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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999
REGISTRATION NO. 33-55678
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 10
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF THE SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
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MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
(Exact name of trust)
MERRILL LYNCH LIFE INSURANCE COMPANY
(Name of depositor)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Complete address of depositor's principal executive offices)
------------------------
BARRY G. SKOLNICK, ESQ.
Senior Vice President & General Counsel
Merrill Lynch Life Insurance Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Name and complete address of agent for service)
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Copy to:
STEPHEN E. ROTH, ESQ.
KIMBERLY J. SMITH, ESQ.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
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It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered: Units of Interest in Variable
Universal Life Insurance Contracts.
Check box if it is proposed that the filing will become effective on (date)
at (time) pursuant to Rule 487 [ ]
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PROSPECTUS
May 1, 1999
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
SPRINGFIELD, MASSACHUSETTS 01144-1007
PHONE: (800) 354-5333
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This Prospectus describes a flexible premium variable universal life insurance
contract that Merrill Lynch Life Insurance Company offers.
Generally, through the first 14 days following the in force date, we will invest
your initial payment in the investment division of the Merrill Lynch Variable
Life Separate Account (the "Separate Account") investing in the Money Reserve
Portfolio. Afterward, you may reallocate your investment base to any five of the
investment divisions of the Separate Account. We then invest the assets in
corresponding portfolios of the following:
-- MERRILL LYNCH SERIES FUND, INC.
-- Money Reserve Portfolio
-- Intermediate Government Bond Portfolio
-- Long-Term Corporate Bond Portfolio
-- High Yield Portfolio
-- Capital Stock Portfolio
-- Growth Stock Portfolio
-- Multiple Strategy Portfolio
-- Natural Resources Portfolio
-- Global Strategy Portfolio
-- Balanced Portfolio
-- ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
-- Premier Growth Portfolio
-- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
-- Basic Value Focus Fund
-- Global Bond Focus Fund
-- Global Utility Focus Fund
-- International Equity Focus Fund
-- Developing Capital Markets Focus Fund
-- Special Value Focus Fund
-- Index 500 Fund
-- AIM VARIABLE INSURANCE FUNDS, INC.
-- AIM V.I. Capital Appreciation Fund
-- AIM V.I. Value Fund
-- MFS(Registered Trademark) VARIABLE INSURANCE TRUST(SM)
-- MFS Emerging Growth Series
-- MFS Research Series
-- MERRILL LYNCH FUND OF STRIPPED ("ZERO") U.S. TREASURY
SECURITIES -- Fourteen maturity dates ranging from February 15,
2000-February 15, 2014
Currently, you may change your investment allocation as often as you like.
We guarantee that regardless of investment results, insurance coverage will
continue for the guarantee period. During this guarantee period, we will
terminate the Contract only if any loan debt exceeds certain contract values.
After the guarantee period ends, the Contract will remain in effect as long as
the net cash surrender value is sufficient to cover all charges due. While the
Contract is in effect, the death benefit may vary to reflect the investment
results of the
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investment divisions chosen, but will generally never be less than the face
amount or, after the date the insured reaches attained age 100, the post-100
death benefit.
You may:
-- make additional payments
-- borrow from your Contract
-- reduce the face amount subject to certain conditions
-- redeem the Contract for its net cash surrender value
-- make partial withdrawals
The net cash surrender value will vary with the investment results of the
investment divisions chosen. We don't guarantee any minimum cash surrender
value.
Within certain limits, you may return the Contract or exchange it for a contract
with benefits that don't vary with the investment results of a separate account.
It may not be advantageous to replace existing insurance with the Contract.
PURCHASING THIS CONTRACT INVOLVES CERTAIN RISKS. INVESTMENT RESULTS CAN VARY
BOTH UP AND DOWN AND CAN EVEN DECREASE THE VALUE OF PREMIUM PAYMENTS. THEREFORE,
YOU COULD LOSE ALL OR PART OF THE MONEY YOU INVEST. EXCEPT FOR THE GUARANTEED
DEATH BENEFIT WE PROVIDE, YOU BEAR ALL INVESTMENT RISKS. WE DO NOT GUARANTEE HOW
ANY OF THE INVESTMENT DIVISIONS OR FUNDS WILL PERFORM.
LIFE INSURANCE IS INTENDED TO BE A LONG TERM INVESTMENT. YOU SHOULD EVALUATE
YOUR INSURANCE NEEDS AND THE CONTRACT'S LONG-TERM INVESTMENT POTENTIAL AND RISKS
BEFORE PURCHASING THE CONTRACT.
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(R) VARIABLE INSURANCE
TRUST(SM); THE HOTCHKIS AND WILEY VARIABLE TRUST; THE MERCURY ASSET MANAGEMENT
V.I. FUNDS, INC.; AND THE MERRILL LYNCH FUND OF STRIPPED ("ZERO") U.S., TREASURY
SECURITIES MUST ACCOMPANY THIS PROSPECTUS. PLEASE READ THESE DOCUMENTS CAREFULLY
AND RETAIN THEM FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE CONTRACTS OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
IMPORTANT TERMS............................................. 5
SUMMARY OF THE CONTRACT..................................... 6
What the Contract Provides................................ 6
Availability and Payments................................. 6
The Investment Base....................................... 7
The Investment Divisions.................................. 7
Illustrations............................................. 7
Replacement of Existing Coverage.......................... 7
Right to Cancel ("Free Look" Period) or Convert........... 7
Distributions from the Contract........................... 7
Fees and Charges.......................................... 8
FACTS ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY, MERRILL
LYNCH, PIERCE, FENNER & SMITH INCORPORATED, THE SEPARATE
ACCOUNT, THE FUNDS, AND THE ZERO TRUSTS................... 9
Merrill Lynch Life Insurance Company...................... 9
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 9
The Separate Account...................................... 9
Net Rate of Return for an Investment Division............. 10
Changes Within the Account................................ 11
THE FUNDS................................................... 11
The Series Fund........................................... 11
The Variable Series Funds................................. 12
The AIM V.I. Funds........................................ 13
The Alliance Fund......................................... 14
The MFS Trust............................................. 14
The Hotchkis and Wiley Trust.............................. 15
The Mercury V.I. Funds.................................... 15
Special Risks In Certain Funds............................ 16
The Operation of the Funds................................ 17
The Zero Trusts........................................... 19
FACTS ABOUT THE CONTRACT.................................... 20
Who May be Covered........................................ 20
Initial Payment........................................... 20
Additional Insurance Rider................................ 21
Right to Cancel ("Free Look" Period)...................... 22
Making Additional Payments................................ 22
Investment Base........................................... 23
Charges................................................... 24
Charges Deducted from the Investment Base................. 24
Contract Loading.......................................... 25
Charges to the Separate Account........................... 25
Charges to Fund Assets.................................... 26
Guarantee Period.......................................... 27
Cash Value................................................ 28
Partial Withdrawals....................................... 28
Loans..................................................... 29
Reducing the Face Amount.................................. 31
Death Benefit Proceeds.................................... 32
Payment of Death Benefit Proceeds......................... 35
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Dollar Cost Averaging..................................... 35
Accelerated Benefit Rider................................. 36
Right to Convert Contract................................. 36
Income Plans.............................................. 36
Reports to Contract Owners................................ 37
MORE ABOUT THE CONTRACT..................................... 37
Using the Contract........................................ 37
Some Administrative Procedures............................ 38
Other Contract Provisions................................. 39
Group or Sponsored Arrangements........................... 40
Unisex Legal Considerations for Employers................. 40
Selling the Contracts..................................... 41
Tax Considerations........................................ 41
Our Income Taxes.......................................... 44
Reinsurance............................................... 44
ILLUSTRATIONS............................................... 45
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY............. 51
Directors and Executive Officers.......................... 51
Services Arrangement...................................... 51
State Regulation.......................................... 51
Year 2000................................................. 52
Legal Proceedings......................................... 52
Experts................................................... 52
Legal Matters............................................. 52
Registration Statements................................... 52
Financial Statements...................................... 53
Financial Statements of Merrill Lynch 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.
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IMPORTANT TERMS
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
Contract's face amount to endow on the contract anniversary nearest to the date
the insured reaches attained age 100. To calculate your base premium, we assume
you elect death benefit option 1; a 5% annual rate of return on the base premium
minus contract loading; and a maximum cost of insurance charge. Once we
determine the base premium, it will not change.
cash value: is equal to the investment base plus any unearned cost of insurance
charges and rider costs plus any loan debt less any accrued net loan cost since
the last contact anniversary (or since the contract date during the first
contract year).
contract anniversary: is the same date of each year as the contract date.
contract date or policy 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.
excess sales load: is a portion of the sales load that we may refund to you if
you surrender your Contract or it lapses during the first two policy years.
After policy year two, the excess sales load equals zero.
face amount: is the minimum death benefit prior to the date the insured reaches
attained age 100, as long as the Contract remains in force. The face amount will
change if you change your death benefit option or reduce the face amount; or it
may decrease as a result of a partial withdrawal.
fixed base: On the contract date, the fixed base equals the cash value. From
then on, the fixed base is calculated like the cash value except that the
"investment base" reflects net premiums at 4.5% instead of the net rate of
return, and substitutes the guaranteed maximum cost of insurance rates and
guaranteed maximum rider costs for the current rates. In addition, the fixed
base is calculated without taking into account 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 guarantee period, the
fixed base is zero. We use the fixed base to limit our right to cancel the
Contract during the guarantee period.
guarantee period: is the time that the Contract is guaranteed to remain in
force regardless of investment experience, unless the debt exceeds certain
contract values. It is the period that a comparable fixed life insurance
contract (with the 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.
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.
investment base: is the amount available under a Contract for investment in the
Separate Account at any time.
issue age: is the insured's age as of his or her birthday nearest the contract
date.
loan debt: is the sum of all outstanding loans on a Contract plus accrued
interest.
monthiversary: is the same day each month as the contract date.
net amount at risk: is the excess of the death benefit adjusted for interest at
4.5% over the cash value as of a processing date, before we deduct cost of
insurance.
net cash surrender value: is equal to the cash value less loan debt.
processing dates: are the contract date and the first day of each contract
quarter thereafter. Processing dates are the days when we deduct charges from
the investment base.
processing period: is the period between consecutive processing dates.
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variable insurance amount: is computed daily by multiplying the cash value
(plus excess sales load during the first 24 Contract months) by the cash value
corridor factor for the insured at his or her attained age.
SUMMARY OF THE CONTRACT
WHAT THE CONTRACT PROVIDES
The Contract offers a choice of investments and an opportunity for the
Contract's investment base, net cash surrender value and death benefit to grow
based on investment results.
We don't guarantee that contract values will increase. Depending on the
investment results of the investment divisions you select, the investment base,
net cash surrender value and death benefit may go up or down on any day. You
bear the investment risk.
Death Benefit. You may elect a death benefit option on the application. Under
option 1, the death benefit equals the face amount or variable insurance amount,
whichever is larger. Under option 2, the death benefit equals the larger of
(1) the face amount plus the cash value or (2) the variable insurance amount,
whichever is larger. The variable insurance amount increases or decreases
depending on the investment results of your selected investment divisions. The
death benefit may go up or down depending upon investment performance. However,
it will never drop below the face amount. Death benefit proceeds are equal to
the death benefit reduced by any loan debt and increased by any rider benefits
payable. If the insured dies on or after the date the insured reaches attained
age 100, we will pay the post-100 death benefit proceeds.
Tax Benefits and Tax Considerations. The Contract generally provides at least
the minimum death benefit required under federal tax law. (Due to lack of
guidance, however, there is some uncertainty in this regard with respect to
Contracts issued on a substandard basis and Contracts with an additional
insurance rider attached.) By satisfying the minimum death benefit required
under federal tax law, the Contract provides two important tax benefits:
1) Its death benefit is not subject to income tax;
2) Any increases in the Contract's cash value are not taxable until
distributed from the Contract.
Guarantee Period. Generally, during the guarantee period, we guarantee the
Contract will remain in effect and provide the death benefit regardless of
investment performance unless loan debt exceeds certain contract values. We will
only accept an initial payment if it provides for a guarantee period of at least
three months. The initial guarantee period is based on the initial payment, the
face amount, and the face amount of any additional insurance rider. Each
subsequent payment will extend the guarantee period until the date the insured
would reach attained age 100. Certain Contract transactions will affect the
guarantee period.
You should purchase the Contract for its death benefit. You may use the
Contract's net cash surrender value, as well as its death benefit, to provide
proceeds for various individual and estate planning purposes. However, loans and
partial withdrawals will affect the net cash surrender value and death benefit
proceeds, and may cause the Contract to terminate. Because the Contract is
designed to provide benefits on a long-term basis, before purchasing a Contract
in connection with a specialized purpose, you should consider whether the
long-term nature of the Contract, its investment risks, and the potential impact
of any contemplated loans and partial withdrawals, are consistent with the
purposes you may be considering. Moreover, using a Contract for a specialized
purpose may have tax consequences. (See "Tax Considerations.")
AVAILABILITY AND PAYMENTS
We will issue a Contract for insureds from age 20 through age 85.
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We will not accept an initial payment that provides a guarantee period of less
than three months.
You can make additional payments. On your application you may choose to make
additional payments monthly (for payments from a CMA account only), quarterly,
semi-annually, or annually.
The Contract is not available to insure residents of certain municipalities in
Kentucky where premium taxes in excess of a certain level are imposed.
THE INVESTMENT BASE
A Contract's investment base is the amount available for investment at any time.
On the contract date (usually the next business day after our Service Center
receives your initial payment), the investment base is equal to the initial
payment minus contract loading, cost of insurance charges, and rider costs.
Afterwards, it varies daily based on the investment performance of your selected
investment divisions. You bear the risk of poor investment performance and
receive the benefit of favorable investment performance. You may wish to
consider diversifying your investment in the Contract by allocating the
investment base to two or more investment divisions.
THE INVESTMENT DIVISIONS
Payments are invested in investment divisions of the Separate Account.
Generally, through the first 14 days following the in force date, the initial
payment less contract loading will be invested only in the investment division
of the Separate Account investing in the Money Reserve Portfolio. Afterwards,
the investment base is reallocated to up to five of the investment divisions.
(See "Changing the Allocation".)
ILLUSTRATIONS
Illustrations in this Prospectus or used in connection with the purchase of the
Contract are based on hypothetical investment rates of return. We don't
guarantee these rates. They are illustrative only, and not a representation of
past or future performance. Actual rates of return may be more or less than
those shown in the illustrations. Actual values will be different than those
illustrated.
REPLACEMENT OF EXISTING COVERAGE
Generally, it is not advisable to purchase an insurance contract as a
replacement for existing coverage. Before you buy a Contract, ask your Merrill
Lynch Financial Consultant if changing, or adding to, current insurance coverage
would be advantageous. Don't base your decision to replace existing coverage
solely on a comparison of contract illustrations.
RIGHT TO CANCEL ("FREE LOOK" PERIOD) OR CONVERT
Once you receive the Contract, review it carefully to make sure it is what you
want. Generally, you may return a Contract for a refund within the later of ten
days after receiving it, 45 days from the date the application is completed, or
ten days after we mail or personally deliver the Notice of Withdrawal Right to
you. If you return the Contract during the "free look" period, we will refund
the payment without interest.
You may also convert your Contract within 24 months into a contract with
benefits that do not vary with the investment results of a separate account.
DISTRIBUTIONS FROM THE CONTRACT
Partial Withdrawals. Beginning in Contract year two, you may make partial
withdrawals, subject to certain conditions. (See "Partial Withdrawals".)
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Surrenders. You may surrender your Contract at any time and receive the net
cash surrender value. The net cash surrender value equals the investment base:
- plus any unearned cost of insurance charges and rider costs;
- less any accrued net loan cost since the last contract anniversary (or
since the contract date during the first contract year);
- plus, during the first two contract years, excess sales load.
Loans. You may borrow money from us, using your Contract as collateral, subject
to limits. We deduct loan debt from the amount payable on surrender of the
Contract and 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, both the loan amount
and the amount of capitalized interest are treated as taxable distributions.
Depending upon investment performance of the divisions and the amounts borrowed,
loans may cause a Contract to lapse. If the Contract lapses with loan debt
outstanding, adverse tax consequences may result. (See "Loans" and "Tax
Considerations -- Tax Treatment of Loans and Other Distributions".)
FEES AND CHARGES
Contract Loading. We deduct certain charges from all your payments before we
invest them 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; and
- FEDERAL TAX CHARGE of 1.25% of each payment.
(See "Contract Loading.")
Investment Base Charges. We deduct certain charges from your investment base on
contract anniversaries or processing dates. These charges are:
- COST OF INSURANCE -- on the contract date and on all processing dates
after the contract date, we deduct a cost for the life insurance coverage
we provide (see "Cost of Insurance"); and
- RIDER COST -- on the contract date and on all processing dates after the
contract date, we deduct a cost for any additional insurance riders you
purchased.
- NET LOAN COST -- on each contract anniversary, if there has been any loan
debt during the prior year, we deduct a net loan cost. It equals a
maximum of 2.0% of the loan debt per year (see "Loans").
Separate Account Charges. We deduct certain charges daily from the investment
results of the investment divisions in the Separate Account. These charges are:
- a MORTALITY AND EXPENSE RISK CHARGE deducted from all investment
divisions. It is equivalent to .90% annually at the beginning of the
year; and
- a TRUST CHARGE deducted from only those investment divisions investing in
the Merrill Lynch Fund of Stripped ("Zero") U.S. Treasury Securities (the
"Zero Trusts"). It is currently equivalent to .34% annually at the
beginning of the year. It will never exceed .50% annually.
Advisory Fees and Fund Expenses. The portfolios in the Funds pay monthly
advisory fees and other expenses. (See "Charges to Fund Assets".)
This summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in this Prospectus and in the Contract.
You should retain the Contract together with its attached applications, medical
exam(s), amendments, riders, and endorsements. These are the entire agreement
between you and us.
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For the definitions of some important terms used in this Prospectus, see
"Important Terms."
FACTS ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
THE SEPARATE ACCOUNT, THE FUNDS, AND THE ZERO TRUSTS
MERRILL LYNCH LIFE INSURANCE COMPANY
Merrill Lynch Life Insurance Company ("we" or "us") is a stock life insurance
company organized under the laws of the State of Washington on January 27, 1986
and redomesticated under the laws of the State of Arkansas on August 31, 1991.
We are an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. We are
authorized to sell life insurance and annuities in 49 states, Guam, the U.S.
Virgin Islands and the District of Columbia. We are also authorized to sell
variable life insurance and variable annuities in most jurisdictions.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S")
MLPF&S provides a world-wide broad range of securities brokerage and investment
banking services. It provides marketing services for us and is the principal
underwriter of the Contracts issued through the Separate Account. We retain
MLPF&S to provide services relating to the Contracts under a distribution
agreement. (See "Selling the Contracts".)
THE SEPARATE ACCOUNT
We established the Separate Account, a separate investment account, on November
16, 1990. It is registered with the Securities and Exchange Commission as a unit
investment trust under 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. We use the
Separate Account to support the Contract as well as other variable life
insurance contracts we issue. The Separate Account is also governed by the laws
of the State of Arkansas, our state of domicile.
We own all of the assets in the Separate Account. The assets of the Separate
Account are kept separate from our general account and any other separate
accounts we 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 we conduct.
Obligations to contract owners and beneficiaries that arise under the Contract
are our obligations. Income, gains, and losses, whether or not realized, from
assets allocated to the Separate Account are, in accordance with the Contracts,
credited to or charged against the Separate Account without regard to our other
income, gains or losses. 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 investment
base allocated to the Separate Account under the Contracts), we may transfer the
excess to our general account.
There are currently 36 investment divisions in the Separate Account:
- Ten invest in shares of a specific portfolio of the Merrill Lynch Series
Fund, Inc. (the "Series Fund").
- Seven invest in shares of a specific portfolio of the Merrill Lynch
Variable Series Funds, Inc. (the "Variable Series Funds").
- Two invest in shares of a specific portfolio of the Aim Variable
Insurance Funds, Inc. (the "AIM V.I. Funds").
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- One invests in shares of a portfolio of the Alliance Variable Products
Series Funds, Inc. (the "Alliance Fund").
- Two invest in shares of a specific portfolio of the MFS (R) Variable
Insurance Trust(SM) (the "MFS Trust").
- Fourteen invest in units of a specific Zero Trust.
On or about July 15, 1999, six additional investment divisions become available
in the Separate Account.
- Two invest in Class A shares of a specific portfolio of the Variable
Series Funds.
- One invests in shares of an additional portfolio of the Alliance Fund.
- One invests in shares of a portfolio of the Hotchkis and Wiley Variable
Trust (the "Hotchkis and Wiley Trust").
- One invests in Class A shares of a portfolio of the Mercury Asset
Management V.I. Funds, Inc. (the "Mercury V.I. Funds").
- One invests in units of the Zero Trust maturing on February 15, 2019.
On or about July 15, 1999, two investment divisions previously available under
the Separate Account (the International Equity Focus Fund and the Global Bond
Focus Fund) close to allocations of premiums and contract value.
For more information, see "The Funds" below. You'll find complete information
about the Funds and the Zero Trusts, including the risks associated with each
portfolio in the accompanying prospectuses. They should be read along with this
Prospectus.
Although the investment objectives and policies of certain Funds are similar to
the investment objectives and policies of other portfolios that may be managed
or sponsored by the same investment adviser, manager, or sponsor, we do not
represent or assure that the investment results will be comparable to any other
portfolio, even where the investment advisors or manager is the same.
Differences in portfolio size, actual investments held, fund expenses, and other
factors all contribute to differences in fund performance. For all of these
reasons, you should expect investment results to differ. In particular, certain
Funds available only through the Contract have names similar to funds not
available through the Contract. The performance of any fund not available
through the Contract is not indicative of performance of the similarly named
fund available through the Contract.
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 we furnish to you). When we allocate your
payments or investment base to an investment division, we purchase units based
on the value of a unit of the investment division as of the end of the valuation
period during which the allocation occurs. When we transfer or deduct amounts
out of an investment division, we redeem units in a similar manner. A valuation
period is each business day together with any non-business days before it. A
business day is any day the New York Stock Exchange is open or the SEC requires
that we determine the net asset value of an investment division.
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. We determine 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 the charges to the Separate Account.
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.
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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.
CHANGES WITHIN THE ACCOUNT
We may make available additional investment divisions. We also have 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
our judgment, a portfolio no longer suits the purposes of the Contracts. This
may happen due to a change in laws or regulations, or a change in a portfolio's
investment objectives or restrictions, or because the portfolio is no longer
available for investment, or for some other reason. If necessary, we would get
prior approval from the Arkansas State Insurance Department and the Securities
and Exchange Commission and any other required approvals before making such a
substitution.
Subject to any required regulatory approvals, we reserve 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, we also reserve 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.
THE FUNDS
Below we list the funds into which the investment divisions may invest. There is
no guarantee that any fund or portfolio will be able to meet its investment
objective.
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.
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
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<PAGE> 13
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".)
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 portfolios are currently available through the
Separate Account. Two additional portfolios become available on or about July
15, 1999. The investment objectives and certain investment policies of these
Variable Series Funds portfolios are described below.
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.
The investment division corresponding to this Fund closes to allocations of
premiums and contract value on or about July 15, 1999.
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.
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<PAGE> 14
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.
The investment division corresponding to this Fund closes to allocations of
premiums and contract value on or about July 15, 1999.
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").
Capital Focus Fund seeks to achieve the highest total investment return
consistent with prudent risk. To do this, management of the Fund uses a flexible
"fully managed" investment policy that shifts the emphasis among equity, debt
(including money market), and convertible securities.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Global Growth Focus Fund seeks long-term growth of capital. The Fund invests in
a diversified portfolio of equity securities of issuers located in various
countries and the United States, placing particular emphasis on companies that
have exhibited above-average growth rates in earnings.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
The Variable Series Funds, as part of its operating expenses, pays an investment
advisory fee to MLAM. (See "Charges to Fund Assets".)
THE AIM V.I. FUNDS
The AIM V.I. Funds is registered with the Securities and Exchange Commission as
an open-end 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.
AIM V.I. Capital Appreciation Fund seeks growth of capital through investment in
common stocks, with emphasis on medium and small-sized growth companies. AIM
will be particularly interested in companies that are likely to benefit from new
or innovative products, services or processes, as well as those that have
experienced above-average, long-term growth in earnings and have excellent
prospects for future growth.
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 AIM's
appraisal of 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 market generally.
Income is a secondary objective.
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<PAGE> 15
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173, has served as an
investment adviser since its organization in 1976. Today, AIM together with its
subsidiaries, advises or manages over 110 investment portfolios, including the
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".)
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. One additional portfolio
becomes available on or about July 15, 1999. The investment objectives of these
Alliance Fund portfolios are described below.
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 is 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. This Fund is therefore not intended for
contract owners whose principal objective is assured income and conservation of
capital.
Alliance Quasar Portfolio seeks growth of capital by pursuing aggressive
investment policies. The Fund invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation, and invests only
incidentally for current income. The selection of securities based on the
possibility of appreciation cannot prevent loss in value. Moreover, because the
Fund's investment policies are aggressive, an investment in the Fund is risky
and is not intended for contract owners who want assured income or preservation
of capital.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Alliance is a Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105. 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".)
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.
MFS Emerging Growth Series will seek long-term growth of capital. The series
invests, under normal market conditions, at least 65% of its total assets in
common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities, of emerging growth
companies. These companies are companies that the series' adviser believes are
either early in their life cycle but have the potential to become major
enterprises or are major enterprises whose rates of earnings growth are expected
to accelerate.
MFS Research Series will seek to provide long-term growth of capital and future
income. The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related
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<PAGE> 16
securities, such as preferred stocks, convertible securities and depositary
receipts. The series focuses on companies that the series' adviser believes have
favorable prospects for long-term growth, attractive valuations based on current
and expected earnings or cash flow, dominant or growing market share and
superior management.
MFS, a Delaware corporation, 500 Boylston Street, Boston, Massachusetts 02116,
is a subsidiary of Sun Life of Canada (U.S.) Financial Service Holdings, Inc.,
which, in turn, is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada. The MFS Trust, as part of its operating expenses, pays an
investment advisory fee to MFS. (See "Charges to Fund Assets".)
THE HOTCHKIS AND WILEY TRUST
The Hotchkis and Wiley Trust is registered with the Securities and Exchange
Commission as an open-end management investment company, and its adviser is
Hotchkis and Wiley. One of its mutual fund portfolios becomes available through
the Separate Account on or about July 15, 1999. The investment objective of this
Hotchkis and Wiley Trust portfolio is described below.
Hotchkis and Wiley International VIP Portfolio seeks to provide current income
and long term growth of income, accompanied by growth of capital. The Fund
invests at least 65% of its total assets in stocks in at least ten foreign
markets. Ordinarily, the Fund invests in stocks of companies located in the
developed foreign markets and invests at least 80% of its total assets in stocks
that pay dividends. It also may invest in stocks that don't pay dividends or
interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential. In investing the Fund,
Hotchkis and Wiley follows a value style. This means that it buys stocks that it
believes are currently undervalued by the market and thus have a lower price
than their true worth. Typical value characteristics include:
- - low price-to-earnings ratio relative to the market
- - high dividend yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries. The value discipline
sometimes prevents investments in stocks that are in well-known indexes, like
the S&P 500 or similar foreign indexes.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Hotchkis and Wiley, 725 S. Figueroa Street, Suite 4000, Los Angeles, California
90017-5400, is a division of MLAM. The Hotchkis and Wiley Trust, as part of its
operating expenses, pays an investment advisory fee to Hotchkis and Wiley. (See
"Charges to Fund Assets".)
THE MERCURY V.I. FUNDS
The Mercury V.I. Funds is registered with the Securities and Exchange Commission
as an open-end management investment company, and its adviser is Mercury Asset
Management International Ltd. Class A shares of one of its mutual fund
portfolios becomes available through the Separate Account on or about July 15,
1999. The investment objective of the Mercury V.I. U.S. Large Cap Fund is
described below.
Mercury V.I. U.S. Large Cap Fund's main goal is long-term capital growth. The
Fund invests primarily in a diversified portfolio of equity securities of large
cap companies (which are companies whose market capitalization is at least $5
billion) located in the U.S. that Fund management believes are undervalued or
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<PAGE> 17
have good prospects for earnings growth. The Fund may also invest up to 10% of
its assets in stocks of companies located in Canada.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Mercury Asset Management International Ltd. is located at 33 King William
Street, London EC4R 9AS, England. Its intermediate parent is Mercury Asset
Management Group Ltd. a London-based holding company. The ultimate parent of
Mercury Asset Management Group Ltd. is Merrill Lynch & Co., Inc. The Mercury
V.I. U.S. Large Cap Fund, as part of its operating expenses, pays an investment
advisory fee to Mercury Asset Management International Ltd. (See "Charges to
Fund Assets".)
SPECIAL RISKS IN CERTAIN 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
MLAM'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.
Because a substantial portion of the Global Growth Focus Fund's assets may be
invested on an international basis, you should be aware of certain risks, such
as fluctuations in foreign exchange rates, future political and economic
developments, different legal systems, and the possible imposition of exchange
controls or other foreign government laws or restrictions. An investment in the
Fund may be appropriate only for long-term investors who can assume the risk of
loss of principal, and do not seek current income.
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.
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<PAGE> 18
For the Hotchkis and Wiley International VIP Portfolio, investing in emerging
market and other foreign securities involves certain risk considerations not
typically associated with investing in securities of U.S. issuers, including
currency devaluations and other currency exchange rate fluctuations, political
uncertainty and instability, more substantial government involvement in the
economy, higher rates of inflation, less government supervision and regulation
of the securities markets and participants in those markets, controls on foreign
investment and limitations on repatriation of invested capital and on the Fund's
ability to exchange local currencies for U.S. dollars, greater price volatility,
substantially less liquidity and significantly smaller capitalization of
securities markets, absence of uniform accounting and auditing standards,
generally higher commission expenses, delay in settlement of securities
transactions, and greater difficulty in enforcing shareholder rights and
remedies.
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 OPERATION OF 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. We are the legal owner of all Fund shares held in the Separate
Accounts. We have the right to vote on any matter put to vote at the Funds'
shareholder meetings. However, we will vote all Fund shares attributable to
Contracts according to instructions we receive from contract owners. Shares
attributable to Contracts for which we receive no voting instructions will be
voted in the same proportion as shares in the respective investment divisions
for which we receive instructions. We will also vote shares not attributable to
Contracts in the same proportion as shares in the respective investment
divisions for which we received instructions. If any federal securities laws or
regulations, or their present interpretation, change to permit us to vote Fund
shares in our own right, we may do so.
We determine the number of shares attributable to you by dividing your
Contract's investment base in an investment division by the net asset value of
one share of the corresponding portfolio. We count fractional votes.
Under certain circumstances, state regulatory authorities may require us 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.
We may also disregard instructions to vote for changes in the investment policy
or the investment adviser if it disapproves of the proposed changes. We 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 we disregard voting instructions, we will include a summary of our actions in
the next semi-annual report.
Resolving Material Conflicts. Shares of the Series Fund are available for
investment by us, 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 us or Merrill Lynch & Co.,
Inc.). Shares of the Variable Series Funds, the AIM V.I. Funds, the Alliance
Fund, the MFS Trust, and the Hotchkis and Wiley Trust are sold to separate
accounts of ours, ML Life Insurance Company of New York, and insurance companies
not affiliated with us or Merrill Lynch & Co., Inc. to fund benefits under
variable life insurance and variable annuity contracts, and may be sold to
certain qualified plans. Shares of the Mercury V.I. Funds are sold to separate
accounts of ours, ML Life Insurance Company of New York,
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<PAGE> 19
and may in the future be sold to insurance companies not affiliated with us 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 our 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 differences in voting instructions from our contract owners and those
of the other insurance companies, or for other reasons. We will monitor events
to determine how to respond to conflicts. If a conflict occurs, we may need 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, we will take the action we believe
necessary to protect you consistent with applicable legal requirements.
Administrative Service Arrangements. MLAM has entered into an agreement with
Merrill Lynch Insurance Group, Inc. ("MLIG"), our parent, for 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 compensates 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.
AIM V.I. Funds has entered into an Administrative Services Agreement with AIM,
under 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 us for administrative
services for the AIM V.I. Funds in connection with the Contracts. Under this
agreement, AIM compensates us 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 us for administrative services for the Alliance Fund in
connection with the Contracts. Under this agreement, AFD compensates us 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 for administrative services for the
MFS Trust in connection with the Contracts, certain other contracts issued by
us, 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.
Hotchkis and Wiley has entered into an agreement with MLIG with respect to
administrative services for the Hotchkis and Wiley Trust in connection with the
Contracts, certain other contracts issued by us, and certain contracts issued by
ML Life Insurance Company of New York. Under this agreement, Hotchkis and Wiley
pays compensation to MLIG is an amount equal to a portion of the annual gross
investment advisory fees paid by the Hotchkis and Wiley International VIP
Portfolio to Hotchkis and Wiley attributable to such contracts.
Mercury Asset Management International Ltd. has entered into an agreement with
MLIG with respect to administrative services for the Mercury V.I. Funds in
connection with the Contracts, certain other contracts issued by us, and certain
contracts issued by ML Life Insurance Company of New York. Under this agreement,
Mercury Asset Management International Ltd. pays compensation to MLIG in an
amount equal to a portion of the annual gross investment advisory fees paid by
the Mercury V.I. U.S. Large Cap Fund to Mercury Asset Management International
Ltd. attributable to such contracts.
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<PAGE> 20
THE ZERO TRUSTS
The Zero Trusts are intended to provide safety of capital and a competitive
yield to maturity. It purchases at a deep discount U.S. Government-backed
investments which make no periodic interest payments. 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 are shown below:
<TABLE>
<CAPTION>
TARGETED RATE OF RETURN
TO MATURITY AS
ZERO TRUST MATURITY DATE OF APRIL 9, 1999
- ---------- ------------- --------------------------
<C> <S> <C>
2000... February 15, 2000 3.15%
2001... February 15, 2001 3.37%
2002... February 15, 2002 3.65%
2003... August 15, 2003 3.71%
2004... February 15, 2004 3.82%
2005... February 15, 2005 3.72%
2006... February 15, 2006 3.55%
2007... February 15, 2007 3.72%
2008... February 15, 2008 4.08%
2009... February 15, 2009 4.14%
2010... February 15, 2010 4.31%
2011... February 15, 2011 4.29%
2013... February 15, 2013 4.45%
2014... February 15, 2014 4.58%
</TABLE>
An additional Zero Trust maturing on February 15, 2019 becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
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 we need to sell them to pay benefits and make reallocations. We
pay the sponsor a fee for these transactions and are reimbursed through the
trust charge assessed to the divisions investing in the Zero Trusts. (See
"Charges to Divisions Investing in the Zero Trusts".)
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 return 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") 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 return adjusted for these charges. It does not, however,
represent the actual return on a payment that we might receive under the
Contract on that date, since it does not reflect the charges for contract
loading deducted from payments to the Contract, cost of insurance charges and
rider costs, and any net loan cost deducted from a Contract's investment base
(described in "Charges Deducted from the Investment Base").
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<PAGE> 21
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.
FACTS ABOUT THE CONTRACT
WHO MAY BE COVERED
We will issue a Contract on the life of the insured so long as the relationship
among the applicant and the insured meets our insurable interest requirements
and provided the insured is not over age 85 or under age 20. We will determine
the insured's issue age using the insured's age as of his or her birthday
nearest the contract date. Before we'll issue a Contract, the insured must meet
our medical and other underwriting and insurability requirements.
We assign insureds to underwriting classes which determine the cost of insurance
rates we use in calculating cost of insurance deductions. We may issue Contracts
on insureds in standard, non-smoker, or preferred non-smoker underwriting
classes. We may also issue Contracts on insureds in a "substandard" underwriting
class. Individuals in substandard classes have health or lifestyle factors less
favorable than the average person. For a discussion of the effect of
underwriting classification on cost of insurance deductions, see "Cost of
Insurance".
INITIAL PAYMENT
Minimum. To purchase a Contract, you must complete an application and make a
payment. We require the payment to put the Contract into effect. In the
application, you select the face amount of the Contract. The amount of the
minimum initial payment for a Contract depends on the face amount you select,
and each insured's issue age, sex, and underwriting class. We won't, however,
accept an initial payment for a specified face amount that will provide a
guarantee period of less than three months, or that would cause the Contract to
fail to qualify under federal tax law as we interpret it. You may make
additional payments. (See "Making Additional Payments".)
Coverage. Insurance coverage generally begins on the contract date. This is
usually the next business day following receipt of the initial payment at our
Service Center. Prior to the contract date, we may provide temporary life
insurance coverage under a temporary insurance agreement. Under our underwriting
rules, in most states, temporary life insurance coverage may not exceed $300,000
and may not last more than 90 days.
Backdating. As provided for under state insurance law you may backdate the
Contract to preserve the insured's age. However, you can't backdate more than
six months before the date the application was completed. We deduct cost of
insurance charges and rider costs for the backdated period on the contract date.
Selecting the Initial Face Amount. The minimum initial face amount is $250,000.
The maximum face amount that you may specify for a given initial payment is the
amount which will provide an initial guarantee period of at least three months.
The guarantee period will be shorter for an initial payment amount if you
request a larger face amount. The initial face amount will change if you change
your death benefit option, reduce the face amount, or take a partial withdrawal.
If we determine that, based on your initial payment and the face amount, your
Contract will be a modified endowment contract, we will issue the Contract
provided that:
- you sign a statement acknowledging that the Contract is a modified
endowment contract; or
- you agree either to reduce the initial payment or to increase the face
amount to a level where the Contract will not be a modified endowment
contract.
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<PAGE> 22
For a discussion about the tax consequences of purchasing a modified endowment
contract, see "Tax Considerations."
Initial Guarantee Period. We determine the initial guarantee period for a
Contract based on the initial payment, face amount and any additional insurance
rider face amount. We will adjust the guarantee period when:
- you make an additional payment;
- you take a partial withdrawal;
- you change your death benefit option or reduce your face amount; or
- you increase or decrease your additional insurance rider face amount.
The guarantee period is the period of time we guarantee that the Contract will
remain in force regardless of investment experience unless the loan debt exceeds
certain contract values. We base the guarantee period on the guaranteed maximum
cost of insurance rates in the Contract, guaranteed maximum rider costs (if you
elect an additional insurance rider), 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 their age,
sex and underwriting class. For example, an older insured will have a shorter
guarantee period than a younger insured of the same sex and in the same
underwriting class.
The maximum guarantee period is until the date the insured would reach attained
age 100.
ADDITIONAL INSURANCE RIDER
You may purchase additional insurance coverage, payable to the beneficiary when
the insured dies, through an additional insurance rider either when you purchase
the Contract or on any contract anniversary before the insured reaches attained
age 86. Currently, when you purchase the Contract, the maximum additional
insurance rider face amount is three times the face amount of the Contract. The
minimum additional insurance rider face amount at any time is $100,000. We will
deduct a cost of insurance charge for the rider from your Contract's investment
base on each processing date. This rider charge will be based on the same cost
of insurance rates as the Contract. (See "Cost of Insurance.") There is no
additional contract loading associated with this coverage.
Beginning in contract year 2, you may increase or decrease your additional
insurance rider face amount once each year. You must elect any change in the
additional insurance rider face amount before the insured reaches attained age
86. Any change must be at least $100,000. You must provide evidence of
insurability to increase additional rider face amount. The change will take
effect on the next contract anniversary following underwriting approval of the
change. After the change takes place, we will calculate a new guarantee period
using the existing fixed base and the face amount of the Contract plus the new
additional insurance rider face amount. If you decrease the additional insurance
rider face amount, the guarantee period will increase; and if you increase the
additional insurance rider face amount, the guarantee period will decrease.
Unless you terminate the rider, we will not allow a decrease in the rider face
amount, if the decrease would:
- cause the resulting face amount to be less than $100,000;
- cause the resulting guarantee period to extend beyond the date the
insured would reach attained age 100; or
- cause the Contract to fail to qualify as life insurance under federal
income tax laws as we interpret them.
If you decrease the rider face amount you may cause the Contract to become a
modified endowment contract. In such a case, we will not process the decrease
until you confirm in writing that you intend to convert the Contract to a
modified endowment contract. Increasing or decreasing the additional insurance
21
<PAGE> 23
rider face amount may have adverse tax consequences. You should consult a tax
advisor before changing the face amount of the additional insurance rider.
Additional insurance rider coverage terminates on the earlier of:
- the date the Contract terminates or lapses; or
- the date the insured reaches attained age 100.
RIGHT TO CANCEL ("FREE LOOK" PERIOD)
You may cancel your Contract during the "free look" period by returning it for a
refund. Generally, the "free look" period ends the later of ten days after you
receive the Contract, 45 days from the date you complete the application, or ten
days after we mail or personally deliver the Notice of Withdrawal Right to you.
To cancel the Contract during the "free look" period, you must mail or deliver
the Contract to our Service Center or to the registered representative who sold
it. We will refund your payment without interest. We may require you to wait six
months before applying for another contract.
MAKING ADDITIONAL PAYMENTS
After the end of the "free look" period, you may make additional payments so
long as the insured is living and has not yet reached attained age 100.
Additional payments must be at least $100. If an additional payment would cause
the Contract to become a modified endowment contract we will return the
additional payment, unless you confirm in writing that you intend to convert the
Contract to a modified endowment contract. We will return that portion of any
additional payment beyond the amount necessary to extend the guarantee period to
the date the insured would reach attained age 100. We will also return any
additional payment which would cause the Contract to fail to qualify as life
insurance under federal tax laws as we interpret them.
You may elect to make additional payments annually, semiannually or quarterly.
You may also make payments on a monthly basis if you authorize us to withdraw
the payment from your CMA(1) account. If you have the CMA Insurance Service,
additional payments may be withdrawn automatically from your CMA account and
transferred to your Contract. The withdrawals will continue under the plan
specified until we are notified otherwise. For additional payments not withdrawn
from a CMA account, we will send you reminder notices.
Effect of Additional Payments. Generally, we accept any additional payment the
day we receive it. On the date we accept an additional payment we will:
- increase the Contract's investment base by the amount of the payment
minus any applicable contract loading;
- reflect the payment in the calculation of the variable insurance amount
(see "Variable Insurance Amount"); and
- increase the fixed base by the amount of the payment less applicable
contract loading.
As of the processing date on or next following receipt and acceptance of an
additional payment, we will increase the guarantee period if the guarantee
period before the additional payment does not extend beyond the date the insured
would reach attained age 100.
We will determine the increase in the guarantee period by taking the immediate
increase in the cash value resulting from the additional payment and adding
interest at the annual rate of 4.5% for the period from when we receive and
accept the payment to the contract processing date on or next following such
date. This is the guarantee adjustment amount. We add the guarantee adjustment
amount to the fixed base and we use the resulting new fixed base to calculate a
new guarantee period.
- ---------------
(1)Cash Management Account and CMA are registered trademarks of Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
22
<PAGE> 24
The amount of the increase in the guarantee period will depend on the amount of
the additional payment and the contract year in which we receive and accept it.
If we have applied any excess sales load to keep the Contract in force, we will
first apply an additional payment (less contract loading) to recover such excess
sales load. We will next apply an additional payment as a loan repayment, if
there is any loan debt. We will apply any excess as an additional payment.
The Examples below show the effect of additional payments. Example 1 shows the
effect on the guarantee period of a $9,576 additional payment at the beginning
of contract year five. Example 2 shows the effect of a $19,152 additional
payment at the beginning of contract year five. Example 3 shows the effect of a
$9,576 additional payment 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>
5 $9,576 2.75 years
EXAMPLE 2
- ----------------------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
- -------- ---------- ----------------
5 $19,152 5.25 years
EXAMPLE 3
- ----------------------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
- -------- ---------- ----------------
6 $9,576 2.25 years
</TABLE>
INVESTMENT BASE
A Contract's investment base is the sum of the amounts invested in each of the
investment divisions. On the contract date, the investment base equals the
initial payment minus contract loading and cost of insurance charges and rider
costs. We adjust the investment base daily to reflect the investment performance
of the investment divisions you've selected. (See "Net Rate of Return for an
Investment Division".) The investment performance reflects the deduction of
Separate Account charges. (See "Charges to the Separate Account".)
Partial withdrawals, loans and deductions for cost of insurance, rider costs,
and net loan costs decrease the investment base. (See "Charges Deducted from the
Investment Base", "Partial Withdrawals", and "Loans".) Loan repayments and
additional payments increase it. You may elect from which investment divisions
loans and partial withdrawals are taken and to which investment divisions
repayments and additional payments are added. If you don't make an election, we
will allocate increases and decreases proportionately to your investment base in
the investment divisions selected.
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<PAGE> 25
Initial Investment Allocation and Preallocation. Generally, during the first 14
days following the in force date, the initial payment minus contract loading
will remain in the division investing in the Money Reserve Portfolio. Afterward,
we'll reallocate the investment base to the investment divisions you've
selected. You may invest in up to five of the investment divisions.
Changing the Allocation. Currently, you may change investment allocations as
often as you wish. However, we may charge up to $25 for each change in excess of
six each year. To change your investment base allocation, call or write our
Service Center. (See "Some Administrative Procedures".) A dollar cost averaging
feature may also be available. (See "Dollar Cost Averaging".)
Zero Trust Allocations. If your investment base is in any of the Zero Trusts,
we'll notify you 30 days before that Trust matures. Tell us in writing at least
seven days before the maturity date how to reinvest the proceeds. If you don't
tell us, we'll move the proceeds to the investment division investing in the
Money Reserve Portfolio. Units of a specific Zero Trust may no longer be
available when we receive a request for allocation. Should this occur, we'll
attempt to notify you immediately so that you can change the request.
Allocation to the Division Investing in the Natural Resources Portfolio. We
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
We deduct 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. We may use proceeds from any charges, including the
mortality and expense risk charge, in part to cover distribution expenses.
We deduct these charges pro-rata from the investment base on processing dates.
(See "Charges Deducted from the Investment Base".) We deduct a contract load
from each payment you make. (See "Contract Loading".) We also deduct certain
charges daily from the investment results of each investment division in the
Separate Account in determining its net rate of return. (See "Charges to the
Separate Account".) The portfolios in the Funds also pay monthly advisory fees
and other expenses. (See "Charges to Fund Assets".)
CHARGES DEDUCTED FROM THE INVESTMENT BASE
Cost of Insurance. We deduct a cost of insurance charge from the investment
base on the contract date and each processing date thereafter before the date
the insured reaches attained age 100. This charge compensates us for the cost of
providing life insurance coverage on the insured. It is based on the insured's
underwriting class, sex and attained age, and the Contract's net amount at risk.
To determine the cost of insurance, we multiply 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.
Current cost of insurance rates may be equal to or less than the guaranteed cost
of insurance rates. For all insureds, 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.
We guarantee that the current cost of insurance rates will never exceed the
maximum guaranteed rates shown in the Contract. The maximum guaranteed rates
(except those issued on a substandard basis) do not exceed the rates based on
the 1980 Commissioners Standard Ordinary Mortality Table (1980 CSO Table). We
may use rates that are equal to or less than these rates, but never greater. The
maximum rates
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<PAGE> 26
for Contracts issued on a substandard basis are based on a multiple of the 1980
CSO Table. Any change in the current 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".
Rider Charges. We deduct rider charges on the contract date and on each
processing date thereafter. These charges are explained under "Additional
Insurance Rider."
CONTRACT LOADING
We deduct contract loading from each payment you make. The contract loading
equals 50% of each payment you make until you make cumulative payments equaling
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 is equal to 46.25% of each payment through the second base
premium and 1.25% of each payment thereafter. It compensates us for sales
expenses and the costs for underwriting and issuing the Contract. We may reduce
the sales load in certain group or sponsored arrangements.
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. The excess sales load equals any sales load we deduct from
the first two base premiums in excess of:
- 30% of premium amounts paid up to an amount equal to the first base
premium; and
- 10% of additional premium amounts paid up to an amount equal to the
second base premium.
We calculate and apply the excess sales load in the following situations only in
the first 24 contract months:
- We refund it to you if you surrender the Contract or the Contract lapses,
except to the extent that we have previously applied it to keep the
Contract in force.
- We add it to the cash value to keep the Contract in force if loan debt
exceeds the larger of (i) cash value plus any excess sales load we have
not previously applied to keep the Contract in force and (ii) the fixed
base.
- We add it to the cash value to determine the variable insurance amount.
If certain Contract changes resulting in a reduction in face amount occur before
the end of the first two policy years, we may adjust the amount of excess sales
load under a Contract.
CHARGES TO THE SEPARATE ACCOUNT
Each day we deduct a mortality and expense risk charge from each division of the
Separate Account. The total amount of this charge is .90% annually at the
beginning of the year. Of this amount, .75% is for
- the risk we assume that insureds as a group will live for a shorter time
than actuarial tables predict. As a result, we would be paying more in
death benefits than planned; and
- the risk we assume that it will cost us more to issue and administer the
Contracts than expected.
The remaining amount, .15%, is for
- the risks we assume for potentially unfavorable investment results. One
risk is that the Contract's cash value cannot cover the charges due
during the guarantee period.
If the mortality and expense risk charge is not enough to cover the actual
expenses of mortality, maintenance, and administration, we will bear the loss.
If the charge exceeds the actual expenses, the
25
<PAGE> 27
excess will be added to our profit and may be used to finance distribution
expenses. We cannot increase the total charge.
Charges to Divisions Investing in the Zero Trusts. We assess a daily trust
charge against the assets of each division investing in the Zero Trusts. This
charge reimburses us 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. We may increase it, but it won't exceed
.50% annually at the beginning of the year. The charge is based on cost with no
expected profit.
Tax Charges. We have the right under the Contract to impose a charge against
Separate Account assets for its taxes, if any. We don't currently impose such a
charge, but we may in the future. Also, see "Contract Loading" above for a
discussion of tax charges included in contract load.
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.
We have 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. We 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 at an annual rate of
the average daily net assets of each portfolio. The fee for each is shown as
follows:
<TABLE>
<CAPTION>
PORTFOLIO NAME ADVISORY FEE
-------------- ------------
<S> <C>
Basic Value Focus Fund .60%
Global Bond Focus Fund .60%
Global Utility Focus Fund .60%
Index 500 Fund .30%
International Equity Focus Fund .75%
Developing Capital Markets Focus Fund 1.00%
Special Value Focus Fund .75%
Capital Focus Fund .60%
Global Growth Focus Fund .75%
</TABLE>
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
greater than 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 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.
26
<PAGE> 28
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 at an annual rate of 1.00% of each
of the Alliance Premier Growth Portfolio's and the Alliance Quasar Portfolio's
average daily net assets.
Charges to MFS Trust Assets. The MFS Trust incurs operating expenses and pays a
monthly advisory fee to MFS at an annual rate of .75% of the average daily net
assets of each of the MFS Emerging Growth Series and MFS Research Series.
Charges to Hotchkis and Wiley Trust Assets. The Hotchkis and Wiley Trust incurs
operating expenses and pays a monthly advisory fee to Hotchkis and Wiley at an
annual rate of .75% of the average daily net assets of the Hotchkis and Wiley
International VIP Portfolio.
Charges to Mercury V.I. Funds Assets. The Mercury V.I. Funds incurs operating
expenses and pays a monthly advisory fee to Mercury Asset Management
International Ltd. at an annual rate of .65% of the average daily net assets of
the Mercury V.I. U.S. Large Cap Fund.
Mercury Asset Management International Ltd. has agreed to limit the operating
expenses paid by the Mercury V.I. U.S. Large Cap Fund for one year to 1.25% of
its average daily net assets.
GUARANTEE PERIOD
Subject to certain conditions, we guarantee that regardless of investment
performance the Contract will stay in effect for the guarantee period.
Additional payments, partial withdrawals, changes in death benefit options,
reductions of face amount, and increases and decreases in the face amount of the
additional insurance rider may affect the guarantee period. We won't cancel the
Contract during the guarantee period unless any loan debt exceeds certain
contract values. We hold a reserve in our general account to support this
guarantee. The guarantee period never extends beyond the date the insured
reaches attained age 100.
When the Guarantee Period Does Not Extend to the Date the Insured Would Reach
Attained Age 100. After the end of the guarantee period, we may cancel the
Contract if the net cash surrender value (plus certain excess sales load) on a
processing date is insufficient to cover charges due on that date.
We will notify you before canceling the Contract. You will then have 61 days to
pay an amount, after deducting contract loading, which equals at least three
times the charges that were due (and not deducted) on the processing date when
we determined the cash value to be insufficient, plus any excess sales load we
previously applied to keep the Contract in force. If you pay this amount, we
will deduct the charges due and apply the balance to the investment base. If we
haven't received the required payment by the end of this grace period, we'll
cancel the Contract.
At that time we will deduct any charges for cost of insurance and rider costs
for the grace period, and refund any unearned charges or cost of insurance,
rider costs, and any excess sales load not used to keep the Contract in force.
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, we will extend the guarantee period to the insured's
attained age 100.
Reinstatement. Subject to state regulation, if we cancel a Contract, it may be
reinstated prior to the date the insured reaches attained age 100 and while the
insured is still living if:
- You request the reinstatement within three years after the end of the
grace period;
- We receive satisfactory evidence of insurability; and
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<PAGE> 29
- You pay the reinstatement payment. The reinstatement payment is the
minimum payment for which we 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.
The effective date of a reinstated contract is the processing date on or next
following the date the reinstatement application is approved. Thus, if the
insured dies before the effective date of the reinstated Contract, we won't pay
a death benefit.
CASH VALUE
Because investment results vary daily, we don't guarantee any minimum cash
value. On any date the cash value equals:
- the Contract's investment base on that date;
- plus debt;
- plus unearned cost of insurance charges and rider costs;
- minus any accrued net loan cost since the last contract anniversary (or
since the contract date during the first contract year).
Canceling to Receive Net Cash Surrender Value. You may cancel the Contract at
any time while the insured is living to receive the net cash surrender value in
a lump sum or under an income plan. We will determine the net cash surrender
value as of the date we receive your written request at our Service Center. If
the Contract is cancelled during the first 24 contract months, any excess sales
load not used to keep the Contract in force will also be paid to you. You must
make the request in writing in a form satisfactory to us. All rights to death
benefits will end on the date you send the written request to us. Cancelling the
Contract may have tax consequences. See "Tax Considerations."
PARTIAL WITHDRAWALS
Currently, beginning in the second Contract year and before the date the insured
reaches attained age 100, and subject to state regulation, you may make partial
withdrawals by submitting a request in a form satisfactory to us.
- You may make one partial withdrawal each contract year.
- The amount of any partial withdrawal may not exceed 90% of the Contract's
cash value less any loan debt.
- The effective date of the withdrawal is the date our Service Center
receives a withdrawal request.
- The minimum amount for each partial withdrawal is $1,000.
- Following a partial withdrawal, the remaining cash value minus loan debt
must be at least $5,000 and the remaining face amount must be at least
$250,000.
- A partial withdrawal may not be repaid.
We will not permit a partial withdrawal if after the withdrawal:
- the guarantee period would extend beyond the date the insured would reach
attained age 100; or
- the Contract would not qualify as life insurance under federal tax law.
If the partial withdrawal would cause the Contract to become a modified
endowment contract, we will delay processing the withdrawal until you confirm in
writing your intention to convert the Contract to a modified endowment contract.
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<PAGE> 30
Effect on Variable Insurance Amount, Investment Base, Cash Value, Fixed Base,
and Face Amount. As of the effective date of the withdrawal, we reduce the
investment base, cash value, and fixed base by the amount of the partial
withdrawal. If you choose death benefit option 1, we will reduce the face amount
of the Contract by the amount of the partial withdrawal. Unless you tell us
differently, we allocate this reduction proportionately to the investment base
in your investment divisions. In addition, we reduce the variable insurance
amount by the amount of the withdrawal multiplied by the cash value corridor
factor. (See "Cash Value Corridor Factor".)
Effect on Guaranteed Period. As of the processing date on or next following a
partial withdrawal, we calculate a new guarantee period. We do this 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 withdrawal to the contract processing date on or next following such
date. This is the guarantee adjustment amount. We subtract the guarantee
adjustment amount from the fixed base and use the new fixed base to calculate a
new guarantee period.
The examples below show the effect of partial withdrawals. The amount of the
reduction in the face amount will depend on the amount of the partial
withdrawal, the face amount at the time of the withdrawal and the contract year
in which the withdrawal is made. Larger withdrawals result in larger reductions
in the guarantee period. 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>
15 $5,000 .5 years
EXAMPLE 2
- ----------------------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
- -------- ---------- ----------------
15 $10,000 1 year
EXAMPLE 3
- ----------------------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
- -------- ---------- ----------------
20 $10,000 .5 years
</TABLE>
LOANS
Any time after the "free look" period and before the date the insured reaches
attained age 100, you may use the Contract as collateral to borrow funds from
us. The minimum loan is $1,000. Preferred loans are available beginning on the
later of the tenth contract anniversary or the date the insured reaches attained
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age 55. See "Net Loan Cost." You may repay all or part of the loan debt any time
during the insured's lifetime. Each repayment must be for at least $1,000 or the
amount of the loan debt, if less. Certain states won't permit a minimum amount
that can be borrowed or repaid. If we previously applied any excess sales load
to keep the Contract in force, we will first apply any loan repayment to repay
such excess sales load.
When you take a loan, we transfer from your investment base the amount of the
loan and hold it as collateral in our general account. When a loan repayment is
made, we transfer the amount of the repayment from the general account to the
investment divisions. You may select the divisions you want to borrow from, and
the divisions you want to repay (including interest payments). If you don't
specify, we'll take the borrowed amounts proportionately from and make
repayments proportionately to your investment base as then allocated to the
investment divisions.
If you have the CMA Insurance Service, you can transfer loans and loan
repayments to and from your CMA account.
Effect on Death Benefit and Cash Value. Whether or not you repay a loan, 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 will 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 loan debt. The
maximum amount that can be borrowed at any time is the difference between the
loan value and the loan debt.
Once available, we calculate the preferred loan value on each contract
anniversary. The preferred loan value for the contract year is equal to 12% of
the cash value minus existing loan debt on the contract anniversary. This amount
is available each contract year. We apply it first to convert any existing loan
debt to preferred loan status and then make it available for new loans.
Interest. While loan debt remains unpaid, we may charge interest at a maximum
rate of 6% annually, subject to state regulation. Currently, we charge interest
at 5.25% annually. Interest accrues each day and payments are due at the end of
each contract year. If you don't pay the interest when due, we add it to the
unpaid loan amount. Loan debt is considered part of cash value used to calculate
gain.
The amount held in our 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 currently earns interest at an annual
rate of 4.50%.
Net Loan Cost. In addition to the loan interest we charge, on each contract
anniversary we reduce 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%. We take the net loan cost 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 Loan Debt. If the loan debt exceeds the larger of
(i) the cash value (plus excess sales load during the first 24 policy months)
and less charges due on that date and (iii) the fixed base on a processing date,
we will cancel the Contract 61 days after we mail a notice of intent to
terminate the Contract to you unless we have received at least the minimum
repayment amount specified in the notice. Upon termination, we will deduct any
cost of insurance charges and rider costs that may be
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applicable to the 61-day period and refund any unearned cost of insurance
charges, rider costs, and any excess sales load that we did not previously apply
to keep the Contract in force. If the Contract lapses with a loan outstanding,
you may have adverse tax consequences. (See "Tax Considerations -- Contract
Loans".)
REDUCING THE FACE AMOUNT
Beginning in contract year four and after two base premiums have been paid, and
so long as the insured has not reached attained age 86, you may reduce the face
amount once each contract year. The effective date of the change will be the
contract anniversary next following the date we approve the change. The minimum
amount for each face amount reduction is $100,000. We will not permit a
reduction in face amount if:
- it would result in a face amount of less than $250,000 or a guarantee
period extending beyond the date the insured would reach attained age
100; or
- after the reduction, the Contract would fail to qualify as life insurance
under federal tax laws as we interpret them.
As of the effective date of a face amount reduction, we calculate a new
guarantee period using the new face amount (plus the 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. The larger the reduction, the larger
the increase in the guarantee period.
A face amount reduction may cause a Contract to convert into a modified
endowment contract. In such a case, we will not process the reduction until you
confirm in writing your intent to convert the Contract. A face amount reduction
may have other adverse tax consequences. You should consult a tax advisor before
changing your Contract's face amount.
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.
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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 years
EXAMPLE 2
- -----------------------------------------------------------
CONTRACT FACE AMOUNT INCREASE IN
YEAR REDUCTION GUARANTEE PERIOD
- -------- ----------- ----------------
5 $150,000 3.25 years
EXAMPLE 3
- -----------------------------------------------------------
CONTRACT FACE AMOUNT INCREASE IN
YEAR REDUCTION GUARANTEE PERIOD
- -------- ----------- ----------------
6 $150,000 3.5 years
</TABLE>
DEATH BENEFIT PROCEEDS
We will pay the death benefit proceeds to the beneficiary when we receive all
information needed to process the payment, including due proof of the insured's
death. When we first receive reliable notification of the insured's death by a
representative of the owner or the insured, we may transfer the investment base
to the division investing in the Money Reserve Portfolio, pending payment of
death benefit proceeds.
Amount of Death Benefit Proceeds. The death benefit proceeds depend on the
death benefit option you choose.
- 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 face amount
plus the cash value; or the variable insurance amount.
TO DETERMINE THE DEATH BENEFIT PROCEEDS, WE WILL SUBTRACT ANY LOAN DEBT FROM THE
DEATH BENEFIT AND ADD 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 before the grace period
minus any overdue charges. (See "Guarantee Period".)
If the insured dies after the insured reaches attained age 100, we will pay the
beneficiary the post - 100 death benefit proceeds.
Variable Insurance Amount. We determine the variable insurance amount daily by
multiplying the cash value (plus excess sales load during the first 24 months
after we issue the Contract) by the cash value corridor factor.
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CASH VALUE CORRIDOR FACTOR
We use the cash value corridor factor to determine the amount of death benefit
purchased by $1.00 of cash value. It is based on the insured's attained age 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. Your contract contains a table of factors as of each
anniversary.
Table of Illustrative Cash Value Corridor Factors
on Anniversaries
<TABLE>
<CAPTION>
ATTAINED AGE FEMALE
- ------------ ------
<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 so long as the insured has not reached attained age 86, you may
change the death benefit option. The effective date of the change will be the
contract anniversary next following the date we approve the change. We will
change the face amount to keep the death benefit constant on the effective date
of the change. Therefore, if you change from option 1 to option 2, we will
decrease the face amount of the Contract by the cash value on the date of the
change. We will not permit a change in the death benefit option if it would
result in a face amount of less than $250,000 or if the resulting guarantee
period would extend beyond the date the insured would reach attained age 100. If
the change is from option 2 to option 1, we will increase the face amount of the
Contract by the cash value on the date of the change.
If you request a change from option 1 to option 2, we will require you to
provide evidence of insurability. We will not permit a change in death benefit
options if after the change the Contract would fail to qualify as life insurance
under federal tax laws as we interpret them.
As of the effective date of a change in the death benefit option that results in
a change in the face amount, we calculate a new guarantee period using the new
face amount (plus the additional insurance rider face amount) and the fixed base
on that date.
A change in the death benefit option may cause the Contract to convert into a
modified endowment contract. In such a case, we will not process the change
until you confirm in writing that you wish to convert the Contract. Changing the
death benefit option may also have other adverse tax consequences. You should
consult a tax advisor before changing the Contract's death benefit option.
Example 1 below 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.
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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
Post-100 Death Benefit Proceeds. The death benefit proceeds at and after the
date the insured reaches attained age 100 depend on the death benefit option in
effect on the date of death.
If option 1 is in effect, we calculate the post-100 death benefit 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 date the insured reaches attained age 100,
and
(2) the cash value as of the date of death plus the net amount at risk
at the date the insured reaches attained age 100.
- the net amount at risk at the date the insured reaches attained age 100
equals the face amount at the date the insured reaches 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 equals the face amount at
the date the insured reaches attained age 100 plus the cash value as of the date
of death.
To determine post-100 death benefit proceeds under either option, we will
subtract only loan debt from the death benefit.
Benefits at the Date the Insured Reaches Attained Age 100. As of the date the
insured reaches attained age 100, any guarantee period ends. The cash value will
continue to increase or decrease depending on the investment experience of the
investment divisions to which you allocated your Contract's investment base.
Upon the death of the insured, we will pay the beneficiary the post-100 death
benefit proceeds.
As of the date the insured reaches attained age 100:
- We will no longer deduct cost of insurance charges.
- We will continue to accept loan repayments.
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- We will continue to deduct net loan cost.
- We will not permit additional payments, partial withdrawals or additional
loans.
- Loan interest will continue to accrue.
- Additional insurance rider coverage terminates.
The tax consequences of continuing the Contract beyond the 100th birthday of the
insured are uncertain. You should consult a tax advisor as to those
consequences.
PAYMENT OF DEATH BENEFIT PROCEEDS
We will generally pay the death benefit proceeds to the beneficiary within seven
days after our Service Center receives all the information needed to process the
payment. We may delay payment, however, if we are contesting the Contract or
under the circumstances described in "Using the Contract" and "Other Contract
Provisions". If a delay is necessary and death of the insured occurs prior to
the end of the guarantee period, we may delay payment of any excess of the death
benefit over the face amount. After the guarantee period has expired, we may
delay payment of the entire death benefit.
We 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
below.
DOLLAR COST AVERAGING
What Is It? Once the feature is approved and is available in your state, the
Contract will offer an optional transfer feature called Dollar Cost Averaging
("DCA"). Contact the Service Center about availability. This feature allows you
to make automatic monthly transfers from the Money Reserve Portfolio to up to
four other investment divisions depending on your current allocation of
investment base. The DCA program will terminate and no transfers will be made if
transfers under DCA would cause you to be invested in more than 5 divisions.
The DCA feature is intended to reduce the effect of short-term price
fluctuations on investment cost. Since the same dollar amount is transferred to
selected divisions each month, more units of a division are purchased when their
value is low and fewer units are purchased when their value is high. Therefore,
over the long haul a DCA program may let you buy units at a lower average cost.
However, a DCA program does not assure a profit or protect against a loss in
declining markets.
Once available, you can choose the DCA feature any time. Once you start using
it, you must continue it for at least three months. You can select a duration in
months for the DCA program. If you do not choose a duration we will make
reallocations at monthly intervals until the balance in the Money Reserve
Portfolio is zero. While the DCA program is in place any amount in the Money
Reserve Portfolio is available for transfer.
Minimum Amounts. To elect DCA, you need to have a minimum amount in the Money
Reserve Portfolio. We determine the amount required by multiplying the specified
length of your DCA program in months by your specified monthly transfer amount.
If you do not select a duration we determine the minimum amount required by
multiplying your monthly transfer amount by 3 months. You must specify at least
$100 for transfer each month. Allocations may be made in specific whole dollar
amounts or in percentage increments of 1%. We reserve the right to change these
minimums.
Should the amount in your Money Reserve Portfolio be less than the selected
monthly transfer amount, we'll notify you that you need to put more money in the
Money Reserve Portfolio to continue DCA. If you do not specify a duration or the
specified duration has not been reached and the amount in the Money Reserve
Portfolio is less than the monthly transfer amount, the entire amount will be
transferred. Transfers are made based on your selected DCA percentage
allocations or are made pro-rata based on your specified DCA transfer amounts.
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When Do We Make DCA Transfers? We'll make the first DCA transfer on the first
monthiversary date after the later of the date our Service Center receives your
election or fourteen days after the in force date. We'll make additional DCA
transfers on each subsequent monthiversary. We don't charge for DCA transfers.
These transfers are in addition to reallocations permitted under the Contract.
ACCELERATED BENEFIT RIDER
In the future, we may offer an Accelerated Benefit Rider you could add to the
Contract when we issue it. If this rider is offered, we expect to permit you to
receive, upon request and subject to our approval, 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. We may charge for the administration of an Accelerated Benefit Rider.
We expect that for federal income tax purposes, accelerated benefit payments
under any Accelerated Benefit Rider we may offer should be fully excludable from
the gross income of the beneficiary, as long as he or she is the insured under
the Contract. You should consult a tax advisor before adding the rider or
requesting an accelerated benefit payment under it.
RIGHT TO CONVERT CONTRACT
You may convert the Contract to a contract with benefits that do not vary with
the investment results of a separate account. Once you exercise this right, we
will not allocate the investment base and additional payments to the Separate
Account. You must submit your request to convert in writing within 24 months
after the issue date of your Contract provided the insured is still living. You
will not have to provide evidence of insurability.
We will convert your Contract by adding an endorsement to it and by
transferring, without charge, the investment base in the Separate Account to the
guaranteed interest division. Assets in the guaranteed interest division are
held in our general account. The investment base and any additional payments
will remain in the guaranteed interest division, and we will credit them with
interest at a rate we declare. Once we declare an interest rate, it will remain
in effect for at least one year. After conversion, your Contract will no longer
be subject to Separate Account charges. For a discussion of the tax consequences
of converting the Contract, see "Tax Considerations."
INCOME PLANS
We offer several income plans to provide for payment of the death benefit
proceeds to the beneficiary. Payments under these plans do not depend on the
investment results of a separate account. You may choose one or more income
plans at any time during the insureds' lifetime. If you haven't selected a plan
when the insured dies, the beneficiary has one year to apply the death benefit
proceeds either paid or payable to one or more of the plans. In addition, if you
cancel the Contract, you may also choose one or more income plans for payment of
the proceeds.
We need to approve any plan where any income payment would be less than $100.
Income plans include:
- Annuity Plan. You can use an amount to purchase a single premium
immediate annuity.
- Interest Payment. You can leave amounts with us 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. We make payments in equal installments for up
to a fixed number of years.
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- Income for Life. We make payments in equal monthly installments until
the death of a named person or the 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. We make payments in equal installments until
proceeds applied under this option and interest on the unpaid balance at
not less than 3% per year are exhausted.
- Joint Life Income. We make payments 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.
UNDER THE INCOME FOR LIFE AND JOINT LIFE INCOME OPTIONS, OUR CONTRACTUAL
OBLIGATION MAY BE SATISFIED WITH ONLY ONE PAYMENT IF AFTERWARD THE NAMED PERSON
OR PERSONS DIES. IN ADDITION, ONCE IN EFFECT, SOME OF THE INCOME PLANS MAY NOT
PROVIDE ANY SURRENDER RIGHTS.
REPORTS TO CONTRACT OWNERS
After the end of each processing period, we will send you a statement showing
the allocation of your investment base, death benefit, cash value, any loan debt
and, if there has been a change, new face amount, 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 your state.
You will receive confirmation of all financial transactions. These confirmations
will show the price per unit of each of your investment divisions, the number of
units you have 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".)
We will also send you 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. If you have a Merrill Lynch Cash Management Account(R),
you may elect to have your contract linked electronically to your CMA account.
We call this the CMA Insurance Service. With this service, you will have certain
Contract information included as part of your regular monthly CMA account
statement. It will list the investment base allocation, death benefit, net cash
surrender 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 the insured, unless someone other than the
insured has been named as the owner in the application. The contract owner has
all rights and options described in the Contract.
If you are not the insured, you may want to name a contingent owner. If you die
before the insured, the contingent owner will own your interest in the contract
and have all your rights. If you don't name a contingent owner and you die
before the insured, your estate will then own your interest in the Contract upon
your death.
If there is more than one contract owner, we will treat the owners as joint
tenants with rights of survivorship unless the ownership designation provides
otherwise. We may require completion of additional forms. The owners must
exercise their rights and options jointly, except that any one of the owners may
reallocate the Contract's investment base by phone 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.
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Changing the Owner. During the insured's lifetime, you have the right to
transfer ownership of the Contract. However, if you've named an irrevocable
beneficiary, that person will need to consent. The new owner will have all
rights and options described in the Contract. The change will be effective as of
the date the notice is signed, but will not affect any payment we've made or
action we've taken before our Service Center receives the notice of the change.
Changing the owner may have tax consequences. You should consult a tax advisor
before changing the Contract's owner.
Assigning the Contract as Collateral. You may assign the Contract as collateral
security for a loan or other obligation. This does not change the ownership.
However, your rights and any beneficiary's rights are subject to the terms of
the assignment. You must give satisfactory written notice at our Service Center
in order to make or release an assignment. We are not responsible for the
validity of any assignment.
For a discussion of the tax issues associated with a collateral assignment, see
"Tax Considerations".
Naming Beneficiaries. We will pay the primary beneficiary the death benefit
proceeds of the Contract on the insured's death. If the primary beneficiary has
died, we will pay the contingent beneficiary. If no contingent beneficiary is
living, we will pay the insured's estate.
You may name more than one person as primary or contingent beneficiaries. We
will pay proceeds in equal shares to the surviving beneficiaries unless the
beneficiary designation provides differently.
You have the right to change beneficiaries during the insured's lifetime.
However, if your primary beneficiary designation is irrevocable, the primary
beneficiary must consent when certain contract rights and options are exercised.
If you change the beneficiary, the change will take effect as of the date the
notice is signed, but will not affect any payment we've made or action we've
taken before our Service Center receives the notice of the change.
When We Make Payments. We generally pay death benefit proceeds, partial
withdrawals, loans and net cash surrender value within seven days after our
Service Center receives all the information needed to process the payment.
However, we may delay payment if it isn't practical for us to value or dispose
of Trust units or Fund 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
We reserve the right to modify or eliminate the procedures described below. For
administrative and tax purposes, we may from time to time require that specific
forms be completed for certain transactions, including surrenders.
Personal Identification Number. We will send you a four-digit personal
identification number ("PIN") shortly after the Contract is placed in force and
before the end of the "free look" period. You must give this number when you
call the Service Center to get information about the Contract, to make a loan
(if an authorization is on file), or to make other requests.
Reallocating the Investment Base. Contract owners can reallocate their
investment base either in writing or by telephone. If you request the
reallocation by telephone, you must give your PIN as well as your Contract
number. We will give a confirmation number over the telephone and then follow up
in writing.
Requesting a Loan. You may request a loan in writing or, if all required
authorization forms are on file, by telephone. Once our Service Center receives
the authorization, you can call the Service Center, give
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your Contract number, name and PIN, and tell us the loan amount and the
divisions from which the loan should be taken.
Upon request, we will wire the funds to the account at the financial institution
named on your authorization. We will generally wire the funds within two working
days of receipt of the request. If you have the CMA Insurance Service, funds may
be transferred directly to that CMA account.
Requesting Partial Withdrawals. Beginning in the second contract year, you may
request partial withdrawals in writing or by telephone if all required telephone
authorization forms are on file. Once our Service Center receives the
authorization, you can call the Service Center, give your Contract number, name
and PIN, and tell us how much to withdraw and from which investment divisions.
Upon request, we will wire the funds to the account at the financial institution
named on your authorization. We will usually wire the funds within two working
days of receipt of the request. If you have the CMA Insurance Service, funds can
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. We reserve the right to change procedures or discontinue the
ability to make telephone transfers.
We 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. We will not be liable for following
telephone instructions that we reasonably believe to be genuine.
OTHER CONTRACT PROVISIONS
In Case of Errors in the Application. If an age or sex stated in the
application is wrong, it could mean that the face amount or any other Contract
benefit is wrong. We will pay the correct benefits for the true age or sex.
Incontestability. We will rely on statements made in the applications. We can
contest the validity of a Contract if any material misstatements are made in the
application. We 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 that change or increase.
Subject to state regulation, we won't contest the validity of a Contract after
it has been in effect during the insured's lifetime for two years from the date
of issue or the date of any reinstatement. We won't contest any change in face
amount due to a change in death benefit option or any increase in the additional
insurance rider face amount after the change or increase has been in effect
during the insured's lifetime 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, we 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 loan debt and partial withdrawals.
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 increase in the face amount 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. To maintain this qualification to the
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<PAGE> 41
maximum extent of the law, we reserve the right to return any additional
payments that would cause the Contract to fail to qualify as life insurance
under applicable federal tax law as we may interpret it. Further, we reserve the
right to make changes in the Contract or its riders or to make distributions
from the Contract to the extent necessary to continue to qualify the Contract as
life insurance. Any changes will apply uniformly to all Contracts that are
affected and you will be given advance written notice of such changes.
State Variations. Certain Contract features, including the "free look" right,
are subject to state variation. You should read your Contract carefully to
determine whether any variations apply in the state in which the Contract is
issued.
On Contracts issued before we obtained certain state approvals, we use a 5%,
rather than a 4 1/2%, assumed interest rate to determine the Contract's
guarantee period, fixed base, and cost of insurance charges. On these Contracts
we also use a 4%, rather than a 3%, assumed interest rate to calculate income
plan payment amounts.
In addition, under these contracts, we charge interest on loans at 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.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce the contract loading,
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 us 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. We take 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.
We make any reductions according to rules in effect when an application for a
Contract or additional payment is approved. We may change these rules from time
to time. However, reductions in charges will not discriminate unfairly against
any person.
UNISEX LEGAL CONSIDERATIONS
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.
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 these Contracts.
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. You
should disregard references made in this prospectus to such sex-based
distinctions.
40
<PAGE> 42
SELLING THE CONTRACTS
Role of Merrill Lynch, Pierce, Fenner & Smith, Incorporated. MLPF&S is the
principal underwriter of the Contract. It was organized in 1958 under the laws
of the state of Delaware and is registered as a broker-dealer under the
Securities Exchange Act of 1934. It is a member of the National Association of
Securities Dealers, Inc. ("NASD"). 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 Merrill Lynch Asset Management,
the investment adviser for the Series Fund and the Variable Series Funds.
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 FCs.
Role of Merrill Lynch Life Agencies. Contracts are sold by registered
representatives of MLPF&S who are also licensed through various Merrill Lynch
Life Agencies as our insurance agents. We have entered into a distribution
agreement with MLPF&S and companion sales agreements with the Merrill Lynch Life
Agencies through which 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 amounts paid
under the distribution and sales agreements for the Separate Account for the
year ended December 31, 1998, December 31, 1997, and December 31, 1996 were
$22,517,219, $15,107,535, and $10,059,108, respectively.
Commissions. The maximum commission we 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. The target premium is equal to 75% of the base premium. In addition,
we may pay, on an annual basis, an amount equal to .11% of persisting investment
base under a Contract. Commissions may be paid in the form of non-cash
compensation, subject to applicable regulatory requirements.
TAX CONSIDERATIONS
Introduction. The following summary discussion is based on our understanding of
current Federal income tax law as the Internal Revenue Service (IRS) now
interprets it. We can't guarantee that the law or the IRS's interpretation won't
change. It does not purport to be complete or to cover all tax situations. This
discussion is not intended as tax advice. Counsel or other tax advisors should
be consulted for further information.
We haven't considered any applicable state or other tax laws. Of course, your
own tax status or that of your beneficiary can affect the tax consequences of
ownership or receipt of distributions.
Tax Status of the Contract. In order to qualify as a life insurance contract
for Federal income tax purposes and to receive the tax treatment normally
accorded life insurance contracts under Federal tax law, a contract must satisfy
certain requirements which are set forth in the Internal Revenue Code (IRC).
Guidance as to how these requirements are to be applied to certain features of
the Contract is limited. Nevertheless, we believe that a Contact issued on the
basis of a standard risk class should satisfy the applicable requirements. There
is less guidance with respect to Contracts issued on a substandard basis (i.e.,
a premium class involving a higher than standard mortality risk) and it is not
clear whether such Contacts would satisfy the applicable requirements. There may
also be some uncertainty as to Contracts with an additional insurance rider
attached. If it is subsequently determined that Contact does not satisfy the
applicable requirements, we may take appropriate steps to bring the Contact into
compliance with such requirements and reserve the right to restrict Contact
transactions in order to do so.
41
<PAGE> 43
Diversification Requirements. IRC section 817(h) and the regulations under it
provide that separate account investments underlying a Contract must be
"adequately diversified" for it to qualify as a life insurance contract under
IRC section 7702. The separate account intends to comply with the
diversification requirements of the regulations under section 817(h). This will
affect how we make investments.
In certain circumstances, owners of variable life contracts have been considered
for Federal income tax purposes to be the owners of the assets of the separate
account supporting their contracts due to their ability to exercise investment
control over those assets. Where this is the case, the contract owners have been
currently taxed on income and gains attributable to the separate account assets.
There is little guidance in this area, and some features such as the flexibility
of an owner to allocate premium payments and transfer contract accumulation
values have not been explicitly addressed in published rulings. While we believe
that the contracts do not give owners investment control over variable account
assets, we reserve the right to modify the Contracts as necessary to prevent an
owner from being treated as the owner of the variable account assets supporting
the Contract.
The following discussion assumes that the Contract will qualify as a life
insurance contract for Federal income tax purposes.
Tax Treatment of Contract Benefits in General. We believe that the death
benefit under a Contract should be excludible from the gross income of the
beneficiary. Federal, state and local gift, estate, inheritance, transfer and
other tax consequences of ownership of receipt of Contract proceeds depend on
the circumstances of each owner or beneficiary. A tax advisor should be
consulted on these consequences.
Generally, the owner will not be deemed to be in constructive receipt of the
contract value until there is a distribution. When distributions from a Contract
occur, or when loans are taken out from or secured by a Contract, the tax
consequences depend on whether the Contract is classified as a "modified
endowment contract."
Modified Endowment Contracts. Under the Internal Revenue Code, life insurance
contracts that fail to satisfy the "7-pay test" are classified as "modified
endowment contracts," with less favorable tax treatment than other life
insurance contracts. 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 effect, in order to comply with the 7-pay test, a Contract must be
purchased with a higher face amount for a given initial payment than would
otherwise be required to satisfy the federal tax definition of a life insurance
contract.
Certain changes in a Contract after it is issued could also cause it to fail to
satisfy the 7-pay test and therefore to be classified as a modified endowment
contract. Making additional payments, reducing the Contract's death benefit
during the first seven contract years, reducing the Contracts benefits 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 termination of
additional benefits under a rider are examples of changes that could result in a
Contract becoming classified as a modified endowment contract. Even if these
events do not result in a Contract becoming classified as a modified endowment
contract, moreover, they could reduce the amount that may be paid in the future
without causing the Contract to be classified as a modified endowment contract.
It should be noted that 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.
Any Contract received in 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 below.
Contract owners may choose not to exercise their right to make additional
premium payments, in order to preserve their Contract's current tax treatment.
Due to the flexibility of the Contract as to premium payments and benefits, the
individual circumstances of each Contract will determine whether it is
classified as a modified endowment contract. As the foregoing discussion
indicates, the 7-pay test and the rules governing whether a Contract is
classified as a
42
<PAGE> 44
modified endowment contract are quite complex. A current or prospective owner
should therefore consult with a competent adviser to determine whether a
Contract transaction will cause the Contract to be classified as a modified
endowment contract.
Distributions (Other Than Death Benefits) from Modified Endowment
Contracts. Contracts classified as modified endowment contracts are subject to
the following tax rules:
(1) All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a modified endowment contract will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the owner's investment in the Contract only
after all gain has been distributed.
(2) Loans taken from or secured by a Contract classified as a modified
endowment contract (including collateral assignments) are treated as
distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject to
tax except where the distribution or loan is made when the owner has
attained age 59 1/2 or is disabled, or where the distribution is part
of a series of substantially equal periodic payments for the life (or
life expectancy) of the owner or the joint lives (or joint life
expectancies) of the owner and the owner's beneficiary or designated
beneficiary.
If a Contract becomes a modified endowment contract, distributions that occur
during the 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.
Distributions (Other Than Death Benefits) from Contracts that are not Modified
Endowment Contracts. Distributions (other than death benefits) from a Contract
that is not classified as a modified endowment contract are generally treated
first as a recovery of the owner's investment in the Contract and only after the
recovery of all investment in the Contract as taxable income. However, certain
distributions which must be made in order to enable the Contract to continue to
qualify as a life insurance contract for Federal income tax purposes if Contract
benefits are reduced during the first 15 Contract years may be treated in whole
or in part as ordinary income subject to tax.
Loans from or secured by a Contract that is not a modified Endowment Contract
are generally not treated as distributions. However, the tax consequences of
preferred loans are unclear. You should consult a tax advisor as to those
consequences.
Finally, neither distributions from nor loans from or secured by a Contract that
is not a modified endowment contract are subject to the 10 percent additional
income tax.
Investment in the Contract. Your investment in the Contract is generally your
aggregate Premiums. When a distribution is taken from the Contract, your
investment in the Contract is reduced by the amount of the distribution that is
tax-free.
Multiple Contracts. All modified endowment contracts that are issued by us (or
our affiliates) to the same owner during any calendar year are treated as one
modified endowment contract for purposes of determining the amount includible in
the owner's income when a taxable distribution occurs.
Contract Loans. If a Contract loan is outstanding when a Contract is canceled
or lapses, the amount of the outstanding indebtedness will be added to the
amount distributed and will be taxed accordingly. In general, interest on a
Contract loan will not be deductible. Before taking out a Contract loan, you
should consult a tax adviser as to the tax consequences.
Other Tax Considerations. The transfer of the Contract or 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 a beneficiary of, or the payment of proceeds to, a person who is assigned to
a generation which is two or
43
<PAGE> 45
more generations below the generation assignment of the owner may have
generation skipping transfer tax consequences under federal tax law. The
individual situation of each owner or beneficiary will determine the extent, if
any, to which federal, state, and local transfer and inheritance taxes may be
imposed and how ownership or receipt of Contract proceeds will be treated for
purposes of federal, state and local estate, inheritance, generation skipping
and other taxes.
Contracts Used for Business Purposes. The Contract can be used in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such arrangements may vary depending on the particular facts
and circumstances. If you are purchasing the Contract for any arrangement the
value of which depends in part on its tax consequences, you should consult a
qualified tax adviser. In recent years, moreover, Congress has adopted new rules
relating to life insurance owned by businesses. Any business contemplating the
purchase of a new Policy or a change in an existing Policy should consult a tax
adviser.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the
Contract could change by legislation or otherwise. It is possible that any
legislative change could be retroactive (that is, effective prior to the date of
the change). Consult a tax advisor with respect to legislative developments and
their effect on the Contract.
We don't 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 you should
consult a competent tax adviser. Although this tax discussion is based on our
understanding of federal income tax laws as they are currently interpreted, we
can't guarantee that those laws or interpretations will remain unchanged.
OUR 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 will result in a significantly higher corporate
income tax liability for us in early contract years. We make a charge to
compensate us for the anticipated higher corporate income taxes that result from
the sale of a Contract. (See "Contract Loading".)
We currently make no other charges to the Separate Account for any federal,
state or local taxes that we incur that may be attributable to the Separate
Account or to the Contracts. We reserve the right, however, to make a charge for
any tax or other economic burden resulting from the application of tax laws that
we determine to be properly attributable to the Separate Account or to the
Contracts.
REINSURANCE
We intend to reinsure some of the risks assumed under the Contracts.
44
<PAGE> 46
ILLUSTRATIONS
ILLUSTRATIONS OF DEATH BENEFITS, INVESTMENT BASE, CASH SURRENDER VALUES AND
ACCUMULATED PAYMENTS
The tables below 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 47 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 48 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.
3. The illustration on page 49 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 50 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 .58%. This
charge assumes that investment base is allocated equally among all investment
divisions and is based on the 1998 expenses (including monthly advisory fees and
operating expenses) for the Funds, and the current trust charge. This charge
also reflects expense reimbursements made in 1998 to certain portfolios by the
investment adviser to the respective portfolio. These reimbursements, amounted
to .17%, .13%, .35% and .03% of the average daily net assets of the Developing
Capital Markets Focus Fund, the Natural Resources Portfolio, the Alliance Quasar
Portfolio and the Alliance Premier Growth Portfolio, respectively. (See "Charges
to Fund Assets".) 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 58%
charge described above, the gross annual rates of investment return of 0%, 6%
and 12% correspond to net annual rates of -1.47%, 4.47%, and 10.42%,
respectively. The gross returns are before any deductions and should not be
compared to rates which reflect 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 income taxes included in the contract loading,
see "Contract Loading"). In order to produce after tax returns of 0%, 6%
45
<PAGE> 47
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.
We 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.
46
<PAGE> 48
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 31,698 500,000 500,000 500,000
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.................................... 9,576 332,472 500,000 500,000 507,526
30.................................... 9,576 668,029 500,000 500,000 1,167,918
55.................................... 0 2,698,733 500,000 1,001,677 12,215,593
</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................................... 4,055 4,314 4,575 4,055 4,314 4,575
2................................... 8,285 9,077 9,903 8,285 9,077 9,903
3................................... 16,042 17,864 19,820 16,042 17,864 19,820
4................................... 23,553 26,911 30,637 23,553 26,911 30,637
5................................... 30,860 36,271 42,494 30,860 36,271 42,494
6................................... 37,978 45,972 55,517 37,978 45,972 55,517
7................................... 44,918 56,042 69,844 44,918 56,042 69,844
8................................... 51,725 66,543 85,661 51,725 66,543 85,661
9................................... 58,373 77,468 103,107 58,373 77,468 103,107
10................................... 64,810 88,789 122,309 64,810 88,789 122,309
15................................... 92,032 150,311 250,929 92,032 150,311 250,929
20................................... 110,399 222,100 416,005 110,399 222,100 416,005
30................................... 105,317 372,636 1,091,512 105,317 372,636 1,091,512
55................................... 0 1,001,677 12,215,593 0 1,001,677 12,215,593
</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 be 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 US 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.
47
<PAGE> 49
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 31,698 500,000 500,000 500,000
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.................................... 9,576 332,472 500,000 500,000 500,000
30.................................... 9,576 668,029 500,000 500,000 990,195
55.................................... 0 2,698,733 500,000 500,000 9,754,189
</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................................... 3,092 3,316 3,542 3,092 3,316 3,542
2................................... 6,483 7,149 7,845 6,483 7,149 7,845
3................................... 13,492 15,048 16,719 13,492 15,048 16,719
4................................... 20,277 23,180 26,399 20,277 23,180 26,399
5................................... 26,828 31,543 36,961 26,828 31,543 36,961
6................................... 33,141 40,144 48,496 33,141 40,144 48,496
7................................... 39,191 48,970 61,090 39,191 48,970 61,090
8................................... 44,954 58,008 74,838 44,954 58,008 74,838
9................................... 50,413 67,251 89,856 50,413 67,251 89,856
10................................... 55,536 76,681 106,265 55,536 76,681 106,265
15................................... 75,363 126,436 215,364 75,363 126,436 215,364
20................................... 82,178 179,516 360,602 82,178 179,516 360,602
30................................... 8,791 284,640 925,416 8,791 284,640 925,416
55................................... 0 0 9,754,189 0 0 9,754,189
</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 be 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
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 US 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.
48
<PAGE> 50
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 CASH VALUE(3)(5)
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 32,831 520,571 521,827 523,084
2.................................. 31,268 67,304 548,629 552,894 557,315
3.................................. 31,268 103,501 576,060 585,126 594,882
4.................................. 31,268 141,507 602,932 618,638 636,196
5.................................. 31,268 181,414 629,289 653,523 681,686
6.................................. 31,268 223,316 655,148 689,854 731,799
7.................................. 31,268 267,314 680,523 727,702 787,022
8.................................. 31,268 313,511 705,466 767,180 847,936
9.................................. 31,268 362,018 729,950 808,327 915,100
10.................................. 31,268 412,950 753,917 851,152 989,095
15.................................. 31,268 708,454 863,844 1,090,503 1,486,283
20.................................. 31,268 1,085,602 956,346 1,377,290 2,180,720
30.................................. 31,268 2,181,280 1,071,068 2,114,862 4,867,822
55.................................. 0 8,430,956 500,000 3,544,031 48,397,997
</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................................... 20,571 21,827 23,084 20,571 21,827 23,084
2................................... 48,629 52,894 57,315 48,629 52,894 57,315
3................................... 76,060 85,126 94,882 76,060 85,126 94,882
4................................... 102,932 118,638 136,196 102,932 118,638 136,196
5................................... 129,289 153,523 181,686 129,289 153,523 181,686
6................................... 155,148 189,854 231,799 155,148 189,854 231,799
7................................... 180,523 227,702 287,022 180,523 227,702 287,022
8................................... 205,466 267,180 347,936 205,466 267,180 347,936
9................................... 229,950 308,327 415,100 229,950 308,327 415,100
10................................... 253,917 351,152 489,095 253,917 351,152 489,095
15................................... 363,844 590,503 986,283 363,844 590,503 986,283
20................................... 456,346 877,290 1,680,720 456,346 877,290 1,680,720
30................................... 571,068 1,614,862 4,367,822 571,068 1,614,862 4,367,822
55................................... 0 3,044,031 47,897,997 0 3,044,031 47,897,997
</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 be 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
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 US 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.
49
<PAGE> 51
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 CASH VALUE(3)(5)
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 32,831 519,601 520,821 522,043
2.................................... 31,268 67,304 546,809 550,946 555,236
3.................................... 31,268 103,501 573,474 582,269 591,735
4.................................... 31,268 141,507 599,595 614,835 631,874
5.................................... 31,268 181,414 625,159 648,677 676,010
6.................................... 31,268 223,316 650,164 683,843 724,549
7.................................... 31,268 267,314 674,586 720,357 777,914
8.................................... 31,268 313,511 698,396 758,242 836,571
9.................................... 31,268 362,018 721,574 797,528 901,039
10.................................... 31,268 412,950 744,086 838,234 971,876
15.................................... 31,268 708,454 845,759 1,064,032 1,445,976
20.................................... 31,268 1,085,602 925,482 1,328,181 2,096,043
30.................................... 31,268 2,181,280 975,982 1,951,436 4,527,652
55.................................... 0 8,430,956 500,000 500,000 40,006,089
</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................................... 19,601 20,821 22,043 19,601 20,821 22,043
2................................... 46,809 50,946 55,236 46,809 50,946 55,236
3................................... 73,474 82,269 91,735 73,474 82,269 91,735
4................................... 99,595 114,835 131,874 99,595 114,835 131,874
5................................... 125,159 148,677 176,010 125,159 148,677 176,010
6................................... 150,164 183,843 224,549 150,164 183,843 224,549
7................................... 174,586 220,357 277,914 174,586 220,357 277,914
8................................... 198,396 258,242 336,571 198,396 258,242 336,571
9................................... 221,574 297,528 401,039 221,574 297,528 401,039
10................................... 244,086 338,234 471,876 244,086 338,234 471,876
15................................... 345,759 564,032 945,976 345,759 564,032 945,976
20................................... 425,482 828,181 1,596,043 425,482 828,181 1,596,043
30................................... 475,982 1,451,436 4,027,652 475,982 1,451,436 4,027,652
55................................... 0 0 39,506,089 0 0 39,506,089
</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 be 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
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 US 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.
50
<PAGE> 52
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their positions with us 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 our indirect
parent, Merrill Lynch & Co., Inc. The principal positions of our 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.
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.
Our shares are not owned by any of our officers or directors, as we are a wholly
owned subsidiary of MLIG. Our officers and directors 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
We and MLIG, are parties to a service agreement pursuant to which MLIG has
agreed to provide certain accounting, data processing, legal, actuarial,
management, advertising and other services to us, including services related to
the Separate Account and the Contracts. We reimburse expenses incurred by MLIG
under this service agreement on an allocated cost basis. Charges billed to us by
MLIG under the agreement were $43.2 million for the year ended December 31,
1998.
STATE REGULATION
We are subject to the laws of the State of Arkansas and to the regulations of
the Arkansas Insurance Department (the "Insurance Department"). We file a
detailed financial statement in the prescribed form
51
<PAGE> 53
(the "Annual Statement") with the Insurance Department each year covering our
operations for the preceding year and our 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. Our books and accounts are subject to
review by the Insurance Department at all times. A full examination of our
operations is conducted periodically by the Insurance Department and under the
auspices of the National Association of Insurance Commissioners. We are also
subject to the insurance laws and regulations of all jurisdictions in which we
are 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 we or the other service providers use do not
properly address this problem before 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. Substantial
resources are being devoted to this effort. It is difficult to predict whether
the amount of resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on us. Currently, we don't anticipate that the
transition to the 21st century will have any material impact on our ability to
continue to service the Contracts at current levels. In addition, we have 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. We will continue to monitor the situation. At this time, however, we
cannot give assurance 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. We and MLPF&S are engaged
in various kinds of routine litigation that, in our judgment, is not material to
our total assets or to MLPF&S.
EXPERTS
Our financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 and of the Separate Account as
of December 31, 1998 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., our Chief Actuary and Chief Financial Officer, 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,
our Senior Vice President and General Counsel. Sutherland Asbill & Brennan LLP
of Washington, D.C. has provided advice on certain matters relating to federal
securities laws.
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
52
<PAGE> 54
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
Our financial statements, included herein, should be distinguished from the
financial statements of the Separate Account and should be considered only as
bearing upon our ability to meet our obligations under the Contracts.
53
<PAGE> 55
<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, 1998 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 (the "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, 1998. 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, 1998 and the results of its operations and
the changes in its net assets for each of the three years in
the period then ended 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.
February 4, 1999
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS: Cost Shares Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in Merrill Lynch Series Fund, Inc. (Note 1):
Money Reserve Portfolio $ 86,585,835 86,585,835 $ 86,585,835
Intermediate Government Bond Portfolio 21,343,673 1,941,670 21,979,706
Long-Term Corporate Bond Portfolio 21,965,632 1,903,747 22,673,624
Capital Stock Portfolio 40,157,899 1,759,745 47,565,902
Growth Stock Portfolio 45,212,262 1,723,506 63,252,677
Multiple Strategy Portfolio 28,639,028 1,754,015 31,870,459
High Yield Portfolio 32,281,551 3,584,085 28,314,275
Natural Resources Portfolio 1,812,547 218,219 1,496,986
Global Strategy Portfolio 42,573,590 2,749,630 43,994,080
Balanced Portfolio 13,776,731 962,481 15,572,940
--------------------- ---------------------
334,348,748 363,306,484
--------------------- ---------------------
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Global Utility Focus Fund 2,684,153 182,299 3,113,667
International Equity Focus Fund 10,865,894 986,194 10,532,548
Global Bond Focus Fund 1,349,087 141,774 1,403,561
Basic Value Focus Fund 51,905,445 3,671,360 53,858,851
Developing Capital Markets Focus Fund 5,327,376 544,303 3,499,867
Special Value Focus Fund 4,478,605 191,550 3,821,418
Index 500 Fund 12,434,362 879,576 14,274,760
--------------------- ---------------------
89,044,922 90,504,672
--------------------- ---------------------
Investments in Alliance
Variable Products Series Fund, Inc. (Note 1):
Premier Growth Portfolio 19,503,725 798,385 24,773,881
--------------------- ---------------------
19,503,725 24,773,881
--------------------- ---------------------
Investments in MFS Variable Insurance Trust (Note 1):
MFS Emerging Growth Series 8,618,103 485,272 10,418,786
MFS Research Series 8,497,279 507,047 9,659,247
--------------------- ---------------------
17,115,382 20,078,033
--------------------- ---------------------
Investments in AIM Variable Insurance Funds, Inc. (Note 1):
AIM V.I. Value Fund 11,990,076 528,360 13,869,452
AIM V.I. Capital Appreciation Fund 3,785,782 164,933 4,156,320
--------------------- ---------------------
15,775,858 18,025,772
--------------------- ---------------------
</TABLE>
(continued)
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998 (continued)
<TABLE>
<CAPTION>
Cost Units Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities, Series A through K (Note 1):
1999 Trust 927,818 1,182,644 1,177,227
2000 Trust 738,402 971,580 926,022
2001 Trust 277,131 352,080 320,868
2002 Trust 605,383 864,864 751,549
2003 Trust 254,055 372,581 302,178
2004 Trust 976,985 1,582,037 1,248,718
2005 Trust 621,857 1,061,762 804,147
2006 Trust 336,924 573,077 421,487
2007 Trust 201,726 361,461 251,219
2008 Trust 445,286 888,718 573,703
2009 Trust 71,344 162,017 98,779
2010 Trust 758,153 1,345,565 764,039
2011 Trust 163,044 436,263 235,359
2013 Trust 282,043 757,106 359,413
2014 Trust 3,751,251 11,348,708 5,011,703
--------------------- ---------------------
10,411,402 13,246,411
--------------------- ---------------------
TOTAL ASSETS $ 486,200,037 529,935,253
===================== =====================
LIABILITIES:
Payable to Merrill Lynch Life Insurance Company 10,341,771
---------------------
TOTAL LIABILITIES 10,341,771
---------------------
NET ASSETS $ 519,593,482
=====================
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 43,140,141 $ 18,534,136 $ 12,043,745
Mortality and Expense Charges (Note 3) (4,032,700) (2,791,171) (1,751,522)
Transaction Charges (Note 3) (42,609) (36,928) (28,838)
--------------------- --------------------- ---------------------
Net Investment Income 39,064,832 15,706,037 10,263,385
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses) on Investments:
Net Realized Gains (Losses) 4,254,287 2,063,224 (45,179)
Net Change in Unrealized Gains 9,022,651 18,236,659 8,986,838
--------------------- --------------------- ---------------------
Net Gain on Investments 13,276,938 20,299,883 8,941,659
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Operations 52,341,770 36,005,920 19,205,044
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 115,096,996 99,960,767 70,164,840
Transfers of Policy Loading, Net (Note 3) 4,617,057 4,809,499 3,408,619
Transfers Due to Deaths (3,013,716) (1,185,686) (813,683)
Transfers Due to Other Terminations (5,398,486) (3,656,934) (2,808,710)
Transfers Due to Policy Loans (4,179,365) (2,605,297) (2,600,351)
Transfers of Cost of Insurance (7,106,344) (4,830,049) (3,101,640)
Transfers of Loan Processing Charges (111,109) (75,863) (50,705)
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Principal Transactions 99,905,033 92,416,437 64,198,370
--------------------- --------------------- ---------------------
Increase in Net Assets 152,246,803 128,422,357 83,403,414
Net Assets Beginning Balance 367,346,679 238,924,322 155,520,908
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 519,593,482 $ 367,346,679 $ 238,924,322
===================== ===================== =====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Merrill Lynch Variable Life Separate Account ("Account"),
a separate account of Merrill Lynch Life Insurance
Company ("Merrill Lynch Life"),was established to support
Merrill Lynch Life's 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 Lynch &
Co."). The Account is registered as a unit investment
trust under the Investment Company Act of 1940 and
consists of thirty - seven investment divisions (thirty-
eight during the year). The investment divisions are as
follows:
Merrill Lynch Series Fund, Inc.: Ten of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the Merrill Lynch Series Fund,
Inc. ("Merrill Series Fund"). The investment advisor to
the funds of the Merrill Series Fund is Merrill Lynch
Asset Management, L.P. ("MLAM"), an indirect subsidiary
of Merrill Lynch & Co.
Merrill Lynch Variable Series Funds, 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. ("Merrill Variable Funds").
The investment advisor to the funds of the Merrill
Variable funds is MLAM.
Alliance Variable Products Series Fund, Inc.: One of
the investment divisions invests in the securities of a
single mutual fund portfolio of the Alliance Variable
Products Series Fund, Inc.("Alliance Variable Fund").
The investment advisor to the fund of the Alliance
Variable Fund is Alliance Capital Management L.P.
MFS Variable Insurance Trust: Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the MFS Variable Insurance
Trust ("MFS Variable Trust"). The investment advisor to
the funds of the MFS Variable Trust is Massachusetts
Financial Services Company.
AIM Variable Insurance Funds: Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the AIM Variable Insurance
Funds,Inc.("AIM Variable Funds").The investment advisor
to the funds of the AIM Variable Funds is AIM Advisors,
Inc.
The Merrill Lynch Fund of Stripped (" Zero") U.S.
Treasury Securities, Series A through K: Fifteen of the
investment divisions (sixteen 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 ("Merrill Zero Trusts").
Each trust of the Merrill 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. Merrill Zero Trusts are sponsored
by Merrill Lynch, Pierce,Fenner & Smith Inc.("MLPF&S"),
a wholly-owned subsidiary of Merrill Lynch & Co.
The assets of the Account are registered in the name of
Merrill Lynch Life. The portion of the Account's assets
applicable 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. SIGNIFICANT ACCOUNTING POLICIES
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.
Investment transactions are recorded on the trade date.
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 that 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. CHARGES AND FEES
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 is 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.
. Merrill Lynch Life pays all transaction charges to MLPF&S
on the sale of Zero Trusts 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.
4. OTHER
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, 1998
<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 $ 43,140,141 $ 3,784,922 $ 1,186,920 $ 1,163,464
Mortality and Expense Charges (4,032,700) (571,710) (169,923) (165,743)
Transaction Charges (42,609) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 39,064,832 3,213,212 1,016,997 997,721
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 4,254,287 0 88,736 2,505
Net Change in Unrealized Gains (Losses) 9,022,651 0 307,577 314,402
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 13,276,938 0 396,313 316,907
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 52,341,770 3,213,212 1,413,310 1,314,628
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 115,096,996 90,763,244 501,432 767,159
Transfers of Policy Loading, Net 4,617,057 5,761,930 (94,769) (85,276)
Transfers Due to Deaths (3,013,716) (659,242) (41,709) (44,002)
Transfers Due to Other Terminations (5,398,486) (895,577) (125,850) (149,634)
Transfers Due to Policy Loans (4,179,365) (791,727) (201,618) (141,339)
Transfers of Cost of Insurance (7,106,344) (1,267,360) (239,342) (257,209)
Transfers of Loan Processing Charges (111,109) (21,627) (2,317) (4,170)
Transfers Among Investment Divisions 0 (70,544,251) 4,025,316 6,191,523
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 99,905,033 22,345,390 3,821,143 6,277,052
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 152,246,803 25,558,602 5,234,453 7,591,680
Net Assets Beginning Balance 367,346,679 50,859,418 16,710,222 15,074,395
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 519,593,482 $ 76,418,020 $ 21,944,675 $ 22,666,075
===================== ===================== ===================== =====================
</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, 1998
<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 $ 4,910,196 $ 8,255,444 $ 3,777,893 $ 2,782,900
Mortality and Expense Charges (384,794) (468,862) (272,772) (261,160)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 4,525,402 7,786,582 3,505,121 2,521,740
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 622,301 1,652,032 (12,684) (240,001)
Net Change in Unrealized Gains (Losses) 798,294 7,267,892 (652,635) (4,269,509)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 1,420,595 8,919,924 (665,319) (4,509,510)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 5,945,997 16,706,506 2,839,802 (1,987,770)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,845,144 3,842,590 1,631,368 1,690,810
Transfers of Policy Loading, Net (94,382) (114,341) (115,876) (100,463)
Transfers Due to Deaths (230,259) (247,841) (169,612) (329,226)
Transfers Due to Other Terminations (686,343) (453,901) (600,699) (322,159)
Transfers Due to Policy Loans (536,062) (391,815) (164,457) (208,837)
Transfers of Cost of Insurance (620,516) (797,583) (455,610) (431,770)
Transfers of Loan Processing Charges (10,890) (17,291) (5,454) (7,336)
Transfers Among Investment Divisions 2,395,537 2,089,356 1,166,213 5,434,295
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,062,229 3,909,174 1,285,873 5,725,314
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,008,226 20,615,680 4,125,675 3,737,544
Net Assets Beginning Balance 38,543,874 42,621,459 27,734,941 24,565,637
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 47,552,100 $ 63,237,139 $ 31,860,616 $ 28,303,181
===================== ===================== ===================== =====================
</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, 1998
<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 $ 50,415 $ 6,432,490 $ 1,194,303 $ 154,262
Mortality and Expense Charges (16,413) (382,968) (128,481) (22,067)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 34,002 6,049,522 1,065,822 132,195
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (177,750) 38,112 84,875 341,481
Net Change in Unrealized Gains (Losses) (86,387) (2,688,064) 497,741 52,645
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (264,137) (2,649,952) 582,616 394,126
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (230,135) 3,399,570 1,648,438 526,321
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 69,914 3,451,783 664,904 111,728
Transfers of Policy Loading, Net (7,687) (115,886) (70,497) (8,674)
Transfers Due to Deaths (14,856) (312,128) (102,541) (181,968)
Transfers Due to Other Terminations (37,332) (796,317) (146,013) 8,662
Transfers Due to Policy Loans (4,856) (232,828) (52,985) (22,854)
Transfers of Cost of Insurance (25,346) (699,514) (218,141) (35,313)
Transfers of Loan Processing Charges (210) (10,920) (3,053) (1,036)
Transfers Among Investment Divisions (481,598) 7,379 1,688,726 780,958
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (501,971) 1,291,569 1,760,400 651,503
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (732,106) 4,691,139 3,408,838 1,177,824
Net Assets Beginning Balance 2,228,469 39,288,309 12,159,367 1,934,920
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 1,496,363 $ 43,979,448 $ 15,568,205 $ 3,112,744
===================== ===================== ===================== =====================
</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, 1998
<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 $ 878,329 $ 68,920 $ 6,396,025 $ 72,168
Mortality and Expense Charges (99,996) (10,846) (451,849) (41,977)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 778,333 58,074 5,944,176 30,191
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (477,812) 965 809,105 (354,595)
Net Change in Unrealized Gains (Losses) 303,555 73,408 (3,348,639) (1,267,972)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (174,257) 74,373 (2,539,534) (1,622,567)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 604,076 132,447 3,404,642 (1,592,376)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 944,661 99,868 3,320,167 479,712
Transfers of Policy Loading, Net (15,821) (912) (149,703) (3,984)
Transfers Due to Deaths (3,996) 0 (322,056) 0
Transfers Due to Other Terminations (79,523) (4,048) (238,988) (124,916)
Transfers Due to Policy Loans (39,056) (2,021) (804,084) (69,653)
Transfers of Cost of Insurance (178,969) (19,010) (797,844) (69,597)
Transfers of Loan Processing Charges (1,715) (96) (8,750) (1,004)
Transfers Among Investment Divisions (1,057,338) 191,053 8,620,910 (766,164)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (431,757) 264,834 9,619,652 (555,606)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 172,319 397,281 13,024,294 (2,147,982)
Net Assets Beginning Balance 10,379,700 1,005,816 40,836,639 5,656,322
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 10,552,019 $ 1,403,097 $ 53,860,933 $ 3,508,340
===================== ===================== ===================== =====================
</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, 1998
<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 $ 825,649 $ 271,124 $ 13,280 $ 47,674
Mortality and Expense Charges (35,524) (85,396) (128,005) (59,653)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 790,125 185,728 (114,725) (11,979)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (261,247) 236,637 716,239 238,795
Net Change in Unrealized Gains (Losses) (835,245) 1,545,430 5,075,031 1,735,700
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (1,096,492) 1,782,067 5,791,270 1,974,495
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (306,367) 1,967,795 5,676,545 1,962,516
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 193,130 400,013 1,074,723 673,718
Transfers of Policy Loading, Net (9,818) (41,068) (29,864) 6,204
Transfers Due to Deaths (174,493) 0 0 0
Transfers Due to Other Terminations 8,829 (292,386) (115,677) (85,357)
Transfers Due to Policy Loans (5,789) (13,850) (74,234) (110,624)
Transfers of Cost of Insurance (51,015) (132,596) (228,224) (142,709)
Transfers of Loan Processing Charges (377) (1,941) (3,152) (1,093)
Transfers Among Investment Divisions 614,892 7,922,238 12,406,559 4,787,878
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 575,359 7,840,410 13,030,131 5,128,017
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 268,992 9,808,205 18,706,676 7,090,533
Net Assets Beginning Balance 3,550,887 4,451,059 6,034,863 3,299,653
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,819,879 $ 14,259,264 $ 24,741,539 $ 10,390,186
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
AIM V.I.
MFS AIM V.I. Capital
Research Value Appreciation 1998
Series Fund Fund Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 128,956 $ 633,881 $ 110,926 $ 0
Mortality and Expense Charges (60,287) (76,327) (25,006) (1,138)
Transaction Charges 0 0 0 (413)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 68,669 557,554 85,920 (1,551)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 96,489 102,600 28,813 175,810
Net Change in Unrealized Gains (Losses) 1,094,848 1,953,097 420,487 (169,636)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 1,191,337 2,055,697 449,300 6,174
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 1,260,006 2,613,251 535,220 4,623
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 473,646 470,081 222,692 0
Transfers of Policy Loading, Net (13,727) (25,861) 610 (3,347)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (36,242) (18,603) (3,871) (142)
Transfers Due to Policy Loans (119,989) (55,689) (6,050) 0
Transfers of Cost of Insurance (113,258) (132,127) (45,690) (559)
Transfers of Loan Processing Charges (1,614) (1,575) (510) 115
Transfers Among Investment Divisions 4,795,291 7,512,526 2,105,081 (1,009,553)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 4,984,107 7,748,752 2,272,262 (1,013,486)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 6,244,113 10,362,003 2,807,482 (1,008,863)
Net Assets Beginning Balance 3,412,214 3,503,328 1,347,537 1,008,863
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 9,656,327 $ 13,865,331 $ 4,155,019 $ 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1999 2000 2001 2002
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (11,024) (8,358) (2,797) (6,610)
Transaction Charges (4,155) (3,152) (1,055) (2,493)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (15,179) (11,510) (3,852) (9,103)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 31,978 30,788 3,390 7,762
Net Change in Unrealized Gains (Losses) 37,736 32,216 20,788 58,057
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 69,714 63,004 24,178 65,819
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 54,535 51,494 20,326 56,716
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 6,973 10,886 1,134 0
Transfers of Policy Loading, Net (9,434) (8,167) (1,588) (3,083)
Transfers Due to Deaths 0 (41,368) 0 0
Transfers Due to Other Terminations (46,021) (16,217) 5 61
Transfers Due to Policy Loans 0 (8,043) (8,561) (3,284)
Transfers of Cost of Insurance (14,275) (10,985) (3,965) (8,029)
Transfers of Loan Processing Charges (830) (315) (438) (110)
Transfers Among Investment Divisions (36,492) 12,309 15,559 (2,238)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (100,079) (61,900) 2,146 (16,683)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance (45,544) (10,406) 22,472 40,033
1,222,269 936,029 298,247 711,189
Net Assets Ending Balance --------------------- --------------------- --------------------- ---------------------
$ 1,176,725 $ 925,623 $ 320,719 $ 751,222
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2003 2004 2005 2006
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (3,169) (11,146) (6,986) (2,956)
Transaction Charges (1,194) (4,203) (2,634) (1,118)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (4,363) (15,349) (9,620) (4,074)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 36,875 82,668 27,351 7,005
Net Change in Unrealized Gains (Losses) 3,077 53,907 64,056 34,865
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 39,952 136,575 91,407 41,870
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 35,589 121,226 81,787 37,796
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 6,690 15,109 16,282 39,242
Transfers of Policy Loading, Net (12,446) (9,249) (6,280) (90)
Transfers Due to Deaths (94,266) 0 (44,153) 0
Transfers Due to Other Terminations (590) (97,003) 176 40
Transfers Due to Policy Loans (3,337) (9,730) 0 0
Transfers of Cost of Insurance (4,870) (13,052) (9,023) (2,284)
Transfers of Loan Processing Charges (1,023) (509) (28) (17)
Transfers Among Investment Divisions 25,606 (11,873) 3,618 49,273
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (84,236) (126,307) (39,408) 86,164
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (48,647) (5,081) 42,379 123,960
Net Assets Beginning Balance 351,245 1,253,270 763,251 297,331
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 302,598 $ 1,248,189 $ 805,630 $ 421,291
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2007 2008 2009 2010
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (1,864) (4,472) (774) (6,108)
Transaction Charges (704) (1,689) (292) (2,310)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (2,568) (6,161) (1,066) (8,418)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 3,665 4,208 6,806 107,549
Net Change in Unrealized Gains (Losses) 23,688 67,650 6,024 (5,222)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 27,353 71,858 12,830 102,327
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 24,785 65,697 11,764 93,909
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 20,803 47,517 13,806 7,454
Transfers of Policy Loading, Net (468) (200) 0 456
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (18) (28) (3) (77)
Transfers Due to Policy Loans 0 0 0 457
Transfers of Cost of Insurance (1,987) (5,032) (1,585) (6,557)
Transfers of Loan Processing Charges (9) (418) (3) (135)
Transfers Among Investment Divisions 26,618 46,745 (6,614) 126,478
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 44,939 88,584 5,601 128,076
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 69,724 154,281 17,365 221,985
Net Assets Beginning Balance 181,369 419,161 81,351 541,624
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 251,093 $ 573,442 $ 98,716 $ 763,609
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
------------------------------------------------------------------
2011 2013 2014
Trust Trust Trust
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ $ 0
Mortality and Expense Charges (1,662) (2,391) (41,486)
Transaction Charges (628) (905) (15,664)
--------------------- --------------------- ---------------------
Net Investment Income (Loss) (2,290) (3,296) (57,150)
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 2,460 1,919 188,457
Net Change in Unrealized Gains (Losses) 24,821 35,201 443,767
--------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 27,281 37,120 632,224
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 24,991 33,824 575,074
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,561 58,559 157,493
Transfers of Policy Loading, Net (925) 8,492 (6,749)
Transfers Due to Deaths 0 0 0
Transfers Due to Other Terminations (85) (119) (42,520)
Transfers Due to Policy Loans 0 0 (96,450)
Transfers of Cost of Insurance (2,399) (2,072) (60,927)
Transfers of Loan Processing Charges (8) (53) (1,197)
Transfers Among Investment Divisions 41,671 58,079 774,434
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 40,815 122,886 724,084
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 65,806 156,710 1,299,158
Net Assets Beginning Balance 169,440 202,538 3,710,473
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 235,246 $ 359,248 $ 5,009,631
===================== ===================== =====================
</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
-----------------------------------------------------------------
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)
on Investments:
Net Realized Gains (Losses) 2,063,224 0 28,903 (129,911)
Net Change in Unrealized Gains (Losses) 18,236,659 0 202,623 399,513
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 177,958 519,115 (43,217) 66,054
Net Change in Unrealized Gains (Losses) 4,630,014 6,064,599 2,796,441 (5,499)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 111,013 196,560 49,619 49,962
Net Change in Unrealized Gains (Losses) (413,042) 1,050,704 545,849 269,176
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (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)
on Investments:
Net Realized Gains (Losses) 193,102 (8,217) 319,132 87,634
Net Change in Unrealized Gains (Losses) (1,033,706) (32,725) 2,665,523 (718,388)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (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)
on Investments:
Net Realized Gains (Losses) 25,948 4,833 17,322 31,933
Net Change in Unrealized Gains (Losses) 139,551 294,968 195,126 64,983
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 14,825 7,233 18,270 32,599
Net Change in Unrealized Gains (Losses) 67,120 (73,720) (49,949) (30,951)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 5,521 9,645 14,192 3,810
Net Change in Unrealized Gains (Losses) 49,493 61,471 45,718 14,238
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 6,813 5,427 38,160 10,438
Net Change in Unrealized Gains (Losses) 48,467 22,626 73,112 69,622
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 1,717 801 3,163 9,593
Net Change in Unrealized Gains (Losses) 27,825 19,338 47,651 (248)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 85,341 73,982 479 23,472
Net Change in Unrealized Gains (Losses) (3,039) 49,240 31,648 651,287
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (45,179) 0 18,190 (69,537)
Net Change in Unrealized Gains (Losses) 8,986,838 0 (494,507) (262,935)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (192,580) 76,061 (205,247) (38,619)
Net Change in Unrealized Gains (Losses) 677,575 2,799,507 511,360 263,711
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 88,450 51,512 16,557 6,978
Net Change in Unrealized Gains (Losses) 143,526 2,581,792 341,710 68,172
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 1,353 347 54,169 (2,241)
Net Change in Unrealized Gains (Losses) 266,897 7,902 1,807,802 (796)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (20,703) (914) 10,567 1,373
Net Change in Unrealized Gains (Losses) 250,904 38,506 (9,400) 14,566
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 6,017 5,854 12,442 700
Net Change in Unrealized Gains (Losses) 37,385 37,303 12,222 4,215
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 3,431 936 17,968 48,027
Net Change in Unrealized Gains (Losses) 10,227 4,471 (10,934) (65,787)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 655 202 2,072 542
Net Change in Unrealized Gains (Losses) 3,403 (764) (4,484) (1,142)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (1,501) 3,521 2,269 55,970
Net Change in Unrealized Gains (Losses) 5,242 (124,824) (1,550) 75,563
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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>
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, 1998
and 1997, 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, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted
accounting principles.
February 22, 1999
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------- ------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,504,599; 1997 - $2,927,562) $ 2,543,097 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $162,710; 1997 - $72,599) 158,591 73,612
Trading account securities, at estimated fair value 17,280 15,625
Real estate held-for-sale 25,960 31,805
Policy loans on insurance contracts 1,139,456 1,118,139
------------- -------------
Total Investments 3,884,384 4,247,789
CASH AND CASH EQUIVALENTS 95,377 86,388
ACCRUED INVESTMENT INCOME 73,459 78,224
DEFERRED POLICY ACQUISITION COSTS 405,640 365,105
FEDERAL INCOME TAXES - DEFERRED 9,403 -
REINSURANCE RECEIVABLES 2,893 1,617
AFFILIATED RECEIVABLES - NET - 166
RECEIVABLES FROM SECURITIES SOLD 14,938 75,820
OTHER ASSETS 46,512 49,353
SEPARATE ACCOUNTS ASSETS 10,571,489 9,149,119
------------- -------------
TOTAL ASSETS $ 15,104,095 $ 14,053,581
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------ ------------- -------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,816,744 $ 4,188,110
Claims and claims settlement expenses 63,925 50,574
------------- -------------
Total policy liabilities and accruals 3,880,669 4,238,684
OTHER POLICYHOLDER FUNDS 20,802 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 13,864 15,374
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 15,840 24,438
AFFILIATED PAYABLES - NET 822 -
PAYABLES FOR SECURITIES PURCHASED 10,541 95,135
UNEARNED POLICY CHARGE REVENUE 55,235 32,102
OTHER LIABILITIES 24,273 22,332
SEPARATE ACCOUNTS LIABILITIES 10,559,459 9,149,119
------------- -------------
Total Liabilities 14,581,505 13,605,527
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 173,496 80,735
Accumulated other comprehensive income (loss) (230) 17,995
------------- -------------
Total Stockholder's Equity 522,590 448,054
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,104,095 $ 14,053,581
============= =============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 272,038 $ 308,702 $ 336,661
Net realized investment gains 12,460 13,289 8,862
Policy charge revenue 197,662 178,933 158,829
------------ ------------ ------------
Total Revenues 482,160 500,924 504,352
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 195,676 209,542 235,255
Market value adjustment expense 5,528 4,079 6,071
Policy benefits (net of reinsurance recoveries: 1998 - $9,761;
1997 - $10,439; 1996 - $8,317) 31,891 27,029 21,052
Reinsurance premium ceded 19,972 17,879 15,582
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Insurance expenses and taxes 51,735 49,105 47,077
------------ ------------ ------------
Total Benefits and Expenses 349,637 379,745 387,073
------------ ------------ ------------
Earnings Before Federal Income Tax Provision 132,523 121,179 117,279
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 40,535 52,705 22,814
Deferred (773) (12,261) 15,078
------------ ------------ ------------
Total Federal Income Tax Provision 39,762 40,444 37,892
------------ ------------ ------------
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
============ ============ ============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (31,718) 22,347 (79,749)
Reclassification adjustment for gains included in net earnings (15,932) (12,390) (8,622)
------------ ------------ ------------
Net unrealized gains (losses) on investment securities (47,650) 9,957 (88,371)
Adjustments for:
Policyholder liabilities 14,483 10,094 58,415
Deferred policy acquisition costs 5,129 (822) 12,411
Income tax (expense) benefit related to items of
other comprehensive income 9,813 (6,730) 6,141
------------ ------------ ------------
Other comprehensive income (loss), net of tax (18,225) 12,499 (11,404)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 74,536 $ 93,234 $ 67,983
============ ============ ============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholder's
Stock Capital Earnings Income (loss) Equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 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 loss, net of tax (11,404) (11,404)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 498,820
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
Net earnings 92,761 92,761
Other comprehensive loss, net of tax (18,225) (18,225)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1998 $ 2,000 $ 347,324 $ 173,496 $ (230) $ 522,590
=========== =========== =========== ============ =============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 92,761 $ 80,735 $ 79,387
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Capitalization of policy acquisition costs (80,241) (71,577) (43,668)
Amortization (accretion) of investments (5,350) (4,672) (4,836)
Net realized investment gains (12,460) (13,289) (8,862)
Interest credited to policyholders' account balances 195,676 209,542 235,255
Provision (benefit) for deferred Federal income tax (773) (12,261) 15,078
Changes in operating assets and liabilities:
Accrued investment income 4,765 7,962 5,756
Claims and claims settlement expenses 13,351 10,908 9,854
Federal income taxes - current (8,598) 3,470 13,935
Other policyholder funds (6,358) 7,740 5,813
Liability for guaranty fund assessments (1,510) (3,399) (2,371)
Affiliated receivables/payables 988 (6,330) 3,735
Policy loans on insurance contracts (21,317) (26,068) (52,804)
Trading account securities (287) (14,928) -
Unearned policy charge revenue 23,133 11,269 7,801
Other, net 3,506 452 (10,194)
Net cash and cash equivalents provided ----------- ----------- -----------
by operating activities 242,121 251,665 315,915
----------- ----------- -----------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 893,619 846,041 847,091
Maturities of available-for-sale securities 451,759 595,745 536,449
Purchases of available-for-sale securities (1,028,086) (1,156,222) (956,840)
Mortgage loans principal payments received - 68,864 22,789
Purchases of mortgage loans - (5,375) -
Sales of real estate held-for-sale 14,135 6,060 5,407
Recapture of investment in Separate Accounts - 11,026 8,829
Investment in Separate Accounts (12,000) (21) (10,063)
Net cash and cash equivalents provided ----------- ----------- -----------
by investing activities 319,427 366,118 453,662
----------- ----------- -----------
</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, 1998, 1997 AND 1996
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ - $ (135,000) $ (175,000)
Policyholders' account balances:
Deposits 1,042,509 1,101,934 542,062
Withdrawals (including transfers to/from Separate Accounts) (1,595,068) (1,593,320) (1,090,572)
Net cash and cash equivalents used ------------ ------------ ------------
by financing activities (552,559) (626,386) (723,510)
============ ============ ============
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,989 (8,603) 46,067
CASH AND CASH EQUIVALENTS
Beginning of year 86,388 94,991 48,924
------------ ------------ ------------
End of year $ 95,377 $ 86,388 $ 94,991
============ ============ ============
Supplementary Disclosure of Cash Flow Information
Cash paid to affiliates for:
Federal income taxes $ 49,133 $ 49,235 $ 8,880
Interest 860 842 988
</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
Description of Business: 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 primarily 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.
Basis of Reporting: 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.
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.
To facilitate comparisons with the current year, certain
amounts in the prior years have been reclassified.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for mortality
risk and the cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
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 as a component of accumulated other
comprehensive income (loss), net of tax. Unrealized gains and
losses on trading account securities are included in net
realized investment gains (losses). 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.
All outstanding mortgage loans were repaid during 1997. The
Company recognized income from mortgage loans based on the cash
payment interest rate of the loan, which may have been
different from the accrual interest rate of the loan for
certain 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 (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.
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.
<PAGE>
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 7.5%. 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:
1998 1997 1996
----------- ----------- -----------
Beginning balance $ 102,252 $ 112,249 $ 124,833
Capitalized amounts 6,085 5,077 5,077
Interest accrued 7,669 9,653 10,669
Amortization (14,213) (24,727) (28,330)
----------- ----------- -----------
Ending balance $ 101,793 $ 102,252 $ 112,249
=========== =========== ===========
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.
1999 $ 7,045
2000 $ 6,110
2001 $ 5,670
2002 $ 5,400
2003 $ 5,386
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. At December 31, 1998, the
$12,030 excess of Separate Accounts Assets over Separate
Accounts liabilities represents the Company's temporary
investment in certain investment divisions that were made to
facilitate the establishment of those investment divisions.
Net investment income and net realized and unrealized gains
(losses) attributable to Separate Accounts assets accrue
directly to the policyholder and are not reported as revenue in
the Company's Statement of Earnings.
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.
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:
<PAGE>
Interest-sensitive life products 4.00% - 5.70%
Interest-sensitive deferred annuities 3.40% - 8.69%
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.
Claims and Claims Settlement Expenses: For life insurance
products, the liability equals the death benefit for claims
that have been reported to the Company and an estimate based
upon prior experience for unreported claims. For annuity
products, the liability equals the guaranteed minimum death
benefit reserve.
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.
Unearned Policy Charge Revenue: Certain variable life insurance
products contain policy charges that are assessed at policy
issuance. These policy charges are deferred and amortized into
policy charge revenue based on the estimated future gross
profits for each group of contracts. The Company records a
liability equal to the unamortized balance of these policy
charges.
Accounting Pronouncements: During 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This pronouncement requires a Company to
present disaggregated information based on the internal
segments used in managing its business. Adoption did not impact
the Company's financial position or results of operations, but
it did affect the presentation of the Company's disclosures
(See Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities". This
pronouncement will be effective for annual periods beginning
after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial
position or results of operations.
<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:
1998 1997
------------ -------------
Assets:
Fixed maturity securities (1) $ 2,543,097 $ 3,008,608
Equity securities (1), (2) 158,591 73,612
Trading account securities (1) 17,280 15,625
Policy loans on insurance contracts (3) 1,139,456 1,118,139
Cash and cash equivalents (4) 95,377 86,388
Separate Accounts assets (5) 10,571,489 9,149,119
------------- -------------
Total financial instruments $ 14,525,290 $ 13,451,491
============= =============
(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, 1998 and 1997, securities without a
readily ascertainable market value, having an amortized cost of
$376,993 and $389,728, had an estimated fair value of $375,470
and $396,253, respectively.
(2) The Company has investments in two limited partnerships that
do not have readily ascertainable market values. Management has
estimated the fair value as equal to cost based on the review of
the underlying investments of the partnerships. At December 31,
1998 and 1997, the Company's limited partnership investments were
$11,569 and $4,744, respectively.
(3) 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.
(4) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(5) 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>
1998
-----------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,079,867 $ 56,703 $ 29,078 $ 2,107,492
Mortgage-backed securities 229,197 7,908 43 237,062
U.S. Government and agencies 150,500 6,393 1,328 155,565
Foreign governments 21,157 35 2,996 18,196
Municipals 23,878 905 1 24,782
------------ ------------ ------------ ------------
Total fixed maturity securities $ 2,504,599 $ 71,944 $ 33,446 $ 2,543,097
============ ============ ============ ============
Equity securities:
Non-redeemable preferred stocks $ 151,130 $ 699 $ 4,823 $ 147,006
Limited partnerships 11,569 - - 11,569
Common stocks 11 5 - 16
------------ ------------ ------------ ------------
Total equity securities $ 162,710 $ 704 $ 4,823 $ 158,591
============ ============ ============ ============
</TABLE>
<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
Limited partnerships 4,744 - - 4,744
Common stocks 10 11 - 21
------------ ------------ ------------ ------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============ ============ ============ ============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1998 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------ ------------
Fixed maturity securities:
Due in one year or less $ 383,825 $ 383,628
Due after one year through five years 926,665 950,938
Due after five years through ten years 599,278 610,339
Due after ten years 365,634 361,130
------------ ------------
2,275,402 2,306,035
Mortgage-backed securities 229,197 237,062
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
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, 1998 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------ ------------
AAA $ 479,923 $ 495,661
AA 146,703 148,169
A 756,880 773,977
BBB 992,041 1,005,835
Non-investment grade 129,052 119,455
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
<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 available-for-sale
investments had actually been realized, with corresponding
credits or charges reported in stockholder's equity as a
component of accumulated other comprehensive income (loss), net
of taxes. The following reconciles net unrealized investment
gains (losses) on available-for-sale investments at December 31:
1998 1997
------------ ------------
Assets:
Fixed maturity securities $ 38,498 $ 81,046
Equity securities (4,119) 1,013
Deferred policy acquisition costs (323) (5,452)
Federal income taxes - deferred 124 -
Separate Accounts assets 30 -
------------ ------------
34,210 76,607
------------ ------------
Liabilities:
Policyholders' account balances 34,440 48,923
Federal income taxes - deferred - 9,689
------------ ------------
34,440 58,612
------------ ------------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ (230) $ 17,995
============ ============
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 included in net
realized investment gains were $932 and $520 at December 31,
1998 and 1997, respectively.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1998 1997 1996
---------- ---------- ----------
Proceeds $ 893,619 $ 846,041 $ 847,091
Gross realized investment gains 20,232 16,783 19,078
Gross realized investment losses 17,429 7,193 10,749
<PAGE>
The Company had investment securities with a carrying value of
$27,189 and $26,508 that were deposited with insurance
regulatory authorities at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the Company's $12,030 investment in
Separate Account assets included $30 of unrealized gains.
During 1997, the Company realized a $1,005 gain on the sale of
its investment in the Separate Accounts.
All outstanding mortgage loans were repaid during 1997.
Information on impaired loans for the years ended December 31
follows:
1997 1996
----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668
Interest income recognized (cash basis) 2,830 4,848
For the years ended December 31, 1997 and 1996, $7,891 and
$28,555, respectively, of real estate held-for-sale was
acquired in satisfaction of debt.
Net investment income arose from the following sources for the
years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 202,313 $ 236,325 $ 266,916
Equity securities 9,234 3,020 1,876
Mortgage loans - 4,627 9,764
Real estate held-for-sale 2,264 1,939 563
Policy loans on insurance contracts 59,236 57,998 56,512
Cash and cash equivalents 3,912 9,570 6,710
Other 761 709 899
------------ ----------- -----------
Gross investment income 277,720 314,188 343,240
Less investment expenses (5,682) (5,486) (6,579)
------------ ----------- -----------
Net investment income $ 272,038 $ 308,702 $ 336,661
============ =========== ===========
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 2,617 $ 6,149 $ 4,690
Equity securities 186 3,441 3,639
Trading account securities 1,368 697 -
Investment in Separate Accounts - 1,005 106
Mortgage loans - 6,252 599
Real estate held-for-sale 8,290 (4,252) (171)
Cash and cash equivalents (1) (3) (1)
------------ ----------- -----------
Net realized investment gains $ 12,460 $ 13,289 $ 8,862
============ =========== ===========
<PAGE>
The following is a reconciliation of the change in valuation
allowances that were recorded to reflect other-than-temporary
declines in the estimated fair value of mortgage loans for the
years ended December 31, 1997 and 1996.
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ----------- ----------- -----------
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Provision for income taxes computed at
Federal statutory rate $ 46,383 $ 42,413 $ 41,048
Decrease in income taxes resulting from:
Dividend received deduction (3,664) (1,969) (3,135)
Foreign tax credit (2,957) - -
Other - - (21)
------------ ------------ ------------
Federal income tax provision $ 39,762 $ 40,444 $ 37,892
============ ============ ============
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1998 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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 11,062 $ (2,422) $ (5,770)
Policyholders' account balances (10,950) (16,099) 15,004
Liability for guaranty fund assessments 529 1,190 760
Investment adjustments (1,350) 5,070 5,122
Other (64) - (38)
------------ ------------ ------------
Deferred Federal income tax
provision (benefit) $ (773) $ (12,261) $ 15,078
============ ============ ============
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 106,132 $ 95,182
Investment adjustments 1,951 601
Liability for guaranty fund assessments 4,852 5,381
Net unrealized investment loss on investment securities 124 -
------------ ------------
Total deferred tax assets 113,059 101,164
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 99,732 88,670
Net unrealized investment gain on investment securities - 9,689
Other 3,924 3,988
------------ ------------
Total deferred tax liabilities 103,656 102,347
------------ ------------
Net deferred tax (asset) liability $ (9,403) $ 1,183
============ ============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
NOTE 5. 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 $750 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 $589 that can be drawn upon for
delinquent reinsurance recoverables.
<PAGE>
As of December 31, 1998, the Company had the following life
insurance in-force:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $13,124,108 $ 3,259,006 $ 1,771 $ 9,866,872 0%
</TABLE>
The Company has 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.
NOTE 6. 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 $43,179, $43,028 and $43,515 for the years
ended December 31, 1998, 1997 and 1996, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG that approximates the daily Federal funds rate. Total
intercompany interest paid was $860, $842 and $988 for 1998,
1997 and 1996, 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
$1,915, $1,913 and $2,279 for 1998, 1997 and 1996,
respectively.
MLIG has entered into agreements with MLAM and Hotchkis & Wiley
("H&W"), a division of MLAM, with respect to administrative
services for the Merrill Lynch Series Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., and Hotchkis & Wiley Variable
Trust (collectively, "the Funds"). The Company invests in the
various mutual fund portfolios of the Funds in connection with
the variable life insurance and annuity contracts the Company
has in-force. Under this agreement, MLAM and H&W pay
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Funds to MLAM
and H&W. The Company received from MLIG its allocable share of
such compensation in the amount of $20,289, $19,057 and $16,514
during 1998, 1997 and 1996, respectively.
<PAGE>
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 $79,117, $72,729 and $42,639 for
1998, 1997 and 1996, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisitions
costs and are being amortized in accordance with the policy
discussed in Note 1.
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 7. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
The Company paid no dividends in 1998. During 1997 and 1996,
the Company paid dividends of $135,000 and $175,000,
respectively, to MLIG. Of these stockholders' dividends,
$110,030 and $175,000 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, 1998 and 1997, approximately $29,707 and
$24,304, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1998 and 1997, were $299,069 and $245,042,
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 1998, 1997 and 1996 was
$55,813, $81,963 and $93,532, 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 that
a life insurance company should have based upon that company's
risk profile. As of December 31, 1998 and 1997, based on the
RBC formula, the Company's total adjusted capital level was
473% and 394%, respectively, of the minimum amount of capital
required to avoid regulatory action.
<PAGE>
In March 1998, the NAIC adopted the Codification of Statutory
Accounting Principles ("Codification"). The Codification,
which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be
effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if,
the state of Arkansas will require adoption of Codification for
the preparation of statutory financial statements.
Codification is not expected to have a material impact on the
Company's capital requirements or statutory financial
statements.
NOTE 8. 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). The Company has utilized public information to
estimate what future assessments it will incur as a result of
insolvencies. At December 31, 1998 and 1997, the Company has
established an estimated liability for future guaranty fund
assessments of $13,864 and $15,374, 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.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1998, $6,569 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 9. SEGMENT INFORMATION
In reporting to management, the Company's operating results are
categorized into two business segments: Life Insurance and
Annuities. The Company's Life Insurance segment consists of
variable life insurance products and interest-sensitive life
products. The Company's Annuity segment consists of variable
annuities and interest sensitive annuities
<PAGE>
The Company's organization is structured in accordance with its
two business segments. Each segment has its own administrative
service center that provides product support to the Company and
customer service support to the Company's policyholders.
Additionally, marketing and sales management functions, within
MLIG, are organized according to these two business segments.
The accounting policies of the business segments are the same
as those described in the summary of significant accounting
policies. All revenue and expense transactions are recorded at
the product level and accumulated at the business segment level
for review by management.
The "Other" category, presented in the following segment
financial information, represents assets and related earnings
that do not support policyholder liabilities.
The following table summarizes each business segment's
contribution to the consolidated amounts:
<TABLE>
<CAPTION>
Life
1998 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 35,228 $ 32,765 $ 8,369 $ 76,362
Other revenues 84,836 124,864 422 210,122
------------ ------------ ------------ ------------
Net revenues 120,064 157,629 8,791 286,484
------------ ------------ ------------ ------------
Policy benefits 18,397 13,494 - 31,891
Reinsurance premiums ceded 19,972 - - 19,972
DAC amortization 13,040 31,795 - 44,835
Other non-interest expenses 18,030 39,233 - 57,263
------------ ------------ ------------ ------------
Total non-interest expenses 69,439 84,522 - 153,961
------------ ------------ ------------ ------------
Net earnings before Federal income
tax provision 50,625 73,107 8,791 132,523
Income tax expense 16,033 20,653 3,076 39,762
------------ ------------ ------------ ------------
Net earnings $ 34,592 $ 52,454 $ 5,715 $ 92,761
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 6,069,649 $ 8,885,981 $ 148,465 $15,104,095
Deferred policy acquisition costs $ 207,713 $ 197,927 $ - $ 405,640
Policy liabilities and accruals $ 2,186,001 $ 1,694,668 $ - $ 3,880,669
Other policyholder funds $ 16,033 $ - $ 4,769 $ 20,802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
1997 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 38,826 $ 47,973 $ 12,361 $ 99,160
Other revenues 86,301 102,782 3,139 192,222
------------ ------------ ------------ ------------
Net revenues 125,127 150,755 15,500 291,382
------------ ------------ ------------ ------------
Policy benefits 15,876 11,153 - 27,029
Reinsurance premiums ceded 17,879 - - 17,879
DAC amortization 36,180 35,931 - 72,111
Other non-interest expenses 16,545 36,639 - 53,184
------------ ------------ ------------ ------------
Total non-interest expenses 86,480 83,723 - 170,203
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 38,647 67,032 15,500 121,179
Income tax expense 12,753 22,265 5,426 40,444
------------ ------------ ------------ ------------
Net earnings $ 25,894 $ 44,767 $ 10,074 $ 80,735
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,925,872 $ 7,998,461 $ 129,248 $14,053,581
Deferred policy acquisition costs $ 182,610 $ 182,495 $ - $ 365,105
Policy liabilities $ 2,229,533 $ 2,009,151 $ - $ 4,238,684
Other policyholder funds $ 18,788 $ - $ 8,372 $ 27,160
</TABLE>
<TABLE>
<CAPTION>
Life
1996 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 40,805 $ 44,994 $ 15,607 $ 101,406
Other revenues 78,759 86,430 2,502 167,691
------------ ------------ ------------ ------------
Net revenues 119,564 131,424 18,109 269,097
------------ ------------ ------------ ------------
Policy benefits 12,150 8,902 - 21,052
Reinsurance premiums ceded 15,582 - - 15,582
DAC amortization 30,988 31,048 - 62,036
Other non-interest expenses 18,169 34,979 - 53,148
------------ ------------ ------------ ------------
Total non-interest expenses 76,889 74,929 - 151,818
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 42,675 56,495 18,109 117,279
Income tax expense 13,895 17,658 6,339 37,892
------------ ------------ ------------ ------------
Net earnings $ 28,780 $ 38,837 $ 11,770 $ 79,387
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,623,370 $ 6,957,228 $ 156,895 $12,737,493
Deferred policy acquisition costs $ 194,979 $ 171,482 $ - $ 366,461
Policy liabilities and accruals $ 2,638,177 $ 1,881,537 $ - $ 4,519,714
Other policyholder funds $ 16,256 $ - $ 3,164 $ 19,420
</TABLE>
<PAGE>
(a) Management considers investment income net of interest
credited to policyholders' account balances in evaluating
results.
The table below summarizes the Company's net revenues by
product for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Life Insurance
Variable life insurance $ 91,806 $ 92,245 $ 89,897
Interest-sensitive life insurance 28,258 32,882 29,667
------------ ------------ ------------
Total Life Insurance 120,064 125,127 119,564
------------ ------------ ------------
Annuities
Variable annuities 105,545 88,509 70,116
Interest-sensitive annuities 52,084 62,246 61,308
------------ ------------ ------------
Total Annuities 157,629 150,755 131,424
------------ ------------ ------------
Other 8,791 15,500 18,109
------------ ------------ ------------
Total $ 286,484 $ 291,382 $ 269,097
============ ============ ============
</TABLE>
<PAGE> 56
PROSPECTUS
May 1, 1999
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
SPRINGFIELD, MASSACHUSETTS 01144-1007
PHONE: (800) 354-5333
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This Prospectus describes a flexible premium variable universal life insurance
contract that Merrill Lynch Life Insurance Company offers only in Massachusetts,
Pennsylvania and Vermont.
Generally, through the first 14 days following the in force date, we will invest
your initial payment in the investment division of the Merrill Lynch Variable
Life Separate Account (the "Separate Account") investing in the Money Reserve
Portfolio. Afterward, you may reallocate your investment base to any five of the
investment divisions of the Separate Account. We then invest the assets in
corresponding portfolios of the following:
-- MERRILL LYNCH SERIES FUND, INC.
-- Money Reserve Portfolio
-- Intermediate Government Bond Portfolio
-- Long-Term Corporate Bond Portfolio
-- High Yield Portfolio
-- Capital Stock Portfolio
-- Growth Stock Portfolio
-- Multiple Strategy Portfolio
-- Natural Resources Portfolio
-- Global Strategy Portfolio
-- Balanced Portfolio
-- ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
-- Premier Growth Portfolio
-- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
-- Basic Value Focus Fund
-- Global Bond Focus Fund
-- Global Utility Focus Fund
-- International Equity Focus Fund
-- Developing Capital Markets Focus Fund
-- Special Value Focus Fund
-- Index 500 Fund
-- AIM VARIABLE INSURANCE FUNDS, INC.
-- AIM V.I. Capital Appreciation Fund
-- AIM V.I. Value Fund
-- MFS(Registered Trademark) VARIABLE INSURANCE TRUST(SM)
-- MFS Emerging Growth Series
-- MFS Research Series
-- MERRILL LYNCH FUND OF STRIPPED ("ZERO") U.S. TREASURY
SECURITIES -- Fourteen maturity dates ranging from February 15,
2000-February 15, 2014
Currently, you may change your investment allocation as often as you like.
<PAGE> 57
We guarantee that regardless of investment results, insurance coverage will
continue for the guarantee period. Each payment extends the guarantee period
until it reaches the life of the insured. During this guarantee period, we will
terminate the Contract only if any loan debt exceeds certain contract values.
After the guarantee period ends, the Contract will remain in effect as long as
the net cash surrender value is sufficient to cover all charges due. While the
Contract is in effect, the death benefit may vary to reflect the investment
results of the investment divisions chosen, but will generally never be less
than the face amount.
You may:
-- make additional payments
-- borrow from your Contract
-- redeem the Contract for its net cash surrender value
-- make partial withdrawals
The net cash surrender value will vary with the investment results of the
investment divisions chosen. We don't guarantee any minimum cash surrender
value.
Within certain limits, you may return the Contract or exchange it for a contract
with benefits that don't vary with the investment results of a separate account.
It may not be advantageous to replace existing insurance with the Contract.
PURCHASING THIS CONTRACT INVOLVES CERTAIN RISKS. INVESTMENT RESULTS CAN VARY
BOTH UP AND DOWN AND CAN EVEN DECREASE THE VALUE OF PREMIUM PAYMENTS. THEREFORE,
YOU COULD LOSE ALL OR PART OF THE MONEY YOU INVEST. EXCEPT FOR THE GUARANTEED
DEATH BENEFIT WE PROVIDE, YOU BEAR ALL INVESTMENT RISKS. WE DO NOT GUARANTEE HOW
ANY OF THE INVESTMENT DIVISIONS OR FUNDS WILL PERFORM.
LIFE INSURANCE IS INTENDED TO BE A LONG TERM INVESTMENT. YOU SHOULD EVALUATE
YOUR INSURANCE NEEDS AND THE CONTRACT'S LONG-TERM INVESTMENT POTENTIAL AND RISKS
BEFORE PURCHASING THE CONTRACT.
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(Registered Trademark)
VARIABLE INSURANCE TRUST(SM); THE HOTCHKIS AND WILEY VARIABLE TRUST; The Mercury
Asset Management V.I. Funds, Inc.; and The Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities must accompany this prospectus. Please read
these documents carefully and retain them for future reference.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE CONTRACTS OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 58
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IMPORTANT TERMS............................................. 5
SUMMARY OF THE CONTRACT..................................... 6
What the Contract Provides................................ 6
Availability and Payments................................. 6
The Investment Base....................................... 7
The Investment Divisions.................................. 7
Illustrations............................................. 7
Replacement of Existing Coverage.......................... 7
Right to Cancel ("Free Look" Period) or Convert........... 7
Distributions from the Contract........................... 7
Fees and Charges.......................................... 8
FACTS ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY, MERRILL
LYNCH, PIERCE, FENNER & SMITH INCORPORATED, THE SEPARATE
ACCOUNT, THE FUNDS, AND THE ZERO TRUSTS................... 8
Merrill Lynch Life Insurance Company...................... 8
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 9
The Separate Account...................................... 9
Net Rate of Return for an Investment Division............. 10
Changes Within the Account................................ 10
THE FUNDS................................................... 11
The Series Fund........................................... 11
The Variable Series Funds................................. 12
The AIM V.I. Funds........................................ 13
The Alliance Fund......................................... 13
The MFS Trust............................................. 14
The Hotchkis and Wiley Trust.............................. 14
The Mercury V.I. Funds.................................... 15
Special Risks In Certain Funds............................ 15
The Operation of the Funds................................ 16
The Zero Trusts........................................... 18
FACTS ABOUT THE CONTRACT.................................... 19
Who May be Covered........................................ 19
Initial Payment........................................... 19
Additional Insurance Rider................................ 20
Right to Cancel ("Free Look" Period)...................... 20
Making Additional Payments................................ 20
Investment Base........................................... 22
Charges................................................... 23
Charges Deducted from the Investment Base................. 23
Contract Loading.......................................... 23
Charges to the Separate Account........................... 24
Charges to Fund Assets.................................... 24
Guarantee Period.......................................... 25
Cash Value................................................ 26
Partial Withdrawals....................................... 27
Loans..................................................... 28
Death Benefit Proceeds.................................... 29
Payment of Death Benefit Proceeds......................... 31
Dollar Cost Averaging..................................... 31
</TABLE>
3
<PAGE> 59
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Right to Convert Contract................................. 32
Income Plans.............................................. 32
Reports to Contract Owners................................ 33
MORE ABOUT THE CONTRACT..................................... 33
Using the Contract........................................ 33
Some Administrative Procedures............................ 34
Other Contract Provisions................................. 35
Group or Sponsored Arrangements........................... 35
Unisex Legal Considerations............................... 36
Selling the Contract...................................... 36
Tax Considerations........................................ 37
Our Income Taxes.......................................... 39
Reinsurance............................................... 39
ILLUSTRATIONS............................................... 40
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY............. 46
Directors and Executive Officers.......................... 46
Services Arrangement...................................... 46
State Regulation.......................................... 46
Year 2000................................................. 47
Legal Proceedings......................................... 47
Experts................................................... 47
Legal Matters............................................. 47
Registration Statements................................... 47
Financial Statements...................................... 47
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.
4
<PAGE> 60
IMPORTANT TERMS
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
Contract's face amount to endow on the contract anniversary nearest to the date
the younger insured would reach attained age 100. To calculate your base
premium, we assume you elect death benefit option 1; a 5% annual rate of return
on the base premium minus contract loading; and a maximum cost of insurance
charge. Once we determine the base premium, it will not change.
cash value: is equal to the investment base plus any unearned cost of insurance
charges and rider costs plus any loan debt less any accrued net loan cost since
the last contact anniversary (or since the contract date during the first
contract year).
contract anniversary: is the same date of each year as the contract date.
contract date or policy 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.
excess sales load: is a portion of the sales load that we may refund to you if
you surrender your Contract or it lapses during the first two policy years.
After policy year two, the excess sales load equals zero.
face amount: is the minimum death benefit as long as the Contract remains in
force. The face amount will change if you change your death benefit option; or
it may decrease as a result of a partial withdrawal.
fixed base: On the contract date, the fixed base equals the cash value. From
then on, the fixed base is calculated like the cash value except that the
"investment base" reflects net premiums at 5% instead of the net rate of return,
and substitutes the guaranteed maximum cost of insurance rates and guaranteed
maximum rider costs for the current rates. In addition, the fixed base is
calculated without taking into account 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 guarantee period, the fixed
base is zero. We use the fixed base to limit our right to cancel the Contract
during the guarantee period.
guarantee period: is the time that the Contract is guaranteed to remain in
force regardless of investment experience, unless the loan debt exceeds certain
contract values. It is the period that a comparable fixed life insurance
contract (with the 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.
investment base: is the amount available under a Contract for investment in the
Separate Account at any time.
issue age: is the insured's age as of his or her birthday nearest the contract
date.
loan debt: is the sum of all outstanding loans on a Contract plus accrued
interest.
monthiversary: is the same day each month as the contract date.
net amount at risk: is the excess of the death benefit adjusted for interest at
an annual rate of 5% over the cash value as of a processing date, before we
deduct cost of insurance.
net cash surrender value: is equal to the cash value less loan debt.
processing dates: are the contract date and the first day of each contract
quarter thereafter. Processing dates are the days when we deduct 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 excess sales load during the first 24 contract months) by the cash value
corridor factor for the insured at his or her attained age.
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SUMMARY OF THE CONTRACT
WHAT THE CONTRACT PROVIDES
The Contract offers a choice of investments and an opportunity for the
Contract's investment base, net cash surrender value and death benefit to grow
based on investment results.
We don't guarantee that contract values will increase. Depending on the
investment results of the investment divisions you select, the investment base,
net cash surrender value and death benefit may go up or down on any day. You
bear the investment risk.
Death Benefit. You may elect a death benefit option on the application. Under
option 1, the death benefit equals the face amount or variable insurance amount,
whichever is larger. Under option 2, the death benefit equals the larger of (1)
the face amount plus the cash value or (2) the variable insurance amount. The
variable insurance amount increases or decreases depending on the investment
results of your selected investment divisions. The death benefit may go up or
down depending upon investment performance. However, it will never drop below
the face amount. Death benefit proceeds are equal to the death benefit reduced
by any loan debt and increased by any rider benefits payable.
Tax Benefits and Tax Considerations. The Contract generally provides at least
the minimum death benefit required under federal tax law. (Due to lack of
guidance, however, there is some uncertainty in this regard with respect to
Contracts issued on a substandard basis, and Contracts with an additional rider
attached.) By satisfying the minimum death benefit required under federal tax
law, the Contract provides two important tax benefits:
1) Its death benefit is not subject to income tax;
2) Any increases in the Contract's cash value are not taxable until
distributed from the Contract.
Guarantee Period. Generally, during the guarantee period you select, we
guarantee the Contract will remain in effect and provide the death benefit
regardless of investment performance, unless loan debt exceeds certain contract
values. We will only accept an initial payment if it provides for a guarantee
period of at least two years. The initial guarantee period is based on the
initial payment, the face amount, and the face amount of any additional
insurance rider. Each subsequent payment will extend the guarantee period until
it extends over the duration of the insured's life. Certain Contract
transactions will affect the guarantee period.
You should purchase the Contract for its death benefit. You may use the
Contract's net cash surrender value, as well as its death benefit, to provide
proceeds for various individual and estate planning purposes. However, loans and
partial withdrawals will affect the net cash surrender value and death benefit
proceeds, and may cause the Contract to terminate. Because the Contract is
designed to provide benefits on a long-term basis, before purchasing a Contract
in connection with a specialized purpose, you should consider whether the
long-term nature of the Contract, its investment risks, and the potential impact
of any contemplated loans and partial withdrawals, are consistent with the
purposes you may be considering. Moreover, using a Contract for a specialized
purpose may have tax consequences. (See "Tax Considerations.")
AVAILABILITY AND PAYMENTS
We will issue a Contract for insureds from age 20 through age 85.
- The minimum initial payment is 75% of the base premium.
- We will not accept an initial payment that provides an initial guarantee
period of less than two years.
- The minimum face amount (excluding any additional insurance rider face
amount) is $250,000 or that face amount that generates a $4,000 base
premium, if larger.
You can make additional payments. On your application you may choose to make
additional payments monthly (for payments from a CMA account only), quarterly,
semi-annually, or annually.
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THE INVESTMENT BASE
A Contract's investment base is the amount available for investment at any time.
On the contract date (usually the next business day after our Service Center
receives your initial payment), the investment base is equal to the initial
payment minus contract loading, cost of insurance charges, and rider costs.
Afterwards, it varies daily based on the investment performance of your selected
investment divisions. You bear the risk of poor investment performance and
receive the benefit of favorable investment performance. You may wish to
consider diversifying your investment in the Contract by allocating the
investment base to two or more investment divisions.
THE INVESTMENT DIVISIONS
Payments are invested in investment divisions of the Separate Account.
Generally, through the first 14 days following the in force date, the initial
payment less contract loading will be invested only in the investment division
of the Separate Account investing in the Money Reserve Portfolio. Afterwards,
the investment base is reallocated to up to five of the investment divisions.
(See "Changing the Allocation".)
ILLUSTRATIONS
Illustrations in this Prospectus or used in connection with the purchase of the
Contract are based on hypothetical investment rates of return. We don't
guarantee these rates. They are illustrative only, and not a representation of
past or future performance. Actual rates of return may be more or less than
those shown in the illustrations. Actual values will be different than those
illustrated.
REPLACEMENT OF EXISTING COVERAGE
Generally, it is not advisable to purchase an insurance contract as a
replacement for existing coverage. Before you buy a Contract, ask your Merrill
Lynch Financial Consultant if changing, or adding to, current insurance coverage
would be advantageous. Don't base your decision to replace existing coverage
solely on a comparison of contract illustrations.
RIGHT TO CANCEL ("FREE LOOK" PERIOD) OR CONVERT
Once you receive the Contract, review it carefully to make sure it is what you
want. Generally, you may return a Contract for a refund within the later of ten
days after receiving it, 45 days from the date the application is completed, or
ten days after we mail or personally deliver the Notice of Withdrawal Right to
you. If you return the Contract during the "free look" period, we will refund
the payment without interest.
You may also convert your Contract within 24 months into a contract with
benefits that do not vary with the investment results of a separate account.
DISTRIBUTIONS FROM THE CONTRACT
Partial Withdrawals. Beginning in Contract year sixteen, you may make partial
withdrawals, subject to certain conditions. (See "Partial Withdrawals".)
Surrenders. You may surrender your Contract at any time and receive the net
cash surrender value. The net cash surrender value equals the investment base:
- plus any unearned cost of insurance charges and rider costs;
- less any accrued net loan cost since the last contract anniversary (or
since the contract date during the first contract year);
- plus, during the first 2 contract years, excess sales load.
Loans. You may borrow money from us, using your Contract as collateral, subject
to limits. We deduct loan debt from the amount payable on surrender of the
Contract and 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, both the loan amount
and the amount of capitalized interest are treated as taxable distributions.
Depending upon investment performance of the divisions and the amounts borrowed,
loans may cause a
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Contract to lapse. If the Contract lapses or is surrendered with loan debt
outstanding, adverse tax consequences may result. (See "Loans" and "Tax
Considerations -- Tax Treatment of Loans and Other Distributions".)
FEES AND CHARGES
Contract Loading. We deduct certain charges from all your payments before we
invest them 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; and
- FEDERAL TAX CHARGE of 1.25% of each payment.
(See "Contract Loading.")
Investment Base Charges. We deduct certain charges from your investment base on
contract anniversaries or processing dates. These charges are:
- COST OF INSURANCE -- on the contract date and on all processing dates
after the contract date, we deduct a cost for the life insurance coverage
we provide (see "Cost of Insurance"); and
- RIDER COST -- on the contract date and on all processing dates after the
contract date, we deduct a cost for any additional insurance riders you
purchased.
- NET LOAN COST -- on each contract anniversary, if there has been any loan
debt during the prior year, we deduct a net loan cost. It equals a
maximum of 2.0% of the loan debt per year (see "Loans").
Separate Account Charges. We deduct certain charges daily from the investment
results of the investment divisions in the Separate Account. These charges are:
- a MORTALITY AND EXPENSE RISK CHARGE deducted from all investment
divisions. It is equivalent to .90% annually at the beginning of the
year; and
- a TRUST CHARGE deducted from only those investment divisions investing in
the Merrill Lynch Fund of Stripped ("Zero") U.S. Treasury Securities (the
"Zero Trusts"). It is currently equivalent to .34% annually at the
beginning of the year. It will never exceed .50% annually.
Advisory Fees and Fund Expenses. The portfolios in the Funds pay monthly
advisory fees and other expenses. (See "Charges to Fund Assets".)
This summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in this Prospectus and in the Contract.
You should retain the Contract together with its attached applications, medical
exam(s), amendments, riders, and endorsements. These are the entire agreement
between you and us.
For the definitions of some important terms used in this Prospectus, see
"Important Terms."
FACTS ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
THE SEPARATE ACCOUNT, THE FUNDS, AND THE ZERO TRUSTS
MERRILL LYNCH LIFE INSURANCE COMPANY
Merrill Lynch Life Insurance Company ("we" or "us") is a stock life insurance
company organized under the laws of the State of Washington on January 27, 1986
and redomesticated under the laws of the State of Arkansas on August 31, 1991.
We are an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. We are
authorized to sell life insurance and annuities in 49 states, Guam, the U.S.
Virgin Islands and the District of Columbia. We are also authorized to sell
variable life insurance and variable annuities in most jurisdictions.
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MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S")
MLPF&S provides a world-wide broad range of securities brokerage and investment
banking services. It provides marketing services for us and is the principal
underwriter of the Contracts issued through the Separate Account. We retain
MLPF&S to provide services relating to the Contracts under a distribution
agreement. (See "Selling the Contracts".)
THE SEPARATE ACCOUNT
We established the Separate Account, a separate investment account, on November
16, 1990. It is registered with the Securities and Exchange Commission as a unit
investment trust under 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. We use the
Separate Account to support the Contract as well as other variable life
insurance contracts we issue. The Separate Account is also governed by the laws
of the State of Arkansas, our state of domicile.
We own all of the assets in the Separate Account. The assets of the Separate
Account are kept separate from our general account and any other separate
accounts we 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 we conduct.
Obligations to contract owners and beneficiaries that arise under the Contract
are our obligations. Income, gains, and losses, whether or not realized, from
assets allocated to the Separate Account are, in accordance with the Contracts,
credited to or charged against the Separate Account without regard to our other
income, gains or losses. 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 investment
base allocated to the Separate Account under the Contracts), we may transfer the
excess to our general account.
There are currently 36 investment divisions in the Separate Account.
- Ten invest in shares of a specific portfolio of the Merrill Lynch Series
Fund, Inc. (the "Series Fund").
- Seven invest in shares of a specific portfolio of the Merrill Lynch
Variable Series Funds, Inc. (the "Variable Series Funds").
- Two invest in shares of a specific portfolio of AIM Variable Insurance
Funds, Inc. (the "AIM V.I. Funds").
- One invests in shares of a portfolio of Alliance Variable Products Series
Fund, Inc. (the "Alliance Fund").
- Two invest in shares of a specific portfolio of MFS(R) Variable Insurance
Trust(SM) (the "MFS Trust").
- Fourteen invest in units of a specific Zero Trust.
On or about July 15, 1999, six additional investment divisions become available
in the Separate Account.
- Two invest in Class A shares of a specific portfolio of the Variable
Series Funds.
- One invests in shares of an additional portfolio of the Alliance Fund.
- One invests in shares of a portfolio of the Hotchkis and Wiley Variable
Trust (the "Hotchkis and Wiley Trust").
- One invests in Class A shares of a portfolio of the Mercury Asset
Management V.I. Funds, Inc. (the "Mercury V.I. Funds").
- One invests in units of the Zero Trust maturing on February 15, 2019.
On or about July 15, 1999, two investment divisions previously available under
the Separate Account (the International Equity Focus Fund and the Global Bond
Focus Fund) close to allocations of premiums and contract value.
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For more information, see "The Funds" below. You'll find complete information
about the Funds and the Zero Trusts, including the risks associated with each
portfolio in the accompanying prospectuses. They should be read along with this
Prospectus.
Although the investment objectives and policies of certain Funds are similar to
the investment objectives and policies of other portfolios that may be managed
or sponsored by the same investment adviser, manager, or sponsor, we do not
represent or assure that the investment results will be comparable to any other
portfolio, even where the investment advisors or manager is the same.
Differences in portfolio size, actual investments held, fund expenses, and other
factors all contribute to differences in fund performance. For all of these
reasons, you should expect investment results to differ. In particular, certain
Funds available only through the Contract have names similar to funds not
available through the Contract. The performance of any fund not available
through the Contract is not indicative of performance of the similarly named
fund available through the Contract.
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 we furnish to you). When we allocate your
payments or investment base to an investment division, we purchase units based
on the value of a unit of the investment division as of the end of the valuation
period during which the allocation occurs. When we transfer or deduct amounts
out of an investment division, we redeem units in a similar manner. A valuation
period is each business day together with any non-business days before it. A
business day is any day the New York Stock Exchange is open or the SEC requires
that we determine the net asset value of an investment division.
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. We determine 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 the charges to the Separate Account.
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.
CHANGES WITHIN THE ACCOUNT
We may make available additional investment divisions. We also have 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
our judgment, a portfolio no longer suits the purposes of the Contracts. This
may happen due to a change in laws or regulations, or a change in a portfolio's
investment objectives or restrictions, or because the portfolio is no longer
available for investment, or for some other reason. If necessary, we would get
prior approval from the Arkansas State Insurance Department and the Securities
and Exchange Commission and any other required approvals before making such a
substitution.
Subject to any required regulatory approvals, we reserve 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, we also reserve 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.
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THE FUNDS
Below we list the funds into which the investment divisions may invest. There is
no guarantee that any fund or portfolio will be able to meet its investment
objective.
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.
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 loan 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 loan 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 loan 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 loan 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".)
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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 portfolios are currently available through the
Separate Account. Two additional portfolios become available on or about July
15, 1999. The investment objectives and certain investment policies of these
Variable Series Funds portfolios are described below.
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.
The investment division corresponding to this Fund closes to allocations of
premiums and contract value on or about July 15, 1999.
Global Utility Focus Fund seeks both capital appreciation and current income
through investment of at least 65% of its total assets in equity and loan 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.
The investment division corresponding to this Fund closes to allocations of
premiums and contract value on or about July 15, 1999.
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").
Capital Focus Fund seeks to achieve the highest total investment return
consistent with prudent risk. To do this, management of the Fund uses a flexible
"fully managed" investment policy that shifts the emphasis among equity, debt
(including money market), and convertible securities.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
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Global Growth Focus Fund seeks long-term growth of capital. The Fund invests in
a diversified portfolio of equity securities of issuers located in various
countries and the United States, placing particular emphasis on companies that
have exhibited above-average growth rates in earnings.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
The Variable Series Funds, as part of its operating expenses, pays an investment
advisory fee to MLAM. (See "Charges to Fund Assets".)
THE AIM V.I. FUNDS
The AIM V.I. Funds is registered with the Securities and Exchange Commission as
an open-end 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.
AIM V.I. Capital Appreciation Fund seeks growth of capital through investment in
common stocks, with emphasis on medium and small-sized growth companies. AIM
will be particularly interested in companies that are likely to benefit from new
or innovative products, services or processes, as well as those that have
experienced above-average, long-term growth in earnings and have excellent
prospects for future growth.
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 AIM's
appraisal of the current or projected earnings of the companies issuing the
securities, or relative to AIM's appraisal of current market values of assets
owned by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective.
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173, has served as an
investment adviser since its organization in 1976. Today, AIM together with its
subsidiaries, advises or manages over 110 investment portfolios, including the
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".)
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. One additional portfolio
becomes available on or about July 15, 1999. The investment objectives of these
Alliance Fund portfolios are described below.
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 is 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. This Fund is therefore not intended for
contract owners whose principal objective is assured income and conservation of
capital.
Alliance Quasar Portfolio seeks growth of capital by pursuing aggressive
investment policies. The Fund invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation, and invests only
incidentally for current income. The selection of securities based on the
possibility of appreciation cannot prevent loss in value. Moreover, because the
Fund's investment policies are aggressive, an investment in the Fund is risky
and is not intended for contract owners who want assured income or preservation
of capital.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Alliance is a Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105. Alliance Capital Management
Corporation ("ACMC"), the sole general partner of Alliance, is an
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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".)
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.
MFS Emerging Growth Series will seek long-term growth of capital. The series
invests, under normal market conditions, at least 65% of its total assets in
common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities, of emerging growth
companies. These companies are companies that the series' adviser believes are
either early in their life cycle but have the potential to become major
enterprises or are major enterprises whose rates of earnings growth are expected
to accelerate.
MFS Research Series will seek to provide long-term growth of capital and future
income. The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts. The series focuses on companies
that the series' adviser believes have favorable prospects for long-term growth,
attractive valuations based on current and expected earnings or cash flow,
dominant or growing market share and superior management.
MFS, a Delaware corporation, 500 Boylston Street, Boston, Massachusetts 02116,
is a subsidiary of Sun Life of Canada (U.S.) Financial Service Holdings, Inc.,
which, in turn, is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada. The MFS Trust, as part of its operating expenses, pays an
investment advisory fee to MFS. (See "Charges to Fund Assets".)
THE HOTCHKIS AND WILEY TRUST
The Hotchkis and Wiley Trust is registered with the Securities and Exchange
Commission as an open-end management investment company, and its adviser is
Hotchkis and Wiley. One of its mutual fund portfolios becomes available through
the Separate Account on or about July 15, 1999. The investment objective of this
Hotchkis and Wiley Trust portfolio is described below.
Hotchkis and Wiley International VIP Portfolio seeks to provide current income
and long term growth of income, accompanied by growth of capital. The Fund
invests at least 65% of its total assets in stocks in at least ten foreign
markets. Ordinarily, the Fund invests in stocks of companies located in the
developed foreign markets and invests at least 80% of its total assets in stocks
that pay dividends. It also may invest in stocks that don't pay dividends or
interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential. In investing the Fund,
Hotchkis and Wiley follows a value style. This means that it buys stocks that it
believes are currently undervalued by the market and thus have a lower price
than their true worth. Typical value characteristics include:
- low price-to-earnings ratio relative to the market
- high dividend yield relative to the market
- low price-to-book value ratio relative to the market
- financial strength
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries. The value discipline
sometimes prevents investments in stocks that are in well-known indexes, like
the S&P 500 or similar foreign indexes.
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<PAGE> 70
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Hotchkis and Wiley, 725 S. Figueroa Street, Suite 4000, Los Angeles, California
90017-5400, is a division of MLAM. The Hotchkis and Wiley Trust, as part of its
operating expenses, pays an investment advisory fee to Hotchkis and Wiley. (See
"Charges to Fund Assets".)
THE MERCURY V.I. FUNDS
The Mercury V.I. Funds is registered with the Securities and Exchange Commission
as an open-end management investment company, and its adviser is Mercury Asset
Management International Ltd. Class A shares of one of its mutual fund
portfolios becomes available through the Separate Account on or about July 15,
1999. The investment objective of the Mercury V.I. U.S. Large Cap Fund is
described below.
Mercury V.I. U.S. Large Cap Fund's main goal is long-term capital growth. The
Fund invests primarily in a diversified portfolio of equity securities of large
cap companies (which are companies whose market capitalization is at least $5
billion) located in the U.S. that Fund management believes are undervalued or
have good prospects for earnings growth. The Fund may also invest up to 10% of
its assets in stocks of companies located in Canada.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
Mercury Asset Management International Ltd. is located at 33 King William
Street, London EC4R 9AS, England. Its intermediate parent is Mercury Asset
Management Group Ltd. a London-based holding company. The ultimate parent of
Mercury Asset Management Group Ltd. is Merrill Lynch & Co., Inc. The Mercury
V.I. U.S. Large Cap Fund, as part of its operating expenses, pays an investment
advisory fee to Mercury Asset Management International Ltd. (See "Charges to
Fund Assets".)
SPECIAL RISKS IN CERTAIN FUNDS
Investment in lower-rated loan 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 loan debt securities in which it may invest, and will
rely on MLAM'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.
Because a substantial portion of the Global Growth Focus Fund's assets may be
invested on an international basis, you should be aware of certain risks, such
as fluctuations in foreign exchange rates, future political and economic
developments, different legal systems, and the possible imposition of exchange
controls or other foreign government laws or restrictions. An investment in the
Fund may be appropriate only for long-term investors who can assume the risk of
loss of principal, and do not seek current income.
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
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<PAGE> 71
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.
For the Hotchkis and Wiley International VIP Portfolio, investing in emerging
market and other foreign securities involves certain risk considerations not
typically associated with investing in securities of U.S. issuers, including
currency devaluations and other currency exchange rate fluctuations, political
uncertainty and instability, more substantial government involvement in the
economy, higher rates of inflation, less government supervision and regulation
of the securities markets and participants in those markets, controls on foreign
investment and limitations on repatriation of invested capital and on the Fund's
ability to exchange local currencies for U.S. dollars, greater price volatility,
substantially less liquidity and significantly smaller capitalization of
securities markets, absence of uniform accounting and auditing standards,
generally higher commission expenses, delay in settlement of securities
transactions, and greater difficulty in enforcing shareholder rights and
remedies.
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 OPERATION OF 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. We are the legal owner of all Fund shares held in the Separate
Accounts. We have the right to vote on any matter put to vote at the Funds'
shareholder meetings. However, we will vote all Fund shares attributable to
Contracts according to instructions we receive from contract owners. Shares
attributable to Contracts for which we receive no voting instructions will be
voted in the same proportion as shares in the respective investment divisions
for which we receive instructions. We will also vote shares not attributable to
Contracts in the same proportion as shares in the respective investment
divisions for which we received instructions. If any federal securities laws or
regulations, or their present interpretation, change to permit us to vote Fund
shares in our own right, we may do so.
We determine the number of shares attributable to you by dividing your
Contract's investment base in an investment division by the net asset value of
one share of the corresponding portfolio. We count fractional votes.
Under certain circumstances, state regulatory authorities may require us 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.
We may also disregard instructions to vote for changes in the investment policy
or the investment adviser if it disapproves of the proposed changes. We 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 we disregard voting instructions, we will include a summary of our actions in
the next semi-annual report.
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<PAGE> 72
Resolving Material Conflicts. Shares of the Series Fund are available for
investment by us, 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 us or Merrill Lynch & Co.,
Inc.). Shares of the Variable Series Funds, the AIM V.I. Funds, the Alliance
Fund, the MFS Trust, and the Hotchkis and Wiley Trust are sold to separate
accounts of ours, ML Life Insurance Company of New York, and insurance companies
not affiliated with us or Merrill Lynch & Co., Inc. to fund benefits under
variable life insurance and variable annuity contracts, and may be sold to
certain qualified plans. Shares of the Mercury V.I. Funds are sold to separate
accounts of ours, ML Life Insurance Company of New York, and may in the future
be sold to insurance companies not affiliated with us 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 our 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 differences in voting instructions from our contract owners and those
of the other insurance companies, or for other reasons. We will monitor events
to determine how to respond to conflicts. If a conflict occurs, we may need 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, we will take the action we believe
necessary to protect you consistent with applicable legal requirements.
Administrative Service Arrangements. MLAM has entered into an agreement with
Merrill Lynch Insurance Group, Inc. ("MLIG"), our parent, for 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 compensates 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.
AIM V.I. Funds has entered into an Administrative Services Agreement with AIM,
under 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 us for administrative
services for the AIM V.I. Funds in connection with the Contracts. Under this
agreement, AIM compensates us 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 us for administrative services for the Alliance Fund in
connection with the Contracts. Under this agreement, AFD compensates us 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 for administrative services for the
MFS Trust in connection with the Contracts, certain other contracts issued by
us, 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.
Hotchkis and Wiley has entered into an agreement with MLIG with respect to
administrative services for the Hotchkis and Wiley Trust in connection with the
Contracts, certain other contracts issued by us, and certain contracts issued by
ML Life Insurance Company of New York. Under this agreement, Hotchkis and Wiley
pays compensation to MLIG in an amount equal to a portion of the annual gross
investment advisory fees paid by the Hotchkis and Wiley International VIP
Portfolio to Hotchkis and Wiley attributable to such contracts.
Mercury Asset Management International Ltd. has entered into an agreement with
MLIG with respect to administrative services for the Mercury V.I. Funds in
connection with the Contracts, certain other contracts issued by us, and certain
contracts issued by ML Life Insurance Company of New York. Under this agreement,
Mercury Asset Management International Ltd. pays compensation to MLIG in an
amount equal to a portion of the annual gross
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<PAGE> 73
investment advisory fees paid by the Mercury V.I. U.S. Large Cap Fund to Mercury
Asset Management International Ltd. attributable to such contracts.
THE ZERO TRUSTS
The Zero Trusts are intended to provide safety of capital and a competitive
yield to maturity. It purchases at a deep discount U.S. Government-backed
investments which make no periodic interest payments. 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 loan debt obligations issued by the U.S. Government stripped of
their unmatured interest coupons;
- coupons stripped from U.S. loan debt obligations; and
- receipts and certificates for such stripped loan debt obligations and
coupons.
The Zero Trusts currently available are shown below:
<TABLE>
<CAPTION>
TARGETED RATE OF RETURN
TO MATURITY AS
ZERO TRUST MATURITY DATE OF
ZERO TRUST MATURITY DATE APRIL 9, 1999
- ---------- ------------- ---------------------------
<C> <S> <C>
2000 February 15, 2000 3.15%
2001 February 15, 2001 3.37%
2002 February 15, 2002 3.65%
2003 August 15, 2003 3.71%
2004 February 15, 2004 3.82%
2005 February 15, 2005 3.72%
2006 February 15, 2006 3.55%
2007 February 15, 2007 3.72%
2008 February 15, 2008 4.08%
2009 February 15, 2009 4.14%
2010 February 15, 2010 4.31%
2011 February 15, 2011 4.29%
2013 February 15, 2013 4.45%
2014 February 15, 2014 4.58%
</TABLE>
An additional Zero Trust maturing on February 15, 2019 becomes available for
allocations of premium payments and contract value on or about July 15, 1999.
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 we need to sell them to pay benefits and make reallocations. We
pay the sponsor a fee for these transactions and are reimbursed through the
trust charge assessed to the divisions investing in the Zero Trusts. (See
"Charges to Divisions Investing in the Zero Trusts".)
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 return 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") 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 return adjusted for these charges. It does not, however,
represent the actual return on a payment that we might receive under the
Contract on that date, since it does not reflect the charges for contract
loading deducted from payments to the Contract, cost of insurance charges and
rider costs, and any net loan cost deducted from a Contract's investment base
(described in "Charges Deducted from the Investment Base").
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<PAGE> 74
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.
FACTS ABOUT THE CONTRACT
WHO MAY BE COVERED
We will issue a Contract on the life of the insured so long as the relationship
among the applicant and the insured meets our insurable interest requirements
and provided the insured is not over age 85 or under age 20. We will determine
the insured's issue age using the insured's age as of his or her birthday
nearest the contract date. Before we'll issue a Contract, the insured must meet
our medical and other underwriting and insurability requirements.
We assign insureds to underwriting classes which determine the cost of insurance
rates we use in calculating cost of insurance deductions. We may issue Contracts
on insureds in standard, non-smoker, or preferred non-smoker underwriting
classes. We may also issue Contracts on insureds in a "substandard" underwriting
class. Individuals in substandard classes have health or lifestyle factors less
favorable than the average person. For a discussion of the effect of
underwriting classification on cost of insurance deductions, see "Cost of
Insurance".
INITIAL PAYMENT
Minimum. To purchase a Contract, you must complete an application and make a
payment. We require the payment to put the Contract into effect. In the
application, you select the face amount of the Contract. The amount of the
minimum initial payment for a Contract depends on the face amount you select,
and each insured's issue age, sex, and underwriting class. The minimum initial
payment for any Contract is 75% of the base premium. We won't, however, accept
an initial payment for a specified face amount that will provide a guarantee
period of less than two years, or that would cause the Contract to fail to
qualify under federal tax law as we interpret it. You may make additional
payments. (See "Making Additional Payments".)
Coverage. Insurance coverage generally begins on the contract date. This is
usually the next business day following receipt of the initial payment at our
Service Center. Prior to the contract date, we may provide temporary life
insurance coverage under a temporary insurance agreement. Under our underwriting
rules, in most states, temporary life insurance coverage may not exceed $300,000
and may not last more than 90 days.
Backdating. As provided for under state insurance law you may backdate the
Contract to preserve the insured's age. However, you can't backdate more than
six months before the date the application was completed. We deduct cost of
insurance charges and rider costs for the backdated period on the contract date.
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 you may specify for a given initial payment is the
amount which will provide an initial guarantee period of at least two years. The
guarantee period will be shorter for an initial payment amount if you request a
larger face amount. The initial face amount will change if you change your death
benefit option or take a partial withdrawal.
If we determine that, based on your initial payment and the face amount, your
Contract will be a modified endowment contract, we will issue the Contract
provided that:
- you sign a statement acknowledging that the Contract is a modified
endowment contract; or
- you agree either to reduce the initial payment or to increase the face
amount to a level where the Contract will not be a modified endowment
contract.
For a discussion about the tax consequences of purchasing a modified endowment
contract, see "Tax Considerations."
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<PAGE> 75
Initial Guarantee Period. We determine the initial guarantee period for a
Contract based on the initial payment, face amount and any additional insurance
rider face amount. We will adjust the guarantee period when:
- you make an additional payment;
- you take a partial withdrawal;
- you change your death benefit option; or
- you increase or decrease your additional insurance rider face amount.
The guarantee period is the period of time we guarantee that the Contract will
remain in force regardless of investment experience unless the loan debt exceeds
certain contract values. We base the guarantee period on the guaranteed maximum
cost of insurance rates in the Contract, guaranteed maximum rider costs (if you
elect an additional insurance rider), 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 their age,
sex and underwriting class. For example, an older insured will have a shorter
guarantee period than a younger insured of the same sex and in the same
underwriting class.
The maximum guarantee period is for the insured's whole life.
ADDITIONAL INSURANCE RIDER
You may purchase additional insurance coverage, payable to the beneficiary when
the insured dies, through an additional insurance rider either when you purchase
the Contract or on any contract anniversary before the insured reaches attained
age 86. Currently, when you purchase the Contract, the maximum additional
insurance rider face amount is three times the face amount of the Contract. The
minimum additional insurance rider face amount at any time is $100,000. We will
deduct a cost of insurance charge for the rider from your Contract's investment
base on each processing date. This rider charge will be based on the same cost
of insurance rates as the Contract. (See "Cost of Insurance.") There is no
additional contract loading associated with this coverage.
You may increase (subject to providing evidence of insurability) or decrease
(after your seventh contract anniversary) your additional insurance rider face
amount once each year. Any change must be at least $100,000. The change will
take effect on the next contract anniversary following underwriting approval of
the change. After the change takes place, we will calculate a new guarantee
period using the existing fixed base and the face amount of the Contract plus
the new additional insurance rider face amount. If you decrease the additional
insurance rider face amount, the guarantee period will increase; and if you
increase the additional insurance rider face amount, the guarantee period will
decrease. We will not allow an increase 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 increase's effective date.
If you decrease the rider face amount you may cause the Contract to become a
modified endowment contract. In such a case, we will not process the decrease
until you confirm in writing that you intend to convert the Contract to a
modified endowment contract. Increasing or decreasing the additional insurance
rider face amount may have adverse tax consequences. You should consult a tax
adviser before changing the face amount of the additional insurance rider.
RIGHT TO CANCEL ("FREE LOOK" PERIOD)
You may cancel your Contract during the "free look" period by returning it for a
refund. Generally, the "free look" period ends the later of ten days after you
receive the Contract, 45 days from the date you complete the application, or ten
days after we mail or personally deliver the Notice of Withdrawal Right to you.
To cancel the Contract during the "free look" period, you must mail or deliver
the Contract to our Service Center or to the registered representative who sold
it. We will refund your payment without interest. We may require you to wait six
months before applying for another contract.
MAKING ADDITIONAL PAYMENTS
After the end of the "free look" period, you may make additional payments so
long as the insured is living. Additional payments must be at least $100. If an
additional payment would cause the Contract to become a modified endowment
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<PAGE> 76
contract we will return the additional payment, unless you confirm in writing
that you intend to convert the Contract to a modified endowment contract. We may
still return the additional amount until we receive your instructions. We will
return that portion of any additional payment beyond the amount necessary to
extend the guarantee period to the insured's whole life. We will also return any
additional payment which would cause the Contract to fail to qualify as life
insurance under federal tax laws as we interpret them.
You may elect to make additional payments annually, semiannually or quarterly.
You may also make payments on a monthly basis if you authorize us to withdraw
the payment from your CMA(1) account. If you have the CMA Insurance Service,
additional payments may be withdrawn automatically from your CMA account and
transferred to your Contract. The withdrawals will continue under the plan
specified until we are notified otherwise. For additional payments not withdrawn
from a CMA account, we will send you reminder notices.
If we have applied any excess sales load to keep the Contract in force, we will
first apply an additional payment (less contract loading) to recover such excess
sales load. We will next apply an additional payment as a loan repayment, if
there is any loan debt. We will apply any excess as an additional payment.
Effect of Additional Payments. Generally, we accept any additional payment the
day we receive it. On the date we accept an additional payment we will:
- increase the Contract's investment base by the amount of the payment
minus any applicable contract loading;
- reflect the payment in the calculation of the variable insurance amount
(see "Variable Insurance Amount"); and
- increase the fixed base by the amount of the payment less applicable
contract loading.
As of the processing date on or next following receipt and acceptance of an
additional payment, we will increase the guarantee period if the guarantee
period before the additional payment does not extend beyond the insured's whole
life.
We will determine the increase in the guarantee period by taking the immediate
increase in the cash value resulting from the additional payment and adding
interest at the annual rate of 5% for the period from when we receive and accept
the payment to the contract processing date on or next following such date. This
is the guarantee adjustment amount. We add the guarantee adjustment amount to
the fixed base and we use the resulting new fixed base 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 we receive and accept it.
The Examples below show the effect of additional payments. Example 1 shows the
effect on the guarantee period of a $5,000 additional payment at the beginning
of contract year five. Example 2 shows the effect of a $10,000 additional
payment at the beginning of contract year five. Example 3 shows the effect of a
$5,000 additional payment 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.
- ---------------
(1) Cash Management Account and CMA are registered trademarks of Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
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<PAGE> 77
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
- -------- ---------- ----------------
<C> <S> <C>
5 $5,000 1.5 yrs
EXAMPLE 2
- ----------------------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
- -------- ---------- ----------------
5 $10,000 3 yrs
EXAMPLE 3
- ----------------------------------------------------------
CONTRACT ADDITIONAL INCREASE IN
YEAR PAYMENT GUARANTEE PERIOD
- -------- ---------- ----------------
6 $5,000 1.25 yrs
</TABLE>
INVESTMENT BASE
A Contract's investment base is the sum of the amounts invested in each of the
investment divisions. On the contract date, the investment base equals the
initial payment minus contract loading and cost of insurance charges and rider
costs. We adjust the investment base daily to reflect the investment performance
of the investment divisions you've selected. (See "Net Rate of Return for an
Investment Division".) The investment performance reflects the deduction of
Separate Account charges. (See "Charges to the Separate Account".)
Partial withdrawals, loans and deductions for cost of insurance, rider cost, and
net loan cost decrease the investment base. (See "Charges Deducted from the
Investment Base", "Partial Withdrawals", and "Loans".) Loan repayments and
additional payments increase it. You may elect from which investment divisions
loans and partial withdrawals are taken and to which investment divisions
repayments and additional payments are added. If you don't make an election, we
will allocate increases and decreases proportionately to your investment base in
the investment divisions selected.
Initial Investment Allocation and Preallocation. Generally, during the first 14
days following the in force date, the initial payment minus contract loading
will remain in the division investing in the Money Reserve Portfolio. Afterward,
we'll reallocate the investment base to the investment divisions you've
selected. You may invest in up to five of the investment divisions.
Changing the Allocation. Currently, you may change investment allocations as
often as you wish. However, we may charge up to $25 for each change in excess of
six each year. To change your investment base allocation, call or write our
Service Center. (See "Some Administrative Procedures".) A dollar cost averaging
feature may also be available. (See "Dollar Cost Averaging".)
Zero Trust Allocations. If your investment base is in any of the Zero Trusts,
we'll notify you 30 days before that Trust matures. Tell us in writing at least
seven days before the maturity date how to reinvest the proceeds. If you don't
tell us, we'll move the proceeds to the investment division investing in the
Money Reserve Portfolio. Units of a specific Zero Trust may no longer be
available when we receive a request for allocation. Should this occur, we'll
attempt to notify you immediately so that you can change the request.
Allocation to the Division Investing in the Natural Resources Portfolio. We
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.
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CHARGES
We deduct 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. We may use proceeds from any charges, including the
mortality and expense risk charge, in part to cover distribution expenses.
We deduct these charges pro-rata from the investment base on processing dates.
(See "Charges Deducted from the Investment Base".) We deduct a contract load
from each payment you make. (See "Contract Loading".) We also deduct certain
charges daily from the investment results of each investment division in the
Separate Account in determining its net rate of return. (See "Charges to the
Separate Account".) The portfolios in the Funds also pay monthly advisory fees
and other expenses. (See "Charges to Fund Assets".)
CHARGES DEDUCTED FROM THE INVESTMENT BASE
Cost of Insurance. We deduct a cost of insurance charge from the investment
base on the contract date and each processing date thereafter. This charge
compensates us for the cost of providing life insurance coverage on the
insureds. It is based on each insured's underwriting class, sex and attained
age, and the Contract's net amount at risk.
To determine the cost of insurance, we multiply 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. For all insureds, 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.
We guarantee that the current cost of insurance rates will never exceed the
maximum guaranteed rates shown in the Contract. The maximum guaranteed rates
(except those issued on a substandard basis) do not exceed the rates based on
the 1980 Commissioners Standard Ordinary Mortality Table (1980 CSO Table). We
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 current 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".
Rider Charges. We deduct rider charges on the contract date and on each
processing date thereafter. These charges are explained under "Additional
Insurance Rider."
CONTRACT LOADING
We deduct contract loading from each payment you make. The contract loading
equals 50% of each payment you make until you make cumulative payments equaling
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 is equal to 46.25% of each payment through the second base
premium and 1.25% of each payment thereafter. It compensates us for sales
expenses and the costs for underwriting and issuing the Contract. We may reduce
the sales load in certain group or sponsored arrangements.
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.
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<PAGE> 79
Excess Sales Load. The excess sales load equals any sales load we deduct from
the first two base premiums in excess of:
- 30% of premium amounts paid up to an amount equal to the first base
premium; and
- 10% of additional premium amounts paid up to an amount equal to the
second base premium.
We calculate and apply the excess sales load in the following situations only in
the first 24 contract months:
- We refund it to you if you surrender the Contract or the Contract lapses.
- We add it to the cash value to keep the Contract in force if loan debt
exceeds the larger of (i) cash value plus any excess sales load we have
not previously applied to keep the Contract in force and (ii) the fixed
base.
- We add it to the cash value to determine the variable insurance amount.
CHARGES TO THE SEPARATE ACCOUNT
Each day we deduct a mortality and expense risk charge from each division of the
Separate Account. The total amount of this charge is .90% annually at the
beginning of the year. Of this amount, .75% is for
- the risk we assume that insureds as a group will live for a shorter time
than actuarial tables predict. As a result, we would be paying more in
death benefits than planned; and
- the risk we assume that it will cost us more to issue and administer the
Contracts than expected.
The remaining amount, .15%, is for
- the risks we assume for potentially unfavorable investment results. One
risk is that the Contract's cash value cannot cover the charges due
during the guarantee period.
If the mortality and expense risk charge is not enough to cover the actual
expenses of mortality, maintenance, and administration, we will bear the loss.
If the charge exceeds the actual expenses, the excess will be added to our
profit and may be used to finance distribution expenses. We cannot increase the
total charge.
Charges to Divisions Investing in the Zero Trusts. We assess a daily trust
charge against the assets of each division investing in the Zero Trusts. This
charge reimburses us 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. We may increase it, but it won't exceed
.50% annually at the beginning of the year. The charge is based on cost with no
expected profit.
Tax Charges. We have the right under the Contract to impose a charge against
Separate Account assets for its taxes, if any. We don't currently impose such a
charge, but we may in the future. Also, see "Contract Loading" above for a
discussion of tax charges included in the contract load.
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.
We have 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. We have also agreed to reimburse MLAM
for any amounts it pays under the investment advisory agreement, as described
below. These
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<PAGE> 80
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 at an annual rate of
the average daily net assets of each portfolio. The fee for each is shown as
follows:
<TABLE>
<CAPTION>
PORTFOLIO NAME ADVISORY FEE
-------------- ------------
<S> <C>
Basic Value Focus Fund .60%
Global Bond Focus Fund .60%
Global Utility Focus Fund .60%
Index 500 Fund .30%
International Equity Focus Fund .75%
Developing Capital Markets Focus Fund 1.00%
Special Value Focus Fund .75%
Capital Focus Fund .60%
Global Growth Focus Fund .75%
</TABLE>
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
greater than 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 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 at an annual rate of 1.00% of each
of the Alliance Premier Growth Portfolio's and the Alliance Quasar Portfolio's
average daily net assets.
Charges to MFS Trust Assets. The MFS Trust incurs operating expenses and pays a
monthly advisory fee to MFS at an annual rate of .75% of the average daily net
assets of each of the MFS Emerging Growth Series and MFS Research Series.
Charges to Hotchkis and Wiley Trust Assets. The Hotchkis and Wiley Trust incurs
operating expenses and pays a monthly advisory fee to Hotchkis and Wiley at an
annual rate of .75% of the average daily net assets of the Hotchkis and Wiley
International VIP Portfolio.
Charges to Mercury V.I. Funds Assets. The Mercury V.I. Funds incurs operating
expenses and pays a monthly advisory fee to Mercury Asset Management
International Ltd. at an annual rate of .65% of the average daily net assets of
the Mercury V.I. U.S. Large Cap Fund.
Mercury Asset Management International Ltd. has agreed to limit the operating
expenses paid by the Mercury V.I. U.S. Large Cap Fund for one year to 1.25% of
its average daily net assets.
GUARANTEE PERIOD
Subject to certain conditions, we guarantee that regardless of investment
performance the Contract will stay in effect for the guarantee period.
Additional payments, partial withdrawals, changes in death benefit options, and
increases and decreases in the face amount of the additional insurance rider may
affect the guarantee period. We won't cancel the
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<PAGE> 81
Contract during the guarantee period unless any loan debt exceeds certain
contract values. We hold a reserve in our general account to support this
guarantee.
When the Guarantee Period is Less Than for Life. After the end of the guarantee
period, we may cancel the Contract if the net cash surrender value (plus certain
excess sales load) on a processing date is insufficient to cover charges due on
that date.
We will notify you before canceling the Contract. You will then have 61 days to
pay an amount, after deducting contract loading, which equals at least three
times the charges that were due (and not deducted) on the processing date when
we determined the cash value to be insufficient, plus any excess sales load we
previously applied to keep the Contract in force. If you pay this amount, we
will deduct the charges due and apply the balance to the investment base. If we
haven't received the required payment by the end of this grace period, we'll
cancel the Contract.
At that time we will deduct any charges for cost of insurance and rider costs
for the grace period, and refund any unearned charges or cost of insurance,
rider costs, and any excess sales load not used to keep the contract in force.
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
insured's whole life, we will extend the guarantee period to equal the insured's
whole life.
Reinstatement. Subject to state regulation, if we cancel a Contract, it may be
reinstated while the insured is still living if:
- You request the reinstatement within three years after the end of the
grace period;
- We receive satisfactory evidence of insurability; and
- You pay the reinstatement payment. The reinstatement payment is the
minimum payment for which we 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.
The effective date of a reinstated contract is the processing date on or next
following the date the reinstatement application is approved. Thus, if the
insured dies before the effective date of the reinstated Contract, we won't pay
a death benefit.
CASH VALUE
Because investment results vary daily, we don't guarantee any minimum cash
value. On any date the cash value equals:
- the Contract's investment base on that date;
- plus loan debt;
- plus unearned cost of insurance charges and rider costs;
- minus any accrued net loan cost since the last contract anniversary (or
since the contract date during the first contract year).
Canceling to Receive Net Cash Surrender Value. You may cancel the Contract at
any time while the insured is living to receive the net cash surrender value in
a lump sum or under an income plan. We will determine the net cash surrender
value as of the date we receive your written request at our Service Center. If
the Contract is cancelled during the first 24 contract months, any excess sales
load not used to keep the Contract in force will also be paid to you. You must
make the request in writing in a form satisfactory to us. All rights to death
benefits will end on the date you send the written request to us. Cancelling the
Contract may have tax consequences. See "Tax Considerations."
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<PAGE> 82
PARTIAL WITHDRAWALS
Currently, beginning in Contract year sixteen, and subject to state regulation,
you may make partial withdrawals by submitting a request in a form satisfactory
to us.
- You may make one partial withdrawal each contract year.
- The amount of any partial withdrawal may not exceed 90% of the Contract's
cash value less any loan debt.
- The effective date of the withdrawal is the date our Service Center
receives a withdrawal request.
- The minimum amount for each partial withdrawal is $1,000.
- Following a partial withdrawal, the remaining cash value minus loan debt
must be at least $5,000.
- A partial withdrawal may not be repaid.
If the partial withdrawal would cause the Contract to become a modified
endowment contract, we will delay processing the withdrawal until you confirm in
writing your intention to convert the Contract to a modified endowment contract.
A partial withdrawal may have tax consequences. See "Tax Considerations."
Effect on Variable Insurance Amount, Investment Base, Cash Value, Fixed Base,
and Face Amount. As of the effective date of the withdrawal, we reduce the
investment base, cash value, and fixed base by the amount of the partial
withdrawal. If you choose death benefit option 1, we will reduce the face amount
of the Contract by the amount of the partial withdrawal. Unless you tell us
differently, we allocate this reduction proportionately to the investment base
in your investment divisions. In addition, we reduce the variable insurance
amount by the amount of the withdrawal multiplied by the cash value corridor
factor. (See "Cash Value Corridor Factor.")
Effect on Guaranteed Period. As of the processing date on or next following a
partial withdrawal, we calculate a new guarantee period. We do this 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 withdrawal to the contract processing date on or next following such
date. This is the guarantee adjustment amount. We subtract the guarantee
adjustment amount from the fixed base and use the new fixed base to calculate a
new guarantee period.
The examples below show the effect of partial withdrawals. The amount of the
reduction in the face amount will depend on the amount of the partial
withdrawal, the face amount at the time of the withdrawal and the contract year
in which the withdrawal is made. Larger withdrawals result in larger reductions
in the guarantee period. 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
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<PAGE> 83
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>
16 $5,000 .25 yrs
EXAMPLE 2
- ----------------------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
- -------- ---------- ----------------
16 $10,000 .75 yrs
EXAMPLE 3
- ----------------------------------------------------------
CONTRACT PARTIAL DECREASE IN
YEAR WITHDRAWAL GUARANTEE PERIOD
- -------- ---------- ----------------
18 $10,000 .75 yrs
</TABLE>
LOANS
You may use the Contract as collateral to borrow funds from us. The minimum loan
is $1,000. You may repay all or part of the loan debt any time during the
insured's lifetime. Each repayment must be for at least $1,000 or the amount of
the loan debt, if less. Certain states won't permit a minimum amount that can be
borrowed or repaid. If we previously applied any excess sales load to keep the
Contract in force, we will first apply any loan repayment to repay such excess
sales load.
Loans may have tax consequences -- See "Tax Considerations."
When you take a loan, we transfer from your investment base the amount of the
loan and hold it as collateral in our general account. When a loan repayment is
made, we transfer the amount of the repayment from the general account to the
investment divisions. You may select the divisions you want to borrow from, and
the divisions you want to repay (including interest payments). If you don't
specify, we'll take the borrowed amounts proportionately from and make
repayments proportionately to your investment base as then allocated to the
investment divisions.
If you have the CMA Insurance Service, you can transfer loans and loan
repayments to and from your CMA account.
Effect on Death Benefit and Cash Value. Whether or not you repay a loan, 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 will 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 loan debt. The
maximum amount that can be borrowed at any time is the difference between the
loan value and the loan debt.
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<PAGE> 84
Interest. While loan debt remains unpaid, we may charge interest at a maximum
rate of 6% annually, subject to state regulation. Currently, we charge interest
at 5.75% annually. Interest accrues each day and payments are due at the end of
each contract year. If you don't pay the interest when due, we add it to the
unpaid loan amount. Loan debt is considered part of cash value used to calculate
gain.
The amount held in our general account as collateral for a loan earns interest
at a minimum of 4% annually. Currently the loan amount earns interest at an
annual rate of 5%.
Net Loan Cost. In addition to the loan interest we charge, on each contract
anniversary we reduce 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 is 5.75% and the collateral
amount earns interest at an annual rate of 5%, the current net loan cost on
loaned amounts is .75%. We take the net loan cost 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 Loan Debt. If the loan debt exceeds the larger of
(i) the cash value (plus excess sales load during the first 24 policy months)
and less charges due on that date and (iii) the fixed base on a processing date,
we will cancel the Contract 61 days after we mail a notice of intent to
terminate the Contract to you unless we have received at least the minimum
repayment amount specified in the notice. Upon termination, we will deduct any
cost of insurance charges and rider costs that may be applicable to the 61-day
period and refund any unearned cost of insurance charges, rider costs, and any
excess sales load that we did not previously apply to keep the Contract in
force. If the Contract lapses with a loan outstanding, you may have adverse tax
consequences. (See "Tax Considerations -- Contract Loans".)
DEATH BENEFIT PROCEEDS
We will pay the death benefit proceeds to the beneficiary when we receive all
information needed to process the payment, including due proof of the insured's
death. When we first receive reliable notification of the insured's death by a
representative of the owner or the insured, we may transfer the investment base
to the division investing in the Money Reserve Portfolio, pending payment of
death benefit proceeds.
Amount of Death Benefit Proceeds. The death benefit proceeds depend on the
death benefit option you choose.
- 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 face amount
plus the cash value or the variable insurance amount.
TO DETERMINE THE DEATH BENEFIT PROCEEDS, WE WILL SUBTRACT ANY LOAN DEBT FROM THE
DEATH BENEFIT AND ADD 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 before the grace period minus any overdue
charges. (See "When the Guarantee Period is Less Than for Life".)
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<PAGE> 85
Variable Insurance Amount. We determine the variable insurance amount daily by
multiplying the cash value (plus excess sales load during the first 24 Contract
months) by the cash value corridor factor.
CASH VALUE CORRIDOR FACTOR
We use the cash value corridor factor to determine the amount of death benefit
purchased by $1.00 of cash value. It is based on the insured's attained age 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. Your contract contains a table of factors as of each
anniversary.
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, you may change the death benefit option. We will change the face
amount to keep the death benefit constant on the effective date of the change.
Therefore, if you change from option 1 to option 2, we will decrease the face
amount of the Contract by the cash value on the date of the change. We will not
permit a change in the death benefit option if it would result in a face amount
of less than $100,000. If the change is from option 2 to option 1, we will
increase the face amount of the Contract by the cash value on the date of the
change.
If you request a change from option 1 to option 2, we will require you to
provide evidence of insurability. We will not permit a change in death benefit
options if after the change the Contract would fail to qualify as life insurance
under federal tax laws as we interpret them.
A change in the death benefit option may cause the Contract to convert into a
modified endowment contract. In such a case, we will not process the change
until you confirm in writing that you wish to convert the Contract. Changing the
death benefit option may also have other adverse tax consequences. You should
consult a tax adviser before changing your Contract's death benefit option.
Example 1 below 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.
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<PAGE> 86
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
PAYMENT OF DEATH BENEFIT PROCEEDS
We will generally pay the death benefit proceeds to the beneficiary within seven
days after our Service Center receives all the information needed to process the
payment. We may delay payment, however, if we are contesting the Contract or
under the circumstances described in "Using the Contract" and "Other Contract
Provisions". If a delay is necessary and death of the insured occurs prior to
the end of the guarantee period, we may delay payment of any excess of the death
benefit over the face amount. After the guarantee period has expired, we may
delay payment of the entire death benefit.
We 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
below.
DOLLAR COST AVERAGING
What Is It? Once the feature is approved and is available in your state, the
Contract will offer an optional transfer feature called Dollar Cost Averaging
("DCA"). Contact the Service Center about availability. This feature allows you
to make automatic monthly transfers from the Money Reserve Portfolio to up to
four other investment divisions depending on your current allocation of
investment base. The DCA program will terminate and no transfers will be made if
transfers under DCA would cause you to be invested in more than 5 divisions.
The DCA feature is intended to reduce the effect of short-term price
fluctuations on investment cost. Since the same dollar amount is transferred to
selected divisions each month, more units of a division are purchased when their
value is low and fewer units are purchased when their value is high. Therefore,
over the long haul a DCA program may let you buy units at a lower average cost.
However, a DCA program does not assure a profit or protect against a loss in
declining markets.
Once available, you can choose the DCA feature any time. Once you start using
it, you must continue it for at least three months. You can select a duration in
months for the DCA program. If you do not choose a duration we will make
reallocations at monthly intervals until the balance in the Money Reserve
Portfolio is zero. While the DCA program is in place any amount in the Money
Reserve Portfolio is available for transfer.
Minimum Amounts. To elect DCA, you need to have a minimum amount in the Money
Reserve Portfolio. We determine the amount required by multiplying the specified
length of your DCA program in months by your specified
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<PAGE> 87
monthly transfer amount. If you do not select a duration we determine the
minimum amount required by multiplying your monthly transfer amount by 3 months.
You must specify at least $100 for transfer each month. Allocations may be made
in specific whole dollar amounts or in percentage increments of 1%. We reserve
the right to change these minimums.
Should the amount in your Money Reserve Portfolio be less than the selected
monthly transfer amount, we'll notify you that you need to put more money in the
Money Reserve Portfolio to continue DCA. If you do not specify a duration or the
specified duration has not been reached and the amount in the Money Reserve
Portfolio is less than the monthly transfer amount, the entire amount will be
transferred. Transfers are made based on your selected DCA percentage
allocations or are made pro-rata based on your specified DCA transfer amounts.
When Do We Make DCA Transfers? We'll make the first DCA transfer on the first
monthiversary date after the later of the date our Service Center receives your
election or fourteen days after the in force date. We'll make additional DCA
transfers on each subsequent monthiversary. We don't charge for DCA transfers.
These transfers are in addition to reallocations permitted under the Contract.
RIGHT TO CONVERT CONTRACT
You may convert the Contract to a contract with benefits that do not vary with
the investment results of a separate account. Once you exercise this right, we
will not allocate the investment base and additional payments to the Separate
Account. You must submit your request to convert in writing within 24 months
after the issue date of your Contract provided the insured is still living. You
will not have to provide evidence of insurability.
We will convert your Contract by adding an endorsement to it and by
transferring, without charge, the investment base in the Separate Account to the
guaranteed interest division. Assets in the guaranteed interest division are
held in our general account. The investment base and any additional payments
will remain in the guaranteed interest division, and we will credit them with
interest at a rate we declare. Once we declare an interest rate, it will remain
in effect for at least one year. After conversion, your Contract will no longer
be subject to Separate Account charges. For a discussion of the tax consequences
of converting the Contract, see "Tax Consequences."
INCOME PLANS
We offer several income plans to provide for payment of the death benefit
proceeds to the beneficiary. Payments under these plans do not depend on the
investment results of a separate account. You may choose one or more income
plans at any time during the insureds' lifetime. If you haven't selected a plan
when the insured dies, the beneficiary has one year to apply the death benefit
proceeds either paid or payable to one or more of the plans. In addition, if you
cancel the Contract, you may also choose one or more income plans for payment of
the proceeds.
We need to approve any plan where any income payment would be less than $100.
Income plans include:
- Annuity Plan. You can use an amount to purchase a single premium
immediate annuity.
- Interest Payment. You can leave amounts with us 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. We make payments in equal installments for up
to a fixed number of years.
- Income for Life. We make payments in equal monthly installments until
the death of a named person or the 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. We make payments in equal installments until
proceeds applied under this option and interest on the unpaid balance at
not less than 3% per year are exhausted.
- Joint Life Income. We make payments 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.
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If one dies, payments of at least two-thirds of the full amount are made.
Payments end completely when both named persons die.
UNDER THE INCOME FOR LIFE AND JOINT LIFE INCOME OPTIONS, OUR CONTRACTUAL
OBLIGATION MAY BE SATISFIED WITH ONLY ONE PAYMENT IF AFTERWARD THE NAMED PERSON
OR PERSONS DIES. IN ADDITION, ONCE IN EFFECT, SOME OF THE INCOME PLANS MAY NOT
PROVIDE ANY SURRENDER RIGHTS.
REPORTS TO CONTRACT OWNERS
After the end of each processing period, we will send you a statement showing
the allocation of your investment base, death benefit, cash value, any loan debt
and, if there has been a change, new face amount, 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 your state.
You will receive confirmation of all financial transactions. These confirmations
will show the price per unit of each of your investment divisions, the number of
units you have 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".)
We will also send you 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. If you have a Merrill Lynch Cash Management Account(R),
you may elect to have your contract linked electronically to your CMA account.
We call this the CMA Insurance Service. With this service, you will have certain
Contract information included as part of your regular monthly CMA account
statement. It will list the investment base allocation, death benefit, net cash
surrender value, loan debt and any CMA account activity affecting the Contract
during the month.
MORE ABOUT THE CONTRACT
USING THE CONTRACT
Ownership. The contract owner is the insured, unless someone other than the
insured has been named as the owner in the application. The contract owner has
all rights and options described in the Contract.
If you are not the insured, you may want to name a contingent owner. If you die
before the insured, the contingent owner will own your interest in the contract
and have all your rights. If you don't name a contingent owner and you die
before the insured, your estate will then own your interest in the Contract upon
your death.
If there is more than one contract owner, we will treat the owners as joint
tenants with rights of survivorship unless the ownership designation provides
otherwise. We may require completion of additional forms. The owners must
exercise their rights and options jointly, except that any one of the owners may
reallocate the Contract's investment base by phone 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, you have the right to
transfer ownership of the Contract. However, if you've named an irrevocable
beneficiary, that person will need to consent. The new owner will have all
rights and options described in the Contract. The change will be effective as of
the date the notice is signed, but will not affect any payment we've made or
action we've taken before our Service Center receives the notice of the change.
Changing the owner may have tax consequences. You should consult a tax adviser
before changing the Contract's owner.
Assigning the Contract as Collateral. You may assign the Contract as collateral
security for a loan or other obligation. This does not change the ownership.
However, your rights and any beneficiary's rights are subject to the
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terms of the assignment. You must give satisfactory written notice at our
Service Center in order to make or release an assignment. We are not responsible
for the validity of any assignment.
For a discussion of the tax issues associated with a collateral assignment, see
"Tax Considerations".
Naming Beneficiaries. We will pay the primary beneficiary the death benefit
proceeds of the Contract on the insured's death. If the primary beneficiary has
died, we will pay the contingent beneficiary. If no contingent beneficiary is
living, we will pay the insured's estate.
You may name more than one person as primary or contingent beneficiaries. We
will pay proceeds in equal shares to the surviving beneficiaries unless the
beneficiary designation provides differently.
You have the right to change beneficiaries during the insured's lifetime.
However, if your primary beneficiary designation is irrevocable, the primary
beneficiary must consent when certain contract rights and options are exercised.
If you change the beneficiary, the change will take effect as of the date the
notice is signed, but will not affect any payment we've made or action we've
taken before our Service Center receives the notice of the change.
Maturity Proceeds. The maturity date is the contract anniversary nearest the
insured's 100th birthday. On the maturity date, we will pay the net cash
surrender value to the contract owner, provided the insured is still living and
the Contract is in effect at that time.
When We Make Payments. We generally pay death benefit proceeds, partial
withdrawals, loans and net cash surrender value within seven days after our
Service Center receives all the information needed to process the payment.
However, we may delay payment if it isn't practical for us to value or dispose
of Trust units or Fund 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
We reserve the right to modify or eliminate the procedures described below. For
administrative and tax purposes, we may from time to time require that specific
forms be completed for certain transactions, including surrenders.
Personal Identification Number. We will send you a four-digit personal
identification number ("PIN") shortly after the Contract is placed in force and
before the end of the "free look" period. You must give this number when you
call the Service Center to get information about the Contract, to make a loan
(if an authorization is on file), or to make other requests.
Reallocating the Investment Base. Contract owners can reallocate their
investment base either in writing or by telephone. If you request the
reallocation by telephone, you must give your PIN as well as your Contract
number. We will give a confirmation number over the telephone and then follow up
in writing.
Requesting a Loan. You may request a loan in writing or, if all required
authorization forms are on file, by telephone. Once our Service Center receives
the authorization, you can call the Service Center, give your Contract number,
name and PIN, and tell us the loan amount and the divisions from which the loan
should be taken.
Upon request, we will wire the funds to the account at the financial institution
named on your authorization. We will generally wire the funds within two working
days of receipt of the request. If you have the CMA Insurance Service, funds may
be transferred directly to that CMA account.
Requesting Partial Withdrawals. Beginning in contract year 16, you may request
partial withdrawals in writing or by telephone if all required telephone
authorization forms are on file. Once our Service Center receives the
authorization, you can call the Service Center, give your Contract number, name
and PIN, and tell us how much to withdraw and from which investment divisions.
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Upon request, we will wire the funds to the account at the financial institution
named on your authorization. We will usually wire the funds within two working
days of receipt of the request. If you have the CMA Insurance Service, funds can
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. We reserve the right to change procedures or discontinue the
ability to make telephone transfers.
We 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. We will not be liable for following
telephone instructions that we reasonably believe to be genuine.
OTHER CONTRACT PROVISIONS
In Case of Errors in the Application. If an age or sex stated in the
application is wrong, it could mean that the face amount or any other Contract
benefit is wrong. We will pay the correct benefits for the true age or sex.
Incontestability. We will rely on statements made in the applications. We can
contest the validity of a Contract if any material misstatements are made in the
application. We 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 that change or increase.
Subject to state regulation, we won't contest the validity of a Contract after
it has been in effect during the insured's lifetime for two years from the date
of issue or the date of any reinstatement. We won't contest any change in face
amount due to a change in death benefit option or any increase in the additional
insurance rider face amount after the change or increase has been in effect
during the insured's lifetime 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, we 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 loan 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 increase in the face amount 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. To maintain this qualification to the maximum
extent of the law, we reserve the right to return any additional payments that
would cause the Contract to fail to qualify as life insurance under applicable
federal tax law as we may interpret it. Further, we reserve the right to make
changes in the Contract or its riders or to make distributions from the Contract
to the extent necessary to continue to qualify the Contract as life insurance.
Any changes will apply uniformly to all Contracts that are affected and you will
be given advance written notice of such changes.
State Variations. Certain Contract features, including the "free look" right,
are subject to state variation. You should read your Contract carefully to
determine whether any variations apply in the state in which the Contract is
issued.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce the contract loading,
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 us to sell Contracts to
its employees on an individual basis.
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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. We take 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.
We make any reductions according to rules in effect when an application for a
Contract or additional payment is approved. We may change these rules from time
to time. However, reductions in charges will not discriminate unfairly against
any person.
UNISEX LEGAL CONSIDERATIONS
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.
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 these Contracts.
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. You
should disregard references made in this prospectus to such sex-based
distinctions.
SELLING THE CONTRACTS
Role of Merrill Lynch, Pierce, Fenner & Smith, Incorporated. MLPF&S is the
principal underwriter of the Contract. It was organized in 1958 under the laws
of the state of Delaware and is registered as a broker-dealer under the
Securities Exchange Act of 1934. It is a member of the National Association of
Securities Dealers, Inc. ("NASD"). 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 Merrill Lynch Asset Management,
the investment adviser for the Series Fund and the Variable Series Funds.
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 FCs.
Role of Merrill Lynch Life Agencies. Contracts are sold by registered
representatives of MLPF&S who are also licensed through various Merrill Lynch
Life Agencies as our insurance agents. We have entered into a distribution
agreement with MLPF&S and companion sales agreements with the Merrill Lynch Life
Agencies through which 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 amounts paid
under the distribution and sales agreements for the Separate Account for the
year ended December 31, 1998, December 31, 1997, and December 31, 1996 were
$22,517,219, $15,107,535, and $10,059,108, respectively.
Commissions. The maximum commission we 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. The target premium is equal to 75% of the base premium. In addition,
we may pay, on an annual basis, an amount equal to .11% of persisting investment
base under a Contract. Commissions may be paid in the form of non-cash
compensation, subject to applicable regulatory requirements.
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TAX CONSIDERATIONS
Introduction. The following summary discussion is based on our understanding of
current Federal income tax law as the Internal Revenue Service (IRS) now
interprets it. We can't guarantee that the law or the IRS's interpretation won't
change. It does not purport to be complete or to cover all tax situations. This
discussion is not intended as tax advice. Counsel or other tax advisors should
be consulted for further information.
We haven't considered any applicable state or other tax laws. Of course, your
own tax status or that of your beneficiary can affect the tax consequences of
ownership or receipt of distributions.
Tax Status of the Contract. In order to qualify as a life insurance contract
for Federal income tax purposes and to receive the tax treatment normally
accorded life insurance contracts under Federal tax law, a contract must satisfy
certain requirements which are set forth in the Internal Revenue Code (IRC).
Guidance as to how these requirements are to be applied to certain features of
the Contract is limited. Nevertheless, we believe that a Contract issued on the
basis of a standard risk class should satisfy the applicable requirements. There
is less guidance with respect to Contracts issued on a substandard basis (i.e.,
a premium class involving a higher than standard mortality risk) and it is not
clear whether such Contracts would satisfy the applicable requirements. There
may also be some uncertainty as to Contracts with an additional insurance rider
attached. If it is subsequently determined that Contract does not satisfy the
applicable requirements, we may take appropriate steps to bring the Contract
into compliance with such requirements and reserve the right to restrict
Contract transactions in order to do so.
Diversification Requirements. IRC section 817(h) and the regulations under it
provide that separate account investments underlying a Contract must be
"adequately diversified" for it to qualify as a life insurance contract under
IRC section 7702. The separate account intends to comply with the
diversification requirements of the regulations under section 817(h). This will
affect how we make investments.
In certain circumstances, owners of variable life contracts have been considered
for Federal income tax purposes to be the owners of the assets of the separate
account supporting their contracts due to their ability to exercise investment
control over those assets. Where this is the case, the contract owners have been
currently taxed on income and gains attributable to the separate account assets.
There is little guidance in this area, and some features such as the flexibility
of an owner to allocate premium payments and transfer contract accumulation
values have not been explicitly addressed in published rulings. While we believe
that the contracts do not give owners investment control over variable account
assets, we reserve the right to modify the Contracts as necessary to prevent an
owner from being treated as the owner of the variable account assets supporting
the Contract.
The following discussion assumes that the Contract will qualify as a life
insurance contract for Federal income tax purposes.
Tax Treatment of Contract Benefits in General. We believe that the death
benefit under a Contract should be excludible from the gross income of the
beneficiary. Federal, state and local gift, estate, inheritance, transfer and
other tax consequences of ownership of receipt of Contract proceeds depend on
the circumstances of each owner or beneficiary. A tax advisor should be
consulted on these consequences.
Generally, the owner will not be deemed to be in constructive receipt of the
contract value until there is a distribution. When distributions from a Contract
occur, or when loans are taken out from or secured by a Contract, the tax
consequences depend on whether the Contract is classified as a "modified
endowment contract."
Modified Endowment Contracts. Under the Internal Revenue Code, life insurance
contracts that fail to satisfy the "7-pay test" are classified as "modified
endowment contracts," with less favorable tax treatment than other life
insurance contracts. 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 effect, in order to comply with the 7-pay test, a Contract must be
purchased with a higher face amount for a given initial payment than would
otherwise be required to satisfy the federal tax definition of a life insurance
contract.
Certain changes in a Contract after it is issued could also cause it to fail to
satisfy the 7-pay test and therefore to be classified as a modified endowment
contract. Making additional payments, reducing the Contract's death benefit
during the first seven contract years, reducing the Contracts benefits 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 termination of
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additional benefits under a rider are examples of changes that could result in a
Contract becoming classified as a modified endowment contract. Even if these
events do not result in a Contract becoming classified as a modified endowment
contract, moreover, they could reduce the amount that may be paid in the future
without causing the Contract to be classified as a modified endowment contract.
It should be noted that 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.
Any Contract received in 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 below.
Contract owners may choose not to exercise their right to make additional
premium payments, in order to preserve their Contract's current tax treatment.
Due to the flexibility of the Contract as to premium payments and benefits, the
individual circumstances of each Contract will determine whether it is
classified as a modified endowment contract. As the foregoing discussion
indicates, the 7-pay test and the rules governing whether a Contract is
classified as a modified endowment contract are quite complex. A current or
prospective owner should therefore consult with a competent adviser to determine
whether a Contract transaction will cause the Contract to be classified as a
modified endowment contract.
Distributions (Other Than Death Benefits) from Modified Endowment
Contracts. Contracts classified as modified endowment contracts are subject to
the following tax rules:
(1) All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a modified endowment contract will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the owner's investment in the Contract only
after all gain has been distributed.
(2) Loans taken from or secured by a Contract classified as a modified
endowment contract (including collateral assignments) are treated as
distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject to
tax except where the distribution or loan is made when the owner has
attained age 59 1/2 or is disabled, or where the distribution is part
of a series of substantially equal periodic payments for the life (or
life expectancy) of the owner or the joint lives (or joint life
expectancies) of the owner and the owner's beneficiary or designated
beneficiary.
If a Contract becomes a modified endowment contract, distributions that occur
during the 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.
Distributions (Other Than Death Benefits) from Contracts that are not Modified
Endowment Contracts. Distributions (other than death benefits) from a Contract
that is not classified as a modified endowment contract are generally treated
first as a recovery of the owner's investment in the Contract and only after the
recovery of all investment in the Contract as taxable income. However, certain
distributions which must be made in order to enable the Contract to continue to
qualify as a life insurance contract for Federal income tax purposes if Contract
benefits are reduced during the first 15 Contract years may be treated in whole
or in part as ordinary income subject to tax.
Loans from or secured by a Contract that is not a modified Endowment Contract
are generally not treated as distributions. However, the tax consequences of
preferred loans are unclear. You should consult a tax advisor as to those
consequences.
Finally, neither distributions from nor loans from or secured by a Contract that
is not a modified endowment contract are subject to the 10 percent additional
income tax.
Investment in the Contract. Your investment in the Contract is generally your
aggregate Premiums. When a distribution is taken from the Contract, your
investment in the Contract is reduced by the amount of the distribution that is
tax-free.
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Multiple Contracts. All modified endowment contracts that are issued by us (or
our affiliates) to the same owner during any calendar year are treated as one
modified endowment contract for purposes of determining the amount includible in
the owner's income when a taxable distribution occurs.
Contract Loans. If a Contract loan is outstanding when a Contract is canceled
or lapses, the amount of the outstanding indebtedness will be added to the
amount distributed and will be taxed accordingly. In general, interest on a
Contract loan will not be deductible. Before taking out a Contract loan, you
should consult a tax adviser as to the tax consequences.
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 us. (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.) It is not clear whether
exercising the policy split rider will be treated as a taxable transaction or
whether the individual Contracts that result would be classified as modified
endowment contracts. A competent tax advisor should be consulted before
exercising the policy split rider.
Other Tax Considerations. The transfer of the Contract or 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 a 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 owner may have generation skipping transfer tax consequences under federal
tax law. The individual situation of each owner or beneficiary will determine
the extent, if any, to which federal, state, and local transfer and inheritance
taxes may be imposed and how ownership or receipt of Contract proceeds will be
treated for purposes of federal, state and local estate, inheritance, generation
skipping and other taxes.
Contracts Used for Business Purposes. The Contract can be used in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such arrangements may vary depending on the particular facts
and circumstances. If you are purchasing the Contract for any arrangement the
value of which depends in part on its tax consequences, you should consult a
qualified tax adviser. In recent years, moreover, Congress has adopted new rules
relating to life insurance owned by businesses. Any business contemplating the
purchase of a new Policy or a change in an existing Policy should consult a tax
adviser.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the
Contract could change by legislation or otherwise. It is possible that any
legislative change could be retroactive (that is, effective prior to the date of
the change). Consult a tax advisor with respect to legislative developments and
their effect on the Contract.
We don't 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 you should
consult a competent tax adviser. Although this tax discussion is based on our
understanding of federal income tax laws as they are currently interpreted, we
can't guarantee that those laws or interpretations will remain unchanged.
OUR 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 will result in a significantly higher corporate
income tax liability for us in early contract years. We make a charge to
compensate us for the anticipated higher corporate income taxes that result from
the sale of a Contract. (See "Contract Loading".)
We currently make no other charges to the Separate Account for any federal,
state or local taxes that we incur that may be attributable to the Separate
Account or to the Contracts. We reserve the right, however, to make a charge for
any tax or other economic burden resulting from the application of tax laws that
we determine to be properly attributable to the Separate Account or to the
Contracts.
REINSURANCE
We intend to reinsure some of the risks assumed under the Contracts.
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ILLUSTRATIONS
ILLUSTRATIONS OF DEATH BENEFITS, INVESTMENT BASE, CASH SURRENDER VALUES AND
ACCUMULATED PAYMENTS
The tables below 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
$9,055 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 43 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 44 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 45 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 .58%. This
charge assumes that investment base is allocated equally among all investment
divisions and is based on the 1998 expenses (including monthly advisory fees and
operating expenses) for the Funds, and the current trust charge. This charge
also reflects expense reimbursements made in 1998 to certain portfolios by the
investment adviser to the respective portfolio. These reimbursements, amounted
to .17%, .13%, .35% and .03% of the average daily net assets of the Developing
Capital Markets Focus Fund, the Natural Resources Portfolio, the Alliance Quasar
Portfolio and the Alliance Premier Growth Portfolio, respectively. (See "Charges
to Fund Assets".) 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 .58%
charge described above, the gross annual rates of investment return of 0%, 6%
and 12% correspond to net annual rates of -1.47%, 4.47%, and 10.42%,
respectively. The gross returns are before any deductions and should not be
compared to rates which reflect 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 income taxes included in the contract loading,
see "Contract Loading"). 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.
40
<PAGE> 96
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.
We 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> 97
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 40,980 500,000 500,000 500,000
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 90,791 500,000 500,000 500,000
9........................................................ 9,055 104,838 500,000 500,000 500,000
10........................................................ 9,055 119,587 500,000 500,000 500,000
15........................................................ 9,055 205,164 500,000 500,000 500,000
20........................................................ 9,055 314,383 500,000 500,000 500,000
30........................................................ 9,055 631,684 500,000 500,000 1,074,748
55........................................................ 0 2,562,910 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....................................................... 3,798 4,042 4,287 3,798 4,042 4,287
2....................................................... 7,312 8,030 8,778 7,312 8,030 8,778
3....................................................... 14,593 16,249 18,028 14,593 16,249 18,028
4....................................................... 21,633 24,702 28,107 21,633 24,702 28,107
5....................................................... 28,475 33,439 39,145 28,475 33,439 39,145
6....................................................... 35,133 42,487 51,260 35,133 42,487 51,260
7....................................................... 41,617 51,872 64,581 41,617 51,872 64,581
8....................................................... 47,973 61,653 79,283 47,973 61,653 79,283
9....................................................... 54,175 71,824 95,491 54,175 71,824 95,491
10....................................................... 60,169 82,351 113,319 60,169 82,351 113,319
15....................................................... 85,189 139,189 232,311 85,189 139,189 232,311
20....................................................... 101,293 204,653 383,061 101,293 204,653 383,061
30....................................................... 90,522 356,623 1,004,437 90,522 356,623 1,004,437
55....................................................... 0 937,061 11,253,521 0 937,061 11,253,521
</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 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 next 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 US 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> 98
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: 2.75 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 40,980 500,000 500,000 500,000
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 90,791 500,000 500,000 500,000
9........................................................ 9,055 104,838 500,000 500,000 500,000
10........................................................ 9,055 119,587 500,000 500,000 500,000
15........................................................ 9,055 205,164 500,000 500,000 500,000
20........................................................ 9,055 314,383 500,000 500,000 500,000
30........................................................ 9,055 631,684 500,000 500,000 885,394
55........................................................ 0 2,562,910 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......................................................... 2,836 3,044 3,254 2,836 3,044 3,254
2......................................................... 5,509 6,100 6,720 5,509 6,100 6,720
3......................................................... 12,040 13,430 14,924 12,040 13,430 14,924
4......................................................... 18,352 20,965 23,861 18,352 20,965 23,861
5......................................................... 24,434 28,700 33,597 24,434 28,700 33,597
6......................................................... 30,282 36,642 44,217 30,282 36,642 44,217
7......................................................... 35,870 44,773 55,791 35,870 44,773 55,791
8......................................................... 41,174 53,079 68,405 41,174 53,079 68,405
9......................................................... 46,176 61,550 82,158 46,176 61,550 82,158
10......................................................... 50,842 70,164 97,156 50,842 70,164 97,156
15......................................................... 68,362 115,025 196,219 68,362 115,025 196,219
20......................................................... 72,678 161,202 324,967 72,678 161,202 324,967
30......................................................... 0 236,346 827,471 0 236,346 827,471
55......................................................... 0 0 8,740,842 0 0 8,740,842
</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 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 next 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 US 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> 99
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 29,115 517,259 518,315 519,373
2....................................................... 27,729 59,687 542,054 545,713 549,505
3....................................................... 27,729 91,786 566,269 574,113 582,546
4....................................................... 27,729 125,491 589,973 603,621 618,863
5....................................................... 27,729 160,881 613,208 634,323 658,835
6....................................................... 27,729 198,041 635,992 666,285 702,855
7....................................................... 27,729 237,058 658,337 699,567 751,351
8....................................................... 27,729 278,027 680,294 734,276 804,837
9....................................................... 27,729 321,043 701,837 770,441 863,798
10....................................................... 27,729 366,211 722,906 808,061 928,737
15....................................................... 27,729 628,270 818,969 1,017,685 1,364,357
20....................................................... 27,729 962,730 898,602 1,267,482 1,970,068
30....................................................... 27,729 1,934,397 990,288 1,901,737 4,300,149
55....................................................... 0 7,476,716 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..................................................... 17,259 18,315 19,373 17,259 18,315 19,373
2..................................................... 42,054 45,713 49,505 42,054 45,713 49,505
3..................................................... 66,269 74,113 82,546 66,269 74,113 82,546
4..................................................... 89,973 103,621 118,863 89,973 103,621 118,863
5..................................................... 113,208 134,323 158,835 113,208 134,323 158,835
6..................................................... 135,992 166,285 202,855 135,992 166,285 202,855
7..................................................... 158,337 199,567 251,351 158,337 199,567 251,351
8..................................................... 180,294 234,276 304,837 180,294 234,276 304,837
9..................................................... 201,837 270,441 363,798 201,837 270,441 363,798
10..................................................... 222,906 308,061 428,737 222,906 308,061 428,737
15..................................................... 318,969 517,685 864,357 318,969 517,685 864,357
20..................................................... 398,602 767,482 1,470,068 398,602 767,482 1,470,068
30..................................................... 490,288 1,401,737 3,800,149 490,288 1,401,737 3,800,149
55..................................................... 0 2,618,167 41,393,919 0 2,618,167 41,393,919
</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 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 US 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> 100
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 29,115 516,290 517,309 518,331
2....................................................... 27,729 59,687 540,235 543,766 547,427
3....................................................... 27,729 91,786 563,685 571,258 579,401
4....................................................... 27,729 125,491 586,638 599,820 614,543
5....................................................... 27,729 160,881 609,081 629,480 653,162
6....................................................... 27,729 198,041 631,012 660,277 695,610
7....................................................... 27,729 237,058 652,403 692,226 742,248
8....................................................... 27,729 278,027 673,228 725,342 793,478
9....................................................... 27,729 321,043 693,466 759,648 849,745
10....................................................... 27,729 366,211 713,080 795,150 911,527
15....................................................... 27,729 628,270 800,893 991,226 1,324,068
20....................................................... 27,729 962,730 867,752 1,218,392 1,885,420
30....................................................... 27,729 1,934,397 895,226 1,738,325 3,959,944
55....................................................... 0 7,476,716 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..................................................... 16,290 17,309 18,331 16,290 17,309 18,331
2..................................................... 40,235 43,766 47,427 40,235 43,766 47,427
3..................................................... 63,685 71,258 79,401 63,685 71,258 79,401
4..................................................... 86,638 99,820 114,543 86,638 99,820 114,543
5..................................................... 109,081 129,480 153,162 109,081 129,480 153,162
6..................................................... 131,012 160,277 195,610 131,012 160,277 195,610
7..................................................... 152,403 192,226 242,248 152,403 192,226 242,248
8..................................................... 173,228 225,342 293,478 173,228 225,342 293,478
9..................................................... 193,466 259,648 349,745 193,466 259,648 349,745
10..................................................... 213,080 295,150 411,527 213,080 295,150 411,527
15..................................................... 300,893 491,226 824,068 300,893 491,226 824,068
20..................................................... 367,752 718,392 1,385,420 367,752 718,392 1,385,420
30..................................................... 395,226 1,238,325 3,459,944 395,226 1,238,325 3,459,944
55..................................................... 0 0 33,124,159 0 0 33,124,159
</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 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 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 US 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> 101
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their positions with us 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 our indirect
parent, Merrill Lynch & Co., Inc. The principal positions of our 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.
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.
Our shares are not owned by any of our officers or directors, as we are a wholly
owned subsidiary of MLIG. Our officers and directors, 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
We and MLIG, are parties to a service agreement pursuant to which MLIG has
agreed to provide certain accounting, data processing, legal, actuarial,
management, advertising and other services to us, including services related to
the Separate Account and the Contracts. We reimburse expenses incurred by MLIG
under this service agreement on an allocated cost basis. Charges billed to us by
MLIG under the agreement were $43.2 million for the year ended December 31,
1998.
STATE REGULATION
We are subject to the laws of the State of Arkansas and to the regulations of
the Arkansas Insurance Department (the "Insurance Department"). We file a
detailed financial statement in the prescribed form (the "Annual Statement")
with the Insurance Department each year covering our operations for the
preceding year and our 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
46
<PAGE> 102
correct. Our books and accounts are subject to review by the Insurance
Department at all times. A full examination of our operations is conducted
periodically by the Insurance Department and under the auspices of the National
Association of Insurance Commissioners. We are also subject to the insurance
laws and regulations of all jurisdictions in which we are 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 we or the other service providers use do not
properly address this problem before 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. Substantial
resources are being devoted to this effort. It is difficult to predict whether
the amount of resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on us. Currently, we don't anticipate that the
transition to the 21st century will have any material impact on our ability to
continue to service the Contracts at current levels. In addition, we have 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. We will continue to monitor the situation. At this time, however, we
cannot give assurance 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. We and MLPF&S are engaged
in various kinds of routine litigation that, in our judgment, is not material to
our total assets or to MLPF&S.
EXPERTS
Our financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 and of the Separate Account as
of December 31, 1998 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., our Chief Actuary and Chief Financial Officer, 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,
our Senior Vice President and General Counsel. Sutherland Asbill & Brennan LLP
of Washington, D.C. has provided advice on certain matters relating to federal
securities laws.
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
Our financial statements, included herein, should be distinguished from the
financial statements of the Separate Account and should be considered only as
bearing upon our ability to meet our obligations under the Contracts.
47
<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, 1998 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 (the "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, 1998. 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, 1998 and the results of its operations and
the changes in its net assets for each of the three years in
the period then ended 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.
February 4, 1999
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS: Cost Shares Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in Merrill Lynch Series Fund, Inc. (Note 1):
Money Reserve Portfolio $ 86,585,835 86,585,835 $ 86,585,835
Intermediate Government Bond Portfolio 21,343,673 1,941,670 21,979,706
Long-Term Corporate Bond Portfolio 21,965,632 1,903,747 22,673,624
Capital Stock Portfolio 40,157,899 1,759,745 47,565,902
Growth Stock Portfolio 45,212,262 1,723,506 63,252,677
Multiple Strategy Portfolio 28,639,028 1,754,015 31,870,459
High Yield Portfolio 32,281,551 3,584,085 28,314,275
Natural Resources Portfolio 1,812,547 218,219 1,496,986
Global Strategy Portfolio 42,573,590 2,749,630 43,994,080
Balanced Portfolio 13,776,731 962,481 15,572,940
--------------------- ---------------------
334,348,748 363,306,484
--------------------- ---------------------
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Global Utility Focus Fund 2,684,153 182,299 3,113,667
International Equity Focus Fund 10,865,894 986,194 10,532,548
Global Bond Focus Fund 1,349,087 141,774 1,403,561
Basic Value Focus Fund 51,905,445 3,671,360 53,858,851
Developing Capital Markets Focus Fund 5,327,376 544,303 3,499,867
Special Value Focus Fund 4,478,605 191,550 3,821,418
Index 500 Fund 12,434,362 879,576 14,274,760
--------------------- ---------------------
89,044,922 90,504,672
--------------------- ---------------------
Investments in Alliance
Variable Products Series Fund, Inc. (Note 1):
Premier Growth Portfolio 19,503,725 798,385 24,773,881
--------------------- ---------------------
19,503,725 24,773,881
--------------------- ---------------------
Investments in MFS Variable Insurance Trust (Note 1):
MFS Emerging Growth Series 8,618,103 485,272 10,418,786
MFS Research Series 8,497,279 507,047 9,659,247
--------------------- ---------------------
17,115,382 20,078,033
--------------------- ---------------------
Investments in AIM Variable Insurance Funds, Inc. (Note 1):
AIM V.I. Value Fund 11,990,076 528,360 13,869,452
AIM V.I. Capital Appreciation Fund 3,785,782 164,933 4,156,320
--------------------- ---------------------
15,775,858 18,025,772
--------------------- ---------------------
</TABLE>
(continued)
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998 (continued)
<TABLE>
<CAPTION>
Cost Units Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities, Series A through K (Note 1):
1999 Trust 927,818 1,182,644 1,177,227
2000 Trust 738,402 971,580 926,022
2001 Trust 277,131 352,080 320,868
2002 Trust 605,383 864,864 751,549
2003 Trust 254,055 372,581 302,178
2004 Trust 976,985 1,582,037 1,248,718
2005 Trust 621,857 1,061,762 804,147
2006 Trust 336,924 573,077 421,487
2007 Trust 201,726 361,461 251,219
2008 Trust 445,286 888,718 573,703
2009 Trust 71,344 162,017 98,779
2010 Trust 758,153 1,345,565 764,039
2011 Trust 163,044 436,263 235,359
2013 Trust 282,043 757,106 359,413
2014 Trust 3,751,251 11,348,708 5,011,703
--------------------- ---------------------
10,411,402 13,246,411
--------------------- ---------------------
TOTAL ASSETS $ 486,200,037 529,935,253
===================== =====================
LIABILITIES:
Payable to Merrill Lynch Life Insurance Company 10,341,771
---------------------
TOTAL LIABILITIES 10,341,771
---------------------
NET ASSETS $ 519,593,482
=====================
</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, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 43,140,141 $ 18,534,136 $ 12,043,745
Mortality and Expense Charges (Note 3) (4,032,700) (2,791,171) (1,751,522)
Transaction Charges (Note 3) (42,609) (36,928) (28,838)
--------------------- --------------------- ---------------------
Net Investment Income 39,064,832 15,706,037 10,263,385
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses) on Investments:
Net Realized Gains (Losses) 4,254,287 2,063,224 (45,179)
Net Change in Unrealized Gains 9,022,651 18,236,659 8,986,838
--------------------- --------------------- ---------------------
Net Gain on Investments 13,276,938 20,299,883 8,941,659
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Operations 52,341,770 36,005,920 19,205,044
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 115,096,996 99,960,767 70,164,840
Transfers of Policy Loading, Net (Note 3) 4,617,057 4,809,499 3,408,619
Transfers Due to Deaths (3,013,716) (1,185,686) (813,683)
Transfers Due to Other Terminations (5,398,486) (3,656,934) (2,808,710)
Transfers Due to Policy Loans (4,179,365) (2,605,297) (2,600,351)
Transfers of Cost of Insurance (7,106,344) (4,830,049) (3,101,640)
Transfers of Loan Processing Charges (111,109) (75,863) (50,705)
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Principal Transactions 99,905,033 92,416,437 64,198,370
--------------------- --------------------- ---------------------
Increase in Net Assets 152,246,803 128,422,357 83,403,414
Net Assets Beginning Balance 367,346,679 238,924,322 155,520,908
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 519,593,482 $ 367,346,679 $ 238,924,322
===================== ===================== =====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Merrill Lynch Variable Life Separate Account ("Account"),
a separate account of Merrill Lynch Life Insurance
Company ("Merrill Lynch Life"),was established to support
Merrill Lynch Life's 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 Lynch &
Co."). The Account is registered as a unit investment
trust under the Investment Company Act of 1940 and
consists of thirty - seven investment divisions (thirty-
eight during the year). The investment divisions are as
follows:
Merrill Lynch Series Fund, Inc.: Ten of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the Merrill Lynch Series Fund,
Inc. ("Merrill Series Fund"). The investment advisor to
the funds of the Merrill Series Fund is Merrill Lynch
Asset Management, L.P. ("MLAM"), an indirect subsidiary
of Merrill Lynch & Co.
Merrill Lynch Variable Series Funds, 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. ("Merrill Variable Funds").
The investment advisor to the funds of the Merrill
Variable funds is MLAM.
Alliance Variable Products Series Fund, Inc.: One of
the investment divisions invests in the securities of a
single mutual fund portfolio of the Alliance Variable
Products Series Fund, Inc.("Alliance Variable Fund").
The investment advisor to the fund of the Alliance
Variable Fund is Alliance Capital Management L.P.
MFS Variable Insurance Trust: Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the MFS Variable Insurance
Trust ("MFS Variable Trust"). The investment advisor to
the funds of the MFS Variable Trust is Massachusetts
Financial Services Company.
AIM Variable Insurance Funds: Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the AIM Variable Insurance
Funds,Inc.("AIM Variable Funds").The investment advisor
to the funds of the AIM Variable Funds is AIM Advisors,
Inc.
The Merrill Lynch Fund of Stripped (" Zero") U.S.
Treasury Securities, Series A through K: Fifteen of the
investment divisions (sixteen 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 ("Merrill Zero Trusts").
Each trust of the Merrill 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. Merrill Zero Trusts are sponsored
by Merrill Lynch, Pierce,Fenner & Smith Inc.("MLPF&S"),
a wholly-owned subsidiary of Merrill Lynch & Co.
The assets of the Account are registered in the name of
Merrill Lynch Life. The portion of the Account's assets
applicable 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. SIGNIFICANT ACCOUNTING POLICIES
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.
Investment transactions are recorded on the trade date.
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 that 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. CHARGES AND FEES
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 is 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.
. Merrill Lynch Life pays all transaction charges to MLPF&S
on the sale of Zero Trusts 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.
4. OTHER
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, 1998
<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 $ 43,140,141 $ 3,784,922 $ 1,186,920 $ 1,163,464
Mortality and Expense Charges (4,032,700) (571,710) (169,923) (165,743)
Transaction Charges (42,609) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 39,064,832 3,213,212 1,016,997 997,721
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 4,254,287 0 88,736 2,505
Net Change in Unrealized Gains (Losses) 9,022,651 0 307,577 314,402
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 13,276,938 0 396,313 316,907
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 52,341,770 3,213,212 1,413,310 1,314,628
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 115,096,996 90,763,244 501,432 767,159
Transfers of Policy Loading, Net 4,617,057 5,761,930 (94,769) (85,276)
Transfers Due to Deaths (3,013,716) (659,242) (41,709) (44,002)
Transfers Due to Other Terminations (5,398,486) (895,577) (125,850) (149,634)
Transfers Due to Policy Loans (4,179,365) (791,727) (201,618) (141,339)
Transfers of Cost of Insurance (7,106,344) (1,267,360) (239,342) (257,209)
Transfers of Loan Processing Charges (111,109) (21,627) (2,317) (4,170)
Transfers Among Investment Divisions 0 (70,544,251) 4,025,316 6,191,523
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 99,905,033 22,345,390 3,821,143 6,277,052
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 152,246,803 25,558,602 5,234,453 7,591,680
Net Assets Beginning Balance 367,346,679 50,859,418 16,710,222 15,074,395
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 519,593,482 $ 76,418,020 $ 21,944,675 $ 22,666,075
===================== ===================== ===================== =====================
</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, 1998
<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 $ 4,910,196 $ 8,255,444 $ 3,777,893 $ 2,782,900
Mortality and Expense Charges (384,794) (468,862) (272,772) (261,160)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 4,525,402 7,786,582 3,505,121 2,521,740
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 622,301 1,652,032 (12,684) (240,001)
Net Change in Unrealized Gains (Losses) 798,294 7,267,892 (652,635) (4,269,509)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 1,420,595 8,919,924 (665,319) (4,509,510)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 5,945,997 16,706,506 2,839,802 (1,987,770)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,845,144 3,842,590 1,631,368 1,690,810
Transfers of Policy Loading, Net (94,382) (114,341) (115,876) (100,463)
Transfers Due to Deaths (230,259) (247,841) (169,612) (329,226)
Transfers Due to Other Terminations (686,343) (453,901) (600,699) (322,159)
Transfers Due to Policy Loans (536,062) (391,815) (164,457) (208,837)
Transfers of Cost of Insurance (620,516) (797,583) (455,610) (431,770)
Transfers of Loan Processing Charges (10,890) (17,291) (5,454) (7,336)
Transfers Among Investment Divisions 2,395,537 2,089,356 1,166,213 5,434,295
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 3,062,229 3,909,174 1,285,873 5,725,314
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,008,226 20,615,680 4,125,675 3,737,544
Net Assets Beginning Balance 38,543,874 42,621,459 27,734,941 24,565,637
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 47,552,100 $ 63,237,139 $ 31,860,616 $ 28,303,181
===================== ===================== ===================== =====================
</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, 1998
<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 $ 50,415 $ 6,432,490 $ 1,194,303 $ 154,262
Mortality and Expense Charges (16,413) (382,968) (128,481) (22,067)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 34,002 6,049,522 1,065,822 132,195
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (177,750) 38,112 84,875 341,481
Net Change in Unrealized Gains (Losses) (86,387) (2,688,064) 497,741 52,645
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (264,137) (2,649,952) 582,616 394,126
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (230,135) 3,399,570 1,648,438 526,321
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 69,914 3,451,783 664,904 111,728
Transfers of Policy Loading, Net (7,687) (115,886) (70,497) (8,674)
Transfers Due to Deaths (14,856) (312,128) (102,541) (181,968)
Transfers Due to Other Terminations (37,332) (796,317) (146,013) 8,662
Transfers Due to Policy Loans (4,856) (232,828) (52,985) (22,854)
Transfers of Cost of Insurance (25,346) (699,514) (218,141) (35,313)
Transfers of Loan Processing Charges (210) (10,920) (3,053) (1,036)
Transfers Among Investment Divisions (481,598) 7,379 1,688,726 780,958
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (501,971) 1,291,569 1,760,400 651,503
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (732,106) 4,691,139 3,408,838 1,177,824
Net Assets Beginning Balance 2,228,469 39,288,309 12,159,367 1,934,920
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 1,496,363 $ 43,979,448 $ 15,568,205 $ 3,112,744
===================== ===================== ===================== =====================
</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, 1998
<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 $ 878,329 $ 68,920 $ 6,396,025 $ 72,168
Mortality and Expense Charges (99,996) (10,846) (451,849) (41,977)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 778,333 58,074 5,944,176 30,191
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (477,812) 965 809,105 (354,595)
Net Change in Unrealized Gains (Losses) 303,555 73,408 (3,348,639) (1,267,972)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (174,257) 74,373 (2,539,534) (1,622,567)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 604,076 132,447 3,404,642 (1,592,376)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 944,661 99,868 3,320,167 479,712
Transfers of Policy Loading, Net (15,821) (912) (149,703) (3,984)
Transfers Due to Deaths (3,996) 0 (322,056) 0
Transfers Due to Other Terminations (79,523) (4,048) (238,988) (124,916)
Transfers Due to Policy Loans (39,056) (2,021) (804,084) (69,653)
Transfers of Cost of Insurance (178,969) (19,010) (797,844) (69,597)
Transfers of Loan Processing Charges (1,715) (96) (8,750) (1,004)
Transfers Among Investment Divisions (1,057,338) 191,053 8,620,910 (766,164)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (431,757) 264,834 9,619,652 (555,606)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 172,319 397,281 13,024,294 (2,147,982)
Net Assets Beginning Balance 10,379,700 1,005,816 40,836,639 5,656,322
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 10,552,019 $ 1,403,097 $ 53,860,933 $ 3,508,340
===================== ===================== ===================== =====================
</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, 1998
<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 $ 825,649 $ 271,124 $ 13,280 $ 47,674
Mortality and Expense Charges (35,524) (85,396) (128,005) (59,653)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 790,125 185,728 (114,725) (11,979)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (261,247) 236,637 716,239 238,795
Net Change in Unrealized Gains (Losses) (835,245) 1,545,430 5,075,031 1,735,700
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (1,096,492) 1,782,067 5,791,270 1,974,495
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (306,367) 1,967,795 5,676,545 1,962,516
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 193,130 400,013 1,074,723 673,718
Transfers of Policy Loading, Net (9,818) (41,068) (29,864) 6,204
Transfers Due to Deaths (174,493) 0 0 0
Transfers Due to Other Terminations 8,829 (292,386) (115,677) (85,357)
Transfers Due to Policy Loans (5,789) (13,850) (74,234) (110,624)
Transfers of Cost of Insurance (51,015) (132,596) (228,224) (142,709)
Transfers of Loan Processing Charges (377) (1,941) (3,152) (1,093)
Transfers Among Investment Divisions 614,892 7,922,238 12,406,559 4,787,878
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 575,359 7,840,410 13,030,131 5,128,017
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 268,992 9,808,205 18,706,676 7,090,533
Net Assets Beginning Balance 3,550,887 4,451,059 6,034,863 3,299,653
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,819,879 $ 14,259,264 $ 24,741,539 $ 10,390,186
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
AIM V.I.
MFS AIM V.I. Capital
Research Value Appreciation 1998
Series Fund Fund Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 128,956 $ 633,881 $ 110,926 $ 0
Mortality and Expense Charges (60,287) (76,327) (25,006) (1,138)
Transaction Charges 0 0 0 (413)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 68,669 557,554 85,920 (1,551)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 96,489 102,600 28,813 175,810
Net Change in Unrealized Gains (Losses) 1,094,848 1,953,097 420,487 (169,636)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 1,191,337 2,055,697 449,300 6,174
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 1,260,006 2,613,251 535,220 4,623
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 473,646 470,081 222,692 0
Transfers of Policy Loading, Net (13,727) (25,861) 610 (3,347)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (36,242) (18,603) (3,871) (142)
Transfers Due to Policy Loans (119,989) (55,689) (6,050) 0
Transfers of Cost of Insurance (113,258) (132,127) (45,690) (559)
Transfers of Loan Processing Charges (1,614) (1,575) (510) 115
Transfers Among Investment Divisions 4,795,291 7,512,526 2,105,081 (1,009,553)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 4,984,107 7,748,752 2,272,262 (1,013,486)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 6,244,113 10,362,003 2,807,482 (1,008,863)
Net Assets Beginning Balance 3,412,214 3,503,328 1,347,537 1,008,863
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 9,656,327 $ 13,865,331 $ 4,155,019 $ 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1999 2000 2001 2002
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (11,024) (8,358) (2,797) (6,610)
Transaction Charges (4,155) (3,152) (1,055) (2,493)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (15,179) (11,510) (3,852) (9,103)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 31,978 30,788 3,390 7,762
Net Change in Unrealized Gains (Losses) 37,736 32,216 20,788 58,057
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 69,714 63,004 24,178 65,819
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 54,535 51,494 20,326 56,716
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 6,973 10,886 1,134 0
Transfers of Policy Loading, Net (9,434) (8,167) (1,588) (3,083)
Transfers Due to Deaths 0 (41,368) 0 0
Transfers Due to Other Terminations (46,021) (16,217) 5 61
Transfers Due to Policy Loans 0 (8,043) (8,561) (3,284)
Transfers of Cost of Insurance (14,275) (10,985) (3,965) (8,029)
Transfers of Loan Processing Charges (830) (315) (438) (110)
Transfers Among Investment Divisions (36,492) 12,309 15,559 (2,238)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (100,079) (61,900) 2,146 (16,683)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance (45,544) (10,406) 22,472 40,033
1,222,269 936,029 298,247 711,189
Net Assets Ending Balance --------------------- --------------------- --------------------- ---------------------
$ 1,176,725 $ 925,623 $ 320,719 $ 751,222
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2003 2004 2005 2006
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (3,169) (11,146) (6,986) (2,956)
Transaction Charges (1,194) (4,203) (2,634) (1,118)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (4,363) (15,349) (9,620) (4,074)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 36,875 82,668 27,351 7,005
Net Change in Unrealized Gains (Losses) 3,077 53,907 64,056 34,865
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 39,952 136,575 91,407 41,870
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 35,589 121,226 81,787 37,796
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 6,690 15,109 16,282 39,242
Transfers of Policy Loading, Net (12,446) (9,249) (6,280) (90)
Transfers Due to Deaths (94,266) 0 (44,153) 0
Transfers Due to Other Terminations (590) (97,003) 176 40
Transfers Due to Policy Loans (3,337) (9,730) 0 0
Transfers of Cost of Insurance (4,870) (13,052) (9,023) (2,284)
Transfers of Loan Processing Charges (1,023) (509) (28) (17)
Transfers Among Investment Divisions 25,606 (11,873) 3,618 49,273
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (84,236) (126,307) (39,408) 86,164
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (48,647) (5,081) 42,379 123,960
Net Assets Beginning Balance 351,245 1,253,270 763,251 297,331
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 302,598 $ 1,248,189 $ 805,630 $ 421,291
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2007 2008 2009 2010
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (1,864) (4,472) (774) (6,108)
Transaction Charges (704) (1,689) (292) (2,310)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (2,568) (6,161) (1,066) (8,418)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 3,665 4,208 6,806 107,549
Net Change in Unrealized Gains (Losses) 23,688 67,650 6,024 (5,222)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 27,353 71,858 12,830 102,327
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 24,785 65,697 11,764 93,909
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 20,803 47,517 13,806 7,454
Transfers of Policy Loading, Net (468) (200) 0 456
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (18) (28) (3) (77)
Transfers Due to Policy Loans 0 0 0 457
Transfers of Cost of Insurance (1,987) (5,032) (1,585) (6,557)
Transfers of Loan Processing Charges (9) (418) (3) (135)
Transfers Among Investment Divisions 26,618 46,745 (6,614) 126,478
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 44,939 88,584 5,601 128,076
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 69,724 154,281 17,365 221,985
Net Assets Beginning Balance 181,369 419,161 81,351 541,624
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 251,093 $ 573,442 $ 98,716 $ 763,609
===================== ===================== ===================== =====================
</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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
------------------------------------------------------------------
2011 2013 2014
Trust Trust Trust
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ $ 0
Mortality and Expense Charges (1,662) (2,391) (41,486)
Transaction Charges (628) (905) (15,664)
--------------------- --------------------- ---------------------
Net Investment Income (Loss) (2,290) (3,296) (57,150)
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 2,460 1,919 188,457
Net Change in Unrealized Gains (Losses) 24,821 35,201 443,767
--------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 27,281 37,120 632,224
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 24,991 33,824 575,074
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 2,561 58,559 157,493
Transfers of Policy Loading, Net (925) 8,492 (6,749)
Transfers Due to Deaths 0 0 0
Transfers Due to Other Terminations (85) (119) (42,520)
Transfers Due to Policy Loans 0 0 (96,450)
Transfers of Cost of Insurance (2,399) (2,072) (60,927)
Transfers of Loan Processing Charges (8) (53) (1,197)
Transfers Among Investment Divisions 41,671 58,079 774,434
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 40,815 122,886 724,084
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 65,806 156,710 1,299,158
Net Assets Beginning Balance 169,440 202,538 3,710,473
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 235,246 $ 359,248 $ 5,009,631
===================== ===================== =====================
</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
-----------------------------------------------------------------
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)
on Investments:
Net Realized Gains (Losses) 2,063,224 0 28,903 (129,911)
Net Change in Unrealized Gains (Losses) 18,236,659 0 202,623 399,513
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 177,958 519,115 (43,217) 66,054
Net Change in Unrealized Gains (Losses) 4,630,014 6,064,599 2,796,441 (5,499)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 111,013 196,560 49,619 49,962
Net Change in Unrealized Gains (Losses) (413,042) 1,050,704 545,849 269,176
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (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)
on Investments:
Net Realized Gains (Losses) 193,102 (8,217) 319,132 87,634
Net Change in Unrealized Gains (Losses) (1,033,706) (32,725) 2,665,523 (718,388)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (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)
on Investments:
Net Realized Gains (Losses) 25,948 4,833 17,322 31,933
Net Change in Unrealized Gains (Losses) 139,551 294,968 195,126 64,983
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 14,825 7,233 18,270 32,599
Net Change in Unrealized Gains (Losses) 67,120 (73,720) (49,949) (30,951)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 5,521 9,645 14,192 3,810
Net Change in Unrealized Gains (Losses) 49,493 61,471 45,718 14,238
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 6,813 5,427 38,160 10,438
Net Change in Unrealized Gains (Losses) 48,467 22,626 73,112 69,622
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 1,717 801 3,163 9,593
Net Change in Unrealized Gains (Losses) 27,825 19,338 47,651 (248)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 85,341 73,982 479 23,472
Net Change in Unrealized Gains (Losses) (3,039) 49,240 31,648 651,287
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (45,179) 0 18,190 (69,537)
Net Change in Unrealized Gains (Losses) 8,986,838 0 (494,507) (262,935)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (192,580) 76,061 (205,247) (38,619)
Net Change in Unrealized Gains (Losses) 677,575 2,799,507 511,360 263,711
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 88,450 51,512 16,557 6,978
Net Change in Unrealized Gains (Losses) 143,526 2,581,792 341,710 68,172
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 1,353 347 54,169 (2,241)
Net Change in Unrealized Gains (Losses) 266,897 7,902 1,807,802 (796)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (20,703) (914) 10,567 1,373
Net Change in Unrealized Gains (Losses) 250,904 38,506 (9,400) 14,566
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 6,017 5,854 12,442 700
Net Change in Unrealized Gains (Losses) 37,385 37,303 12,222 4,215
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 3,431 936 17,968 48,027
Net Change in Unrealized Gains (Losses) 10,227 4,471 (10,934) (65,787)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 655 202 2,072 542
Net Change in Unrealized Gains (Losses) 3,403 (764) (4,484) (1,142)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (1,501) 3,521 2,269 55,970
Net Change in Unrealized Gains (Losses) 5,242 (124,824) (1,550) 75,563
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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>
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, 1998
and 1997, 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, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted
accounting principles.
February 22, 1999
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------- ------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,504,599; 1997 - $2,927,562) $ 2,543,097 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $162,710; 1997 - $72,599) 158,591 73,612
Trading account securities, at estimated fair value 17,280 15,625
Real estate held-for-sale 25,960 31,805
Policy loans on insurance contracts 1,139,456 1,118,139
------------- -------------
Total Investments 3,884,384 4,247,789
CASH AND CASH EQUIVALENTS 95,377 86,388
ACCRUED INVESTMENT INCOME 73,459 78,224
DEFERRED POLICY ACQUISITION COSTS 405,640 365,105
FEDERAL INCOME TAXES - DEFERRED 9,403 -
REINSURANCE RECEIVABLES 2,893 1,617
AFFILIATED RECEIVABLES - NET - 166
RECEIVABLES FROM SECURITIES SOLD 14,938 75,820
OTHER ASSETS 46,512 49,353
SEPARATE ACCOUNTS ASSETS 10,571,489 9,149,119
------------- -------------
TOTAL ASSETS $ 15,104,095 $ 14,053,581
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------ ------------- -------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,816,744 $ 4,188,110
Claims and claims settlement expenses 63,925 50,574
------------- -------------
Total policy liabilities and accruals 3,880,669 4,238,684
OTHER POLICYHOLDER FUNDS 20,802 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 13,864 15,374
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 15,840 24,438
AFFILIATED PAYABLES - NET 822 -
PAYABLES FOR SECURITIES PURCHASED 10,541 95,135
UNEARNED POLICY CHARGE REVENUE 55,235 32,102
OTHER LIABILITIES 24,273 22,332
SEPARATE ACCOUNTS LIABILITIES 10,559,459 9,149,119
------------- -------------
Total Liabilities 14,581,505 13,605,527
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 173,496 80,735
Accumulated other comprehensive income (loss) (230) 17,995
------------- -------------
Total Stockholder's Equity 522,590 448,054
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,104,095 $ 14,053,581
============= =============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 272,038 $ 308,702 $ 336,661
Net realized investment gains 12,460 13,289 8,862
Policy charge revenue 197,662 178,933 158,829
------------ ------------ ------------
Total Revenues 482,160 500,924 504,352
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 195,676 209,542 235,255
Market value adjustment expense 5,528 4,079 6,071
Policy benefits (net of reinsurance recoveries: 1998 - $9,761;
1997 - $10,439; 1996 - $8,317) 31,891 27,029 21,052
Reinsurance premium ceded 19,972 17,879 15,582
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Insurance expenses and taxes 51,735 49,105 47,077
------------ ------------ ------------
Total Benefits and Expenses 349,637 379,745 387,073
------------ ------------ ------------
Earnings Before Federal Income Tax Provision 132,523 121,179 117,279
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 40,535 52,705 22,814
Deferred (773) (12,261) 15,078
------------ ------------ ------------
Total Federal Income Tax Provision 39,762 40,444 37,892
------------ ------------ ------------
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
============ ============ ============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (31,718) 22,347 (79,749)
Reclassification adjustment for gains included in net earnings (15,932) (12,390) (8,622)
------------ ------------ ------------
Net unrealized gains (losses) on investment securities (47,650) 9,957 (88,371)
Adjustments for:
Policyholder liabilities 14,483 10,094 58,415
Deferred policy acquisition costs 5,129 (822) 12,411
Income tax (expense) benefit related to items of
other comprehensive income 9,813 (6,730) 6,141
------------ ------------ ------------
Other comprehensive income (loss), net of tax (18,225) 12,499 (11,404)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 74,536 $ 93,234 $ 67,983
============ ============ ============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholder's
Stock Capital Earnings Income (loss) Equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 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 loss, net of tax (11,404) (11,404)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 498,820
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
Net earnings 92,761 92,761
Other comprehensive loss, net of tax (18,225) (18,225)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1998 $ 2,000 $ 347,324 $ 173,496 $ (230) $ 522,590
=========== =========== =========== ============ =============
</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, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 92,761 $ 80,735 $ 79,387
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Capitalization of policy acquisition costs (80,241) (71,577) (43,668)
Amortization (accretion) of investments (5,350) (4,672) (4,836)
Net realized investment gains (12,460) (13,289) (8,862)
Interest credited to policyholders' account balances 195,676 209,542 235,255
Provision (benefit) for deferred Federal income tax (773) (12,261) 15,078
Changes in operating assets and liabilities:
Accrued investment income 4,765 7,962 5,756
Claims and claims settlement expenses 13,351 10,908 9,854
Federal income taxes - current (8,598) 3,470 13,935
Other policyholder funds (6,358) 7,740 5,813
Liability for guaranty fund assessments (1,510) (3,399) (2,371)
Affiliated receivables/payables 988 (6,330) 3,735
Policy loans on insurance contracts (21,317) (26,068) (52,804)
Trading account securities (287) (14,928) -
Unearned policy charge revenue 23,133 11,269 7,801
Other, net 3,506 452 (10,194)
Net cash and cash equivalents provided ----------- ----------- -----------
by operating activities 242,121 251,665 315,915
----------- ----------- -----------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 893,619 846,041 847,091
Maturities of available-for-sale securities 451,759 595,745 536,449
Purchases of available-for-sale securities (1,028,086) (1,156,222) (956,840)
Mortgage loans principal payments received - 68,864 22,789
Purchases of mortgage loans - (5,375) -
Sales of real estate held-for-sale 14,135 6,060 5,407
Recapture of investment in Separate Accounts - 11,026 8,829
Investment in Separate Accounts (12,000) (21) (10,063)
Net cash and cash equivalents provided ----------- ----------- -----------
by investing activities 319,427 366,118 453,662
----------- ----------- -----------
</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, 1998, 1997 AND 1996
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ - $ (135,000) $ (175,000)
Policyholders' account balances:
Deposits 1,042,509 1,101,934 542,062
Withdrawals (including transfers to/from Separate Accounts) (1,595,068) (1,593,320) (1,090,572)
Net cash and cash equivalents used ------------ ------------ ------------
by financing activities (552,559) (626,386) (723,510)
============ ============ ============
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,989 (8,603) 46,067
CASH AND CASH EQUIVALENTS
Beginning of year 86,388 94,991 48,924
------------ ------------ ------------
End of year $ 95,377 $ 86,388 $ 94,991
============ ============ ============
Supplementary Disclosure of Cash Flow Information
Cash paid to affiliates for:
Federal income taxes $ 49,133 $ 49,235 $ 8,880
Interest 860 842 988
</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
Description of Business: 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 primarily 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.
Basis of Reporting: 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.
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.
To facilitate comparisons with the current year, certain
amounts in the prior years have been reclassified.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for mortality
risk and the cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
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 as a component of accumulated other
comprehensive income (loss), net of tax. Unrealized gains and
losses on trading account securities are included in net
realized investment gains (losses). 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.
All outstanding mortgage loans were repaid during 1997. The
Company recognized income from mortgage loans based on the cash
payment interest rate of the loan, which may have been
different from the accrual interest rate of the loan for
certain 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 (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.
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.
<PAGE>
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 7.5%. 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:
1998 1997 1996
----------- ----------- -----------
Beginning balance $ 102,252 $ 112,249 $ 124,833
Capitalized amounts 6,085 5,077 5,077
Interest accrued 7,669 9,653 10,669
Amortization (14,213) (24,727) (28,330)
----------- ----------- -----------
Ending balance $ 101,793 $ 102,252 $ 112,249
=========== =========== ===========
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.
1999 $ 7,045
2000 $ 6,110
2001 $ 5,670
2002 $ 5,400
2003 $ 5,386
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. At December 31, 1998, the
$12,030 excess of Separate Accounts Assets over Separate
Accounts liabilities represents the Company's temporary
investment in certain investment divisions that were made to
facilitate the establishment of those investment divisions.
Net investment income and net realized and unrealized gains
(losses) attributable to Separate Accounts assets accrue
directly to the policyholder and are not reported as revenue in
the Company's Statement of Earnings.
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.
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:
<PAGE>
Interest-sensitive life products 4.00% - 5.70%
Interest-sensitive deferred annuities 3.40% - 8.69%
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.
Claims and Claims Settlement Expenses: For life insurance
products, the liability equals the death benefit for claims
that have been reported to the Company and an estimate based
upon prior experience for unreported claims. For annuity
products, the liability equals the guaranteed minimum death
benefit reserve.
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.
Unearned Policy Charge Revenue: Certain variable life insurance
products contain policy charges that are assessed at policy
issuance. These policy charges are deferred and amortized into
policy charge revenue based on the estimated future gross
profits for each group of contracts. The Company records a
liability equal to the unamortized balance of these policy
charges.
Accounting Pronouncements: During 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This pronouncement requires a Company to
present disaggregated information based on the internal
segments used in managing its business. Adoption did not impact
the Company's financial position or results of operations, but
it did affect the presentation of the Company's disclosures
(See Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities". This
pronouncement will be effective for annual periods beginning
after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial
position or results of operations.
<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:
1998 1997
------------ -------------
Assets:
Fixed maturity securities (1) $ 2,543,097 $ 3,008,608
Equity securities (1), (2) 158,591 73,612
Trading account securities (1) 17,280 15,625
Policy loans on insurance contracts (3) 1,139,456 1,118,139
Cash and cash equivalents (4) 95,377 86,388
Separate Accounts assets (5) 10,571,489 9,149,119
------------- -------------
Total financial instruments $ 14,525,290 $ 13,451,491
============= =============
(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, 1998 and 1997, securities without a
readily ascertainable market value, having an amortized cost of
$376,993 and $389,728, had an estimated fair value of $375,470
and $396,253, respectively.
(2) The Company has investments in two limited partnerships that
do not have readily ascertainable market values. Management has
estimated the fair value as equal to cost based on the review of
the underlying investments of the partnerships. At December 31,
1998 and 1997, the Company's limited partnership investments were
$11,569 and $4,744, respectively.
(3) 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.
(4) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(5) 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>
1998
-----------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,079,867 $ 56,703 $ 29,078 $ 2,107,492
Mortgage-backed securities 229,197 7,908 43 237,062
U.S. Government and agencies 150,500 6,393 1,328 155,565
Foreign governments 21,157 35 2,996 18,196
Municipals 23,878 905 1 24,782
------------ ------------ ------------ ------------
Total fixed maturity securities $ 2,504,599 $ 71,944 $ 33,446 $ 2,543,097
============ ============ ============ ============
Equity securities:
Non-redeemable preferred stocks $ 151,130 $ 699 $ 4,823 $ 147,006
Limited partnerships 11,569 - - 11,569
Common stocks 11 5 - 16
------------ ------------ ------------ ------------
Total equity securities $ 162,710 $ 704 $ 4,823 $ 158,591
============ ============ ============ ============
</TABLE>
<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
Limited partnerships 4,744 - - 4,744
Common stocks 10 11 - 21
------------ ------------ ------------ ------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============ ============ ============ ============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1998 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------ ------------
Fixed maturity securities:
Due in one year or less $ 383,825 $ 383,628
Due after one year through five years 926,665 950,938
Due after five years through ten years 599,278 610,339
Due after ten years 365,634 361,130
------------ ------------
2,275,402 2,306,035
Mortgage-backed securities 229,197 237,062
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
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, 1998 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------ ------------
AAA $ 479,923 $ 495,661
AA 146,703 148,169
A 756,880 773,977
BBB 992,041 1,005,835
Non-investment grade 129,052 119,455
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
<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 available-for-sale
investments had actually been realized, with corresponding
credits or charges reported in stockholder's equity as a
component of accumulated other comprehensive income (loss), net
of taxes. The following reconciles net unrealized investment
gains (losses) on available-for-sale investments at December 31:
1998 1997
------------ ------------
Assets:
Fixed maturity securities $ 38,498 $ 81,046
Equity securities (4,119) 1,013
Deferred policy acquisition costs (323) (5,452)
Federal income taxes - deferred 124 -
Separate Accounts assets 30 -
------------ ------------
34,210 76,607
------------ ------------
Liabilities:
Policyholders' account balances 34,440 48,923
Federal income taxes - deferred - 9,689
------------ ------------
34,440 58,612
------------ ------------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ (230) $ 17,995
============ ============
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 included in net
realized investment gains were $932 and $520 at December 31,
1998 and 1997, respectively.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1998 1997 1996
---------- ---------- ----------
Proceeds $ 893,619 $ 846,041 $ 847,091
Gross realized investment gains 20,232 16,783 19,078
Gross realized investment losses 17,429 7,193 10,749
<PAGE>
The Company had investment securities with a carrying value of
$27,189 and $26,508 that were deposited with insurance
regulatory authorities at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the Company's $12,030 investment in
Separate Account assets included $30 of unrealized gains.
During 1997, the Company realized a $1,005 gain on the sale of
its investment in the Separate Accounts.
All outstanding mortgage loans were repaid during 1997.
Information on impaired loans for the years ended December 31
follows:
1997 1996
----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668
Interest income recognized (cash basis) 2,830 4,848
For the years ended December 31, 1997 and 1996, $7,891 and
$28,555, respectively, of real estate held-for-sale was
acquired in satisfaction of debt.
Net investment income arose from the following sources for the
years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 202,313 $ 236,325 $ 266,916
Equity securities 9,234 3,020 1,876
Mortgage loans - 4,627 9,764
Real estate held-for-sale 2,264 1,939 563
Policy loans on insurance contracts 59,236 57,998 56,512
Cash and cash equivalents 3,912 9,570 6,710
Other 761 709 899
------------ ----------- -----------
Gross investment income 277,720 314,188 343,240
Less investment expenses (5,682) (5,486) (6,579)
------------ ----------- -----------
Net investment income $ 272,038 $ 308,702 $ 336,661
============ =========== ===========
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 2,617 $ 6,149 $ 4,690
Equity securities 186 3,441 3,639
Trading account securities 1,368 697 -
Investment in Separate Accounts - 1,005 106
Mortgage loans - 6,252 599
Real estate held-for-sale 8,290 (4,252) (171)
Cash and cash equivalents (1) (3) (1)
------------ ----------- -----------
Net realized investment gains $ 12,460 $ 13,289 $ 8,862
============ =========== ===========
<PAGE>
The following is a reconciliation of the change in valuation
allowances that were recorded to reflect other-than-temporary
declines in the estimated fair value of mortgage loans for the
years ended December 31, 1997 and 1996.
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ----------- ----------- -----------
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Provision for income taxes computed at
Federal statutory rate $ 46,383 $ 42,413 $ 41,048
Decrease in income taxes resulting from:
Dividend received deduction (3,664) (1,969) (3,135)
Foreign tax credit (2,957) - -
Other - - (21)
------------ ------------ ------------
Federal income tax provision $ 39,762 $ 40,444 $ 37,892
============ ============ ============
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1998 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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 11,062 $ (2,422) $ (5,770)
Policyholders' account balances (10,950) (16,099) 15,004
Liability for guaranty fund assessments 529 1,190 760
Investment adjustments (1,350) 5,070 5,122
Other (64) - (38)
------------ ------------ ------------
Deferred Federal income tax
provision (benefit) $ (773) $ (12,261) $ 15,078
============ ============ ============
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 106,132 $ 95,182
Investment adjustments 1,951 601
Liability for guaranty fund assessments 4,852 5,381
Net unrealized investment loss on investment securities 124 -
------------ ------------
Total deferred tax assets 113,059 101,164
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 99,732 88,670
Net unrealized investment gain on investment securities - 9,689
Other 3,924 3,988
------------ ------------
Total deferred tax liabilities 103,656 102,347
------------ ------------
Net deferred tax (asset) liability $ (9,403) $ 1,183
============ ============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
NOTE 5. 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 $750 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 $589 that can be drawn upon for
delinquent reinsurance recoverables.
<PAGE>
As of December 31, 1998, the Company had the following life
insurance in-force:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $13,124,108 $ 3,259,006 $ 1,771 $ 9,866,872 0%
</TABLE>
The Company has 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.
NOTE 6. 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 $43,179, $43,028 and $43,515 for the years
ended December 31, 1998, 1997 and 1996, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG that approximates the daily Federal funds rate. Total
intercompany interest paid was $860, $842 and $988 for 1998,
1997 and 1996, 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
$1,915, $1,913 and $2,279 for 1998, 1997 and 1996,
respectively.
MLIG has entered into agreements with MLAM and Hotchkis & Wiley
("H&W"), a division of MLAM, with respect to administrative
services for the Merrill Lynch Series Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., and Hotchkis & Wiley Variable
Trust (collectively, "the Funds"). The Company invests in the
various mutual fund portfolios of the Funds in connection with
the variable life insurance and annuity contracts the Company
has in-force. Under this agreement, MLAM and H&W pay
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Funds to MLAM
and H&W. The Company received from MLIG its allocable share of
such compensation in the amount of $20,289, $19,057 and $16,514
during 1998, 1997 and 1996, respectively.
<PAGE>
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 $79,117, $72,729 and $42,639 for
1998, 1997 and 1996, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisitions
costs and are being amortized in accordance with the policy
discussed in Note 1.
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 7. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
The Company paid no dividends in 1998. During 1997 and 1996,
the Company paid dividends of $135,000 and $175,000,
respectively, to MLIG. Of these stockholders' dividends,
$110,030 and $175,000 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, 1998 and 1997, approximately $29,707 and
$24,304, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1998 and 1997, were $299,069 and $245,042,
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 1998, 1997 and 1996 was
$55,813, $81,963 and $93,532, 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 that
a life insurance company should have based upon that company's
risk profile. As of December 31, 1998 and 1997, based on the
RBC formula, the Company's total adjusted capital level was
473% and 394%, respectively, of the minimum amount of capital
required to avoid regulatory action.
<PAGE>
In March 1998, the NAIC adopted the Codification of Statutory
Accounting Principles ("Codification"). The Codification,
which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be
effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if,
the state of Arkansas will require adoption of Codification for
the preparation of statutory financial statements.
Codification is not expected to have a material impact on the
Company's capital requirements or statutory financial
statements.
NOTE 8. 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). The Company has utilized public information to
estimate what future assessments it will incur as a result of
insolvencies. At December 31, 1998 and 1997, the Company has
established an estimated liability for future guaranty fund
assessments of $13,864 and $15,374, 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.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1998, $6,569 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 9. SEGMENT INFORMATION
In reporting to management, the Company's operating results are
categorized into two business segments: Life Insurance and
Annuities. The Company's Life Insurance segment consists of
variable life insurance products and interest-sensitive life
products. The Company's Annuity segment consists of variable
annuities and interest sensitive annuities
<PAGE>
The Company's organization is structured in accordance with its
two business segments. Each segment has its own administrative
service center that provides product support to the Company and
customer service support to the Company's policyholders.
Additionally, marketing and sales management functions, within
MLIG, are organized according to these two business segments.
The accounting policies of the business segments are the same
as those described in the summary of significant accounting
policies. All revenue and expense transactions are recorded at
the product level and accumulated at the business segment level
for review by management.
The "Other" category, presented in the following segment
financial information, represents assets and related earnings
that do not support policyholder liabilities.
The following table summarizes each business segment's
contribution to the consolidated amounts:
<TABLE>
<CAPTION>
Life
1998 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 35,228 $ 32,765 $ 8,369 $ 76,362
Other revenues 84,836 124,864 422 210,122
------------ ------------ ------------ ------------
Net revenues 120,064 157,629 8,791 286,484
------------ ------------ ------------ ------------
Policy benefits 18,397 13,494 - 31,891
Reinsurance premiums ceded 19,972 - - 19,972
DAC amortization 13,040 31,795 - 44,835
Other non-interest expenses 18,030 39,233 - 57,263
------------ ------------ ------------ ------------
Total non-interest expenses 69,439 84,522 - 153,961
------------ ------------ ------------ ------------
Net earnings before Federal income
tax provision 50,625 73,107 8,791 132,523
Income tax expense 16,033 20,653 3,076 39,762
------------ ------------ ------------ ------------
Net earnings $ 34,592 $ 52,454 $ 5,715 $ 92,761
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 6,069,649 $ 8,885,981 $ 148,465 $15,104,095
Deferred policy acquisition costs $ 207,713 $ 197,927 $ - $ 405,640
Policy liabilities and accruals $ 2,186,001 $ 1,694,668 $ - $ 3,880,669
Other policyholder funds $ 16,033 $ - $ 4,769 $ 20,802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
1997 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 38,826 $ 47,973 $ 12,361 $ 99,160
Other revenues 86,301 102,782 3,139 192,222
------------ ------------ ------------ ------------
Net revenues 125,127 150,755 15,500 291,382
------------ ------------ ------------ ------------
Policy benefits 15,876 11,153 - 27,029
Reinsurance premiums ceded 17,879 - - 17,879
DAC amortization 36,180 35,931 - 72,111
Other non-interest expenses 16,545 36,639 - 53,184
------------ ------------ ------------ ------------
Total non-interest expenses 86,480 83,723 - 170,203
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 38,647 67,032 15,500 121,179
Income tax expense 12,753 22,265 5,426 40,444
------------ ------------ ------------ ------------
Net earnings $ 25,894 $ 44,767 $ 10,074 $ 80,735
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,925,872 $ 7,998,461 $ 129,248 $14,053,581
Deferred policy acquisition costs $ 182,610 $ 182,495 $ - $ 365,105
Policy liabilities $ 2,229,533 $ 2,009,151 $ - $ 4,238,684
Other policyholder funds $ 18,788 $ - $ 8,372 $ 27,160
</TABLE>
<TABLE>
<CAPTION>
Life
1996 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 40,805 $ 44,994 $ 15,607 $ 101,406
Other revenues 78,759 86,430 2,502 167,691
------------ ------------ ------------ ------------
Net revenues 119,564 131,424 18,109 269,097
------------ ------------ ------------ ------------
Policy benefits 12,150 8,902 - 21,052
Reinsurance premiums ceded 15,582 - - 15,582
DAC amortization 30,988 31,048 - 62,036
Other non-interest expenses 18,169 34,979 - 53,148
------------ ------------ ------------ ------------
Total non-interest expenses 76,889 74,929 - 151,818
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 42,675 56,495 18,109 117,279
Income tax expense 13,895 17,658 6,339 37,892
------------ ------------ ------------ ------------
Net earnings $ 28,780 $ 38,837 $ 11,770 $ 79,387
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,623,370 $ 6,957,228 $ 156,895 $12,737,493
Deferred policy acquisition costs $ 194,979 $ 171,482 $ - $ 366,461
Policy liabilities and accruals $ 2,638,177 $ 1,881,537 $ - $ 4,519,714
Other policyholder funds $ 16,256 $ - $ 3,164 $ 19,420
</TABLE>
<PAGE>
(a) Management considers investment income net of interest
credited to policyholders' account balances in evaluating
results.
The table below summarizes the Company's net revenues by
product for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Life Insurance
Variable life insurance $ 91,806 $ 92,245 $ 89,897
Interest-sensitive life insurance 28,258 32,882 29,667
------------ ------------ ------------
Total Life Insurance 120,064 125,127 119,564
------------ ------------ ------------
Annuities
Variable annuities 105,545 88,509 70,116
Interest-sensitive annuities 52,084 62,246 61,308
------------ ------------ ------------
Total Annuities 157,629 150,755 131,424
------------ ------------ ------------
Other 8,791 15,500 18,109
------------ ------------ ------------
Total $ 286,484 $ 291,382 $ 269,097
============ ============ ============
</TABLE>
<PAGE> 104
PART II. OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
The Insurance Company's By-Laws provide, in Article VI, Section 1, 2, 3 and
4, as follows:
Section 1. Actions Other Than by or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact that he
is or was a director, officer or employee of the Corporation, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 2. Actions by or in the Right of the Corporation. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer or employee of the Corporation, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the Court in which such action or suit was brought
shall determined upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other Court shall deem proper.
Section 3. Right to Indemnification. To the extent that a director,
officer of employee of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections 1
and 2 of this Article, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
Section 4. Determination of Right to Indemnification. Any indemnification
under Sections 1 and 2 of this Article (unless ordered by a Court) shall be made
by the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, or employee is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 and 2 of this Article. Such determination shall be made (i) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders.
Any persons serving as an officer, director or trustee of a corporation,
trust, or other enterprise, including the Registrant, at the request of Merrill
Lynch are entitled to indemnification from Merrill Lynch, to the fullest extent
authorized or permitted by law, for liabilities with respect to actions taken or
omitted by such persons in any capacity in which such persons serve Merrill
Lynch or such other corporation, trust, or other enterprise. Any action
initiated by
II-1
<PAGE> 105
any such person for which indemnification is provided shall be approved by the
Board of Directors of Merrill Lynch prior to such initiation.
DIRECTORS' AND OFFICERS' INSURANCE
Merrill Lynch has purchased from Corporate Officers' and Directors'
Assurance Company directors' and officers' liability insurance policies which
cover, in addition to the Indemnification described above, liabilities for which
indemnification is not provided under the By-Laws. The Company will pay an
allocable portion of the insurance premium paid by Merrill Lynch with respect to
such insurance policies.
ARKANSAS BUSINESS CORPORATION LAW
In addition, Section 4-26-814 of the Arkansas Business Corporation Law
generally provides that a corporation has the power to indemnify a director or
officer of the corporation, or a person serving at the request of the
corporation as a director or officer of another corporation or other enterprise
against any judgments, amounts paid in settlement, and reasonably incurred
expenses in a civil or criminal action or proceeding if the director or officer
acted in good faith in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation (or, in the case of a criminal
action or proceeding, if he or she in addition had no reasonable cause to
believe that his or her conduct was unlawful).
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
REPRESENTATION PURSUANT TO SECTION 26(e)
Merrill Lynch Life Insurance Company hereby represents that the fees and
charges deducted under the Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by Merrill Lynch Life Insurance Company.
II-2
<PAGE> 106
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
OFFICERS AND DIRECTORS
AS OF DECEMBER 3, 1998
DIRECTORS
Herbert M. Allison, Jr.
George A. Schieren
John L. Steffens
OFFICERS
<TABLE>
<S> <C>
Herbert M. Allison, Jr. President and Chief Executive Officer
John L. Steffens Vice Chairman of the Board
George A. Schieren General Counsel
Theresa Lang Treasurer
Andrea L. Dulberg Secretary
</TABLE>
EXECUTIVE VICE PRESIDENTS
Thomas W. Davis
Barry S. Friedberg
Edward L. Goldberg
Jerome P. Kenney
E. Stanley O'Neal
Thomas H. Patrick
Winthrop H. Smith, Jr.
Roger M. Vasey
SENIOR VICE PRESIDENTS
Harry P. Allex
Rosemary T. Berkery
Daniel H. Bayly
Michael J. Castellano
Peter Clarke
Michael R. Cowan
Richard A. Dunn
Richard M. Fuscone
Donald N. Gershuny
J. Michael Giles
Mark B. Goldfus
Allen N. Jones
John G. Heimann
Theresa Lang
Michael J.P. Marks
G. Kelly Martin
Andrew J. Melnick
Robert J. McCann
Athanassios N. Michas
Joseph H. Moglia
Carlos M. Morales
Hisashi Moriya
Thomas O. Muller III
Daniel T. Napoli
John Qua
Christopher R. Reeves
George A. Schieren
Howard A. Shallcross
Edward E. Sheridan
Robert D. Sherman
James F. Shoaf
Howard P. Sorgen
G. Stephen Thoma
Arthur L. Thomas
J. Arthur Urciuoli
Anthony J. Vespa
Conrad P. Volstad
Kevan V. Watts
Seth H. Waugh
Madeline A. Weinstein
Joseph T. Willett
Robert W. Williamson
II-3
<PAGE> 107
FIRST VICE PRESIDENTS
Robert E. Aherne
Charles P. Borkowski, Jr.
Matthias B. Bowman
John R. Cummings
Richard M. Drew
Alan R. Eckert
Harry J. Ferguson
Richard K. Gordon
Brian C. Henderson
Michael Koeneke
Jack Levy
Frank M. Macioce, Jr.
Donald N. Malawsky
Barry J. Mandel
Orestes J. Mihaly
G. Peter O'Brien
Clarence O. Peterson, III
Lawrence W. Roberts
Eric M. Rosenberg
Stanley Schaefer
Barry G. Skolnick
Thomas W. Smith
Arthur H. Sobel
Kenneth S. Spirer
John B. Sprung
Paul A. Stein
Nathan C. Thorne
Edward J. Toohey
James R. Vallone
O. Ray Vass
Frank T. Vayda
David N. Webb
VICE PRESIDENTS
Leonard E. Accardo
Rudley B. Anthony
Joseph A. Boccuzzi
Robert G. Dieckmann
Freddy Enriquez
Edward J. Gallagher, Jr.
Scott C. Harrison
Peter C. Lee
Richard D. Lilleston
Daniel R. Mayo
Avadhesh K. Nigam
David D. Northrop
George A. Ruth
John M. Sabatino
Michael S. Schreier
John P. Smith
Robert H. Werthman
ASSISTANT VICE PRESIDENTS
Gregory R. Krolikowski
Edward A. Mallaney
ASSISTANT SECRETARIES
Darryl W. Colletti
Lawrence M. Egan, Jr.
Andrea Lowenthal
Margaret E. Nelson
II-4
<PAGE> 108
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Two Prospectuses consisting of 98 and 92 pages, respectively.
Undertaking to file reports.
Rule 484 Undertaking.
Representation Pursuant to Section 26(e).
Merrill Lynch, Pierce, Fenner & Smith Incorporated Officers and Directors
The signatures.
Written Consents of the Following Persons:
(a) Barry G. Skolnick, Esq.
(b) Joseph E. Crowne, Jr., F.S.A.
(c) Sutherland Asbill & Brennan LLP
(d) Deloitte & Touche LLP, Independent Auditors
The following exhibits:
<TABLE>
<S> <C> <C> <C>
1. A. (1) Resolution of the Board of Directors of Merrill Lynch Life
Insurance Company establishing the Separate Account
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 8 to Form S-6 Registration No. 33-55472 Filed
April 29, 1997)
(2) Not applicable
(3)(a) Distribution Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 8 to Form S-6 Registration No.
33-55472 Filed April 29, 1997)
(b) Amended Sales Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch Life Agency Inc. (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 8 to
Form S-6 Registration No. 33-55472 Filed April 29, 1997)
(c) Schedules of Sales Commissions. (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 8 to Form S-6
Registration No. 33-55472 Filed April 29, 1997)
(d) Indemnity Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch Life Agency, Inc. (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 8 to
Form S-6 Registration No. 33-55472 Filed April 29, 1997)
(4) Not applicable
(5)(a) (1) Flexible Premium Variable Universal Life Insurance Policy
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 8 to Form S-6 Registration No. 33-55678 Filed
April 30, 1997)
(5)(a) (2) Flexible Premium Variable Universal Life Insurance Policy
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 4 to Form S-6 Registration No. 33-55678 Filed
December 9, 1994)
(b) (1) Backdating Endorsement (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 8 to Form S-6
Registration No. 33-55678 Filed April 30, 1997)
(2)(a) Additional Insurance Rider for Flexible Premium Variable
Universal Life Insurance Policy (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 8 to Form S-6
Registration No. 33-55678 Filed April 30, 1997)
(2)(b) Additional Insurance Rider for Flexible Premium Variable
Universal Life Insurance Policy (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 4 to Form S-6
Registration No. 33-55678 Filed December 9, 1994)
(3) Endorsement for Guaranteed Interest Division for Flexible
Premium Variable Universal Life Insurance Policy
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 8 to Form S-6 Registration No. 33-55678 Filed
April 30, 1997)
(4) Endorsement for Flexible Premium Variable Universal Life
Insurance Policy (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 4 to Form S-6 Registration No.
33-55678 Filed December 9, 1994)
(5) Accelerated Benefit Rider (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 4 to Form S-6
Registration No. 33-55472 Filed December 9, 1994)
(6) Unisex Rider (Form No. EIUN192S) (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 5 to Form S-6
Registration No. 33-55678 Filed April 28, 1995)
(7) Policy Endorsement (Form No. VUSDEC) (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 6 to
Form S-6 Registration No. 33-55678 Filed February 29, 1996.)
(6)(a) Articles of Amendment, Restatement, and Redomestication of
the Articles of Incorporation of Merrill Lynch Life
Insurance Company (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 8 to Form S-6 Registration No.
33-55472 Filed April 29, 1997)
(b) Amended and Restated By-Laws of Merrill Lynch Life Insurance
Company (Incorporated by Reference to Registrant's Post-
Effective Amendment No. 8 to Form S-6 Registration No.
33-55472 Filed April 29, 1997)
(7) Not applicable
</TABLE>
II-5
<PAGE> 109
<TABLE>
<S> <C> <C>
(8)(a) Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch Series Fund, Inc. (Incorporated by Reference
to Registrant's Post-Effective Amendment No. 8 to Form S-6
Registration No. 33-55472 Filed April 29, 1997)
(b) Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch Funds Distributor, Inc. (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 8 to
Form S-6 Registration No. 33-55472 Filed April 29, 1997)
(c) Agreement between Merrill Lynch Life Insurance Company and
Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 8 to Form S-6 Registration No. 33-55472 Filed
April 29, 1997)
(d) Participation Agreement among Merrill Lynch Life Insurance
Company, ML Life Insurance Company of New York and Monarch
Life Insurance Company (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 8 to Form S-6
Registration No. 33-55472 Filed April 29, 1997)
(e) Management Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch Asset Management, Inc.
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 8 to Form S-6 Registration No. 33-55472 Filed
April 29, 1997)
(f) Form of Participation Agreement Among Merrill Lynch Life
Insurance Company, Alliance Capital Management L.P., and
Alliance Fund Distributors, Inc. (Incorporated by Reference
to Merrill Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 10 to Form N-4 Registration No.
33-43773 Filed December 10, 1996)
(g) Form of Participation Agreement Among MFS Variable Insurance
Trust, Merrill Lynch Life Insurance Company, and
Massachusetts Financial Services Company (Incorporated by
Reference to Merrill Lynch Life Variable Annuity Separate
Account A's Post-Effective Amendment No. 10 to Form N-4
Registration No. 33-43773 Filed December 10, 1996)
(h) Participation Agreement By and Among AIM Variable Insurance
Funds, Inc., AIM Distributors, Inc., and Merrill Lynch Life
Insurance Company (Incorporated by Reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 11 to Form N-4 Registration No.
33-43773 Filed April 24, 1997)
(i) Form of Participation Agreement among Merrill Lynch Life
Insurance Company, Hotchkis and Wiley Variable Trust, and
Hotchkis and Wiley (Incorporated by reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 12 to Form N-4 Registration No.
33-43773 Filed May 1, 1998)
(j) Form of Participation Agreement between Merrill Lynch Life
Insurance Company and Mercury Asset Management V.I. Funds,
Inc. (Incorporated by reference to Merrill Lynch Life
Variable Annuity Separate Account A's Post-Effective
Amendment No. 15 to Form N-4 Registration No. 33-43773 Filed
April 14, 1999)
(9)(a) Service Agreement among Merrill Lynch Insurance Group, Inc.,
Family Life Insurance Company and Merrill Lynch Life
Insurance Company (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 8 to Form S-6 Registration No.
33-55472 Filed April 29, 1997)
(10)(a)(1) Variable Life Insurance Application (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 8 to
Form S-6 Registration No. 33-55678 Filed April 30, 1997)
(10)(a)(2) Variable Life Insurance Application (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 4 to
Form S-6 Registration No. 33-55472 Filed December 9, 1994)
(10)(a)(3) Variable Life Insurance Application (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 8 to
Form S-6 Registration No. 33-55472 Filed April 29, 1997)
(b) Application for Reinstatement (Incorporated by Reference to
Registrant's Post-Effective Amendment No. 8 to Form S-6
Registration No. 33-55678 Filed April 30, 1997)
(c) Variable Life Insurance Application, Part 1 (Form No. A1016
New 3/95) (Incorporated by Reference to Registrant's Post-
Effective Amendment No. 5 to Form S-6 Registration No.
33-55678 Filed April 28, 1995)
(d) Variable Life Insurance Application, Part 2 (Form No. A1011
Revised 10/94) (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 5 to Form S-6 Registration No.
33-55678 Filed April 28, 1995)
(e) Temporary Insurance Agreement (Form No. A1010 Revised 6/94)
(Incorporated by Reference to Registrant's Post-Effective
Amendment No. 5 to Form S-6 Registration No. 33-55678 Filed
April 28, 1995)
(11)(a) Memorandum describing Merrill Lynch Life Insurance Company's
Issuance, Transfer and Redemption Procedures (Incorporated
by Reference to Registrant's Post-Effective Amendment No. 2
to Form S-6 Registration No. 33-55678 Filed March 1, 1994)
(11)(b) Amended and restated memorandum describing Merrill Lynch
Life Insurance Company's Issuance, Transfer and Redemption
Procedures (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 4 to Form S-6 Registration No.
33-55678 Filed December 9, 1994)
(11)(c) Amended and restated memorandum describing Merrill Lynch
Life Insurance Company's Issuance, Transfer and Redemption
Procedures (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 6 to Form S-6 Registration No.
33-55678 Filed February 29, 1996.)
(11)(d) Supplement to Memorandum describing Merrill Lynch Life
Insurance Company's Issuance, Transfer and Redemption
Procedures (Incorporated by Reference to Registrant's
Post-Effective Amendment No. 8 to Form S-6 Registration No.
33-55472 Filed April 29, 1997)
2. See Exhibit 1.A.(5)
3. Opinion and Consent of Barry G. Skolnick, Esq. as to the
legality of the securities being registered (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 7 to
Form S-6 Registration No. 33-55678 Filed April 25, 1996)
4. Not applicable
5. Not applicable
</TABLE>
II-6
<PAGE> 110
<TABLE>
<S> <C> <C>
6. Opinion and Consent of Joseph E. Crowne, Jr., F.S.A. as to
actuarial matters pertaining to the securities being
registered
7. (a) Power of Attorney of Joseph E. Crowne, Jr. (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 2 to
Form S-6 Registration No. 33-55472 Filed March 1, 1994)
(b) Power of Attorney of David E. Dunford (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 2 to
Form S-6 Registration No. 33-55472 Filed March 1, 1994)
(c) Power of Attorney of Gail R. Farkas (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 6 to
Form S-6 Registration No. 33-55678 Filed February 29, 1996.)
(d) Power of Attorney of John C.R. Hele (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 2 to
Form S-6 Registration No. 33-55472 Filed March 1, 1994)
(e) Power of Attorney of Allen N. Jones (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 2 to
Form S-6 Registration No. 33-55472 Filed March 1, 1994)
(f) Power of Attorney of Barry G. Skolnick (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 2 to
Form S-6 Registration No. 33-55472 Filed March 1, 1994)
(g) Power of Attorney of Anthony J. Vespa (Incorporated by
Reference to Registrant's Post-Effective Amendment No. 2 to
Form S-6 Registration No. 33-55472 Filed March 1, 1994)
8. (a) Written Consent of Barry G. Skolnick, Esq.
(b) Written Consent of Joseph E. Crowne, Jr., F.S.A. (See
Exhibit 6)
(c) Written Consent of Sutherland Asbill & Brennan LLP
(d) Written Consent of Deloitte & Touche LLP, Independent
Auditors
</TABLE>
II-7
<PAGE> 111
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT,
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT, HEREBY CERTIFIES THAT THIS
POST-EFFECTIVE AMENDMENT NO. 10 MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS
PURSUANT TO PARAGRAPH (b) OF RULE 485 UNDER THE SECURITIES ACT OF 1933, AND HAS
DULY CAUSED THIS POST-EFFECTIVE AMENDMENT NO. 10 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, AND ITS
SEAL TO BE HEREUNTO AFFIXED AND ATTESTED, ALL IN THE CITY OF PLAINSBORO AND THE
STATE OF NEW JERSEY, ON THE 27TH DAY OF APRIL 1999.
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT
(Registrant)
BY: MERRILL LYNCH LIFE INSURANCE COMPANY
(Depositor)
<TABLE>
<S> <C>
Attest: /s/ EDWARD W. DIFFIN, JR. By: /s/ BARRY G. SKOLNICK
----------------------------- -----------------------
Edward W. Diffin, Jr. Barry G. Skolnick
Vice President Senior Vice President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 10 to the Registration Statement has been signed below by the
following persons in the capacities indicated on April 27, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board, President, and Chief
- -------------------------------------------------- Executive Officer
Anthony J. Vespa
* Director, Senior Vice President, Chief Financial
- -------------------------------------------------- Officer, Chief Actuary, and Treasurer
Joseph E. Crowne, Jr.
* Director, Senior Vice President, and Chief
- -------------------------------------------------- Investment Officer
David M. Dunford
* Director and Senior Vice President
- --------------------------------------------------
Gail R. Farkas
*By: /s/ BARRY G. SKOLNICK In his own capacity as Director, Senior Vice
---------------------------------------------- President, Secretary, General Counsel, and as
Barry G. Skolnick Attorney-in-Fact
</TABLE>
II-8
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
6. Opinion and Consent of Joseph E. Crowne, Jr., F.S.A. as to
actuarial matters pertaining to the securities being
registered
8.(a) Written Consent of Barry G. Skolnick, Esq.
8.(c) Written Consent of Sutherland Asbill & Brennan LLP
8.(d) Written Consent of Deloitte & Touche LLP, Independent
Auditors
</TABLE>
<PAGE> 1
EXHIBIT 6
[MERRILL LYNCH LIFE INSURANCE COMPANY]
April 27, 1999
Board of Directors
Merrill Lynch Life Insurance Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Re: Merrill Lynch Variable Life Separate Account
To The Board of Directors:
This opinion is furnished in connection with the filing of Post-effective
Amendment No. 10 to the Registration Statement on Form S-6 (File No. 33-55678)
which covers premiums received under certain flexible premium variable life
insurance contracts ("Contracts" or "Contract") issued by Merrill Lynch Life
Insurance Company (the "Company").
The Prospectus included in the Registration Statement describes Contracts which
are issued by the Company. The Contract forms were reviewed under my direction,
and I am familiar with the Registration Statement and exhibits thereto. In my
opinion:
1. The illustrations of death benefits, investment base, net cash surrender
values, and cash values and accumulated premiums included in the
Registration Statement for the Contract and based on the assumptions stated
in the illustrations, are consistent with the provisions of the Contract.
The rate structure of the Contract has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear more favorable to a prospective purchaser of a Contract for the ages
and sexes shown, than to prospective purchasers of a Contract for other
ages and sex.
2. The table of illustrative cash value corridor factors included in the
"Death Benefit Proceeds" section is consistent with the provisions of the
Contract.
3. The information with respect to the Contract contained in (i) the
illustrations of the increase in guarantee period included in the
"Additional Payments" section of the Examples, (ii) the illustrations of a
decrease in guarantee period included in the "Partial Withdrawals" section
of the Examples and (iii) the illustrations of the changes in face amount
included in the "Changing the Death Benefit Option" section of the
Examples, based on the assumptions specified, are consistent with the
provisions of the Contract.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of my name relating to actuarial matters under the
heading "Experts" in the Prospectus.
Very truly yours,
/s/ JOSEPH E. CROWNE
Joseph E. Crowne, FSA
Senior Vice President &
Chief Financial Officer
<PAGE> 1
EXHIBIT 8(a)
[MERRILL LYNCH LIFE INSURANCE COMPANY]
CONSENT
I hereby consent to the reference to my name under the heading "Legal Matters"
in the prospectus included in Post-Effective Amendment No. 10 to the
Registration Statement on Form S-6 for certain variable life insurance contracts
issued through Merrill Lynch Variable Life Separate Account of Merrill Lynch
Life Insurance Company (File No. 33-55678).
/s/ BARRY G. SKOLNICK
------------------------------------------
Barry G. Skolnick, Esq.
Senior Vice President and General Counsel
April 27, 1999
<PAGE> 1
EXHIBIT 8(c)
[Letterhead]
CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading "Legal Matters" in the
prospectus included in Post-Effective Amendment No. 10 to the Registration
Statement on Form S-6 for certain variable universal life insurance contracts
issued through Merrill Lynch Variable Life Separate Account of Merrill Lynch
Life Insurance Company (File No. 33-55678). In giving this consent, we do not
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
/s/ Sutherland Asbill & Brennan LLP
SUTHERLAND ASBILL & BRENNAN LLP
Washington, D.C.
April 27, 1999
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 10 to Registration
Statement No. 33-55678 of Merrill Lynch Variable Life Separate Account on Form
S-6 of our reports on (i) Merrill Lynch Life Insurance Company dated February
22, 1999, and (ii) Merrill Lynch Variable Life Separate Account dated February
4, 1999, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 27, 1999
