<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1994
REGISTRATION NO. 33-43058
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
POST EFFECTIVE AMENDMENT NO. 4
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
----------------
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
(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 AND GENERAL COUNSEL
MERRILL LYNCH LIFE INSURANCE COMPANY
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2404
----------------
It is proposed that this filing will become effective (check
appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of Rule 486.
Check box if it is proposed that the filing will become effective on (date) at
(time) pursuant to Rule 487 / /
PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT
HAS REGISTERED AN INDEFINITE AMOUNT OF SECURITIES UNDER THE SECURITIES ACT OF
1933. THE REGISTRANT FILED THE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1993
ON FEBRUARY 28, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE
SEPARATE ACCOUNT II
CROSS REFERENCE TO ITEMS REQUIRED BY FORM N-8B-2
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------------------------------------------------
<C> <S>
1 Cover Page
2 Cover Page
3 More About the Separate Account and Its Divisions
4 Facts About the Insurance Company and the Separate Account
5 Facts About the Insurance Company and the Separate Account
6 Facts About the Insurance Company and the Separate Account;
More About the Separate Account and Its Divisions
7 Not Applicable
8 Not Applicable
9 More About the Insurance Company
10 Summary of the Policy; Facts About the Policy; More About the
Policy;
More About the Separate Account and Its Divisions
11 Summary of the Policy; Facts About the Insurance Company and
the Separate Account; More About the Separate Account and Its
Divisions
12 Summary of the Policy; Facts About the Insurance Company and
the Separate Account; More About the Separate Account and Its
Divisions
13 Summary of the Policy; Facts About the Policy; More About the
Policy;
More About the Separate Account and Its Divisions
14 Facts About the Policy; More About the Policy
15 Summary of the Policy; Facts About the Policy
16 Summary of the Policy; Facts About the Policy; More About the
Separate Account and Its Divisions
17 Summary of the Policy; Facts About the Policy; More About the
Policy
18 More About the Separate Account and Its Divisions
19 Facts About the Insurance Company and the Separate Account
20 More About the Separate Account and Its Divisions
21 Facts About the Policy
22 More About the Separate Account and Its Divisions
23 Not Applicable
24 Facts About the Policy; More About the Policy
25 Facts About the Insurance Company and the Separate Account
26 Not Applicable
27 Facts About the Insurance Company and the Separate Account;
More About the Insurance Company
28 More About the Insurance Company
29 Facts About the Insurance Company and the Separate Account
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 More About the Policy
36 Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------------------------------------------------
<C> <S>
37 Not Applicable
38 More About the Policy
39 Facts About the Insurance Company and the Separate Account;
More About the Policy
40 Not Applicable
41 Facts About the Insurance Company and the Separate Account;
More About the Policy
42 Not Applicable
43 Not Applicable
44 Summary of the Policy; Facts About the Policy; More About the
Policy;
More About the Separate Account and Its Divisions
45 Not Applicable
46 Facts About the Policy; More About the Separate Account and Its
Divisions
47 Facts About the Policy; More About the Separate Account and Its
Divisions
48 More About the Separate Account and Its Divisions
49 More About the Separate Account and Its Divisions
50 Not Applicable
51 Cover Page; Facts About the Policy; More About the Policy
52 More About the Separate Account and Its Divisions
53 More About the Policy
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
</TABLE>
<PAGE>
PROSPECTUS
---------------------------------------------------------
Single Premium Variable Life Insurance Policy
- --------------------------------------------------------------------------------
This prospectus ("Prospectus") is for a single premium
variable life insurance policy issued by Merrill Lynch
Life Insurance Company (the "Insurance Company" or "We"),
a subsidiary of Merrill Lynch & Co., Inc. The policy
permits you, as the policyowner, to make additional
payments subject to certain restrictions.
Until the end of the "free look" period, your single
premium will be placed in the division investing in the
Money Reserve Portfolio. After the "free look" period,
your investment base may be allocated among up to any
five investment divisions. Each division is part of
Merrill Lynch Life Variable Life Separate Account II (the
"Separate Account"), a separate investment account of the
Insurance Company. The investments available through the
divisions include 10 mutual fund portfolios of the
Merrill Lynch Series Fund, Inc. ("Series Fund"), seven
mutual fund portfolios of the Merrill Lynch Variable
Series Funds, Inc. ("Variable Series Funds") and 20 unit
investment trusts in The Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities (collectively the
"Trusts" and individually, a "Trust"). Under our current
rules, you may change the allocation of your investment
base as many times as you wish.
The policy provides life insurance coverage on the
insured. We guarantee that the coverage will remain in
force for life, or for a shorter time depending on the
face amount selected for a given single premium. During
this guarantee period, we may terminate the policy only
if the policy debt exceeds certain policy values. After
the guarantee period, the policy will remain in force as
long as there is not excessive policy debt and as long as
the policy's net cash surrender value is sufficient to
cover the charges due.
While the policy is in force, the death benefit may vary
to reflect the policy's investment results but will never
be less than the current face amount.
You may turn in the policy for its net cash surrender
value while the insured is still living. The net cash
surrender value will vary with the investment results of
the policy. We don't guarantee any minimum.
It may not be advantageous to replace existing insurance
with the policy. Within certain limits, you may return
the policy or exchange it for life insurance with
benefits that do not vary with the investment results of
a separate account.
If you make certain changes to your policy, including
additional payments, it may be treated as a "modified
endowment contract" under Federal tax law. If the policy
is a modified endowment contract, any loan, partial
withdrawal or surrender may result in adverse tax
consequences and/or penalties. See "Tax Considerations",
page 28.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE
REFERENCE. IT IS NOT VALID UNLESS ACCOMPANIED BY CURRENT
PROSPECTUSES FOR THE MERRILL LYNCH SERIES FUND, INC., THE
MERRILL LYNCH VARIABLE SERIES FUNDS, INC. AND THE MERRILL
LYNCH FUND OF STRIPPED ("ZERO") U.S. TREASURY SECURITIES.
- --------------------------------------------------------------------------------
Issued by: Administered at:
Merrill Lynch Life Insurance Service Center
Company P.O. Box 9025
Plainsboro, New Jersey 08536 Springfield, Massachusetts
Distributed by: 01102-9025
Merrill Lynch Pierce, Fenner &
Smith Incorporated
("MLPF&S")
Plainsboro, New Jersey 08536
<PAGE>
Date: July __, 1994
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SUMMARY OF THE POLICY
Purpose of the Policy................................................ 3
Availability......................................................... 3
The Investment Divisions............................................. 3
How the Death Benefit Varies......................................... 3
How the Investment Base Varies....................................... 3
Net Cash Surrender Value and Cash Surrender Value.................... 3
Your Right to Cancel ("Free Look" Period) or Exchange Your Policy.... 4
How Death Benefit and Cash Surrender Value Increases are Taxed....... 4
Charges to Your Investment Base...................................... 4
Other Charges and Fees............................................... 5
Assumption of Previously Issued Policies and Subsequent Merger....... 5
IMPORTANT TERMS
Important Terms...................................................... 7
FACTS ABOUT THE INSURANCE COMPANY AND THE SEPARATE ACCOUNT
The Insurance Company and MLPF&S..................................... 8
The Insurance Company's Separate Account............................. 8
FACTS ABOUT THE POLICY
Who May be Covered By a Policy....................................... 11
Premiums............................................................. 12
Making Additional Payments........................................... 12
Investment Base...................................................... 14
Charges Deducted from Your Investment Base........................... 15
Charges to the Separate Account...................................... 16
Net Cash Surrender Value............................................. 17
Policy Loans......................................................... 17
Death Benefit Proceeds............................................... 19
Payment of Death Benefit Proceeds.................................... 20
Policy Guarantees.................................................... 20
When Your Guarantee Period is Less Than for Life..................... 20
Your Right to Cancel ("Free Look" Period) or Exchange Your Policy.... 21
Reports to Policyowners.............................................. 21
Single Premium Immediate Annuity Rider............................... 22
MORE ABOUT THE POLICY
Using Your Policy.................................................... 23
Some Administrative Procedures....................................... 24
Other Policy Provisions.............................................. 25
Income Plans......................................................... 26
Group or Sponsored Arrangements...................................... 27
Legal Considerations for Employers................................... 27
Selling the Policies................................................. 28
Administrative Services.............................................. 28
Tax Considerations................................................... 28
The Insurance Company's Income Taxes................................. 32
Reinsurance.......................................................... 32
MORE ABOUT THE SEPARATE ACCOUNT AND ITS DIVISIONS
About the Separate Account........................................... 33
Changes Within the Separate Account.................................. 33
Net Rate of Return for an Investment Division........................ 33
The Series Fund and the Variable Series Funds........................ 34
The Trusts........................................................... 35
Charges to Series Fund Assets........................................ 36
Charges to Variable Series Funds Assets.............................. 36
ILLUSTRATIONS
Illustrations of Death Benefits, Investment Base, Cash Surrender
Values and Accumulated Premiums...................................... 38
MORE ABOUT THE INSURANCE COMPANY
Management........................................................... 45
State Regulation..................................................... 46
Registration Statement............................................... 46
Legal Proceedings.................................................... 46
Legal Matters........................................................ 46
Experts.............................................................. 46
Financial Statements................................................. 46
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.
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF THE POLICY
- ----------------------------------------------------------------
PURPOSE OF THE POLICY
A single premium variable life policy offers a choice of
investments and an opportunity for the policy's
investment base, net cash surrender value and death
benefit to grow based on investment results.
We don't promise that your policy values will increase.
Depending on the policy's investment results, the
investment base and net cash surrender value may
increase or decrease on any day and the death benefit
may increase or decrease on any policy processing date.
As the policyowner, you bear the investment risk. We do
guarantee to keep the policy in force during the
guarantee period as long as the policy debt does not
exceed certain policy values (see "Interest", page 18).
- --------------------------------------------------------------------------------
AVAILABILITY
We can issue a policy for an insured up to age 75. The
minimum single premium is $5,000 for an insured under
age 20 and $10,000 for an insured age 20 and over or, if
less, for all ages the single premium required to
purchase a face amount of at least $100,000. (The policy
won't be available to insure residents of certain
municipalities in Kentucky where premium taxes in excess
of a certain level are imposed.)
- --------------------------------------------------------------------------------
THE INVESTMENT
DIVISIONS
Your single premium submitted with your application will
automatically be placed in the division of the Separate
Account investing in the Money Reserve Portfolio. After
the "free look" period, you may choose to invest in up
to 5 of the 37 investment divisions in the Separate
Account available for new allocations (see "Changing
Your Investment Base Allocation", page 13). Ten
divisions invest exclusively in shares of designated
mutual fund portfolios of the Merrill Lynch Series Fund,
Inc. ("Series Fund"). Seven investment divisions invest
exclusively in shares of designated mutual fund
portfolios of the Merrill Lynch Variable Series Funds,
Inc. ("Variable Series Funds"). Each mutual fund
portfolio has a different investment objective. The
other 20 divisions invest in units of designated unit
investment trusts in The Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities (the "Trusts").
- --------------------------------------------------------------------------------
HOW THE DEATH BENEFIT VARIES
The death benefit may increase or decrease on each
policy processing date depending on your policy's
investment results. It equals the policy's face amount
or variable insurance amount, whichever is larger.
- --------------------------------------------------------------------------------
HOW THE INVESTMENT BASE VARIES
Your policy's investment base is the amount available
for investment at any time. On the policy date (usually
the business day next following the receipt of your
single premium at the Service Center), the investment
base is equal to the single premium. Afterwards, it
varies daily based on investment performance. You bear
the risk of poor performance and you receive the
benefits from favorable investment performance.
- --------------------------------------------------------------------------------
NET CASH SURRENDER VALUE AND CASH SURRENDER VALUE
On a policy anniversary your policy's net cash surrender
value equals your investment base minus any deferred
policy loading. The net cash surrender value varies
daily based on investment performance. We don't
guarantee any minimum.
3
<PAGE>
For purposes of certain computations under the policy,
we use the policy's cash surrender value. It is
calculated by adding the amount of any policy debt to
the net cash surrender value.
- --------------------------------------------------------------------------------
YOUR RIGHT TO CANCEL ("FREE LOOK" PERIOD) OR EXCHANGE YOUR POLICY
You may return your policy within ten days after
receiving it or, if required by your state, within the
later of the ten days and 45 days from the date the
application is executed ("free look" period). We will
refund the premium paid without interest.
You may also exchange this policy within 18 months for a
policy with benefits that do not vary with the
investment results of a separate account.
- --------------------------------------------------------------------------------
HOW DEATH BENEFIT AND CASH SURRENDER VALUE INCREASES ARE TAXED
The death benefit should be fully excludable from the
beneficiary's gross income for Federal income tax
purposes, according to Section 101(a)(1) of the Internal
Revenue Code. You won't be taxed on any increase in cash
surrender value while the policy remains in force. For a
discussion of the tax issues associated with the policy,
see "Tax Considerations" on page 28.
- --------------------------------------------------------------------------------
CHARGES TO YOUR INVESTMENT BASE
We invest the entire amount of your single premium and
any additional payments in the Separate Account. We then
deduct certain charges from your investment base on
policy processing dates (see "Charges Deducted From Your
Investment Base", page 15). The charges deducted are as
follows:
DEFERRED POLICY LOADING equals 7.0% of the single
premium and any additional payments received in the
first year. It consists of a sales load of 4.0%, a first
year administrative expense of .5% and a state and local
premium tax charge of 2.5%. (The sales load and first
year administrative charge may be reduced if cumulative
premiums are sufficiently high to reach certain
breakpoints.) The deferred policy loading for any
additional payment received after the first policy year
equals 6.5%. It consists of a sales load of 4.0% and a
state and local premium tax charge of 2.5%. Although
chargeable to the single premium and any additional
payments, the amount of the deferred policy loading is
initially advanced to the Separate Account as part of
your investment base and then deducted in equal
installments on the ten policy anniversaries following
the date we receive and accept the payment. The amount
deducted from the investment base as of the policy
anniversary will equal .70% of the single premium and
any additional payments received in the first policy
year and .65% for any additional payments received after
the first policy year. We deduct the balance of the
deferred policy loading in determining your net cash
surrender value.
REALLOCATION CHARGES are deducted on policy processing
dates if you change your investment base allocation more
than five times per policy year (see "Reallocation
Charges", page 16).
MORTALITY COSTS are deducted on all policy processing
dates after the policy date (see "Mortality Cost", page
16).
We may reduce certain charges to your investment base in
group or sponsored arrangements (see "Group or Sponsored
Arrangements", page 27).
NET LOAN COST is deducted on your policy anniversary if
there has been any policy debt outstanding. It equals a
maximum .75% of the debt per year for the first ten
policy years and .60% thereafter.
4
<PAGE>
5
<PAGE>
UNDERWRITING AND THE COST OF PROVIDING INSURANCE
Underwriting is the process by which we evaluate the
risk of providing life insurance on the insured. We use
two methods of underwriting:
- simplified underwriting with no physical exam; and
- para-medical or medical underwriting with a
physical exam.
The amount of your single premium and the age of the
insured determine whether we will do underwriting on a
simplified or medical basis. For a discussion of premium
and age limits, see "Who May be Covered By a Policy" on
page 10.
If we use the simplified underwriting method, we incur
extra insurance risk because we have less information
about the insured. We therefore use guaranteed maximum
mortality rates based on the 1980 CET Mortality Table
which was designed to take this type of extra insurance
risk into account.
If we use the para-medical or medical underwriting
method, we gather more information about the insured.
Because we have additional information we therefore have
less insurance risk for insureds we evaluate under this
method. We use guaranteed maximum mortality rates based
on the 1980 CSO Mortality Table for this method.
The maximum guaranteed mortality rates we may charge
using the 1980 CET Table are equivalent to 130% of the
1980 CSO Table for male ages 38 and above and female
ages 41 and above. At younger ages, the rates vary from
130% of the 1980 CSO Table to 212% at ages where the
1980 CSO rates are the lowest.
The mortality rates we use currently for insureds in the
non-smoker simplified underwriting class are equal to or
less than the 1980 CSO Table.
To the extent the 1980 CET Table is considered
substandard we would in effect be charging you a
substandard mortality cost, even if the insured was
healthy, to the extent (a) we ever increased the current
mortality rates above the 1980 CSO Table for those
insureds in the non-smoker simplified underwriting class
or (b) the insured is underwritten under the simplified
method but is not in the non-smoker class (see
"Mortality Cost", page 16).
- --------------------------------------------------------------------------------
OTHER CHARGES AND FEES
ADVISORY FEES
The portfolios in the Series Fund and the Variable
Series Funds pay monthly advisory fees and other
expenses (see "Charges to Series Fund Assets", page 36
and "Charges to Variable Series Funds Assets", page 36).
SEPARATE ACCOUNT CHARGES
There are certain charges deducted daily from the
investment results of the divisions in the Separate
Account. These charges are:
- an asset charge deducted from all divisions to
cover mortality and expense risks and guaranteed
benefits risk which is currently equivalent to a
maximum effective rate of .60% annually at the
beginning of the year; and
- a trust charge deducted from only those divisions
investing in the Trusts which is currently
equivalent to .34% annually at the beginning of the
year and will never exceed .50% annually.
- --------------------------------------------------------------------------------
ASSUMPTION OF PREVIOUSLY ISSUED POLICIES AND SUBSEQUENT MERGER
The policies were originally issued by Monarch Life
Insurance Company ("Monarch"). On November 14, 1990,
Monarch, the Insurance Company and certain other Merrill
Lynch insurance companies entered into an indemnity
6
<PAGE>
reinsurance and assumption agreement (the "Assumption
Agreement"). Under the Assumption Agreement, Tandem
Insurance Group, Inc. ("Tandem"), one of the Merrill
Lynch insurance companies, acquired, on an assumption
reinsurance basis, certain of the variable life
insurance policies issued by Monarch through its
Variable Account A, including the policies ("reinsured
policies") described in this prospectus. On October 1,
1991, Tandem was merged with and into the Insurance
Company (the "merger"), which thereby succeeded to all
of Tandem's liabilities and obligations. Thus, the
Insurance Company has all the liabilities and
obligations under the reinsured policies. All further
payments made under the reinsured policies will be made
directly to or by the Insurance Company.
As the owner of a reinsured policy, you have the same
rights and values under your policy as you did before
the reinsurance or merger transaction. However, you will
look to the Insurance Company instead of to Monarch or
Tandem to fulfill the terms of your policy. Pursuant to
the Assumption Agreement, all of the assets of Monarch's
Variable Account A relating to the reinsured policies
were transferred to Tandem and allocated to the Separate
Account. By virtue of the merger, the Separate Account
became a separate account of the Insurance Company.
- --------------------------------------------------------------------------------
THIS SUMMARY IS INTENDED TO PROVIDE ONLY A VERY BRIEF
OVERVIEW OF THE MORE SIGNIFICANT ASPECTS OF THE POLICY.
THE POLICY TOGETHER WITH ITS ATTACHED APPLICATION
CONSTITUTES THE ENTIRE AGREEMENT BETWEEN YOU AND US AND
SHOULD BE RETAINED.
FOR THE DEFINITION OF CERTAIN TERMS USED IN THIS
PROSPECTUS, SEE "IMPORTANT TERMS" ON PAGE 7.
7
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT TERMS
- --------------------------------------------------------------------------------
ATTAINED AGE.................. is the issue age of the insured plus the number
of full years since the policy date.
CASH SURRENDER VALUE.......... is equal to the net cash surrender value plus any
policy debt.
DEATH BENEFIT................. is the larger of the face amount and the variable
insurance amount.
DEATH BENEFIT PROCEEDS........ are equal to the death benefit less any policy
debt and less any overdue charges.
DEFERRED POLICY LOADING....... is chargeable to the single premium and any
additional payments. However, we advance the
amount of the charge to the Separate Account as
part of your investment base. We then take back
these funds in equal installments on the next ten
policy anniversaries following the date we
receive and accept your payment.
FACE AMOUNT................... is the minimum death benefit as long as the
policy remains in force. Additional payments may
increase your face amount.
GUARANTEE PERIOD.............. is the time we guarantee that the policy will
remain in force regardless of investment
experience unless the policy debt exceeds certain
policy values. It is the period that a comparable
fixed life policy (same face amount, single
premium, guaranteed mortality table and loading)
would remain in force if credited with 4%
interest per year.
INVESTMENT BASE............... is the amount available under your policy for
investment in the Separate Account at any time.
Your investment base is the sum of the amounts
invested in each of the divisions you have
selected.
ISSUE AGE..................... is the insured's age as of the insured's birthday
nearest the policy date.
NET CASH SURRENDER
VALUE........................ is the amount you would receive on any day should
you decide to cancel your policy. It is equal to
the investment base less the deferred policy
loading and less a pro-rata portion of the
charges not yet deducted.
NET SINGLE PREMIUM
FACTOR....................... is the factor used in the calculation of the
variable insurance amount on policy processing
dates. It is based on the insured's underwriting
class, sex and attained age and is designed to
make the policy meet the guidelines of what
constitutes a life insurance policy under the
Internal Revenue Code.
POLICY DATE................... is used to determine policy processing dates,
policy years and policy anniversaries. It is
usually the business day next following the
receipt of the single premium at the Service
Center.
POLICY DEBT................... is the outstanding loan on a policy plus accrued
interest.
POLICY PROCESSING DATES....... are the policy date and the first day of each
policy quarter thereafter. Policy processing
dates after the policy date are the days when we
deduct certain charges from your investment base
and redetermine the death benefit.
POLICY PROCESSING PERIOD...... is the period between consecutive policy
processing dates.
TABULAR VALUE................. is equal to the cash surrender value for a
comparable fixed life policy with the same face
amount, single premium, loading and guarantee
period. It is the value we use to limit your
mortality cost deductions as well as our right to
cancel your policy during the guarantee period.
The tabular value is zero after the guarantee
period.
VARIABLE INSURANCE
AMOUNT....................... is determined on each policy processing date. It
is the cash surrender value multiplied by the net
single premium factor.
8
<PAGE>
- --------------------------------------------------------------------------------
FACTS ABOUT THE INSURANCE COMPANY AND THE SEPARATE ACCOUNT
- ----------------------------------------------------------------
THE INSURANCE COMPANY AND MLPF&S
The Insurance Company is a stock life insurance company
organized under the laws of the State of Washington in
1986 and redomesticated under the laws of the State of
Arkansas in 1991. 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 authorized to offer variable life
insurance and variable annuities in most jurisdictions.
MLPF&S is also a wholly owned subsidiary of Merrill
Lynch & Co., Inc. and provides a broad range of
securities brokerage and investment banking services in
the United States. It provides marketing services for us
and is the principal underwriter of our variable life
policies issued through the Separate Account. We retain
MLPF&S to provide services relating to the policies
under a Distribution Agreement. Administrative services
for the policies are provided at the service center (the
"Service Center"), P.O. Box 9025, Springfield,
Massachusetts 01102-9025.
- --------------------------------------------------------------------------------
THE INSURANCE COMPANY'S SEPARATE ACCOUNT
The Separate Account is a separate investment account
established by Tandem on November 19, 1990, and acquired
by the Insurance Company on October 1, 1991 by virtue of
the merger. (See "Assumption of Previously Issued
Policies and Subsequent Merger", page 5.) We use it to
support our variable life policies and for other
purposes permitted by applicable laws and regulations.
Its assets are kept separate from our general account
and any other separate accounts we may have.
We own all the assets in the Separate Account. As
required, the assets in the Separate Account are at
least equal to the reserves and other liabilities of the
Separate Account. These assets, to the extent of the
reserves and liabilities of the Separate Account, may
not be charged with liabilities from any other business
we conduct. However, if the assets exceed the required
reserves and other liabilities, we may transfer the
excess to our general account.
There are currently 37 investment divisions in the
Separate Account available for new allocations. Ten
invest in shares of a specific portfolio of the Series
Fund. Seven invest in shares of a specific portfolio of
the Variable Series Funds. Twenty invest in units of a
specific Trust.
You will find complete information about the Series
Fund, Variable Series Funds and the Trusts, including
the risks associated with each portfolio, in the
accompanying Prospectuses. You should read them with
this Prospectus.
THE SERIES FUND
The investment objectives of the various portfolios in
the Series Fund are described below. There is no
guarantee that any portfolio will meet its investment
objective. Meeting the objectives depends on how well
Series Fund management anticipates changing economic
conditions.
MONEY RESERVE PORTFOLIO seeks to preserve capital
and liquidity. It also seeks the highest possible
current income consistent with those objectives. It
invests in short term money market securities.
9
<PAGE>
INTERMEDIATE GOVERNMENT BOND PORTFOLIO seeks the
highest possible current income consistent with the
protection of capital. It invests in intermediate
term debt securities issued or guaranteed by the
U.S. Government or its agencies.
LONG TERM CORPORATE BOND PORTFOLIO seeks as high a
level of current income as is consistent with
prudent investment risk. It invests primarily in
fixed-income, high quality corporate bonds.
HIGH YIELD PORTFOLIO seeks high current income,
consistent with prudent management, by investing
principally in fixed-income securities rated in the
lower categories of the established rating services.
CAPITAL STOCK PORTFOLIO seeks long term growth of
capital and income, plus moderate current income. It
invests in common stocks 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 above average long term
growth of capital. It invests primarily in common
stocks of aggressive growth companies considered to
have special growth potential.
MULTIPLE STRATEGY PORTFOLIO seeks the highest total
investment return consistent with prudent risk. It
does this through a fully managed investment policy
utilizing equity securities, primarily common stocks
of large-capitalization companies, as well as
investment grade 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 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.
The investment adviser for the Series Fund is Merrill
Lynch Asset Management, L.P. ("MLAM"), a subsidiary of
Merrill Lynch & Co., Inc. and 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 Series Fund
Assets", page 36).
THE VARIABLE SERIES FUNDS
Seven of the 18 mutual fund portfolios in the Variable
Series Funds are currently available through the
Separate Account. The investment objectives of these
seven portfolios are described below. There is no
guarantee that any portfolio will meet its investment
objective. Meeting the objectives depends on how well
Variable Series Funds management anticipates changing
economic conditions.
10
<PAGE>
BASIC VALUE FOCUS FUND seeks to attain 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. Particular
emphasis is placed on securities which provide an
above-average dividend return and sell at a
below-average price/earnings ratio.
WORLD INCOME FOCUS FUND seeks to achieve high
current income by investing in a global portfolio of
fixed-income securities denominated in various
currencies, including multinational currency units.
The Fund may invest in United States and foreign
government and corporate fixed-income securities,
including high yield, high risk, lower rated and
unrated securities. The Fund will allocate its
investments among different types of fixed-income
securities denominated in various currencies.
GLOBAL UTILITY FOCUS FUND seeks to obtain capital
appreciation and current income through investment
at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies
which are, in the opinion of management of the Fund,
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 to obtain
capital appreciation through investment in
securities, principally equities, of issuers 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.
INTERNATIONAL BOND FUND seeks to achieve a high
total investment return by investing in a non-U.S.
international portfolio of debt instruments
denominated in various currencies and multi-national
currency units.
DEVELOPING CAPITAL MARKETS FOCUS FUND seeks to
achieve 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.
Currently, these four countries are Japan, the
United Kingdom, the United States, and Germany.
EQUITY GROWTH FUND seeks to attain long-term growth
of capital by investing primarily in common stocks
of relatively small companies that management of the
Fund believes have special investment value and
emerging growth companies regardless of size. Such
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 such selection. MLAM receives from
the Fund an advisory fee at the annual rate of 0.75%
of the average daily net assets of the Fund. This is
a higher fee than that of many other mutual funds,
but management of the Fund believes it is justified
by the high degree of care that must be given to the
initial selection and continuous supervision of the
types of portfolio securities in which the Fund
invests.
MLAM is the investment adviser for the Variable Series
Funds. The Variable Series Funds, as part of its
operating expenses, pays an investment advisory fee to
MLAM. (See "Charges to Variable Series Funds Assets",
page 36.)
11
<PAGE>
THE TRUSTS
The Merrill Lynch Fund of Stripped ("Zero") U.S.
Treasury Securities was formed to provide safety of
capital and a high yield to maturity. It seeks this
through U.S. Government backed investments which make no
periodic interest payments, and therefore are purchased
at a deep discount. When held to maturity the
investments should receive approximately a fixed yield.
The value of Trust units before maturity varies more
than it would if the Trusts contained interest-bearing
U.S. Treasury securities of comparable maturities.
The fixed investment portfolios of the Trusts 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 Trusts currently available have maturity dates in
years 1994 through 2011, 2013 and 2014.
MLPF&S is sponsor for the Trusts. The sponsor will sell
units of the Trusts to the Separate Account and has
agreed to repurchase units when 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 Trusts (see "Charges to Divisions Investing in the
Trusts", page 17).
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FACTS ABOUT THE POLICY
- ----------------------------------------------------------------
WHO MAY BE COVERED
BY A POLICY
We can issue a policy for an insured up to age 75. We
use the insured's age as of the insured's birthday
nearest the policy date. (We call this the insured's
issue age.) The insured must also meet our underwriting
requirements.
We use two methods of underwriting:
- simplified underwriting, with no physical exam; and
- para-medical or medical underwriting with a
physical exam.
The single premium and the age of the insured determine
whether we will do underwriting on a simplified or
medical basis. The maximum premium we will underwrite on
a simplified basis is $25,000 for insureds through age
14, $50,000 for insureds age 15 through 29, $75,000 for
insureds age 30 through 39, $100,000 for insureds age 40
through 49 and $150,000 for insureds age 50 through 75.
However, if you select the maximum face amount (see
"Selecting the Face Amount", below), we may take the net
amount at risk (see "Mortality Cost", page 16) into
account in determining the method of underwriting.
We assign insureds to underwriting classes which
determine the mortality rates we will use in calculating
mortality cost deductions and which determine the
guaranteed mortality rates used in calculating net
single premium factors and guarantee periods. In
assigning insureds to underwriting classes, we
distinguish between those insureds underwritten on a
simplified basis and those on a para-medical or medical
basis. Under both the simplified and medical
underwriting methods, policies may be issued on insureds
either in the standard or non-smoker underwriting class.
Policies may also be issued on
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<PAGE>
insureds in a substandard underwriting class. For a
discussion of the effect of underwriting classification
on mortality cost deductions, see "Mortality Cost" on
page 16.
- --------------------------------------------------------------------------------
PREMIUMS
You purchase a face amount of insurance coverage with a
single premium payment. You may make additional payments
subject to certain restrictions (see "Making Additional
Payments", page 12). The minimum single premium is
$5,000 for an insured under age 20 and $10,000 for an
insured age 20 and over or, if less, for all ages the
single premium required to purchase a face amount of at
least $100,000. We may reduce the minimum single premium
requirements for certain group or sponsored arrangements
(see "Group or Sponsored Arrangements", page 27).
SELECTING THE FACE AMOUNT
You may select the face amount for a given premium
within the following limits:
- The minimum face amount is the amount which will
give you a guarantee period for the whole of life.
- The maximum face amount is the amount which will
give you the minimum guarantee period we require
for the insured's age, sex and underwriting class.
As the face amount is increased for a given single
premium, the guarantee period becomes shorter and the
mortality costs in the early policy years are larger to
cover the increased amounts of insurance.
<TABLE>
<CAPTION>
TABLE OF ILLUSTRATIVE FACE
AMOUNTS FOR $10,000 SINGLE PREMIUM
STANDARD-SIMPLIFIED ISSUE
GUARANTEE PERIOD MINIMUM
FOR LIFE GUARANTEE PERIOD
----------------- -------------------
ISSUE
AGE MALE FEMALE MALE FEMALE
----- ------- ------- -------- --------
<S> <C> <C> <C> <C>
35 $33,389 $38,906 $166,773 $209,875
45 $24,424 $28,497 $ 90,736 $126,292
55 $18,386 $21,346 $ 49,162 $ 78,522
65 $14,447 $16,308 $ 27,801 $ 44,723
</TABLE>
GUARANTEE PERIOD
The guarantee period is the time we guarantee that the
policy will remain in force regardless of investment
experience unless the policy debt exceeds certain policy
values. It is for the insured's life or for a shorter
period depending on the face amount selected for a given
single premium. The guarantee period is based on the
guaranteed maximum mortality rates in the policy, the
deferred policy loading and a 4% interest assumption.
This means that for a given premium 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.
- --------------------------------------------------------------------------------
MAKING ADDITIONAL PAYMENTS
After the end of the "free look" period, you may make an
additional payment any time you choose up to four times
a policy year. (In the state of Kentucky no additional
payments can be made until after the first policy year.)
We may require satisfactory evidence of insurability
before we accept your payment if
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<PAGE>
the payment increases the net amount at risk under the
policy (see "Mortality Cost", page 16) or if the
guarantee period at the time of the payment is one year
or less. The minimum additional payment we will accept
is $1,000.
If your additional payment requires evidence of
insurability, we will place that payment in the division
investing in the Money Reserve Portfolio on the business
day next following receipt at the Service Center. Once
the underwriting is completed and we accept your
payment, the amount applicable to the additional payment
in the division investing in the Money Reserve Portfolio
will be allocated either according to your instructions
or, if no instructions have been received,
proportionately to your investment base in your
investment divisions.
If your additional payment doesn't require evidence of
insurability, on the date we receive and accept the
payment we'll:
- increase your investment base by the amount of the
payment; and
- increase the deferred policy loading (see "Deferred
Policy Loading", page 15).
Currently, any additional payment not requiring evidence
of insurability will be accepted the day it is received.
If your additional payment requires evidence of
insurability, it will be reflected in your policy values
as described above, effective the next business day
after the payment was received at the Service Center.
If there is a loan outstanding on your policy, unless
you tell us otherwise, we will treat any payment by you
as a loan repayment, not as an additional payment.
As of the policy processing date on or next following
the date we receive and accept the additional payment,
your variable insurance amount will reflect the
additional payment (see "Variable Insurance Amount",
page 19). As of such date, we'll also increase either
your guarantee period or face amount or both. If your
guarantee period prior to any additional payments is
less than for life, payments will first be used to
extend your guarantee period to the whole of life. Any
excess amounts or subsequent additional payments will be
used to increase your policy's face amount. The amount
of this increase is determined by taking the additional
payment or any excess amount, deducting the applicable
deferred policy loading, bringing the result up at an
annual rate of 4% interest from the date we receive and
accept the additional payment to the next policy
processing date, and then multiplying by the applicable
net single premium factor. If the additional payment is
received and accepted on a policy processing date, the
payment minus the deferred policy loading is multiplied
by the applicable net single premium factor.
If the insured dies after an additional payment is
received and accepted and before the next policy
processing date, we'll pay the beneficiary the larger
of:
- the amount of the death benefit calculated as of
the prior policy processing date plus the amount of
the additional payment; and
- the cash surrender value as of the date we received
and accepted the additional payment multiplied by
the net single premium factor as of such date (see
"Net Single Premium Factor", page 19).
The amount paid to the beneficiary will be reduced by
the amount of any policy debt and any overdue charges if
the policy is in a grace period.
14
<PAGE>
GUARANTEE OF INSURABILITY RIDER
This rider gives you guaranteed options to make certain
of the additional payments as described above without
evidence of insurability. It is available only to
insureds in a standard or non-smoker underwriting class.
We will limit the amount of the payments under the
rider. While the rider is in effect you will have a
guaranteed option on each of your first five policy
anniversaries. Subject to evidence of insurability and a
maximum age requirement, you may also extend the
guaranteed options to include your next five policy
anniversaries.
To exercise an option we must receive the additional
payment while the insured is alive and within 30 days
before or after your policy anniversary. If you don't
exercise an option you will forfeit any remaining
options and the rider will end.
- --------------------------------------------------------------------------------
INVESTMENT BASE
Your investment base is the amount available for
investment at any time. It's the sum of the amounts
invested in each of the Separate Account divisions. We
adjust your investment base daily to reflect the
divisions' investment performance (see "Net Rate of
Return for an Investment Division", page 33).
Certain charges and policy loans directly decrease your
investment base. Loan repayments and additional payments
increase it. You may elect in writing from which
investment divisions you want loans taken and to which
divisions you want repayments and additional payments
added. If you don't make such an election, we allocate
increases and decreases proportionately to the
investment base in your investment divisions. (For the
special rules on additional payments which require
evidence of insurability, see "Making Additional
Payments", page 12.)
INVESTMENT BASE ALLOCATION DURING THE "FREE LOOK" PERIOD
Under our current rules, we will place your single
premium submitted with your application in the division
investing in the Money Reserve Portfolio. Your
application sets forth this designation. We won't make
an allocation change during the "free look" period.
CHANGING YOUR INVESTMENT BASE ALLOCATION
After the "free look" period, your investment base can
be allocated among up to any five divisions. Currently,
you may change the allocation of your investment base as
often as you choose. However, we may at some point in
the future limit the number of changes permitted but not
to less than five per policy year. We will notify you if
we do so. We will assess a charge for each allocation
change in excess of five per policy year (see
"Reallocation Charges", page 16).
In order to change your investment base allocation, you
must call or write the Service Center. If your "free
look" period has expired, we will make the change as
soon as we receive your request. You can give allocation
requests during the "free look" period and the
allocation will be made immediately following the end of
the "free look" period (see "Some Administrative
Procedures", page 24).
TRUST ALLOCATIONS
We'll notify you 30 days before a Trust you've invested
in matures. You must tell us in writing at least seven
days before the maturity date how to reinvest your funds
in the division investing in that Trust. If we don't
hear from you, we'll move your investment base in that
division to the division investing in
15
<PAGE>
the Money Reserve Portfolio. An allocation on a trust
maturity date won't be considered a change in the
allocation of the investment base for purposes of
calculating the charge for any allocation changes over
five in each policy year.
Units of a specific Trust may no longer be available
when we receive your request for allocation. Should this
occur, we will notify you immediately so that you may
change your request.
ALLOCATION TO THE DIVISION INVESTING IN THE NATURAL
RESOURCES PORTFOLIO
Shares of the Natural Resources Portfolio may not be
available when we receive your request for allocation.
Should this occur, we will notify you immediately so
that you may change your request.
- --------------------------------------------------------------------------------
CHARGES DEDUCTED FROM YOUR INVESTMENT BASE
The charges described below are deducted from your
investment base. We also deduct certain asset and trust
charges daily from the investment results of each
division in the Separate Account in determining the net
rate of return. Currently, the asset and trust charges
are equivalent to .60% and .34% annually at the
beginning of the year (see "Charges to the Separate
Account", page 16).
DEFERRED POLICY LOADING
We invest 100% of your single premium and any additional
payments you may make. Chargeable to the single premium
and any additional payments is an amount called the
deferred policy loading. This charge consists of a sales
load, a first year administrative expense (not assessed
against additional payments received after the first
policy year) and a state and local premium tax charge.
The sales load, equal to a maximum of 4.0% of the single
premium and any additional payments, compensates us for
sales expenses. The first year administrative expense,
equal to a maximum of .5% of the single premium and any
additional payments received in the first policy year,
compensates us for the expenses associated with issuing
the policies. We do not expect to make a profit from
this expense. The sales load and first year
administrative expense may be reduced if cumulative
premiums are sufficiently high to reach certain
breakpoints and in certain group or sponsored
arrangements as described on page 27. We anticipate that
the sales load charge may be insufficient to cover our
distribution expenses. Any shortfall will be made up
from our general account which may include amounts
derived from mortality gains and risk charges.
The state and local premium tax charge, equal to 2.5% of
your single premium and any additional payments,
compensates us for state and local premium taxes we must
pay when we accept a premium. Premium taxes vary from
state to state. The 2.5% rate is the minimum rate we
expect to pay on premiums from all states.
Although chargeable to your single premium and to any
additional payments, we advance the amount of the
deferred policy loading to the Separate Account as part
of your investment base. We then take back the loading
in equal installments on the ten policy anniversaries
following the date we receive and accept your payment.
In determining your policy's net cash surrender value,
we subtract the balance of the deferred policy loading
from your investment base.
16
<PAGE>
During the period that the deferred policy loading is
included in your investment base, a positive net rate of
return will give you greater increases in net cash
surrender value and a negative net rate of return
greater decreases in net cash surrender value than if
the loading had not been included in your investment
base.
MORTALITY COST
We deduct a mortality cost from your investment base on
each processing date after the policy date. This charge
compensates us for the cost of providing life insurance
coverage for the insured. We base it on the underwriting
class we assign to the insured, the insured's sex and
attained age and the policy's net amount at risk (except
in Montana and Massachusetts, see "Legal Considerations
for Employers", page 27).
To determine the mortality cost, we multiply the current
mortality rate by the policy's net amount at risk
(adjusted for interest at an annual rate of 4%). The net
amount at risk is the difference, as of the previous
policy processing date, between the death benefit and
the cash surrender value.
Current mortality rates may be equal to or less than the
guaranteed mortality rates depending on the insured's
underwriting class, sex and attained age. We guarantee
that the current mortality rates will never exceed the
maximum guaranteed rates shown in your policy. For
insureds age 20 and over, current mortality rates
distinguish between insureds in a smoker (standard)
underwriting class and insureds in a non-smoker
underwriting class. We use the 1980 Commissioners
Standard Ordinary Mortality Table (CSO Table) for
policies underwritten on a medical basis and the 1980
Commissioners Extended Term Mortality Table (CET Table)
for policies underwritten on a simplified basis to
determine these maximum rates if the policies are issued
on insureds in a standard or non-smoker underwriting
class. For policies issued on a substandard basis we use
a multiple of the 1980 CSO Table.
Because we do less underwriting under the simplified
underwriting method, the guaranteed maximum mortality
rates are higher for the simplified classes than for the
medical underwriting classes. The current mortality
rates for the simplified classes may be higher than the
guaranteed rates for the medical classes depending on
the age and sex of the insured. However, for the non-
smoker simplified underwriting class, current mortality
rates are equal to or less than the guaranteed rates for
the medical underwriting classes.
During the period between processing dates, your net
cash surrender value takes the mortality cost into
account on a pro-rated basis.
MAXIMUM MORTALITY COST. During the guarantee period we
will limit the deduction for mortality cost if
investment results are unfavorable. We do this by
substituting in our calculation the tabular value for
the cash surrender value in determining the net amount
at risk and by multiplying by the guaranteed maximum
mortality rate. We will deduct this alternate amount
from your investment base when it is less than the
mortality cost we would have otherwise deducted.
REALLOCATION CHARGES
Reallocation charges are deducted on policy processing
dates if you change your investment base allocation more
than five times per policy year. The
17
<PAGE>
charge equals $25.00 for each allocation change made
during a policy processing period, which exceeds five
for the policy year. We do not expect to make a profit
from these charges.
NET LOAN COST
The net loan cost is explained below under "Policy
Loans".
- --------------------------------------------------------------------------------
CHARGES TO THE SEPARATE ACCOUNT
We deduct an asset charge from each division of the
Separate Account to cover our mortality, expense and
guaranteed benefits risks. We make the charge each day.
The total amount of this charge is computed at a maximum
effective annual rate of .60% at the beginning of the
year. We will realize a gain from this charge to the
extent it is not needed to provide for benefits and
expenses under the policies.
The mortality risk assumed is the risk that insureds as
a group will live for a shorter time than our actuarial
tables predict. As a result, we would be paying more in
death benefits than we planned.
The expense risk assumed is the risk that it will cost
us more to issue and administer the policies than we
expect.
The guaranteed benefits risks are related to potentially
unfavorable investment results. One risk is that the
policy's net cash surrender value cannot cover the
charges due during the guarantee period. The other risk
is that we may have to limit the deduction for mortality
cost (see "Maximum Mortality Cost", page 16).
CHARGES TO DIVISIONS INVESTING IN THE TRUSTS
We assess a daily trust charge against the assets of
each division investing in the Trusts. This charge
reimburses us for the transaction charge we pay to
MLPF&S when units are sold to the Separate Account.
The trust charge is currently equivalent to .34%
annually at the beginning of the year. It may be
increased, but will not exceed .50% annually at the
beginning of the year. The charge is based on cost
(taking into account our loss of interest) with no
expected profit for us.
- --------------------------------------------------------------------------------
NET CASH SURRENDER VALUE
Your policy's net cash surrender value fluctuates daily
with the investment results of the investment divisions
you select. We don't guarantee any minimum. On a policy
processing date which is also your policy anniversary,
the net cash surrender value equals:
- the policy's investment base on that date;
- minus the balance of the deferred policy loading
(see "Deferred Policy Loading", page 15).
If the date of calculation is not a policy processing
date, we also subtract a pro-rata mortality cost. And,
if there is any existing policy debt, we will also
subtract a pro-rata net loan cost on dates other than
the policy anniversary.
CANCELLING TO RECEIVE NET CASH SURRENDER VALUE
You may cancel your policy at any time while the insured
is living and receive the policy's net cash surrender
value. Your request to cancel must be in writing in a
form satisfactory to us. All rights to death benefits
will end on the date the written request is sent to us.
The net cash surrender value will be determined upon our
receipt of the written request at the Service Center.
You may elect to receive this amount either in a single
payment or under one or more Income Plans (see "Income
Plans", page 26
18
<PAGE>
- --------------------------------------------------------------------------------
POLICY LOANS
You may use your policy as collateral to borrow funds
from us. The minimum loan we will make is $1,000 unless
you're borrowing to pay the premium on another variable
life insurance policy issued by the Insurance Company.
In that case, you may borrow the exact amount required
even if it's less than $1,000. You may repay all or part
of the loan any time during the insured's lifetime. Each
repayment must be for at least $1,000 or the amount of
the policy debt, if less.
19
<PAGE>
When you take a loan, we transfer an amount equal to the
amount you borrowed out of your investment divisions and
hold it as collateral in our general account. You may
tell us in writing which investment divisions you want
borrowed amounts taken from and which divisions should
receive repayments. If you don't, we'll take the borrowed
amounts proportionately from and make repayments
proportionately to your investment divisions.
EFFECT ON DEATH BENEFIT AND CASH SURRENDER VALUE
Whether or not you repay a policy loan, taking a loan
will have a permanent effect on your cash surrender value
and may have a permanent effect on your death benefit.
This is because the collateral for your loan doesn't
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 surrender 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 surrender value will be lower, as may be the death
benefit. In that case, the lower cash surrender value may
cause the policy to lapse sooner than if no loan had been
taken.
LOAN VALUE
The loan value of your policy equals:
- 75% of the policy's cash surrender value during the
first three years; or
- 90% of the policy's cash surrender value after the
first three years.
The cash surrender value is the net cash surrender value
plus any policy debt.
In certain states the loan value may differ from that
above for particular years. Also, certain states won't
permit us to impose a minimum on the amount you can
borrow or repay.
The maximum amount you can borrow at any time is the
difference between the loan value and the policy debt
(the outstanding loan plus accrued interest). When
additional amounts are borrowed they are added to the
policy debt in determining the amount of your new loan.
INTEREST
While a policy loan is outstanding, we'll charge you
interest of 4.75% annually. Interest accrues each day and
payments are due at the end of each policy year. If you
don't pay the interest when due, we add it to your loan.
Interest paid on a policy loan is not tax-deductible.
The amount held in our general account as collateral for
your loan earns interest at a minimum of 4.0% annually
for the first ten policy years and 4.15% thereafter.
NET LOAN COST
On each policy anniversary, we reduce your investment
base by the net loan cost (the difference between the
interest charged and the earnings on the amount held as
collateral in the general account) and add that amount to
the amount held in the general account as collateral for
the loan. For the first ten policy years this equals .75%
of the policy debt on the previous policy anniversary
taking into account any loans and repayments since then.
After the first ten policy years, the net loan cost
equals .60%.
Between policy anniversaries, your policy's net cash
surrender value is reduced by this charge on a pro-rated
basis.
CANCELLATION DUE TO EXCESS DEBT
If your policy debt exceeds the larger of the cash
surrender value and the tabular value, we'll mail a
notice of our intent to cancel the policy, specifying
18
<PAGE>
the minimum repayment amount. If we do not receive that
amount within 61 days after we mail the notice, we will
cancel the policy. Depending upon investment performance
of the divisions and the amounts borrowed, loans may
cause the policy to lapse. If the policy lapses with a
loan outstanding, adverse tax consequences may result
(see "Tax Considerations", page 28.
- --------------------------------------------------------------------------------
DEATH BENEFIT PROCEEDS
We will pay the death benefit proceeds to the beneficiary
when we receive all information needed to make the
payment, including due proof of the insured's death.
AMOUNT OF DEATH BENEFIT PROCEEDS
The policy's death benefit proceeds equal:
- the death benefit, which is the larger of the
current face amount and the variable insurance
amount; less
- any policy debt; and less
- any overdue charges if the policy is in a grace
period (see "When Your Guarantee Period is Less
Than for Life", page 20).
The values above are those as of the date of death. The
death benefit will never be less than the amount required
to keep the policy qualified as life insurance under
Federal income tax laws.
The amount paid on death will be greater when an
additional payment has been received and accepted during
a policy processing period and the insured dies prior to
the next policy processing date (see "Making Additional
Payments", page 12).
VARIABLE INSURANCE AMOUNT
We determine the variable insurance amount on each policy
processing date by:
- calculating the cash surrender value; and
- multiplying by the net single premium factor
(explained below).
The variable insurance amount changes only on a policy
processing date. It will never be less than required by
Federal income tax law.
NET SINGLE PREMIUM FACTOR
The net single premium factor is based on the insured's
sex, underwriting class and attained age on the policy
processing date. It decreases as the insured's age
increases. As a result, the variable insurance amount
will decrease in relationship to the policy's cash
surrender value. Also, net single premium factors may be
higher for a woman than for a man of the same age. A
table of net single premium factors is included in the
policy.
TABLE OF ILLUSTRATIVE NET SINGLE PREMIUM FACTORS
ON POLICY ANNIVERSARIES
STANDARD-SIMPLIFIED ISSUE STANDARD-MEDICAL ISSUE
<TABLE>
<CAPTION>
ATTAINED ATTAINED
AGE MALE FEMALE AGE MALE FEMALE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
5 8.61444 10.08769 5 10.26605 12.37298
15 6.45795 7.65253 15 7.41158 8.96292
25 4.89803 5.70908 25 5.50384 6.48170
35 3.59024 4.18342 35 3.97197 4.64894
45 2.62620 3.06419 45 2.87749 3.36465
55 1.97694 2.29528 55 2.14058 2.48940
65 1.55349 1.75357 65 1.65786 1.87562
75 1.28954 1.38615 75 1.35394 1.45952
85 1.14214 1.17173 85 1.18029 1.21265
</TABLE>
19
<PAGE>
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PAYMENT OF DEATH BENEFIT PROCEEDS
We will usually pay the death benefit proceeds to the
beneficiary within seven days after we receive all the
information we need to process the payment. We may delay
payment if the policy is being contested or under the
circumstances described in "Using Your Policy", page 23
and "Other Policy Provisions", page 25. If we do delay
payment, 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 (see "Income Plans", page 26).
- --------------------------------------------------------------------------------
POLICY GUARANTEES
Although your policy values depend on the investment
results of the investment divisions you've selected and
the amount of net cash surrender value is not guaranteed,
the policy does provide the following guarantees.
GUARANTEE PERIOD
We guarantee that the policy will stay in force for the
insured's life, or for a shorter guarantee period
depending on the face amount selected for a given
premium. We won't cancel the policy during the guarantee
period unless the policy debt exceeds certain policy
values (see "Interest", page 18). We'll hold a reserve in
our general account to support this guarantee.
MORTALITY COST
Each policy issued on a standard basis guarantees maximum
mortality rates based on the 1980 CSO Table for policies
underwritten on a medical basis and the 1980 CET Table
for policies underwritten on a simplified basis. For
policies issued on a substandard basis we use a multiple
of the 1980 CSO Table. We may use current rates that are
equal to or less than these rates, but never greater. In
addition, we limit the mortality cost if investment
results are unfavorable (see "Maximum Mortality Cost",
page 16). In effect, during the guarantee period you will
not be charged for mortality costs that are greater than
those for a comparable fixed policy based on 4% interest
and the same guaranteed mortality rates.
YOUR POLICY'S TABULAR VALUE
When we issue your policy, its tabular value equals the
cash surrender value. From then on, the tabular value
equals the cash surrender value for a comparable fixed
life policy with the same face amount and guarantee
period, based on 4% interest and the guaranteed mortality
table. After the guarantee period the tabular value is
zero. The tabular value is used to limit the mortality
cost deduction as well as our right to cancel your policy
during the guarantee period.
OTHER AMOUNTS DEDUCTED FROM INVESTMENT BASE
There are currently no charges for administrative
expenses beyond the first year and we won't impose any in
the future. The loan charge will never exceed a maximum
of .75% of the policy debt per year for the first ten
policy years and .60% thereafter.
AMOUNTS DEDUCTED FROM THE SEPARATE ACCOUNT
The amount of these deductions is limited and can't be
increased above the maximums shown in "Charges to the
Separate Account" on page 16.
- --------------------------------------------------------------------------------
WHEN YOUR GUARANTEE PERIOD IS LESS THAN FOR LIFE
After the end of the guarantee period, we may cancel your
policy if the net cash surrender value on a policy
processing date won't cover the charges due (see "Charges
Deducted from Your Investment Base", page 15).
We will notify you before cancelling your policy. You'll
have 61 days to pay us three times the charges due on the
policy processing date when your net cash surrender value
became insufficient. (In certain states the amount of the
required
20
<PAGE>
payment may differ.) We will cancel your policy at the
end of this grace period if we have not received your
payment. Any excess of the payment above the overdue
charges will be treated as an additional payment.
REINSTATING YOUR POLICY
If we cancel your policy, you may reinstate it 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 make a premium payment which is sufficient to
give you a guarantee period of at least five years
from the effective date of the reinstated policy.
We will treat your premium payment as an additional
payment requiring underwriting (see "Making Additional
Payments", page 12).
Your reinstated policy will be effective on the policy
processing date on or next following the date we approve
your reinstatement application.
- --------------------------------------------------------------------------------
YOUR RIGHT TO CANCEL ("FREE LOOK" PERIOD) OR EXCHANGE YOUR POLICY
You may cancel your policy during your "free look"
period. In most states it is ten days after you receive
it. In some states, however, it is the later of the ten
days and 45 days from the date the application is
executed. If you decide to cancel, you may mail or
deliver the policy to us or to the registered
representative who sold it to you. We will refund the
premium paid without interest. If you cancel, we may
require that you wait six months before applying to us
again.
SPECIAL CANCELLATION RIGHT FOR CORPORATE PURCHASERS
Corporations that purchase one or more policies at the
same time with an aggregate single premium of $250,000 or
more, where the investment base has at all times been
allocated to the division investing in the Money Reserve
Portfolio and where no additional payments have been made
nor policy loans taken, may cancel the policy(ies) and
receive the greater of the premium paid without interest
and the net cash surrender value.
EXCHANGING YOUR POLICY
You may exchange this policy for a policy with benefits
that do not vary with the investment results of a
separate account. You must request this in writing within
18 months of the issue date of your policy. You also must
return the original policy.
The new policy will have the same owner and beneficiary
as those of your original policy on the date of the
exchange. It will have the same issue age, issue date,
face amount, cash surrender value, benefit riders and
underwriting class as the original policy. Any policy
debt will be carried over to the new policy.
We won't ask for evidence of insurability.
- --------------------------------------------------------------------------------
REPORTS TO POLICYOWNERS
After the end of each policy quarter you'll receive a
statement of the allocation of your investment base,
death benefit, net cash surrender value, any policy debt
and, if there has been a change, your current face amount
and guarantee period. All figures will be as of the first
day of the current policy quarter. The statement will
show the amounts deducted from or added to the investment
base during the policy quarter. We will project your
policy's value at a net rate of return of 8% and based on
this value tell you when the policy will terminate unless
additional payments are made. It will also include any
other information that may be currently required by the
state insurance department of the jurisdiction in which
this policy is delivered.
21
<PAGE>
Policyowners will receive confirmation of all financial
transactions. Such confirmations will show the price per
unit of each of the policyowner's investment divisions,
the number of units a policyowner has in the investment
division and the value of the investment division
computed by multiplying the quantity of units by the
price per unit. (See "Net Rate of Return for an
Investment Division", page 33). The sum of the values in
each investment division is a policyowner's investment
base.
You will also receive semiannual reports containing a
financial statement for the Separate Account and a list
of portfolio securities of the Series Fund and the
Variable Series Funds, as required by the Investment
Company Act of 1940.
- --------------------------------------------------------------------------------
SINGLE PREMIUM IMMEDIATE ANNUITY RIDER
If it's allowed in your state, you may add a single
premium immediate annuity rider (SPIAR) to your policy.
This rider would provide you with a fixed income for a
period of ten years. If you are the insured and you die
before the period ends, we'll pay the rider value in a
lump sum to the beneficiary under the policy. For tax
purposes, this payment won't be considered part of the
life insurance death benefit.
If you surrender the rider before the end of the period,
we'll pay you the rider value over five years or apply it
to a lifetime income for you, as you choose.
If you are not the insured and you die before the income
period ends, we'll pay the remaining payments to the new
owner.
If you change the owner of the policy, we will change the
owner of the SPIAR to the new owner of the policy.
If the policy ends because the insured dies (where you
are not the insured), because we terminate the policy, or
because you've cancelled it for its net cash surrender
value, we'll continue the annuity under the same terms
but under a separate written agreement. Or you can choose
one of the options available upon surrender of the rider.
The rider won't have any effect on your policy's loan
value.
The reserves for this rider will be held in our general
account.
Pledging, assigning or gifting a policy with a SPIAR may
have tax consequences to you. You are advised to consult
your tax advisor prior to effecting an assignment, pledge
or gift of such a policy. For a discussion of the tax
issues associated with use of a SPIAR, see "Tax
Considerations", page 28.
22
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT THE POLICY
- ----------------------------------------------------------------
USING YOUR POLICY
OWNERSHIP
The policyowner is usually the insured, unless another
owner has been named in the application. The policyowner
has all rights and options described in the policy.
If you, the policyowner, are not also 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 policy and have all your rights. If you don't
name a contingent owner, your estate will own your
interest in the policy at your death.
If there is more than one policyowner, we will treat the
owners as joint tenants with rights of survivorship
unless the ownership designation provides otherwise. The
owners must exercise their rights and options jointly,
except that any one of the owners may reallocate the
Contract's investment base by phone if the owner
provides the personal identification code as well as the
policy number. One policyowner must be designated, in
writing, to receive all notices, correspondence and tax
reporting to which policyowners are entitled under the
policy.
CHANGING THE OWNER
During your lifetime, you have the right to transfer
ownership of the policy. The new owner will have all
rights and options described in the policy. The change
will be effective as of the day the notice is signed,
but will not affect any payment made or action taken by
us before receipt of the notice of the change at the
Service Center.
ASSIGNING THE POLICY AS COLLATERAL
You may assign this policy 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 us satisfactory written notice at the
Service Center in order to make or release an
assignment. We are not responsible for the validity of
any assignment.
NAMING BENEFICIARIES
We'll pay the primary beneficiary the proceeds of this
policy on the insured's death. If the primary
beneficiary has died, we pay the contingent beneficiary.
If no contingent beneficiary is living, we pay the
insured's estate.
You may name more than one person as primary or
contingent beneficiaries. We'll pay proceeds in equal
shares to the surviving beneficiary unless the
beneficiary designation provides otherwise.
You have the right to change beneficiaries during the
insured's lifetime unless the primary beneficiary
designation has been made irrevocable. If the
designation is irrevocable, the primary beneficiary must
consent when you exercise certain rights and options
under this policy. If you change the beneficiary the
change will take effect as of the day the notice is
signed, but will not affect any payment made or action
taken by us before receipt of the notice of the change
at the Service Center.
23
<PAGE>
CHANGING THE INSURED
Subject to certain requirements, you may request that we
change the insured under a policy. To do so, we must
receive a written request from you and the proposed new
insured. We will also require evidence of insurability
for the proposed new insured. If the request for change
is approved, the insurance on the new insured will take
effect on the policy processing date on or next
following the date of approval, provided the new insured
is still living.
The policy will be changed as follows on the effective
date:
- The issue age will be the new insured's issue age
(the new insured's age as of the birthday nearest
the policy date).
- The guaranteed maximum mortality rates will be
those in effect on the policy date for the new
insured's issue age, sex and underwriting class.
- A charge for changing the insured will be deducted
from the policy's investment base on the effective
date. The charge will equal $1.50 per $1,000 of
face amount with a minimum of $200 and a maximum of
$1,500.
- The policy's issue date will be the effective date
of the change.
The face amount or guarantee period may also change on
the effective date depending on the new insured's age,
sex and underwriting class. We will also determine a new
variable insurance amount.
MATURITY PROCEEDS
The maturity date is the policy anniversary nearest the
insured's 100th birthday. On the maturity date, we'll
pay you the net cash surrender value provided the
insured is still living.
HOW WE MAKE PAYMENTS
We'll usually pay death benefit proceeds, net cash
surrender value on cancellation and loans within seven
days after the 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 Series Fund
shares or Variable Series Funds shares because:
- the New York Stock Exchange is closed for other
than a regular holiday or weekend; or
- trading is restricted; or
- an emergency exists according to Securities and
Exchange Commission ("SEC") rules.
We may also delay payment if an SEC order allows us to
in order to protect our policyowners.
- --------------------------------------------------------------------------------
SOME ADMINISTRATIVE PROCEDURES
Described below are certain of our administrative
procedures. We reserve the right to modify them from
time to time or to eliminate them. For administrative
and tax purposes, we may from time to time require
specific forms be completed in order to accomplish
certain transactions, including surrenders.
SIGNATURE GUARANTEES
In order for you to make certain policy transactions and
changes, we require that your signature be guaranteed.
Your signature can only be guaranteed by a national bank
or trust company (not a savings bank or federal savings
and loan association), a member bank of the Federal
Reserve System or a member firm of a national securities
exchange.
24
<PAGE>
Currently, your signature must be guaranteed on:
- WRITTEN requests for cash surrenders, policy loans
and reallocations of investment base;
- the form required for change in owner designation;
and
- phone authorization forms if not submitted with
your application.
YOUR PERSONAL IDENTIFICATION CODE
We will send you a four digit personal identification
code shortly after your policy is placed in force and
before the end of the "free look" period. You need to
give us this number when you call us at the Service
Center to get information about your policy, to make a
policy loan (if an authorization is on file), or to make
other requests. Your personal identification code will
be accompanied by a notice reminding you that your
investment base is in the division investing in the
Money Reserve Portfolio and that you may change this
allocation by calling or writing the Service Center (see
"Changing Your Investment Base Allocation", page 14).
REALLOCATING YOUR INVESTMENT BASE
You can reallocate your investment base either in
writing in a form satisfactory to us or by phone. If you
do it by phone, you must tell us your personal
identification code as well as your policy number. We
will give you a confirmation number over the phone and
then follow up in writing.
REQUESTING A POLICY LOAN
A loan may be requested in writing or, if all required
forms are on file with us, by phone. Once we have the
authorization, you can call the Service Center, give us
your policy number, name and personal identification
code, and then tell us how much you want to borrow and
from which divisions the loan should be transferred. We
will wire the funds to your account at the financial
institution named on your authorization. We will usually
wire the funds within two working days of receipt of the
request.
TELEPHONE REQUESTS
A telephone request for a policy loan 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. The
Insurance Company reserves the right to change or
discontinue the telephone transfer procedures.
- --------------------------------------------------------------------------------
OTHER POLICY PROVISIONS
IN CASE OF ERRORS ON THE APPLICATION
If an age or sex given in the application is wrong, it
could mean that the face amount, guarantee period, or
any other policy benefit is wrong. We'll pay what the
premium would have bought for the correct age or sex
assuming the same guarantee period.
INCONTESTIBILITY
We rely on statements made in the applications. Legally,
they are considered representations, not warranties. We
can contest the validity of a policy if any material
misstatements are made in the initial application. We
can also contest any amount of death benefit which
wouldn't be payable except for the fact that an
additional payment was made if any material
misstatements are made in the application required with
the additional payment.
We won't contest the validity of a policy after it has
been in effect during the insured's lifetime for two
years from the date of issue. Nor will we contest any
25
<PAGE>
amount of death benefit attributable to an additional
payment after such death benefit has been in effect
during the insured's lifetime for two years from the
date we received and accepted the payment.
PAYMENT IN CASE OF SUICIDE
If the insured commits suicide within two years from
this policy's issue date, we'll pay only a limited death
benefit. The benefit will be equal to the premium paid.
If the insured commits suicide within two years of any
date we receive and accept an additional payment, any
amount of death benefit which wouldn't be payable except
for the fact that the additional payment was made will
be limited to the amount of the additional payment. The
death benefit we will pay will be reduced by any policy
debt.
POLICY CHANGES -- APPLICABLE TAX LAW
For you to receive the tax treatment accorded to life
insurance under Federal income tax law, your policy must
qualify initially and continue to qualify as life
insurance under the Internal Revenue Code or successor
law. Therefore, to assure this qualification, we have
reserved the right to defer acceptance of or to return
any additional payments that would cause the policy to
fail to qualify as life insurance under applicable tax
law as interpreted by us. Further, we reserve the right
to make changes in the policy or its riders or to make
distributions from the policy to the extent we find it
necessary to continue to qualify your policy as life
insurance. Any such changes will apply uniformly to all
policies that are affected and you will be given advance
written notice of such changes.
DIVIDENDS
Our variable life insurance policies are
non-participating. This means that they don't provide
for dividends. Investment results under these variable
life policies are reflected in benefits.
STATE VARIATIONS
Certain policy features are subject to state variation.
You should read your policy carefully to determine
whether any variations apply in the state in which the
policy was issued.
- --------------------------------------------------------------------------------
INCOME PLANS We offer several income plans to provide for payment of
the death benefit proceeds to the beneficiary. You may
choose one or more income plans at any time during the
insured's lifetime. If no plan has been chosen when the
insured dies, the beneficiary has one year to apply the
death benefit proceeds either paid or payable to such
beneficiary to one or more of the plans. You may also
choose one or more income plans on cancelling the policy
for its net cash surrender value. Our approval is needed
for any plan where any income payments would be less
than $100. Payments under these plans do not depend on
the investment results of a separate account.
Income plans are:
ANNUITY PLAN
An amount can be used to purchase a single premium
immediate annuity. Annuity purchase rates will be 3%
less than for new annuitants.
INCOME FOR A FIXED PERIOD
Payments are made in equal installments for up to 30
years.
26
<PAGE>
INCOME FOR LIFE
Payments are made in equal monthly installments
until death of a named person or end of a designated
period, whichever is later. The designated period
may be for 10 or 20 years.
INTEREST PAYMENT
Amounts are left on deposit with us to earn interest
of at least 3% per year.
INCOME OF A FIXED AMOUNT
Payments are made in equal installments until
proceeds applied under the option and interest on
unpaid balance at not less than 3% per year are
exhausted.
JOINT LIFE INCOME
Payments are made in monthly installments as long as
at least one of two named persons is living. While
both are living, we make full payments. If one dies,
we make payments at two-thirds of the full amount.
Payments end completely when both named persons die.
Once in effect, some of the plans may not provide any
surrender rights.
- --------------------------------------------------------------------------------
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may
reduce the sales load, the first-year administrative
expense, the mortality cost and the minimum premium and
we may modify our underwriting classifications.
Group arrangements include those in which a trustee or
an employer, for example, purchases policies covering a
group of individuals on a group basis. Sponsored
arrangements include those in which an employer allows
us to sell policies to its employees on an individual
basis.
Our costs for sales, administration and mortality
generally vary with the size and stability of the group
and the reasons the policies 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 our requirements for size and
number of years in existence. Group or sponsored
arrangements that have been set up solely to buy
policies or that have been in existence less than six
months will not qualify for reduced charges.
We'll make any reductions according to our rules in
effect when an application for a policy or additional
payment is approved. Our current rules call for
reductions resulting in a sales load of not more than 3%
of the premium.
We may change these rules from time to time. However,
reductions in charges will not discriminate unfairly
against any person.
- --------------------------------------------------------------------------------
LEGAL CONSIDERATIONS FOR EMPLOYERS
In 1983, the Supreme Court held in ARIZONA GOVERNING
COMMITTEE V. NORRIS that optional annuity benefits
provided under an employee's deferred compensation plan
could not, under Title VII of the Civil Rights Act of
1964, vary between men and women. In that case, the
Court applied its decision only to benefits derived from
contributions made on or after August 1, 1983.
Subsequent decisions of lower Federal courts indicate
that in other factual circumstances the Title VII
prohibition of sex-distinct benefits may apply to
contributions made before that date. In addition,
legislative, regulatory or decisional authority of some
states may prohibit use of sex-distinct mortality tables
under certain circumstances.
27
<PAGE>
The policy offered by this prospectus is based on
mortality tables that distinguish between men and women.
As a result, the policy pays different benefits to men
and women of the same age. Employers and employee
organizations should check with their legal advisers
before purchasing this policy.
The states of Montana and Massachusetts prohibit the use
of actuarial tables that distinguish between men and
women in determining premiums and policy benefits for
policies issued on the life of its residents. Therefore,
policies offered by this prospectus to insure residents
of Montana and Massachusetts will have premiums and
benefits which are based on actuarial tables that do not
differentiate on the basis of sex.
- --------------------------------------------------------------------------------
SELLING THE POLICIES The Insurance Company retains MLPF&S under a
distribution agreement to act as principal underwriter
for the policies described in this prospectus as well as
other policies issued through the separate account.
MLPF&S also is principal underwriter (distributor) for
other registered investment companies, including other
separate accounts of the Insurance Company and an
affiliated insurance company. It is registered with the
SEC as a broker-dealer and is a member of the National
Association of Securities Dealers.
The Insurance Company has companion sales agreements
with MLPF&S and various Merrill Lynch Life Agencies.
Under these agreements, applications for the policies
are solicited by financial consultants of MLPF&S. The
financial consultants are authorized under applicable
state regulations to sell variable life insurance as
insurance agents.
The maximum commission as a percentage of a premium
payable to qualified registered representatives will, in
no event, exceed 3.5%. In addition, the organizations
described above will also receive override payments and
may be reimbursed under MLPF&S's expense reimbursement
allowance program for portions of expenses incurred.
The total amounts paid under the distribution and sales
agreements for the Separate Account for the years ended
December 31, 1991, December 31, 1992 and December 31,
1993 were $1,185,775, $673,788 and $915,429,
respectively.
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES The Insurance Company and its parent, Merrill Lynch
Insurance Group, Inc. ("MLIG") are parties to a service
agreement pursuant to which MLIG has agreed to provide
certain data processing, legal, actuarial, management,
advertising and other services to the Insurance Company,
including services related to the Separate Account and
the policies. Expenses incurred by MLIG in relation to
this service agreement are reimbursed by the Insurance
Company on an allocated cost basis. Charges billed to
the Insurance Company by MLIG pursuant to the agreement
were $55.9 million for the year ended December 31, 1993.
- --------------------------------------------------------------------------------
TAX CONSIDERATIONS
DEFINITION OF LIFE INSURANCE
In order to qualify as a life insurance contract for
Federal tax purposes, this policy must meet the
definition of a life insurance contract which is set
forth in Section 7702 of the Internal Revenue Code. The
Section 7702 definition can be met if a life insurance
policy satisfies either one of two tests that are
contained in that section. The manner in which these
tests should be applied to certain innovative features
of the policy offered by this prospectus is not directly
addressed by Section 7702 or the proposed regulations
issued
28
<PAGE>
thereunder. The presence of these innovative policy
features, and the absence of final regulations or any
other pertinent interpretations of the tests, thus
creates some uncertainty about the application of the
tests to this policy.
Nevertheless, we believe that the policy offered by this
prospectus qualifies as a life insurance contract for
Federal tax purposes. This means that:
- the death benefit should be fully excludable from the
gross income of the beneficiary under Section 101(a)(1)
of the Internal Revenue Code; and
- the policyowner should not be considered in
constructive receipt of the policy's cash surrender
value, including any increases, until actual
cancellation of the policy.
We have reserved the right to make changes in this
policy if such changes are deemed necessary to assure
its qualification as a life insurance contract for tax
purposes (see "Policy Changes -- Applicable Tax Law",
page 26).
DIVERSIFICATION
Section 817(h) of the Internal Revenue Code provides
that separate account investments (or the investments of
a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the contract
must be "adequately diversified" in accordance with
Treasury regulations in order for the contract to
qualify as life insurance. The Treasury Department has
issued regulations prescribing the diversification
requirements in connection with variable contracts. The
Separate Account, through the Series Fund and the
Variable Series Funds, intends to comply with these
requirements. Although we don't control the Series Fund
or the Variable Series Funds, we intend to monitor the
investments of the Series Fund and the Variable Series
Funds to ensure compliance with the requirements
prescribed by the Treasury Department.
In connection with the issuance of the diversification
regulations, the Treasury Department stated that it
anticipates the issuance of regulations or rulings
prescribing the circumstances in which a policyowner's
control of the investments of a separate account may
cause the policyowner, rather than the insurance
company, to be treated as the owner of the assets in the
account. If the policyowner is considered the owner of
the assets of the Separate Account, income and gains
from the account would be included in the policyowner's
gross income.
The ownership rights under this policy are similar to,
but different in certain respects from, those described
by the IRS in rulings in which it determined that the
policyowners were not owners of separate account assets.
For example, the owner of this policy has additional
flexibility in allocating premiums and cash values.
These differences could result in the policyowner being
treated as the owner of the assets of the Separate
Account. In addition, the Insurance Company does not
know what standards will be set forth in the regulations
or rulings which the Treasury has stated it expects to
be issued. We therefore reserve the right to modify this
policy as necessary to attempt to prevent the
policyowner from being considered the owner of the
assets of the Separate Account.
POLICY LOANS
Under current law policy loans are considered
indebtedness of a policyowner and no part of a loan
constitutes income to an owner. However, any interest
paid on policy loans for single premium policies will
not be tax-deductible.
29
<PAGE>
TAX TREATMENT OF POLICY LOANS AND OTHER DISTRIBUTIONS
Federal Tax Laws establishes a new class of life
insurance policies referred to as modified endowment
contracts. A modified endowment contract is any contract
which satisfies the definition of life insurance set
forth in Section 7702 of the Code but fails to meet the
7-pay test. This test applies a cumulative limit on the
amount of premiums that can be paid into a contract each
year in the first seven contract years in order to avoid
modified endowment contract treatment.
Loans from, as well as collateral assignments of,
modified endowment contracts will be treated as
distributions to the policyowner. All pre-death
distributions (including loans and collateral
assignments) from these policies will be included in
gross income on an income first basis to the extent of
any income in the policy immediately before the
distribution.
The law also imposes a 10% penalty tax on pre-death
distributions (including loans, collateral assignments
and surrenders) from modified endowment contracts to the
extent they are included in income, unless such amounts
are distributed on or after the taxpayer attains age
59 1/2, because the taxpayer is disabled, or as
substantially equal periodic payments over the
taxpayer's life (or life expectancy) or over the joint
lives (or joint life expectancies) of the taxpayer and
his beneficiary.
These provisions apply to policies entered into on or
after June 21, 1988. However, a policy that is not
originally classified as a modified endowment contract
can become so classified if a material change is made in
the policy at any time. A material change includes, but
is not limited to, a change in the benefits that was not
reflected in a prior 7-pay test computation. Certain
changes made to your policy may cause it to become
subject to these provisions. We believe that these
changes include your contractual right to make certain
additional premium payments. You may choose not to
exercise this right in order to preserve your policy's
current tax treatment.
If you do preserve your policy's current tax treatment,
policy loans will be considered your indebtedness and no
part of a policy loan will constitute income to you.
However, a lapse of a policy with an outstanding loan
will result in the treatment of the loan cancellation
(including the accrued interest) as a distribution under
the policy and may be taxable. Pre-death distributions
will generally not be included in gross income to the
extent that the amount received does not exceed your
investment in the policy.
Any policy received in exchange for a modified endowment
contract is considered a modified endowment contract.
If there is any borrowing against your policy, whether a
modified endowment contract or not, the interest paid on
loans is not tax deductible.
AGGREGATION OF MODIFIED ENDOWMENT CONTRACTS
In the case of a pre-death distribution (including
loans, collateral assignments and surrenders) from a
policy that is treated as a modified endowment contract,
a special "aggregation" requirement may apply for
purposes of determining the amount of the "income on the
contract." Specifically, if the Insurance Company or any
of its affiliates issue to the same policyowner more
than one modified endowment contract during a calendar
year, then for
30
<PAGE>
purposes of measuring the "income on the contract" with
respect to a distribution from any of those contracts,
the "income on the contract" for all such contracts will
be aggregated and attributed to that distribution.
TAXATION OF SINGLE PREMIUM IMMEDIATE ANNUITY RIDER
If a SPIAR is used to make the payments on the policy, a
portion of each payment from the annuity will be
includible in income for federal tax purposes when
distributed. The amount of taxable income consists of
the excess of the payment amount over the exclusion
amount. The exclusion amount is defined as the payment
amount multiplied by the ratio of the investment in the
annuity rider to the total amount expected to be paid by
the Insurance Company under the annuity.
If payments cease because of death before the investment
in the annuity rider has been fully recovered, a
deduction is allowed for the unrecovered amount.
Moreover, if the payments continue beyond the time at
which the investment in the annuity rider has been fully
recovered, the full amount of each payment will be
includible in income. If the SPIAR is surrendered before
all of the scheduled payments have been made by the
Insurance Company, the remaining income in the annuity
rider will be taxed just as in the case of life
insurance policies.
Payments under an immediate annuity rider are not
subject to the 10% penalty tax that is generally
applicable to distributions from annuities made before
the recipient attains age 59 1/2.
Other than the tax consequences described above, and
assuming that the SPIAR is not subjected to an
assignment, gift or pledge, no income will be recognized
to the policyowners or beneficiary.
The SPIAR does not exist independently of a policy.
Accordingly, there are tax consequences if a policy with
a SPIAR is assigned, transferred by gift, or pledged. An
owner of a policy with a SPIAR is advised to consult a
tax advisor prior to effecting an assignment, gift or
pledge of the policy.
OTHER TRANSACTIONS
Changing the owner or the insured may have tax
consequences. Exchanging this policy for another
involving the same insured will have no tax consequences
if there is no policy debt and no cash or other property
is received, according to Section 1035(a)(1) of the
Internal Revenue Code.
OTHER TAXES
Federal estate and state and local estate, inheritance
and other taxes depend upon your or the beneficiary's
specific situation.
OWNERSHIP OF POLICIES BY NON-NATURAL PERSONS. The above
discussion of the tax consequences arising from the
purchase, ownership, and transfer of a policy has
assumed that the owner of the policy consists of one or
more individuals. Organizations exempt from taxation
under Section 501(a) of the Code may be subject to
additional or different tax consequences with respect to
transactions such as policy loans. Further,
organizations purchasing policies covering the life of
an individual who is an officer or employee of, or is
financially interested in, the taxpayer's trade or
business, may be unable to deduct all or a portion of
the interest or premiums paid with respect to such
policies. Such organizations should obtain tax advice
prior to the acquisition of a policy and also before
entering into any subsequent changes to or transactions
under the Policy.
31
<PAGE>
Merrill Lynch Life does not make any guarantee regarding
the tax status of any policy or any transaction
regarding the policy.
THE ABOVE DISCUSSION IS NOT INTENDED AS TAX ADVICE. FOR
TAX ADVICE YOU SHOULD CONSULT A COMPETENT TAX ADVISOR.
ALTHOUGH OUR 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.
- --------------------------------------------------------------------------------
THE INSURANCE COMPANY'S INCOME TAXES
FEDERAL INCOME TAXES
We don't expect to incur any Federal income tax
liability that would be chargeable to the Separate
Account. As a result, no charges for Federal income
taxes are currently deducted from the Separate Account.
Changes in Federal tax treatment of variable life
insurance or in the Insurance Company's tax status may
mean that we will have to pay Federal income taxes
chargeable to the Separate Account in the future. If we
make a charge for taxes, we expect to accumulate it
daily and transfer it from each investment division and
into the general account monthly. We would keep any
investment earnings on any tax charges accumulated in an
investment division.
Tax charges, if they were imposed, won't apply to
policies issued in connection with qualified pension
arrangements.
STATE AND LOCAL INCOME TAXES
Under current laws, we may incur state and local income
taxes (in addition to premium taxes) in several states,
although these taxes are not significant. If the amount
of these taxes changes substantially, we may make
charges to the Separate Account.
- --------------------------------------------------------------------------------
REINSURANCE We intend to reinsure some of the risks we assume under
the policies.
32
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT THE SEPARATE ACCOUNT AND ITS DIVISIONS
- ----------------------------------------------------------------
ABOUT THE SEPARATE ACCOUNT
The Separate Account is registered with the SEC under
the Investment Company Act of 1940 as an investment
company. This registration does not involve any SEC
supervision of our management or the management of the
Separate Account. The Separate Account is also governed
by the laws of the State of Arkansas, our state of
domicile.
- --------------------------------------------------------------------------------
CHANGES WITHIN THE SEPARATE ACCOUNT
We may from time to time make additional investment
divisions available to you. These divisions will invest
in investment portfolios we find suitable for the
policies. 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 policies. 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. We would get prior
approval from the insurance department of our state of
domicile before making such a substitution. This
approval process is on file with the insurance
department of the jurisdiction in which this policy is
delivered. We would also get prior approval from the SEC
and any other required approvals before making such a
substitution.
We reserve the right to transfer assets of the Separate
Account, which we determine to be associated with the
class of policies to which your policy belongs, to
another separate account.
When permitted by law, we 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
policyowners, or other persons who have voting
rights as to the Separate Account; and
- combine the Separate Account with other separate
accounts.
RIGHT TO EXCHANGE POLICY
Policyowners may exchange their policies for a policy
with benefits that do not vary with the investment
results of a Separate Account if:
- there is a change in an investment adviser of any
portfolio; or
- there is a material change in the investment
objectives or restrictions of any portfolio in
which the investment divisions invest.
We will notify you if there is any such change. You will
be able to exchange your policy within 60 days after our
notice or the effective date of the change, whichever is
later. No evidence of insurability is required on
exchange.
- --------------------------------------------------------------------------------
NET RATE OF RETURN FOR AN INVESTMENT DIVISION
Each investment division has a distinct unit value (also
referred to as "price" or "separate account index" in
reports furnished to the policyowner by the Insurance
Company). When payments or other amounts are allocated
to an investment division, a number of units are
purchased based on the value of a unit of the investment
division as of the end of the valuation period during
which the allocation is made. When amounts are
transferred out of, or deducted from, an investment
division, units are redeemed in a similar
33
<PAGE>
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 there's
enough trading in portfolio securities to materially
affect 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. The
Insurance Company determines the net rate of return of
an investment division at the end of each valuation
period. The net rate of return reflects the investment
performance of the division for the valuation period and
is net of the charges to the Separate Account described
above.
For divisions investing in the Series Fund or the
Variable Series Funds, shares are valued at net asset
value and we consider any dividends or capital gains
distributions declared by the Series Fund or the
Variable Series Funds.
For divisions investing in the Trusts, units of each
Trust will be valued at the sponsor's repurchase price,
as explained in the prospectus for the Trusts.
- --------------------------------------------------------------------------------
THE SERIES FUND AND THE VARIABLE SERIES FUNDS
BUYING AND REDEEMING SHARES
The Series Fund and the Variable Series Funds sell and
redeem their shares at net asset value. We redeem shares
to pay benefits and make reallocations. Any dividend or
capital gain distribution will be reinvested at net
asset value in shares of the same portfolio.
VOTING RIGHTS
We will vote Series Fund and Variable Series Funds
shares according to your instructions. However, if the
Investment Company Act of 1940 or any related
regulations should change, or if interpretations of it
or related regulations should change, and we decide that
we're permitted to vote the shares of the Series Fund or
the Variable Series Funds in our own right, we may
decide to do so.
We determine the number of shares that you have in an
investment division by dividing a policy's investment
base in that division by the net asset value of one
share of the portfolio. Fractional votes will be
counted.
We will determine the number of shares you can instruct
us to vote 90 days or less before the Series Fund or
Variable Series Funds meeting. We will ask you for
voting instructions by mail at least 14 days before the
meeting.
If we don't get your instructions in time, we'll vote
the shares in the same proportion as the instructions
received for all policies (including those received from
other types of policies we issue through the Separate
Account) in that investment division. We'll also vote
shares we hold in the Separate Account which are not
attributable to policyowners in the same proportion.
Under certain circumstances, we may be required by state
regulatory authorities to disregard voting instructions.
This may happen if following the instructions would mean
voting to change the sub-classification or investment
objectives of the portfolios, or to approve or
disapprove an investment advisory contract.
34
<PAGE>
We may also disregard instructions to vote for changes
initiated by an owner in the investment policy or the
investment adviser if we disapprove 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 us that the change would result in
overly speculative or unsound investments.
If we disregard voting instructions, we'll include a
summary of our actions in the next semiannual report.
RESOLVING MATERIAL CONFLICTS
Shares of the Series Fund are available for investment
by other Merrill Lynch insurance companies and Monarch.
Shares of the Variable Series Funds are currently sold
only to separate accounts of Merrill Lynch Life, ML Life
Insurance Company of New York, and Family Life Insurance
Company (an insurance company not affiliated with
Merrill Lynch Life or Merrill Lynch & Co., Inc.) to fund
benefits under certain variable life insurance and
variable annuity contracts. The Basic Value Focus Fund,
World Income Focus Fund, Global Utility Focus Fund,
International Equity Focus Fund, International Bond Fund
and Developing Capital Markets Focus Fund are only
offered to separate accounts of Merrill Lynch Life and
ML Life Insurance Company of New York. The Equity Growth
Fund is also offered to Family Life Insurance Company.
It is possible that differences might arise between our
Separate Account and one or more separate accounts of
the other insurance companies which invest in the Series
Fund or the Variable Series 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 policyowners
and those of the other insurance companies, or for other
reasons. We will monitor events so we can identify how
to respond to such conflicts. If such a conflict occurs,
we may be required to eliminate one or more divisions of
the Separate Account which invest in the Series Fund or
the Variable Series Funds or substitute a new portfolio
for a portfolio in which a division invests. In
responding to any conflict, we will take the action
which we believe necessary to protect our policyowners.
- --------------------------------------------------------------------------------
THE TRUSTS
THE 20 TRUSTS:
<TABLE>
<CAPTION>
Trust Maturity Date
----- -------------------------
<C> <S>
1994 August 15, 1994
1995 November 15, 1995
1996 February 15, 1996
1997 February 15, 1997
1998 February 15, 1998
1999 February 15, 1999
2000 February 15, 2000
2001 February 15, 2001
2002 February 15, 2002
2003 August 15, 2003
2004 February 15, 2004
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Trust Maturity Date
----- -------------------------
2005 February 15, 2005
<C> <S>
2006 February 15, 2006
2007 February 15, 2007
2008 February 15, 2008
2009 February 15, 2009
2010 February 15, 2010
2011 February 15, 2011
2013 February 15, 2013
2014 February 15, 2014
</TABLE>
TARGETED RATE OF RETURN TO MATURITY
From time to time, we may calculate a targeted rate of
return to maturity for an investment division investing
in a Trust. Because the underlying securities in the
Trusts will grow to their face value on the maturity
date, it is possible to determine a compound rate of
growth to maturity for the Trust units. But because the
units are held in the Separate Account the asset charges
described in "Charges to the Separate Account" on page
16, must be taken into account in determining a net
return. The net rate of return to maturity depends on
the compound rate of growth adjusted for these charges.
It does not, however, represent the actual return on a
premium we might receive under the policy on that date,
since it does not reflect the charges deducted from a
policy's investment base described in "Charges Deducted
from Your Investment Base" on page 15.
Since the value of the Trust units will vary daily to
reflect the market value of the underlying securities,
the compound rate of growth to maturity and the net rate
of return to maturity will vary correspondingly.
- --------------------------------------------------------------------------------
CHARGES TO SERIES FUND ASSETS
The Series Fund incurs operating expenses and pays a
monthly advisory fee to Merrill Lynch Asset Management,
Inc. ("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.
Under a reimbursement agreement, the Series Fund will be
reimbursed so that ordinary expenses of the portfolios
(which includes the monthly advisory fee) do not exceed
.50% of the average daily net assets.
MLAM has agreed that if any portfolio's aggregate
ordinary expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) exceed the
expense limitations for investment companies in effect
under any state securities law or regulation, it will
reduce its fee for that portfolio by the amount of the
excess. If required, it will reimburse the Series Fund
for the excess.
- --------------------------------------------------------------------------------
CHARGES TO VARIABLE SERIES FUNDS ASSETS
The Variable Series Funds incurs operating expenses and
pays a monthly advisory fee to MLAM. This fee equals an
annual rate of .60% of the average daily net assets of
the Basic Value Focus Fund, World Income Focus Fund and
Global Utility Focus Fund. This fee equals an annual
rate of .75%, .60% and
36
<PAGE>
1.00% of the average daily net assets of the
International Equity Focus Fund, the International Bond
Fund and the Developing Capital Markets Focus Fund,
respectively.
Under its investment advisory agreement, MLAM has agreed
to reimburse the Variable Series Funds if and to the
extent that in any fiscal year the operating expenses of
any Fund exceeds the most restrictive expense
limitations then in effect under any state securities
laws or published regulations thereunder. Expenses for
this purpose include MLAM's fee but exclude interest,
taxes, brokerage commissions and extraordinary expenses,
such as litigation. No fee payments will be made to MLAM
with respect to any Fund during any fiscal year which
would cause the expenses of such Fund to exceed the pro
rata expense limitation applicable to such Fund at the
time of such payment. This reimbursement agreement will
remain in effect so long as the advisory agreement
remains in effect and cannot be amended without Variable
Series Funds approval.
MLAM and Merrill Lynch Life Agency, Inc. have entered
into two agreements which limit the operating expenses
paid by each Fund in a given year to 1.25% of its
average daily net assets, which is less than the expense
limitations imposed by state securities laws or
published regulations thereunder. These reimbursement
agreements provide that any expenses in excess of 1.25%
of average daily net assets will be reimbursed to the
Fund by MLAM which, in turn, will be reimbursed by
Merrill Lynch Life Agency, Inc.
37
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATIONS
- ----------------------------------------------------------------
ILLUSTRATIONS OF DEATH BENEFITS, INVESTMENT BASE,
CASH SURRENDER VALUES
AND ACCUMULATED PREMIUMS
The tables on pages 40 through 44 demonstrate the way in
which your policy works. The tables are based on the
following ages, face amounts, premiums and guarantee
periods.
1. The illustration on page 40 is for a policy
issued to a male age five in the standard-simplified
underwriting class with a single premium of $5,000, a
face amount of $40,057 and a guarantee period for life.
2. The illustration on page 41 is for a policy
issued to a male age forty in the standard-simplified
underwriting class with a single premium of $10,000, a
face amount of $28,477 and a guarantee period for life.
3. The illustration on page 42 is for a policy
issued to a male age fifty-five in the
standard-simplified underwriting class with a single
premium of $10,000, a face amount of $18,386 and a
guarantee period for life.
4. The illustration on page 43 is for a policy
issued to a female age sixty-five in the
standard-simplified underwriting class with a single
premium of $10,000, a face amount of $16,308 and a
guarantee period for life.
5. The illustration on page 44 is for a policy
issued to a male age forty in the standard-simplified
underwriting class with a single premium of $10,000, a
face amount of $123,712 and a guarantee period of 15
years. This illustration also demonstrates the effects
of additional payments.
The tables show how the death benefit, investment base
and 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%, 4%, 8% and 12%.
The death benefit, investment base and cash surrender
value for your policy would be different from those
shown if the actual rates of return averaged 0%, 4%, 8%
and 12% over a period of years, but also fluctuated
above or below those averages for individual policy
years.
The amounts shown for the death benefit, investment base
and cash surrender value as of the end of each policy
year take into account the daily charge for mortality,
expense and guaranteed benefits risks in the Separate
Account equivalent to an effective annual charge of .60%
at the beginning of the year.
The amounts shown in the tables also assume an
additional charge of .490%. This charge assumes that
investment base is allocated equally among all
investment divisions and is based on the 1993 expenses
(including the monthly advisory fees) for the Series
Fund and the Variable Series Funds, anticipated 1994
expenses for the International Bond Fund and the
Developing Capital Markets Focus Fund, and the current
trust charge. This charge does not reflect expenses
incurred by the Global Strategy Portfolio and the
Natural Resources Portfolio of the Series Fund in 1993
which were reimbursed to the Series Fund by MLAM. These
reimbursements amounted to .01% and .09%, respectively,
of the average daily net assets of these portfolios.
(See "Charges to the Series Fund Assets" on page 36.)
The actual charge under a policy will depend on the
actual allocation of your investment base and may be
higher or lower depending on how your investment base is
allocated.
38
<PAGE>
Taking into account the .60% charge for mortality,
expense and guaranteed benefits risks in the Separate
Account and the .490% charge described above, the gross
annual rates of investment return of 0%, 4%, 8% and 12%
correspond to net annual rates of -1.09%, 2.89%, 6.86%
and 10.84%, respectively. The gross returns are before
any deductions and should not be compared to rates which
are after deduction of charges.
The hypothetical returns shown on the tables are without
any Insurance Company income tax charges that may be
attributable to the Separate Account in the future. In
order to produce after tax returns of 0%, 4%, 8% and
12%, the portfolio would have to earn a sufficient
amount in excess of 0% or 4% or 8% or 12% to cover any
tax charges.
The second column of the tables shows the amount which
would accumulate if an amount equal to the single
premium were invested to earn interest (after taxes) at
5% compounded annually.
We'll furnish upon request a personalized illustration
reflecting the proposed insured's age, face amount and
the premium amounts requested. The illustration will
also use current mortality rates and will assume that
the proposed insured is in a standard underwriting
class.
39
<PAGE>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 5
$5,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $40,057 GUARANTEE PERIOD: FOR LIFE
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT (2)
PREMIUMS ASSUMING HYPOTHETICAL GROSS
PAID PLUS ANNUAL INVESTMENT RETURN OF
INTEREST AT 5% AS --------------------------------------
POLICY YEAR PAYMENTS (1) OF END OF YEAR 0% 4% 8% 12%
--------------------- ------------ ----------------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1................... $5,000 $ 5,250 $40,057 $40,057 41,365 43,017
2................... 0 5,513 40,057 40,057 42,683 46,132
3................... 0 5,788 40,057 40,057 44,014 49,415
4................... 0 6,078 40,057 40,057 45,359 52,878
5................... 0 6,381 40,057 40,057 46,719 56,535
6................... 0 6,700 40,057 40,057 48,096 60,400
7................... 0 7,036 40,057 40,057 49,491 64,489
8................... 0 7,387 40,057 40,057 50,907 68,819
9................... 0 7,757 40,057 40,057 52,345 73,408
10................... 0 8,144 40,057 40,057 53,806 78,274
15................... 0 10,395 40,057 40,057 61,662 107,736
20 (age 25).......... 0 13,266 40,057 40,057 70,663 148,279
30 (age 35).......... 0 21,610 40,057 40,057 92,779 280,744
60 (age 65).......... 0 93,396 40,057 40,057 210,139 1,908,291
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
------------------------------------- -------------------------------------
POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
--------------------- ------ ------- -------- ---------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... $4,853 $ 5,051 $ 5,248 $ 5,445 $4,538 $ 4,736 $ 4,933 $ 5,130
2................... 4,709 5,104 5,512 5,935 4,429 4,824 5,232 5,655
3................... 4,568 5,161 5,795 6,476 4,323 4,916 5,550 6,231
4................... 4,430 5,221 6,097 7,073 4,220 5,011 5,887 6,863
5................... 4,295 5,285 6,420 7,732 4,120 5,110 6,245 7,557
6................... 4,162 5,351 6,763 8,458 4,022 5,211 6,623 8,318
7................... 4,030 5,417 7,127 9,255 3,925 5,312 7,022 9,150
8................... 3,896 5,483 7,511 10,129 3,826 5,413 7,441 10,059
9................... 3,758 5,545 7,912 11,082 3,723 5,510 7,877 11,047
10................... 3,617 5,604 8,332 12,121 3,617 5,604 8,332 12,121
15................... 3,035 6,035 10,943 19,119 3,035 6,035 10,943 19,119
20 (age 25).......... 2,457 6,500 14,427 30,273 2,457 6,500 14,427 30,273
30 (age 35).......... 1,464 7,744 25,842 78,196 1,464 7,744 25,842 78,196
60 (age 65).......... 0 9,148 135,269 1,228,390 0 9,148 135,269 1,228,390
<FN>
- --------------------------
(1) All payments are illustrated as if made at the beginning of the policy
year.
(2) Assumes no policy loan has been made.
</TABLE>
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND
CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE
ACTUAL GROSS RATES OF RETURN AVERAGED 0%, 4%, 8% AND 12% OVER A PERIOD OF YEARS,
BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS.
NO REPRESENTATIONS CAN BE MADE BY THE INSURANCE COMPANY OR THE SERIES FUND OR
THE VARIABLE SERIES FUNDS OR THE TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
40
<PAGE>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 40
$10,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $28,477 GUARANTEE PERIOD: FOR LIFE
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT (2)
PREMIUMS ASSUMING HYPOTHETICAL GROSS
PAID PLUS ANNUAL INVESTMENT RETURN OF
INTEREST AT 5% AS -----------------------------------
POLICY YEAR PAYMENTS (1) OF END OF YEAR 0% 4% 8% 12%
--------------------- ------------ ----------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1................... $10,000 $10,500 $28,477 $28,477 $29,405 $ 30,579
2................... 0 11,025 28,477 28,477 30,341 32,790
3................... 0 11,576 28,477 28,477 31,286 35,121
4................... 0 12,155 28,477 28,477 32,240 37,580
5................... 0 12,763 28,477 28,477 33,206 40,176
6................... 0 13,401 28,477 28,477 34,184 42,922
7................... 0 14,071 28,477 28,477 35,175 45,827
8................... 0 14,775 28,477 28,477 36,181 48,904
9................... 0 15,513 28,477 28,477 37,203 52,164
10................... 0 16,289 28,477 28,477 38,241 55,622
15................... 0 20,789 28,477 28,477 43,824 76,557
20 (age 60).......... 0 26,533 28,477 28,477 50,226 105,389
25 (age 65).......... 0 33,864 28,477 28,477 57,568 146,107
30 (age 70).......... 0 43,219 28,477 28,477 65,989 199,840
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
---------------------------------- ----------------------------------
POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
--------------------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... 9,747 10,143 10,539 10,934 9,117 9,513 9,909 10,304
2................... 9,491 10,285 11,106 11,957 8,931 9,725 10,546 11,397
3................... 9,232 10,425 11,703 13,078 8,742 9,935 11,213 12,588
4................... 8,970 10,564 12,332 14,305 8,550 10,144 11,912 13,885
5................... 8,705 10,700 12,994 15,648 8,355 10,350 12,644 15,298
6................... 8,436 10,833 13,690 17,118 8,156 10,553 13,410 16,838
7................... 8,164 10,964 14,422 18,725 7,954 10,754 14,212 18,515
8................... 7,889 11,092 15,191 20,484 7,749 10,952 15,051 20,344
9................... 7,610 11,218 16,002 22,409 7,540 11,148 15,932 22,339
10................... 7,326 11,339 16,852 24,512 7,326 11,339 16,852 24,512
15................... 6,166 12,232 22,168 38,725 6,166 12,232 22,168 38,725
20 (age 60).......... 4,786 12,952 28,828 60,489 4,786 12,952 28,828 60,489
25 (age 65).......... 3,145 13,418 37,057 93,407 3,145 13,418 37,057 93,407
30 (age 70).......... 1,165 13,487 46,963 142,221 1,165 13,487 46,963 142,221
<FN>
- --------------------------
(1) All payments are illustrated as if made at the beginning of the policy
year.
(2) Assumes no policy loan has been made.
</TABLE>
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND
CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE
ACTUAL GROSS RATES OF RETURN AVERAGED 0%, 4%, 8% AND 12% OVER A PERIOD OF YEARS,
BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS.
NO REPRESENTATIONS CAN BE MADE BY THE INSURANCE COMPANY OR THE SERIES FUND OR
THE VARIABLE SERIES FUNDS OR THE TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
41
<PAGE>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 55
$10,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $18,386 GUARANTEE PERIOD: FOR LIFE
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT (2)
PREMIUM ASSUMING HYPOTHETICAL GROSS
PAID PLUS ANNUAL INVESTMENT RETURN OF
INTEREST AT 5% AS -----------------------------------
POLICY YEAR PAYMENTS (1) OF END OF YEAR 0% 4% 8% 12%
--------------------- ------------ ----------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1................... $10,000 $10,500 $18,386 $18,386 $18,986 $ 19,744
2................... 0 11,025 18,386 18,386 19,591 21,175
3................... 0 11,576 18,386 18,386 20,203 22,684
4................... 0 12,155 18,386 18,386 20,821 24,275
5................... 0 12,763 18,386 18,386 21,447 25,957
6................... 0 13,401 18,386 18,386 22,081 27,735
7................... 0 14,071 18,386 18,386 22,723 29,617
8................... 0 14,775 18,386 18,386 23,375 31,610
9................... 0 15,513 18,386 18,386 24,037 33,723
10 (age 65).......... 0 16,289 18,386 18,386 24,709 35,962
15................... 0 20,789 18,386 18,386 28,324 49,527
20 (age 75).......... 0 26,533 18,386 18,386 32,470 68,224
30 (age 85).......... 0 43,219 18,386 18,386 42,688 129,560
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
---------------------------------- ----------------------------------
POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
--------------------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... 9,698 10,094 10,488 10,882 9,068 9,464 9,858 10,252
2................... 9,392 10,183 10,998 11,841 8,832 9,623 10,438 11,281
3................... 9,081 10,266 11,529 12,884 8,591 9,776 11,039 12,394
4................... 8,766 10,344 12,082 14,017 8,346 9,924 11,662 13,597
5................... 8,446 10,416 12,660 15,248 8,095 10,066 12,310 14,898
6................... 8,121 10,482 13,261 16,586 7,841 10,202 12,981 16,306
7................... 7,791 10,540 13,887 18,036 7,581 10,330 13,677 17,826
8................... 7,455 10,590 14,536 19,608 7,315 10,450 14,396 19,468
9................... 7,111 10,630 15,209 21,310 7,041 10,560 15,139 21,240
10 (age 65).......... 6,760 10,660 15,906 23,149 6,760 10,660 15,906 23,149
15................... 5,229 11,010 20,157 35,247 5,229 11,010 20,157 35,247
20 (age 75).......... 3,471 11,074 25,180 52,905 3,471 11,074 25,180 52,905
30 (age 85).......... 0 9,971 37,375 113,436 0 9,971 37,375 113,436
<FN>
- --------------------------
(1) All payments are illustrated as if made at the beginning of the policy
year.
(2) Assumes no policy loan has been made.
</TABLE>
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND
CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE
ACTUAL GROSS RATES OF RETURN AVERAGED 0%, 4%, 8% AND 12% OVER A PERIOD OF YEARS,
BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS.
NO REPRESENTATIONS CAN BE MADE BY THE INSURANCE COMPANY OR THE SERIES FUND OR
THE VARIABLE SERIES FUNDS OR THE TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
42
<PAGE>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE ISSUE AGE 65
$10,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $16,308 GUARANTEE PERIOD: FOR LIFE
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT (2)
PREMIUM ASSUMING HYPOTHETICAL GROSS
PAID PLUS ANNUAL INVESTMENT RETURN OF
INTEREST AT 5% AS ----------------------------------
POLICY YEAR PAYMENTS (1) OF END OF YEAR 0% 4% 8% 12%
--------------------- ------------ ----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1................... $10,000 $10,500 $16,308 $16,308 $16,841 $17,514
2................... 0 11,025 16,308 16,308 17,378 18,783
3................... 0 11,576 16,308 16,308 17,921 20,122
4................... 0 12,155 16,308 16,308 18,470 21,535
5................... 0 12,763 16,308 16,308 19,025 23,027
6................... 0 13,401 16,308 16,308 19,587 24,605
7................... 0 14,071 16,308 16,308 20,157 26,275
8................... 0 14,775 16,308 16,308 20,736 28,043
9................... 0 15,513 16,308 16,308 21,323 29,917
10 (age 75).......... 0 16,289 16,308 16,308 21,920 31,905
15................... 0 20,789 16,308 16,308 25,127 43,944
20 (age 85).......... 0 26,533 16,308 16,308 28,808 60,543
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
--------------------------------- ---------------------------------
POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
--------------------- ------ ------- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... $9,689 $10,085 $10,479 $10,872 $9,059 $ 9,455 $ 9,849 $10,242
2................... 9,374 10,164 10,978 11,820 8,814 9,604 10,418 11,260
3................... 9,055 10,238 11,498 12,850 8,565 9,748 11,008 12,360
4................... 8,733 10,309 12,042 13,971 8,313 9,889 11,622 13,551
5................... 8,409 10,375 12,611 15,190 8,059 10,025 12,261 14,840
6................... 8,082 10,437 13,206 16,517 7,802 10,157 12,926 16,237
7................... 7,751 10,492 13,825 17,957 7,541 10,282 13,615 17,747
8................... 7,413 10,538 14,468 19,517 7,273 10,398 14,328 19,377
9................... 7,066 10,574 15,131 21,202 6,996 10,504 15,061 21,132
10 (age 75).......... 6,708 10,595 15,813 23,017 6,708 10,595 15,813 23,017
15................... 5,105 10,853 19,900 34,802 5,105 10,853 19,900 34,802
20 (age 85).......... 3,235 10,763 24,586 51,670 3,235 10,763 24,586 51,670
<FN>
- --------------------------
(1) All payments are illustrated as if made at the beginning of the policy
year.
(2) Assumes no policy loan has been made.
</TABLE>
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND
CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE
ACTUAL GROSS RATES OF RETURN AVERAGED 0%, 4%, 8% AND 12% OVER A PERIOD OF YEARS,
BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS.
NO REPRESENTATIONS CAN BE MADE BY THE INSURANCE COMPANY OR THE SERIES FUND OR
THE VARIABLE SERIES FUNDS OR THE TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
43
<PAGE>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 40
$10,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $123,712 GUARANTEE PERIOD AT ISSUE: 15 YEARS
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
TOTAL DEATH BENEFIT (2)
PREMIUMS ASSUMING HYPOTHETICAL GROSS
PAID PLUS ANNUAL INVESTMENT RETURN OF
END OF INTEREST AT --------------------------------------
POLICY YEAR PAYMENTS (1) 5% 0% 4% 8% 12%
--------------------- ------------ ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1................... $10,000 $ 10,500 $123,712 $123,712 $123,712 $123,712
2................... 1,500 12,600 123,712 123,712 123,712 123,712
3................... 1,500 14,805 123,712 123,712 123,712 123,712
4................... 1,500 17,120 123,712 123,712 123,712 123,712
5................... 1,500 19,551 123,712 123,712 123,712 123,712
6................... 1,500 22,104 123,712 123,712 123,712 123,712
7................... 1,500 24,784 123,712 123,712 123,712 123,712
8................... 1,500 27,598 123,712 123,712 123,712 123,712
9................... 1,500 30,553 123,712 123,712 123,712 123,712
10................... 1,500 33,656 123,712 123,712 123,712 123,712
15................... 1,500 51,657 123,712 123,712 123,712 140,799
20 (age 60).......... 1,500 74,632 123,712 123,712 123,712 210,568
25 (age 65).......... 1,500 103,954 123,712 123,712 134,710 304,753
30 (age 70).......... 0 132,675 * 123,712 154,568 419,967
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ------------------------------------ ------------------------------------
POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
--------------------- ------- ------- -------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... $ 9,372 $ 9,763 $ 10,155 $ 10,547 $ 8,742 $ 9,133 $ 9,525 $ 9,917
2................... 10,189 11,016 11,877 12,770 9,541 10,368 11,229 12,122
3................... 10,952 12,260 13,674 15,194 10,296 11,604 13,018 14,538
4................... 11,659 13,491 15,548 17,837 11,005 12,837 14,894 17,183
5................... 12,307 14,707 17,503 20,724 11,664 14,064 16,860 20,082
6................... 12,894 15,903 19,540 23,881 12,273 15,281 18,919 23,259
7................... 13,423 17,080 21,670 27,341 12,832 16,490 21,080 26,750
8................... 13,890 18,235 23,897 31,139 13,340 17,686 23,348 30,589
9................... 14,298 19,369 26,231 35,318 13,799 18,870 25,732 34,819
10................... 14,637 20,471 28,670 39,918 14,198 20,032 28,232 39,479
15................... 15,591 25,746 43,178 71,659 15,153 25,307 42,739 71,221
20 (age 60).......... 14,158 29,275 61,912 121,296 13,719 26,836 61,474 120,857
25 (age 65).......... 9,303 29,533 87,153 196,612 8,864 29,095 86,714 196,173
30 (age 70).......... * 13,815 110,099 298,976 * 13,717 110,002 298,879
<FN>
- --------------------------
(1) All payments are illustrated as if made at the beginning of the policy
year.
(2) Assumes no policy loan has been made.
* Additional payment will be required to prevent policy termination.
</TABLE>
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE
AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING
INTEREST RATES AND RATES OF INFLATION. THE DEATH BENEFIT, INVESTMENT BASE AND
CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE
ACTUAL GROSS RATES OF RETURN AVERAGED 0%, 4%, 8% AND 12% OVER A PERIOD OF YEARS,
BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS.
NO REPRESENTATIONS CAN BE MADE BY THE INSURANCE COMPANY OR THE SERIES FUND OR
THE VARIABLE SERIES FUNDS OR THE TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
44
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT THE INSURANCE COMPANY
- --------------------------------------------------------------------------------
MANAGEMENT
The Insurance Company's directors and executive officers
and their positions with the Insurance Company are as
follows:
<TABLE>
<CAPTION>
NAME POSITION HELD
------------------------- -----------------------------------
<S> <C>
Anthony J. Vespa Chairman of the Board, President
and Chief Executive Officer
Joseph E. Crowne 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
John C.R. Hele Director and Senior Vice President
Allen N. Jones Director
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 the Insurance Company's indirect parent, Merrill
Lynch & Co., Inc. The principal positions of the
Insurance Company's directors and executive officers for
the past five years are listed below:
Mr. Vespa joined the Insurance Company in January 1994.
Since February 1994, he has held the position of Senior
Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. From February 1991 to February 1994, he
held the position of District Director and First Vice
President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. From September 1988 to February 1991, he
held the position of Senior Resident Vice President of
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Mr. Crowne joined the Insurance Company in June 1991.
From January 1989 to May 1991, he was a Principal with
Coopers & Lybrand.
Mr. Skolnick joined the Insurance Company in November
1990. He joined Merrill Lynch, Pierce, Fenner & Smith
Incorporated in July 1984. Since May 1992, he has held
the position of Assistant General Counsel of Merrill
Lynch & Co., Inc. and First Vice President of Merrill
Lynch, Pierce, Fenner & Smith Incorporated. Prior to May
1992, he held the position of Senior Counsel of Merrill
Lynch & Co., Inc.
Mr. Dunford joined the Insurance Company in July 1990.
He joined Merrill Lynch, Pierce, Fenner & Smith
Incorporated in September 1989. Prior to September 1989,
he held the position of President of Travelers
Investment Management Co.
Mr. Hele joined the Insurance Company in December 1990.
He joined Merrill Lynch, Pierce, Fenner & Smith
Incorporated in August 1988.
Mr. Jones joined the Insurance Company in June 1992.
Since May 1992, he has held the position of Senior Vice
President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. From June 1992 to February 1994, he was
Chairman of the Board, President, and Chief Executive
Officer of the Insurance Company. From January 1992 to
June 1992, he was a First Vice President of Merrill
Lynch, Pierce, Fenner & Smith. From January 1991 to
January 1992, he was a District Director of Merrill
Lynch, Pierce, Fenner & Smith. Prior to January 1991, he
was a Senior Resident Vice President of Merrill Lynch,
Pierce, Fenner & Smith.
45
<PAGE>
Mr. Boucher joined the Insurance Company in May 1992.
Prior to May 1992, he held the position of Vice
President of Monarch Financial Services, Inc. (formerly
Monarch Resources, Inc.)
No shares of the Insurance Company are owned by any of
its officers or directors, as it is a wholly owned
subsidiary of Merrill Lynch Insurance Group, Inc. The
officers and directors of the Insurance Company, both
individually and as a group, own less than one percent
of the outstanding shares of common stock of Merrill
Lynch & Co., Inc.
- --------------------------------------------------------------------------------
STATE REGULATION
We're regulated and supervised by the Insurance
Department of the State of Arkansas (the "Insurance
Department"). A detailed financial statement in the
prescribed form (the "Annual Statement") is filed 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 asupices of
the National Association of Insurance Commissioners.
We're also subject to the insurance laws and regulations
of all jurisdictions where we do business. The variable
life insurance policies offered by this Prospectus have
been approved by the Insurance Department of the State
of Arkansas and in other jurisdictions.
- --------------------------------------------------------------------------------
REGISTRATION
STATEMENT
We have filed a Registration Statement under the
Securities Act 1933 with the SEC relating to the
offering described in this Prospectus. This Prospectus
does not include all the information in the Registration
Statement. We have omitted certain portions according to
SEC rules. You may obtain the omitted information from
the SEC's main office in Washington, D.C. by paying the
SEC's prescribed fees.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
As an insurance company, we are ordinarily involved in
various kinds of routine litigation that in our judgment
is not of material importance in relation to our total
assets.
- --------------------------------------------------------------------------------
LEGAL MATTERS
The legal validity of the policies described in this
Prospectus has been passed on by Barry G. Skolnick,
Senior Vice President and General Counsel of the
Insurance Company.
- --------------------------------------------------------------------------------
EXPERTS
The financial statements of the Insurance Company and of
the Separate Account as of December 31, 1993 and 1992
and for each of the three years in the period ended
December 31, 1993, included in this Prospectus have been
audited by Deloitte & Touche, independent auditors, as
stated in their reports appearing herein, and have been
so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and
auditing. Deloitte & Touche's principal business address
is 1633 Broadway, New York, New York 10019-6754.
Actuarial matters included in this Prospectus have been
examined by Joseph E. Crowne, F.S.A., Chief Actuary and
Chief Financial Officer of the Insurance Company, as
stated in his opinion filed as an exhibit to the
Registration Statement.
- --------------------------------------------------------------------------------
FINANCIAL
STATEMENTS
The financial statements of the Insurance Company,
included herein, should be distinguished from the
financial statements of the Separate Account and should
be considered only as bearing upon the ability of the
Insurance Company to meet its obligations under the
policies.
46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying statements of net assets of Merrill Lynch Life
Variable Life Separate Account II (the "Account") as of December 31, 1993 and
1992 and the related statements of earnings and changes in net assets for the
periods presented. These financial statements are the responsibility of the
management of Merrill Lynch Life Insurance Company. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of mutual fund securities owned at December
31, 1993, by correspondence with the funds' transfer agent. 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, 1993 and 1992
and the results of its operations and the changes in its net assets for the
periods presented 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.
/S/Deloitte & Touche
February 16, 1994
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1993
====================================================
<TABLE>
<CAPTION>
ASSETS Cost Shares Market Value
================ ================ ================
<S> <C> <C> <C>
Investment in Merrill Lynch Series Fund, Inc. (Note B):
Money Reserve Portfolio $ 438,620,196 438,620,196 $ 438,620,196
Intermediate Government Bond Portfolio 225,959,405 20,018,543 240,622,883
Long-Term Corporate Bond Portfolio 103,655,972 8,931,873 112,452,283
Capital Stock Portfolio 151,482,415 6,809,310 175,203,541
Growth Stock Portfolio 88,155,753 3,830,058 94,410,938
Multiple Strategy Portfolio 829,095,746 52,292,504 1,037,483,285
High Yield Portfolio 69,832,521 7,581,705 73,390,906
Natural Resources Portfolio 16,129,714 2,056,848 15,488,063
Global Strategy Portfolio 135,975,097 9,592,777 147,920,617
Balanced Portfolio 64,564,635 4,909,122 71,771,360
---------------- ----------------
2,123,471,454 2,407,364,072
---------------- ----------------
Investment in Unit Investment Trusts (Note B)
Stripped ("Zero") U.S. Treasury Securities,
Series A through J:
1994 Trust 62,986,919 81,409,995 79,709,340
1995 Trust 52,960,936 73,746,561 68,448,608
1996 Trust 33,778,238 48,745,804 44,524,905
1997 Trust 34,057,844 52,573,315 45,577,384
1998 Trust 35,089,417 59,029,626 48,094,979
1999 Trust 7,212,640 12,421,349 9,510,406
2000 Trust 8,593,935 15,320,843 11,042,804
2001 Trust 33,981,499 74,204,915 50,089,802
2002 Trust 2,397,933 4,647,270 2,915,976
2003 Trust 29,384,656 79,780,617 45,038,552
2005 Trust 12,105,242 34,041,819 17,311,286
2006 Trust 2,634,025 7,925,496 3,799,721
2007 Trust 6,828,414 23,661,566 10,529,634
2008 Trust 15,539,545 59,558,078 24,081,713
2009 Trust 6,618,415 26,421,930 9,895,277
2010 Trust 5,998,497 17,860,268 6,173,580
2011 Trust 2,787,358 9,956,141 3,207,669
2013 Trust 807,575 2,844,127 783,101
353,763,088 480,734,737
---------------- ----------------
Total Invested Assets $ 2,477,234,542 2,888,098,809
================
Receivable from Merrill Lynch Series Funds, Inc. 1,852,080
----------------
Total Assets 2,889,950,889
----------------
LIABILITIES
Payable to Merrill Lynch Life Insurance Company 17,166,480
----------------
Total Liabilities 17,166,480
----------------
Net Assets $ 2,872,784,409
================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1992
===================================================
<TABLE>
<CAPTION>
ASSETS Cost Shares Market Value
================ ================ ================
<S> <C> <C> <C>
Investment in Merrill Lynch Series Fund, Inc. (Note B)
Money Reserve Portfolio $ 532,816,891 532,816,891 $ 532,816,891
Intermediate Government Bond Portfolio 216,476,904 19,399,757 227,947,144
Long-Term Corporate Bond Portfolio 99,175,827 8,717,133 105,215,800
Capital Stock Portfolio 143,618,668 6,846,999 158,987,321
Growth Stock Portfolio 96,913,977 4,421,717 106,032,779
Multiple Strategy Portfolio 795,954,774 50,870,792 951,283,808
High Yield Portfolio 46,526,428 5,500,896 50,058,150
Natural Resources Portfolio 6,477,894 940,404 6,592,232
Global Strategy Portfolio 40,824,909 3,192,857 42,241,493
Balanced Portfolio 41,033,051 3,281,293 44,953,712
---------------- ----------------
2,019,819,323 2,226,129,330
---------------- ----------------
Investment in Unit Investment Trusts (Note B)
Stripped ("Zero") U.S. Treasury Securities,
Series A through I:
1993 Trust 37,496,592 45,151,587 43,849,867
1994 Trust 73,007,266 94,902,123 88,430,747
1995 Trust 59,097,885 83,324,361 72,221,390
1996 Trust 38,557,674 56,538,287 47,827,999
1997 Trust 38,829,628 60,874,945 48,005,982
1998 Trust 40,419,621 69,519,190 50,865,106
1999 Trust 7,845,057 14,074,909 9,523,928
2000 Trust 9,075,236 17,247,118 10,837,744
2001 Trust 38,096,844 84,771,958 49,149,934
2002 Trust 2,165,476 4,340,973 2,300,412
2003 Trust 33,509,411 94,023,008 44,143,802
2005 Trust 12,222,817 36,926,531 15,420,519
2006 Trust 2,925,230 9,278,844 3,607,800
2007 Trust 8,261,131 30,221,293 10,807,437
2008 Trust 19,946,021 80,157,890 25,967,950
2009 Trust 8,077,790 33,633,739 10,049,425
2010 Trust 6,489,168 25,948,098 7,105,368
2011 Trust 2,675,216 11,186,062 2,838,128
---------------- ----------------
438,698,063 542,953,538
---------------- ----------------
Total Invested Assets $ 2,458,517,386 2,769,082,868
================
Receivable from Merrill Lynch Series Funds, Inc. 1,168,229
----------------
Total Assets 2,770,251,097
----------------
LIABILITIES
Payable to Merrill Lynch Life Insurance Company 18,995,996
----------------
Total Liabilities 18,995,996
----------------
Net Assets $ 2,751,255,101
================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991
=============================================================
<TABLE>
<CAPTION>
1993 1992 1991
================ ================ ================
<S> <C> <C> <C>
Reinvested Dividends $ 157,524,630 $ 78,117,694 $ 133,875,282
Net Gain:
Realized 77,222,781 55,204,908 27,512,318
Unrealized 100,298,797 11,977,660 298,587,822
--------------- ---------------- ----------------
Investment Earnings 335,046,208 145,300,262 459,975,422
Mortality and Expense Charges (Note C) (17,816,608) (17,216,984) (16,812,719)
Transaction Charges (Note D) (1,822,452) (1,859,668) (2,066,645)
---------------- ---------------- ----------------
Net Earnings 315,407,148 126,223,610 441,096,058
Capital Shares Transactions:
Transfers of Net Premiums 13,356,961 15,870,188 19,594,863
Transfers of Policy Loading, Net (14,938,127) (21,375,095) (23,616,907)
Transfers Due to Deaths (25,399,159) (23,583,884) (16,282,859)
Transfers Due to Other Terminations (66,518,195) (80,167,617) (156,876,94)
Transfers Due to Policy Loans (62,711,054) (97,684,959) (91,688,506)
Transfers of Cost of Insurance (34,885,568) (33,436,957) (29,220,826)
Transfers of Loan Processing Charges (2,784,789) (2,224,380) (1,559,790)
Transfers of Shares from Assumption
Reinsurance, Net 2,091 (557,174) 2,726,746,278
---------------- ---------------- ----------------
Increase in Net Assets 121,529,308 (116,936,268) 2,868,191,369
Net Assets Beginning Balance 2,751,255,101 2,868,191,369 0
---------------- ---------------- ----------------
Net Assets Ending Balance $ 2,872,784,409 $ 2,751,255,101 $ 2,868,191,369
================ ================ ================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1993
Note - A Merrill Lynch Life Variable Life Separate Account II ("Account"), a
separate account of Merrill Lynch Life Insurance Company ("Merrill Lynch Life")
was established by a board of directors resolution on November 19, 1990 and is
governed by Arkansas State Insurance Law. The Account is a registered unit
investment trust under the Investment Company Act of 1940 and consists of
twenty-eight investment divisions (twenty-nine during the year). Ten of the
divisions invest in the securities of a single mutual fund portfolio of the
Merrill Lynch Series Fund, Inc. ("Series Fund"). The portfolios of the Series
Fund have varying investment objectives relative to growth of capital and
income. The Series Fund receives investment advice from Merrill Lynch Asset
Management, L.P. for a fee at an effective annual rate of .50% of the first
$250 million of net assets of the Series Fund with declining rates to .30% of
such assets over $800 million. Eighteen of the divisions (nineteen during the
year) invest in the securities of a single trust of the Merrill Lynch Fund of
Stripped ("Zero") U.S. Treasury Securities, Series A through J. Each trust of
the Series consists of Stripped Treasury Securities with a fixed maturity date
and a Treasury Note deposited to provide income to pay expenses of the trust.
On various dates during 1991 Tandem Insurance Group, Inc. ("Tandem
Insurance") an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill") and an affiliate assumed substantially all variable life policies
issued by Monarch Life Insurance Company ("Monarch Life") and sold through the
Merrill retail network. On October 1, 1991, Tandem Insurance was merged with
and into Merrill Lynch Life. References in these financial statements and
notes to financial statements to Merrill Lynch Life in addition refers to
Tandem Insurance. This merger has been accounted for as a combination of
entities under common control. The Account's financial statements are reported
on a historical basis.
The Account was formed by Merrill Lynch Life, an indirect wholly-owned
subsidiary of Merrill to support Merrill Lynch Life's operations respecting
certain variable life insurance contracts ("Contracts"). The assets of the
Account are the property 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 maintained 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.
Note - B The significant accounting policies of the Account are as follows:
* Investments are made in the divisions and are valued at the net asset
values of the respective Portfolios.
* Transactions are recorded on the trade date.
* Income from dividends is recognized on the ex-dividend date. All
dividends are automatically reinvested.<PAGE>
* Realized gains and losses on the sales of investments are computed on
the first in first out method.
* The operations of the Account are included in the Federal income tax
return of Merrill Lynch Life. Under the provisions of the Contracts,
Merrill Lynch Life has the right to charge the Account for any Federal
income tax attributable to the Account. No charge is currently being
made against the Account for income tax, since under current tax law,
Merrill Lynch Life pays no tax on investment income and capital gains
reflected in variable life insurance policy reserves. However, Merrill
Lynch Life retains the right to charge for any Federal income tax
incurred which is attributable to the Account if the law is changed.
Charges for state and local taxes, if any, attributable to the Account
may also be made.
Note - C Merrill Lynch Life assumes mortality and expense risks related to the
operations of the Account and will deduct a daily charge from the assets of the
Account to cover these risks. The daily charges vary by Contract form and are
equal to a rate of .50% to .90% (on an annual basis) of the net assets for
Contract owners.
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 the tenth Contract anniversaries. The deductions are for
(1) premiums for optional benefits (2) additional premiums for extra mortality
risks, (3) sales load, (4) administrative expenses, (5) state premium taxes and
(6) a risk charge for the guaranteed minimum death benefit.
In addition, the cost of providing life insurance coverage will be deducted
only on processing dates. This cost will vary dependant 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.
Note - D Merrill Lynch Life pays all Transaction Charges to Merrill Lynch,
Pierce, Fenner & Smith Inc., sponsor of the unit investment trusts, on the sale
of Series A through J Unit Investment Trust units to the Account and deducts a
daily asset charge against the assets of each trust for the reimbursement of
these transaction charges. The assets charge is equivalent to an effective
annual rate of .34% (annually at the beginning of the year) of net assets for
Contract owners.
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
==========================================================
Intermediate Long-Term
Money Government Corporate Capital
Reserve Bond Bond Stock
Portfolio Portfolio Portfolio Portfolio
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 14,579,642 $ 19,756,552 $ 8,906,432 $ 8,483,704
Net Gain (Loss):
Realized 0 2,368,600 2,037,165 9,255,863
Unrealized 0 3,193,238 2,756,338 8,352,474
----------------- ----------------- ----------------- -----------------
Investment Earnings 14,579,642 25,318,390 13,699,935 26,092,041
Mortality and Expense Charges (Note C) (3,235,134) (1,481,978) (729,699) (1,049,934)
Transaction Charges (Note D) 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Earnings 11,344,508 23,836,412 12,970,236 25,042,107
Capital Shares Transactions:
Transfers of Net Premiums 3,244,129 664,464 410,338 1,613,438
Transfers of Policy Loading, Net (3,804,574) (1,150,420) (535,370) (746,736)
Transfers Due to Deaths (5,579,687) (1,567,950) (1,132,049) (1,441,652)
Transfers Due to Other Terminations (25,788,859) (3,398,749) (1,564,718) (2,886,981)
Transfers Due to Policy Loans (17,840,370) (5,444,951) (2,352,782) (2,723,453)
Transfers of Cost of Insurance (6,469,103) (3,032,428) (1,480,593) (2,071,101)
Transfers of Loan Processing Charges (582,722) (215,248) (120,170) (148,107)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 0 (9,251)
Transfers Among Investment Divisions (46,276,980) 3,170,917 990,311 (674,380)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (91,753,658) 12,862,047 7,185,203 15,953,884
Net Assets Beginning Balance 526,438,460 226,628,332 104,702,393 158,603,030
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 434,684,802 $ 239,490,379 $ 111,887,596 $ 174,556,914
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Growth Multiple High Natural
Stock Strategy Yield Resources
Portfolio Portfolio Portfolio Portfolio
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 5,665,091 $ 87,413,712 $ 6,392,554 $ 294,435
Net Gain (Loss): ----------------- ----------------- ----------------- -----------------
Realized 5,031,894 12,104,149 3,761,965 994,165
Unrealized (2,863,617) 53,058,504 26,663 (755,989)
Investment Earnings 7,833,368 152,576,365 10,181,182 532,611
Mortality and Expense Charges (Note C) (662,670) (5,971,729) (400,671) (73,112)
Transaction Charges (Note D) 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Earnings 7,170,698 146,604,636 9,780,511 459,499
Capital Shares Transactions:
Transfers of Net Premiums 1,156,863 3,314,727 170,174 107,007
Transfers of Policy Loading, Net (527,407) (4,743,076) (305,484) (62,087)
Transfers Due to Deaths (424,081) (9,386,175) (269,656) (19,504)
Transfers Due to Other Terminations (2,765,551) (19,554,318) (481,749) (143,466)
Transfers Due to Policy Loans (425,398) (20,329,642) (848,315) (333,844)
Transfers of Cost of Insurance (1,212,545) (11,614,386) (773,730) (133,409)
Transfers of Loan Processing Charges (119,166) (936,321) (83,586) (9,751)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 0 (5,990)
Transfers Among Investment Divisions (14,943,118) 3,152,807 16,183,411 8,982,492
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (12,089,705) 86,508,252 23,371,576 8,840,947
Net Assets Beginning Balance 105,940,870 945,906,570 49,468,427 6,564,031
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 93,851,165 $ 1,032,414,822 $ 72,840,003 $ 15,404,978
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1993
========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=======================================================================
Global
Strategy Balanced 1993 1994
Portfolio Portfolio Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 2,776,280 $ 3,256,228 $ 0 $ 0
Net Gain (Loss):
Realized 2,181,371 718,355 7,600,757 2,947,880
Unrealized 10,528,938 3,286,065 (6,353,275) 1,298,940
----------------- ----------------- ----------------- -----------------
Investment Earnings 15,486,589 7,260,648 1,247,482 4,246,820
Mortality and Expense Charges (Note C) (504,473) (383,357) (221,901) (508,606)
Transaction Charges (Note D) 0 0 (118,827) (286,599)
----------------- ----------------- ----------------- -----------------
Net Earnings 14,982,116 6,877,291 906,754 3,451,615
Capital Shares Transactions:
Transfers of Net Premiums 883,491 946,132 21,992 23,935
Transfers of Policy Loading, Net (268,321) (247,293) (277,995) (370,852)
Transfers Due to Deaths (182,566) (192,062) (459,218) (644,926)
Transfers Due to Other Terminations (762,976) (530,808) (1,517,138) (1,493,290)
Transfers Due to Policy Loans (617,005) (1,179,288) (1,344,280) (1,442,272)
Transfers of Cost of Insurance (965,449) (728,980) (491,114) (1,148,711)
Transfers of Loan Processing Charges (76,146) (56,909) (21,391) (50,783)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 0 0
Transfers Among Investment Divisions 92,899,773 21,494,125 (40,428,502) (6,937,701)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 105,892,917 26,382,208 (43,610,892) (8,612,985)
Net Assets Beginning Balance 42,026,750 45,006,299 43,610,892 87,973,500
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 147,919,667 $ 71,388,507 $ 0 $ 79,360,515
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997 1998
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 2,531,808 2,210,012 2,210,676 2,994,693
Unrealized 2,364,168 1,476,343 2,343,186 2,560,078
----------------- ----------------- ----------------- -----------------
Investment Earnings 4,895,976 3,686,355 4,553,862 5,554,771
Mortality and Expense Charges (Note C) (419,735) (285,506) (296,476) (316,125)
Transaction Charges (Note D) (239,987) (159,486) (159,716) (172,825)
----------------- ----------------- ----------------- -----------------
Net Earnings 4,236,254 3,241,363 4,097,670 5,065,821
Capital Shares Transactions:
Transfers of Net Premiums 30,144 115,040 53,460 69,848
Transfers of Policy Loading, Net (335,217) (227,076) (230,677) (240,503)
Transfers Due to Deaths (470,755) (257,684) (356,746) (852,485)
Transfers Due to Other Terminations (1,583,904) (777,122) (892,523) (696,428)
Transfers Due to Policy Loans (526,706) (1,254,579) (700,428) (1,135,551)
Transfers of Cost of Insurance (918,171) (526,125) (516,461) (582,580)
Transfers of Loan Processing Charges (62,879) (37,166) (39,762) (44,413)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 0 0
Transfers Among Investment Divisions (4,037,538) (3,570,145) (3,812,833) (4,276,293)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (3,668,772) (3,293,494) (2,398,300) (2,692,584)
Net Assets Beginning Balance 71,771,752 47,580,295 47,743,574 50,542,096
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 68,102,980 $ 44,286,801 $ 45,345,274 $ 47,849,512
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1993
=======================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=======================================================================
1999 2000 2001 2002
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 625,244 863,965 2,818,246 88,089
Unrealized 618,895 686,361 5,055,214 383,108
383,108
----------------- ----------------- ----------------- -----------------
Investment Earnings 1,244,139 1,550,326 7,873,460 471,197
Mortality and Expense Charges (Note C) (64,753) (69,214) (325,829) (18,118)
Transaction Charges (Note D) (33,994) (38,396) (174,748) (9,812)
----------------- ----------------- ----------------- -----------------
Net Earnings 1,145,392 1,442,716 7,372,883 443,267
Capital Shares Transactions:
Transfers of Net Premiums 38,088 23,917 157,512 24,031
Transfers of Policy Loading, Net (46,671) (45,190) (233,056) (11,613)
Transfers Due to Deaths (58,665) (135,087) (578,022) 0
Transfers Due to Other Terminations (110,441) (43,082) (278,181) (6,472)
Transfers Due to Policy Loans (83,801) (1,006,945) (622,795) (33,626)
Transfers of Cost of Insurance (99,900) (119,952) (567,843) (37,523)
Transfers of Loan Processing Charges (5,080) (6,601) (59,429) (2,780)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 0 0
Transfers Among Investment Divisions (791,329) 95,520 (4,245,238) 237,399
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (12,407) 205,296 945,831 612,683
Net Assets Beginning Balance 9,474,383 10,782,807 48,896,335 2,288,723
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 9,461,976 $ 10,988,103 $ 49,842,166 $ 2,901,406
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
2003 2005 2006 2007
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 3,582,928 1,234,406 348,296 1,360,880
Unrealized 5,019,505 2,008,342 483,127 1,154,914
----------------- ----------------- ----------------- -----------------
Investment Earnings 8,602,433 3,242,748 831,423 2,515,794
Mortality and Expense Charges (Note C) (287,455) (103,227) (27,829) (71,351)
Transaction Charges (Note D) (158,308) (57,414) (13,328) (38,431)
----------------- ----------------- ----------------- -----------------
Net Earnings 8,156,670 3,082,107 790,266 2,406,012
Capital Shares Transactions:
Transfers of Net Premiums 75,547 22,035 12,663 2,105
Transfers of Policy Loading, Net (177,031) (64,933) (22,622) (40,889)
Transfers Due to Deaths (134,868) (59,006) 0 (157,848)
Transfers Due to Other Terminations (505,225) (118,556) (78,723) (179,374)
Transfers Due to Policy Loans (539,543) (79,214) (105,193) (360,953)
Transfers of Cost of Insurance (478,519) (178,631) (43,120) (127,078)
Transfers of Loan Processing Charges (34,708) (10,141) (4,227) (6,469)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 0 0
Transfers Among Investment Divisions (5,463,264) (708,013) (357,722) (1,810,743)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 899,059 1,885,648 191,322 (275,237)
Net Assets Beginning Balance 43,914,851 15,340,588 3,589,009 10,751,148
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 44,813,910 $ 17,226,236 $ 3,780,331 $ 10,475,911
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1993
=======================================================================
<TABLE>
<CAPTION>
Divisions Investing In
===================================================
2008 2009 2010
Trust Trust Trust
================= ================= =================
<S> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 3,557,489 1,137,602 2,093,934
Unrealized 2,520,239 1,305,227 (441,116)
----------------- ----------------- -----------------
Investment Earnings 6,077,728 2,442,829 1,652,818
Mortality and Expense Charges (Note C) (170,845) (69,964) (45,688)
Transaction Charges (Note D) (90,609) (35,465) (22,783)
----------------- ----------------- -----------------
Net Earnings 5,816,274 2,337,400 1,584,347
Capital Shares Transactions:
Transfers of Net Premiums 53,137 51,618 70,774
Transfers of Policy Loading, Net (125,814) (41,754) (38,843)
Transfers Due to Deaths (909,544) (27,469) (101,454)
Transfers Due to Other Terminations (256,678) (163,074) (1,851)
Transfers Due to Policy Loans (990,614) (330,661) (21,361)
Transfers of Cost of Insurance (322,908) (121,041) (81,977)
Transfers of Loan Processing Charges (32,008) (8,178) (5,672)
Transfers of Shares from Assumption
Reinsurance, Net 17,332 0 0
Transfers Among Investment Divisions (5,118,459) (1,847,994) (2,330,052)
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (1,869,282) (151,153) (926,089)
Net Assets Beginning Balance 25,814,557 10,001,748 7,070,268
----------------- ----------------- -----------------
Net Assets Ending Balance $ 23,945,275 $ 9,850,595 $ 6,144,179
================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
2011 2013
Trust Trust Total
================= ================= =================
<S> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 157,524,630
Net Gain (Loss):
Realized 512,543 49,806 77,222,781
Unrealized 257,400 (24,473) 100,298,797
----------------- ----------------- -----------------
Investment Earnings 769,943 25,333 335,046,208
Mortality and Expense Charges (Note C) (19,623) (1,606) (17,816,608)
Transaction Charges (Note D) (10,835) (889) (1,822,452)
----------------- ----------------- -----------------
Net Earnings 739,485 22,838 315,407,148
Capital Shares Transactions:
Transfers of Net Premiums 352 0 13,356,961
Transfers of Policy Loading, Net (14,956) (1,667) (14,938,127)
Transfers Due to Deaths 0 0 (25,399,159)
Transfers Due to Other Terminations 82,576 (20,534) (66,518,195)
Transfers Due to Policy Loans 19,147 (56,631) (62,711,054)
Transfers of Cost of Insurance (38,852) (3,338) (34,885,568)
Transfers of Loan Processing Charges (4,862) (114) (2,784,789)
Transfers of Shares from Assumption
Reinsurance, Net 0 0 2,091
Transfers Among Investment Divisions (415,002) 838,551 0
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 367,888 779,105 121,529,308
Net Assets Beginning Balance 2,823,413 0 2,751,255,101
----------------- ----------------- -----------------
Net Assets Ending Balance $ 3,191,301 $ 779,105 $ 2,872,784,409
================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1992
=========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
==================================================================
Intermediate Long-Term
Money Government Corporate Capital
Reserve Bond Bond Stock
Portfolio Portfolio Portfolio Portfolio
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 22,006,017 $ 15,890,139 $ 8,024,792 $ 4,338,858
Net Gain (Loss):
Realized 0 1,689,998 1,273,535 3,168,830
Unrealized 0 (2,226,297) (1,195,461) (3,597,985)
----------------- ----------------- ----------------- -----------------
Investment Earnings 22,006,017 15,353,840 8,102,866 3,909,703
Mortality and Expense Charges (Note C) (3,929,324) (1,363,780) (657,773) (914,528)
Transaction Charges (Note D) 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Earnings 18,076,693 13,990,060 7,445,093 2,995,175
Capital Shares Transactions:
Transfers of Net Premiums 5,467,801 836,687 376,705 1,549,160
Transfers of Policy Loading, Net (6,930,695) (1,562,142) (714,760) (926,057)
Transfers Due to Deaths (7,815,127) (2,006,749) (1,415,186) (1,055,715)
Transfers Due to Other Terminations (32,425,439) (5,051,648) (2,062,193) (3,690,645)
Transfers Due to Policy Loans (31,693,789) (6,033,996) (3,086,307) (4,189,413)
Transfers of Cost of Insurance (7,228,700) (2,838,314) (1,332,568) (1,897,482)
Transfers of Loan Processing Charges (602,385) (155,901) (80,489) (107,816)
Transfers of Shares from Assumption
Reinsurance, Net (107,209) (45,866) (21,171) (31,990)
Transfers Among Investment Divisions (70,853,737) 12,147,255 2,603,164 30,369,948
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (134,112,587) 9,279,386 1,712,288 23,015,165
Net Assets Beginning Balance 660,551,047 217,348,946 102,990,105 135,587,865
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 526,438,460 $ 226,628,332 $ 104,702,393 $ 158,603,030
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Growth Multiple High Natural
Stock Strategy Yield Resources
Portfolio Portfolio Portfolio Portfolio
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 15,890,139 $ 8,024,792 $ 4,338,858 $ 461,367
Net Gain (Loss):
Realized 6,100,529 9,219,951 4,160,760 (290,834)
Unrealized (3,507,907) 9,785,832 (915,428) 315,376
----------------- ----------------- ----------------- -----------------
Investment Earnings 3,053,989 39,431,027 8,421,286 131,514
Mortality and Expense Charges (Note C) (568,453) (5,652,221) (292,987) (44,158)
Transaction Charges (Note D) 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Earnings 2,485,536 33,778,806 8,128,299 87,356
Capital Shares Transactions:
Transfers of Net Premiums 1,187,051 3,842,605 96,505 93,559
Transfers of Policy Loading, Net (624,624) (6,187,450) (352,368) (49,921)
Transfers Due to Deaths (498,231) (6,130,130) (171,610) (32,925)
Transfers Due to Other Terminations (1,946,570) (18,535,334) (913,904) (129,655)
Transfers Due to Policy Loans (4,517,451) (24,006,432) (1,638,098) (365,526)
Transfers of Cost of Insurance (1,159,032) (10,959,496) (608,235) (85,457)
Transfers of Loan Processing Charges (85,558) (756,898) (60,550) (5,148)
Transfers of Shares from Assumption
Reinsurance, Net (21,335) (191,410) (10,072) (1,326)
Transfers Among Investment Divisions 25,655,951 29,925,062 7,320,604 712,036
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 20,475,737 779,323 11,790,571 222,993
Net Assets Beginning Balance 85,465,133 945,127,247 37,677,856 6,341,038
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 105,940,870 $ 945,906,570 $ 49,468,427 $ 6,564,031
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1992
========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================
Global
Strategy Balanced 1992 1993
Portfolio Portfolio Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 617,279 $ 1,071,072 $ 0 $ 0
Net Gain (Loss):
Realized 521,975 550,190 5,335,630 928,963
Unrealized (228,462) 1,012,077 (4,534,655) 1,514,319
----------------- ----------------- ----------------- -----------------
Investment Earnings 910,792 2,633,339 800,975 2,443,282
Mortality and Expense Charges (Note C) (209,795) (235,318) (27,039) (269,634)
Transaction Charges (Note D) 0 0 (8,060) (149,809)
----------------- ----------------- ----------------- -----------------
Net Earnings 700,997 2,398,021 765,876 2,023,839
Capital Shares Transactions:
Transfers of Net Premiums 479,919 802,264 2,607 135,013
Transfers of Policy Loading, Net (204,029) (243,889) (172,438) (285,539)
Transfers Due to Deaths (47,596) (409,842) (163,829) (99,880)
Transfers Due to Other Terminations (655,634) (1,783,976) (1,166,098) (845,239)
Transfers Due to Policy Loans (684,504) (1,240,184) (759,943) (1,584,357)
Transfers of Cost of Insurance (508,996) (552,102) (5,679) (564,168)
Transfers of Loan Processing Charges (25,160) (24,185) (10,565) (26,407)
Transfers of Shares from Assumption
Reinsurance, Net (8,500) (9,045) 0 (8,823)
Transfers Among Investment Divisions 20,769,227 15,587,010 (56,216,376) (573,047)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 19,815,724 14,524,072 (57,726,445) (1,828,608)
Net Assets Beginning Balance 22,211,026 30,482,227 57,726,445 45,439,500
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 42,026,750 $ 45,006,299 $ 0 $ 43,610,892
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 2,610,315 2,271,387 1,257,415 1,947,415
Unrealized 2,824,333 3,032,629 2,122,761 1,601,238
----------------- ----------------- ----------------- -----------------
Investment Earnings 5,434,648 5,304,016 3,380,176 3,548,653
Mortality and Expense Charges (Note C) (542,689) (422,591) (287,864) (301,352)
Transaction Charges (Note D) (311,741) (243,949) (162,967) (163,582)
----------------- ----------------- ----------------- -----------------
Net Earnings 4,580,218 4,637,476 2,929,345 3,083,719
Capital Shares Transactions:
Transfers of Net Premiums 36,436 36,083 144,662 66,161
Transfers of Policy Loading, Net (538,242) (437,466) (298,255) (331,375)
Transfers Due to Deaths (1,188,327) (493,318) (207,470) (668,603)
Transfers Due to Other Terminations (2,318,390) (969,030) (935,793) (1,386,805)
Transfers Due to Policy Loans (2,612,556) (3,641,307) (1,549,436) (1,693,110)
Transfers of Cost of Insurance (1,126,608) (879,003) (499,474) (523,572)
Transfers of Loan Processing Charges (36,820) (38,786) (25,756) (38,097)
Transfers of Shares from Assumption
Reinsurance, Net (17,793) (14,532) (9,624) (9,659)
Transfers Among Investment Divisions (5,548,921) 1,676,118 (1,887,019) 636,185
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (8,771,003) (123,765) (2,338,820) (865,156)
Net Assets Beginning Balance 96,744,503 71,895,517 49,919,115 48,608,730
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 87,973,500 $ 71,771,752 $ 47,580,295 $ 47,743,574
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1992
=========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=======================================================================
1998 1999 2000 2001
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 1,978,460 432,160 364,216 3,025,840
Unrealized 2,037,056 294,364 477,824 1,364,039
----------------- ----------------- ----------------- -----------------
Investment Earnings 4,015,516 726,524 842,040 4,389,879
Mortality and Expense Charges (Note C) (314,764) (59,160) (53,013) (314,326)
Transaction Charges (Note D) (173,236) (30,899) (31,129) (171,279)
----------------- ----------------- ----------------- -----------------
Net Earnings 3,527,516 636,465 757,898 3,904,274
Capital Shares Transactions:
Transfers of Net Premiums 56,447 43,518 32,138 203,026
Transfers of Policy Loading, Net (337,509) (65,263) (52,380) (311,440)
Transfers Due to Deaths (161,616) (93,762) 0 (302,479)
Transfers Due to Other Terminations (1,484,947) (593,025) (55,143) (1,065,449)
Transfers Due to Policy Loans (1,444,388) (273,479) (79,069) (1,187,536)
Transfers of Cost of Insurance (561,265) (98,893) (121,427) (533,551)
Transfers of Loan Processing Charges (30,546) (2,415) (2,249) (39,568)
Transfers of Shares from Assumption
Reinsurance, Net (10,235) (1,916) (2,181) (9,890)
Transfers Among Investment Divisions (1,432,887) 728,991 2,378,824 (4,544,704)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (1,879,430) 280,221 2,856,411 (3,887,317)
Net Assets Beginning Balance 52,421,526 9,194,162 7,926,396 52,783,652
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 50,542,096 $ 9,474,383 $ 10,782,807 $ 48,896,335
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
2002 2003 2005 2006
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 26,071 1,696,939 916,369 409,732
Unrealized 134,936 2,086,310 377,163 (76,345)
----------------- ----------------- ----------------- -----------------
Investment Earnings 161,007 3,783,249 1,293,532 333,387
Mortality and Expense Charges (Note C) (6,635) (260,338) (87,309) (23,692)
Transaction Charges (Note D) (3,841) (145,216) (48,886) (12,819)
----------------- ----------------- ----------------- -----------------
Net Earnings 150,531 3,377,695 1,157,337 296,876
Capital Shares Transactions:
Transfers of Net Premiums 14,905 71,711 21,711 10,019
Transfers of Policy Loading, Net (7,161) (237,175) (99,944) (25,382)
Transfers Due to Deaths 0 (156,811) (93,821) (37,825)
Transfers Due to Other Terminations 0 (360,248) (476,523) (93,906)
Transfers Due to Policy Loans (15,563) (1,616,928) (738,270) (594,690)
Transfers of Cost of Insurance (26,869) (448,917) (166,413) (46,811)
Transfers of Loan Processing Charges (1,900) (24,874) (2,428) (2,428)
Transfers of Shares from Assumption
Reinsurance, Net (463) (8,882) (3,103) (726)
Transfers Among Investment Divisions 2,175,243 (1,712,942) 1,378,399 (11,118)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 2,288,723 (1,117,371) 976,945 (505,991)
Net Assets Beginning Balance 0 45,032,222 14,363,643 4,095,000
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 2,288,723 $ 43,914,851 $ 15,340,588 $ 3,589,009
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1992
==========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=====================================================
2007 2008 2009
Trust Trust Trust
================= ================= =================
<S> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 705,402 2,107,671 983,782
Unrealized 192,789 (81,117) (35,465)
----------------- ----------------- -----------------
Investment Earnings 898,191 2,026,554 948,317
Mortality and Expense Charges (Note C) (69,051) (165,156) (74,239)
Transaction Charges (Note D) (37,814) (89,573) (37,842)
----------------- ----------------- -----------------
Net Earnings 791,326 1,771,825 836,236
Capital Shares Transactions:
Transfers of Net Premiums 5,203 83,901 99,978
Transfers of Policy Loading, Net (65,817) (168,104) (78,759)
Transfers Due to Deaths (59,083) (140,781) (23,234)
Transfers Due to Other Terminations (201,485) (651,093) (240,905)
Transfers Due to Policy Loans (489,246) (790,756) (793,779)
Transfers of Cost of Insurance (125,522) (291,092) (134,265)
Transfers of Loan Processing Charges (6,334) (23,545) (231)
Transfers of Shares from Assumption
Reinsurance, Net (2,175) (5,225) (2,022)
Transfers Among Investment Divisions (1,342,447) (6,613,529) (2,020,575)
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (1,495,580) (6,828,399) (2,357,556)
Net Assets Beginning Balance 12,246,728 32,642,956 12,359,304
----------------- ----------------- -----------------
Net Assets Ending Balance $ 10,751,148 $ 25,814,557 $ 10,001,748
================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
2010 2011
Trust Trust Total
================= ================= =================
<S> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 78,117,694
Net Gain (Loss):
Realized 1,514,943 297,264 55,204,908
Unrealized (904,726) 108,462 11,977,660
----------------- ----------------- -----------------
Investment Earnings 610,217 405,726 145,300,262
Mortality and Expense Charges (Note C) (52,895) (16,900) (17,216,984)
Transaction Charges (Note D) (28,100) (8,926) (1,859,668)
----------------- ----------------- -----------------
Net Earnings 529,222 379,900 126,223,610
Capital Shares Transactions:
Transfers of Net Premiums 69,763 4,650 15,870,188
Transfers of Policy Loading, Net (46,551) (20,360) (21,375,095)
Transfers Due to Deaths (109,934) 0 (23,583,884)
Transfers Due to Other Terminations (47,970) (80,570) (80,167,617)
Transfers Due to Policy Loans (272,172) (92,674) (97,684,959)
Transfers of Cost of Insurance (82,858) (30,188) (33,436,957)
Transfers of Loan Processing Charges (4,311) (3,030) (2,224,380)
Transfers of Shares from Assumption
Reinsurance, Net (1,430) (571) (557,174)
Transfers Among Investment Divisions (3,250,604) 1,943,889 0
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (3,216,845) 2,101,046 (116,936,268)
Net Assets Beginning Balance 10,287,113 722,367 2,868,191,369
----------------- ----------------- -----------------
Net Assets Ending Balance $ 7,070,268 $ 2,823,413 $ 2,751,255,101
================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1991
========================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================
Intermediate Long-term
Money Government Corporate Capital
Reserve Bond Bond Stock
Portfolio Portfolio Portfolio Portfolio
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 42,494,243 $ 15,386,857 $ 8,179,650 $ 8,408,677
Net Gain (Loss):
Realized 0 188,847 267,826 1,583,293
Unrealized 0 13,696,538 7,235,434 18,966,638
----------------- ----------------- ----------------- -----------------
Investment Earnings 42,494,243 29,272,242 15,682,910 28,958,608
Mortality and Expense Charges (Note C) (4,565,285) (1,191,403) (601,344) (705,268)
Transaction Charges (Note D) 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Earnings 37,928,958 28,080,839 15,081,566 28,253,340
Capital Shares Transactions:
Transfers of Net Premiums 9,977,575 862,153 363,578 1,183,556
Transfers of Policy Loading, Net (7,528,208) (1,710,127) (822,327) (789,341)
Transfers Due to Deaths (6,087,555) (2,398,586) (625,538) (714,735)
Transfers Due to Other Terminations (65,822,275) (9,463,351) (7,025,439) (3,497,651)
Transfers Due to Policy Loans (25,610,053) (5,664,253) (3,646,753) (3,812,241)
Transfers of Cost of Insurance (8,295,550) (2,161,182) (1,119,526) (1,209,561)
Transfers of Loan Processing Charges (438,288) (114,187) (50,662) (66,229)
Transfers of Shares from Assumption
Reinsurance, Net 751,546,719 194,199,831 95,098,320 95,033,713
Transfers Among Investment Divisions (25,120,276) 15,717,809 5,736,886 21,207,014
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 660,551,047 217,348,946 102,990,105 135,587,865
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 660,551,047 $ 217,348,946 $ 102,990,105 $ 135,587,865
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Growth Multiple High Natural
Stock Strategy Yield Resources
Portfolio Portfolio Portfolio Portfolio
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 813,465 $ 51,053,482 $ 4,402,876 $ 256,267
Net Gain (Loss):
Realized 8,126,665 4,685,648 1,744,896 106,710
Unrealized 12,626,710 145,543,202 4,447,150 (201,038)
----------------- ----------------- ----------------- -----------------
Investment Earnings 21,566,840 201,282,332 10,594,922 161,939
Mortality and Expense Charges (Note C) (368,368) (5,181,740) (213,252) (41,989)
Transaction Charges (Note D) 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Earnings 21,198,472 196,100,592 10,381,670 119,950
Capital Shares Transactions:
Transfers of Net Premiums 644,068 3,434,521 60,027 74,369
Transfers of Policy Loading, Net (437,584) (6,927,708) (331,430) (56,776)
Transfers Due to Deaths (184,659) (3,648,907) (241,601) (11,316)
Transfers Due to Other Terminations (2,387,823) (36,493,347) (1,750,095) (273,439)
Transfers Due to Policy Loans (848,497) (30,274,645) (1,198,475) (189,115)
Transfers of Cost of Insurance (576,751) (8,663,613) (363,547) (77,119)
Transfers of Loan Processing Charges (31,773) (545,539) (34,323) (5,233)
Transfers of Shares from Assumption
Reinsurance, Net 36,035,780 831,507,604 30,462,867 8,112,975
Transfers Among Investment Divisions 32,053,900 638,289 692,763 (1,353,258)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 85,465,133 945,127,247 37,677,856 6,341,038
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 85,465,133 $ 945,127,247 $ 37,677,856 $ 6,341,038
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1991
============================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=======================================================================
Global
Strategy Balanced 1991 1992
Portfolio Portfolio Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 1,261,845 $ 1,617,920 $ 0 $ 0
Net Gain (Loss):
Realized 176,901 241,945 1,225,015 521,959
Unrealized 1,645,045 2,908,584 0 4,534,655
----------------- ----------------- ----------------- -----------------
Investment Earnings 3,083,791 4,768,449 1,225,015 5,056,614
Mortality and Expense Charges (Note C) (121,955) (160,519) (113,269) (359,206)
Transaction Charges(Note D) 0 0 (64,292) (202,210)
----------------- ----------------- ----------------- -----------------
Net Earnings 2,961,836 4,607,930 1,047,454 4,495,198
Capital Shares Transactions:
Transfers of Net Premiums 319,716 695,016 5,106 42,984
Transfers of Policy Loading, Net (148,835) (226,125) (250,217) (497,575)
Transfers Due to Deaths (115,941) (52,595) (267,588) (152,778)
Transfers Due to Other Terminations (999,077) (2,010,069) (2,808,344) (2,989,438)
Transfers Due to Policy Loans (605,337) (1,042,695) (708,861) (2,138,660)
Transfers of Cost of Insurance (224,429) (285,377) (216,033) (666,304)
Transfers of Loan Processing Charges (11,963) (15,490) (7,207) (20,006)
Transfers of Shares from Assumption 0 0 0 0
Reinsurance, Net 15,844,427 23,629,619 32,384,805 62,276,724
Transfers Among Investment Divisions 5,190,629 5,182,013 (29,179,115) (2,623,700)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 22,211,026 30,482,227 0 57,726,445
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 22,211,026 $ 30,482,227 $ 0 $ 57,726,445
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 281,081 (531,800) (392,415) (266,487)
Unrealized 4,838,957 (309,583) (229,286) (151,327)
----------------- ----------------- ----------------- -----------------
Investment Earnings 5,120,038 13,204,197 10,702,058 7,425,040
Mortality and Expense Charges (Note C) (252,309) (531,800) (392,415) (266,487)
Transaction Charges(Note D) (142,530) (309,583) (229,286) (151,327)
----------------- ----------------- ----------------- -----------------
Net Earnings 4,725,199 12,362,814 10,080,357 7,007,226
Capital Shares Transactions:
Transfers of Net Premiums 137,008 54,808 35,841 231,538
Transfers of Policy Loading, Net (366,292) (602,188) (473,264) (339,276)
Transfers Due to Deaths (58,198) (560,714) (68,903) (101,746)
Transfers Due to Other Terminations (2,211,211) (3,415,258) (2,355,488) (1,709,676)
Transfers Due to Policy Loans (1,723,749) (1,819,893) (1,516,801) (1,621,600)
Transfers of Cost of Insurance (473,730) (995,239) (690,150) (416,590)
Transfers of Loan Processing Charges (13,067) (33,994) (22,889) (7,931)
Transfers of Shares from Assumption
Reinsurance, Net 42,272,777 92,245,651 67,275,247 43,188,437
Transfers Among Investment Divisions 3,150,763 (491,484) (368,433) 3,688,733
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 45,439,500 96,744,503 71,895,517 49,919,115
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 45,439,500 $ 96,744,503 $ 71,895,517 $ 49,919,115
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1991
=============================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=======================================================================
1997 1998 1999 2000
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 308,682 370,460 74,930 160,868
Unrealized 7,575,116 8,408,428 1,384,507 1,284,684
----------------- ----------------- ----------------- -----------------
Investment Earnings 7,883,798 8,778,888 1,459,437 1,445,552
Mortality and Expense Charges (Note C) (277,321) (292,460) (48,449) (40,804)
Transaction Charges (Note D) (150,454) (161,727) (24,883) (23,673)
----------------- ----------------- ----------------- -----------------
Net Earnings 7,456,023 8,324,701 1,386,105 1,381,075
Capital Shares Transactions:
Transfers of Net Premiums 72,467 91,068 426,046 33,826
Transfers of Policy Loading, Net (323,775) (350,446) (16,662) (48,372)
Transfers Due to Deaths (41,440) (219,704) 0 0
Transfers Due to Other Terminations (1,577,483) (1,707,643) (110,274) (229,143)
Transfers Due to Policy Loans (1,372,804) (1,280,234) (176,565) (235,446)
Transfers of Cost of Insurance (403,071) (480,837) (74,545) (67,719)
Transfers of Loan Processing Charges (19,720) (24,903) (2,724) (134)
Transfers of Shares from Assumption
Reinsurance, Net 44,951,299 47,316,489 6,572,362 7,363,139
Transfers Among Investment Divisions (132,766) 753,035 1,190,419 (270,830)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 48,608,730 52,421,526 9,194,162 7,926,396
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 48,608,730 $ 52,421,526 $ 9,194,162 $ 7,926,396
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
2001 2003 2005 2006
Trust Trust Trust Trust
================= ================= ================= =================
<S> <C> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Net Gain (Loss):
Realized 651,478 778,530 363,186 156,154
Unrealized 9,689,050 8,548,081 2,820,540 758,915
----------------- ----------------- ----------------- -----------------
Investment Earnings 10,340,528 9,326,611 3,183,726 915,069
Mortality and Expense Charges (Note C) (297,700) (258,243) (83,928) (24,553)
Transaction Charges (Note D) (163,728) (146,550) (47,406) (13,845)
----------------- ----------------- ----------------- -----------------
Net Earnings 9,879,100 8,921,818 3,052,392 876,671
Capital Shares Transactions:
Transfers of Net Premiums 227,270 88,531 96,471 9,617
Transfers of Policy Loading, Net (385,411) (318,571) (104,635) (27,367)
Transfers Due to Deaths (71,823) (261,174) (15,487) (32,940)
Transfers Due to Other Terminations (1,898,611) (1,546,345) (850,740) (109,393)
Transfers Due to Policy Loans (1,285,979) (1,536,398) (641,929) (134,292)
Transfers of Cost of Insurance (447,747) (388,972) (142,520) (36,448)
Transfers of Loan Processing Charges (25,002) (15,604) (6,585) (2,784)
Transfers of Shares from Assumption
Reinsurance, Net 48,827,981 45,630,160 14,950,612 4,742,517
Transfers Among Investment Divisions (2,036,126) (5,541,223) (1,973,936) (1,190,581)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 52,783,652 45,032,222 14,363,643 4,095,000
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 52,783,652 $ 45,032,222 $ 14,363,643 $ 4,095,000
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF EARNINGS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1991
============================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=======================================================================
2007 2008 2009
Trust Trust Trust
================= ================= =================
<S> <C> <C> <C>
Reinvested Dividends $ 0 $ 0 $ 0
$ 0 $ 0
Net Gain (Loss):
Realized 583,050 1,188,093 1,305,106
Unrealized 2,353,517 6,103,046 2,007,100
----------------- ----------------- -----------------
Investment Earnings 2,936,567 7,291,139 3,312,206
Mortality and Expense Charges (Note C) (80,581) (193,511) (84,925)
Transaction Charges (Note D) (44,848) (106,911) (47,420)
----------------- ----------------- -----------------
Net Earnings 2,811,138 6,990,717 3,179,861
Capital Shares Transactions:
Transfers of Net Premiums 31,104 170,389 134,126
Transfers of Policy Loading, Net (105,867) (261,416) (101,321)
Transfers Due to Deaths (101,308) (59,671) (6,200)
Transfers Due to Other Terminations (828,616) (2,072,045) (555,241)
Transfers Due to Policy Loans (300,167) (1,419,093) (400,688)
Transfers of Cost of Insurance (131,216) (379,531) (137,009)
Transfers of Loan Processing Charges (6,546) (24,096) (8,249)
Transfers of Shares from Assumption
Reinsurance, Net 17,386,413 35,668,829 20,622,165
Transfers Among Investment Divisions (6,508,207) (5,971,127) (10,368,140)
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 12,246,728 32,642,956 12,359,304
Net Assets Beginning Balance 0 0 0
----------------- ----------------- -----------------
Net Assets Ending Balance $ 12,246,728 $ 32,642,956 $ 12,359,304
================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
2010 2011
Trust Trust Total
================= ================= =================
<S> <C> <C> <C>
Reinvested Dividends 0 0 133,875,282
Net Gain (Loss):
Realized 848,220 79,068 27,512,318
Unrealized 1,520,925 54,450 298,587,822
----------------- ----------------- -----------------
Investment Earnings 2,369,145 133,518 459,975,422
Mortality and Expense Charges (Note C) (61,532) (2,103) (16,812,719)
Transaction Charges (Note D) (34,796) (1,176) (2,066,645)
----------------- ----------------- -----------------
Net Earnings 2,272,817 130,239 441,096,058
Capital Shares Transactions:
Transfers of Net Premiums 92,084 0 19,594,863
Transfers of Policy Loading, Net (62,188) (3,603) (23,616,907)
Transfers Due to Deaths (181,752) 0 (16,282,859)
Transfers Due to Other Terminations (160,728) (18,699) (156,876,942)
Transfers Due to Policy Loans (475,259) (8,024) (91,688,506)
Transfers of Cost of Insurance (93,192) (3,318) (29,220,826)
Transfers of Loan Processing Charges (4,662) 0 (1,559,790)
Transfers of Shares from Assumption
Reinsurance, Net 11,530,632 68,184 2,726,746,278
Transfers Among Investment Divisions (2,630,639) 557,588 0
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 10,287,113 722,367 2,868,191,369
Net Assets Beginning Balance 0 0 0
----------------- ----------------- -----------------
Net Assets Ending Balance $ 10,287,113 $ 722,367 $ 2,868,191,369
================= ================= =================
</TABLE>
<PAGE>
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, 1993
and 1992, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1993. 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 provides 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, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the
Company changed its method of accounting for certain investments
in debt and equity securities to conform with Statement of
Financial Accounting Standards No. 115.
/s/Deloitte & Touche
February 28, 1994
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
ASSETS 1993 1992
- ------ ---- ----
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1993 - $5,369,236; 1992 - $334,638) $ 5,597,359 $ 335,916
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1993 - $140,635) 144,035 0
Fixed maturity securities to be held to maturity, at amortized cost
(estimated fair value: 1992 - $6,713,831) 0 6,449,981
Equity securities available for sale, at estimated fair value
(cost: 1993 - $24,424; 1992 - $31,598) 24,970 33,186
Equity securities held for trading, at estimated fair value
(cost 1993 - $19,694) 20,585 0
Mortgage loans on real estate 191,214 264,966
Real estate available for sale
(accumulated depreciation: 1993 - $850; 1992 - $321) 29,761 12,847
Policy loans on insurance contracts 924,579 834,461
------------- -------------
Total Investments 6,932,503 7,931,357
CASH AND CASH EQUIVALENTS 122,218 172,124
ACCRUED INVESTMENT INCOME 120,337 138,797
DEFERRED POLICY ACQUISITION COSTS 318,903 373,214
FEDERAL INCOME TAXES - DEFERRED 16,878 19,982
REINSURANCE RECEIVABLES 1,190 856
RECEIVABLES FROM AFFILIATES - NET 789 0
OTHER ASSETS 21,481 19,864
SEPARATE ACCOUNTS ASSETS 4,715,278 3,127,767
------------- -------------
TOTAL ASSETS $ 12,249,577 $ 11,783,961
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1993 1992
- ------------------------------------ ---- ----
LIABILITIES:
<S> <C> <C>
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 6,691,811 $ 7,804,447
Claims and claims settlement expenses 20,295 7,565
------------- -------------
Total policy liabilities and accruals 6,712,106 7,812,012
OTHER POLICYHOLDER FUNDS 28,768 14,637
LIABILITY FOR GUARANTY FUND ASSESSMENTS 28,083 27,104
OTHER LIABILITIES 68,165 16,790
FEDERAL INCOME TAXES - CURRENT 10,122 30,010
PAYABLE TO AFFILIATES - NET 0 2,638
SEPARATE ACCOUNTS LIABILITIES 4,715,278 3,118,296
------------- -------------
Total Liabilities 11,562,522 11,021,487
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 637,590 654,717
Retained earnings 47,860 102,873
Net unrealized investment gain (loss) (395) 2,884
------------- -------------
Total Stockholder's Equity 687,055 762,474
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,249,577 $ 11,783,961
============= =============
</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, 1993, 1992 AND 1991
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 586,461 $ 712,739 $ 787,603
Net realized investment gains (losses) 63,052 (29,639) (21,957)
Policy charge revenue 95,684 81,653 82,745
----------- ----------- -----------
Total Revenues 745,197 764,753 848,391
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account
balances 454,671 546,979 638,984
Market value adjustment expense 30,816 6,229 1,198
Policy benefits (reinsurance recoveries: 1993 - $6,004;
1992 - $5,555; 1991 - $6,328) 17,030 12,066 9,537
Reinsurance premium ceded 12,665 12,457 12,765
Amortization of deferred policy acquisition costs 109,456 88,795 93,391
Insurance expenses and taxes 47,784 72,560 78,448
----------- ----------- -----------
Total Benefits and Expenses 672,422 739,086 834,323
----------- ----------- -----------
Earnings Before Federal Income
Tax Provision 72,775 25,667 14,068
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 20,112 28,549 42,919
Deferred 4,803 (19,913) (40,459)
----------- ----------- -----------
Total Federal Income Tax Provision 24,915 8,636 2,460
----------- ----------- -----------
NET EARNINGS $ 47,860 $ 17,031 $ 11,608
=========== =========== ===========
</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, 1993, 1992 AND 1991
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
-------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1991 $ 2,000 $ 572,321 $ 74,234 $ (103) $ 648,452
Capital contribution 82,396 82,396
Net earnings 11,608 11,608
Net unrealized investment loss (1,142) (1,142)
BALANCE, DECEMBER 31, 1991 2,000 654,717 85,842 (1,245) 741,314
Net earnings 17,031 17,031
Net unrealized investment gain 4,129 4,129
-------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1992 2,000 654,717 102,873 2,884 762,474
Dividend to Parent (17,127) (102,873) (120,000)
Net earnings 47,860 47,860
Net unrealized investment loss (1) (3,279) (3,279)
-------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1993 $ 2,000 $ 637,590 $ 47,860 $ ( 395) $ 687,055
======== =========== ========== =========== =============
</TABLE>
(1) Asset gains less adjustment of policyholders' account balances
and deferred policy acquisition costs (See Note 1).
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, 1993, 1992 AND 1991
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 47,860 $ 17,031 $ 11,608
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 109,456 88,795 93,391
Capitalization of policy acquisition costs (91,189) (39,146) (149,440)
Depreciation and amortization 1,142 (16,033) (25,417)
Net realized investment (gains) losses (63,052) 29,639 21,957
Interest credited to policyholders' account balances 454,671 546,979 638,984
Provision for deferred Federal
income tax 4,803 (19,913) (40,459)
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 18,460 6,018 (9,271)
Policy liabilities and accruals 12,730 7,775 101,521
Federal income taxes - current (19,888) 14,955 44,782
Other policyholder funds 14,131 12,826 (25,035)
Liability for guaranty fund assessments 979 16,439 10,665
Payable to Family Life Insurance Company 0 0 (28,224)
Policy loans (90,118) (126,925) (88,362)
Investment trading securities (145,972) 0 0
Other, net 49,425 (26,296) (30,343)
------------ ------------- -------------
Net cash and cash equivalents provided
by operating activities 303,438 512,144 526,357
------------ ------------- -------------
</TABLE>
(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, 1993, 1992 AND 1991
(Concluded) (Dollars In Thousands)
==============================================================================
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Fixed maturity securities sold 571,337 1,281,705 4,005,959
Fixed maturity securities matured 2,776,992 2,206,447 746,273
Fixed maturity securities purchased (1,866,857) (2,806,416) (5,142,471)
Equity securities available for sale purchased (8,983) (17,843) (67,348)
Equity securities available for sale sold 6,451 44,188 20,768
Mortgage loans on real estate principal payments received 35,561 8,548 5,977
Mortgage loans on real estate acquired (674) (853) (740)
Real estate available for sale purchased 0 (340) (22,706)
Real estate available for sale sold 7,408 178 25,000
Interest rate swaps sold 0 2,302 0
Recapture of investment in Separate Accounts 29,389 0 0
Investment in Separate Accounts (20,000) (3,841) 0
------------ ------------- -------------
Net cash and cash equivalents provided (used)
by investing activities 1,530,624 714,075 (429,288)
------------ ------------- -------------
FINANCING ACTIVITIES:
Paid-in capital from parent 0 0 82,396
Dividend paid to parent (120,000) 0 0
Affiliated notes payable (3,427) (83,200) 18,794
Policyholders' account balances:
Deposits 814,314 217,410 436,564
Withdrawals (net of transfers to Separate Accounts) (2,574,854) (1,338,034) (772,811)
Net cash and cash equivalents used ------------ ------------- -------------
by financing activities (1,883,967) (1,203,824) (235,057)
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (49,906) 22,395 (137,988)
CASH AND CASH EQUIVALENTS
Beginning of year 172,124 149,729 287,717
------------ ------------- -------------
End of year $ 122,218 $ 172,124 $ 149,729
============ ============= =============
</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
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: Merrill Lynch Life Insurance Company (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co.").
The Company sells life insurance and annuity products which
comprise one business segment. The primary products that the
Company currently markets are immediate annuities, market value
adjusted annuities, variable life insurance and variable
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 Merrill Lynch & Co. retail network.
On June 12, 1991, the Company's former parent, Family Life
Insurance Company ("Family Life"), was sold to a non-affiliated
entity. Immediately prior to this sale, Family Life, through a
dividend, transferred its 100% ownership interest in the
Company to its parent MLIG. (See Note 8).
On October 1, 1991, Tandem Insurance Group, Inc. ("Tandem"), a
wholly-owned subsidiary of MLIG, was merged with and into the
Company. This merger has been accounted for as a combination
of entities under common control. The assets, liabilities,
stockholder's equity, earnings and cash flows as presented in
these financial statements are reported on a combined
historical basis for all periods presented.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles for
stock life insurance companies.
Revenue Recognition: Revenues for the Company's interest
sensitive life, interest sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholder account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest crediting rates for the
Company's fixed rate products are as follows:
Interest sensitive life products 4.0% - 8.8%
Interest sensitive deferred annuities 2.4% - 9.0%
Immediate annuities 4.0% - 10.0%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are
unreported as of the valuation date.
<PAGE>
Reinsurance: Effective during 1992, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 113
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" ("SFAS No. 113"), which requires that
reinsurance receivables and prepaid reinsurance premium ceded
be reported as assets. SFAS No. 113 eliminates the practice by
insurance enterprises of reporting assets and liabilities
relating to reinsured contracts net of the effects of
reinsurance. The impact of adopting SFAS No. 113 was not
material.
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. On life insurance contracts which the Company is
currently marketing, the maximum amount of mortality risk
retained by the Company is $500,000 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 $1,024,000 that
can be drawn upon for delinquent reinsurance recoverables.
As of December 31, 1993, the Company had life insurance in-
force which was ceded to other life insurance companies of
$2,005,191,000.
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.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, which 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.
Included in deferred policy acquisition costs are those costs
related to the acquisition by assumption reinsurance of
insurance contracts from unaffiliated insurers. The deferred
costs will be amortized in proportion to the future gross
profits over the anticipated life of the acquired insurance
contracts utilizing an interest methodology.
In December 1990, the Company entered into an assumption
reinsurance agreement with a non-affiliated insurer (See Note
6). The acquisition costs relating to this agreement are being
amortized over a twenty-year period using an effective interest
rate of 9.01%. This reinsurance agreement provides for payment
of contingent ceding commissions based upon the persistency and
mortality experience of the insurance contracts assumed. Any
payments made for the contingent ceding commissions will be
capitalized and amortized using an identical methodology as
that used for the initial acquisition costs. The following is
a reconciliation of the acquisition costs for the reinsurance
transaction for the three years ended December 31,:
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Beginning balance $ 150,450 $ 160,235 $ 24,294
Capitalized amounts 6,987 6,060 156,641
Interest accrued 13,136 15,401 14,071
Amortization (30,926) (31,246) (34,771)
---------- ---------- ----------
Ending balance $ 139,647 $ 150,450 $ 160,235
========== ========== ==========
</TABLE>
The following table presents the expected amortization 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.
1994 $18,732,000
1995 17,840,000
1996 16,056,000
1997 12,488,000
1998 8,925,000
Investments: Effective December 31, 1993, the Company has
adopted SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115"). In compliance
with SFAS No. 115, the Company classified its investments in
fixed maturity securities and equity securities in two
categories, each separately identified:
Available for sale securities include both fixed maturity
and equity securities. These securities may be sold for the
Company's general liquidity needs, asset/liability
management strategy, credit dispositions and investment
opportunities. These securities are carried at estimated
fair value with unrealized gains and losses included in
stockholder's equity (net of tax). 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
in the net realized investment gains (losses) caption of
the statement of earnings.
Trading securities represent securities that are managed
with an investment objective to maximize total return
subject to the Company's quality guidelines. Investments in
this portfolio will consist primarily of marketable fixed
maturity and equity investments. These securities are
carried at estimated fair value with unrealized gains and
losses included in the statement of earnings. The debt and
equity securities classified as trading securities as of
December 31, 1993 were acquired in 1993 and immediately
classified as trading securities in compliance with SFAS
No. 60 "Accounting and Reporting by Insurance Enterprises",
prior to the adoption of SFAS No. 115.
SFAS No. 115 allows fixed maturity securities to be carried at
amortized cost if the Company has both the ability and positive
intent to hold these securities to maturity. The Company has
determined that it can not guarantee that it will not have the
need or opportunity to sell any particular security in its
investment holdings. As such, the Company did not utilize this
classification as of December 31, 1993.
In compliance with a recent Securities and Exchange Commissions
("SEC") staff announcement, the Company has recorded certain
adjustments to deferred policy acquisition costs and
policyholders' account balances in conjunction with its
adoption of SFAS No. 115. The SEC requires that companies
adjust those assets and liabilities that would have been
adjusted had the unrealized investment gains or losses from
securities classified as available for sale actually been
realized with corresponding credits or charges reported
directly to shareholder's equity. Accordingly, deferred policy
acquisition costs have
<PAGE>
been decreased by $36,044,000 and
policyholders' account balances have been increased by
$193,233,000 as of December 31, 1993.
As of December 31, 1992, the Company classified its investments
in fixed maturity securities as either "to be held to maturity"
or "available for sale." Fixed maturity securities to be held
to maturity are stated in the balance sheets at amortized cost.
Fixed maturity securities available for sale are stated at
estimated fair value. The net unrealized gain and loss on these
securities are reflected as a component of stockholder's
equity.
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accrued to
the maturity date and interest income is accrued daily.
Realized gains and losses on the sale or maturity of the
investments are determined on the basis of identified cost.
Fixed maturity securities may contain securities which are
considered high yield. The Company defines high yield fixed
maturity securities as unsecured corporate debt obligations
which do not have a rating equivalent to Standard and Poor's
(or similar rating agency) BBB or higher, and are not
guaranteed by an agency of the federal government. Probable
losses are recognized in the period that a decline in value is
determined to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal
balances net of valuation allowances. Such valuation allowances
are based on the decline in value expected by management to be
realized on in-substance foreclosures of mortgage loans and on
mortgage loans which management believes may not be collectible
in full. In establishing valuation allowances management
considers, among other things, the estimated fair value of the
underlying collateral.
The Company has previously made mortgage loans collateralized
by real estate and direct investments in real estate. The
return on and the ultimate recovery of these loans and
investments are generally dependent on the successful
operation, sale or refinancing of the real estate. In many
parts of the country, current real estate markets are
characterized by above-normal vacancy rates, a lack of ready
sources of credit for real estate financing, reduced or
declining real estate values, and similar factors.
The Company employs a system to monitor the effects of current
and expected real estate market conditions and other factors
when assessing the collectability of mortgage loans and the
recoverability of the Company's real estate investments. When,
in management's judgment, these assets are impaired,
appropriate losses are recorded. Such estimates necessarily
include assumptions, which may include anticipated improvements
in selected market conditions for real estate, which may or may
not occur. The more significant assumptions management
considers involve estimates of the following: lease, absorption
and sales rate; real estate values and rates of return;
operating expenses; required capital improvements; inflation;
and sufficiency of any collateral independent of the real
estate.
Resulting from the Company's management and valuation of its
mortgage loans on real estate, management believes that the
carrying value approximates the fair value of these
investments.
During 1993 the Financial Accounting Standards Board issued
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"). SFAS No. 114 requires that for impaired
loans, the impairment shall be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral.
Impairments of mortgage loans on real estate are established as
valuation allowances and recorded to net realized investment
gains (losses). SFAS No. 114 must be adopted for fiscal years
beginning after December 15, 1994. The Company has decided
not to early adopt this statement. The Company estimates
that the impact on both financial position and earnings
from adopting SFAS No. 114 would be immaterial.
Real estate available for sale, including real estate acquired
in satisfaction of debt subsequent to its acquisition date, is
stated at depreciated cost less valuation allowances and
estimated selling costs.
<PAGE>
Depreciation is computed using the
straight-line method over the estimated useful lives of the
properties, which generally is 40 years.
Policy loans on insurance contracts are stated at unpaid
principal balances. The Company estimates the fair market 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.
Fair Value of Financial Instruments: Beginning in 1992, the
Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments", which requires companies to report the
fair value of financial instruments, for certain assets and
liabilities both on and off - balance sheet.
Federal Income Taxes: The results of the 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.
Effective the first quarter 1992, the Company adopted SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109") which
requires an asset and liability method in recording income
taxes on all transactions that have been recognized in the
financial statements. SFAS No. 109 provides that deferred
taxes be adjusted to reflect tax rates at which future tax
liabilities or assets are expected to be settled or realized.
Previously, the Company accounted for income taxes in
accordance with SFAS No. 96, "Accounting for Income Taxes."
The effect of adopting SFAS No. 109 was not material.
Separate Accounts: The Separate Accounts are established in
conformity with Arkansas insurance law, the Company's
domiciliary state, and under such law, if and to the extent
provided under the applicable insurance contracts, assets held
in the Separate Accounts equal to the reserves and other
contract liabilities with respect to the Separate Accounts may
not be chargeable with liabilities that arise from any other
business of the Company. Separate Accounts assets may be
subject to General Account claims only to the extent the value
of such assets exceeds the Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing
net deposits and accumulated net investment earnings less fees,
held for the benefit of policyholders, are shown as separate
captions in the balance sheets. Assets held in the Separate
Accounts are carried at quoted market values.
The carrying value for Separate Accounts assets and liabilities
approximates the estimated fair value of the underlying assets.
Postretirement Benefits Other Than Pensions: During the fourth
quarter 1992, the Company adopted SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions"
("SFAS No. 106"). SFAS No. 106 requires the accrual of
postretirement benefits (such as health care benefits) during
the years an employee provides service. Prior to 1992, the
cost of these benefits were expensed on a modified pay-as-you-go
basis when such cost was allocated from MLIG as a component of
the Company's operating expenses. The effect of adopting SFAS
No. 106 was not material.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
The carrying amounts approximate the estimated fair value of
cash and cash equivalents.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. INVESTMENTS
The amortized cost (original cost for equity securities) less
valuation allowances and estimated fair value of investments in
fixed maturity securities and equity securities as of December
31 are:
<TABLE>
<CAPTION>
1993
----
Amortized
Cost less Gross Gross Estimated
Valuation Unrealized Unrealized Fair
Allowances Gains Losses Value
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 3,181,667 $ 159,233 $ 18,440 $ 3,322,460
Mortgage-backed securities 2,015,328 79,645 3,998 2,090,975
U.S. Treasury securitiesand obligations of
U.S. government corporations and
agencies 159,329 10,887 126 170,090
Obligations of states and political
subdivisions 12,912 922 0 13,834
------------ ------------ ------------ ------------
Total fixed maturity securities available
for sale $ 5,369,236 $ 250,687 $ 22,564 $ 5,597,359
============ ============ ============ ============
Equity securities available for sale:
Common stocks $ 4,481 $ 577 $ 657 $ 4,401
Non-redeemable preferred stocks 19,943 757 131 20,569
------------ ------------ ------------ ------------
Total equity securities available for sale $ 24,424 $ 1,334 $ 788 $ 24,970
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1992
----
Amortized
Cost less Gross Gross Estimated
Valuation Unrealized Unrealized Fair
Allowances Gains Losses Value
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities to be held to
maturity:
Corporate securities $ 3,052,333 $ 134,016 $ 7,721 $ 3,178,628
Mortgage-backed securities 3,292,132 141,387 5,215 3,428,304
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies 97,976 1,798 1,396 98,378
Obligations of states and political
subdivisions 7,540 981 0 8,521
------------ ------------ ------------ ------------
Total fixed maturity securities to be
held to maturity $6,449,981 $ 278,182 $ 14,332 $ 6,713,831
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1992
----
Amortized
Cost less Gross Gross Estimated
Valuation Unrealized Unrealized Fair
Allowances Gains Losses Value
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 134,675 $ 6,648 $ 938 $ 140,385
Mortgage-backed securities 117,248 3,316 8,337 112,227
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies 74,109 916 560 74,465
Obligations of states and political
subdivisions 8,606 233 0 8,839
------------ ------------ ------------ ------------
Total fixed maturity securities
available for sale $ 334,638 $ 11,113 $ 9,835 $ 335,916
============ ============ ============ ============
Equity securities available for sale:
Common stocks $ 12,980 $ 762 $ 0 $ 13,742
Non-redeemable preferred stocks 18,618 826 0 19,444
------------ ------------ ------------ ------------
Total equity securities available for sale $ 31,598 $ 1,588 $ 0 $ 33,186
============ ============ ============ ============
</TABLE>
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
approach, 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, 1993 and 1992,
respectively, securities without a readily ascertainable market
value, having an amortized cost less valuation allowances of
approximately $773,965,000 and $992,340,000, had an estimated
fair value of approximately $819,866,000 and $1,064,915,000,
respectively.
The amortized cost less valuation allowances and estimated fair
value of fixed maturity securities available for sale at
December 31, 1993 by contractual maturity are shown below:
<TABLE>
<CAPTION>
Amortized
Cost less Estimated
Valuation Fair
Allowances Value
------------ ------------
(In Thousands)
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 293,809 $ 299,884
Due after one year through five years 1,162,162 1,207,307
Due after five years through ten years 1,499,057 1,585,524
Due after ten years 398,880 413,669
------------ ------------
3,353,908 3,506,384
Mortgage-backed securities 2,015,328 2,090,975
------------ ------------
Total fixed maturity securities
available for sale $ 5,369,236 $ 5,597,359
============ ============
</TABLE>
<PAGE>
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 will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The Company's investment in mortgage loans on real estate
consists principally of loans collateralized by commercial real
estate. The largest concentrations of commercial real estate
mortgage loans are for properties located in California
($53,795,000 or 24%), Illinois ($28,294,000 or 13%) and
Pennsylvania ($27,558,000 or 12%).
For the years ended December 31, 1993 and 1992, $29,555,000 and
$3,126,000, respectively, of real estate was acquired in
satisfaction of debt.
Net investment income arose from the following sources for the
years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Fixed maturity securities $ 511,655 $ 652,136 $ 715,102
Equity securities 4,143 4,813 2,852
Mortgage loans on real estate 20,342 25,954 32,827
Real estate available for sale 32 1,004 310
Policy loans on insurance contracts 46,129 40,843 34,366
Other 11,135 5,924 13,015
------------ ------------ ------------
Gross investment income 593,436 730,674 798,472
Less expenses (6,975) (17,935) (10,869)
------------ ------------ ------------
Net investment income $ 586,461 $ 712,739 $ 787,603
============ ============ ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances, determined by specific identification for
the years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Fixed maturity securities available for sale $ 67,473 $ 15,907 $ (12,689)
Fixed maturity securities held for trading 5,562 0 0
Equity securities available for sale 22 (3,051) (804)
Equity securities held for trading 2,587 0 0
Mortgage loans on real estate (9,310) (42,997) (12,913)
Real estate available for sale (4,733) (1,800) 3,224
Other 1,451 2,302 1,225
------------ ------------ ------------
Net realized investment gains (losses) $ 63,052 $ (29,639) $ (21,957)
============ ============ ============
</TABLE>
<PAGE>
Valuation allowances have been established to reflect other than
temporary declines in estimated fair value of the following
classification of investments as of December 31,:
<TABLE>
<CAPTION>
1993 1992
---- ----
(In Thousands)
<S> <C> <C>
Fixed maturity securities to be held to maturity $ 0 $ 19,711
Fixed maturity securities available for sale 850 0
Equity securities available for sale 0 210
Mortgage loans on real estate 45,924 55,610
Real estate available for sale 20,797 5,600
------------ ------------
$ 67,571 $ 81,131
============ ============
</TABLE>
Proceeds, gains and losses from the sale or maturity of fixed
maturity securities available for sale and held to maturity for
the years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Proceeds $ 3,348,329 $ 3,488,152 $ 4,752,232
Realized investment gains 71,599 51,925 88,230
Realized investment losses 4,126 25,732 91,745
</TABLE>
Approximately $4,291,000 of unrealized holding gains from
investment trading securities were recorded in net realized
investment gains during 1993.
The Company held investments at December 31, 1993 of
$22,672,000 which have been non-income producing for the
preceding twelve months.
The Company had investment securities of $28,702,000 and
$19,030,000 held on deposit with insurance regulatory
authorities at December 31, 1993 and 1992, respectively.
At December 31, 1992, the Company retained $9,741,000 in the
Separate Accounts, including unrealized gains of $1,504,000.
The investments in the Separate Accounts were for the purpose
of providing original funding of certain mutual funds available
as investment options to variable life and annuity
policyholders. No funds were retained in the Separate Accounts
at December 31, 1993.
The Company has restructured the terms of certain of its
investments in fixed maturity securities and mortgage loans on
real estate during 1993 and 1992. The following table provides
the amortized cost less valuation allowances immediately prior
to restructuring, gross interest income that would have been
earned had the loans been current per their original terms
("Expected Income"), gross interest income recorded during the
year ("Actual Income") and equity interests which were received
in the restructuring:
<PAGE>
<TABLE>
<CAPTION>
1993 1992
---- ----
(In Thousands)
<S> <C> <C>
Fixed maturity securities:
Amortized cost less valuation allowances $ 3,743 $ 13,148
Expected income 916 2,781
Actual income 103 1,011
Equity interest received 1,833 2,003
Mortgage loans on real estate:
Amortized cost less valuation allowance $ 79,624 $ 0
Expected income 6,859 0
Actual income 5,076 0
</TABLE>
NOTE 3. FEDERAL INCOME TAXES
The Company's operating results (excluding Tandem prior to
September 30, 1991) are consolidated with those of MLIG. MLIG
and the Company are included in Merrill Lynch & Co.'s
consolidated Federal income tax returns. It is the policy of
Merrill Lynch & Co. to allocate the tax associated with such
operating results to its respective subsidiaries on a separate
company basis. The Company has the intent to pay accumulated
Federal income tax to MLIG upon request. For the nine months
ended September 30, 1991, Tandem filed a separate Federal
income tax return.
The following is a reconciliation of the provision for income
taxes based on income before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the three years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 25,471 $ 8,726 $ 4,783
Increase (decrease) in income taxes resulting from:
Federal tax rate increase (631)
Recognition of prior year capital loss tax
benefits (2,219)
Other 75 (90) (104)
------------ ------------ ------------
Federal income tax provision $ 24,915 $ 8,636 $ 2,460
============ ============ ============
</TABLE>
The Federal statutory rate for 1993, 1992 and 1991 was 35%, 34%
and 34%, respectively.
The Company provides for deferred income taxes resulting from
temporary differences which 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 were as follows:
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deferred policy acquisition costs $ (9,030) $ (17,633) $ (32,834)
Policyholders' account balances 6,433 21,301 (6,282)
Estimated liability for guaranty fund assessments (1,066) (2,735) (3,626)
Investment adjustments 7,941 (21,875) 2,437
Other 525 1,029 (154)
------------ ------------ ------------
Deferred Federal income tax
provision (benefit) $ 4,803 $ (19,913) $ (40,459)
============ ============ ============
</TABLE>
Deferred tax assets and liabilities as of December 31, are
determined as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 99,475 $ 105,908
Investment adjustments 19,596 27,537
Estimated liability for guaranty fund assessments 7,427 6,361
------------ ------------
Total deferred tax asset 126,498 139,806
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 92,625 101,655
Net unrealized investment gain (loss) (213) 1,486
Other 17,208 16,683
------------ ------------
Total deferred tax liability 109,620 119,824
------------ ------------
Net deferred tax asset $ 16,878 $ 19,982
============ ============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
Federal income taxes paid (recovered) totaled $40,000,000,
$13,594,000 and $(1,560,000) in 1993, 1992 and 1991,
respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain 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 $55,843,000, $63,300,000 and $78,306,000 for the
years ended December 31, 1993, 1992 and 1991, 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 to the Company. The
Company pays a fee to MLAM for these services, through the MLIG
service agreement.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
Merrill Lynch, Pierce, Fenner and Smith, Inc. ("MLPF&S") who
are the
<PAGE>
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 approximately $67,102,000,
$25,158,000 and $27,974,000 for 1993, 1992 and 1991,
respectively. Substantially all of these commissions were
capitalized as deferred policy acquisition costs and are being
amortized in accordance with the policy discussed in Note 1.
In connection with the acquisition of a block of variable life
insurance business from Monarch Life Insurance Company
("Monarch Life"), the Company borrowed funds from Merrill Lynch
& Co. to partially finance the transaction. As of December 31,
1991, the outstanding balance of these loans was approximately
$83,200,000. These loans were repaid during 1992. Interest
was calculated on these loans at LIBOR plus 150 basis points.
Intercompany interest paid on these loans during 1992 and 1991
was approximately $4,025,000 and $6,300,000, respectively.
The Company and Merrill Lynch Trust Company ("ML Trust") were
parties to an agreement whereby the Company retained ML Trust
to hold certain invested assets upon the terms and conditions
of the agreement. ML Trust was paid a fee based on its current
fee schedule. This agreement was terminated during 1993.
The Company has entered into certain other marketing and
administrative service agreements with affiliates in connection
with the variable life and annuity policies it sells.
During 1993, 1992 and 1991, the Company allowed the recapture
of certain policies previously indemnity reinsured by the
Company from Family Life. Simultaneously with the recapture,
the Company's affiliate, ML Life Insurance Company of New York
("ML Life"), assumption reinsured these policies. These
transactions resulted in the transfer of approximately
$11,900,000 $2,000,000 $19,200,000 of policy reserves during
1993, 1992 and 1991, respectively.
The fair value of the Company's payables to affiliates is
estimated at carrying value. These borrowings are payable on
demand and bear a variable interest rate based on LIBOR.
Total intercompany interest paid was $737,000, $5,409,000 and
$8,567,000 for 1993, 1992 and 1991, respectively.
NOTE 5. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
On December 20, 1993, the Company paid a $44,988,000 ordinary
dividend and a $75,012,000 extraordinary dividend to MLIG. The
Company received approval from the Arkansas Insurance
Commissioner prior to the declaration and payment of the
extraordinary dividend.
At December 31, 1993 and 1992, approximately $37,221,000 and
$44,988,000, respectively, of retained earnings was available
for distribution to the Company's stockholder. Statutory
capital and surplus at December 31, 1993 and 1992, was
$374,209,000 and $451,888,000, respectively.
During 1991, MLIG contributed capital to the Company of
$82,396,000. The contribution was made to support the
underwriting of additional insurance premiums and deposits. No
contributions were received during 1993 and 1992.
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 taxes and
valuing securities on a different basis. The Company's
statutory net income for the years ended December 31, 1993,
1992 and 1991 was $45,604,000, $60,140,000 and $65,771,000,
respectively.
<PAGE>
The National Association of Insurance Commissioners ("NAIC")
has developed and implemented effective December 31,
1993, the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital which
a life insurance company should have based upon that company's
risk profile. The NAIC has established four different levels of
regulatory action with respect to the RBC adequacy monitoring
system. Each of these levels may be triggered if an insurer's
total adjusted capital is less than a corresponding level of
RBC. These levels are as follows:
For companies with capital levels which are below 100% of
the basic RBC level (company action level) calculated for
that company, the company must submit to the domiciliary
insurance commissioner, and implement, an approved plan to
increase adjusted capital to at least 100% of the basic
RBC.
For companies with capital levels which are below 75% of
the basic RBC level calculated for that company, the
company must submit to an examination by the domiciliary
insurance department and as a result of the findings of the
examination, corrective orders may be issued.
For companies with capital levels which are below 50% of
the basic RBC level (authorized control level) calculated
for that company, the domiciliary insurance commissioner
will have the authority to place the company into
conservatorship or liquidation.
For companies with capital levels which are below 35% of
the basic RBC level calculated for that company, the
domiciliary insurance commissioner will be required to
place the company into conservatorship or liquidation.
As of December 31, 1993, based on the RBC formula, the
Company's total adjusted capital level was 279% of the basic
RBC level.
NOTE 6. REINSURANCE AGREEMENTS
On December 28, 1990, the Company entered into an indemnity
reinsurance agreement with Family Life, in which the Company
100% coinsured substantially all of Family Life's general
account interest-sensitive life and annuity business, and
modified coinsured all of the separate account variable annuity
business. As of December 31, 1993, substantially all of this
business has been assumption reinsured by the Company and an
affiliate.
On December 31, 1990, the Company and an affiliate entered into
a 100% reinsurance agreement with respect to all variable life
policies issued by Monarch Life and sold through the Merrill
Lynch & Co. retail network. As a result of the indemnity
provisions of the agreement, the Company became obligated to
reimburse Monarch Life for its net amount at risk with regard
to the reinsured policies. At the date of acquisition, assets
of approximately $553,000,000 supporting general account
reserves, on a statutory accounting basis, were transferred
from Monarch Life to the Company. This agreement provides for
contingent ceding commission payments to Monarch Life dependent
upon the lapse rate during the five years ending in 1995 and
mortality experience during the ten years ending in 2000. To
date, the Company has paid approximately $225,900,000 to
Monarch Life under the terms of the agreement. As of December
31, 1993, the Company has accrued $7,673,000 for such payments.
On various dates during 1992 and 1991, the Company and an
affiliate assumption reinsured substantially all such policies,
wherever permitted by appropriate regulatory authorities. Upon
assumption, the policy liabilities and the underlying assets of
approximately $2,625,000,000 were transferred to the Merrill
Lynch Life Variable Life Separate Account II. As a result of
the assumptions, the Company became directly obligated to the
policyholders, rather than to Monarch Life. Certain contract
owners of the reinsured policies elected to remain with Monarch
Life as permitted under certain
<PAGE>
state insurance laws. Assets
and liabilities of those policies not assumption reinsured by
the Company or its affiliate have remained with Monarch Life.
The Company and its affiliate have indemnified Monarch Life
against its net amount at risk on such policies. As of
December 31, 1993, approximately 10 life insurance policies
with $1,499,000 life insurance in force remain under the
indemnity provisions of the reinsurance agreement.
During 1992, the Company, and its affiliates, entered into an
agreement with Monarch Life for the purchase, transfer or
assignment of certain services and assets owned, licensed or
leased by Monarch Life. Additionally, the Company along with
its affiliates were allowed to actively solicit the employment
of individuals employed by Monarch Life, who are required to
service the Company's and its affiliates' variable life
insurance policies and Monarch Life's variable life insurance
policies. In consideration of this, the Company and its
affiliate, ML Life, transferred title to Monarch Life certain
telecommunications equipment owned by Merrill Lynch Insurance
Group Services, Inc., an affiliate of the Company, with a net
book value of $1,753,000. The Company agreed to service
Monarch Life's variable life insurance policies for a period of
five years at an annual rate of $100 per policy. Monarch Life
has an option to terminate the service agreement upon proper
notification.
NOTE 7. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts for the
purpose of minimizing exposure to fluctuations in interest
rates of specific assets held. The notional amount of such
swaps outstanding at December 31, 1993 and 1992 was
approximately $155,082,000 and $197,024,000 respectively. The
average unexpired term at December 31, 1993 and 1992 was 3.2
and 3.5 years, respectively.
The current amount at risk, on a present value basis, of
terminating or replacing at current market rates all
outstanding matched swaps in a loss position at December 31,
1993 and 1992 was $0 and $0, respectively. During 1992 and
1991, a net investment gain of approximately $2,302,000 and
$4,750,000, respectively, was recorded in connection with
interest rate swap activity. The Company did not realize net
investment gains (losses) from interest rate swap activity
during 1993.
During 1993, 1992 and 1991, the Company did not enter into
unmatched interest rate swap arrangements and did not act as an
intermediary or broker in interest rate swaps.
Estimated fair values for the Company's interest rate swaps are
based on broker quotes. At December 31, 1993 and 1992, the
estimated fair value for these contracts was $4,317,000 and
$10,551,000, respectively.
NOTE 8. SALE OF FAMILY LIFE INSURANCE COMPANY
On June 12, 1991, MLIG sold Family Life to a non-affiliated
entity. Prior to closing, MLIG transferred to affiliates of
Family Life, to the extent permitted by law, all assets and
liabilities of Family Life that were not related to Family
Life's mortgage protection life insurance business. Certain
life insurance and annuity products sold through the retail
network of Merrill Lynch & Co. and underwritten by Family Life
have been or will be assumption reinsured by the Company or its
affiliate in those jurisdictions in which the Company or its
affiliate has the authority to do so. (See Note 6)
NOTE 9. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result
of the insolvency of an insurer. At the time an insolvency
occurs, the guaranty association assesses the remaining members
of the association an amount sufficient to satisfy the
insolvent insurer's policyholder obligations (within specified
limits). During 1991, and to a lesser extent 1992, there were
certain highly
<PAGE>
publicized life insurance insolvencies. The
Company has utilized public information to estimate what future
assessments it will incur as a result of these insolvencies.
At December 31, 1993 and 1992, the Company had accrued an
estimated liability for future guaranty fund assessments of
$28,083,000 and $27,104,000, respectively. The Company
regularly monitors public information regarding insurer
insolvencies and will adjust its estimated liability where
appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
* * * * * *
<PAGE>
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
Merrill Lynch Life Insurance Company's By-Laws provide, in Article VI, 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 determine 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 or 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 attorneys' 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.
II-1
<PAGE>
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 &
Co., Inc. are entitled to indemnification from Merrill Lynch & Co. Inc., 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 & Co., Inc. or such other corporation, trust, or other
enterprise. Any action initiated by any such person for which indemnification is
provided shall be approved by the Board of Directors of Merrill Lynch & Co.,
Inc. prior to such initiation.
DIRECTORS' AND OFFICERS' INSURANCE
Merrill Lynch & Co., Inc. 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 & Co., Inc. with respect to such insurance policy.
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 judgements, 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.
REPRESENTATIONS PURSUANT TO RULE 6E-3(T)
This filing is made pursuant to Rule 6e-3(T) under the Investment Company
Act of 1940.
Registrant elects to be governed by Rule 6e-3(T)(b)(13)(i)(B) under the
Investment Company Act of 1940 with respect to the policies described in the
Prospectus.
Registrant makes the following representations:
(1) Section 6e-3(T)(b)(13)(iii)(F) has been relied upon.
(2) The level of the mortality and expense risk and guaranteed benefits
risk charge is within the range of industry practice for comparable
flexible or scheduled contracts.
(3) Registrant has concluded that there is a reasonable likelihood that
the distribution financing arrangement of the Separate Account will
benefit the Separate Account and policyowners and will keep and make
available to the Commission on request a memorandum setting forth the basis
for this representation.
II-2
<PAGE>
(4) The Separate Account will invest only in management investment
companies which have undertaken to have a board of directors, a
majority of whom are not interested persons of the company, formulate and
approve any plan under Rule 12b-1 to finance distribution expenses.
The methodology used to support the representation made in paragraph (2) above
is based on an analysis of the mortality and expense risk and guaranteed
benefits risk charge contained in other variable life insurance policies.
Registrant undertakes to keep and make available to the Commission on request
the documents used to support the representation in paragraph (2) above.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The Prospectus consisting of 84 pages.
The undertaking to file reports.
Rule 484 Undertaking.
Representations Pursuant to Rule 6e-3(T).
The signatures.
Written Consents of the following persons:
1. Barry G. Skolnick, Esq.
2. Joseph E. Crowne, F.S.A.
3. Deloitte & Touche, Independent Certified Public Accountants
The following exhibits:
3. Opinion and Consent of Barry G. Skolnick, Esq.
6. Opinion and Consent of Joseph E. Crowne, F.S.A.
<TABLE>
<C> <S> <C>
8. (a) Written Consent of Barry G. Skolnick, Esq. See Exhibit 3.
(b) Written Consent of Joseph E. Crowne, F.S.A. See Exhibit 6.
(c) Written Consent of Deloitte & Touche, Independent Certified
Public Accountants.
(e) Form of Participation Agreement Between Merrill Lynch
Variable Series Funds, Inc., Merrill Lynch Life Insurance
Company, ML Life Insurance Company of New York and Family
Life Insurance Company.
(d) Service Agreement among Merrill Lynch Life Insurance
Company, Family Life Insurance Company and Merrill Lynch
Insurance Group, Inc.
9.
Memorandum describing Merrill Lynch Life Insurance Company's
Issuance, Transfer and Redemption Procedures.
11.
</TABLE>
II-3
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Merrill Lynch Life Variable Life Separate Account II, has
caused this Post-Effective Amendment No. 4 to the Registration Statement to be
signed on its behalf, in the City of Plainsboro and the State of New Jersey, on
the 13th day of May, 1994.
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
(Registrant)
By: MERRILL LYNCH LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ TERRY L. RAPP By: /s/ BARRY G. SKOLNICK
----------------------------- --------------------------------
Terry L. Rapp Barry G. Skolnick
Assistant Secretary Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 to the Registration Statement has been signed
below by the following persons in the capacities indicated on May 13, 1994.
SIGNATURE TITLE
- -------------------------------- ----------------------------------------------
* 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
* Director, Senior Vice President and Chief
- -------------------------------- Investment Officer
David M. Dunford
* Director and Senior Vice President
- --------------------------------
John C.R. Hele
* Director
- --------------------------------
Allen N. Jones
/s/ BARRY G. SKOLNICK * In his own capacity as Director, Senior Vice
- -------------------------------- President and General Counsel and as
Barry G. Skolnick Attorney-In-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C> <C> <C>
1.A. (1) Resolutions of the Board of Directors of Merrill Lynch Life Insurance Company
establishing the Separate Account. Incorporated by reference to the
Registration Statement filed by the Registrant on Form S-6 (File No.
33-43058).
(2) Not applicable.
(3) Distributing Contracts.
(a) Distribution Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Incorporated by reference to the Pre-Effective Amendment No. 1 to
the Registration Statement filed by Merrill Lynch Variable Life
Separate Account on Form S-6 (File No. 33-55472).
(b) Amended Sales Agreement between Merrill Lynch Life Insurance
Company and Merrill Lynch Life Agency, Inc. Incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registration
Statement filed by Merrill Lynch Variable Life Separate Account on
Form S-6 (File No. 33-55472).
(c) Schedule of Sales Commissions. See Exhibit A (3)(b).
(4) Not applicable.
(5) (a) Modified Single Premium Variable Life Insurance Policy.
Incorporated by reference to the Registration Statement filed on
Form S-6 for Variable Account A of Monarch Life Insurance Company
(File No. 33-457).
(5) (b1) Guarantee of Insurability Rider. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (b2) Death Benefit Proceeds Rider. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (b3) Single Premium Immediate Annuity Rider. Incorporated by reference
to the Registration Statement filed on Form S-6 for Variable
Account A of Monarch Life Insurance Company (File No. 33-457).
(5) (b4) Change of Insured Rider. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (b5) Partial Withdrawal Rider. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (b6) Special Allocation Rider. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (b7) Backdating Endorsement. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (b8) Additional Payment Endorsement. Incorporated by reference to the
Registration Statement filed on Form S-6 for Variable Account A of
Monarch Life Insurance Company (File No. 33-457).
(5) (c) Certificate of Assumption. Incorporated by reference to
Pre-Effective Amendment No. 1 to Tandem Insurance Group, Inc.
Registration Statement on Form S-6 (File No. 33-37941).
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
(5) (d) Company Name Change Endorsement. Incorporated by reference to
Post-Effective Amendment No. 3 to Tandem Insurance Group, Inc.
Registration Statement on Form S-6 (File No. 33-37941).
(6) (a) Articles of Amendment, Restatement, and Redomestication of the
Articles of Incorporation of Merrill Lynch Life Insurance Company.
Incorporated by reference to the Registration Statement filed by
the Registrant on Form S-6 (File No. 33-43058).
(b) Amended and Restated By-Laws of Merrill Lynch Life Insurance
Company. Incorporated by reference to the Registration Statement
filed by the Registrant on Form S-6 (File No. 33-43058).
(7) Not applicable.
(8) (a) Agreement between Merrill Lynch Life Insurance Company and Merrill
Lynch Series Fund, Inc. Incorporated by reference to the
Pre-Effective Amendment No. 1 to the Registration Statement filed
by Merrill Lynch Variable Life Separate Account on Form S-6 (File
No. 33-55472).
(b) Agreement between Merrill Lynch Life Insurance Company and Merrill
Lynch Funds Distributor, Inc. Incorporated by reference to the
Pre-Effective Amendment No. 1 to the Registration Statement filed
by Merrill Lynch Variable Life Separate Account on Form S-6 (File
No. 33-55472).
(c) Agreement between Merrill Lynch Life Insurance Company and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. Incorporated by
reference to the Pre-Effective Amendment No. 1 to the Registration
Statement filed by Merrill Lynch Variable Life Separate Account on
Form S-6 (File No. 33-55472).
(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 Post-Effective
Amendment No. 3 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No.
33-55472).
(e) Form of Participation Agreement Between Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch Life Insurance Company, ML Life
Insurance Company of New York and Family Life Insurance Company.
(9) (a) Amended form of terminated Service Agreement between Merrill Lynch
Life Insurance Company and Monarch Life Insurance Company.
Incorporated by reference to Post-Effective Amendment No. 1 to
Tandem Insurance Group, Inc. Registration Statement on Form S-6
(File No. 33-37941).
(b) Board Resolution for Merger and Combination of Accounts.
Incorporated by reference to Post-Effective Amendment No. 3 to
Tandem Insurance Group, Inc. Registration Statement on Form S-6
(File No. 33-37941).
(c) Plan and Agreement of Merger between Tandem Insurance Group, Inc.
and Merrill Lynch Life Insurance Company. Incorporated by
reference to the Registration Statement filed by the Registrant on
Form S-6 (File 33-43058).
(d) Service Agreement among Merrill Lynch Life Insurance Company,
Family Life Insurance Company and Merrill Lynch Insurance Group,
Inc.
(10) Application form for Modified Single Premium Variable Life Insurance Policy.
Incorporated by reference to the Registration Statement filed on Form S-6 for
Variable Account A of Monarch Life Insurance Company (File No. 33-457).
(11) Memorandum describing Merrill Lynch Life Insurance Company's Issuance,
Transfer and Redemption Procedures.
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
2. See 1.A.(5).
3. Opinion and Consent of Barry G. Skolnick, Esq. as to the legality of the securities
being registered.
4. Not applicable.
5. Not applicable.
6. Opinion and Consent of Joseph E. Crowne, F.S.A. as to actuarial matters pertaining to
the securities being registered.
7. (a) Power of Attorney of Joseph E. Crowne (Incorporated by Reference to Post-
Effective Amendment No. 2 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No. 33-55472).
(b) Power of Attorney of David E. Dunford (Incorporated by Reference to Post-
Effective Amendment No. 2 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No. 33-55472).
(c) Power of Attorney of John C.R. Hele (Incorporated by Reference to Post-
Effective Amendment No. 2 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No. 33-55472).
(d) Power of Attorney of Allen N. Jones (Incorporated by Reference to Post-
Effective Amendment No. 2 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No. 33-55472).
(e) Power of Attorney of Barry G. Skolnick (Incorporated by Reference to Post-
Effective Amendment No. 2 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No. 33-55472).
(f) Power of Attorney of Anthony J. Vespa (Incorporated by Reference to Post-
Effective Amendment No. 2 to the Registration Statement filed by Merrill
Lynch Variable Life Separate Account on Form S-6 (File No. 33-55472).
8. (a) Written Consent of Barry G. Skolnick, Esq. See Exhibit 3.
(b) Written Consent of Joseph E. Crowne, F.S.A. See Exhibit 6.
(c) Written Consent of Deloitte & Touche, Certified Public Accountants.
</TABLE>
II-7
<PAGE>
PRIME PLAN V
- ------------------------------------------
PROSPECTUSES FOR:
- Single Premium Variable Life Insurance Policies
Issued by Merrill Lynch Life Insurance Company
- Merrill Lynch Series Fund, Inc.
- Merrill Lynch Variable Series Funds, Inc.
- The Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities
<PAGE>
[LOGO]
May 13, 1994
Board of Directors
Merrill Lynch Life Insurance Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
To The Board of Directors:
In my capacity as General Counsel of Merrill Lynch Life Insurance Company (the
"Company"), I have supervised the establishment of the Merrill Lynch Life
Variable Life Separate Account II (the "Account"), by the Board of Directors of
the Company as a separate account for assets applicable to certain variable life
insurance policies (the "Policies") issued by the Company pursuant to the
provisions of Section 23-81-402 of the Insurance Laws of the State of Arkansas.
Moreover, I have supervised the preparation of Post-Effective Amendment No. 4 to
the Registration Statement on Form S-6 (as so amended, the "Registration
Statement") (File No. 33-43058) filed by the Company and the Account with the
Securities and Exchange Commission under the Securities Act of 1933, for the
registration of the Policies to be issued with respect to the Account.
I have made such examination of the law and examined such corporate records and
such other documents as in my judgment are necessary and appropriate to enable
me to render the following opinion that:
1 The Company has been duly organized under the laws of the State of Arkansas
and is a validly existing corporation.
2. The Account is duly created and validly existing as a separate account
pursuant to the aforesaid provisions of Arkansas Law.
3. The assets in the Account equal to the reserves and other contract
liabilities with respect to the Account will not be chargeable with liabilities
arising out of any other business the Company may conduct.
4. The Policies have been duly authorized by the Company and constitute legal,
validly issued and binding obligations of the Company in accordance with their
terms.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the caption "Legal Matters" in the
Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Barry G. Skolnick
---------------------
Barry G. Skolnick
Senior Vice President and General Counsel
<PAGE>
[LOGO]
May 13, 1994
Board of Directors
Merrill Lynch Life Insurance Company
800 Scudders Mill Road
Plainsboro, New Jersey 08536
To The Board of Directors:
This opinion is furnished in connection with the filing of the Post-Effective
Amendment No. 4 to the Registration Statement on Form S-6 (as so amended, the
"Registration Statement") (File No. 33-43058) which covers premiums received
under the single premium variable life insurance policies ("Policies" or
"Policy") issued by Merrill Lynch Life Insurance Company (the "Company").
The Prospectus included in the Registration Statement describes Policies which
are issued by the Company. The Policy forms were reviewed under my direction,
and I am familiar with the Registration Statement and Exhibits thereto. In my
opinion:
1. Using the interest rate and mortality tables guaranteed in the Policy,
current mortality rates cannot be established at levels such that the "sales
load," as defined in paragraph (c)(4) of Rule 6(e)-2 under the Investment
Company Act of 1940, would exceed 9 percent of any payment.
2. The illustrations of death benefits, investment base, cash surrender
values and accumulated premiums included in the Registration Statement for the
Policy and based on the assumptions stated in the illustrations, are consistent
with the provision of the Policy. The rate structure of the Policies has not
been designed so as to make the relationship between premiums and benefits, as
shown in the illustrations, appear more favorable to a prospective purchaser of
a Policy for the ages and sexes shown, than to prospective purchasers of a
Policy for other ages and sex.
3. The table of illustrative net single premium factors included in the
"Death Benefit" section is consistent with the provisions of the Policies.
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 and
Chief Financial Officer
<PAGE>
Exhibit 8(c)
INDEPENDENT AUDITORS' REPORT
We consent to the use in this Post-Effective Amendment No. 4 to
Registration Statement No. 33-43058 of Merrill Lynch Life Variable Separate
Account II on Form S-6 of our reports on (i) Merrill Lynch Life Insurance
Company dated February 28, 1994, and (ii) Merrill Lynch Life Variable Life
Separate Account II dated February 16, 1994, 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.
New York, New York
May 13, 1994
<PAGE> 1
PARTICIPATION AGREEMENT
THIS AGREEMENT is made by and among Merrill Lynch Variable
Series Funds, Inc. (the "Fund"), Merrill Lynch Life Insurance Company, an
insurance company organized under the laws of the State of Arkansas, ML Life
Insurance Company of New York, an insurance company organized under the laws of
the State of New York, Family Life Insurance Company, an insurance company
organized under the laws of the State of Washington, -----------------,
- ------------------, (collectively, the "Participating Insurance Companies")
and separate accounts of the Participating Insurance Companies that currently
invest or in the future will invest in the Fund (such separate accounts being
referred to herein as the "Separate Accounts").
WHEREAS, the Fund is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 (the "1940 Act")
as an open-end diversified investment management company; and
WHEREAS, the Fund is organized as a series fund, currently
with fourteen portfolios; and
WHEREAS, the Fund was organized as a funding vehicle for
variable annuity contracts; and
WHEREAS, the Participating Insurance Companies are desirous of
having the Fund serve as one of the funding vehicles for their respective
variable annuity contracts and/or variable life insurance contracts issued
through the Separate Accounts.
NOW, THEREFORE, and in consideration of the mutual covenants
herein contained, it is hereby agreed by and among the Participating Insurance
Companies as follows:
1. Each Participating Insurance Company shall designate
an individual to monitor for the occurrence of any event which may give rise to
the existence of any material irreconcilable conflict between the interests of
the participants of all Separate Accounts investing in the Fund, and to advise
each other Participating Insurance Company and the Board of Directors of the
Fund (the "Board"), if any such event shall occur. Such an event may include
(but will not necessarily be limited to): (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or public ruling, private letter
ruling, no action or interpretive letter, or any similar action by insurance,
tax or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any portfolio are being managed; or (e) a decision by a Participating Insurance
Company to disregard the voting instructions of its contract owners.
<PAGE> 2
2. (a) If a Participating Insurance Company shall have
advised the other Participating Insurance Companies of the occurrence of an
event which may give rise to a material irreconcilable conflict as provided in
paragraph 1 above, the Participating Insurance Companies shall consult with
each other in a good faith effort (i) to determine whether such event gives
rise to such a conflict and, (ii) if it does, to attempt to resolve such
conflict within a reasonable period of time without resort to the provisions of
paragraph 2(b) of this Agreement.
(b) If the Participating Insurance Companies are
unable to resolve a conflict through consultation as provided in paragraph
2(a), and if any Participating Insurance Company determines that such conflict
is a material irreconcilable conflict:
(i) if the event giving rise to the conflict
involves the inability, for state insurance regulatory or any other reason, of
one or more of the Participating Insurance Companies to invest in the Fund or
one of its portfolios unless the investment adviser or principal underwriter of
the Fund or such portfolio is changed, then such Participating Insurance
Company or Companies shall withdraw their investments from the Fund or such
portfolio within a reasonable period of time; provided, however, that if such
Participating Insurance Company or Companies own a majority of the then
outstanding shares of the Fund or such portfolio, the Participating Insurance
Companies will advise the Board that the agreement with the investment adviser
or principal underwriter, as the case may be, for the Fund or such portfolio is
to be terminated and that the Participating Insurance Companies intend to vote
their shares in the Fund to effect such termination (and if the Board does not
then terminate such agreement, the Participating Insurance Companies shall
recommend to their respective contract owners that the shares in the Fund be
voted to effect such termination); and
(ii) if the event giving rise to the conflict
involves a need to change the investment policy of the Fund or one of its
portfolios so that one or more of the participating insurance companies may
continue to invest in the Fund or such portfolio, the participating insurance
companies agree to advise the Board of Directors of the Fund of the changes in
the investment policies of the Fund or such portfolio that must be effected so
as to permit all of the participating insurance companies to continue to invest
in the Fund or such portfolio (and if required to effect such change, the
participating insurance companies will recommend to their respective contract
owners that the shares in the Fund be voted to effect such change).
(c) The Participating Insurance Company which,
pursuant to paragraph 1 of this Agreement, initially advises of an event which
may give rise to a conflict shall also advise the Board as to whether such
event in fact gave rise to a conflict and, if so, the action taken by the
Participating Insurance Companies pursuant to paragraph 2 of this Agreement to
resolve such conflict.
<PAGE> 3
3. If, as provided in paragraph 2(b) of this Agreement, it is
determined by the Participating Insurance Companies that a material
irreconcilable conflict exists and that one or more of the Participating
Insurance Companies must withdraw their assets from the Fund or one of its
portfolios (or if a Participating Insurance Company determines that it should
withdraw its assets from the Fund so as to avoid a material irreconcilable
conflict), such Company or Companies shall take whatever steps are necessary to
effect such withdrawal within a reasonable period of time, up to and including:
(a) withdrawing the assets allocable to some or all of the Separate Accounts
from the Fund or any portfolio and reinvesting such assets in a different
investment medium (including another portfolio of the Fund) or submitting the
question of whether such withdrawal should be implemented to a vote of all
affected participants and, as appropriate, withdrawing the assets of any
particular group (i.e., contract owners of one or more Participating Insurance
Companies) that votes in favor of such withdrawal, or offering to the affected
participants the option of making such a change; and (b) establishing a new
registered management investment company or management separate account. No
charge or penalty will be imposed on contract owners directly or indirectly as
a result of such a withdrawal. In no event will the Fund or the investment
adviser of the Fund be required to establish a new funding medium for any
variable insurance contract. No Participating Insurance Company will be
required to establish a new funding medium for any variable insurance contract.
No Participating Insurance Company will be required to establish a new funding
medium for any variable insurance contract if an offer to do so has been
declined by vote of a majority of participants materially adversely affected by
the material irreconcilable conflict.
4. The Participating Insurance Companies acknowledge to
the Fund that prospectus disclosure regarding potential risks of mixed and
shared funding permitted by this Agreement may be appropriate.
5. The Fund will file with its books and records all
reports received by the Board concerning potential or existing conflicts, and
the means by which it is proposed that any conflicts be resolved, will note the
receipt of such reports in the minutes of meetings of the Board and will make
such reports available to the Securities and Exchange Commission (the
"Commission") upon request.
6. Each of the Participating Insurance Companies agrees
that any action taken by it under this Agreement, including any action in
identifying and resolving any material conflicts of interest, will be carried
out with a view only to the interest of its contract owners participating in
the Fund.
7. Each Participating Insurance Company shall provide
pass-through voting privileges to all of its contract owners so long as the
Commission continues to interpret the 1940 Act to require such pass-through
voting privileges for variable insurance
<PAGE> 4
contract owners. Each Participating Insurance Company shall be responsible
for assuring that its Separate Accounts calculate voting privileges in a manner
consistent with the other Participating Insurance Companies. It is a condition
of this Agreement that each Participating Insurance Company will vote shares,
for which it has not received voting instructions as well as shares
attributable to it, in the same proportion as it votes shares for which it has
received instructions.
8. This Agreement shall terminate automatically in the
event of its assignment, unless made with the written consent of each party.
9. This Agreement shall be subject to the provisions of
the 1940 Act and the rules and regulations thereunder, including any exemptive
relief therefrom and the orders of the Commission setting forth such relief.
Executed this day of , 1994.
MERRILL LYNCH LIFE INSURANCE COMPANY
By
-------------------------------
Name:
Title:
ML LIFE INSURANCE COMPANY OF NEW YORK
By
--------------------------------
Name:
Title:
FAMILY LIFE INSURANCE COMPANY
By
--------------------------------
Name:
Title:
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
By
-------------------------------
Name:
Title:
By
--------------------------------
Name:
Title:
<PAGE> 1
SERVICE AGREEMENT
BETWEEN
MERRILL LYNCH INSURANCE GROUP, INC.,
FAMILY LIFE INSURANCE COMPANY
AND
MERRILL LYNCH LIFE INSURANCE COMPANY
This Service Agreement is entered into as of the 29th day of November,
1990 between Family Life Insurance Company, a Washington Corporation ("FLIC"),
Merrill Lynch Life Insurance Company, a Washington corporation ("MLLIC") and
Merrill Lynch Insurance Group, Inc., a Delaware corporation, for itself and for
its affiliates other than FLIC and MLLIC ("MLIG").
W I T N E S S E T H:
WHEREAS, FLIC is a wholly-owned subsidiary of MLIG, and MLLIC is a
wholly-owned subsidiary of FLIC, and
WHEREAS, each party to this Agreement desires to utilize certain services
to be provided by the other parties in carrying out certain of their respective
corporate functions, and
WHEREAS, each party is willing to furnish, or cause its affiliates to
furnish, such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties do hereby mutually agree as follows, effective
as to FLIC and MLLIC respectively, only so long as it is an affiliate of MLIG:
<PAGE> 2
1. Each party will provide or contract or arrange with any of its
affiliates for the providing of, as available, services as listed in Exhibit I
hereto, if and to the extent requested by the other. Exhibit I may be modified
from time to time by agreement between the parties.
2. For services provided, the service recipient agrees to pay the
service provider:
(a) the amounts as may be specified in one or more Schedules, pertaining
to particular categories of services, as may be executed by the parties and
attached to and incorporated into this Agreement; or
(b) if not so specified, to pay those charges (direct and indirect) and
expenses incurred by the service provider which, as reasonably determined by
the service provider and demonstrated to the reasonable satisfaction of service
recipient, reflect actual cost of such services to the service provider,
provided that
(1) charges and expenses for personnel shall be based on a
reasonable allocation of the time spent on service recipient
matters relative to time spent on other matters;
(2) charges and expenses for property or other services shall be
based on a reasonable allocation of the proportion of and
period of time such property or services is utilized for
service recipient matters relative to that utilized for other
matters, and;
<PAGE> 3
(3) no charges or expenses shall exceed those charged by the
service provider in the relevant market for comparable
personnel, property or services as the case may be.
After the end of each month, the service provider will send the service
recipient a bill covering service charges and expenses which have been
incurred, or the amount of which has been ascertained, during such month, and
the service recipient will pay for such charges and expenses upon receipt of
the bill.
3. The book, accounts and records of MLIG, its affiliates providing
services hereunder, FLIC and MLLIC as to all transactions hereunder shall be
maintained so as to clearly and accurately disclose the nature and details of
the transactions, including such accounting information as is necessary to
support the reasonableness of the charges, expenses or fees hereunder. The
service recipient shall have the right, at its own expense, and at any
reasonable time, to make an audit of the services rendered and the amounts
charged therefor.
<PAGE> 4
4. The term of this Agreement shall commence as of the date hereinabove
indicated and continue until December 31, 1990, and thereafter shall be deemed
to be renewed automatically, upon the same terms and conditions, for successive
periods of one year each, until any party, at least 60 days prior to the
expiration of the original term or of any extended term, shall give written
notice to the other parties of its intention not to renew the Agreement,
provided that, notwithstanding the foregoing, electronic data processing
services will be made available to the service recipient for up to six months
following any such termination, if the service recipient shall so request.
5. It is understood that (a) MLIG, any of its affiliates or
subsidiaries, will invest for their own account and may act as investment
advisor for others and that MLIG or such others or persons or organizations
affiliated with MLIG could have investment interests adverse to the interests
of FLIC or MLLIC in the same or related investments; (b) MLIG is not obligated
to make available to FLIC or MLLIC any particular investment opportunity which
comes to MLIG or its subsidiaries or affiliates, regardless or whether such
opportunity is consistent with the investment policies of FLIC or MLLIC; and
(c) FLIC and MLLIC shall retain full control over their respective investment
activities, and MLIG or any of its affiliates or subsidiaries shall have no
power or authority by virtue of this Agreement, whether as agent or otherwise,
to obligate or commit FLIC or MLLIC for the acquisition or disposition of any
investment.
<PAGE> 5
6. All differences between MLIG, FLIC and MLLIC on which agreement
cannot be reached will be decided by arbitration. The arbitrators will
interpret this Agreement in accordance with the usual business practices,
rather than strict technicalities or rule of law. Three arbitrators will
decide any differences. They must be officers of life insurance companies
other than the parties to this agreement, their parents, subsidiaries and
affiliates. One of the arbitrators is to be appointed by service provider and
one by the service recipient, and these two will select a third. If the two
are unable to agree on a third, the choice will be left to the President of the
American Council of Life Insurance or its successor organization. The
arbitrators' decision will be by majority vote and no appeal will be taken from
it. The costs of the arbitration will be borne by the losing party unless the
arbitrators decide otherwise.
7. No assignment of this Agreement shall be made by any party without
the consent of the other parties.
8. Subject to the foregoing Clause 7, this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the parties
hereto.
9. This Agreement shall supersede that Management Services Agreement
between FLIC and MLLIC dated April 28, 1986.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
MERRILL LYNCH INSURANCE GROUP, INC.
By: /s/ Thomas H. Patrick
---------------------------------------
FAMILY LIFE INSURANCE COMPANY
By: /s/ James W. Grace
---------------------------------------
MERRILL LYNCH LIFE INSURANCE COMPANY
By: /s/ James W. Grace
---------------------------------------
<PAGE> 7
EXHIBIT I
To Service Agreement
Between MLIG, FLIC and MLLIC
Personnel, Property and Services (except as provided under separate agreements
or Schedules):
1. Accounting and auditing.
2. Actuarial.
3. Administration.
4. Advertising, marketing and public relations.
5. Claims (pursuant to the service recipient's guidelines and
subject to final approval by the service recipient).
6. Corporate Secretary.
7. Development of software programs.
8. Electronic date processing.
9. Financial and cash advice or management.
10. Investment advisory or management.
11. Legal.
12. Office and general supplies.
13. Payroll services.
14. Personnel.
15. Premium billing and collection.
16. Printing.
17. Product design and development.
18. Regulatory filings and reports.
19. Storage.
20. Underwriting (pursuant to the service recipient's guidelines and
subject to final approval by the service recipient).
<PAGE> 8
AMENDMENT
to
SERVICE AGREEMENT
between
MERRILL LYNCH INSURANCE GROUP, INC.
and
MERRILL LYNCH LIFE INSURANCE COMPANY
The above referenced Agreement is amended as follows:
1. MLLIC shall have ultimate control of and responsibility for any functions
delegated to the service provider under this Agreement.
2. MLLIC shall have the right to terminate this Agreement in the event the
service provider does not perform services delegated to it to the
satisfaction of MLLIC.
3. Section (a) of Clause 2 of the Agreement shall be deleted. In Section (b)
of Clause 2:
(i) the following words shall be deleted "(b) if not so
specified, to pay."
(ii) the word "reflect," shall be deleted and the word
"represent," shall be added in its place.
<PAGE> 9
4. Item 10 of Exhibit 1 is amended to read as follows:
Investment advisory or management (pursuant to the service recipient's
guidelines and subject to final approval by the service recipient).
IN WITNESS WHEREOF, the parties hereto have dully executed this Agreement as of
the 25 day of February, 1993.
MERRILL LYNCH LIFE INSURANCE COMPANY
By: /s/ Sandra K. Kelly
-----------------------------------
MERRILL LYNCH INSURANCE GROUP, INC.
By: /s/ Robert M. Bordeman
-----------------------------------
<PAGE>
Exhibit 11
DESCRIPTION OF MERRILL LYNCH LIFE INSURANCE COMPANY'S
ISSUANCE, TRANSFER AND REDEMPTION PROCEDURES
FOR POLICIES PURSUANT TO
Rule 6e-3(T) (b) (12) (iii)
This document sets forth the administrative procedures that will be
followed by Merrill Lynch Life Insurance Company ("Merrill Lynch Life") in
connection with the issuance of its Single Premium Variable Life Insurance
Policies ("Policies") issued through Merrill Lynch Life Variable Life Separate
Account II ("Separate Account"), the transfer of assets held under the Policies,
and the redemption by owners of their interests in said Policies.
1. PROCEDURES RELATING TO ISSUANCE AND PURCHASE OF THE POLICIES
A. TERM COST STRUCTURE, PREMIUMS AND UNDERWRITING STANDARDS
The term cost charges for Merrill Lynch Life's Policy will not be the same
for all policy owners. Insurance is based on the principle of pooling and
distribution of mortality risks which assumes that each owner is charged a cost
of insurance commensurate with the insured's mortality risk as actuarially
determined, reflecting factors such as age, sex, health, and occupation. A
uniform term cost for all insureds would discriminate unfairly in favor of those
insureds representing greater risks. Although there will be no uniform term
costs for all insureds, for a given face amount and guarantee period there will
be a uniform term cost schedule for all insureds of the same issue age, sex and
underwriting classification. Similarly, the face amount that a policy owner can
purchase with a single premium will also vary to reflect factors similar to
those that affect term cost charges.
<PAGE>
The Policy provides for guaranteed life insurance coverage which will
remain in force for life, or for a shorter time, if elected. The Policy will
not be canceled during the guarantee period unless the policy debt exceeds
certain policy values. After the guarantee period, the Policy will remain in
force as long as there is not excessive policy debt and the Policy's cash
surrender value is sufficient to cover the charges due.
The owner may select the face amount for a given premium within the
following limits: 1) the minimum face amount is the amount which will give a
guarantee period for the whole of life; 2) the maximum face amount is the amount
which will give the minimum guarantee period we will require. For a given
single premium and face amount the guarantee period is based on the guaranteed
maximum mortality rates in the Policy, the deferred policy loading and a 4%
interest assumption.
The Policy will be offered and sold pursuant to an established mortality
structure and underwriting standards in accordance with state insurance laws.
Where state insurance laws prohibit the use of actuarial tables that distinguish
between men and women in determining premiums and policy benefits for their
insured residents, Merrill Lynch Life will comply. The prospectus specifies
face amounts for a given premium for illustrative ages. In addition, the
premium to be paid by an owner will be specified in the Policy.
<PAGE>
B. APPLICATION AND PREMIUM PROCESSING
When a completed application is received, Merrill Lynch Life will follow
certain insurance underwriting (I.E., evaluation of risks) procedures designed
to determine whether the proposed insured is insurable. This process may
require that further information be provided by the proposed insured before a
determination can be made. Merrill Lynch Life uses two methods of underwriting,
simplified underwriting and paramedical or medical underwriting. Insureds in a
standard medical classification will have their maximum mortality rates based on
the 1980 CSO mortality table. For insureds underwritten on a simplified basis,
Merrill Lynch Life will use the 1980 CET mortality table to calculate mortality
cost. For insureds in a substandard underwriting class, Merrill Lynch Life will
use a multiple of those tables. During the underwriting process, Merrill Lynch
Life may, however, provide temporary life insurance coverage, the death benefit
of which shall not exceed $100,000, until coverage begins under the Policy,
provided the premium has been paid.
The date on which a Policy is issued is referred to as the issue date. The
issue date represents the commencement of the suicide and contestable periods
for purposes of the Policies. The single premium will be credited to the
Separate Account and the investment base will begin to vary with investment
experience on the business day next following receipt of the single premium at
the Policies' Service Center (the "Service Center"), which is generally the
policy date.
<PAGE>
The Policy date is the date used to determine policy processing dates,
policy years and anniversaries. Policy processing dates are the policy date and
the first day of each policy quarter thereafter. Policy processing dates after
the policy date are the days when Merrill Lynch Life deducts certain charges
from a Policy's investment base. As provided for under state insurance law, the
policy owner, to preserve insurance age, may backdate the policy. In no case
may the policy date be more than six months prior to the issue date.
Currently during the "free look" period the initial premium will be
invested in the investment division investing in the Money Reserve Portfolio.
At the end of the "free look" period, the investment base will be allocated
among the investment divisions in accordance with the owner's instructions.
Merrill Lynch Life may from time to time change the division(s) where the
investment base may be allocated during the "free look" period.
If an age or sex given in the application is wrong, the face amount or any
other Policy benefit may also be wrong. Merrill Lynch Life will pay the benefit
that any premium would have bought at the correct age or sex.
C. ADDITIONAL PAYMENTS
An owner may make additional payments subject to Merrill Lynch Life's
rules. Merrill Lynch Life may in certain circumstances require additional
evidence of insurability
<PAGE>
before accepting an additional payment. Where an additional payment would not
require evidence of insurability, the additional payment will be allocated among
the investment divisions in accordance with the owner's instructions, or if no
instructions have been received in proportion to the investment base in each
division on that date. The payment will be credited to the Policy on the date
of receipt at the Service Center. On that date, Merrill Lynch Life will
increase the investment base by the amount of the payment and increase the
deferred policy loading.
When an additional payment requires evidence of insurability, the
additional payment will be invested in the investment division investing in the
Money Reserve Portfolio on the next business day following receipt of the
payment at the Service Company. On the day Merrill Lynch Life completes its
underwriting and accepts the additional payment, the investment base applicable
to the additional payment in the division investing in the Money Reserve
Portfolio will be allocated among the investment divisions in accordance with
the owner's instructions or if no instructions have been received in proportion
to the investment base in each division on that date. Once underwriting is
completed and the payment is accepted, the payment will be reflected in the
investment base and deferred policy loading as of the next business day
following receipt of the payment at the Service Center. As of the policy
processing date on or next following the date Merrill Lynch Life receives and
accepts any additional payment, Merrill Lynch Life will reflect the payment in
the variable insurance amount and increase the Policy's guaranteed benefits by
increasing either the Policy's guarantee period or face amount or both. If the
guarantee period prior to receipt and acceptance of an additional
<PAGE>
payment is less than for life, payments will first be used to extend the
guarantee period. Any amount in excess of that required to extend the guarantee
period to the whole of life or any subsequent additional payments will be used
to increase the Policy's face amount.
If the insured dies after an additional payment is made and before the next
policy processing date, Merrill Lynch Life will pay the beneficiary the larger
of (a) the death benefit calculated as of the policy processing period plus the
additional payment and (b) the cash surrender value as of the date it receives
and accepts the additional payment (including the payment) multiplied by the net
single premium factor for such date. The amount paid will be reduced by any
policy debt and overdue charges if the Policy is in the grace period and will be
increased by any amounts due from riders.
D. GRACE PERIOD
If the guarantee period is less than for life, a Policy may be canceled by
Merrill Lynch Life after the end of the guarantee period if the net cash
surrender value on a policy processing date cannot support the charges due. The
Policy, however, provides for a 61-day grace period. The grace period will end
61 days after Merrill Lynch Life mails a notice to the owner stating that it may
terminate the Policy because of insufficient cash surrender value.
The Policy will lapse at the end of the grace period unless Merrill Lynch
Life receives payment of the grace amount during that time. The grace amount
will be shown
<PAGE>
on the notice. During the grace period, the death benefit proceeds will equal
the death benefit in effect immediately prior to the grace period, reduced by
any overdue charges.
E. REINSTATEMENT
A Policy that is canceled by Merrill Lynch Life may be reinstated while the
insured is still living. The Policy will be reinstated if, within three years
after the end of the grace period, Merrill Lynch Life receives from the Policy's
owner, (a) an application to reinstate the Policy; (b) satisfactory evidence of
insurability; and (c) a premium payment which is sufficient to give the Policy a
guarantee period after reinstatement of at least five years from the effective
date of the reinstatement.
The face amount will be the same as that in effect at the time the Policy
was canceled. The reinstatement will be effective on the policy processing date
on or next following the date Merrill Lynch Life approved the reinstatement
application.
F. REPAYMENT OF LOAN
A loan or any part of a loan under Merrill Lynch Life's Policies may be
repaid while the insured is living and the Policy is in force. Upon repayment
of a policy loan, a transfer will be made from Merrill Lynch Life's general
account to the Separate Account in an amount equal to the amount repaid. The
owner may designate the investment
<PAGE>
divisions to which the repayment will be made, otherwise the repayment will be
allocated in proportion to the investment base in each division as of the date
of the repayment.
II. TRANSFERS AMONG INVESTMENT DIVISIONS
The Separate Account currently has 37 investment divisions, 20 of which
invest in a corresponding series of the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities (the "Trust"), ten of which invest in shares of a
corresponding fund of the Merrill Lynch Series Fund, Inc. ("Series Fund") and
seven of which invest in shares of a corresponding fund of the Merrill Lynch
Variable Series Funds, Inc. ("Variable Series Funds"). The Trust is registered
under the Investment Company Act of 1940 as a unit investment trust. The Series
Fund and the Variable Series Funds are each registered under the Investment
Company Act of 1940 as an open-end, investment company. The owner may transfer
among the investment divisions up to five times a year. Allocations can be made
to as many as five divisions at any time.
III. REDEMPTION PROCEDURES: SURRENDER AND RELATED TRANSACTIONS
A. SURRENDER FOR NET CASH SURRENDER VALUE
An owner of a Policy may surrender the Policy for its net cash surrender
value at any time while the insured is living. The surrender is effective on
the date the policy holder transmits the request and the Policy to Merrill Lynch
Life. Merrill Lynch Life will pay the net cash surrender value based on the
next computed value after the request and
<PAGE>
Policy are received at the Service Center. The net cash surrender value will
usually be paid within seven days after receipt of the Policy and a signed
request for surrender at the Service Center.
The net cash surrender value on the policy date equals the total investment
base less the deferred policy loading.
The net cash surrender value on each subsequent policy processing date
equals the total investment base, less the balance of any deferred policy
loading. On a policy processing date other than a policy anniversary Merrill
Lynch Life also subtracts any pro rata net loan cost if there is any policy
debt.
On any date during a policy processing period the net cash surrender value
equals the total investment base less any pro rata net loan cost if there is any
policy debt, less the balance of any deferred policy loading, less the pro rata
mortality cost since the last policy processing date.
Merrill Lynch Life will make the payment of the net cash surrender value
out of its general account and, at the same time, transfer assets from the
Separate Account to its general account in an amount equal to the investment
base (applicable to the Policy) held in the Separate Account.
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In lieu of receiving the net cash surrender value in a single sum upon
surrender of a Policy, the owner may elect to apply the net cash surrender value
to one or more of the Income Plans described in the Policy. The Income Plans
are subject to the restrictions and limitations set forth in the Policy.
B. DEATH CLAIMS
Merrill Lynch Life will pay a death benefit to the beneficiary within seven
days after receipt at the Service Center of the Policy, due proof of death of
the insured, and all other requirements necessary to make payment.
Death benefit proceeds equal the sum of the death benefit which is the
larger of the current face amount and the variable insurance amount, less any
policy debt and less any overdue charges if the Policy is in a grace period. On
each policy processing date, Merrill Lynch Life will determine the variable
insurance amount to take into account the investment experience of the
designated investment divisions since the previous policy processing date. The
variable insurance amount is determined by multiplying the cash surrender value
by the net single premium factor. The variable insurance amount determined on
the policy processing date will remain the same until the next policy processing
date. The death benefit will never be less than the amount required to keep the
Policy qualified as life insurance under Federal income tax laws. The proceeds
payable to the beneficiary will also be adjusted to reflect any amounts due from
riders. The amount payable also reflects interest from the date of the death to
the date of payment.
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Merrill Lynch Life will pay the death benefit out of its general account
and, at the same time, will transfer the investment base (applicable to the
Policy) out of the Separate Account to the general account. In lieu of payment
of the death benefit in a single sum, one or more Income Plans may be elected as
described in the Policy.
C. POLICY LOAN
The owner may borrow an amount equal to the difference between the loan
value and the policy debt. The loan value of the policy equals 75% of a
Policy's cash surrender value during policy years 1 through 3 and 90%
thereafter. The cash surrender value for this purpose will be the cash
surrender value computed on the date a proper request for a loan is received by
Merrill Lynch Life. Payment of the loan from Merrill Lynch Life's general
account will be made to the policy owner within seven days of receipt of the
request. Interest accrues daily at an effective annual rate of 4.75% compounded
annually. The smallest loan will generally be for $1,000. With a proper
written request to Merrill Lynch Life, an owner may designate the divisions from
which the loan amounts will be transferred.
When a loan is taken out, a portion of the investment base equal to the
loan is transferred from the Separate Account to Merrill Lynch Life's general
account. Unless designated otherwise by the owner, loans will be allocated
among the investment divisions of the Separate Account based upon the investment
base in each investment division as of
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the date the loans are made. The amount maintained in the general account will
not be credited with the return earned by the Separate Account during the period
the loan is outstanding. Instead, interest will be credited daily for the first
ten policy years at an effective annual rate of 4%, and at an effective annual
rate of 4.15% thereafter. Therefore, taking a loan will have a permanent effect
on a Policy's cash surrender value and may have a permanent effect on the death
benefit whether or not repaid in whole or in part.
The amount of any outstanding loan plus loan interest is subtracted from
the death benefit proceeds or the cash surrender value when calculating net cash
surrender value.
Whenever the then outstanding loans plus accrued loan interest exceeds the
larger of the cash surrender value and the tabular value, the Policy terminates
61 days after notice has been mailed by Merrill Lynch Life to the owner and any
assignee of record at their last known addresses, unless a repayment of the
amount in excess of the cash surrender value is made within that period.
D. EXCHANGING THE POLICY
An owner may exchange the Policy for a fixed policy issued by Merrill Lynch
Life with benefits that do not vary with the investment results of a separate
account provided Merrill Lynch Life receives the owner's request to exchange and
the original Policy within 18 months of the issue date of the Policy. The new
policy will have the same owner and
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beneficiary as the original Policy on the date of exchange. It will also have
the same issue age, issue date, face amount, benefit riders, cash surrender
value and underwriting class as the original Policy.
