. For a discussion of the tax consequences of
increasing or decreasing the additional insurance rider face amount, see "Tax
Considerations" on page 30.
ADDITIONAL PAYMENTS
After the "free look" period, contract owners may make additional payments while
the insured is living. Additional payments must be submitted with an additional
payment form. The minimum Merrill Lynch Life will accept for these payments is
$100. For Contracts that are not modified endowment contracts, making an
additional payment may cause them to become modified endowment contracts. (See
"Tax Considerations" on page 30.) Merrill Lynch Life will return that portion of
any additional payment beyond that necessary to extend the guarantee period to
the whole of life of the insured. Merrill Lynch Life will also return that
portion of any additional payment that would cause the Contract to fail to
qualify as life insurance under federal tax law as interpreted by Merrill Lynch
Life.
Contract owners may specify an additional payment amount on the application to
be paid on a monthly (for payments from a CMA account only), quarterly,
semi-annual, or annual basis. For additional payments not being withdrawn from a
CMA account, Merrill Lynch Life will send reminder notices beginning in the
second contract year. If a contract owner has the CMA Insurance Service, such
additional payments may be withdrawn automatically from his or her CMA account
and transferred to his or her Contract. The withdrawals will continue under the
selected plan until Merrill Lynch Life is notified otherwise.
EFFECT OF ADDITIONAL PAYMENTS
Generally, any additional payments will be accepted the day they are received at
the Service Center. However, if acceptance of any portion of the payment would
cause a Contract which is not a modified endowment contract to become a modified
endowment contract, to the extent feasible, Merrill Lynch Life will not accept
that portion of the payment unless the contract owner confirms in writing his or
her intent to convert the Contract to a modified endowment contract. Merrill
Lynch Life may return that portion of the payment pending receipt of
instructions from the contract owner.
On the date Merrill Lynch Life receives and accepts an additional payment,
Merrill Lynch Life will:
- increase the Contract's investment base by the amount of the payment less
contract loading applicable to the payment;
- reflect the payment in the calculation of the variable insurance amount
(see "Variable Insurance Amount" on page 24); and
- increase the fixed base by the amount of the payment less contract
loading applicable to the payment (see "The Contract's Fixed Base" on
page 21).
As of the processing date on or next following receipt and acceptance of an
additional payment, Merrill Lynch Life will increase the guarantee period if the
guarantee period prior to receipt and acceptance of an additional payment is
less than for the whole of life of the insured.
Merrill Lynch Life will determine the increase in the guarantee period by taking
the immediate increase in the cash value resulting from the additional payment
and adding to that interest at the annual rate of 5% for the period from the
date Merrill Lynch Life receives and accepts the payment to the contract
processing date on or next following such date. This is the guarantee adjustment
amount. The guarantee adjustment amount is
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added to the fixed base and the resulting new fixed base is used to calculate a
new guarantee period. For a discussion of the effect of additional payments on a
Contract's guarantee period, see "Additional Payments" in the Examples on page
44.
If any excess sales load has been applied to keep the Contract in force, any
additional payment, less contract loading, will first be applied to recover such
excess load (see "Excess Sales Load" on page 18). Next, unless specified
otherwise, if there is any debt, any payment made will be applied as a loan
repayment, with any excess applied as an additional payment. (See "Loans" on
page 21.)
INVESTMENT BASE
A Contract's investment base is the amount available for investment at any time.
It is the sum of the amounts invested in each of the investment divisions. On
the contract date, the investment base equals the initial payment less contract
loading and charges for cost of insurance and rider costs. Merrill Lynch Life
adjusts the investment base daily to reflect the investment performance of the
investment divisions the contract owner has selected. (See "Net Rate of Return
for an Investment Division" on page 35.) The investment performance reflects the
deduction of Separate Account charges. (See "Charges to the Separate Account" on
page 19.)
Partial withdrawals, loans and deductions for cost of insurance, rider costs and
net loan cost decrease the investment base. (See "Charges Deducted from the
Investment Base" below, "Partial Withdrawals" on page 23, and "Loans" on page
21.) Loan repayments and additional payments increase it. Contract owners may
elect from which investment divisions loans and partial withdrawals are taken
and to which investment divisions repayments and additional payments are added.
If an election is not made, Merrill Lynch Life will allocate increases and
decreases proportionately to the contract owner's investment base as then
allocated in the investment divisions.
Initial Investment Allocation and Preallocation. Through the first 14 days
following the in force date, the initial payment less contract loading will
remain in the division investing in the Money Reserve Portfolio. Thereafter, the
investment base will be reallocated to the investment divisions selected by the
contract owner on the application, if different. The contract owner may select
up to five of the 37 investment divisions in the Separate Account.
Changing the Allocation. After the first 14 days following the in force date, a
contract owner's investment base may be invested in up to five investment
divisions at any one time. Currently, investment allocations may be changed as
often as desired. Merrill Lynch Life reserves the right to charge up to $25 for
each change in excess of six each year. In order to change their investment base
allocation, contract owners must call or write to the Service Center. (See "Some
Administrative Procedures" on page 27.)
Zero Trust Allocations. Merrill Lynch Life will notify contract owners 30 days
before a Zero Trust in which they have invested matures. Contract owners must
notify Merrill Lynch Life by calling or writing at least seven days before the
maturity date how to reinvest their funds in the division investing in that Zero
Trust. If Merrill Lynch Life is not notified, it will move the contract owner's
investment base in that division to the investment division investing in the
Money Reserve Portfolio.
Units of a specific Zero Trust may no longer be available when a request for
allocation is received. Should this occur, Merrill Lynch Life will attempt to
notify the contract owner immediately so that the request can be changed.
Allocation to the Division Investing in the Natural Resources
Portfolio. Merrill Lynch Life and the Separate Account reserve the right to
suspend the sale of units of the investment division investing in the Natural
Resources Portfolio in response to conditions in the securities markets or
otherwise.
CHARGES DEDUCTED FROM THE INVESTMENT BASE
Merrill Lynch Life deducts the charges described below to cover costs and
expenses, services provided and risks assumed under the Contracts. The amount of
a charge may not necessarily correspond to the costs associated with providing
the services or benefits indicated by the designation of the charge or
associated with
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the particular Contract. For example, the contract loading may not fully cover
all of the sales and distribution expenses actually incurred by Merrill Lynch
Life, and proceeds from other charges, including the mortality and expense risk
charge, may be used in part to cover such expenses.
The charges described below are deducted pro-rata from the investment base on
processing dates.
Cost of Insurance. Merrill Lynch Life deducts the cost of insurance from the
investment base on the contract date and on each processing date thereafter.
This charge compensates Merrill Lynch Life for the cost of providing life
insurance coverage for the insured. It is based on the underwriting class, sex
(except where unisex rates are required by state law) and attained age of the
insured and the Contract's net amount at risk.
To determine the cost of insurance, Merrill Lynch Life multiplies the current
cost of insurance rate by the Contract's net amount at risk. The net amount at
risk is the difference, as of a processing date, between the death benefit
(adjusted for interest at an annual rate of 5%) and the cash value, but before
the deduction for cost of insurance.
Current cost of insurance rates may be equal to or less than the guaranteed cost
of insurance rates depending on the underwriting class, sex (except where unisex
rates are required by state law) and attained age of the insured. Current cost
of insurance rates are lower for insureds in a preferred non-smoker underwriting
class than for insureds of the same age in a non-smoker underwriting class and
are lower for insureds in a non-smoker underwriting class than for insureds of
the same age and sex in a standard underwriting class.
Merrill Lynch Life guarantees that the current cost of insurance rates will
never exceed the maximum guaranteed rates shown in the Contract. The maximum
guaranteed rates for Contracts (other than those issued on a substandard basis)
do not exceed the rates based on the 1980 Commissioners Standard Ordinary
Mortality Table (CSO Table). Merrill Lynch Life may use rates that are equal to
or less than these rates, but never greater. The maximum rates for Contracts
issued on a substandard basis are based on a multiple of the 1980 CSO Table. Any
change in the cost of insurance rates will apply to all insureds of the same
age, sex and underwriting class whose Contracts have been in force for the same
length of time.
Net Loan Cost. The net loan cost is explained under "Loans" on page 21.
Rider Charges. Rider charges are deducted on the contract date and on each
processing date thereafter. These charges are explained under "Additional
Insurance Rider" on page 15.
CONTRACT LOADING
Chargeable to each payment is an amount called the contract loading. The
contract loading equals 50% of each payment made until cumulative payments have
been made in an amount equal to two base premiums, and 5% of each payment
thereafter. This charge consists of a sales load, a charge for federal taxes and
a state and local premium tax charge.
The sales load, equal to 46.25% of each payment through the second base premium
and 1.25% of each payment thereafter, compensates Merrill Lynch Life for sales
expenses and the costs for underwriting and issuing the Contract. The sales load
may be reduced in certain group or sponsored arrangements as described on page
29.
The charge for federal taxes is equal to 1.25% of each payment.
The state and local premium tax charge is equal to 2.5% of each payment.
Excess Sales Load. Excess sales load is equal to any sales load deducted from
the first two base premiums in excess of 30% of premiums paid up to an amount
equal to the first base premium, and then 10% of premiums paid up to an amount
equal to the second base premium. It is calculated and applied in the following
situations only during the first 24 months after the Contract is issued:
- It is refunded if the Contract is surrendered during the first 24 months
after issue.
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- It is added to the cash value so as to keep the Contract in force if debt
exceeds the larger of (i) cash value plus any excess sales load not
previously applied to keep the Contract in force and (ii) the fixed base
during the first 24 months after issue.
- It is added to the cash value in determining the variable insurance
amount during the first 24 months after issue.
CHARGES TO THE SEPARATE ACCOUNT
Each day Merrill Lynch Life deducts an asset charge from each division of the
Separate Account. The total amount of this charge is computed at .90% annually
at the beginning of the year. Of this amount, .75% is for
- the risk assumed by Merrill Lynch Life that insureds as a group will live
for a shorter time than actuarial tables predict. As a result, Merrill
Lynch Life would be paying more in death benefits than planned; and
- the risk assumed by Merrill Lynch Life that it will cost more to issue
and administer the Contracts than expected.
The remaining amount, .15%, is for
- the risk assumed by Merrill Lynch Life with respect to potentially
unfavorable investment results. This risk is that the Contract's cash
value cannot cover the charges due during the guarantee period.
If the asset charge is inadequate to cover the actual expenses of mortality,
maintenance, and administration, Merrill Lynch Life will bear the loss. If the
charge exceeds the actual expenses, the excess will be added to Merrill Lynch
Life's profit and may be used to finance distribution expenses. The total asset
charge may not be increased.
Charges to Divisions Investing in the Zero Trusts. Merrill Lynch Life assesses
a daily trust charge against the assets of each division investing in the Zero
Trusts. This charge reimburses Merrill Lynch Life for the transaction charge
paid to MLPF&S when units are sold to the Separate Account.
The trust charge is currently equivalent to .34% annually at the beginning of
the year. It may be increased, but will not exceed .50% annually at the
beginning of the year. The charge is based on cost (taking into account loss of
interest) with no expected profit.
Tax Charges. Merrill Lynch Life has the right under the Contract to impose a
charge against Separate Account assets for any taxes imposed on the Separate
Account's investment earnings. (See "Merrill Lynch Life's Income Taxes" on page
34.)
CHARGES TO FUND ASSETS
Charges to Series Fund Assets. The Series Fund incurs operating expenses and
pays a monthly advisory fee to MLAM. This fee equals an annual rate of:
- .50% of the first $250 million of the aggregate average daily net assets
of the Series Fund;
- .45% of the next $50 million of such assets;
- .40% of the next $100 million of such assets;
- .35% of the next $400 million of such assets; and
- .30% of such assets over $800 million.
One or more of the insurance companies investing in the Series Fund has agreed
to reimburse the Series Fund so that the ordinary expenses of each portfolio
(which include the monthly advisory fee) do not exceed .50% of the portfolio's
average daily net assets. These companies have also agreed to reimburse MLAM for
any amounts it pays under the investment advisory agreement, as described below.
These reimbursement
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obligations will remain in effect so long as the advisory agreement remains in
effect and cannot be amended or terminated without Series Fund approval.
Charges to Variable Series Funds Assets. The Variable Series Funds incurs
operating expenses and pays a monthly advisory fee to MLAM. This fee equals an
annual rate of .60% of the average daily net assets of the Basic Value Focus
Fund, Global Bond Focus Fund and Global Utility Focus Fund. This fee equals an
annual rate of .30%, .75%, 1.00%, and .75% of the average daily net assets of
the Index 500 Fund, the International Equity Focus Fund, the Developing Capital
Markets Focus Fund, and the Special Value Focus Fund, respectively.
MLAM and Merrill Lynch Life Agency, Inc. have entered into agreements which
limit the operating expenses, exclusive of any distribution fees imposed on
Class B shares, paid by each fund in a given year to 1.25% of its average daily
net assets. These reimbursement agreements provide that any such expenses in
excess of 1.25% of average daily net assets will be reimbursed to the fund by
MLAM which, in turn, will be reimbursed by Merrill Lynch Life Agency, Inc.
Charges to AIM V.I. Funds Assets. The AIM V.I. Funds incurs operating expenses
and pays a monthly advisory fee to AIM, which serves as the investment adviser
to each fund of the AIM V.I. Funds. As the investment adviser, AIM receives from
the AIM V.I. Capital Appreciation Fund and the AIM V.I. Value Fund an advisory
fee at an annual rate of .65% of the first $250 million of each fund's average
daily net assets and .60% of each fund's average daily net assets in excess of
$250 million.
Effective May 1, 1998, the AIM V.I. Funds reimburse AIM in an amount up to 0.25%
of the average net asset value of each fund, for expenses incurred in providing,
or assuring that participating insurance companies provide, certain
administrative services. Currently the fee only applies to the average net asset
value of each fund in excess of the net asset value of each fund as calculated
on April 30, 1998.
Charges to Alliance Fund Assets. The Alliance Fund incurs operating expenses
and pays a monthly advisory fee to Alliance, which serves as the investment
adviser to each fund of the Alliance Fund. As the investment adviser, Alliance
receives from the Alliance Premier Growth Portfolio an advisory fee at an annual
rate of 1.00% of the fund's average daily net assets.
Charges to MFS Trust Assets. The MFS Trust incurs operating expenses and pays a
monthly advisory fee to MFS, which serves as the investment adviser to each of
the funds of MFS Trust. As the investment adviser, MFS receives from the MFS
Emerging Growth Series and MFS Research Series an advisory fee, computed and
paid monthly, at an annual rate of .75% of the average daily net assets of the
respective fund.
GUARANTEE PERIOD
Merrill Lynch Life guarantees that the Contract will stay in force for the
guarantee period unless the debt exceeds certain contract values. (See "Loans"
on page 21.) Additional payments will extend the guarantee period until such
time as it is guaranteed for the whole of life of the insured. The guarantee
period will be affected by partial withdrawals, by changes in death benefit
options and by increases and decreases in the face amount of the additional
insurance rider. A reserve is held in Merrill Lynch Life's general account to
support this guarantee.
When the Guarantee Period is Less Than for Life. After the end of the guarantee
period, Merrill Lynch Life may cancel the Contract if the cash value plus
certain excess sales load on a processing date is insufficient to cover charges
due on that date. (See "Charges Deducted from the Investment Base" on page 17
and "Contract Loading -- Excess Sales Load" on page 18.)
Merrill Lynch Life will notify the contract owner at the owner's last known
address before cancelling the Contract. The contract owner will then have 61
days to pay an amount which, after deducting contract loading, equals at least
three times the charges that were due (and not deducted) on the processing date
when the cash value was determined to be insufficient, plus any excess sales
load previously applied to keep the Contract in force. If this amount is paid,
Merrill Lynch Life will deduct the charges due on the processing date and will
apply the balance to the investment base. Merrill Lynch Life will cancel the
Contract at the end of
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this grace period if payment has not yet been received. At that time, Merrill
Lynch Life will deduct any charges for cost of insurance and rider costs that
were applicable to the grace period and refund any unearned charges for the cost
of insurance, rider costs and any excess sales load not previously applied to
keep the Contract in force.
Subject to state regulation, if Merrill Lynch Life cancels a Contract, it may be
reinstated while the insured is still living if:
- the reinstatement is requested within three years after the end of the
grace period;
- Merrill Lynch Life receives satisfactory evidence of the insured's
insurability; and
- the reinstatement payment is made. The reinstatement payment is the
minimum payment for which Merrill Lynch Life would then issue a Contract
for the minimum guarantee period with the same face amount as the
original Contract, based on the insured's attained age and underwriting
class as of the effective date of the reinstated Contract.
A reinstated Contract will be effective on the processing date on or next
following the date the reinstatement application is approved.
The Contract's Fixed Base. On the contract date, the fixed base equals the cash
value. From then on, the fixed base is calculated in the same manner as the cash
value except that the calculation substitutes 5% for the net rate of return, the
guaranteed maximum cost of insurance rates and guaranteed maximum rider costs
are substituted for the current rates and it is calculated as though there had
been no loans or repayments. The fixed base is equivalent to the cash value for
a comparable fixed benefit contract with the same face amount and guarantee
period. After the end of the guarantee period the fixed base is zero. The fixed
base is used to limit Merrill Lynch Life's right to cancel the Contract during
the guarantee period.
Automatic Adjustment. On any contract anniversary, if the cash value is greater
than the fixed base necessary to cause the guarantee period to equal the whole
of life of the insured, the guarantee period will be extended to the whole of
life of the insured.
CASH VALUE
A Contract's cash value fluctuates daily with the investment results of the
investment divisions selected. Merrill Lynch Life does not guarantee any minimum
cash value. The cash value on any date equals the total investment base plus
debt plus unearned charges for cost of insurance and rider costs less any
accrued net loan cost since the last contract anniversary (or since the contract
date during the first contract year).
Cancelling the Contract. A contract owner may cancel the Contract at any time
while the insured is living. The request must be in writing in a form
satisfactory to Merrill Lynch Life. All rights to death benefits will end on the
date the written request is sent to Merrill Lynch Life.
The contract owner will then receive the net cash surrender value. The contract
owner may elect to receive this amount either in a single payment or under one
or more income plans described on page 29. The net cash surrender value will be
determined as of the date of receipt of the written request at the Service
Center.
If the Contract is cancelled during the first 24 months after the issue date of
the Contract, excess sales load, as described above, will be refunded except to
the extent previously applied to keep the Contract in force. (See "Contract
Loading -- Excess Sales Load" on page 18.)
LOANS
Contract owners may use the Contract as collateral to borrow funds from Merrill
Lynch Life. The minimum loan is $1,000. Contract owners may repay all or part of
the loan at any time during the insured's lifetime. Each repayment must be for
at least $1,000 or the amount of the debt, if less. Certain states won't permit
establishing a minimum amount that can be borrowed or repaid. If any excess
sales load was previously applied to keep the Contract in force, any loan
repayment will first be applied to repay such excess sales load.
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When a loan is taken, Merrill Lynch Life transfers a portion of the contract
owner's investment base equal to the amount borrowed out of the investment
divisions and holds it as collateral in its general account. When a loan
repayment is made, Merrill Lynch Life transfers an amount equal to the repayment
from the general account to the investment divisions. The contract owner may
select from which divisions borrowed amounts should be taken and which divisions
should receive repayments (including interest payments). Otherwise, Merrill
Lynch Life will take the borrowed amounts proportionately from and make
repayments proportionately to the contract owner's investment base as then
allocated in the investment divisions.
If a contract owner has the CMA Insurance Service, loans may be transferred to
and loan repayments transferred from his or her CMA account.
Effect on Death Benefit and Cash Value. Whether or not a loan is repaid, taking
a loan will have a permanent effect on a Contract's cash value and may have a
permanent effect on its death benefit. This is because the collateral for a loan
does not participate in the performance of the investment divisions while the
loan is outstanding. If the amount credited to the collateral is more than what
is earned in the investment divisions, the cash value may be higher as a result
of the loan, as may be the death benefit. Conversely, if the amount credited is
less, the cash value will be lower, as may be the death benefit. In that case,
the lower cash value may cause the Contract to lapse sooner than if no loan had
been taken.
Loan Value. The loan value of a Contract equals 90% of its cash value. The sum
of all outstanding loan amounts plus accrued interest is called debt. The
maximum amount that can be borrowed at any time is the difference between the
loan value and the debt.
Interest. While a loan is outstanding, Merrill Lynch Life may charge interest
at a maximum rate of 6% annually, subject to state regulation. Currently Merrill
Lynch Life charges interest of 5.75% annually. Interest accrues each day and
payments are due at the end of each contract year. IF THE INTEREST ISN'T PAID
WHEN DUE, IT IS ADDED TO THE OUTSTANDING LOAN AMOUNT. Interest paid on a loan
generally is not tax deductible.
The amount held in Merrill Lynch Life's general account as collateral for a loan
earns interest at a minimum of 4% annually. Currently a loan amount earns
interest at 5%.
Merrill Lynch Life may change the interest rates currently charged on loans and
the rates of interest earned on the loan collateral amounts. Any such changes
will be effective on the contract anniversary following the date such rates are
declared.
Net Loan Cost. Whether or not loan interest is paid when due, on the contract
anniversary, Merrill Lynch Life reduces the investment base by the net loan cost
(the difference between the interest charged and the earnings on the amount held
as collateral in the general account) and adds that amount to the amount held in
the general account as collateral for the loan. Since the interest charged is
5.75% and the collateral earnings on such amounts are 5%, the current net loan
cost on loaned amounts is .75%. The net loan cost is taken into account in
determining the net cash surrender value of the Contract if the date of
surrender is not a contract anniversary.
Cancellation Due to Excess Debt. If on a processing date the debt exceeds the
larger of (i) the cash value plus certain excess sales load, and less charges
due on that date, and (ii) the fixed base (if any), Merrill Lynch Life will
cancel the Contract 61 days after a notice of intent to terminate the Contract
is mailed to the contract owner unless Merrill Lynch Life has received at least
the minimum repayment amount specified in the notice. During the first 24 months
after the Contract is issued, Merrill Lynch Life will add excess sales load to
the cash value as necessary to keep the Contract in force if debt exceeds the
larger of the cash value less charges due and the fixed base. (See "Contract
Loading -- Excess Sales Load" on page 18.) Upon termination, Merrill Lynch Life
will deduct any charges for cost of insurance and rider costs that may be
applicable to the 61-day period and refund any unearned charges for cost of
insurance, riders costs and any excess sales load not previously applied to keep
the Contract in force. If the Contract lapses with a loan outstanding, adverse
tax consequences may result. (See "Tax Considerations -- Tax Treatment of Loans
and Other Distributions" on page 31.)
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PARTIAL WITHDRAWALS
Beginning in contract year sixteen, and subject to state regulation, a contract
owner may make partial withdrawals by submitting a request in a form
satisfactory to Merrill Lynch Life. The effective date of the withdrawal is the
date a withdrawal request is received at the Service Center. Contract owners
will receive the withdrawal amount in a single payment.
Contract owners may make one partial withdrawal each contract year. The minimum
amount for each partial withdrawal is $1,000. The remaining cash value less debt
following a partial withdrawal must equal or exceed $5,000. The amount of any
partial withdrawal may not exceed the loan value as of the effective date of the
partial withdrawal less any debt. A partial withdrawal may not be repaid.
Effect on Investment Base, Fixed Base, Cash Value and Death Benefit. As of the
effective date of the withdrawal, the investment base, fixed base, cash value
and, if the contract owner has elected death benefit option 1, the face amount
of the Contract will each be reduced by the amount of the partial withdrawal.
Merrill Lynch Life allocates this reduction proportionately to the investment
base in each of the contract owner's investment divisions unless notified
otherwise. The variable insurance amount will also reflect the partial
withdrawal as of the effective date.
Effect on Guarantee Period. As of the processing date on or next following the
effective date of a partial withdrawal, Merrill Lynch Life calculates a new
guarantee period. This is done by taking the immediate decrease in cash value
resulting from the partial withdrawal and adding to that amount interest at an
annual rate of 5% for the period from the date of the withdrawal to the contract
processing date on or next following such date. This is the guarantee adjustment
amount. The guarantee adjustment amount is subtracted from the fixed base and
the resulting new fixed base is used to calculate a new guarantee period. For a
discussion of the effect of partial withdrawals on a Contract's guarantee
period, see "Partial Withdrawals" in the Examples on page 45.
A partial withdrawal may cause a Contract which is not a modified endowment
contract to become a modified endowment contract. In such a case, Merrill Lynch
Life will not process the partial withdrawal until the contract owner confirms
in writing his or her intent to convert the Contract to a modified endowment
contract. For a discussion of the tax issues associated with a partial
withdrawal, see "Tax Considerations" on page 30.
DEATH BENEFIT PROCEEDS
Merrill Lynch Life will pay the death benefit proceeds to the beneficiary upon
receipt of all information needed to process the payment, including due proof of
the death of the insured. When Merrill Lynch Life is first provided reliable
notification of the insured's death by a representative of the owner or the
insured, investment base may be transferred to the division investing in the
Money Reserve Portfolio, pending payment of death benefit proceeds.
If the insured should die within two years from the Contract's issue date,
within two years from the effective date of any requested change in the death
benefit option requiring evidence of insurability, or within two years of an
increase in the additional insurance rider face amount, due proof of the
insured's death should be sent promptly to the Service Center since Merrill
Lynch Life may pay only a limited benefit or contest the Contract. (See
"Incontestability" and "Payment in Case of Suicide" on page 28.)
Death Benefit Proceeds. The death benefit payable depends on the death benefit
option in effect on the date of death.
- Under option 1, the death benefit is equal to the larger of the face
amount or the variable insurance amount.
- Under option 2, the death benefit is equal to the larger of the face
amount plus the cash value or the variable insurance amount.
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Contract owners who wish to have investment experience reflected in insurance
coverage should choose option 2. Contract owners who wish to have insurance
coverage that generally does not vary in amount should choose option 1.
The death benefit will never be less than the amount required to keep the
Contract qualified as life insurance under federal income tax laws.
To determine the death benefit proceeds, Merrill Lynch Life will subtract from
the death benefit any debt and add to the death benefit any rider benefits
payable.
The values used in calculating the death benefit proceeds are as of the date of
death. If the insured dies during the grace period, the death benefit proceeds
equal the death benefit proceeds in effect immediately prior to the grace period
reduced by any overdue charges. (See "When the Guarantee Period is Less Than for
Life" on page 20.)
Variable Insurance Amount. Merrill Lynch Life determines the variable insurance
amount daily by:
- calculating the cash value (plus any excess sales load during the first
24 months after the Contract is issued); and
- multiplying it by the cash value corridor factor (explained below) for
the insured at his or her attained age.
The variable insurance amount will never be less than required by federal tax
law.
Cash Value Corridor Factor. The cash value corridor factor is used to determine
the amount of death benefit purchased by $1.00 of cash value. It is based on the
attained age of the insured on the date of calculation. It decreases daily as
the insured's age increases. As a result, the variable insurance amount as a
multiple of the cash value will decrease over time. A table of cash value
corridor factors as of each anniversary is included in the Contract.
Table of Illustrative Cash Value Corridor Factors
on Anniversaries
<TABLE>
<CAPTION>
ATTAINED AGE FACTOR
------------ ------
<S> <C>
40 and under 250%
45 215%
55 150%
65 120%
75-90 105%
95 and over 100%
</TABLE>
Changing the Death Benefit Option. On each contract anniversary beginning with
the fifteenth, the contract owner may change the death benefit option. Merrill
Lynch Life will change the face amount in order to keep the death benefit
constant on the effective date of the change. Therefore, if the change is from
option 1 to option 2, the face amount of the Contract will be decreased by the
cash value on the date of the change. A change in the death benefit option will
not be permitted if it would result in a face amount of less than $100,000. If
the change is from option 2 to option 1, the face amount of the Contract will be
increased by the cash value on the date of the change. For a discussion of the
effect of a change in the death benefit option on a Contract, see "Changing the
Death Benefit Option" in the Examples on page 46.
If the contract owner requests a change in the death benefit option from option
1 to option 2, evidence of insurability in a form satisfactory to Merrill Lynch
Life that the insured is insurable may be required. In no event will a change be
permitted if, after the change, the Contract would not qualify as life insurance
under federal tax laws as interpreted by Merrill Lynch Life.
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A change in the death benefit option may cause a Contract which is not a
modified endowment contract to become a modified endowment contract. In such a
case, Merrill Lynch Life will not process the change until the contract owner
confirms in writing his or her intent to convert the Contract to a modified
endowment contract. For a discussion of the tax issues associated with a change
in the death benefit option, see "Tax Considerations" on page 30.
PAYMENT OF DEATH BENEFIT PROCEEDS
Merrill Lynch Life will generally pay the death benefit proceeds to the
beneficiary within seven days after all the information needed to process the
payment is received at its Service Center. Merrill Lynch Life will add interest
from the date of the insured's death to the date of payment at an annual rate of
at least 4%. The beneficiary may elect to receive the proceeds either in a
single payment or under one or more income plans described on page 29.
Payment may be delayed if the Contract is being contested or under the
circumstances described in "Using the Contract" on page 26 and "Other Contract
Provisions" on page 28. If a delay is necessary and death of the insured occurs
prior to the end of the guarantee period, Merrill Lynch Life may delay payment
of any excess of the death benefit over the face amount. After the guarantee
period has expired, Merrill Lynch Life may delay payment of the entire death
benefit.
RIGHTS TO CANCEL OR CONVERT
"Free Look" Period. A contract owner may cancel his or her Contract during the
"free look" period by returning it for a refund. Generally, the "free look"
period ends the later of ten days after the Contract is received, 45 days after
the contract owner completes the application or ten days after Merrill Lynch
Life mails or personally delivers to the contract owner the Notice of Withdrawal
Right. To cancel the Contract during the "free look" period, the contract owner
must mail or deliver the Contract to Merrill Lynch Life's Service Center or to
the registered representative who sold it. Merrill Lynch Life will refund the
payment made without interest. If cancelled, Merrill Lynch Life may require the
contract owner to wait six months before applying again.
Converting the Contract. A contract owner may convert the Contract for a
contract with benefits that do not vary with the investment results of a
separate account. Once a contract owner exercises this right, the investment
base and additional payments may not be allocated to the Separate Account. A
request to convert must be made in writing within 24 months after the issue date
of the Contract while the insured is living. The conversion will not require
evidence of insurability.
The conversion will be accomplished by adding an endorsement to the Contract and
transferring, without charge, the investment base in the Separate Account to the
guaranteed interest division ("GID"). Assets in the guaranteed interest division
are held in Merrill Lynch Life's general account. The investment base at the
time of conversion and any additional payments will remain in the guaranteed
interest division and be credited with interest at a rate declared by Merrill
Lynch Life. A declared interest rate for any amount allocated to the guaranteed
interest division will be in effect for at least one year. After conversion, the
Contract will not be subject to charges to the Separate Account. For a
discussion of the tax consequences of converting the Contract, see "Tax
Considerations" on page 30.
REPORTS TO CONTRACT OWNERS
After the end of each processing period, contract owners will be sent a
statement of the allocation of their investment base, death benefit, cash value,
any debt and, if there has been a change, the face amount, the guarantee period
and the additional insurance rider face amount. All figures will be as of the
end of the immediately preceding processing period. The statement will show the
amounts deducted from or added to the investment base during the processing
period. The statement will also include any other information that may be
currently required by a contract owner's state.
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Contract owners will receive confirmation of all financial transactions. Such
confirmations will show the price per unit of each of the contract owner's
investment divisions, the number of units a contract owner has in the investment
division and the value of the investment division computed by multiplying the
quantity of units by the price per unit. (See "Net Rate of Return for an
Investment Division" on page 35.) The sum of the values in each investment
division is a contract owner's investment base.
Contract owners will also be sent an annual and a semi-annual report containing
financial statements and a list of portfolio securities of the Funds, as
required by the Investment Company Act of 1940.
CMA Account Reporting. Contract owners who have the CMA Insurance Service will
have certain Contract information included as part of their regular monthly CMA
account statement. It will list the investment base allocation, death benefit,
cash value, debt and any CMA account activity affecting the Contract during the
month.
MORE ABOUT THE CONTRACT
USING THE CONTRACT
Ownership. The contract owner is usually the insured, unless another owner has
been named in the application. The contract owner has all rights and options
described in the Contract.
The contract owner may want to name a contingent owner. If the contract owner
dies before the insured, the contingent owner will own the contract owner's
interest in the Contract and have all the contract owner's rights. If the
contract owner doesn't name a contingent owner, the contract owner's estate will
own the contract owner's interest in the Contract upon the owner's death.
If there is more than one contract owner, Merrill Lynch Life will treat the
owners as joint tenants with rights of survivorship unless the ownership
designation provides otherwise. The owners must exercise their rights and
options jointly, except that any one of the owners may reallocate the Contract's
investment base by telephone if the owner provides the personal identification
number as well as the Contract number. One contract owner must be designated, in
writing, to receive all notices, correspondence and tax reporting to which
contract owners are entitled under the Contract.
Changing the Owner. During the insured's lifetime, with the consent of any
irrevocable beneficiary, the contract owner has the right to transfer ownership
of the Contract. The new owner will have all rights and options described in the
Contract. The change will be effective as of the day the notice is signed, but
will not affect any payment made or action taken by Merrill Lynch Life before
receipt of the notice of the change at the Service Center. Changing the owner
may have tax consequences. (See "Tax Considerations" on page 30.)
Assigning the Contract as Collateral. Contract owners may assign the Contract
as collateral security for a loan or other obligation. This does not change the
ownership. However, the contract owner's rights and any beneficiary's rights are
subject to the terms of the assignment. Contract owners must give satisfactory
written notice at the Service Center in order to make or release an assignment.
Merrill Lynch Life is not responsible for the validity of any assignment.
For a discussion of the tax issues associated with a collateral assignment, see
"Tax Considerations" on page 30.
Naming Beneficiaries. Merrill Lynch Life will pay the primary beneficiary the
death benefit proceeds of the Contract on the insured's death. If the primary
beneficiary has died, Merrill Lynch Life will pay the contingent beneficiary. If
no contingent beneficiary is living, Merrill Lynch Life will pay the estate of
the insured.
A contract owner may name more than one person as primary or contingent
beneficiaries. Merrill Lynch Life will pay proceeds in equal shares to the
surviving beneficiaries unless the beneficiary designation provides otherwise.
A contract owner has the right to change beneficiaries during the insured's
lifetime, unless the primary beneficiary designation has been made irrevocable.
If the designation is irrevocable, the primary beneficiary must consent when
certain rights and options are exercised under this Contract. If the beneficiary
is changed,
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the change will take effect as of the day the notice is signed, but will not
affect any payment made or action taken by Merrill Lynch Life before receipt of
the notice of the change at the Service Center.
Maturity Proceeds. The maturity date is the contract anniversary nearest the
insured's 100th birthday. On the maturity date, Merrill Lynch Life will pay the
net cash surrender value to the contract owner, provided the insured is still
living at that time and the Contract is in effect at that time.
How Merrill Lynch Life Makes Payments. Merrill Lynch Life generally pays death
benefit proceeds, partial withdrawals, loans and net cash surrender value on
cancellation from the Separate Account within seven days after the Service
Center receives all the information needed to process the payment.
However, it may delay payment from the Separate Account if it isn't practical
for Merrill Lynch Life to value or dispose of Trust units, Series Fund shares or
Variable Series Funds shares because:
- the New York Stock Exchange is closed, other than for a customary weekend
or holiday; or
- trading on the New York Stock Exchange is restricted by the Securities
and Exchange Commission; or
- the Securities and Exchange Commission declares that an emergency exists
such that it is not reasonably practical to dispose of securities held in
the Separate Account or to determine the value of their assets; or
- the Securities and Exchange Commission by order so permits for the
protection of contract owners.
SOME ADMINISTRATIVE PROCEDURES
Described below are certain administrative procedures. Merrill Lynch Life
reserves the right to modify them or to eliminate them. For administrative and
tax purposes, Merrill Lynch Life may from time to time require that specific
forms be completed in order to accomplish certain transactions, including
surrenders.
Personal Identification Number. Merrill Lynch Life will send each contract
owner a four-digit personal identification number ("PIN") shortly after the
Contract is placed in force and before the end of the "free look" period. This
number must be given when a contract owner calls the Service Center to get
information about the Contract, to make a loan (if an authorization is on file),
or to make other requests. Each PIN will be accompanied by a notice reminding
the contract owner that all of the investment base is in the division investing
in the Money Reserve Portfolio, and that this allocation may be changed by
calling or writing to the Service Center. (See "Changing the Allocation" on page
17.)
Reallocating the Investment Base. Contract owners can reallocate their
investment base either in writing in a form satisfactory to Merrill Lynch Life
or by telephone. If the reallocation is requested by telephone, contract owners
must give their personal identification number as well as their Contract number.
Merrill Lynch Life will give a confirmation number over the telephone and then
follow up in writing.
Requesting a Loan. A loan may be requested in writing in a form satisfactory to
Merrill Lynch Life or, if all required authorization forms are on file, by
telephone. Once the authorization has been received at the Service Center,
contract owners can call the Service Center, give their Contract number, name
and personal identification number, and tell Merrill Lynch Life the loan amount
and from which divisions the loan should be transferred.
Upon request, Merrill Lynch Life will wire the funds to the contract owner's
account at the financial institution named on the contract owner's
authorization. Merrill Lynch Life will generally wire the funds within two
working days of receipt of the request. If the contract owner has the CMA
Insurance Service, funds may be transferred directly to that CMA account.
Requesting Partial Withdrawals. Beginning in contract year 16, partial
withdrawals may be requested in writing in a form satisfactory to Merrill Lynch
Life. A contract owner may request a partial withdrawal by telephone if all
required telephone authorization forms are on file. Once the authorization has
been received at the Service Center, contract owners can call the Service
Center, give their Contract number, name and personal identification number, and
tell Merrill Lynch Life how much to withdraw and from which investment
divisions.
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Upon request, Merrill Lynch Life will wire the funds to the contract owner's
account at the financial institution named on the contract owner's
authorization. Merrill Lynch Life will generally wire the funds within two
working days of receipt of the request. If the contract owner has the CMA
Insurance Service, funds may be transferred directly to that CMA account.
Telephone Requests. A telephone request for a loan, partial withdrawal or a
reallocation received before 4 p.m. (ET) generally will be processed the same
day. A request received at or after 4 p.m. (ET) will be processed the following
business day. Merrill Lynch Life reserves the right to change or discontinue
telephone transfer procedures.
Merrill Lynch Life will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These procedures may
include, but are not limited to, possible recording of telephone calls and
obtaining appropriate identification before effecting any telephone
transactions. Merrill Lynch Life will not be liable for following telephone
instructions that it reasonably believes to be genuine.
OTHER CONTRACT PROVISIONS
In Case of Errors in the Application. If an age or sex given in the application
is wrong, it could mean that the face amount or any other Contract benefit is
wrong. Merrill Lynch Life will pay what the payments made would have bought for
the guarantee period at the true age or sex.
Incontestability. Merrill Lynch Life will rely on statements made in the
applications. Legally, they are considered representations, not warranties.
Merrill Lynch Life can contest the validity of a Contract if any material
misstatements are made in the initial application or any application for
reinstatement. Merrill Lynch Life can also contest the validity of any change in
face amount due to a change in death benefit option or any increase in the
additional insurance rider face amount requested if any material misstatements
are made in any application required for the change or increase.
Subject to state regulation, Merrill Lynch Life will not contest the validity of
a Contract after it has been in effect during the lifetime of the insured for
two years from the date of issue or the date of any reinstatement. A change in
face amount due to a change in the death benefit option or any increase in the
additional insurance rider face amount won't be contested after the change or
increase has been in effect during the lifetime of the insured for two years
from the date of the change.
Payment in Case of Suicide. Subject to state regulation, if the insured commits
suicide within two years from the Contract's issue date or the date of any
reinstatement, Merrill Lynch Life will pay only a limited death benefit and then
terminate the Contract. The benefit will be equal to the amount of the payments
made, reduced by any debt.
Subject to state regulation, if the insured commits suicide within two years of
the effective date of a change in the death benefit option requiring evidence of
insurability or of the effective date of an increase in the additional insurance
rider face amount, any amount of death benefit which would not be payable except
for the fact that the face amount was increased will be limited to the amount of
cost of insurance deductions made for the increase.
Contract Changes -- Applicable Federal Tax Law. To receive the tax treatment
accorded to life insurance under federal income tax law, the Contract must
qualify initially and continue to qualify as life insurance under the Internal
Revenue Code or successor law. Therefore, to maintain this qualification to the
maximum extent of the law, Merrill Lynch Life reserves the right to return any
additional payments that would cause the Contract to fail to qualify as life
insurance under applicable tax law as interpreted by Merrill Lynch Life.
Further, Merrill Lynch Life reserves the right to make changes in the Contract
or its riders or to make distributions from the Contract to the extent it is
necessary to continue to qualify the Contract as life insurance. Any changes
will apply uniformly to all Contracts that are affected and contract owners will
be given advance written notice of such changes.
State Variations. Certain Contract features, including the "free look" right,
are subject to state variation. The contract owner should read his or her
Contract carefully to determine whether any variations apply in the state in
which the Contract is issued.
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INCOME PLANS
Merrill Lynch Life offers several income plans to provide for payment of the
death benefit proceeds to the beneficiary. The contract owner may choose one or
more income plans at any time during the lifetime of the insured. If no plan has
been chosen when the insured dies, the beneficiary has one year to apply the
death benefit proceeds either paid or payable to that beneficiary to one or more
of the plans. The contract owner may also choose one or more income plans if the
Contract is cancelled. Merrill Lynch Life's approval is needed for any plan
where any income payment would be less than $100. Payments under these plans do
not depend on the investment results of a separate account.
Income plans include:
Annuity Plan. An amount can be used to purchase a single premium immediate
annuity.
Interest Payment. Amounts can be left with Merrill Lynch Life to earn
interest at an annual rate of at least 3%. Interest payments can be made
annually, semi-annually, quarterly or monthly.
Income for a Fixed Period. Payments are made in equal installments for a
fixed number of years.
Income for Life. Payments are made in equal monthly installments until
death of a named person or end of a designated period, whichever is later.
The designated period may be for 10 or 20 years. Other designated periods
and payment schedules may be available on request.
Income of a Fixed Amount. Payments are made in equal installments until
proceeds applied under the option and interest on unpaid balance at not
less than 3% per year are exhausted.
Joint Life Income. Payments are made in monthly installments as long as at
least one of two named persons is living. Other payment schedules may be
available on request. While both are living, full payments are made. If one
dies, payments of at least two-thirds of the full amount are made. Payments
end completely when both named persons die.
Once in effect, some of the plans may not provide any surrender rights.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, Merrill Lynch Life may reduce the
sales load, cost of insurance rates and the minimum payment and may modify
underwriting classifications and requirements.
Group arrangements include those in which a trustee or an employer, for example,
purchases Contracts covering a group of individuals on a group basis. Sponsored
arrangements include those in which an employer allows Merrill Lynch Life to
sell Contracts to its employees on an individual basis. Costs for sales,
administration and mortality generally vary with the size and stability of the
group and the reasons the Contracts are purchased, among other factors. Merrill
Lynch Life takes all these factors into account when reducing charges. To
qualify for reduced charges, a group or sponsored arrangement must meet certain
requirements, including requirements for size and number of years in existence.
Group or sponsored arrangements that have been set up solely to buy Contracts or
that have been in existence less than six months will not qualify for reduced
charges.
Merrill Lynch Life makes any reductions according to rules in effect when an
application for a Contract or additional payment is approved. It may change
these rules from time to time. However, reductions in charges will not
discriminate unfairly against any person.
UNISEX LEGAL CONSIDERATIONS FOR EMPLOYERS
In 1983 the Supreme Court held in Arizona Governing Committee v. Norris that
optional annuity benefits provided under an employee's deferred compensation
plan could not, under Title VII of the Civil Rights Act of 1964, vary between
men and women. In addition, legislative, regulatory or decisional authority of
some states may prohibit use of sex-distinct mortality tables under certain
circumstances.
Generally, the Contracts offered by this Prospectus are based on mortality
tables that distinguish between men and women. As a result, the Contract pays
different benefits to men and women of the same age. Employers
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and employee organizations should check with their legal advisers before
purchasing Contracts; specifically, the addition of a unisex rider to such
Contracts may be required.
Some states prohibit the use of actuarial tables that distinguish between men
and women in determining payments and contract benefits for contracts issued on
the lives of their residents. Therefore, Contracts offered in this Prospectus to
insure residents of these states will have unisex payments and benefits which
are based on actuarial tables that do not differentiate on the basis of sex.
SELLING THE CONTRACTS
MLPF&S is the principal underwriter of the Contract. It was organized in 1958
under the laws of the state of Delaware and is registered as a broker dealer
under the Securities Exchange Act of 1934. It is a member of the National
Association of Securities Dealers, Inc. ("NASD"). The principal business address
of MLPF&S is World Financial Center, 250 Vesey Street, New York, New York 10281.
MLPF&S also acts as principal underwriter of other variable life insurance and
variable annuity contracts issued by Merrill Lynch Life, as well as variable
life insurance and variable annuity contracts issued by ML Life Insurance
Company of New York, an affiliate of Merrill Lynch Life. MLPF&S also acts as
principal underwriter of certain mutual funds managed by MLAM, the investment
adviser for the Series Fund and the Variable Series Funds.
Contracts are sold by registered representatives of MLPF&S who are also licensed
through various Merrill Lynch Life Agencies as insurance agents for Merrill
Lynch Life. Merrill Lynch Life has entered into a distribution agreement with
MLPF&S and companion sales agreements with the Merrill Lynch Life Agencies
through which agreements the Contracts and other variable life insurance
contracts issued through the Separate Account are sold and the registered
representatives are compensated by Merrill Lynch Life Agencies and/or MLPF&S.
The maximum commissions Merrill Lynch Life will pay to the applicable insurance
agency to be used to pay commissions to registered representatives are as
follows: 95% of the target premium under the Contract; plus 3% of payments
thereafter. In addition, an amount equal to .11% of persisting investment base
under a Contract may be paid on an annual basis. Commissions may be paid in the
form of non-cash compensation.
The amounts paid under the distribution and sales agreements for the Separate
Account for the years ended December 31, 1997, December 31, 1996, and December
31, 1995 were $15,107,535, $10,059,108, and $8,375,065, respectively.
MLPF&S may arrange for sales of the Contract by other broker-dealers who are
registered under the Securities Exchange Act of 1934 and are members of the
NASD. Registered representatives of these other broker-dealers may be
compensated on a different basis than MLPF&S registered representatives.
TAX CONSIDERATIONS
Definition of Life Insurance. In order to qualify as a life insurance contract
for federal tax purposes, the Contract must meet the definition of a life
insurance contract which is set forth in Section 7702 of the Internal Revenue
Code of 1986, as amended (the "Code"). The manner in which Section 7702 should
be applied to certain features of the Contract offered in this Prospectus is not
directly addressed by Section 7702. Nevertheless, Merrill Lynch Life believes
that the Contract will meet the Section 7702 definition of a life insurance
contract. This means that:
- the death benefit should be fully excludable from the gross income of the
beneficiary under Section 101(a)(1) of the Code; and
- the contract owner should not be considered in constructive receipt of
the cash value, including any increases, until actual cancellation of the
Contract (see "Tax Treatment of Loans and Other Distributions" on page
31).
In the absence of final regulations or other pertinent interpretations of
Section 7702, however, there is necessarily some uncertainty as to whether a
substandard risk Contract will meet the statutory life insurance contract
definition. There may also be some uncertainty with respect to a Contract with
an additional
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insurance rider attached. If a Contract were determined not to be a life
insurance contract for purposes of Section 7702, such Contract would not provide
most of the tax advantages normally provided by a life insurance contract.
Merrill Lynch Life thus reserves the right to make changes in the Contract if
such changes are deemed necessary to attempt to assure its qualification as a
life insurance contract for tax purposes. (See "Contract Changes -- Applicable
Federal Tax Law" on page 28.)
Diversification. Section 817(h) of the Code provides that separate account
investments (or the investments of a mutual fund, the shares of which are owned
by separate accounts of insurance companies) underlying the Contract must be
"adequately diversified" in accordance with Treasury regulations in order for
the Contract to qualify as life insurance. The Treasury Department has issued
regulations prescribing the diversification requirements in connection with
variable contracts. The Separate Account, through the Funds, intends to comply
with these requirements. Each Fund is obligated to comply with the
diversification requirements prescribed by the Treasury Department.
In connection with the issuance of the diversification regulations, the Treasury
Department stated that it anticipates the issuance of regulations or rulings
prescribing the circumstances in which an owner's control of the investments of
a separate account may cause the owner, rather than the insurance company, to be
treated as the owner of the assets in the account. If the contract owner is
considered the owner of the assets of the Separate Account, income and gains
from the account would be included in the owner's gross income.
The ownership rights under the Contract offered in this Prospectus are similar
to, but different in certain respects from, those described by the Internal
Revenue Service in rulings in which it determined that the owners were not
owners of separate account assets. For example, the owner of the Contract has
additional flexibility in allocating payments and cash values. These differences
could result in the owner being treated as the owner of the assets of the
Separate Account. In addition, Merrill Lynch Life does not know what standards
will be set forth in the regulations or rulings which the Treasury has stated it
expects to be issued. Merrill Lynch Life therefore reserves the right to modify
the Contract as necessary to attempt to prevent the contract owner from being
considered an owner of the assets of the Separate Account.
Tax Treatment of Loans and Other Distributions. Federal tax law establishes a
class of life insurance contracts referred to as modified endowment contracts. A
modified endowment contract is any contract which satisfies the definition of
life insurance set forth in Section 7702 of the Code but fails to meet the 7-pay
test. This test applies a cumulative limit on the amount of payments that can be
made into a contract each year in the first seven contract years in order to
avoid modified endowment treatment. In effect, compliance with the 7-pay test
requires that contracts be purchased with a higher face amount for a given
initial payment than would otherwise be required, at a minimum, to meet the
definition of life insurance. Contracts that do not satisfy the 7-pay test,
including contracts which initially satisfied the 7-pay test but later failed
the test, will be considered modified endowment contracts subject to the
following distribution rules. Loans, partial withdrawals, capitalized interest,
and complete surrenders from, as well as collateral assignments of, modified
endowment contracts will be treated as distributions to the contract owner.
Furthermore, if the loan interest is capitalized by adding the amount due to the
balance of the loan, the amount of the capitalized interest will be treated as a
distribution which may be subject to income tax, to the extent of the income in
the contract. All pre-death distributions (including loans, partial withdrawals
and collateral assignments) from these contracts will be included in gross
income on an income-first basis to the extent of any income in the contract (the
cash value less the contract owner's investment in the contract) immediately
before the distribution.
The law also imposes a 10% penalty tax on pre-death distributions (including
loans, capitalized interest, collateral assignments, partial withdrawals and
complete surrenders) from modified endowment contracts to the extent they are
included in income, unless such amounts are distributed on or after the taxpayer
attains age 59 1/2, because the taxpayer is disabled, or as substantially equal
periodic payments over the taxpayer's life (or life expectancy) or over the
joint lives (or joint life expectancies) of the taxpayer and his or her
beneficiary.
Contracts that comply with the 7-pay test will not be classified as modified
endowment contracts. Loans from contracts that are not modified endowment
contracts will be considered indebtedness of an owner and no part
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<PAGE> 85
of a loan will constitute income to the owner. In addition, pre-death
distributions from these contracts will generally not be included in gross
income to the extent that the amount received does not exceed the owner's
investment in the contract. A lapse of such a contract with an outstanding loan
will result in the treatment of the loan cancellation (including the accrued
interest) as a distribution under the contract and may be taxable.
Compliance with the 7-pay test does not imply or guarantee that only seven
payments will be required for the initial death benefit to be guaranteed for
life. Making additional payments or reducing the benefits (for example, through
a partial withdrawal, a change in death benefit option or terminating additional
benefits under a rider) may violate the 7-pay test or, at a minimum, reduce the
amount that may be paid in the future under the 7-pay test. Further, reducing
the death benefit during the first seven contract years will require retroactive
retesting and may well result in a failure of the 7-pay test regardless of any
efforts by Merrill Lynch Life to provide a payment schedule that will not
violate the 7-pay test.
Any contract received in an exchange for a modified endowment contract will be
considered a modified endowment contract and will be subject to the tax
treatment accorded to modified endowment contracts that is described in the
Prospectus. A contract that is not originally classified as a modified endowment
contract can become so classified if there is a reduction in benefits during the
first seven contract years (including, for example, by a decrease in the
additional insurance rider face amount or a change in death benefit option) or
if a material change is made in the contract at any time. (A material change
includes, but is not limited to, a change in the benefits that was not reflected
in a prior 7-pay test computation, such as a change in death benefit option.)
This could result from additional payments made after 7-pay test calculations
done at the time of the contract exchange. Contract owners may choose not to
exercise their right to make additional payments, in order to preserve their
contract's current tax treatment.
If a contract becomes a modified endowment contract, distributions that occur
during the contract year it becomes a modified endowment contract and any
subsequent contract year will be taxed as distributions from a modified
endowment contract. In addition, distributions from a contract within two years
before it becomes a modified endowment contract will be taxed in this manner.
This means that a distribution made from a contract that is not a modified
endowment contract could later become taxable as a distribution from a modified
endowment contract.
Special Treatment of Loans on the Contract. If there is any borrowing against
the Contract, whether a modified endowment contract or not, the interest paid on
loans generally is not tax deductible.
Aggregation of Modified Endowment Contracts. In the case of a pre-death
distribution (including a loan, capitalized interest, partial withdrawal,
collateral assignment or complete surrender) from a contract that is treated as
a modified endowment contract under the rules described above, a special
aggregation requirement may apply for purposes of determining the amount of the
income on the contract. Specifically, if Merrill Lynch Life or any of its
affiliates issues to the same contract owner more than one modified endowment
contract within a calendar year, then for purposes of measuring the income on
the contract with respect to a distribution from any of those contracts, the
income on the contract for all those contracts will be aggregated and attributed
to that distribution.
Tax Treatment of Policy Split. The Contract may be issued upon exercise of
rights provided by a policy split rider under certain joint and last survivor
contracts issued by Merrill Lynch Life. (For more information about this rider
and the conditions and rules relating to the exercise of any rights under the
rider, the contract owner should call the Service Center.) A policy split could
have adverse tax consequences; for example, it is not clear whether a policy
split will be treated as a nontaxable exchange under Sections 1031 through 1043
of the Code. If a policy split is not treated as a nontaxable exchange, a split
could result in the recognition of taxable income in an amount up to any gain in
the joint and last survivor contract at the time of the split. In addition, it
is not clear whether the individual contracts that result from a policy split
would in all circumstances be treated as life insurance contracts for federal
income tax purposes and, if so treated, whether the contracts would be
classified as modified endowment contracts. (See "Tax Treatment of Loans and
Other Distributions" on page 31.) Before the contract owner exercises rights
provided by a policy split rider in order to obtain this Contract, it is
important that he or she consult with a competent tax advisor regarding the
possible consequences of a policy split.
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<PAGE> 86
Other Tax Considerations. The transfer of the Contract or the designation of a
beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate and generation skipping
transfer taxes. For example, the transfer of the Contract to, or the designation
as beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation assignment of
the contract owner, may have generation skipping transfer tax considerations
under Section 2601 of the Code.
The individual situation of each contract owner or beneficiary will determine
the extent, if any, to which federal, state and local transfer taxes may be
imposed. The contract owner should consult with a tax advisor for specific
information in connection with these taxes.
The particular situation of each contract owner or beneficiary will determine
how ownership or receipt of contract proceeds will be treated for purpose of
federal or state tax, as well as state and local estate, inheritance, generation
skipping and other taxes.
Other Transactions. Changing the contract owner or an additional insurance
rider's face amount may have tax consequences. Exchanging this Contract for
another involving the same insured should have no federal income tax
consequences if there is no debt and no cash or other property is received,
according to Section 1035(a)(1) of the Code. In addition, exchanging this
Contract for more than one contract, or exchanging this Contract and one or more
other contracts for a single contract, in certain circumstances, may be treated
as an exchange under Section 1035, as long as all such contracts involve the
same insured. Any new contract would have to satisfy the 7-pay test from the
date of the exchange to avoid characterization as a modified endowment contract.
An exchange for a new contract may, however, result in a loss of grandfathering
status for statutory changes made after the old contract was issued. Changing
the insured under this Contract may not be treated as an exchange under Section
1035, but rather as a taxable exchange. A tax advisor should be consulted before
effecting any exchange, since even if an exchange is within Section 1035(a), the
exchange may have tax consequences other than immediate recognition of income.
In addition, the Contract may be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a contract in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Ownership of This Contract by Non-Natural Persons. The above discussion of the
tax consequences arising from the purchase, ownership and transfer of the
Contract has assumed that the owner of the Contract consists of one or more
individuals. Organizations exempt from taxation under Section 501(a) of the Code
may be subject to additional or different tax consequences with respect to
transactions such as contract loans. In recent years, moreover, Congress has
adopted new rules relating to life insurance owned by businesses. Any business
should consult a tax advisor regarding possible tax consequences associated with
a Contract prior to the acquisition of this Contract and also before entering
into any subsequent changes to or transactions under this Contract.
Possible Changes in Taxation. Although the likelihood of legislative change is
uncertain, there is always the possibility that the tax treatment of the
Contracts could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted, would
adversely modify the federal taxation of the Contracts. It is also possible that
any change could be retroactive (that is, effective prior to the date of the
change). A tax advisor should be consulted with respect to legislative
developments and their effect on the Contract.
Merrill Lynch Life does not make any guarantee regarding the tax status of any
Contract or any transaction regarding the Contract.
The above discussion is not intended as tax advice. For tax advice contract
owners should consult a competent tax advisor. Although this tax discussion is
based on Merrill Lynch Life's understanding of federal income tax
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<PAGE> 87
laws as they are currently interpreted, it can't guarantee that those laws or
interpretations will remain unchanged.
MERRILL LYNCH LIFE'S INCOME TAXES
Insurance companies are generally required to capitalize and amortize certain
policy acquisition expenses over a ten-year period rather than currently
deducting such expenses. This treatment applies to the deferred acquisition
expenses of a Contract and results in a significantly higher corporate income
tax liability for Merrill Lynch Life in early contract years. Merrill Lynch Life
makes a charge to compensate Merrill Lynch Life for the anticipated higher
corporate income taxes that result from the receipt of payments under a
Contract. (See "Contract Loading" on page 18.)
Currently, Merrill Lynch Life makes no charges to the Separate Account for any
federal, state or local taxes that it incurs that may be attributable to the
Separate Account or to the Contracts. Merrill Lynch Life, however, reserves the
right to make a charge for assessments of federal premium taxes or federal,
state or local excise, profits or income taxes measured by or attributable to
the receipt of premiums.
REINSURANCE
Merrill Lynch Life intends to reinsure some of the risks assumed under the
Contracts.
MORE ABOUT THE SEPARATE ACCOUNT AND ITS DIVISIONS
ABOUT THE SEPARATE ACCOUNT
The Separate Account is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as a unit investment trust. This
registration does not involve any supervision by the Securities and Exchange
Commission of Merrill Lynch Life's management or the management of the Separate
Account. The Separate Account is also governed by the laws of the State of
Arkansas, Merrill Lynch Life's state of domicile.
Merrill Lynch Life owns all of the assets of the Separate Account. These assets
are held separate and apart from all of Merrill Lynch Life's other assets.
Merrill Lynch Life maintains records of all purchases and redemptions of shares
of the Funds and units of the Zero Trusts by each of the investment divisions.
CHANGES WITHIN THE ACCOUNT
Merrill Lynch Life may from time to time make additional investment divisions
available to contract owners. These divisions will invest in investment
portfolios Merrill Lynch Life finds suitable for the Contracts. Merrill Lynch
Life also has the right to eliminate investment divisions from the Separate
Account, to combine two or more investment divisions, or to substitute a new
portfolio for the portfolio in which an investment division invests. A
substitution may become necessary if, in Merrill Lynch Life's judgment, a
portfolio no longer suits the purposes of the Contracts. This may happen due to
a change in laws or regulations or in a portfolio's investment objectives or
restrictions, or because the portfolio is no longer available for investment, or
for some other reason. Merrill Lynch Life would get any required prior approval
from the Arkansas State Insurance Department and the Securities and Exchange
Commission before making such a substitution. It would also get any other
required approvals before making such a substitution.
Subject to any required regulatory approvals, Merrill Lynch Life reserves the
right to transfer assets of the Separate Account or of any of the investment
divisions to another separate account or investment division.
When permitted by law, Merrill Lynch Life reserves the right to:
- deregister the Separate Account under the Investment Company Act of 1940;
- operate the Separate Account as a management company under the Investment
Company Act of 1940;
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<PAGE> 88
- restrict or eliminate any voting rights of contract owners, or other
persons who have voting rights as to the Separate Account; and
- combine the Separate Account with other separate accounts.
NET RATE OF RETURN FOR AN INVESTMENT DIVISION
Each investment division has a distinct unit value (also referred to as "price"
or "separate account index" in reports furnished to the contract owner by
Merrill Lynch Life). When payments or other amounts are allocated to an
investment division, a number of units are purchased based on the value of a
unit of the investment division as of the end of the valuation period during
which the allocation is made. When amounts are transferred out of, or deducted
from, an investment division, units are redeemed in a similar manner. A
valuation period is each business day together with any non-business days before
it. A business day for an investment division is any day the New York Stock
Exchange is open or the SEC requires that the net asset value of an investment
division be determined.
For each investment division, the separate account index was initially set at
$10.00. The separate account index for each subsequent valuation period
fluctuates based upon the net rate of return for that period. Merrill Lynch Life
determines the net rate of return of an investment division at the end of each
valuation period. The net rate of return reflects the investment performance of
the division for the valuation period and is net of the charges to the Separate
Account described on page 19.
For divisions investing in the Funds, shares are valued at net asset value and
reflect reinvestment of any dividends or capital gains distributions declared by
the Funds.
For divisions investing in the Zero Trusts, units of each Zero Trust are valued
at the sponsor's repurchase price, as explained in the prospectus for the Zero
Trusts.
THE FUNDS
Buying and Redeeming Shares. The Funds sell and redeem their shares at net
asset value. Any dividend or capital gain distribution will be reinvested at net
asset value in shares of the same portfolio.
Voting Rights. Merrill Lynch Life is the legal owner of all Fund shares held in
the Separate Account. As the owner, Merrill Lynch Life has the right to vote on
any matter put to vote at the Funds' shareholder meetings. However, Merrill
Lynch Life will vote all Fund shares attributable to Contracts according to
instructions received from contract owners. Shares attributable to Contracts for
which no voting instructions are received will be voted in the same proportion
as shares in the respective investment divisions for which instructions are
received. Shares not attributable to Contracts will also be voted in the same
proportion as shares in the respective divisions for which instructions are
received. If any federal securities laws or regulations, or their present
interpretation, change to permit Merrill Lynch Life to vote Fund shares in its
own right, it may elect to do so.
Merrill Lynch Life determines the number of shares that contract owners have in
an investment division by dividing their Contract's investment base in that
division by the net asset value of one share of the portfolio. Fractional votes
will be counted. Merrill Lynch Life will determine the number of shares for
which a contract owner may give voting instructions 90 days or less before each
Fund meeting. Merrill Lynch Life will request voting instructions by mail at
least 14 days before the meeting.
Under certain circumstances, Merrill Lynch Life may be required by state
regulatory authorities to disregard voting instructions. This may happen if
following the instructions would mean voting to change the sub-classification or
investment objectives of the portfolios, or to approve or disapprove an
investment advisory contract.
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Merrill Lynch Life may also disregard instructions to vote for changes in the
investment policy or the investment adviser if it disapproves of the proposed
changes. Merrill Lynch Life would disapprove a proposed change only if it was:
- contrary to state law;
- prohibited by state regulatory authorities; or
- decided by management that the change would result in overly speculative
or unsound investments.
If Merrill Lynch Life disregards voting instructions, it will include a summary
of its actions in the next semi-annual report.
Resolving Material Conflicts. Shares of the Series Fund are available for
investment by Merrill Lynch Life, ML Life Insurance Company of New York (an
indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.) and Monarch Life
Insurance Company (an insurance company not affiliated with Merrill Lynch Life
or Merrill Lynch & Co., Inc.). Shares of the Variable Series Funds, the AIM V.I.
Funds, the Alliance Fund, and the MFS Trust are sold to separate accounts of
Merrill Lynch Life, ML Life Insurance Company of New York, and insurance
companies not affiliated with Merrill Lynch Life or Merrill Lynch & Co., Inc. to
fund benefits under variable life insurance and variable annuity contracts, and
may be sold to certain qualified plans.
It is possible that differences might arise between Merrill Lynch Life's
Separate Account and one or more of the other separate accounts which invest in
the Funds. In some cases, it is possible that the differences could be
considered "material conflicts". Such a "material conflict" could also arise due
to changes in the law (such as state insurance law or federal tax law) which
affect these different variable life insurance and variable annuity separate
accounts. It could also arise by reason of difference in voting instructions
from Merrill Lynch Life's contract owners and those of the other insurance
companies, or for other reasons. Merrill Lynch Life will monitor events to
determine how to respond to such conflicts. If a conflict occurs, Merrill Lynch
Life may be required to eliminate one or more investment divisions of the
Separate Account which invest in the Funds or substitute a new portfolio for a
portfolio in which a division invests. In responding to any conflict, Merrill
Lynch Life will take the action which it believes necessary to protect its
contract owners consistent with applicable legal requirements.
Administration Services Arrangements. MLAM has entered into an agreement with
Merrill Lynch Insurance Group, Inc. ("MLIG"), Merrill Lynch Life's parent, with
respect to administration services for the Series Fund and the Variable Series
Funds in connection with the Contracts and other variable life insurance and
variable annuity contracts issued by Merrill Lynch Life. Under this agreement,
MLAM pays compensation to MLIG in an amount equal to a portion of the annual
gross investment advisory fees paid by the Series Fund and the Variable Series
Funds to MLAM attributable to variable contracts issued by Merrill Lynch Life.
AIM V.I. Funds has entered into an Administrative Services Agreement with AIM,
pursuant to which AIM has agreed to provide certain accounting and other
administrative services to the AIM V.I. Funds, including the services of a
principal financial officer and related staff. As compensation to AIM for its
services under the Administrative Services Agreement, the AIM V.I. Funds
reimburse AIM for expenses incurred by AIM or its affiliates in connection with
such services. AIM has entered into an agreement with Merrill Lynch Life with
respect to administrative services for the AIM V.I. Funds in connection with the
Contracts. Under this agreement, AIM pays compensation to Merrill Lynch Life in
an amount equal to a percentage of the average net assets of the AIM V.I. Funds
attributable to the Contracts.
Alliance Fund Distributors, Inc. ("AFD"), an affiliate of Alliance, has entered
into an agreement with Merrill Lynch Life with respect to administrative
services for the Alliance Fund in connection with the Contracts. Under this
agreement, AFD pays compensation to Merrill Lynch Life in an amount equal to a
percentage of the average net assets of the Alliance Fund attributable to the
Contracts.
MFS has entered into an agreement with MLIG with respect to administrative
services for the MFS Trust in connection with the Contracts and certain
contracts issued by ML Life Insurance Company of New York. Under this agreement,
MFS pays compensation to MLIG in an amount equal to a percentage of the average
net assets of the MFS Trust attributable to such contracts.
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THE ZERO TRUSTS
The 15 Zero Trusts:
<TABLE>
<CAPTION>
TARGETED RATE OF RETURN
TO MATURITY AS OF
ZERO TRUST MATURITY DATE APRIL 17, 1998
- ---------- ------------- -----------------------
<C> <S> <C>
1999 February 15, 1999 4.06%
2000 February 15, 2000 4.12%
2001 February 15, 2001 4.10%
2002 February 15, 2002 4.25%
2003 August 15, 2003 4.30%
2004 February 15, 2004 4.38%
2005 February 15, 2005 4.26%
2006 February 15, 2006 4.08%
2007 February 15, 2007 4.19%
2008 February 15. 2008 4.47%
2009 February 15, 2009 4.51%
2010 February 15, 2010 4.63%
2011 February 15, 2011 4.57%
2013 February 15, 2013 4.66%
2014 February 15, 2014 4.75%
</TABLE>
Targeted Rate of Return to Maturity
Because the underlying securities in the Zero Trusts will grow to their face
value on the maturity date, it is possible to estimate a compound rate of growth
to maturity for the Zero Trust units.
But because the units are held in the Separate Account, the asset charge and the
trust charge (described in "Charges to the Separate Account" on page 19) must be
taken into account in estimating a targeted rate of return for the Separate
Account. The targeted rate of return to maturity for the Separate Account
depends on the compound rate of growth adjusted for these charges. It does not,
however, represent the actual return on a payment Merrill Lynch Life might
receive under the Contract on that date, since it does not reflect the charges
for contract loading deducted from payments to a Contract, charges for cost of
insurance and rider costs and any net loan cost deducted from a Contract's
investment base.
Since the value of the Zero Trust units will vary daily to reflect the market
value of the underlying securities, the compound rate of growth to maturity for
the Zero Trust units and the targeted rate of return to maturity for the
Separate Account will vary correspondingly.
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ILLUSTRATIONS
ILLUSTRATIONS OF DEATH BENEFITS, INVESTMENT BASE, NET CASH SURRENDER VALUES AND
ACCUMULATED PAYMENTS
The tables on pages 40 through 43 demonstrate the way in which the Contract
works. The tables are based on the following ages, face amounts, payments and
guarantee periods and show values based upon both current and maximum mortality
charges.
1. The illustration on page 40 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$9,055 through contract year 52, an initial face amount of $500,000, an
initial guarantee period of 2.5 years and coverage under death benefit
option 1. It assumes current mortality charges.
2. The illustration on page 41 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$9,055 through contract year 52, an initial face amount of $500,000, an
initial guarantee period of 2.5 years and coverage under death benefit
option 1. It assumes maximum mortality charges.
3. The illustration on page 42 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$27,729 through contract year 43, an initial face amount of $500,000, an
initial guarantee period of 9.5 years and coverage under death benefit
option 2. It assumes current mortality charges.
4. The illustration on page 43 is for a Contract issued to a male age
45 in the standard non-smoker underwriting class with annual payments of
$27,729 through contract year 43, an initial face amount of $500,000, an
initial guarantee period of 9.5 years and coverage under death benefit
option 2. It assumes maximum mortality charges.
The tables show how the death benefit, investment base and net cash surrender
value may vary over an extended period of time assuming hypothetical rates of
return (i.e., investment income and capital gains and losses, realized or
unrealized) equivalent to constant gross annual rates of 0%, 6% and 12%.
The death benefit, investment base and net cash surrender value for a Contract
would be different from those shown if the actual rates of return averaged 0%,
6% and 12% over a period of years, but also fluctuated above or below those
averages for individual contract years.
The amounts shown for the death benefit, investment base and net cash surrender
value as of the end of each contract year take into account the daily asset
charge in the Separate Account equivalent to .90% (annually at the beginning of
the year) of assets attributable to the Contracts at the beginning of the year.
The amounts shown in the tables also assume an additional charge of .52%. This
charge assumes that investment base is allocated equally among all investment
divisions and is based on the 1997 expenses (including monthly advisory fees)
for the Funds, and the current trust charge. This charge also reflects expense
reimbursements made in 1997 to certain portfolios by the investment adviser to
the respective portfolio. These reimbursements amounted to .17% and .09% of the
average daily net assets of the Developing Capital Markets Focus Fund and the
Natural Resources Portfolio, respectively. (See "Charges to Fund Assets" on page
19.) The actual charge under a Contract for Fund expenses and the trust charge
will depend on the actual allocation of the investment base and may be higher or
lower depending on how the investment base is allocated.
Taking into account the .90% asset charge in the Separate Account and the .52%
charge described above, the gross annual rates of investment return of 0%, 6%
and 12% correspond to net annual rates of -1.42%, 4.53%, and 10.48%,
respectively. The gross returns are before any deductions and should not be
compared to rates which are after deduction of charges.
The hypothetical returns shown on the tables are without any income tax charges
that may be attributable to the Separate Account in the future, although they do
reflect the charge for federal taxes included in the contract loading. (See
"Contract Loading" on page 18.) In order to produce after tax returns of 0%, 6%
and
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<PAGE> 92
12%, the Funds would have to earn a sufficient amount in excess of 0% or 6% or
12% to cover any tax charges attributable to the Separate Account.
The second column of the tables shows the amount which would accumulate if an
amount equal to the payments were invested to earn interest (after taxes) at 5%
compounded annually.
Merrill Lynch Life will furnish upon request a personalized illustration
reflecting the proposed insured's age, face amount and the payment amounts
requested. The illustration will also use current cost of insurance rates and
will assume that the proposed insured is in a standard non-smoker underwriting
class.
39
<PAGE> 93
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $9,055 THROUGH CONTRACT YEAR 52
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 2.5 YEARS
DEATH BENEFIT OPTION 1
BASED ON CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)(7)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS -------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1................................................... 9,055 9,508 500,000 500,000 500,000
2................................................... 9,055 19,491 500,000 500,000 500,000
3................................................... 9,055 29,973 500,000 500,000 500,000
4................................................... 9,055 40,979 500,000 500,000 500,000
5................................................... 9,055 52,536 500,000 500,000 500,000
6................................................... 9,055 64,671 500,000 500,000 500,000
7................................................... 9,055 77,412 500,000 500,000 500,000
8................................................... 9,055 90,790 500,000 500,000 500,000
9................................................... 9,055 104,837 500,000 500,000 500,000
10................................................... 9,055 119,587 500,000 500,000 500,000
15................................................... 9,055 205,163 500,000 500,000 500,000
20................................................... 9,055 314,383 500,000 500,000 500,000
30................................................... 9,055 631,684 500,000 500,000 1,089,767
55................................................... 0 2,562,914 0 0 0
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
---------------------------------- --------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1................................................ 3,800 4,045 4,290 3,800 4,045 4,290
2................................................ 7,318 8,037 8,786 7,318 8,037 8,786
3................................................ 14,606 16,267 18,047 14,606 16,267 18,047
4................................................ 21,658 24,735 28,143 21,658 24,735 28,143
5................................................ 28,514 33,493 39,206 28,514 33,493 39,206
6................................................ 35,189 42,568 51,356 35,189 42,568 51,356
7................................................ 41,695 51,987 64,723 41,695 51,987 64,723
8................................................ 48,074 61,810 79,484 48,074 61,810 79,484
9................................................ 54,303 72,030 95,766 54,303 72,030 95,766
10................................................ 60,327 82,615 113,686 60,327 82,615 113,686
15................................................ 85,533 139,897 233,532 85,533 139,897 233,532
20................................................ 101,875 206,155 386,256 101,875 206,155 386,256
30................................................ 91,703 351,092 1,018,474 91,703 351,092 1,018,474
55................................................ 0 927,326 11,566,813 0 927,326 11,566,813
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered within 24 months after issue,
the contract owner will also receive any excess sales load previously
deducted.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At annual rates of return of 6% and 12% and current
mortality charges, the guarantee period reaches life of the insured in
contract years 27 and 16, respectively. Once a guarantee of life is reached,
no more payments would be accepted. Values shown at annual rates of return
of 0%, 6% and 12% do not reflect any payments shown after a guarantee period
of life is reached.
(7) At contract year 55, on the contract anniversary nearest the insured's 100th
birthday, the Contract reaches its maturity date and a death benefit is no
longer provided. On the maturity date, the net cash surrender value is paid
to the contract owner, provided the insured is still living.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
40
<PAGE> 94
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $9,055 THROUGH CONTRACT YEAR 52
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 2.5 YEARS
DEATH BENEFIT OPTION 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)(7)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS ------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1..................................................... 9,055 9,508 500,000 500,000 500,000
2..................................................... 9,055 19,491 500,000 500,000 500,000
3..................................................... 9,055 29,973 500,000 500,000 500,000
4..................................................... 9,055 40,979 500,000 500,000 500,000
5..................................................... 9,055 52,536 500,000 500,000 500,000
6..................................................... 9,055 64,671 500,000 500,000 500,000
7..................................................... 9,055 77,412 500,000 500,000 500,000
8..................................................... 9,055 90,790 500,000 500,000 500,000
9..................................................... 9,055 104,837 500,000 500,000 500,000
10..................................................... 9,055 119,587 500,000 500,000 500,000
15..................................................... 9,055 205,163 500,000 500,000 500,000
20..................................................... 9,055 314,383 500,000 500,000 500,000
30..................................................... 9,055 631,684 500,000 500,000 898,875
55..................................................... 0 2,562,914 0 0 0
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
--------------------------------- -------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1.................................................... 2,837 3,046 3,256 2,837 3,046 3,256
2.................................................... 5,514 6,106 6,726 5,514 6,106 6,726
3.................................................... 12,051 13,445 14,939 12,051 13,445 14,939
4.................................................... 18,373 20,992 23,892 18,373 20,992 23,892
5.................................................... 24,467 28,746 33,650 24,467 28,746 33,650
6.................................................... 30,331 36,712 44,300 30,331 36,712 44,300
7.................................................... 36,937 44,873 55,915 35,937 44,873 55,915
8.................................................... 41,262 53,215 68,579 41,262 53,215 68,579
9.................................................... 46,287 61,729 82,398 46,287 61,729 82,398
10.................................................... 50,979 70,394 97,476 50,979 70,394 97,476
15.................................................... 68,657 115,640 197,287 68,657 115,640 197,287
20.................................................... 73,168 162,504 327,812 73,168 162,504 327,812
30.................................................... 0 241,038 840,070 0 241,038 840,070
55.................................................... 0 0 8,995,268 0 0 8,995,268
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered within 24 months after issue,
the contract owner will also receive any excess sales load previously
deducted.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At an annual rate of return of 12% and maximum mortality
charges, the guarantee period reaches life of the insured in contract year
17. Once a guarantee of life is reached, no more payments would be accepted.
Values shown at annual rates of return of 0%, 6% and 12% do not reflect any
payments shown after a guarantee period of life is reached.
(7) At contract year 55, on the contract anniversary nearest the insured's 100th
birthday, the Contract reaches its maturity date and a death benefit is no
longer provided. On the maturity date, the net cash surrender value is paid
to the contract owner, provided the insured is still living.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
41
<PAGE> 95
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $27,729 THROUGH CONTRACT YEAR 43
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 9.5 YEARS
DEATH BENEFIT OPTION 2
BASED ON CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)(7)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS --------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
1.................................................. 27,729 29,115 517,268 518,325 519,383
2.................................................. 27,729 59,686 542,084 545,750 549,544
3.................................................. 27,729 91,786 566,333 574,195 582,634
4.................................................. 27,729 125,491 590,082 603,767 619,025
5.................................................. 27,729 160,881 613,373 634,553 659,101
6.................................................. 27,729 198,041 636,224 666,621 703,259
7.................................................. 27,729 237,059 658,647 700,033 751,935
8.................................................. 27,729 278,027 680,691 734,898 805,648
9.................................................. 27,729 321,044 702,330 771,247 864,892
10.................................................. 27,729 366,212 723,506 809,081 930,178
15.................................................. 27,729 628,671 820,227 1,020,304 1,368,930
20.................................................. 27,729 962,731 900,687 1,272,832 1,981,616
30.................................................. 27,729 1,934,397 994,304 1,917,729 4,352,610
55.................................................. 0 7,476,715 0 0 0
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
----------------------------------- ---------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1............................................. 17,268 18,325 19,383 17,268 18,325 19,383
2............................................. 42,084 45,750 49,544 42,084 45,750 49,544
3............................................. 66,333 74,195 82,634 66,333 74,195 82,634
4............................................. 90,082 103,767 119,025 90,082 103,767 119,025
5............................................. 113,373 134,553 159,101 113,373 134,553 159,101
6............................................. 136,224 166,621 203,259 136,224 166,621 203,259
7............................................. 158,647 200,033 251,935 158,647 200,033 251,935
8............................................. 180,691 234,898 305,648 180,691 234,898 305,648
9............................................. 202,330 271,247 364,892 202,330 271,247 364,892
10............................................. 223,506 309,081 430,178 223,506 309,081 430,178
15............................................. 320,227 520,304 868,930 320,227 520,304 868,930
20............................................. 400,687 772,832 1,418,616 400,687 772,832 1,481,616
30............................................. 494,304 1,417,729 3,852,610 494,304 1,417,729 3,852,610
55............................................. 0 2,663,020 42,595,730 0 2,663,020 42,595,730
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered within 24 months after issue,
the contract owner will also receive any excess sales load previously
deducted.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At annual rates of return of 6% and 12% and current
mortality charges, the guarantee period reaches life of the insured in
contract years 37 and 17, respectively. Once a guarantee of life is reached,
no more payments would be accepted. Values shown at annual rates of return
of 0%, 6% and 12% do not reflect any payments shown after a guarantee period
of life is reached.
(7) At contract year 55, on the contract anniversary nearest the insured's 100th
birthday, the Contract reaches its maturity date and a death benefit is no
longer provided. On the maturity date, the net cash surrender value is paid
to the contract owner, provided the insured is still living.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
42
<PAGE> 96
MALE ISSUE AGE 45
STANDARD NON-SMOKER UNDERWRITING CLASS
ANNUAL PAYMENTS OF $27,729 THROUGH CONTRACT YEAR 43
FACE AMOUNT(1): $500,000 INITIAL GUARANTEE PERIOD: 9.5 YEARS
DEATH BENEFIT OPTION 2
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT(3)(7)
PAYMENTS ASSUMING HYPOTHETICAL GROSS
MADE PLUS ANNUAL RATE OF RETURN OF
INTEREST AT 5% AS --------------------------------
CONTRACT YEAR PAYMENTS(2)(6) OF END OF YEAR 0% 6% 12%
------------- -------------- ----------------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
1.................................................. 27,729 29,115 516,298 517,320 518,342
2.................................................. 27,729 59,686 540,264 543,803 547,465
3.................................................. 27,729 91,786 563,746 571,337 579,486
4.................................................. 27,729 125,491 586,743 599,960 614,699
5.................................................. 27,729 160,881 609,240 629,702 653,419
6.................................................. 27,729 198,041 631,235 660,601 696,000
7.................................................. 27,729 237,059 652,701 692,676 742,812
8.................................................. 27,729 278,027 673,611 725,943 794,260
9.................................................. 27,729 321,044 693,942 760,426 850,800
10.................................................. 27,729 366,212 713,658 796,133 912,917
15.................................................. 27,729 628,671 802,096 993,738 1,328,462
20.................................................. 27,729 962,731 869,727 1,223,491 1,896,469
30.................................................. 27,729 1,934,397 898,872 1,753,271 4,009,540
55.................................................. 0 7,476,715 0 0 0
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR
INVESTMENT BASE AND
NET CASH SURRENDER END OF YEAR
VALUE(3)(4) CASH VALUE(3)(5)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN OF ANNUAL RATE OF RETURN OF
----------------------------------- -----------------------------------
CONTRACT YEAR 0% 6% 12% 0% 6% 12%
------------- -------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1........................................... 16,298 17,320 18,342 16,298 17,320 18,342
2........................................... 40,264 43,803 47,465 40,264 43,803 47,465
3........................................... 63,746 71,337 79,486 63,746 71,337 79,486
4........................................... 86,743 99,960 114,699 86,743 99,960 114,699
5........................................... 109,240 129,702 153,419 109,240 129,702 153,419
6........................................... 131,235 160,601 196,000 131,235 160,601 196,000
7........................................... 152,701 192,676 242,812 152,701 192,676 242,812
8........................................... 173,611 225,943 294,260 173,611 225,943 294,260
9........................................... 193,942 260,426 350,800 193,942 260,426 350,800
10........................................... 213,658 296,133 412,917 213,658 296,133 412,917
15........................................... 302,096 493,738 828,462 302,096 493,738 828,462
20........................................... 369,727 723,491 1,396,469 369,727 723,491 1,396,469
30........................................... 398,872 1,253,271 3,509,540 398,872 1,253,271 3,509,540
55........................................... 0 0 34,218,526 0 0 34,218,526
</TABLE>
(1) Assumes no additional insurance rider face amount.
(2) All payments are illustrated as if made at the beginning of the contract
year.
(3) Assumes annual payments are made and no loans or withdrawals have been
taken.
(4) Investment base will equal net cash surrender value on each contract
anniversary. If the Contract is surrendered within 24 months after issue,
the contract owner will also receive any excess sales load previously
deducted.
(5) Cash value will equal investment base and net cash surrender value on each
contract anniversary if no loans have been taken.
(6) The payments shown may extend beyond the year in which the automatic
adjustment is made. At an annual rate of return of 12% and maximum mortality
charges, the guarantee period reaches life of the insured in contract year
17. Once a guarantee of life is reached, no more payments would be accepted.
Values shown at annual rates of return of 0%, 6% and 12% do not reflect any
payments shown after a guarantee period of life is reached.
(7) At contract year 55, on the contract anniversary nearest the insured's 100th
birthday, the Contract reaches its maturity date and a death benefit is no
longer provided. On the maturity date, the net cash surrender value is paid
to the contract owner, provided the insured is still living.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ILLUSTRATED AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS SELECTED, PREVAILING INTEREST
RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND CASH VALUE
WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS RATES OF RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
MERRILL LYNCH LIFE OR THE FUNDS OR THE ZERO TRUSTS THAT THESE HYPOTHETICAL RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
43
<PAGE> 97
EXAMPLES
ADDITIONAL PAYMENTS
As of the processing date on or next following receipt and acceptance of an
additional payment, Merrill Lynch Life will increase the guarantee period if the
guarantee period prior to receipt and acceptance of an additional payment is
less than for the whole of life of the insured.
Merrill Lynch Life will determine the increase in the guarantee period by taking
the immediate increase in the cash value resulting from the additional payment
and adding to that interest at the annual rate of 5% for the period from the
date Merrill Lynch Life receives and accepts the payment to the contract
processing date on or next following such date. This is the guarantee adjustment
amount. The guarantee adjustment amount is added to the fixed base and the
resulting new fixed base is used to calculate a new guarantee period.
The amount of the increase in the guarantee period will depend on the amount of
the additional payment and the contract year in which it is received and
accepted. If additional payments of different amounts were made at the same time
to equivalent Contracts, the Contract to which the larger payment is applied
would have a larger increase in the guarantee period.
Example 1 shows the effect on the guarantee period of a $5,000 additional
payment received and accepted at the beginning of contract year five. Example 2
shows the effect of a $10,000 additional payment received and accepted at the
beginning of contract year five. Example 3 shows the effect of a $5,000
additional payment received and accepted at the beginning of contract year six.
All three examples assume that death benefit option 1 has been elected, that
annual payments of $9,055 have been made up to the contract year reflected in
the example and that no other contract transactions have been made.
MALE ISSUE AGE 45
INITIAL PAYMENT PLUS ANNUAL PAYMENTS OF $9,055
FACE AMOUNT: $500,000
INITIAL GUARANTEE PERIOD: 2.5 YEARS
DEATH BENEFIT OPTION: 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
EXAMPLE 1
-------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
-------- ------------- ----------------
<S> <C> <C> <C> <C>
5 $5,000 1.5 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 2
-------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
-------- ------------- ----------------
<S> <C> <C> <C> <C>
5 $10,000 3 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 3
-------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
-------- ------------- ----------------
<S> <C> <C> <C> <C>
6 $5,000 1.25 years
</TABLE>
44
<PAGE> 98
PARTIAL WITHDRAWALS
As of the processing date on or next following the effective date of a partial
withdrawal, Merrill Lynch Life calculates a new guarantee period. This is done
by taking the immediate decrease in cash value resulting from the partial
withdrawal and adding to that amount interest at an annual rate of 5% for the
period from the date of the withdrawal to the contract processing date on or
next following such date. This is the guarantee adjustment amount. The guarantee
adjustment amount is subtracted from the fixed base and the resulting new fixed
base is used to calculate a new guarantee period.
The amount of the reduction in the guarantee period will depend on the amount of
the withdrawal, the face amount at the time of the withdrawal and the contract
year in which the withdrawal is made. If made at the same time to equivalent
Contracts, a larger withdrawal would result in a greater reduction in the
guarantee period than a smaller withdrawal. The same partial withdrawal made at
the same time from Contracts with the same guarantee periods but with different
face amounts would result in a greater reduction in the guarantee period for the
Contract with the smaller face amount.
Examples 1 and 2 show the effect on the guarantee period of partial withdrawals
for $5,000 and $10,000 taken at the beginning of contract year sixteen. Example
3 shows the effect on the guarantee period of a $10,000 partial withdrawal taken
at the beginning of contract year eighteen. All three examples assume that death
benefit option 1 has been elected, that annual payments of $9,055 have been made
up to the contract year reflected in the example and that no other contract
transactions have been made.
MALE ISSUE AGE 45
INITIAL PAYMENT PLUS ANNUAL PAYMENTS OF $9,055
FACE AMOUNT: $500,000
INITIAL GUARANTEE PERIOD: 2.5 YEARS
DEATH BENEFIT OPTION: 1
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
EXAMPLE 1
-------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
-------- ------------- ----------------
<S> <C> <C> <C> <C>
16 $5,000 .25 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 2
-------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
-------- ------------- ----------------
<S> <C> <C> <C> <C>
16 $10,000 .75 years
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 3
-------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
-------- ------------- ----------------
<S> <C> <C> <C> <C>
18 $10,000 .75 years
</TABLE>
45
<PAGE> 99
CHANGING THE DEATH BENEFIT OPTION
On each contract anniversary beginning with the fifteenth, the contract owner
may change the death benefit option by switching from option 1 to option 2 or
from option 2 to option 1. Merrill Lynch Life will change the face amount of the
Contract in order to keep the death benefit constant on the effective date of
the change. Therefore, if the change is from option 1 to option 2, the face
amount of the Contract will be decreased by the cash value on the date of the
change. If the change is from option 2 to option 1, the face amount of the
Contract will be increased by the cash value on the date of the change.
Example 1 shows the effect on the face amount of a change from option 1 to
option 2 and Example 2 shows the effect on the face amount of a change from
option 2 to option 1. The face amount before each change is $500,000.
EXAMPLE 1
------------------------------------------------------------
Before Option Change
Death Benefit under Option 1: $500,000
Face Amount: $500,000
Cash Value: $40,000
After Option Change
Death Benefit under Option 2: $500,000
Face Amount: $460,000
Cash Value: $40,000
EXAMPLE 2
------------------------------------------------------------
Before Option Change
Death Benefit under Option 2: $540,000
Face Amount: $500,000
Cash Value: $40,000
After Option Change
Death Benefit under Option 1: $540,000
Face Amount: $540,000
Cash Value: $40,000
46
<PAGE> 100
MORE ABOUT MERRLLL LYNCH LIFE INSURANCE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Merrill Lynch Life's directors and executive officers and their positions with
Merrill Lynch Life are as follows:
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE COMPANY
---- ----------------------------
<S> <C>
Anthony J. Vespa Chairman of the Board, President, and
Chief Executive Officer
Joseph E. Crowne, Jr. Director, Senior Vice President,
Chief Financial Officer, Chief
Actuary, and Treasurer
Barry G. Skolnick Director, Senior Vice President,
General Counsel, and Secretary
David M. Dunford Director, Senior Vice President,
and Chief Investment Officer
Gail R. Farkas Director and Senior Vice President
Robert J. Boucher Senior Vice President, Variable Life
Administration
</TABLE>
Each director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and shall have qualified. Each has held
various executive positions with insurance company subsidiaries of Merrill Lynch
Life's indirect parent, Merrill Lynch & Co., Inc. The principal positions of
Merrill Lynch Life's directors and executive officers for the past five years
are listed below:
Mr. Vespa joined Merrill Lynch Life in January 1994. Since February 1994, he has
held the position of Senior Vice President of MLPF&S. From February 1991 to
February 1994, he held the position of District Director and First Vice
President of MLPF&S.
Mr. Crowne joined Merrill Lynch Life in June 1991.
Mr. Skolnick joined Merrill Lynch Life in November 1990. Since May 1992, he has
held the position of Assistant General Counsel of Merrill Lynch & Co., Inc. and
First Vice President and Assistant General Counsel of MLPF&S.
Mr. Dunford joined Merrill Lynch Life in July 1990.
Ms. Farkas joined Merrill Lynch Life in August 1995. Prior to August 1995 she
held the position of Director of Market Planning of MLPF&S.
Mr. Boucher joined Merrill Lynch Life in May 1992.
No shares of Merrill Lynch Life are owned by any of its officers or directors,
as it is a wholly owned subsidiary of MLIG. The officers and directors of
Merrill Lynch Life, both individually and as a group, own less than one percent
of the outstanding shares of common stock of Merrill Lynch & Co., Inc.
SERVICES ARRANGEMENT
Merrill Lynch Life and MLIG are parties to a service agreement pursuant to which
MLIG has agreed to provide certain data processing, legal, actuarial,
management, advertising and other services to Merrill Lynch Life including
services related to the Separate Account and the Contracts. Expenses incurred by
MLIG in relation to this service agreement are reimbursed by Merrill Lynch Life
on an allocated cost basis. Charges billed to Merrill Lynch Life by MLIG
pursuant to the agreement were $43.0 million for the year ended December 31,
1997.
STATE REGULATION
Merrill Lynch Life is subject to the laws of the State of Arkansas and to the
regulations of the Arkansas Insurance Department (the "Insurance Department"). A
detailed financial statement in the prescribed form
47
<PAGE> 101
(the "Annual Statement") is filed with the Insurance Department each year
covering Merrill Lynch Life's operations for the preceding year and its
financial condition as of the end of that year. Regulation by the Insurance
Department includes periodic examination to determine contract liabilities and
reserves so that the Insurance Department may certify that these items are
correct. Merrill Lynch Life's books and accounts are subject to review by the
Insurance Department at all times. A full examination of Merrill Lynch Life's
operations is conducted periodically by the Insurance Department and under the
auspices of the National Association of Insurance Commissioners. Merrill Lynch
Life is also subject to the insurance laws and regulations of all jurisdictions
in which it is licensed to do business.
YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment companies and
financial and business organizations, the Separate Account could be adversely
affected if the computer systems used by Merrill Lynch Life or the other service
providers do not properly address this problem prior to January 1, 2000. Merrill
Lynch & Co., Inc. has established a dedicated group to analyze these issues and
to implement any systems modifications necessary to prepare for the Year 2000.
The resources that are being devoted to this effort are substantial. It is
difficult to predict with precision whether the amount of resources ultimately
devoted, or the outcome of these efforts, will have any negative impact on
Merrill Lynch Life. Currently, Merrill Lynch Life does not anticipate that the
transition to the 21st century will have any material impact on its ability to
continue to service the Contracts at current levels. In addition, Merrill Lynch
Life has sought assurances from the other service providers that they are taking
all necessary steps to ensure that their computer systems will accurately
reflect the Year 2000, and Merrill Lynch Life will continue to monitor the
situation. At this time, however, no assurance can be given that the other
service providers have anticipated every step necessary to avoid any adverse
effect on the Separate Account attributable to the Year 2000 Problem.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. Merrill Lynch Life and
MLPF&S are engaged in various kinds of routine litigation that, in the Company's
judgment, is not material to Merrill Lynch Life's total assets or to MLPF&S.
EXPERTS
The financial statements of Merrill Lynch Life as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 and of the
Separate Account as of December 31, 1997 and for the periods presented, included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and have been so included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing. Deloitte & Touche's principal business address is
Two World Financial Center, New York, New York 10281-1433.
Actuarial matters included in this Prospectus have been examined by Joseph E.
Crowne, Jr., F.S.A., Chief Actuary and Chief Financial Officer of Merrill Lynch
Life, as stated in his opinion filed as an exhibit to the registration
statement.
LEGAL MATTERS
The organization of the Company, its authority to issue the Contract, and the
validity of the form of the Contract have been passed upon by Barry G. Skolnick,
Merrill Lynch Life's Senior Vice President and General Counsel. Sutherland,
Asbill & Brennan LLP of Washington, D.C. has provided advice on certain matters
relating to federal securities and tax laws.
48
<PAGE> 102
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 and the Investment Company Act of
1940 that relate to the Contract and its investment options. This Prospectus
does not contain all of the information in the registration statements as
permitted by Securities and Exchange Commission regulations. The omitted
information can be obtained from the Securities and Exchange Commission's
principal office in Washington, D.C., upon payment of a prescribed fee.
FINANCIAL STATEMENTS
The financial statements of Merrill Lynch Life, included herein, should be
distinguished from the financial statements of the Separate Account and should
be considered only as bearing upon the ability of Merrill Lynch Life to meet its
obligations under the Contracts.
49
<PAGE> 103
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying statement of net assets of
Merrill Lynch Variable Life Separate Account (the "Account")
as of December 31, 1997 and the related statements of
operations and changes in net assets for each of the three
years in the period then ended. These financial statements
are the responsibility of the management of Merrill Lynch
Life Insurance Company. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of mutual fund and unit investment trust securities owned at
December 31, 1997. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Account
at December 31, 1997 and the results of its operations and
the changes in its net assets for the above periods in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole.
The supplemental schedules included herein are presented for
the purpose of additional analysis and are not a required
part of the basic financial statements. These schedules are
the responsibility of the Company's management. Such
schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects
when considered in relation to the basic financial
statements taken as a whole.
January 30, 1998
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS: Cost Shares Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in Merrill Lynch Series Fund, Inc. (Note 1):
Money Reserve Portfolio $ 63,548,989 63,548,989 $ 63,548,989
Intermediate Government Bond Portfolio 16,287,173 1,499,605 16,615,628
Long-Term Corporate Bond Portfolio 14,688,340 1,286,854 15,081,929
Capital Stock Portfolio 31,767,842 1,432,533 38,377,551
Growth Stock Portfolio 31,877,145 1,299,502 42,649,668
Multiple Strategy Portfolio 23,862,232 1,462,641 27,746,299
High Yield Portfolio 24,354,668 2,683,014 24,656,900
Natural Resources Portfolio 2,458,404 274,536 2,229,229
Global Strategy Portfolio 35,197,639 2,253,795 39,306,193
Balanced Portfolio 11,034,733 781,572 12,333,202
--------------------- ---------------------
255,077,165 282,545,588
--------------------- ---------------------
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Global Utility Focus Fund 1,558,534 130,418 1,935,402
International Equity Focus Fund 11,156,709 974,056 10,519,807
Global Bond Focus Fund 1,025,067 107,954 1,006,132
Basic Value Focus Fund 35,554,181 2,579,307 40,856,227
Developing Capital Markets Focus Fund 6,278,665 620,296 5,719,129
Special Value Focus Fund 3,373,872 127,997 3,551,930
Index 500 Fund 4,171,380 331,379 4,466,348
--------------------- ---------------------
63,118,408 68,054,975
--------------------- ---------------------
Investments in Alliance Variable Products Series Funds, Inc. (Note 1):
Premier Growth Portfolio 5,998,849 295,092 6,193,975
--------------------- ---------------------
5,998,849 6,193,975
--------------------- ---------------------
Investments in MFS Variable Insurance Trust (Note 1):
MFS Emerging Growth Series 3,249,675 205,369 3,314,658
MFS Research Series 3,500,889 225,966 3,568,009
--------------------- ---------------------
6,750,564 6,882,667
--------------------- ---------------------
Investments in AIM Variable Insurance Funds, Inc. (Note 1):
AIM V.I. Value Fund 4,009,482 188,947 3,935,762
AIM V.I. Capital Appreciation Fund 1,397,918 61,976 1,347,969
--------------------- ---------------------
5,407,400 5,283,731
--------------------- ---------------------
</TABLE>
(continued)
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
Units
-------------------
<S> <C> <C> <C>
Investments in the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities, Series A through K (Note 1):
1998 Trust 839,634 1,014,604 1,009,270
1999 Trust 1,011,110 1,300,432 1,222,783
2000 Trust 781,003 1,051,825 936,408
2001 Trust 275,431 353,946 298,380
2002 Trust 623,381 895,700 711,490
2003 Trust 306,347 482,014 351,393
2004 Trust 1,035,942 1,774,066 1,253,773
2005 Trust 645,329 1,134,921 763,564
2006 Trust 247,754 461,086 297,451
2007 Trust 155,638 299,730 181,444
2008 Trust 358,569 750,730 419,335
2009 Trust 59,970 154,854 81,380
2010 Trust 530,796 1,107,010 541,904
2011 Trust 122,023 363,895 169,517
2013 Trust 160,468 493,562 202,637
2014 Trust 2,895,201 9,692,115 3,711,886
--------------------- ---------------------
10,048,596 12,152,615
--------------------- ---------------------
TOTAL ASSETS $ 346,400,982 381,113,551
===================== =====================
LIABILITIES:
Payable to Merrill Lynch Life Insurance Company 13,766,872
---------------------
TOTAL LIABILITIES 13,766,872
---------------------
NET ASSETS $ 367,346,679
=====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 18,534,136 $ 12,043,745 $ 7,040,646
Mortality and Expense Charges (Note 3) (2,791,171) (1,751,522) (1,098,797)
Transaction Charges (Note 4) (36,928) (28,838) (18,263)
--------------------- --------------------- ---------------------
Net Investment Income 15,706,037 10,263,385 5,923,586
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,063,224 (45,179) (309,482)
Net Unrealized Gains 18,236,659 8,986,838 10,659,883
--------------------- --------------------- ---------------------
Net Realized and Unrealized Gains 20,299,883 8,941,659 10,350,401
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Operations 36,005,920 19,205,044 16,273,987
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 99,960,767 70,164,840 57,600,863
Transfers of Policy Loading, Net (Note 3) 4,809,499 3,408,619 2,992,695
Transfers Due to Deaths (1,185,686) (813,683) (1,461,703)
Transfers Due to Other Terminations (3,656,934) (2,808,710) (2,139,618)
Transfers Due to Policy Loans (2,605,297) (2,600,351) (1,721,984)
Transfers of Cost of Insurance (4,830,049) (3,101,640) (2,101,569)
Transfers of Loan Processing Charges (75,863) (50,705) (28,928)
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Principal Transactions 92,416,437 64,198,370 53,139,756
--------------------- --------------------- ---------------------
Increase in Net Assets 128,422,357 83,403,414 69,413,743
Net Assets Beginning Balance 238,924,322 155,520,908 86,107,165
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 367,346,679 $ 238,924,322 $ 155,520,908
===================== ===================== =====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
Notes to Financial Statements
1. Merrill Lynch Variable Life Separate Account ("Account"),
a separate account of Merrill Lynch Life Insurance
Company ("Merrill Lynch Life") was established to support
the operations with respect to certain variable life
insurance contracts ("Contracts"). The Account is
governed by Arkansas State Insurance Law. Merrill Lynch
Life is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill"). The Account is registered
as a unit investment trust under the Investment Company
Act of 1940 and consists of thirty-eight investment
divisions (thirty-nine during the year). At any point in
time, the Account may or may not be invested in all
available divisions. Ten of the investment divisions each
invest in the securities of a single mutual fund
portfolio of the Merrill Lynch Series Fund, Inc. Seven of
the investment divisions each invest in the securities of
a single mutual fund portfolio of the Merrill Lynch
Variable Series Funds, Inc. One of the investment
divisions invests in the securities of a single mutual
fund portfolio of the Alliance Variable Products Series
Fund, Inc. Two of the investments divisions each invest
in the securities of a single mutual fund portfolio of
the MFS Variable Insurance Trust. Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the AIM Variable Insurance
Funds, Inc. Sixteen of the investment divisions
(seventeen during the year) each invest in the securities
of a single trust of the Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities, Series A through K
("Zero Trusts"). Each trust of the Zero Trusts consists
of Stripped Treasury Securities with a fixed maturity
date and a Treasury Note deposited to provide income to
pay expenses of the trust.
The assets of the Account are registered in the name of
Merrill Lynch Life. The portion of the Account's assets
attributable to the Contracts are not chargeable with
liabilities arising out of any other business Merrill
Lynch Life may conduct.
The change in net assets accumulated in the Account
provides the basis for the periodic determination of the
amount of increased or decreased benefits under the
Contracts.
The net assets may not be less than the amount required
under Arkansas State Insurance Law to provide for death
benefits (without regard to the minimum death benefit
guarantee) and other Contract benefits.
The financial statements included herein have been
prepared in accordance with generally accepted accounting
principles for variable life separate accounts registered
as unit investment trusts. The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. The following is a summary of significant accounting
policies of the Account:
Investments in the divisions are included in the
statement of net assets at the net asset value of the
shares and units held.
Dividend income is recognized on the ex-dividend date.
All dividends are automatically reinvested.
Realized gains and losses on the sales of investments are
computed on the first in first out method.
The operations of the Account are included in the Federal
income tax return of Merrill Lynch Life. Under the
provisions of the Contracts, Merrill Lynch Life has the
right to charge the Account for any Federal income tax
attributable to the Account. No charge is currently being
made against the Account for such tax since, under
current tax law, Merrill Lynch Life pays no tax on
investment income and capital gains reflected in variable
life insurance contract reserves. However, Merrill Lynch
Life retains the right to charge for any Federal income
tax incurred which is attributable to the Account if the
law is changed. Contract loading, however, includes a
charge for a significantly higher Federal income tax
liability of Merrill Lynch Life (see Note 3). Charges for
state and local taxes, if any, attributable to the
Account may also be made.
3. Merrill Lynch Life assumes mortality and expense risks
related to Contracts investing in the Account and deducts
daily charges at a rate of .9% (on an annual basis) of
the net assets of the Account to cover these risks.
Merrill Lynch Life makes certain deductions from each
premium. For certain Contracts, the deductions are made
before the premium is allocated to the Account. For other
Contracts, the deductions are taken in equal installments
on the first through tenth Contract anniversaries. The
deductions are for (1) sales load, (2) Federal income
taxes, and (3) state and local premium taxes.
In addition, the cost of providing life insurance
coverage for the insureds will be deducted on the dates
specified by the Contract. This cost will vary dependent
upon the insured's underwriting class, sex (except where
unisex rates are required by state law), attained age of
each insured and the Contract's net amount at risk.
4. Merrill Lynch Life pays all transaction charges to
Merrill Lynch, Pierce, Fenner & Smith Inc., a subsidiary
of Merrill and sponsor of the Zero Trusts, on the sale of
Zero Trust units to the Account. Merrill Lynch Life
deducts a daily asset charge against the assets of each
trust for the reimbursement of these transaction charges.
The asset charge is equivalent to an effective annual
rate of .34% (annually at the beginning of the year) of
net assets for Contract owners.
5. Effective following the close of business on August 15,
1997,the Equity Growth Fund was renamed the Special Value
Focus Fund. The Fund's investment objective was not
modified.
Effective following the close of business on December 6,
1996, the International Bond Fund was merged with and
into the former World Income Focus Fund; the World Income
Focus Fund was renamed the Global Bond Focus Fund; and
the Fund's investment objective was modified.
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 18,534,136 $ 3,061,142 $ 1,024,278 $ 853,881
Mortality and Expense Charges (2,791,171) (432,030) (139,164) (116,107)
Transaction Charges (36,928) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 15,706,037 2,629,112 885,114 737,774
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,063,224 0 28,903 (129,911)
Net Unrealized Gains (Losses) 18,236,659 0 202,623 399,513
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 20,299,883 0 231,526 269,602
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 36,005,920 2,629,112 1,116,640 1,007,376
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 99,960,767 80,752,279 309,156 618,629
Transfers of Policy Loading, Net 4,809,499 5,431,651 (94,415) (65,801)
Transfers Due to Deaths (1,185,686) (211,759) (34,457) (48,608)
Transfers Due to Other Terminations (3,656,934) (527,652) (199,221) (257,966)
Transfers Due to Policy Loans (2,605,297) (661,570) (19,762) (84,885)
Transfers of Cost of Insurance (4,830,049) (961,359) (186,799) (177,136)
Transfers of Loan Processing Charges (75,863) (14,418) (2,364) (2,193)
Transfers Among Investment Divisions 0 (79,759,226) 988,023 3,327,999
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 92,416,437 4,047,946 760,161 3,310,039
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 128,422,357 6,677,058 1,876,801 4,317,415
Net Assets Beginning Balance 238,924,322 44,182,360 14,833,421 10,756,980
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 367,346,679 $ 50,859,418 $ 16,710,222 $ 15,074,395
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 1,534,321 $ 2,954,096 $ 1,430,984 $ 1,815,929
Mortality and Expense Charges (304,549) (317,291) (222,898) (175,173)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 1,229,772 2,636,805 1,208,086 1,640,756
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 177,958 519,115 (43,217) 66,054
Net Unrealized Gains (Losses) 4,630,014 6,064,599 2,796,441 (5,499)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 4,807,972 6,583,714 2,753,224 60,555
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 6,037,744 9,220,519 3,961,310 1,701,311
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,655,250 3,002,127 1,618,485 1,133,832
Transfers of Policy Loading, Net 23,121 23,716 (122,374) (57,681)
Transfers Due to Deaths (93,442) (110,623) (132,745) (97,350)
Transfers Due to Other Terminations (484,772) (324,025) (390,645) (204,648)
Transfers Due to Policy Loans (235,369) (485,892) (84,527) (113,971)
Transfers of Cost of Insurance (486,711) (543,329) (360,114) (275,393)
Transfers of Loan Processing Charges (7,416) (9,043) (4,636) (5,844)
Transfers Among Investment Divisions 5,273,125 6,858,211 2,873,888 9,318,948
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 6,643,786 8,411,142 3,397,332 9,697,893
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 12,681,530 17,631,661 7,358,642 11,399,204
Net Assets Beginning Balance 25,862,344 24,989,798 20,376,299 13,166,433
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 38,543,874 $ 42,621,459 $ 27,734,941 $ 24,565,637
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 16,971 $ 1,984,898 $ 1,063,388 $ 48,805
Mortality and Expense Charges (22,152) (322,626) (95,480) (13,670)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (5,181) 1,662,272 967,908 35,135
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 111,013 196,560 49,619 49,962
Net Unrealized Gains (Losses) (413,042) 1,050,704 545,849 269,176
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) (302,029) 1,247,264 595,468 319,138
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (307,210) 2,909,536 1,563,376 354,273
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 171,332 3,285,567 747,249 111,780
Transfers of Policy Loading, Net (10,221) (115,769) (66,625) (4,198)
Transfers Due to Deaths 0 (138,684) (45,737) 0
Transfers Due to Other Terminations (44,526) (511,741) (94,509) (11,478)
Transfers Due to Policy Loans 362 (258,709) (63,906) (14,092)
Transfers of Cost of Insurance (32,834) (576,387) (156,716) (19,823)
Transfers of Loan Processing Charges (319) (10,810) (2,576) (130)
Transfers Among Investment Divisions 212,353 6,664,342 1,705,254 374,103
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 296,147 8,337,809 2,022,434 436,162
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (11,063) 11,247,345 3,585,810 790,435
Net Assets Beginning Balance 2,239,532 28,040,964 8,573,557 1,144,485
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 2,228,469 $ 39,288,309 $ 12,159,367 $ 1,934,920
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic Developing
Equity Bond Value Capital
Focus Focus Focus Markets Focus
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 214,325 $ 61,646 $ 2,148,291 $ 92,408
Mortality and Expense Charges (92,275) (8,564) (280,173) (58,702)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 122,050 53,082 1,868,118 33,706
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 193,102 (8,217) 319,132 87,634
Net Unrealized Gains (Losses) (1,033,706) (32,725) 2,665,523 (718,388)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) (840,604) (40,942) 2,984,655 (630,754)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (718,554) 12,140 4,852,773 (597,048)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,097,659 112,341 2,539,207 796,454
Transfers of Policy Loading, Net (9,101) (502) (81,910) 1,174
Transfers Due to Deaths (108,221) 0 (98,994) (37,303)
Transfers Due to Other Terminations (55,367) (9,771) (200,584) (63,117)
Transfers Due to Policy Loans (19,024) (11,222) (322,540) (63,397)
Transfers of Cost of Insurance (169,695) (15,333) (502,869) (93,497)
Transfers of Loan Processing Charges (2,465) (14) (5,680) (1,150)
Transfers Among Investment Divisions 2,569,724 (20,382) 15,311,530 779,810
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,303,510 55,117 16,638,160 1,318,974
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,584,956 67,257 21,490,933 721,926
Net Assets Beginning Balance 7,794,744 938,559 19,345,706 4,934,396
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 10,379,700 $ 1,005,816 $ 40,836,639 $ 5,656,322
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Special MFS
Value Index Premier Emerging
Focus 500 Growth Growth
Fund Fund Portfolio Series
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 85,609 $ 0 $ 888 $ 0
Mortality and Expense Charges (25,040) (15,755) (16,038) (10,636)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 60,569 (15,755) (15,150) (10,636)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 25,948 4,833 17,322 31,933
Net Unrealized Gains (Losses) 139,551 294,968 195,126 64,983
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 165,499 299,801 212,448 96,916
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 226,068 284,046 197,298 86,280
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 132,757 53,563 201,131 68,836
Transfers of Policy Loading, Net (4,099) (2,313) 7,645 3,043
Transfers Due to Deaths 0 (15,178) 0 0
Transfers Due to Other Terminations (5,437) (2,863) (1,986) (4,728)
Transfers Due to Policy Loans (4,230) (395) (18,646) (10,611)
Transfers of Cost of Insurance (31,479) (19,968) (30,555) (30,261)
Transfers of Loan Processing Charges (311) (626) (1,029) (518)
Transfers Among Investment Divisions 1,570,344 4,154,793 5,681,005 3,187,612
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,657,545 4,167,013 5,837,565 3,213,373
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 1,883,613 4,451,059 6,034,863 3,299,653
Net Assets Beginning Balance 1,667,274 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,550,887 $ 4,451,059 $ 6,034,863 $ 3,299,653
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
AIM V.I.
MFS AIM V.I. Capital
Research Value Appreciation 1997
Series Fund Fund Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 124,894 $ 17,382 $ 0
Mortality and Expense Charges (10,708) (9,699) (4,667) (356)
Transaction Charges 0 0 0 (129)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (10,708) 115,195 12,715 (485)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 14,825 7,233 18,270 32,599
Net Unrealized Gains (Losses) 67,120 (73,720) (49,949) (30,951)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 81,945 (66,487) (31,679) 1,648
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 71,237 48,708 (18,964) 1,163
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 86,976 56,856 55,299 0
Transfers of Policy Loading, Net 2,776 (53) 1,870 (1,313)
Transfers Due to Deaths 0 (11,341) 0 0
Transfers Due to Other Terminations (2,421) (3,980) (150) 216
Transfers Due to Policy Loans (25,774) 24 (11,453) 0
Transfers of Cost of Insurance (19,326) (18,707) (8,800) (331)
Transfers of Loan Processing Charges (542) (664) (191) 44
Transfers Among Investment Divisions 3,299,288 3,432,485 1,329,926 (353,324)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,340,977 3,454,620 1,366,501 (354,708)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 3,412,214 3,503,328 1,347,537 (353,545)
Net Assets Beginning Balance 0 0 0 353,545
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,412,214 $ 3,503,328 $ 1,347,537 $ 0
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (8,966) (10,685) (8,105) (2,038)
Transaction Charges (3,384) (4,034) (3,061) (772)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (12,350) (14,719) (11,166) (2,810)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 5,521 9,645 14,192 3,810
Net Unrealized Gains (Losses) 49,493 61,471 45,718 14,238
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 55,014 71,116 59,910 18,048
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 42,664 56,397 48,744 15,238
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,016 3,172 9,609 3,327
Transfers of Policy Loading, Net (7,846) (9,449) (6,592) (5,055)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations 59 55 (29,935) (79)
Transfers Due to Policy Loans (1,787) 2,400 (6,763) (20,654)
Transfers of Cost of Insurance (7,118) (13,088) (10,007) (2,772)
Transfers of Loan Processing Charges (50) (812) (234) (48)
Transfers Among Investment Divisions 4,943 22,918 135,012 143,929
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (9,783) 5,196 91,090 118,648
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance 32,881 61,593 139,834 133,886
975,982 1,160,676 796,195 164,361
Net Assets Ending Balance --------------------- --------------------- --------------------- ---------------------
$ 1,008,863 $ 1,222,269 $ 936,029 $ 298,247
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (6,076) (2,431) (9,680) (6,524)
Transaction Charges (2,295) (920) (3,658) (2,463)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (8,371) (3,351) (13,338) (8,987)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 6,813 5,427 38,160 10,438
Net Unrealized Gains (Losses) 48,467 22,626 73,112 69,622
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 55,280 28,053 111,272 80,060
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 46,909 24,702 97,934 71,073
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 6,610 28,786 18,132
Transfers of Policy Loading, Net (4,924) (992) (60) (4,530)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations 1 (75) 3,305 (8,291)
Transfers Due to Policy Loans (9,150) (15,991) (28,232) 0
Transfers of Cost of Insurance (7,559) (3,882) (11,795) (8,283)
Transfers of Loan Processing Charges (37) (415) (109) (19)
Transfers Among Investment Divisions 65,946 130,100 208,675 (13,957)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 44,277 115,355 200,570 (16,948)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 91,186 140,057 298,504 54,125
Net Assets Beginning Balance 620,003 211,188 954,766 709,126
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 711,189 $ 351,245 $ 1,253,270 $ 763,251
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (2,228) (1,059) (2,939) (705)
Transaction Charges (842) (402) (1,111) (266)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (3,070) (1,461) (4,050) (971)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,717 801 3,163 9,593
Net Unrealized Gains (Losses) 27,825 19,338 47,651 (248)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 29,542 20,139 50,814 9,345
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 26,472 18,678 46,764 8,374
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 39,168 1,717 38,579 16,681
Transfers of Policy Loading, Net (919) (845) (1,053) (1,800)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (14) (93) (80) (30,350)
Transfers Due to Policy Loans 0 0 (4,900) 0
Transfers of Cost of Insurance (1,902) (1,181) (3,846) (1,535)
Transfers of Loan Processing Charges (5) (18) (338) 1
Transfers Among Investment Divisions 79 130,235 100,294 (20)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 36,407 129,815 128,656 (17,023)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 62,879 148,493 175,420 (8,649)
Net Assets Beginning Balance 234,452 32,876 243,741 90,000
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 297,331 $ 181,369 $ 419,161 $ 81,351
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ $ 0 $ 0
Mortality and Expense Charges (4,808) (1,691) (1,378) (28,105)
Transaction Charges (1,815) (637) (521) (10,618)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (6,623) (2,328) (1,899) (38,723)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 85,341 73,982 479 23,472
Net Unrealized Gains (Losses) (3,039) 49,240 31,648 651,287
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 82,302 123,222 32,127 674,759
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 75,679 120,894 30,228 636,036
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 5,603 2,413 46,077 132,112
Transfers of Policy Loading, Net 7,604 (8,160) 3,553 (8,054)
Transfers Due to Deaths (1,244) 0 0 0
Transfers Due to Other Terminations 375 (190,109) (33) (299)
Transfers Due to Policy Loans 0 0 0 (10,631)
Transfers of Cost of Insurance (4,517) (2,471) (1,587) (31,084)
Transfers of Loan Processing Charges (81) 13 (51) (765)
Transfers Among Investment Divisions (100,379) (75,903) 6,517 461,780
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (92,639) (274,217) 54,476 543,059
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (16,960) (153,323) 84,704 1,179,095
Net Assets Beginning Balance 558,584 322,763 117,834 2,531,378
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 541,624 $ 169,440 $ 202,538 $ 3,710,473
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 12,043,745 $ 2,259,703 $ 882,178 $ 625,900
Mortality and Expense Charges (1,751,522) (338,561) (118,016) (83,645)
Transaction Charges (28,838) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 10,263,385 1,921,142 764,162 542,255
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (45,179) 0 18,190 (69,537)
Net Unrealized Gains (Losses) 8,986,838 0 (494,507) (262,935)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 8,941,659 0 (476,317) (332,472)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 19,205,044 1,921,142 287,845 209,783
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 70,164,840 57,111,336 274,240 441,258
Transfers of Policy Loading, Net 3,408,619 3,817,075 (65,305) (45,661)
Transfers Due to Deaths (813,683) (279,751) (18,739) (40,588)
Transfers Due to Other Terminations (2,808,710) (380,432) (76,682) (101,534)
Transfers Due to Policy Loans (2,600,351) (1,084,294) (52,385) (42,333)
Transfers of Cost of Insurance (3,101,640) (629,669) (140,278) (119,430)
Transfers of Loan Processing Charges (50,705) (10,186) (1,605) (1,801)
Transfers Among Investment Divisions 0 (49,154,498) 2,922,480 2,331,559
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 64,198,370 9,389,581 2,841,726 2,421,470
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 83,403,414 11,310,723 3,129,571 2,631,253
Net Assets Beginning Balance 155,520,908 32,871,637 11,703,850 8,125,727
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 238,924,322 $ 44,182,360 $ 14,833,421 $ 10,756,980
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 2,849,273 $ 474,609 $ 2,134,807 $ 991,648
Mortality and Expense Charges (189,168) (168,016) (161,312) (93,784)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 2,660,105 306,593 1,973,495 897,864
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (192,580) 76,061 (205,247) (38,619)
Net Unrealized Gains (Losses) 677,575 2,799,507 511,360 263,711
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 484,995 2,875,568 306,113 225,092
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 3,145,100 3,182,161 2,279,608 1,122,956
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,079,423 1,942,040 1,309,262 764,317
Transfers of Policy Loading, Net (43,754) (21,164) (65,905) (51,806)
Transfers Due to Deaths (92,681) (8,492) (75,789) (3,979)
Transfers Due to Other Terminations (321,383) (260,142) (312,254) (358,814)
Transfers Due to Policy Loans (145,225) (397,438) (171,503) (204,029)
Transfers of Cost of Insurance (328,889) (333,742) (276,061) (163,545)
Transfers of Loan Processing Charges (5,535) (6,120) (4,502) (4,660)
Transfers Among Investment Divisions 4,872,794 7,878,892 1,654,189 4,143,862
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 6,014,750 8,793,834 2,057,437 4,121,346
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,159,850 11,975,995 4,337,045 5,244,302
Net Assets Beginning Balance 16,702,494 13,013,803 16,039,254 7,922,131
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 25,862,344 $ 24,989,798 $ 20,376,299 $ 13,166,433
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 35,904 $ 658,077 $ 339,821 $ 26,694
Mortality and Expense Charges (18,240) (216,109) (61,936) (6,067)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 17,664 441,968 277,885 20,627
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 88,450 51,512 16,557 6,978
Net Unrealized Gains (Losses) 143,526 2,581,792 341,710 68,172
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 231,976 2,633,304 358,267 75,150
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 249,640 3,075,272 636,152 95,777
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 181,972 2,473,052 553,126 47,855
Transfers of Policy Loading, Net (3,920) (44,092) (27,821) 40
Transfers Due to Deaths 0 (158,560) (1,125) 0
Transfers Due to Other Terminations (55,127) (514,227) (209,048) (554)
Transfers Due to Policy Loans (22,880) (192,425) (60,254) (5,578)
Transfers of Cost of Insurance (28,415) (421,815) (118,014) (10,007)
Transfers of Loan Processing Charges (167) (6,017) (2,108) (145)
Transfers Among Investment Divisions 291,252 3,487,282 2,554,987 650,138
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 362,715 4,623,198 2,689,743 681,749
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 612,355 7,698,470 3,325,895 777,526
Net Assets Beginning Balance 1,627,177 20,342,494 5,247,662 366,959
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 2,239,532 $ 28,040,964 $ 8,573,557 $ 1,144,485
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic
Equity Bond Value International
Focus Focus Focus Bond
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 58,526 $ 29,074 $ 596,893 $ 19,027
Mortality and Expense Charges (55,091) (3,779) (118,246) (2,285)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 3,435 25,295 478,647 16,742
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,353 347 54,169 (2,241)
Net Unrealized Gains (Losses) 266,897 7,902 1,807,802 (796)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 268,250 8,249 1,861,971 (3,037)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 271,685 33,544 2,340,618 13,705
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 756,559 40,516 1,276,821 44,422
Transfers of Policy Loading, Net (3,515) 509 (5,302) 902
Transfers Due to Deaths (33,903) 0 (68,358) (877)
Transfers Due to Other Terminations (41,605) (552) (123,456) 1,893
Transfers Due to Policy Loans (64,171) 0 (76,540) (988)
Transfers of Cost of Insurance (114,440) (5,978) (241,687) (4,818)
Transfers of Loan Processing Charges (1,964) (147) (2,269) (41)
Transfers Among Investment Divisions 2,803,185 284,230 7,975,786 218,985
Transfer of Merged Funds 0 367,255 0 (367,255)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,300,146 685,833 8,734,995 (107,777)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 3,571,831 719,377 11,075,613 (94,072)
Net Assets Beginning Balance 4,222,913 219,182 8,270,093 94,072
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 7,794,744 $ 938,559 $ 19,345,706 $ 0
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Developing Special
Capital Value
Markets Focus Focus 1996 1997
Fund Fund Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 61,179 $ 432 $ 0 $ 0
Mortality and Expense Charges (36,040) (4,712) (249) (2,858)
Transaction Charges 0 0 (91) (1,075)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 25,139 (4,280) (340) (3,933)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (20,703) (914) 10,567 1,373
Net Unrealized Gains (Losses) 250,904 38,506 (9,400) 14,566
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 230,201 37,592 1,167 15,939
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 255,340 33,312 827 12,006
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 610,043 25,818 0 3,518
Transfers of Policy Loading, Net 11,064 1,255 (728) (2,396)
Transfers Due to Deaths (30,841) 0 0 0
Transfers Due to Other Terminations (31,692) (1,214) 159 (67)
Transfers Due to Policy Loans (57,503) 0 0 1,090
Transfers of Cost of Insurance (64,681) (7,114) (210) (3,936)
Transfers of Loan Processing Charges (863) (221) 23 (46)
Transfers Among Investment Divisions 1,835,923 1,615,438 (222,425) 65,390
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,271,450 1,633,962 (223,181) 63,553
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,526,790 1,667,274 (222,354) 75,559
Net Assets Beginning Balance 2,407,606 0 222,354 277,986
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 4,934,396 $ 1,667,274 $ 0 $ 353,545
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (8,548) (9,461) (6,622) (967)
Transaction Charges (3,218) (3,562) (2,493) (365)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (11,766) (13,023) (9,115) (1,332)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 6,017 5,854 12,442 700
Net Unrealized Gains (Losses) 37,385 37,303 12,222 4,215
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 43,402 43,157 24,664 4,915
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 31,636 30,134 15,549 3,583
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,729 2,079 11,888 1,320
Transfers of Policy Loading, Net (7,282) (9,924) (4,276) (634)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (17,187) 13,021 (80) (9,468)
Transfers Due to Policy Loans (34) 3,211 (12,327) 0
Transfers of Cost of Insurance (6,841) (12,333) (7,564) (930)
Transfers of Loan Processing Charges (90) (606) (122) (44)
Transfers Among Investment Divisions 151,070 136,353 52,712 114,790
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 122,365 131,801 40,231 105,034
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 154,001 161,935 55,780 108,617
Net Assets Beginning Balance 821,981 998,741 740,415 55,744
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 975,982 $ 1,160,676 $ 796,195 $ 164,361
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (4,865) (1,249) (7,310) (7,624)
Transaction Charges (1,836) (471) (2,753) (2,871)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (6,701) (1,720) (10,063) (10,495)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 3,431 936 17,968 48,027
Net Unrealized Gains (Losses) 10,227 4,471 (10,934) (65,787)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 13,658 5,407 7,034 (17,760)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 6,957 3,687 (3,029) (28,255)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 9,067 24,881 21,785
Transfers of Policy Loading, Net (2,544) (127) (5,811) (3,031)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (335) (86) 17,456 (23,693)
Transfers Due to Policy Loans (3,280) 0 (3,357) (2,263)
Transfers of Cost of Insurance (6,687) (2,134) (11,301) (8,848)
Transfers of Loan Processing Charges (65) (369) (254) (38)
Transfers Among Investment Divisions 429,537 95,804 127,953 115,644
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 416,626 102,155 149,567 99,556
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 423,583 105,842 146,538 71,301
Net Assets Beginning Balance 196,420 105,346 808,228 637,825
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 620,003 $ 211,188 $ 954,766 $ 709,126
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (1,207) (282) (1,849) (689)
Transaction Charges (456) (107) (697) (259)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (1,663) (389) (2,546) (948)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 655 202 2,072 542
Net Unrealized Gains (Losses) 3,403 (764) (4,484) (1,142)
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 4,058 (562) (2,412) (600)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 2,395 (951) (4,958) (1,548)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 1,301 33,415 0
Transfers of Policy Loading, Net (506) (218) 556 (158)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (15) (2) (65) (22)
Transfers Due to Policy Loans 0 0 1,630 0
Transfers of Cost of Insurance (1,015) (385) (2,980) (1,195)
Transfers of Loan Processing Charges (23) (1) (304) (4)
Transfers Among Investment Divisions 162,335 2 22,434 20,781
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 160,776 697 54,686 19,402
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 163,171 (254) 49,728 17,854
Net Assets Beginning Balance 71,281 33,130 194,013 72,146
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 234,452 $ 32,876 $ 243,741 $ 90,000
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (3,648) (2,818) (822) (15,447)
Transaction Charges (1,376) (1,061) (310) (5,837)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (5,024) (3,879) (1,132) (21,284)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (1,501) 3,521 2,269 55,970
Net Unrealized Gains (Losses) 5,242 (124,824) (1,550) 75,563
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 3,741 (121,303) 719 131,533
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (1,283) (125,182) (413) 110,249
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,719 2,406 47,499 68,173
Transfers of Policy Loading, Net 4,058 (1,867) 4,531 (13,624)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (218) (13) 26 (1,298)
Transfers Due to Policy Loans (7,845) 0 370 0
Transfers of Cost of Insurance (3,366) (3,609) (1,853) (17,870)
Transfers of Loan Processing Charges (48) (6) (69) (288)
Transfers Among Investment Divisions 266,394 108,244 120 1,986,378
Transfer of Merged Funds 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 261,694 105,155 50,624 2,021,471
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 260,411 (20,027) 50,211 2,131,720
Net Assets Beginning Balance 298,173 342,790 67,623 399,658
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 558,584 $ 322,763 $ 117,834 $ 2,531,378
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 7,040,646 $ 2,042,506 $ 590,260 $ 471,729
Mortality and Expense Charges (1,098,797) (276,122) (77,890) (60,109)
Transaction Charges (18,263) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 5,923,586 1,766,384 512,370 411,620
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (309,482) 0 (161,089) (84,296)
Net Unrealized Gains (Losses) 10,659,883 0 967,267 831,382
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 10,350,401 0 806,178 747,086
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 16,273,987 1,766,384 1,318,548 1,158,706
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 57,600,863 48,585,875 237,242 206,770
Transfers of Policy Loading, Net 2,992,695 3,263,562 (47,077) (58,349)
Transfers Due to Deaths (1,461,703) (89,375) (242,713) (243,177)
Transfers Due to Other Terminations (2,139,618) (281,643) (15,301) (159,890)
Transfers Due to Policy Loans (1,721,984) (662,050) (21,269) (22,813)
Transfers of Cost of Insurance (2,101,569) (539,265) (95,544) (78,535)
Transfers of Loan Processing Charges (28,928) (4,005) (2,139) (1,110)
Transfers Among Investment Divisions 0 (45,681,956) 5,740,096 2,729,204
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 53,139,756 4,591,143 5,553,295 2,372,100
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 69,413,743 6,357,527 6,871,843 3,530,806
Net Assets Beginning Balance 86,107,165 26,514,110 4,832,007 4,594,921
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 155,520,908 $ 32,871,637 $ 11,703,850 $ 8,125,727
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 702,946 $ 332,737 $ 1,029,923 $ 530,868
Mortality and Expense Charges (109,563) (73,632) (120,845) (48,511)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 593,383 259,105 909,078 482,357
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (57,970) (58,237) (148,847) (47,719)
Net Unrealized Gains (Losses) 1,648,314 2,148,543 1,270,564 250,744
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 1,590,344 2,090,306 1,121,717 203,025
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 2,183,727 2,349,411 2,030,795 685,382
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,137,847 1,068,231 1,066,156 579,214
Transfers of Policy Loading, Net (62,080) 6,422 (44,104) 3,154
Transfers Due to Deaths (306,000) (10,301) (65,938) (2,080)
Transfers Due to Other Terminations (273,101) (97,817) (337,461) (42,371)
Transfers Due to Policy Loans (216,960) (102,930) (92,141) (72,558)
Transfers of Cost of Insurance (192,230) (159,365) (203,001) (105,754)
Transfers of Loan Processing Charges (2,660) (2,120) (2,802) (2,953)
Transfers Among Investment Divisions 7,075,715 5,643,336 3,815,780 4,138,536
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 7,160,531 6,345,456 4,136,489 4,495,188
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,344,258 8,694,867 6,167,284 5,180,570
Net Assets Beginning Balance 7,358,236 4,318,936 9,871,970 2,741,561
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 16,702,494 $ 13,013,803 $ 16,039,254 $ 7,922,131
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 23,752 $ 808,709 $ 274,872 $ 7,374
Mortality and Expense Charges (12,008) (159,374) (37,964) (1,669)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 11,744 649,335 236,908 5,705
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 47,638 56,413 (36,077) 2,396
Net Unrealized Gains (Losses) 74,639 917,790 540,526 41,816
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 122,277 974,203 504,449 44,212
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 134,021 1,623,538 741,357 49,917
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 173,219 2,484,243 437,292 12,013
Transfers of Policy Loading, Net (227) (1,635) (32,229) (1,185)
Transfers Due to Deaths 0 (257,767) (244,352) 0
Transfers Due to Other Terminations (27,497) (449,161) (88,275) (305)
Transfers Due to Policy Loans (11,517) (299,628) (12,334) 0
Transfers of Cost of Insurance (25,805) (358,387) (80,463) (3,959)
Transfers of Loan Processing Charges (319) (4,268) (1,398) (34)
Transfers Among Investment Divisions 365,584 3,046,233 1,511,909 246,773
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 473,438 4,159,630 1,490,150 253,303
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 607,459 5,783,168 2,231,507 303,220
Net Assets Beginning Balance 1,019,718 14,559,326 3,016,155 63,739
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 1,627,177 $ 20,342,494 $ 5,247,662 $ 366,959
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic
Equity Bond Value International
Focus Focus Focus Bond
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 87,517 $ 8,615 $ 106,693 $ 8,339
Mortality and Expense Charges (23,269) (756) (34,416) (909)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 64,248 7,859 72,277 7,430
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (50,146) 23 2,816 1,587
Net Unrealized Gains (Losses) 207,950 6,982 824,592 1,447
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 157,804 7,005 827,408 3,034
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 222,052 14,864 899,685 10,464
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 484,768 18,466 527,518 12,428
Transfers of Policy Loading, Net (7,642) 825 (2,243) (784)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (123,171) (121) (59,804) (2,748)
Transfers Due to Policy Loans (98,219) 9,020 (13,838) 7,037
Transfers of Cost of Insurance (67,572) (1,412) (88,195) (3,757)
Transfers of Loan Processing Charges (704) (83) (1,106) (86)
Transfers Among Investment Divisions 1,625,203 125,435 5,642,607 (13,353)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,812,663 152,130 6,004,939 (1,263)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,034,715 166,994 6,904,624 9,201
Net Assets Beginning Balance 2,188,198 52,188 1,365,469 84,871
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 4,222,913 $ 219,182 $ 8,270,093 $ 94,072
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Developing
Capital
Markets Focus 1995 1996 1997
Fund Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 13,806 $ 0 $ 0 $ 0
Mortality and Expense Charges (13,411) (1,483) (1,358) (1,725)
Transaction Charges 0 (558) (514) (652)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 395 (2,041) (1,872) (2,377)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (43,247) 12,157 789 310
Net Unrealized Gains (Losses) 31,160 (1,196) 8,972 16,365
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) (12,087) 10,961 9,761 16,675
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (11,692) 8,920 7,889 14,298
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 446,742 0 6,557 2,609
Transfers of Policy Loading, Net 6,365 (1,240) 186 237
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (24,891) (5,133) (118) (168)
Transfers Due to Policy Loans (17,128) 0 (9,116) 0
Transfers of Cost of Insurance (39,732) (1,291) (1,698) (2,572)
Transfers of Loan Processing Charges (2,002) 10 (40) (26)
Transfers Among Investment Divisions 567,104 (117,487) 178,394 231,794
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 936,458 (125,141) 174,165 231,874
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 924,766 (116,221) 182,054 246,172
Net Assets Beginning Balance 1,482,840 116,221 40,300 31,814
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 2,407,606 $ 0 $ 222,354 $ 277,986
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (7,049) (7,718) (5,481) (915)
Transaction Charges (2,664) (2,917) (2,070) (345)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (9,713) (10,635) (7,551) (1,260)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 12,007 9,541 1,741 12,302
Net Unrealized Gains (Losses) 83,423 113,158 98,041 4,321
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 95,430 122,699 99,782 16,623
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 85,717 112,064 92,231 15,363
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,898 3,995 23,896 1,194
Transfers of Policy Loading, Net (17,373) (3,399) (2,494) (381)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (132,812) (540) 110 3
Transfers Due to Policy Loans 7 (60,000) (2,825) (3,268)
Transfers of Cost of Insurance (7,052) (9,302) (7,926) (1,541)
Transfers of Loan Processing Charges (95) (243) (205) (1)
Transfers Among Investment Divisions 777,277 802,185 350,856 (5,671)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 621,850 732,696 361,412 (9,665)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 707,567 844,760 453,643 5,698
Net Assets Beginning Balance 114,414 153,981 286,772 50,046
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 821,981 $ 998,741 $ 740,415 $ 55,744
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (1,352) (911) (6,222) (4,063)
Transaction Charges (511) (344) (2,348) (1,537)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (1,863) (1,255) (8,570) (5,600)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 385 6,784 30,917 1,337
Net Unrealized Gains (Losses) 29,570 17,905 150,791 113,569
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 29,955 24,689 181,708 114,906
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 28,092 23,434 173,138 109,306
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 0 30,500 10,212
Transfers of Policy Loading, Net (831) 217 (3,307) 460
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (63) (59) (226) 245
Transfers Due to Policy Loans 0 0 (10,000) 0
Transfers of Cost of Insurance (1,137) (1,521) (8,914) (4,000)
Transfers of Loan Processing Charges (10) (9) (204) (54)
Transfers Among Investment Divisions 72,433 77,361 219,263 491,998
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 70,392 75,989 227,112 498,861
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 98,484 99,423 400,250 608,167
Net Assets Beginning Balance 97,936 5,923 407,978 29,658
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 196,420 $ 105,346 $ 808,228 $ 637,825
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (540) (221) (614) (898)
Transaction Charges (204) (83) (233) (338)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (744) (304) (847) (1,236)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 293 163 3,614 20,240
Net Unrealized Gains (Losses) 17,073 7,219 17,580 16,726
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 17,366 7,382 21,194 36,966
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 16,622 7,078 20,347 35,730
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 1,010 20,456 5,576
Transfers of Policy Loading, Net (472) (226) 735 (225)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (10) (17) (122) 48
Transfers Due to Policy Loans 0 0 (7,000) 0
Transfers of Cost of Insurance (468) (401) (1,408) (719)
Transfers of Loan Processing Charges (2) (3) (19) 7
Transfers Among Investment Divisions 4,258 24,705 154,313 (120,220)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,306 25,068 166,955 (115,533)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 19,928 32,146 187,302 (79,803)
Net Assets Beginning Balance 51,353 984 6,711 151,949
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 71,281 $ 33,130 $ 194,013 $ 72,146
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (2,316) (2,403) (525) (2,555)
Transaction Charges (875) (907) (198) (965)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (3,191) (3,310) (723) (3,520)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 87,387 2,349 12,386 52,571
Net Unrealized Gains (Losses) 5,161 98,680 14,348 84,461
--------------------- --------------------- --------------------- ---------------------
Net Realized and Unrealized Gains (Losses) 92,548 101,029 26,734 137,032
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 89,357 97,719 26,011 133,512
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,682 0 105 12,149
Transfers of Policy Loading, Net (1,327) (1,656) (847) 1,865
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (16,958) (81) 2 (162)
Transfers Due to Policy Loans 0 0 (2,454) 0
Transfers of Cost of Insurance (1,969) (2,650) (1,359) (2,665)
Transfers of Loan Processing Charges (18) (13) (189) (25)
Transfers Among Investment Divisions 67,414 92,008 (25,040) 145,953
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 49,824 87,608 (29,782) 157,115
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 139,181 185,327 (3,771) 290,627
Net Assets Beginning Balance 158,992 157,463 71,394 109,031
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 298,173 $ 342,790 $ 67,623 $ 399,658
===================== ===================== ===================== =====================
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill
Lynch Life Insurance Company (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Insurance Group, Inc., as of
December 31, 1997 and 1996, and the related statements of
earnings, comprehensive income, stockholder's equity, and cash
flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted
accounting principles.
February 23, 1998
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1997 - $2,927,562; 1996 - $3,232,643) $ 3,008,608 $ 3,301,588
Equity securities, at estimated fair value
(cost: 1997 - $72,599; 1996 - $32,988) 73,612 35,977
Trading account securities, at estimated fair value 15,625 -
Mortgage loans - 70,503
Real estate held-for-sale 31,805 28,851
Policy loans on insurance contracts 1,118,139 1,092,071
-------------- --------------
Total Investments 4,247,789 4,528,990
-------------- --------------
CASH AND CASH EQUIVALENTS 86,388 94,991
ACCRUED INVESTMENT INCOME 78,224 86,186
DEFERRED POLICY ACQUISITION COSTS 365,105 366,461
REINSURANCE RECEIVABLES 1,617 2,642
AFFILIATED RECEIVABLES - NET 166 -
RECEIVABLES FROM SECURITIES SOLD 75,820 -
OTHER ASSETS 49,353 42,861
SEPARATE ACCOUNTS ASSETS 9,149,119 7,615,362
-------------- --------------
TOTAL ASSETS $ 14,053,581 $ 12,737,493
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,188,110 $ 4,480,048
Claims and claims settlement expenses 50,574 39,666
-------------- --------------
Total policy liabilities and accruals 4,238,684 4,519,714
OTHER POLICYHOLDER FUNDS 27,160 19,420
LIABILITY FOR GUARANTY FUND ASSESSMENTS 15,374 18,773
FEDERAL INCOME TAXES - DEFERRED 1,183 6,714
FEDERAL INCOME TAXES - CURRENT 24,438 20,968
AFFILIATED PAYABLES - NET - 6,164
PAYABLES FOR SECURITIES PURCHASED 95,135 13,483
OTHER LIABILITIES 54,434 37,243
SEPARATE ACCOUNTS LIABILITIES 9,149,119 7,605,194
-------------- --------------
Total Liabilities 13,605,527 12,247,673
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 402,937
Retained earnings 80,735 79,387
Accumulated other comprehensive income 17,995 5,496
-------------- --------------
Total Stockholder's Equity 448,054 489,820
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,053,581 $ 12,737,493
============== ==============
</TABLE>
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 308,702 $ 336,661 $ 376,166
Net realized investment gains 13,289 8,862 4,525
Policy charge revenue 178,933 158,829 141,722
-------------- -------------- --------------
Total Revenues 500,924 504,352 522,413
-------------- -------------- --------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 209,542 235,255 261,760
Market value adjustment expense 4,079 6,071 5,805
Policy benefits (net of reinsurance recoveries: 1997 - $10,439;
1996 - $8,317; 1995 - $6,482) 27,029 21,052 19,374
Reinsurance premium ceded 17,879 15,582 13,896
Amortization of deferred policy acquisition costs 72,111 62,036 58,669
Insurance expenses and taxes 49,105 47,077 44,124
------------- -------------- --------------
Total Benefits and Expenses 379,745 387,073 403,628
------------- -------------- --------------
Earnings Before Federal Income Tax Provision 121,179 117,279 118,785
------------- -------------- --------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 52,705 22,814 38,335
Deferred (12,261) 15,078 3,968
-------------- -------------- --------------
Total Federal Income Tax Provision 40,444 37,892 42,303
-------------- -------------- --------------
NET EARNINGS $ 80,735 $ 79,387 $ 76,482
============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NET EARNINGS $ 80,735 $ 79,387 $ 76,482
-------------- -------------- --------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period 22,347 (79,749) 310,981
Reclassification adjustment for gains included in net earnings (12,390) (8,622) (4,351)
-------------- -------------- --------------
Net unrealized gains (losses) on investment securities 9,957 (88,371) 306,630
Adjustments for:
Policyholder liabilities 10,094 58,415 (123,856)
Deferred policy acquisition costs (822) 12,411 (89,261)
Income tax (expense) benefit related to items of
other comprehensive income (6,730) 6,141 (32,729)
-------------- -------------- --------------
Other comprehensive income, net of tax 12,499 (11,404) 60,784
-------------- -------------- --------------
COMPREHENSIVE INCOME $ 93,234 $ 67,983 $ 137,266
============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common paid-in Retained Comprehensive stockholder's
stock capital earnings Income equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 2,000 $ 535,450 $ 66,005 $ (43,884) $ 559,571
Dividend to Parent (33,995) (66,005) (100,000)
Net earnings 76,482 76,482
Other comprehensive income, net of tax 60,784 60,784
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1995 2,000 501,455 76,482 16,900 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Other comprehensive income, net of tax (11,404) (11,404)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 489,820
Dividend to Parent (55,613) (79,387) (135,000)
Net earnings 80,735 80,735
Other comprehensive income, net of tax 12,499 12,499
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 $ 2,000 $ 347,324 $ 80,735 $ 17,995 $ 448,054
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 80,735 $ 79,387 $ 76,482
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 72,111 62,036 58,669
Capitalization of policy acquisition costs (71,577) (43,668) (54,014)
Amortization, (accretion) and depreciation of investments (4,672) (4,836) (6,763)
Net realized investment gains (13,289) (8,862) (4,525)
Interest credited to policyholders' account balances 209,542 235,255 261,760
Provision (benefit) for deferred Federal income tax (12,261) 15,078 3,968
Changes in operating assets and liabilities:
Accrued investment income 7,962 5,756 3,191
Claims and claims settlement expenses 10,908 9,854 3,635
Federal income taxes - current 3,470 13,935 4,759
Other policyholder funds 7,740 5,813 (7,614)
Liability for guaranty fund assessments (3,399) (2,371) (3,630)
Affiliated payables (6,330) 3,735 5,542
Policy loans on insurance contracts (26,068) (52,804) (54,054)
Trading account securities (14,928) - -
Other, net 11,721 (2,393) (12,280)
-------------- -------------- --------------
Net cash and cash equivalents provided
by operating activities 251,665 315,915 275,126
-------------- -------------- ---------------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 846,041 847,091 620,853
Maturities of available-for-sale securities 595,745 536,449 570,923
Purchases of available-for-sale securities (1,156,222) (956,840) (816,564)
Mortgage loans principal payments received 68,864 22,789 30,767
Purchases of mortgage loans (5,375) - (3,608)
Sales of real estate held-for-sale 6,060 5,407 9,710
Improvements to real estate held-for-sale - - (683)
Recapture of investment in Separate Accounts 11,026 8,829 6,559
Investment in Separate Accounts (21) (10,063) (377)
-------------- -------------- ---------------
Net cash and cash equivalents provided
by investing activities 366,118 453,662 417,580
-------------- -------------- ---------------
</TABLE>
See notes to financial statements. (Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Concluded) (Dollars In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ (135,000) $ (175,000) $ (100,000)
Policyholders' account balances:
Deposits 1,101,934 542,062 567,430
Withdrawals (including transfers to/from Separate Accounts) (1,593,320) (1,090,572) (1,250,299)
-------------- -------------- --------------
Net cash and cash equivalents used
by financing activities (626,386) (723,510) (782,869)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (8,603) 46,067 (90,163)
CASH AND CASH EQUIVALENTS
Beginning of year 94,991 48,924 139,087
-------------- ------------- -------------
End of year $ 86,388 $ 94,991 $ 48,924
============== ============= =============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal Federal iincome taxes $ 49,235 $ 8,880 $ 33,576
Interest 842 988 1,310
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance
Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: Merrill Lynch Life Insurance Company (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch & Co.").
The Company sells non-participating life insurance and annuity
products which comprise one business segment. The primary
products that the Company currently markets are variable life
insurance, variable annuities, market value adjusted annuities,
and immediate annuities. The Company is currently licensed to
sell insurance in forty-nine states, the District of Columbia,
the U.S. Virgin Islands and Guam. The Company markets its
products solely through the retail network of Merrill Lynch,
Pierce, Fenner & Smith, Incorporated ("MLPF&S"), a wholly-owned
broker-dealer subsidiary of Merrill Lynch & Co.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles and
prevailing industry practices, both of which require
management to make estimates that affect the reported amounts
and disclosure of contingencies in the financial statements.
Actual results could differ from those estimates.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance
and annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest-crediting rates for
the Company's fixed-rate products are as follows:
Interest-sensitive life products 4.00% - 5.70%
Interest-sensitive deferred annuities 3.55% - 8.77%
Immediate annuities 3.00% - 10.00%
These rates may be changed at the option of the Company, subject
to minimum guarantees, after initial guaranteed rates expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are unreported
as of the valuation date.
Reinsurance: In the normal course of business, the Company seeks
to limit its exposure to loss on any single insured life and to
recover a portion of benefits paid by ceding reinsurance to
other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
Indemnity reinsurance agreements do not relieve the Company from
its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company. The
Company regularly evaluates the financial condition of its
reinsurers so as to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under
reinsurance agreements in the form of letters of credit and
funds withheld totaling $635 that can be drawn upon for
delinquent reinsurance recoverables.
As of December 31, 1997, the Company had life insurance inforce
that was ceded to other life insurance companies of $2,879,306.
The Company entered into an indemnity reinsurance agreement with
an unaffiliated insurer whereby the Company coinsures, on a
modified coinsurance basis, 50% of the unaffiliated insurer's
variable annuity premiums sold through the Merrill Lynch & Co.
distribution system. At December 31, 1997, the Company's quota
share of variable annuity premiums related to this agreement was
$35 million.
Deferred Policy Acquisition Costs: Policy acquisition costs for
life and annuity contracts are deferred and amortized based on
the estimated future gross profits for each group of contracts.
These future gross profit estimates are subject to periodic
evaluation by the Company, with necessary revisions applied
against amortization to date. It is reasonably possible that
estimates of future gross profits could be reduced in the
future, resulting in a material reduction in the carrying amount
of deferred policy acquisition costs.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, that are primarily
related to and vary with the production of new business. Certain
costs and expenses reported in the statements of earnings are
net of amounts deferred. Policy acquisition costs can also arise
from the acquisition or reinsurance of existing in-force
policies from other insurers. These costs include ceding
commissions and professional fees related to the reinsurance
assumed. The deferred costs are amortized in proportion to the
estimated future gross profits over the anticipated life of the
acquired insurance contracts utilizing an interest methodology.
The Company has entered into an assumption reinsurance agreement
with an unaffiliated insurer. The acquisition costs relating to
this agreement are being amortized over a twenty-year period
using an effective interest rate of 9.01%. This
reinsurance agreement provides for payment of contingent ceding
commissions based upon the persistency and mortality experience
of the insurance contracts assumed. Any payments made for the
contingent ceding commissions are capitalized and amortized
using an identical methodology as that used for the initial
acquisition costs. The following is a reconciliation of the
acquisition costs related to the reinsurance agreement for the
years ended December 31:
1997 1996 1995
------------ ------------ ------------
Beginning balance $ 112,249 $ 124,833 $ 133,388
Capitalized amounts 5,077 5,077 13,708
Interest accrued 9,653 10,669 11,620
Amortization (24,727) (28,330) (33,883)
------------ ------------ ------------
Ending balance $ 102,252 $ 112,249 $ 124,833
============ ============ ============
The following table presents the expected amortization, net of
interest accrued, of these deferred acquisition costs over the next
five years. The amortization may be adjusted based on periodic
evaluation of the expected gross profits on the reinsured policies.
1998 11,030
1999 9,927
2000 8,935
2001 8,041
2002 7,237
Investments: The Company's investments in debt and equity securities
are classified as either available-for-sale or trading and are
reported at estimated fair value. Unrealized gains and losses on
available-for-sale securities are included in stockholder's equity,
net of tax. Unrealized gains and losses on trading account
securities are included in net realized investment gains. If a
decline in value of a security is determined by management to be
other-than-temporary, the carrying value is adjusted to the estimated
fair value at the date of this determination and recorded as net realized
investment gains (losses).
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted to
the maturity date, and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of specific identification.
Certain fixed maturity securities are considered non-investment
grade. The Company defines non-investment grade fixed maturity
securities as unsecured debt obligations that do not have a
rating equivalent to Standard and Poor's (or similar rating
agency) BBB- or higher.
During the first quarter 1997, the Company terminated its
interest rate swap contracts that were carried at estimated fair
value and recorded as a component of fixed maturity securities.
Interest income and realized and unrealized gains and losses
were recorded on the same basis as fixed maturity securities
available-for-sale.
As of December 31, 1997, the Company had no mortgage loans
outstanding. Mortgage loans were stated at unpaid principal
balances, net of valuation allowances. Such valuation allowances
were based on the decline in value expected to be realized on
mortgage loans that may not be collectible in full. In
establishing valuation allowances, management considered, among
other things, the estimated fair value of the underlying collateral.
The Company recognized income from mortgage loans based on the
cash payment interest rate of the loan, which may be different
from the accrual interest rate of the loan for certain
outstanding mortgage loans. The Company recognized a realized
gain at the date of the satisfaction of the loan at contractual
terms for loans where there was a difference between the cash
payment interest rate and the accrual interest rate. For all
loans the Company stopped accruing income when an interest
payment default either occurred or was probable. Impairments of
mortgage loans were established as valuation allowances and
recorded to net realized investment gains or losses.
Real estate held-for-sale, is stated at estimated fair value
less estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Investments in limited partnerships are carried at cost.
Income Taxes: The results of operations of the Company are
included in the consolidated Federal income tax return of
Merrill Lynch & Co. The Company has entered into a tax-sharing
agreement with Merrill Lynch & Co. whereby the Company will
calculate its current tax provision based on its operations.
Under the agreement, the Company periodically remits to Merrill
Lynch & Co. its current Federal tax liability.
The Company uses the asset and liability method in providing
income taxes on all transactions that have been recognized in
the financial statements. The asset and liability method
requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or
realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums
and in substantially all states are exempt from state income
taxes.
Separate Accounts: Separate Accounts are established in
conformity with Arkansas State Insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to general claims of the
Company only to the extent the value of such assets exceeds
Separate Accounts liabilities.
Assets and liabilities of Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
Statements of Comprehensive Income: During 1997, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 defines comprehensive income as all non-
owner changes in equity during a period. Comprehensive
income is reported in the Statements of Comprehensive Income
included in the financial statements for the years ended
December 31, 1997, 1996 and 1995.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that
approximate fair value. The carrying value of financial
instruments as of December 31 were:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities:
Securities (1) $ 3,008,608 $ 3,301,858
Interest rate swaps (2) - (270)
-------------- -------------
Total fixed maturity securities 3,008,608 3,301,588
-------------- -------------
Equity securities (1) 73,612 35,977
Trading account securities (1) 15,625 -
Mortgage loans (3) - 70,503
Policy loans on insurance contracts (4) 1,118,139 1,092,071
Cash and cash equivalents (5) 86,388 94,991
Separate Accounts assets (6) 9,149,119 7,615,362
-------------- --------------
Total financial instruments recorded as assets $ 13,451,491 $ 12,210,492
============== ==============
</TABLE>
(1) For publicly traded securities, the estimated fair value
is determined using quoted market prices. For securities
without a readily ascertainable market value, the Company
has determined an estimated fair value using a discounted
cash flow model, including provision for credit risk, based
upon the assumption that such securities will be held to
maturity. Such estimated fair values do not necessarily
represent the values for which these securities could have
been sold at the dates of the balance sheets. At December
31, 1997 and 1996, securities without a readily
ascertainable market value, having an amortized cost of
$389,728 and $338,515, had an estimated fair value of
$396,253 and $348,066, respectively.
(2) Estimated fair values for the Company's interest rate swaps
are based on a discounted cash flow model.
(3) The estimated fair value of mortgage loans approximates
the carrying value.
(4) The Company estimates the fair value of policy loans as
equal to the book value of the loans. Policy loans are
fully collateralized by the account value of the associated
insurance contracts, and the spread between the policy loan
interest rate and the interest rate credited to the account
value held as collateral is fixed.
(5) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(6) Assets held in Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity securities and equity securities (excluding
trading account securities) as of December 31 were:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,412,171 $ 73,318 $ 6,963 $ 2,478,526
Mortgage-backed securities 339,015 12,320 224 351,111
U.S. Government and agencies 119,107 2,767 111 121,763
Foreign governments 36,585 198 1,125 35,658
Municipals 20,684 866 - 21,550
------------- ------------- ------------- -------------
Total fixed maturity securities $ 2,927,562 $ 89,469 $ 8,423 $ 3,008,608
============= ============= ============= =============
Equity securities:
Non-redeemable preferred stocks $ 67,845 $ 1,187 $ 185 $ 68,847
Common stocks 4,754 11 - 4,765
------------- ------------- ------------- -------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============= ============= ============= =============
1996
-------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Fixed maturity securities:
Corporate debt securities $ 2,652,225 $ 67,590 $ 11,765 $ 2,708,050
Mortgage-backed securities 503,997 12,447 1,948 514,496
U.S. Government and agencies 54,386 2,303 158 56,531
Foreign governments 18,111 182 140 18,153
Municipals 3,924 434 - 4,358
------------- ------------- ------------- -------------
Total fixed maturity securities $ 3,232,643 $ 82,956 $ 14,011 $ 3,301,588
============= ============= ============= =============
Equity securities:
Non-redeemable preferred stocks $ 30,554 $ 2,983 $ 85 $ 33,452
Common stocks 2,434 91 - 2,525
------------- ------------- ------------- -------------
Total equity securities $ 32,988 $ 3,074 $ 85 $ 35,977
============= ============= ============= =============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------- --------------
Fixed maturity securities:
Due in one year or less $ 224,663 $ 225,887
Due after one year through five years 1,343,383 1,380,248
Due after five years through ten years 740,784 764,272
Due after ten years 279,717 287,090
------------- --------------
2,588,547 2,657,497
Mortgage-backed securities 339,015 351,111
------------- --------------
Total fixed maturity securities $ 2,927,562 $ 3,008,608
============= ==============
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------- -------------
AAA $ 623,503 $ 642,188
AA 169,805 172,454
A 926,398 950,610
BBB 1,046,614 1,080,036
Non-investment grade 161,242 163,320
------------- -------------
Total fixed maturity securities $ 2,927,562 $ 3,008,608
============= =============
<PAGE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with investments classified as available-for-sale. The Company
adjusts those assets and liabilities as if the unrealized investment gains
or losses from securities classified as available-for-sale had actually
been realized, with corresponding credits or charges reported directly to
stockholder's equity. The following reconciles the net unrealized
investment gain on investment securities classified as available- for-
sale as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities $ 81,046 $ 68,945
Equity securities 1,013 2,989
Deferred policy acquisition costs (5,452) (4,630)
Separate Accounts assets - 168
-------------- --------------
76,607 67,472
-------------- --------------
Liabilities:
Policyholders' account balances 48,923 59,017
Federal income taxes - deferred 9,689 2,959
-------------- --------------
58,612 61,976
-------------- --------------
Stockholder's equity:
Net unrealized investment gain on investment securities $ 17,995 $ 5,496
============== ==============
</TABLE>
During the third quarter 1997, the Company provided $15,000
initial funding for a trading portfolio, composed of
convertible debt and equity securities. The net unrealized
holdings gains on trading account securities earned as of
December 31, 1997, and included in net realized investment gains
are $520.
During the first quarter 1997, the Company terminated its
interest rate swap contracts which it held for the purpose of
minimizing exposure to fluctuations in interest rates related
to specific investment securities held. The notional
amount of such swaps outstanding at December 31 1996 was
approximately $9,000. The swaps were transacted with
investment grade counterparties. As of December 31, 1996, the
Company's interest rate swap contracts were in a $270
unrealized loss position. During 1997, 1996
and 1995, there were no realized investment gains or losses
recorded.
<PAGE>
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1997 1996 1995
----------- ----------- -----------
Proceeds $ 846,041 $ 847,091 $ 620,853
Gross realized investment gains 16,783 19,078 14,196
Gross realized investment losses 7,193 10,749 10,813
The Company had investment securities with a carrying value
of $26,508 and $27,726 that were deposited with insurance
regulatory authorities at December 31, 1997 and 1996,
respectively.
During 1997, the Company realized a $1,005 gain on the sale of
its remaining investment in the Separate Accounts. At December
31, 1996, the Company had invested $10,168 in Separate Accounts,
including $168 of unrealized gains. The investments in Separate
Accounts are for the purpose of providing original funding of
certain mutual fund portfolios available as investment options to
variable life and annuity policyholders.
At December 31, 1997, the Company held no mortgage loans on real
estate. The carrying value and established valuation allowances
of impaired mortgage loans on real estate as of December 31,
1996 were $44,239 and $17,652, respectively.
Additional information on impaired loans for the years ended
December 31 follows:
1997 1996 1995
----------- ----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668 $ 124,089
Interest income recognized (cash-basis) 2,830 4,848 5,482
For the years ended December 31, 1997, 1996 and 1995, $7,891,
$28,555 and $1,300, respectively, of real estate held-for-sale
was acquired in satisfaction of debt.
<PAGE>
Net investment income arose from the following sources for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity securities $ 236,325 $ 266,916 $ 305,648
Equity securities 3,020 1,876 1,329
Mortgage loans 4,627 9,764 12,250
Real estate held-for-sale 1,939 563 153
Policy loans on insurance contracts 57,998 56,512 53,576
Cash and cash equivalents 9,570 6,710 8,463
Other 709 899 1,753
------------ ------------ ------------
Gross investment income 314,188 343,240 383,172
Less investment expenses (5,486) (6,579) (7,006)
------------ ------------ ------------
Net investment income $ 308,702 $ 336,661 $ 376,166
============ ============ ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity securities $ 6,149 $ 4,690 $ 1,908
Equity securities 3,441 3,639 1,475
Trading account securities 697 - -
Investment in Separate Accounts 1,005 106 (369)
Mortgage loans 6,252 599 334
Real estate held-for-sale (4,252) (171) 1,177
Cash and cash equivalents (3) (1) -
------------ ------------ ------------
Net realized investment gains $ 13,289 $ 8,862 $ 4,525
============ ============ ============
</TABLE>
<PAGE>
The following is a reconciliation of the change in valuation
allowances that have been recorded to reflect other-than-
temporary declines in estimated fair value of mortgage loans
for the years ended December 31:
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ------------ ----------- -----------
Mortgage loans:
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
1995 40,070 - 4,189 35,881
The Company held no investments at December 31, 1997 which have
been non-income producing for the preceding twelve months.
The Company has committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1997, $4,744 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income
taxes based on earnings before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 42,413 $ 41,048 $ 41,575
Increase (decrease) in income taxes resulting
from:
Dividend received deduction (1,969) (3,135) (532)
Release of policyholders' surplus - - 1,991
Tax deductible interest - - (718)
Other - (21) (13)
---------- ---------- ----------
Federal income tax provision $ 40,444 $ 37,892 $ 42,303
========== ========== ==========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1997 was 35%.
The Company provides for deferred income taxes resulting from
temporary differences that arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (2,422) $ (5,770) $ (2,179)
Policyholders' account balances (16,099) 15,004 66
Liability for guaranty fund assessments 1,190 760 249
Investment adjustments 5,070 5,122 5,563
Other - (38) 269
-------------- -------------- --------------
Deferred Federal income tax
provision (benefit) $ (12,261) $ 15,078 $ 3,968
============== ============== ==============
</TABLE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 95,182 $ 79,083
Investment adjustments 601 5,671
Liability for guaranty fund assessments 5,381 6,571
-------------- --------------
Total deferred tax assets 101,164 91,325
-------------- --------------
Deferred tax liabilities:
Deferred policy acquisition costs 88,670 91,092
Net unrealized investment gain on investment securities 9,689 2,959
Other 3,988 3,988
-------------- --------------
Total deferred tax liabilities 102,347 98,039
-------------- --------------
Net deferred tax liability $ 1,183 $ 6,714
================ ==============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
<PAGE>
NOTE 5. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain accounting, data processing,
legal, actuarial, management, advertising and other services to
the Company. Expenses incurred by MLIG in relation to this
service agreement are reimbursed by the Company on an allocated
cost basis. Charges billed to the Company by MLIG pursuant to
the agreement were $43,028, $43,515 and $41,729 for the years
ended December 31, 1997, 1996 and 1995, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG which approximates the daily Federal funds rate. Total
intercompany interest paid was $842, $988 and $1,310 for 1997,
1996 and 1995, respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM")
are parties to a service agreement whereby MLAM has agreed to
provide certain invested asset management services to the
Company. The Company pays a fee to MLAM for these services
through the MLIG service agreement. Charges attributable to
this agreement and allocated to the Company by MLIG were
$1,913, $2,279 and $2,635 for 1997, 1996 and 1995,
respectively.
MLAM and MLIG have entered into an agreement with respect to
administrative services for the Merrill Lynch Series Fund, Inc.
("Series Fund") and Merrill Lynch Variable Series Funds, Inc.
("Variable Series Funds"). The Company invests in the various
mutual fund portfolios of the Series Fund and the Variable
Series Funds in connection with the variable life and annuities
the Company has in-force. Under this agreement, MLAM pays
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Series Fund
and the Variable Series Funds to MLAM. The Company received
from MLIG its allocable share of such compensation in the
amount of $19,057, $16,514 and $13,293 during 1997, 1996 and
1995, respectively.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S, who are the Company's licensed insurance agents,
solicit applications for contracts to be issued by the Company.
MLLA is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were $72,729, $42,639 and $43,984 for
1997, 1996 and 1995, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisition
costs and are being amortized in accordance with the policy
discussed in Note 1.
During the first quarter 1997, the Company terminated its
interest rate swap contracts which it entered into with Merrill
Lynch Capital Services, Inc. ("MLCS") with a guarantee from
Merrill Lynch & Co. At December 31, 1996, the notional amount
of such interest rate swap contracts outstanding was $9,000.
Net interest received from these interest rate swap contracts
was $4, ($117), and $256 for 1997, 1996 and 1995, respectively.
Affiliated agreements generally contain reciprocal indemnity
provisions pertaining to each party's representations and
contractual obligations thereunder.
During 1997, the Company sold its investment in 2141 E.
Camelback, Corp. to Merrill Lynch Mortgage Capital, Inc. The
investment was sold at its carrying value of $5,375.
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1997, 1996, and 1995 the Company paid dividends of
$135,000, $175,000, and $100,000, respectively, to MLIG. Of
these stockholder's dividends, $110,030, $175,000 and $73,757,
respectively, were extraordinary dividends as defined by
Arkansas Insurance Law and were paid pursuant to approval
granted by the Arkansas Insurance Commissioner.
At December 31, 1997 and 1996, approximately $24,304 and
$24,970, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1997 and 1996, was $245,042 and $251,697,
respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial
statements by charging policy acquisition costs to expense as
incurred, establishing future policy benefit reserves using
different actuarial assumptions, not providing for deferred
income taxes, and valuing securities on a different basis. The
Company's statutory net income for 1997, 1996 and 1995 was
$81,963, $93,532 and $121,451, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital which
a life insurance company should have based upon that company's
risk profile. As of December 31, 1997 and 1996, based on the
RBC formula, the Company's total adjusted capital level was
394% and 403%, respectively, of the minimum amount of capital
required to avoid regulatory action.
NOTE 7. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result of
the insolvency of an insurer. At the time an insolvency occurs,
the guaranty association assesses the remaining members of the
association an amount sufficient to satisfy the insolvent
insurer's policyholder obligations (within specified limits).
During 1991, and to a lesser extent 1992, there were certain
highly publicized life insurance insolvencies. The Company has
utilized public information to estimate what future assessments
it will incur as a result of these insolvencies. At December 31,
1997 and 1996, the Company has established an estimated
liability for future guaranty fund assessments of $15,374 and
$18,773, respectively. The Company regularly monitors public
information regarding insurer insolvencies and adjusts its
estimated liability as appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
<PAGE>
