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PROSPECTUS
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Single Premium Variable Life Insurance Policy
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This prospectus ("Prospectus") is for a single premium
variable life insurance policy issued by Merrill Lynch
Life Insurance Company (the "Insurance Company" or "We"
or "Us"), a subsidiary of Merrill Lynch & Co., Inc. The
policy permits you, as the policyowner, to make
additional payments subject to certain restrictions. The
policy is not currently being offered for sale to new
purchasers.
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 ten 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");
two mutual fund portfolios of the AIM Variable Insurance
Funds, Inc. ("AIM V.I. Funds"); one mutual fund
portfolio of the Alliance Variable Products Series Fund,
Inc. ("Alliance Fund"); two mutual fund portfolios of
the MFS Variable Insurance Trust ("MFS Trust") (each a
"Fund"; collectively, the "Funds"); and sixteen 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, capitalized
interest or complete surrender may result in adverse tax
consequences and/or penalties. See "Tax Considerations",
page 33.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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.; THE AIM
VARIABLE INSURANCE FUNDS, INC.; THE ALLIANCE VARIABLE
PRODUCTS SERIES FUND, INC.; THE MFS VARIABLE INSURANCE
TRUST; AND THE MERRILL LYNCH FUND OF STRIPPED ("ZERO")
U.S. TREASURY SECURITIES.
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Issued by: Administered at:
Merrill Lynch Life Service Center
Insurance Company P.O. Box 9025
Plainsboro, Springfield, Massachusetts
New Jersey 08536 01102-9025
Distributed by:
Merrill Lynch Pierce,
Fenner & Smith Incorporated
("MLPF&S")
Plainsboro, New Jersey 08536
Date: May 1, 1997
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Table of Contents
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Summary of the Policy Purpose of the Policy............................ 4
Availability..................................... 4
The Investment Divisions......................... 4
How the Death Benefit Varies..................... 4
How the Investment Base Varies................... 4
Net Cash Surrender Value and Cash Surrender
Value............................................ 4
Your Right to Cancel ("Free Look" Period) or Exchange
Your Policy...................................... 5
How Death Benefit and Cash Surrender Value Increases are
Taxed............................................ 5
Charges to Your Investment Base.................. 5
Other Charges and Fees........................... 6
Assumption of Previously Issued Policies and Subsequent
Merger........................................... 6
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Important Terms Important Terms.................................. 8
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Facts About the Insurance
Company
and the Separate
Account The Insurance Company and MLPF&S................. 9
The Insurance Company's Separate Account......... 9
The Series Fund.................................. 9
The Variable Series Funds....................... 11
The AIM V.I. Funds.............................. 12
The Alliance Fund............................... 12
The MFS Trust................................... 13
Certain Risks of the Funds....................... 13
The Trusts....................................... 14
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Facts About the Policy Who May be Covered By a Policy................... 15
Premiums......................................... 15
Making Additional Payments....................... 16
Investment Base.................................. 17
Charges Deducted from Your Investment Base....... 18
Charges to the Separate Account.................. 20
Charges to Series Fund Assets.................... 20
Charges to Variable Series Funds Assets.......... 20
Charges to AIM V.I. Funds Assets................. 21
Charges to Alliance Fund Assets.................. 21
Charges to MFS Trust Assets...................... 21
Net Cash Surrender Value......................... 21
Policy Loans..................................... 22
Death Benefit Proceeds........................... 23
Payment of Death Benefit Proceeds................ 24
Policy Guarantees................................ 24
When Your Guarantee Period is Less Than for
Life............................................. 25
Your Right to Cancel ("Free Look" Period) or Exchange
Your Policy...................................... 25
Reports to Policyowners.......................... 26
Single Premium Immediate Annuity Rider........... 26
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More About the Policy Using Your Policy................................ 27
Some Administrative Procedures................... 28
Other Policy Provisions.......................... 29
Income Plans..................................... 30
Group or Sponsored Arrangements.................. 31
Legal Considerations for Employers............... 31
Selling the Policies............................. 32
Administrative Services.......................... 32
Tax Considerations............................... 33
The Insurance Company's Income Taxes............. 36
Reinsurance...................................... 36
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More About the Separate
Account
and Its Divisions About the Separate Account....................... 37
Changes Within the Separate Account.............. 37
Net Rate of Return for an Investment Division.... 37
The Funds........................................ 38
Resolving Material Conflicts..................... 39
The Trusts....................................... 40
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Illustrations Illustrations of Death Benefits, Investment Base, Cash
Surrender Values and Accumulated Premiums........ 41
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More About the Insurance
Company Management....................................... 48
State Regulation.................................. 48
Registration Statement............................ 49
Legal Proceedings................................. 49
Legal Matters..................................... 49
Experts........................................... 49
Financial Statements.............................. 49
Financial Statements of Merrill Lynch Life Variable Life
Separate Account II.............................. S-1
Financial Statements of Merrill Lynch Life Insurance
Company........................................... G-1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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Summary of the Policy
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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 22).
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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 policies are not
currently being offered for sale to new purchasers.
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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 38 investment divisions in the Separate
Account available for new allocations (see "Changing
Your Investment Base Allocation", page 18). Ten
investment divisions of the Separate Account invest
exclusively in shares of designated mutual fund
portfolios of the Series Fund. Seven investment
divisions of the Separate Account invest exclusively in
Class A shares of designated mutual fund portfolios of
the Variable Series Funds. Two investment divisions of
the Separate Account invest exclusively in shares of
designated mutual fund portfolios of the AIM V.I. Funds.
One investment division of the Separate Account invests
exclusively in shares of a designated mutual fund
portfolio of the Alliance Fund. Two investment divisions
of the Separate Account invest exclusively in shares of
designated mutual fund portfolios of the MFS Trust. Each
mutual fund portfolio has a different investment
objective. The other sixteen divisions invest in units
of designated unit investment trusts in the Trusts.
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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.
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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. Contract
owners may wish to consider diversifying their
investment in the Contract by allocating the investment
base to two or more investment divisions.
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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.
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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.
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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.
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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 33.
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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 18). 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 may be deducted on policy
processing dates if you change your investment base
allocation more than five times per policy year (see
"Reallocation Charges", page 20).
Mortality Costs are deducted on all policy processing
dates after the policy date (see "Mortality Cost", page
24).
We may reduce certain charges to your investment base in
group or sponsored arrangements (see "Group or Sponsored
Arrangements", page 31).
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.
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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 15.
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 24).
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Other Charges and Fees Advisory Fees
The portfolios in the Funds pay monthly advisory fees
and other expenses (see "Charges to Series Fund Assets,"
"Charges to Variable Series Funds Assets," "Charges to
AIM V.I. Funds Assets," "Charges to Alliance Fund
Assets," "Charges to MFS Trust Assets," pages 20-21).
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.
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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
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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.
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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 8.
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Important Terms
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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.
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Facts About the Insurance Company and the Separate
Account
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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.
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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 6.) 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. Arkansas insurance law provides that
the Separate Account's 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 38 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, two invest in shares of a
specific portfolio of the AIM V.I. Funds, one invests in
shares of a specific portfolio of the Alliance Fund, two
invest in shares of a specific portfolio of the MFS
Trust and sixteen invest in units of a specific Trust.
You will find complete information about the Funds and
the Trusts, including the risks associated with each
portfolio, in the accompanying Prospectuses. You should
read them with this Prospectus.
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The Series Fund The Merrill Lynch Series Fund, Inc. is registered with
the Securities and Exchange Commission as an open-end
management investment company and its investment adviser
is Merrill Lynch Asset Management, L.P. ("MLAM"). All of
its ten mutual fund portfolios are currently available
through the Separate Account. The investment objectives
of the various portfolios in the Series Fund are
described below. There is no guarantee that any
portfolio will be able to meet its investment objective.
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Money Reserve Portfolio seeks to preserve capital,
maintain liquidity and achieve the highest possible
current income consistent with those objectives by
investing in short-term money market securities.
Intermediate Government Bond Portfolio seeks to
obtain the highest level of current income consistent
with the protection of capital afforded by investing
in debt securities issued or guaranteed by the U.S.
Government or its agencies with a maximum maturity of
15 years.
Long-Term Corporate Bond Portfolio primarily seeks
to provide as high a level of current income as is
believed to be consistent with prudent investment
risk, and secondarily seeks the preservation of
capital. In seeking to achieve these objectives, the
portfolio invests at least 80% of the value of its
assets in debt securities that have a rating within
the three highest grades of Moody's or Standard &
Poor's.
High Yield Portfolio primarily seeks as high a
level of current income as is believed to be
consistent with prudent management, and secondarily
capital appreciation when consistent with its primary
objective. The Portfolio seeks to achieve its
investment objective by investing principally in
fixed-income securities rated in the lower categories
of the established rating services or in unrated
securities of comparable quality (including
securities commonly known as a "junk bonds").
Capital Stock Portfolio seeks long-term growth of
capital and income, plus moderate current income. It
generally invests in equity securities considered to
be of good or improving quality or considered to be
undervalued based on criteria such as historical
price/book value and price/earnings ratios.
Growth Stock Portfolio seeks long-term growth of
capital by investing in a diversified portfolio of
securities, primarily common stocks, of aggressive
growth companies considered to have special
investment value.
Multiple Strategy Portfolio seeks a high total
investment return consistent with prudent risk
through a fully managed investment policy utilizing
equity securities, intermediate and long-term debt
securities and money market securities.
Natural Resources Portfolio seeks long-term growth
of capital and protection of the purchasing power of
shareholders' capital by investing primarily in
equity securities of domestic and foreign companies
with substantial natural resource assets.
Global Strategy Portfolio seeks high total
investment return by investing primarily in a
portfolio of equity and fixed-income securities,
including convertible securities, of U.S. and foreign
issuers.
Balanced Portfolio seeks a level of current income
and a degree of stability of principal not normally
available from an investment solely in equity
securities and the opportunity for capital
appreciation greater than that normally available
from an investment solely in debt securities by
investing in a balanced portfolio of fixed income and
equity securities.
MLAM is indirectly owned and controlled by Merrill Lynch
& Co., Inc. and is a registered adviser under the
Investment Advisers Act of 1940. The Series Fund,
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as part of its operating expenses, pays an investment advisory fee to MLAM (see
"Charges to Series Fund Assets", page 20).
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The Variable Series Funds
The Merrill Lynch Variable Series Funds, Inc. is
registered with the Securities and Exchange Commission
as an open-end management investment company and its
investment adviser is MLAM. Seven of its 16 mutual fund
portfolios are currently available through the Separate
Account. The investment objectives of the seven
available Variable Series Funds portfolios are described
below. There is no guarantee that any portfolio will be
able to meet its investment objective.
Basic Value Focus Fund seeks capital appreciation,
and secondarily, income by investing in securities,
primarily equities, that management of the Fund
believes are undervalued and therefore represent
basic investment value. Particular emphasis is placed
on securities that provide an above-average dividend
return and sell at a below-average price/earnings
ratio.
Global Utility Focus Fund seeks to obtain capital
appreciation and current income through investment of
at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies
which are, in the opinion of 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, and secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other than
the United States. Under normal conditions, at least
65% of the Fund's net assets will be invested in such
equity securities.
Developing Capital Markets Focus Fund seeks
long-term capital appreciation by investing in
securities, principally equities, of issuers in
countries having smaller capital markets. For
purposes of its investment objective, the Fund
considers countries having smaller capital markets to
be all countries other than the four countries having
the largest equity market capitalizations.
Equity Growth Fund seeks to attain long-term growth
of capital by investing in a diversified portfolio of
securities, primarily common stocks, of relatively
small companies that management of the Fund believes
have special investment value, and of 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.
Global Bond Focus Fund seeks to provide high total
investment return by investing in a global portfolio
of fixed income securities denominated in various
currencies, including multinational currency units.
The Fund will invest in fixed income securities that
have a credit rating of A or better by Standard &
Poor's or by Moody's or commercial paper rated A-1 by
Standard & Poor's or Prime-1 by Moody's or
obligations that MLAM has determined to be of similar
creditworthiness.
Index 500 Fund seeks to provide investment results
that, before expenses, correspond to the aggregate
price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500
Index").
11
<PAGE> 12
The Variable Series Funds, as part of its operating
expenses, pays an investment advisory fee to MLAM. (See
"Charges to Variable Series Funds Assets" on page 20.)
- --------------------------------------------------------------------------------
The AIM V.I. Funds The AIM V.I. Funds is registered with the Securities and
Exchange Commission as an open-end, series, management
investment company and its investment adviser is A I M
Advisors, Inc. ("AIM"). Two of its mutual fund
portfolios are currently available through the Separate
Account. The investment objectives of the two available
AIM V.I. Funds portfolios are described below. There is
no guarantee that any portfolio will be able to meet its
investment objective.
AIM V.I. Capital Appreciation Fund seeks capital
appreciation through investments in common stocks,
with emphasis on medium-sized and smaller emerging
growth companies. The portfolio is primarily
comprised of securities of two basic categories of
companies: (1) "core" companies, which AIM considers
to have experienced above-average and consistent
long-term growth in earnings and to have excellent
prospects for outstanding future growth, and (2)
"earnings acceleration" companies which AIM believes
are currently enjoying a dramatic increase in
profits.
AIM V.I. Value Fund seeks to achieve long-term
growth of capital by investing primarily in equity
securities judged by AIM to be undervalued relative
to the current or projected earnings of the companies
issuing the securities, or relative to current market
values of assets owned by the companies issuing the
securities or relative to the equity markets
generally. Income is a secondary objective. The
investment division investing in this Fund should not
be selected by contract owners who seek income as
their primary investment objective.
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173, is a wholly owned subsidiary of A I M
Management Group Inc., an indirect subsidiary of AMVESCO
plc (formerly INVESCO plc). AIM is a registered adviser
under the Investment Advisers Act of 1940. AIM was
organized in 1976, and, together with its domestic
subsidiaries, manages or advises 48 investment company
portfolios (including the AIM V.I. Funds). The AIM V.I.
Funds, as part of its operating expenses, pays an
investment advisory fee to AIM. (See "Charges to AIM
V.I. Funds Assets" on page 21.)
- --------------------------------------------------------------------------------
The Alliance Fund The Alliance Fund is registered with the Securities and
Exchange Commission as an open-end management investment
company and its investment adviser is Alliance Capital
Management L.P. ("Alliance"). One of its mutual fund
portfolios is currently available through the Separate
Account. The investment objective of the available
Alliance Fund portfolio is described below. There is no
guarantee that this portfolio will be able to meet its
investment objective.
Premier Growth Portfolio seeks growth of capital by
pursuing aggressive investment policies. Since
investments will be made based upon their potential
for capital appreciation, current income will be
incidental to the objective of capital growth.
Because of the market risks inherent in any
investment, the selection of securities on the basis
of their appreciation possibilities cannot ensure
against possible loss in value.
Alliance, a Delaware limited partnership with principal
offices at 1345 Avenue of the Americas, New York, New
York 10105, is a registered adviser under the Investment
Advisers Act of 1940. Alliance Capital Management
Corporation ("ACMC"), the sole general partner of
Alliance, is an indirect wholly-owned
12
<PAGE> 13
subsidiary of The Equitable Life Assurance Society of
the United States, which is in turn a wholly-owned
subsidiary of the Equitable Companies Incorporated, a
holding company which is controlled by AXA, a French
insurance holding company. The Alliance Fund, as part
of its operating expenses, pays an investment advisory
fee to Alliance. (See "Charges to Alliance Fund Assets"
on page 21.)
- --------------------------------------------------------------------------------
The MFS Trust The MFS Trust is registered with the Securities and
Exchange Commission as an open-end management investment
company and its investment adviser is Massachusetts
Financial Services Company ("MFS"). Two of its mutual
fund portfolios are currently available through the
Separate Account. The investment objectives of the
available MFS Trust portfolios are described below.
There is no guarantee that any portfolio will be able to
meet its investment objective.
MFS Emerging Growth Series seeks to provide
long-term growth of capital by investing primarily
(i.e., at least 80% of its assets under normal
circumstances) in common stocks of emerging growth
companies. Emerging growth companies include
companies that MFS believes are early in their life
cycle but which have the potential to become major
enterprises. Dividend and interest income from
portfolio securities, if any, is incidental to the
Fund's objective of long-term growth of capital.
MFS Research Series seeks to provide long-term
growth of capital and future income. The portfolio
securities of the MFS Research Series are selected by
a committee of investment research analysts. This
committee includes investment analysts employed not
only by the Adviser but also by MFS International
(U.K.) Limited, a wholly-owned subsidiary of MFS. The
Series' assets are allocated among industries by the
analysts acting together as a group. Individual
analysts are then responsible for selecting what they
view as the securities best suited to meet the
Series' investment objective within their assigned
industry responsibility.
MFS, a Delaware corporation, 500 Boylston Street,
Boston, Massachusetts 02116, is a subsidiary of Sun Life
of Canada (U.S.), which, in turn, is a wholly-owned
subsidiary of Sun Life Assurance Company of Canada, and
is a registered adviser under the Investment Advisers
Act of 1940. MFS is America's oldest mutual fund
organization. MFS and its predecessor organizations have
a history of money management dating from 1924 and the
founding of the first mutual fund in the United States,
Massachusetts Investors Trust. The MFS Trust, as part of
its operating expenses, pays an investment advisory fee
to MFS. (See "Charges to MFS Trust Assets" on page 21.)
- --------------------------------------------------------------------------------
Certain Risks of the Funds
Investment in lower-rated debt securities, such as those
in which the High Yield Portfolio of the Series Fund,
and the Developing Capital Markets Focus and
International Equity Focus Funds of the Variable Series
Funds, expect to invest, entails relatively greater risk
of loss of income or principal. The Developing Capital
Markets Focus Fund of the Variable Series Funds has no
established rating criteria for the debt securities in
which it may invest, and will rely on the investment
adviser's judgment in evaluating the creditworthiness of
an issuer of such securities. In an effort to minimize
risk, these portfolios will diversify holdings among
many issuers. However, there can be no assurance that
diversification will protect these portfolios from
widespread defaults during periods of sustained economic
downturn.
13
<PAGE> 14
In seeking to protect the purchasing power of capital,
the Natural Resources Portfolio of the Series Fund
reserves the right, when management anticipates
significant economic, political, or financial
instability, such as high inflationary pressures or
upheaval in foreign currency exchange markets, to invest
a majority of its assets in companies that explore for,
extract, process or deal in gold or in asset-based
securities indexed to the value of gold bullion. The
Natural Resources Portfolio will not concentrate its
investments in such securities until it has been advised
that the policies' federal tax status will not be
adversely affected as a result.
In selecting investments for the AIM V.I. Capital
Appreciation Fund, AIM is particularly interested in
companies that are likely to benefit from new or
innovative products, services or processes that should
enhance such companies' prospects for future growth in
earnings. As a result of this policy, the market prices
of many of the securities purchased and held by this
Fund may fluctuate widely. Any income received from
securities held by the Fund will be incidental, and a
policyholder should not consider a purchase of shares of
the Fund as equivalent to a complete investment program.
For the MFS Emerging Growth Series, the nature of
investing in emerging growth companies involves greater
risk than is customarily associated with investments in
more established companies. Emerging growth companies
often have limited product lines, markets or financial
resources, and they may be dependent on one-person
management. In addition, there may be less research
available on many promising small and medium sized
emerging growth companies, making it more difficult to
find and analyze these companies. The securities of
emerging growth companies may have limited marketability
and may be subject to abrupt or erratic market movements
than securities of larger, more established growth
companies or the market averages in general. Shares of
the MFS Emerging Growth Series, therefore, are subject
to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which
invests entirely in proven growth stocks.
Because investment in these portfolios entails
relatively greater risk of loss of income or principal,
it may not be appropriate to allocate all payments and
investment base to an investment division that invests
in one of these portfolios.
- --------------------------------------------------------------------------------
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 1998 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
14
<PAGE> 15
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 20).
- --------------------------------------------------------------------------------
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. The policy is not currently being offered
for sale to new purchasers.
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 24) 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 insureds in a substandard
underwriting class. For a discussion of the effect of
underwriting classification on mortality cost
deductions, see "Mortality Cost" on page 24.
- --------------------------------------------------------------------------------
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 16). 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 31).
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.
15
<PAGE> 16
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
<S> <C> <C> <C> <C>
GUARANTEE PERIOD MINIMUM
FOR LIFE GUARANTEE PERIOD
ISSUE ------------------ --------------------
AGE MALE FEMALE MALE FEMALE
------ ------- ------- -------- --------
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 the payment increases
the net amount at risk under the policy (see "Mortality
Cost", page 24) 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 18).
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.
16
<PAGE> 17
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 23). 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
23).
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.
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 37).
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 16.)
17
<PAGE> 18
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 may assess a charge for each allocation
change in excess of five per policy year (see
"Reallocation Charges", page 20).
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 28).
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 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 20).
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. The sales load and first year
administrative expense may be reduced if cumulative
premiums are sufficiently
18
<PAGE> 19
high to reach certain breakpoints and in certain group
or sponsored arrangements as described on page 31.
The state and local premium tax charge is equal to 2.5%
of your single premium and any additional payments.
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.
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 31).
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
nonsmoker 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
19
<PAGE> 20
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 may be deducted on policy
processing dates if you change your investment base
allocation more than five times per policy year. The
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", p. 22.
- --------------------------------------------------------------------------------
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.
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 19).
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.
- --------------------------------------------------------------------------------
Charges to Series Fund
Assets The Series Fund incurs operating expenses and pays a
monthly advisory fee to MLAM. This fee equals an annual
rate of:
- .50% of the first $250 million of the aggregate
average daily net assets of the Series Fund;
- .45% of the next $50 million of such assets;
- .40% of the next $100 million of such assets;
- .35% of the next $400 million of such assets; and
- .30% of such assets over $800 million.
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.
- --------------------------------------------------------------------------------
Charges to Variable Series
Funds Assets The Variable Series Funds incurs operating expenses and
pays a monthly advisory fee to MLAM. This fee equals an
annual rate of .60% of the average daily net assets of
the Basic Value Focus Fund, Global Utility Focus Fund,
and Global
20
<PAGE> 21
Bond Focus Fund. This fee equals an annual rate of
.30%, .75%, 1.00%, and .75% of the average daily net
assets of the Index 500 Fund, the International Equity
Focus Fund, the Developing Capital Markets Focus Fund
and the Equity Growth Fund, respectively.
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.
- --------------------------------------------------------------------------------
Charges to AIM V.I. Funds
Assets The AIM V.I. Funds incur operating expenses and pay a
monthly advisory fee to AIM, which serves as the
investment adviser to each fund of the AIM V.I. Funds.
As the investment adviser, AIM receives from the AIM
V.I. Capital Appreciation Fund and the AIM V.I. Value
Fund an advisory fee at an annual rate of .65% of each
fund's average daily net assets.
- --------------------------------------------------------------------------------
Charges to Alliance Fund
Assets The Alliance Fund incurs operating expenses and pays a
monthly advisory fee to Alliance, which serves as the
investment adviser to each fund of the Alliance Fund. As
the investment adviser, Alliance receives from the
Alliance Premier Growth Portfolio an advisory fee at an
annual rate of 1.00% of the fund's average daily net
assets.
Alliance voluntarily waives fees and expenses that
exceed .95% of the average net assets of the Alliance
Fund. Alliance may discontinue or reduce any waivers or
assumptions of expenses at any time without notice.
Alliance, however, intends to continue such
reimbursements for the foreseeable future.
- --------------------------------------------------------------------------------
Charges to MFS Trust Assets
The MFS Trust incurs operating expenses and pays a
monthly advisory fee to MFS, which serves as the
investment adviser to each of the funds of MFS Trust. As
the investment adviser, MFS receives from the MFS
Emerging Growth Series and MFS Research Series an
advisory fee, computed and paid monthly, at an annual
rate of .75% of the average daily net assets of the
respective fund.
Subject to termination or revision at the sole
discretion of MFS, MFS has agreed to bear expenses of
the MFS Emerging Growth Series and the MFS Research
Series (the "Series") such that each Series' expenses,
except for management fees ("Other Expenses"), do not
exceed .25% of the average daily net assets of the
Series. The obligation of MFS to bear Other Expenses for
a Series terminates on the last day of the Series'
fiscal year in which Other Expenses are less than or
equal to .25%.
- --------------------------------------------------------------------------------
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 18).
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.
21
<PAGE> 22
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 30).
- --------------------------------------------------------------------------------
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.
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.
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 THE
OUTSTANDING LOAN AMOUNT. Policy debt is considered part
of total cash value which is used to calculate gain.
Interest paid on a policy loan is not tax-deductible.
22
<PAGE> 23
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
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 33).
- --------------------------------------------------------------------------------
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. When Merrill Lynch Life is first provided
reliable notification of the insured's death by a
representative of the owner or the insured, investment
base may be transferred to the division investing in the
Money Reserve Portfolio, pending payment of death
benefit proceeds.
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 25).
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 16).
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
23
<PAGE> 24
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
<TABLE>
<CAPTION>
Standard-Simplified Issue Standard-Medical Issue
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>
- --------------------------------------------------------------------------------
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 27
and "Other Policy Provisions", page 29. 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 30).
- --------------------------------------------------------------------------------
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 22). 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 19). 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
24
<PAGE> 25
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 20.
- --------------------------------------------------------------------------------
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 18).
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 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 16).
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
25
<PAGE> 26
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.
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 37). 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 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.
26
<PAGE> 27
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 33.
- --------------------------------------------------------------------------------
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.
27
<PAGE> 28
Changing the Insured
Subject to certain requirements, you may request that we
change the insured under a policy once each policy year.
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. The
proposed new insured must qualify for a standard or
better underwriting classification. Outstanding debt
must first be repaid and the policy cannot be
collaterally assigned. 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 and the policy is still in effect at
that time.
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 and the policy is still in
effect at that time.
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 Fund 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 may 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
28
<PAGE> 29
association), a member bank of the Federal Reserve
System or a member firm of a national securities
exchange.
Currently, we may require a signature guarantee on:
- written requests for cash surrenders or policy
loans;
- change of owner; 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 18).
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.
Merrill Lynch Life will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine. These procedures may include, but are not
limited to, possible recording of telephone calls and
obtaining appropriate identification before effecting
any telephone transactions. Merrill Lynch Life will not
be liable for following telephone instructions that it
reasonably believes to be genuine.
- --------------------------------------------------------------------------------
Other 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.
Incontestability
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
29
<PAGE> 30
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
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.
30
<PAGE> 31
Income for a Fixed Period
Payments are made in equal installments for up to
30 years.
Income for Life
Payments are made in equal monthly installments
until death of a named person or end of a designated
period, whichever is later. The designated period may
be for 10 or 20 years.
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
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<PAGE> 32
some states may prohibit use of sex-distinct mortality
tables under certain circumstances.
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.
Certain states may 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. (Previously, certain policies
issued on the life of a Massachusetts resident were also
issued on a unisex basis.) Therefore, policies described
in this prospectus to insure residents of Montana (and
certain residents of Massachusetts) will have premiums
and benefits which are based on actuarial tables that do
not differentiate on the basis of sex. Policyowners
should consult the policy.
- --------------------------------------------------------------------------------
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, 1996, December 31, 1995 and December 31,
1994 were $634,950, $677,860, and $808,469,
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 $44.5 million for the year ended December 31, 1996.
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<PAGE> 33
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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 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 30).
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 Funds, intends to comply
with these requirements. Each Fund is obligated to
comply with the diversification requirements prescribed
by the Treasury Department.
In connection with the issuance of the diversification
regulations, the Treasury Department stated that it
anticipates the issuance of regulations or rulings
prescribing the circumstances in which 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.
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<PAGE> 34
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.
Tax Treatment of Policy Loans and Other Distributions
Federal Tax Laws establishes a 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, capitalized interest,
surrenders, 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,
capitalized interest, 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, capitalized interest, 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
34
<PAGE> 35
Insurance Company or any of its affiliates issue to the
same policyowner more than one modified endowment
contract during a calendar year, then for purposes of
measuring the "income on the contract" with respect to
a distribution from any of those contracts, the "income
on the contract" for all such contracts will be
aggregated and attributed to that distribution.
Taxation of Single Premium Immediate Annuity Rider
If a SPIAR was added to the policy at issue 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. In addition, exchanging this
policy for more than one policy, or exchanging this
policy and one or more other policies for a single
policy, in certain circumstances, may be treated as an
exchange under Section 1035, as long as all such
policies involve the same insured(s). Any new policy or
policies would have to satisfy the 7-pay test from the
date of exchange to avoid characterization as a modified
endowment contract. In addition, any exchange for a new
policy or policies may result in a loss of
grandfathering status for statutory changes made after
the old policy or policies were issued. A tax advisor
should be consulted before effecting any exchange, since
even if an exchange is within Section 1035(a), the
exchange may have tax consequences other than immediate
recognition of income.
In addition, the policy may be used in various
arrangements, including non-qualified deferred
compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical
benefit plans and others. The tax consequences of such
plans may vary depending on the particular facts and
35
<PAGE> 36
circumstances of each individual arrangement.
Therefore, if you are contemplating the use of a policy
in any arrangement the value of which depends in part
on its tax consequences, you should be sure to consult
a qualified tax advisor regarding the tax attributes of
the particular arrangement.
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, should consult a tax advisor regarding
possible tax consequences associated with a policy prior
to the acquisition of a policy and also before entering
into any subsequent changes to or transactions under the
Policy.
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 have reinsured some of the risks we assumed under the
policies.
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<PAGE> 37
- --------------------------------------------------------------------------------
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 manner. A
valuation period is each business day together with any
non-business days before it. A business
37
<PAGE> 38
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 Funds, shares are valued
at net asset value and we consider any dividends or
capital gains distributions declared by the 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 Funds Buying and Redeeming Shares
The Funds sell and redeem 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 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 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 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.
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.
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<PAGE> 39
Administration Services Arrangements
MLAM has entered into an agreement with MLIG, with
respect to administration services for the Series Fund
and the Variable Series Funds in connection with the
policies and other variable life insurance and variable
annuity contracts issued by the Insurance Company. Under
this agreement, MLAM pays compensation to MLIG in an
amount equal to a portion of the annual gross investment
advisory fees paid by the Series Fund and the Variable
Series Funds to MLAM attributable to variable contracts
issued by the Insurance Company.
AIM V.I. Funds has entered into an Administrative
Services Agreement with AIM, pursuant to which AIM has
agreed to provide certain accounting and other
administrative services to the AIM V.I. Funds, including
the services of a principal financial officer and
related staff. As compensation to AIM for its services
under the Administrative Services Agreement, the AIM
V.I. Funds reimburse AIM for expenses incurred by AIM or
its affiliates in connection with such services. AIM has
entered into an agreement with the Insurance Company
with respect to administrative services for the AIM V.I.
Funds in connection with the Policies. Under this
agreement, AIM pays compensation to the Insurance
Company in an amount equal to a percentage of the
average net assets of the AIM V.I. Funds attributable to
the Policies.
Alliance Fund Distributors, Inc. ("AFD"), an affiliate
of Alliance, has entered into an agreement with the
Insurance Company with respect to administrative
services for the Alliance Fund in connection with the
Policies. Under this agreement, AFD pays compensation to
the Insurance Company in an amount equal to a percentage
of the average net assets of the Alliance Fund
attributable to the Policies.
MFS has entered into an agreement with MLIG with respect
to administrative services for the MFS Trust in
connection with the Policies and certain policies issued
by ML Life Insurance Company of New York. Under this
agreement, MFS pays compensation to MLIG in an amount
equal to a percentage of the average net assets of the
MFS Trust attributable to such policies.
- --------------------------------------------------------------------------------
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, the AIM V.I. Funds,
the Alliance Fund, and the MFS Trust are sold to
separate accounts of other Merrill Lynch insurance
companies, and insurance companies not affiliated with
Merrill Lynch Life or Merrill Lynch & Co., Inc. to fund
benefits under variable life insurance and variable
annuity contracts, and may be sold to certain qualified
plans. It is possible that differences might arise
between our Separate Account and one or more separate
accounts of the other insurance companies which invest
in the Funds. In some cases, it is possible that the
differences could be considered "material conflicts".
Such a "material conflict" could also arise due to
changes in the law (such as state insurance law or
federal tax law) which affect these different variable
life insurance 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 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, consistent with
applicable legal requirements.
39
<PAGE> 40
- --------------------------------------------------------------------------------
The Trusts The 16 Trusts:
<TABLE>
<CAPTION>
TRUST MATURITY DATE
----- ------------------
<S> <C>
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
2005 February 15, 2005
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
20, 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 18.
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.
40
<PAGE> 41
- --------------------------------------------------------------------------------
Illustrations
- --------------------------------------------------------------------------------
Illustrations of Death
Benefits, Investment Base,
Cash Surrender Values
and Accumulated
Premiums The tables on pages 43 through 47 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 43 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 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 $28,477 and a guarantee period for life.
3. The illustration on page 45 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 46 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 47 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 .52%. This charge assumes that
investment base is allocated equally among all
investment divisions and is based on the 1996 expenses
(including the monthly advisory fees) for the Funds and
the current trust charge. This charge also reflects
expense reimbursements made in 1996 to certain
portfolios by the investment adviser to the respective
portfolio. These reimbursements amounted to .06%, .07%,
.16%, .48%, and .28% of the average daily net assets of
the Developing Capital Markets Focus Fund, the Natural
Resources Portfolio, the MFS Emerging Growth Series, the
MFS Research Series, and the Premier Growth Portfolio,
respectively. (See "Charges to Series Fund Assets",
"Charges to Variable Series Funds Assets", "Charges to
Alliance Fund Assets" and "Charges to MFS Trust Assets",
pages 20-21.) The actual charge under a policy for Fund
expenses and the trust charge will depend on the actual
allocation of your investment base and may be higher or
lower depending on how your investment base is
allocated.
41
<PAGE> 42
Taking into account the .60% charge for mortality,
expense and guaranteed benefits risks in the Separate
Account and the .52% charge described above, the gross
annual rates of investment return of 0%, 4%, 8% and 12%
correspond to net annual rates of -1.12%, 2.86%, 6.84%
and 10.81%, 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. In addition, if a purchase is made, a
personalized illustration will be included at the
delivery of a policy reflecting the insured's actual
underwriting class.
42
<PAGE> 43
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 (AFTER TAX)
PAID PLUS ANNUAL INVESTMENT RETURN OF
INTEREST AT 5% AS ----------------------------------------------
END OF 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 $ 41,352 $ 43,005
2............................ 0 5,513 40,057 40,057 42,658 46,106
3............................ 0 5,788 40,057 40,057 43,975 49,373
4............................ 0 6,078 40,057 40,057 45,306 52,819
5............................ 0 6,381 40,057 40,057 46,651 56,456
6............................ 0 6,700 40,057 40,057 48,012 60,299
7............................ 0 7,036 40,057 40,057 49,391 64,364
8............................ 0 7,387 40,057 40,057 50,790 68,667
9............................ 0 7,757 40,057 40,057 52,210 73,226
10............................ 0 8,144 40,057 40,057 53,652 78,059
15............................ 0 10,395 40,057 40,057 61,399 107,295
20............................ 0 13,266 40,057 40,057 70,264 147,474
30............................ 0 21,610 40,057 40,057 91,997 278,466
60............................ 0 93,396 40,057 40,057 206,625 1,877,548
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS (AFTER TAX) ASSUMING HYPOTHETICAL GROSS (AFTER TAX)
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............................ $4,851 $5,049 $ 5,246 $ 5,443 $4,536 $4,734 $ 4,931 $ 5,128
2............................ 4,706 5,101 5,509 5,932 4,426 4,821 5,229 5,652
3............................ 4,563 5,157 5,790 6,471 4,318 4,912 5,545 6,226
4............................ 4,424 5,215 6,090 7,065 4,214 5,005 5,880 6,855
5............................ 4,288 5,277 6,411 7,722 4,113 5,102 6,236 7,547
6............................ 4,154 5,341 6,752 8,444 4,014 5,201 6,612 8,304
7............................ 4,020 5,405 7,113 9,238 3,915 5,300 7,008 9,133
8............................ 3,886 5,469 7,494 10,107 3,816 5,399 7,424 10,037
9............................ 3,747 5,529 7,892 11,055 3,712 5,494 7,857 11,020
10............................ 3,605 5,586 8,308 12,087 3,605 5,586 8,308 12,087
15............................ 3,018 6,005 10,896 19,041 3,018 6,005 10,896 19,041
20............................ 2,437 6,456 14,345 30,109 2,437 6,456 14,345 30,109
30............................ 1,441 7,663 25,624 77,562 1,441 7,663 25,624 77,562
60............................ 0 8,833 133,006 1,208,593 0 8,833 133,006 1,208,593
</TABLE>
- ------------------------------
(1) All payments are illustrated as if made at the beginning of the policy year.
(2) Assumes no policy loan has been made.
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 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> 44
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 (AFTER TAX)
PAID PLUS ANNUAL INVESTMENT RETURN OF
INTEREST AT 5% AS -------------------------------------------
END OF 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 $29,397 $30,570
2............................ 0 11,025 28,477 28,477 30,323 32,772
3............................ 0 11,576 28,477 28,477 31,258 35,091
4............................ 0 12,155 28,477 28,477 32,203 37,537
5............................ 0 12,763 28,477 28,477 33,158 40,120
6............................ 0 13,401 28,477 28,477 34,125 42,850
7............................ 0 14,071 28,477 28,477 35,104 45,738
8............................ 0 14,775 28,477 28,477 36,098 48,796
9............................ 0 15,513 28,477 28,477 37,107 52,035
10............................ 0 16,289 28,477 28,477 38,132 55,469
15............................ 0 20,789 28,477 28,477 43,638 76,244
20............................ 0 26,533 28,477 28,477 49,942 104,816
25............................ 0 33,864 28,477 28,477 57,162 144,124
30............................ 0 43,219 28,477 28,477 65,433 198,218
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS (AFTER TAX) ASSUMING HYPOTHETICAL GROSS (AFTER TAX)
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............................ $9,744 $10,140 $10,536 $ 10,931 $9,114 $ 9,510 $ 9,906 $ 10,301
2............................ 9,485 10,279 11,100 11,951 8,925 9,719 10,540 11,391
3............................ 9,223 10,416 11,694 13,067 8,733 9,926 11,204 12,577
4............................ 8,959 10,551 12,318 14,290 8,539 10,131 11,898 13,870
5............................ 8,691 10,684 12,976 15,627 8,341 10,334 12,626 15,277
6............................ 8,420 10,813 13,666 17,089 8,140 10,533 13,386 16,809
7............................ 8,146 10,941 14,393 18,689 7,936 10,731 14,183 18,479
8............................ 7,868 11,065 15,157 20,439 7,728 10,925 15,017 20,299
9............................ 7,587 11,186 15,960 22,353 7,517 11,116 15,890 22,283
10............................ 7,301 11,303 16,804 24,444 7,301 11,303 16,804 24,444
15............................ 6,133 12,172 22,073 38,566 6,133 12,172 22,073 38,566
20............................ 4,746 12,864 28,665 60,160 4,746 12,864 28,665 60,160
25............................ 3,102 13,296 36,796 92,774 3,102 13,296 36,796 92,774
30............................ 1,121 13,324 46,566 141,065 1,121 13,324 46,566 141,065..
</TABLE>
- ------------------------------
(1) All payments are illustrated as if made at the beginning of the policy year.
(2) Assumes no policy loan has been made.
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 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> 45
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 $18,980 $19,739
2............................ 0 11,025 18,386 18,386 19,580 21,163
3............................ 0 11,576 18,386 18,386 20,185 22,664
4............................ 0 12,155 18,386 18,386 20,797 24,248
5............................ 0 12,763 18,386 18,386 21,416 25,921
6............................ 0 13,401 18,386 18,386 22,042 27,689
7............................ 0 14,071 18,386 18,386 22,677 29,560
8............................ 0 14,775 18,386 18,386 23,321 31,541
9............................ 0 15,513 18,386 18,386 23,974 33,639
10............................ 0 16,289 18,386 18,386 24,638 35,864
15............................ 0 20,789 18,386 18,386 28,203 49,324
20............................ 0 26,533 18,386 18,386 32,286 67,852
30............................ 0 43,219 18,386 18,386 42,327 128,506
</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............................ $9,695 $10,091 $10,486 $ 10,879 $9,065 $ 9,461 $ 9,856 $ 10,249
2............................ 9,386 10,177 10,991 11,835 8,826 9,617 10,431 11,275
3............................ 9,073 10,257 11,519 12,874 8,583 9,767 11,029 12,384
4............................ 8,755 10,331 12,069 14,002 8,335 9,911 11,649 13,582
5............................ 8,432 10,400 12,642 15,227 8,082 10,050 12,292 14,877
6............................ 8,106 10,462 13,238 16,558 7,826 10,182 12,958 16,278
7............................ 7,773 10,517 13,859 18,001 7,563 10,307 13,649 17,791
8............................ 7,434 10,563 14,503 19,565 7,294 10,423 14,363 19,425
9............................ 7,089 10,599 15,170 21,257 7,019 10,529 15,100 21,187
10............................ 6,736 10,625 15,860 23,086 6,736 10,625 15,860 23,086
15............................ 5,198 10,953 20,071 35,102 5,198 10,953 20,071 35,102
20............................ 3,435 10,992 25,037 52,618 3,435 10,992 25,037 52,618
30............................ 0 9,827 37,059 112,514 0 9,827 37,059 112,514
</TABLE>
- ------------------------------
(1) All payments are illustrated as if made at the beginning of the policy year.
(2) Assumes no policy loan has been made.
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 FUNDS OR THE
TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
45
<PAGE> 46
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 $16,836 $17,509
2............................ 0 11,025 16,308 16,308 17,368 18,773
3............................ 0 11,576 16,308 16,308 17,905 20,105
4............................ 0 12,155 16,308 16,308 18,448 21,511
5............................ 0 12,763 16,308 16,308 18,997 22,995
6............................ 0 13,401 16,308 16,308 19,553 24,564
7............................ 0 14,071 16,308 16,308 20,116 26,224
8............................ 0 14,775 16,308 16,308 20,688 27,981
9............................ 0 15,513 16,308 16,308 21,268 29,843
10............................ 0 16,289 16,308 16,308 21,857 31,817
15............................ 0 20,789 16,308 16,308 25,020 43,764
20............................ 0 26,533 16,308 16,308 28,645 60,214
</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............................ $9,686 $10,082 $10,476 $10,870 $9,056 $ 9,452 $ 9,846 $10,240
2............................ 9,368 10,158 10,971 11,814 8,808 9,598 10,411 11,254
3............................ 9,046 10,229 11,488 12,839 8,556 9,739 10,998 12,349
4............................ 8,722 10,296 12,028 13,955 8,302 9,876 11,608 13,535
5............................ 8,396 10,359 12,593 15,170 8,046 10,009 12,243 14,820
6............................ 8,066 10,417 13,183 16,490 7,786 10,137 12,903 16,210
7............................ 7,733 10,469 13,798 17,923 7,523 10,259 13,588 17,713
8............................ 7,392 10,511 14,435 19,474 7,252 10,371 14,295 19,334
9............................ 7,043 10,543 15,092 21,149 6,973 10,473 15,022 21,079
10............................ 6,684 10,560 15,768 22,953 6,684 10,560 15,768 22,953
15............................ 5,074 10,796 19,815 34,659 5,074 10,796 19,815 34,659
20............................ 3,198 10,680 24,447 51,389 3,198 10,680 24,447 51,389
</TABLE>
- ------------------------------
(1) All payments are illustrated as if made at the beginning of the policy year.
(2) Assumes no policy loan has been made.
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 FUNDS OR THE
TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
46
<PAGE> 47
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>
DEATH BENEFIT
TOTAL ASSUMING HYPOTHETICAL GROSS (AFTER TAX)
PREMIUMS ANNUAL INVESTMENT RETURN OF
PAID PLUS -----------------------------------------------
END OF POLICY YEAR PAYMENTS INTEREST AT 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 51,657 123,712 123,712 123,712 140,284
20............................ 1,500 74,632 123,712 123,712 123,712 209,583
25............................ 1,500 103,954 123,712 123,712 133,743 302,992
30............................ 0 132,675 * 123,712 153,244 416,978
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT BASE CASH VALUE
ASSUMING HYPOTHETICAL GROSS (AFTER TAX) ASSUMING HYPOTHETICAL GROSS (AFTER TAX)
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............................ $ 9,370 $ 9,760 $ 10,152 $ 10,544 $ 8,740 $ 9,130 $ 9,522 $ 9,914
2............................ 10,183 11,010 11,870 12,763 9,535 10,362 11,223 12,115
3............................ 10,942 12,250 13,663 15,182 10,287 11,594 13,007 14,526
4............................ 11,646 13,477 15,532 17,819 10,992 12,823 14,878 17,165
5............................ 12,290 14,687 17,480 20,699 11,648 14,045 16,837 20,056
6............................ 12,874 15,878 19,511 23,845 12,252 15,257 18,889 23,224
7............................ 13,398 17,049 21,632 27,294 12,808 16,459 21,042 26,703
8............................ 13,861 18,198 23,849 31,078 13,312 17,649 23,300 30,528
9............................ 14,265 19,326 26,172 35,241 13,766 18,827 25,673 34,742
10............................ 14,600 20,420 28,598 39,820 14,161 19,981 28,160 39,382
15............................ 15,533 25,650 43,011 71,399 15,094 25,211 42,572 70,960
20............................ 14,079 29,120 61,570 120,730 13,640 28,681 61,131 120,292
25............................ 9,209 29,306 86,531 195,478 8,770 28,868 86,092 195,040
30............................ * 13,517 109,157 296,849 * 13,420 109,060 296,752
</TABLE>
- ------------------------------
(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.
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 FUNDS OR THE
TRUSTS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
47
<PAGE> 48
- --------------------------------------------------------------------------------
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, Jr. Director, Senior Vice President, Chief
Financial Officer, Chief Actuary, and
Treasurer
Barry G. Skolnick Director, Senior Vice President, General
Counsel
and Secretary
David M. Dunford Director, Senior Vice President, and
Chief Investment Officer
Gail R. Farkas Director and Senior Vice President
Robert J. Boucher Senior Vice President, Variable Life
Administration
</TABLE>
Each director is elected to serve until the next annual
meeting of shareholders or until his or her successor is
elected and shall have qualified. Each has held various
executive positions with insurance company subsidiaries
of 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 MLPF&S. From February 1991 to February
1994, he held the position of District Director and
First Vice President of MLPF&S.
Mr. Crowne joined the Insurance Company in June 1991.
Mr. Skolnick joined the Insurance Company in November
1990. Since May 1992, he has held the position of
Assistant General Counsel of Merrill Lynch & Co., Inc.
and First Vice President of MLPF&S.
Mr. Dunford joined the Insurance Company in July 1990.
Ms. Farkas joined the Insurance Company in August 1995.
Prior to August 1995, she held the position of Director
of Market Planning of MLPF&S.
Mr. Boucher joined the Insurance Company in May 1992.
No shares of the Insurance Company are owned by any of
its officers or directors, as it is a wholly owned
subsidiary of MLIG. 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 its financial
condition as of the end of that year. Regulation by the
Insurance Department includes periodic examination to
determine contract liabilities and reserves so that the
Insurance Department may certify that these items are
correct. Our books and accounts are subject to review by
the Insurance Department at all times. A full
examination of our operations is conducted periodically
by the Insurance Department and under the auspices of
the National Association of
48
<PAGE> 49
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 Securities and Exchange
Commission ("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 General Counsel and Secretary of
the Insurance Company.
- --------------------------------------------------------------------------------
Experts The financial statements of the Insurance Company as of
December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, and of the
Separate Account as of December 31, 1996 and for the
periods presented, included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors,
as stated in their reports appearing herein, and have
been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting
and auditing. Deloitte & Touche LLP's principal business
address is Two World Financial Center, New York, New
York 10281-1433.
Actuarial matters included in this Prospectus have been
examined by Joseph E. Crowne, Jr., F.S.A., Chief Actuary
and Chief Financial Officer of 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.
49
<PAGE> 50
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying statement of net assets of
Merrill Lynch Life Variable Life Separate Account II (the
"Account") as of December 31, 1996 and the related
statements of operations and changes in net assets for each
of the three years in the period then ended. These financial
statements are the responsibility of the management of
Merrill Lynch Life Insurance Company. Our responsibility is
to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of mutual fund and unit investment trust securities owned at
December 31, 1996. 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, 1996 and the results of its operations and
the changes in its net assets for the above periods in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole.
The supplemental schedules included herein are presented for
the purpose of additional analysis and are not a required
part of the basic financial statements. These schedules are
the responsibility of the Company's management. Such
schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects
when considered in relation to the basic financial
statements taken as a whole.
January 31, 1997
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS: Cost Shares Market Value
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investments in Merrill Lynch Series Fund, Inc. (Note 1):
Money Reserve Portfolio $ 420,378,596 420,378,596 $ 420,378,596
Intermediate Government Bond Portfolio 184,901,094 16,365,852 178,878,763
Long-Term Corporate Bond Portfolio 92,702,621 7,879,291 90,848,226
Capital Stock Portfolio 204,468,232 9,327,212 216,857,689
Growth Stock Portfolio 151,288,537 6,440,833 178,990,754
Multiple Strategy Portfolio 950,489,383 59,364,619 1,016,915,924
High Yield Portfolio 87,853,192 9,763,560 89,336,571
Natural Resources Portfolio 18,098,989 2,123,988 19,519,450
Global Strategy Portfolio 155,527,563 10,359,494 174,039,499
Balanced Portfolio 68,797,569 4,944,166 75,942,392
----------------- -----------------
2,334,505,776 2,461,707,864
----------------- -----------------
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Global Utility Focus Fund 1,381,417 120,726 1,471,647
International Equity Focus Fund 5,458,210 476,412 5,540,672
Basic Value Focus Fund 13,851,078 985,013 14,519,099
Developing Capital Markets Focus Fund 4,283,957 429,363 4,315,093
Equity Growth Fund 4,373,112 174,284 4,569,734
----------------- -----------------
29,347,774 30,416,245
----------------- -----------------
Units
-----------------
Investments in the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities, Series A through K (Note 1):
1997 Trust 31,387,928 42,875,698 42,742,784
1998 Trust 34,249,061 51,650,102 48,610,494
1999 Trust 17,270,471 22,971,339 20,341,351
2000 Trust 14,987,435 21,336,157 17,780,913
2001 Trust 28,989,496 57,372,133 44,994,670
2002 Trust 5,467,318 8,939,646 6,560,806
2003 Trust 24,564,436 60,773,328 40,346,197
2004 Trust 6,292,568 11,010,092 7,046,459
2005 Trust 12,954,653 29,453,183 17,774,407
2006 Trust 5,785,905 11,375,192 6,524,583
2007 Trust 6,072,724 17,936,742 9,579,476
2008 Trust 12,295,224 41,421,283 20,228,084
2009 Trust 6,111,885 19,460,539 8,875,952
2010 Trust 6,844,843 17,234,726 7,268,056
2011 Trust 1,170,512 3,456,903 1,373,808
2013 Trust 939,495 3,025,637 1,037,763
2014 Trust 14,547,412 49,336,141 15,596,634
----------------- -----------------
229,931,366 316,682,437
----------------- -----------------
TOTAL ASSETS $ 2,593,784,916 2,808,806,546
================= -----------------
LIABILITIES:
Payable to Merrill Lynch Life Insurance Company 23,889,047
-----------------
TOTAL LIABILITIES 23,889,047
-----------------
NET ASSETS $ 2,784,917,499
=================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 227,773,709 $ 176,010,284 $ 247,180,360
Mortality and Expense Charges (Note 3) (16,019,207) (15,619,292) (15,774,764)
Transaction Charges (Note 4) (1,107,972) (1,382,826) (1,442,573)
----------------- ----------------- -----------------
Net Investment Income 210,646,530 159,008,166 229,963,023
----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains 49,679,613 43,387,581 37,024,153
Net Unrealized Gains (Losses) (9,165,154) 186,601,895 (373,279,380)
----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 40,514,459 229,989,476 (336,255,227)
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 251,160,989 388,997,642 (106,292,204)
----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 8,662,019 9,110,961 10,401,083
Transfers of Policy Loading, Net (Note 3) (10,715,483) (14,309,715) (19,215,408)
Transfers Due to Deaths (28,915,284) (28,619,535) (23,345,250)
Transfers Due to Other Terminations (86,971,795) (82,830,969) (71,143,764)
Transfers Due to Policy Loans (46,911,839) (52,662,381) (51,098,887)
Transfers of Cost of Insurance (41,882,708) (37,801,248) (37,539,344)
Transfers of Loan Processing Charges (5,817,667) (5,564,758) (4,561,365)
----------------- ----------------- -----------------
Decrease in Net Assets
Resulting from Principal Transactions (212,552,757) (212,677,645) (196,502,935)
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 38,608,232 176,319,997 (302,795,139)
Net Assets Beginning Balance 2,746,309,267 2,569,989,270 2,872,784,409
----------------- ----------------- -----------------
Net Assets Ending Balance $ 2,784,917,499 $ 2,746,309,267 $ 2,569,989,270
================= ================= =================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
Notes to Financial Statements
1. Merrill Lynch Life Variable Life Separate Account II
("Account"), a separate account of Merrill Lynch Life
Insurance Company ("Merrill Lynch Life"), was established
to support the operations with respect to certain
variable life insurance contracts ("Contracts"). The
Account is governed by Arkansas State Insurance Law.
Merrill Lynch Life is an indirect wholly-owned subsidiary
of Merrill Lynch & Co., Inc. ("Merrill"). The Account is
registered as a unit investment trust under the
Investment Company Act of 1940 and consists of thirty-two
investment divisions (thirty-three during the year). Ten
of the investment divisions each invest in the securities
of a single mutual fund portfolio of the Merrill Lynch
Series Fund, Inc. Five of the investment divisions each
invest in the securities of a single mutual fund
portfolio of the Merrill Lynch Variable Series Funds,
Inc. Seventeen of the investment divisions (eighteen
during the year) each invest in the securities of a
single trust of the Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities, Series A through K
("Zero Trusts"). Each trust of the Zero Trusts consists
of Stripped Treasury Securities with a fixed maturity
date and a Treasury Note deposited to provide income to
pay expenses of the trust.
The assets of the Account are registered in the name of
Merrill Lynch Life. The portion of the Account's assets
applicable to the Contracts are not chargeable with
liabilities arising out of any other business Merrill
Lynch Life may conduct.
The change in net assets accumulated in the Account
provides the basis for the periodic determination of the
amount of increased or decreased benefits under the
Contracts.
The net assets may not be less than the amount required
under Arkansas State Insurance Law to provide for death
benefits (without regard to the minimum death benefit
guarantee) and other Contract benefits.
The financial statements included herein have been
prepared in accordance with generally accepted accounting
principles for variable life separate accounts registered
as unit investment trusts. The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. The following is a summary of significant accounting
policies of the Account:
Investments in the divisions are included in the
statement of net assets at the net asset value of the
shares and units held.
Dividend income is recognized on the ex-dividend date.
All dividends are automatically reinvested.
Realized gains and losses on the sales of investments are
computed on the first in first out method.
The operations of the Account are included in the Federal
income tax return of Merrill Lynch Life. Under the
provisions of the Contracts, Merrill Lynch Life has the
right to charge the Account for any Federal income tax
attributable to the Account. No charge is currently being
made against the Account for such tax since, under
current tax law, Merrill Lynch Life pays no tax on
investment income and capital gains reflected in variable
life insurance contract reserves. However, Merrill Lynch
Life retains the right to charge for any Federal income
tax incurred which is attributable to the Account if the
law is changed. Charges for state and local taxes, if
any, attributable to the Account may also be made.
3. Merrill Lynch Life assumes mortality and expense risks
related to Contracts investing in the Account and deducts
daily charges 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 for the insureds will be deducted on the dates
specified by the Contract. This cost will vary dependent
upon the insured's underwriting class, sex (except where
unisex rates are required by state law), attained age of
each insured and the Contract's net amount at risk.
4. Merrill Lynch Life pays all transaction charges to
Merrill Lynch, Pierce, Fenner & Smith Inc., a subsidiary
of Merrill and sponsor of the Zero Trusts, on the sale of
Zero Trust units to the Account. Merrill Lynch Life
deducts a daily asset charge against the assets of each
trust for the reimbursement of these transaction charges.
The asset charge is equivalent to an effective annual
rate of .34% (annually at the beginning of the year) of
net assets for Contract owners.
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 227,773,709 $ 22,322,107 $ 12,670,410 $ 6,417,235
Mortality and Expense Charges (16,019,207) (2,453,633) (1,055,126) (538,893)
Transaction Charges (1,107,972) 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 210,646,530 19,868,474 11,615,284 5,878,342
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 49,679,613 0 (282,198) 291,252
Net Unrealized Gains (Losses) (9,165,154) 0 (8,158,746) (4,360,593)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 40,514,459 0 (8,440,944) (4,069,341)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 251,160,989 19,868,474 3,174,340 1,809,001
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 8,662,019 1,481,992 378,176 246,968
Transfers of Policy Loading, Net (10,715,483) (1,816,782) (704,263) (345,000)
Transfers Due to Deaths (28,915,284) (5,418,709) (3,037,336) (1,828,049)
Transfers Due to Other Terminations (86,971,795) (24,260,396) (6,262,424) (2,351,947)
Transfers Due to Policy Loans (46,911,839) (7,719,581) (2,963,456) (1,609,516)
Transfers of Cost of Insurance (41,882,708) (7,076,267) (3,061,015) (1,520,025)
Transfers of Loan Processing Charges (5,817,667) (1,327,021) (370,649) (217,121)
Transfers Among Investment Divisions 0 1,134,357 (3,921,116) (1,240,634)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (212,552,757) (45,002,407) (19,942,083) (8,865,324)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 38,608,232 (25,133,933) (16,767,743) (7,056,323)
Net Assets Beginning Balance 2,746,309,267 422,069,158 195,576,370 97,890,502
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 2,784,917,499 $ 396,935,225 $ 178,808,627 $ 90,834,179
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 32,496,085 $ 4,935,599 $ 130,584,365 $ 8,186,678
Mortality and Expense Charges (1,196,938) (953,017) (5,785,971) (492,507)
Transaction Charges 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 31,299,147 3,982,582 124,798,394 7,694,171
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (1,638,056) 18,072,991 3,085,165 (1,174,521)
Net Unrealized Gains (Losses) 479,168 5,789,893 (1,587,213) 2,751,515
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (1,158,888) 23,862,884 1,497,952 1,576,994
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 30,140,259 27,845,466 126,296,346 9,271,165
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,162,809 1,024,322 1,836,044 232,365
Transfers of Policy Loading, Net (649,933) (544,315) (4,119,006) (338,902)
Transfers Due to Deaths (2,306,402) (1,427,441) (9,487,908) (824,673)
Transfers Due to Other Terminations (6,002,699) (2,899,989) (26,318,850) (2,525,427)
Transfers Due to Policy Loans (2,303,689) (2,484,081) (15,505,699) (1,674,888)
Transfers of Cost of Insurance (3,114,712) (2,264,525) (14,653,831) (1,337,882)
Transfers of Loan Processing Charges (401,232) (360,790) (1,815,452) (191,479)
Transfers Among Investment Divisions 5,851,973 18,928,591 (25,956,178) 8,014,226
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (7,763,885) 9,971,772 (96,020,880) 1,353,340
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 22,376,374 37,817,238 30,275,466 10,624,505
Net Assets Beginning Balance 194,382,316 141,248,592 986,530,375 78,645,246
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 216,758,690 $ 179,065,830 $ 1,016,805,841 $ 89,269,751
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 349,977 $ 5,243,591 $ 4,512,649 $ 27,362
Mortality and Expense Charges (109,678) (1,018,242) (461,273) (4,033)
Transaction Charges 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 240,299 4,225,349 4,051,376 23,329
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,112,437 1,223,465 1,690,930 (9,982)
Net Unrealized Gains (Losses) 1,005,764 15,354,296 826,925 90,229
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 2,118,201 16,577,761 2,517,855 80,247
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 2,358,500 20,803,110 6,569,231 103,576
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 100,840 890,743 739,496 0
Transfers of Policy Loading, Net (69,951) (665,833) (291,465) (1,730)
Transfers Due to Deaths (89,926) (1,051,257) (789,145) 0
Transfers Due to Other Terminations (394,485) (3,961,999) (3,408,435) 336,141
Transfers Due to Policy Loans (579,770) (5,976,890) (1,550,370) 7,336
Transfers of Cost of Insurance (294,576) (2,477,101) (1,190,562) (15,936)
Transfers of Loan Processing Charges (45,102) (349,383) (139,236) (1,937)
Transfers Among Investment Divisions 1,765,169 3,912,189 (608,603) 1,043,935
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 392,199 (9,679,531) (7,238,320) 1,367,809
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 2,750,699 11,123,579 (669,089) 1,471,385
Net Assets Beginning Balance 16,869,532 162,879,481 76,598,444 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 19,620,231 $ 174,003,060 $ 75,929,355 $ 1,471,385
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
International Basic Developing
Equity Value Capital Equity
Focus Focus Markets Focus Growth
Fund Fund Fund Fund
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 22,839 $ 0 $ 4,812
Mortality and Expense Charges (14,059) (26,853) (11,108) (13,034)
Transaction Charges 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (14,059) (4,014) (11,108) (8,222)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (36,377) 51,188 (43,537) (195,124)
Net Unrealized Gains (Losses) 82,463 668,021 31,136 196,622
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 46,086 719,209 (12,401) 1,498
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 32,027 715,195 (23,509) (6,724)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 21,521 7,401 7,988 4,782
Transfers of Policy Loading, Net (5,225) (18,572) (4,909) (8,485)
Transfers Due to Deaths 0 0 0 0
Transfers Due to Other Terminations (14,040) 392,765 (18,825) 474,741
Transfers Due to Policy Loans 78,180 (59,051) (77,030) (27,495)
Transfers of Cost of Insurance (62,103) (146,698) (52,602) (55,406)
Transfers of Loan Processing Charges (9,708) (32,955) (8,042) (11,798)
Transfers Among Investment Divisions 5,498,985 13,751,676 4,470,678 4,188,884
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 5,507,610 13,894,566 4,317,258 4,565,223
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 5,539,637 14,609,761 4,293,749 4,558,499
Net Assets Beginning Balance 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 5,539,637 $ 14,609,761 $ 4,293,749 $ 4,558,499
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
1996 1997 1998 1999
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (31,274) (261,516) (291,090) (116,726)
Transaction Charges (17,524) (150,446) (167,995) (67,376)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (48,798) (411,962) (459,085) (184,102)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 10,552,702 2,408,744 2,559,946 561,971
Net Unrealized Gains (Losses) (10,323,182) (200,742) (304,097) 215,793
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 229,520 2,208,002 2,255,849 777,764
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 180,722 1,796,040 1,796,764 593,662
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 13,986 50,403 26,415
Transfers of Policy Loading, Net (30,227) (174,296) (189,911) (54,279)
Transfers Due to Deaths 0 (524,140) (323,562) (203,070)
Transfers Due to Other Terminations (317,078) (1,139,055) (1,210,950) (436,842)
Transfers Due to Policy Loans (115,846) (497,717) (589,683) (19,674)
Transfers of Cost of Insurance 110,045 (625,122) (723,770) (294,695)
Transfers of Loan Processing Charges 29,001 (67,131) (77,088) (18,380)
Transfers Among Investment Divisions (44,947,474) (1,378,679) (1,326,633) 855,990
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (45,271,579) (4,392,154) (4,391,194) (144,535)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (45,090,857) (2,596,114) (2,594,430) 449,127
Net Assets Beginning Balance 45,090,857 45,324,348 51,083,319 19,835,794
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 0 $ 42,728,234 $ 48,488,889 $ 20,284,921
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2000 2001 2002 2003
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (98,899) (265,067) (42,031) (230,244)
Transaction Charges (60,911) (157,233) (23,164) (139,027)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (159,810) (422,300) (65,195) (369,271)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 771,962 2,724,905 259,068 2,554,241
Net Unrealized Gains (Losses) (237,828) (1,734,751) (169,982) (2,458,890)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 534,134 990,154 89,086 95,351
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 374,324 567,854 23,891 (273,920)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 6,765 82,016 36,197 58,731
Transfers of Policy Loading, Net (51,372) (164,225) (19,531) (122,758)
Transfers Due to Deaths (41,755) (519,499) 0 (533,222)
Transfers Due to Other Terminations (429,247) (2,340,306) 236 (1,398,336)
Transfers Due to Policy Loans (156,597) (707,189) (93,463) (451,708)
Transfers of Cost of Insurance (291,702) (660,411) (92,723) (543,051)
Transfers of Loan Processing Charges (34,099) (92,350) (5,866) (65,519)
Transfers Among Investment Divisions 292,540 489 (266,017) (643,586)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (705,467) (4,401,475) (441,167) (3,699,449)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (331,143) (3,833,621) (417,276) (3,973,369)
Net Assets Beginning Balance 18,105,211 48,806,788 6,975,642 44,305,366
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 17,774,068 $ 44,973,167 $ 6,558,366 $ 40,331,997
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2004 2005 2006 2007
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (37,601) (98,982) (36,944) (54,310)
Transaction Charges (22,310) (61,371) (20,546) (32,053)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (59,911) (160,353) (57,490) (86,363)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 214,440 1,414,745 466,065 493,764
Net Unrealized Gains (Losses) (168,339) (1,566,025) (395,373) (685,261)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 46,101 (151,280) 70,692 (191,497)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (13,810) (311,633) 13,202 (277,860)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 133 89,826 11,938 874
Transfers of Policy Loading, Net (16,566) (47,479) (25,595) (30,603)
Transfers Due to Deaths 0 (36,362) 0 (113,435)
Transfers Due to Other Terminations (5,588) (396,304) (88,963) (54,645)
Transfers Due to Policy Loans 34,337 (648,326) (19,454) (288,956)
Transfers of Cost of Insurance (94,514) (272,209) (101,781) (136,458)
Transfers of Loan Processing Charges (6,924) (29,781) (16,885) (15,294)
Transfers Among Investment Divisions 1,524,634 401,129 2,454,361 298,176
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,435,512 (939,506) 2,213,621 (340,341)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 1,421,702 (1,251,139) 2,226,823 (618,201)
Net Assets Beginning Balance 5,622,499 19,019,769 4,295,675 10,194,854
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 7,044,201 $ 17,768,630 $ 6,522,498 $ 9,576,653
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2008 2009 2010 2011
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (120,996) (50,808) (44,183) (7,788)
Transaction Charges (70,378) (30,418) (24,730) (4,763)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (191,374) (81,226) (68,913) (12,551)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,807,273 557,333 448,525 73,132
Net Unrealized Gains (Losses) (2,524,477) (863,586) (708,269) (122,891)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (717,204) (306,253) (259,744) (49,759)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (908,578) (387,479) (328,657) (62,310)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums
Transfers of Policy Loading, Net 38,452 42,330 62,527 900
Transfers Due to Deaths (81,762) (37,828) (19,742) (3,497)
Transfers Due to Other Terminations (86,281) (241,181) (1,017) (18,966)
Transfers Due to Policy Loans (629,178) (145,607) (536,506) 14
Transfers of Cost of Insurance (415,931) (97,994) (43,879) (11,739)
Transfers of Loan Processing Charges (312,779) (114,443) (99,938) (20,237)
Transfers Among Investment Divisions (46,530) (20,311) (16,765) (2,730)
(816,542) 4,281 778,312 25,152
Increase (Decrease) in Net Assets ----------------- ----------------- ----------------- -----------------
Resulting from Principal Transactions
(2,350,551) (610,753) 122,992 (31,103)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance (3,259,129) (998,232) (205,665) (93,413)
23,480,110 9,871,802 7,470,965 1,466,801
Net Assets Ending Balance ----------------- ----------------- ----------------- -----------------
$ 20,220,981 $ 8,873,570 $ 7,265,300 $ 1,373,388
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Divisions Investing in
-----------------------------------
2013 2014
Trust Trust
----------------- -----------------
<S> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0
Mortality and Expense Charges (6,358) (90,025)
Transaction Charges (3,604) (54,123)
----------------- -----------------
Net Investment Income (Loss) (9,962) (144,148)
----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 148,597 (485,433)
Net Unrealized Gains (Losses) (240,740) 154,006
----------------- -----------------
Net Realized and Unrealized Gains (Losses) (92,143) (331,427)
----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (102,105) (475,575)
----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 3,136 1,943
Transfers of Policy Loading, Net (6,215) (55,226)
Transfers Due to Deaths 0 (11,948)
Transfers Due to Other Terminations (27,768) (599,803)
Transfers Due to Policy Loans 2,800 (344,820)
Transfers of Cost of Insurance (18,123) (267,556)
Transfers of Loan Processing Charges (5,223) (43,887)
Transfers Among Investment Divisions (262,241) 6,171,976
----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (313,634) 4,850,679
----------------- -----------------
Increase (Decrease) in Net Assets (415,739) 4,375,104
Net Assets Beginning Balance 1,453,126 11,216,325
----------------- -----------------
Net Assets Ending Balance $ 1,037,387 $ 15,591,429
================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 176,010,284 $ 24,822,150 $ 13,472,963 $ 6,786,063
Mortality and Expense Charges (15,619,292) (2,520,260) (1,070,921) (539,029)
Transaction Charges (1,382,826) 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 159,008,166 22,301,890 12,402,042 6,247,034
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 43,387,581 0 (855,010) 146,795
Net Unrealized Gains (Losses) 186,601,895 0 19,621,941 10,523,245
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 229,989,476 0 18,766,931 10,670,040
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 388,997,642 22,301,890 31,168,973 16,917,074
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 9,110,961 1,709,166 407,854 232,781
Transfers of Policy Loading, Net (14,309,715) (2,847,538) (973,723) (548,353)
Transfers Due to Deaths (28,619,535) (6,450,303) (3,766,278) (1,805,628)
Transfers Due to Other Terminations (82,830,969) (25,664,477) (4,877,616) (2,299,581)
Transfers Due to Policy Loans (52,662,381) (10,281,466) (2,983,639) (2,839,173)
Transfers of Cost of Insurance (37,801,248) (6,710,312) (2,788,345) (1,371,116)
Transfers of Loan Processing Charges (5,564,758) (1,323,256) (358,670) (210,199)
Transfers Among Investment Divisions 0 12,061,983 (4,339,664) (492,798)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (212,677,645) (39,506,203) (19,680,081) (9,334,067)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 176,319,997 (17,204,313) 11,488,892 7,583,007
Net Assets Beginning Balance 2,569,989,270 439,273,471 184,087,478 90,307,495
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 2,746,309,267 $ 422,069,158 $ 195,576,370 $ 97,890,502
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 14,052,632 $ 5,782,691 $ 89,162,861 $ 7,701,496
Mortality and Expense Charges (1,020,643) (616,002) (5,576,347) (437,421)
Transaction Charges 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 13,031,989 5,166,689 83,586,514 7,264,075
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (494,405) (1,254,980) 3,282,266 (930,995)
Net Unrealized Gains (Losses) 19,317,979 26,768,504 60,818,961 4,712,455
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 18,823,574 25,513,524 64,101,227 3,781,460
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 31,855,563 30,680,213 147,687,741 11,045,535
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,329,466 860,299 1,957,795 183,217
Transfers of Policy Loading, Net (807,726) (544,399) (5,061,657) (396,347)
Transfers Due to Deaths (748,695) (395,812) (8,914,824) (688,476)
Transfers Due to Other Terminations (4,629,991) (3,363,433) (24,446,720) (1,383,491)
Transfers Due to Policy Loans (3,350,832) (2,154,820) (17,508,815) (1,945,270)
Transfers of Cost of Insurance (2,581,125) (1,540,036) (13,021,247) (1,104,051)
Transfers of Loan Processing Charges (341,003) (284,780) (1,735,095) (172,281)
Transfers Among Investment Divisions 11,208,250 40,269,631 (6,020,911) 10,296,549
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 78,344 32,846,650 (74,751,474) 4,789,850
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 31,933,907 63,526,863 72,936,267 15,835,385
Net Assets Beginning Balance 162,448,409 77,721,729 913,594,108 62,809,861
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 194,382,316 $ 141,248,592 $ 986,530,375 $ 78,645,246
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
Natural Global
Resources Strategy Balanced 1995
Portfolio Portfolio Portfolio Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 397,120 $ 8,694,293 $ 5,138,015 $ 0
Mortality and Expense Charges (118,050) (972,191) (421,210) (294,965)
Transaction Charges 0 0 0 (185,751)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 279,070 7,722,102 4,716,805 (480,716)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,033,498 2,141,801 805,689 17,529,850
Net Unrealized Gains (Losses) 938,120 5,172,778 7,426,310 (13,865,146)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 1,971,618 7,314,579 8,231,999 3,664,704
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 2,250,688 15,036,681 12,948,804 3,183,988
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 122,502 1,013,662 739,047 16,054
Transfers of Policy Loading, Net (105,777) (894,258) (396,129) (307,336)
Transfers Due to Deaths (21,772) (820,668) (285,619) (711,542)
Transfers Due to Other Terminations 59,974 (5,229,044) (2,944,348) (1,918,138)
Transfers Due to Policy Loans (323,604) (3,945,754) (661,408) (791,739)
Transfers of Cost of Insurance (288,104) (2,125,829) (1,038,823) (573,563)
Transfers of Loan Processing Charges (39,035) (298,471) (145,972) (48,583)
Transfers Among Investment Divisions (2,504,731) (17,325,015) 6,581,550 (63,064,582)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (3,100,547) (29,625,377) 1,848,298 (67,399,429)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (849,859) (14,588,696) 14,797,102 (64,215,441)
Net Assets Beginning Balance 17,719,391 177,468,177 61,801,342 64,215,441
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 16,869,532 $ 162,879,481 $ 76,598,444 $ 0
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
1996 1997 1998 1999
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (262,167) (269,377) (290,687) (110,537)
Transaction Charges (154,485) (153,978) (167,663) (64,260)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (416,652) (423,355) (458,350) (174,797)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,665,788 2,408,526 1,661,614 1,319,537
Net Unrealized Gains (Losses) 1,679,337 2,209,227 4,634,030 1,585,255
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 3,345,125 4,617,753 6,295,644 2,904,792
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 2,928,473 4,194,398 5,837,294 2,729,995
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 26,729 24,322 37,544 30,415
Transfers of Policy Loading, Net (220,428) (229,415) (259,530) (85,456)
Transfers Due to Deaths (35,266) (115,072) (894,917) (1,971,355)
Transfers Due to Other Terminations (777,348) (970,980) (1,022,540) (57,518)
Transfers Due to Policy Loans (507,835) (1,415,740) (866,564) (188,153)
Transfers of Cost of Insurance (547,879) (573,469) (683,950) (282,772)
Transfers of Loan Processing Charges (55,695) (64,775) (82,022) (15,891)
Transfers Among Investment Divisions (912,885) 343,360 3,304,329 2,254,350
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (3,030,607) (3,001,769) (467,650) (316,380)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (102,134) 1,192,629 5,369,644 2,413,615
Net Assets Beginning Balance 45,192,991 44,131,719 45,713,675 17,422,179
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 45,090,857 $ 45,324,348 $ 51,083,319 $ 19,835,794
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2000 2001 2002 2003
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (93,208) (267,633) (35,381) (234,492)
Transaction Charges (56,945) (159,429) (19,497) (141,487)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (150,153) (427,062) (54,878) (375,979)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,079,644 2,169,345 84,556 2,188,877
Net Unrealized Gains (Losses) 1,750,905 6,911,215 1,118,190 7,969,698
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 2,830,549 9,080,560 1,202,746 10,158,575
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 2,680,396 8,653,498 1,147,868 9,782,596
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 16,173 110,390 36,390 64,586
Transfers of Policy Loading, Net (65,537) (243,092) (21,756) (162,797)
Transfers Due to Deaths (49,910) (309,777) 0 (239,034)
Transfers Due to Other Terminations (436,010) (630,758) (88,487) (853,586)
Transfers Due to Policy Loans (250,269) (535,794) (9,540) (505,406)
Transfers of Cost of Insurance (242,805) (605,251) (83,329) (507,876)
Transfers of Loan Processing Charges (29,760) (102,886) (8,902) (68,515)
Transfers Among Investment Divisions 3,796,430 264,215 2,540,001 (744,560)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,738,312 (2,052,953) 2,364,377 (3,017,188)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 5,418,708 6,600,545 3,512,245 6,765,408
Net Assets Beginning Balance 12,686,503 42,206,243 3,463,397 37,539,958
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 18,105,211 $ 48,806,788 $ 6,975,642 $ 44,305,366
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2004 2005 2006 2007
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (23,510) (92,226) (21,182) (54,451)
Transaction Charges (13,886) (57,786) (12,255) (31,888)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (37,396) (150,012) (33,437) (86,339)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 76,995 1,179,925 547,672 804,931
Net Unrealized Gains (Losses) 939,835 3,431,671 497,412 2,083,163
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 1,016,830 4,611,596 1,045,084 2,888,094
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 979,434 4,461,584 1,011,647 2,801,755
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 133 15,117 12,634 887
Transfers of Policy Loading, Net (12,038) (76,421) (18,624) (24,411)
Transfers Due to Deaths 0 (25,998) 0 (17,239)
Transfers Due to Other Terminations (4,674) (330,900) (39,923) (59,076)
Transfers Due to Policy Loans 66,684 (666,457) (209,895) (65,074)
Transfers of Cost of Insurance (59,623) (220,243) (52,758) (113,608)
Transfers of Loan Processing Charges (5,739) (24,379) (11,413) (14,451)
Transfers Among Investment Divisions 1,535,421 795,262 369,986 (681,485)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,520,164 (534,019) 50,007 (974,457)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 2,499,598 3,927,565 1,061,654 1,827,298
Net Assets Beginning Balance 3,122,901 15,092,204 3,234,021 8,367,556
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 5,622,499 $ 19,019,769 $ 4,295,675 $ 10,194,854
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2008 2009 2010 2011
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (120,324) (51,094) (41,651) (9,176)
Transaction Charges (70,339) (30,692) (23,311) (5,475)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (190,663) (81,786) (64,962) (14,651)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 884,636 941,985 1,484,526 203,644
Net Unrealized Gains (Losses) 5,812,953 2,134,127 964,757 418,302
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains 6,697,589 3,076,112 2,449,283 621,946
----------------- ----------------- ----------------- -----------------
Increase in Net Assets
Resulting from Operations 6,506,926 2,994,326 2,384,321 607,295
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums
Transfers of Policy Loading, Net 39,511 44,508 59,489 0
Transfers Due to Deaths (104,127) (27,948) (25,276) (17,288)
Transfers Due to Other Terminations (123,223) 0 (30,038) (93,725)
Transfers Due to Policy Loans (521,395) (73,640) (56,753) 654
Transfers of Cost of Insurance (242,497) (121,680) (169,730) 3,551
Transfers of Loan Processing Charges (267,820) (121,706) (84,072) (13,654)
Transfers Among Investment Divisions (43,536) (23,519) (13,730) (1,605)
(150,546) (482,490) (786,513) (993,610)
Increase (Decrease) in Net Assets ----------------- ----------------- ----------------- -----------------
Resulting from Principal Transactions
(1,413,633) (806,475) (1,106,623) (1,115,677)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance 5,093,293 2,187,851 1,277,698 (508,382)
18,386,817 7,683,951 6,193,267 1,975,183
Net Assets Ending Balance ----------------- ----------------- ----------------- -----------------
$ 23,480,110 $ 9,871,802 $ 7,470,965 $ 1,466,801
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------
2013 2014
Trust Trust
----------------- -----------------
<S> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0
Mortality and Expense Charges (11,340) (43,817)
Transaction Charges (6,937) (26,762)
----------------- -----------------
Net Investment Income (Loss) (18,277) (70,579)
----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 557,038 2,723,833
Net Unrealized Gains (Losses) 332,611 694,060
----------------- -----------------
Net Realized and Unrealized Gains 889,649 3,417,893
----------------- -----------------
Increase in Net Assets
Resulting from Operations 871,372 3,347,314
----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 3,999 16,291
Transfers of Policy Loading, Net (39,511) 207,183
Transfers Due to Deaths 0 (104,364)
Transfers Due to Other Terminations 855 (212,025)
Transfers Due to Policy Loans (132,678) (58,784)
Transfers of Cost of Insurance (17,748) (180,134)
Transfers of Loan Processing Charges (4,108) (36,487)
Transfers Among Investment Divisions (1,399,914) 4,278,387
----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (1,589,105) 3,910,067
----------------- -----------------
Increase (Decrease) in Net Assets (717,733) 7,257,381
Net Assets Beginning Balance 2,170,859 3,958,944
----------------- -----------------
Net Assets Ending Balance $ 1,453,126 $ 11,216,325
================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 247,180,360 $ 17,480,949 $ 22,232,388 $ 11,078,761
Mortality and Expense Charges (15,774,764) (2,517,605) (1,179,517) (575,542)
Transaction Charges (1,442,573) 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 229,963,023 14,963,344 21,052,871 10,503,219
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 37,024,153 0 (1,019,016) 75,887
Net Unrealized Gains (Losses) (373,279,380) 0 (32,149,004) (16,813,358)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (336,255,227) 0 (33,168,020) (16,737,471)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (106,292,204) 14,963,344 (12,115,149) (6,234,252)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 10,401,083 1,953,978 543,078 257,542
Transfers of Policy Loading, Net (19,215,408) (3,150,489) (1,534,327) (702,572)
Transfers Due to Deaths (23,345,250) (4,254,868) (2,896,949) (1,177,899)
Transfers Due to Other Terminations (71,143,764) (24,965,885) (4,994,737) (1,269,868)
Transfers Due to Policy Loans (51,098,887) (11,424,065) (5,810,455) (2,310,361)
Transfers of Cost of Insurance (37,539,344) (6,952,022) (3,039,049) (1,480,394)
Transfers of Loan Processing Charges (4,561,365) (848,038) (98,365) (305,505)
Transfers Among Investment Divisions 0 39,266,714 (25,456,948) (8,356,792)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (196,502,935) (10,374,675) (43,287,752) (15,345,849)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (302,795,139) 4,588,669 (55,402,901) (21,580,101)
Net Assets Beginning Balance 2,872,784,409 434,684,802 239,490,379 111,887,596
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 2,569,989,270 $ 439,273,471 $ 184,087,478 $ 90,307,495
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 19,785,866 $ 15,147,606 $ 143,793,750 $ 7,184,948
Mortality and Expense Charges (987,289) (477,233) (5,700,441) (395,789)
Transaction Charges 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 18,798,577 14,670,373 138,093,309 6,789,159
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,104,282 (10,467,665) 5,827,379 1,121,619
Net Unrealized Gains (Losses) (31,128,817) (11,111,365) (201,192,744) (9,538,975)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (29,024,535) (21,579,030) (195,365,365) (8,417,356)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (10,225,958) (6,908,657) (57,272,056) (1,628,197)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 1,366,713 872,357 2,169,556 161,144
Transfers of Policy Loading, Net (1,166,265) (644,809) (6,725,971) (538,772)
Transfers Due to Deaths (1,806,297) (597,117) (6,374,543) (693,506)
Transfers Due to Other Terminations (3,337,898) (2,133,792) (19,513,936) (1,450,355)
Transfers Due to Policy Loans (3,224,975) (802,503) (16,603,103) (1,088,146)
Transfers of Cost of Insurance (2,399,816) (1,111,968) (12,761,402) (960,536)
Transfers of Loan Processing Charges (454,099) (372,240) (1,836,110) (129,456)
Transfers Among Investment Divisions 9,140,090 (4,430,707) 96,851 (3,702,318)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (1,882,547) (9,220,779) (61,548,658) (8,401,945)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (12,108,505) (16,129,436) (118,820,714) (10,030,142)
Net Assets Beginning Balance 174,556,914 93,851,165 1,032,414,822 72,840,003
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 162,448,409 $ 77,721,729 $ 913,594,108 $ 62,809,861
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
Natural Global
Resources Strategy Balanced 1994
Portfolio Portfolio Portfolio Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 373,375 $ 6,517,828 $ 3,584,889 $ 0
Mortality and Expense Charges (106,249) (1,036,113) (401,040) (248,137)
Transaction Charges 0 0 0 (159,319)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) 267,126 5,481,715 3,183,849 (407,456)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) (652,997) 3,549,064 1,700,964 18,331,185
Net Unrealized Gains (Losses) 118,228 (13,960,659) (8,315,137) (16,722,421)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (534,769) (10,411,595) (6,614,173) 1,608,764
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (267,643) (4,929,880) (3,430,324) 1,201,308
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 138,534 1,470,745 851,040 8,545
Transfers of Policy Loading, Net (127,988) (1,141,149) (494,591) (395,818)
Transfers Due to Deaths (73,158) (1,175,638) (432,307) (876,461)
Transfers Due to Other Terminations (276,251) (2,471,264) (1,235,045) (1,199,852)
Transfers Due to Policy Loans (291,716) (2,123,219) (1,172,951) (1,089,958)
Transfers of Cost of Insurance (248,486) (2,513,574) (945,522) (234,486)
Transfers of Loan Processing Charges 34,664 (124,430) 18,643 11,363
Transfers Among Investment Divisions 3,426,457 42,556,919 (2,746,108) (76,785,156)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,582,056 34,478,390 (6,156,841) (80,561,823)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 2,314,413 29,548,510 (9,587,165) (79,360,515)
Net Assets Beginning Balance 15,404,978 147,919,667 71,388,507 79,360,515
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 17,719,391 $ 177,468,177 $ 61,801,342 $ 0
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
1995 1996 1997 1998
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (346,689) (253,289) (258,597) (269,871)
Transaction Charges (219,971) (149,211) (148,229) (155,967)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (566,660) (402,500) (406,826) (425,838)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,745,342 2,606,820 1,593,071 1,541,769
Net Unrealized Gains (Losses) (1,622,527) (2,102,823) (2,173,169) (2,974,063)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) 1,122,815 503,997 (580,098) (1,432,294)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations 556,155 101,497 (986,924) (1,858,132)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 13,441 39,603 26,127 81,829
Transfers of Policy Loading, Net (437,011) (291,829) (293,815) (353,160)
Transfers Due to Deaths (896,071) (238,192) (379,402) (501,383)
Transfers Due to Other Terminations (1,066,529) (1,802,108) (1,263,246) (911,808)
Transfers Due to Policy Loans (1,143,878) (446,182) (1,252,416) (22,589)
Transfers of Cost of Insurance (922,688) (523,809) (524,736) (585,758)
Transfers of Loan Processing Charges (109,634) (57,329) (56,303) (67,587)
Transfers Among Investment Divisions 118,676 4,124,539 3,517,160 2,082,751
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (4,443,694) 804,693 (226,631) (277,705)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (3,887,539) 906,190 (1,213,555) (2,135,837)
Net Assets Beginning Balance 68,102,980 44,286,801 45,345,274 47,849,512
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 64,215,441 $ 45,192,991 $ 44,131,719 $ 45,713,675
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
1999 2000 2001 2002
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (78,338) (62,149) (251,092) (17,766)
Transaction Charges (44,254) (38,332) (149,969) (10,703)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (122,592) (100,481) (401,061) (28,469)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 516,055 501,763 2,166,175 152,585
Net Unrealized Gains (Losses) (1,027,935) (1,168,467) (5,279,593) (372,763)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (511,880) (666,704) (3,113,418) (220,178)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (634,472) (767,185) (3,514,479) (248,647)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 21,244 5,958 105,869 23,467
Transfers of Policy Loading, Net (50,621) (87,059) (309,468) (17,837)
Transfers Due to Deaths 0 (190,028) (225,911) (73,157)
Transfers Due to Other Terminations (197,712) (456,108) (664,955) (55,245)
Transfers Due to Policy Loans (225,787) (21,720) (886,085) 138,904
Transfers of Cost of Insurance (231,338) (174,810) (513,726) (54,089)
Transfers of Loan Processing Charges 47,120 (22,049) (17,905) (6,801)
Transfers Among Investment Divisions 9,231,769 3,411,401 (1,609,263) 855,396
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 8,594,675 2,465,585 (4,121,444) 810,638
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets 7,960,203 1,698,400 (7,635,923) 561,991
Net Assets Beginning Balance 9,461,976 10,988,103 49,842,166 2,901,406
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 17,422,179 $ 12,686,503 $ 42,206,243 $ 3,463,397
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2003 2004 2005 2006
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (222,798) (6,328) (82,723) (18,872)
Transaction Charges (134,454) (3,792) (51,883) (11,059)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (357,252) (10,120) (134,606) (29,931)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,720,038 (4,266) 779,904 188,563
Net Unrealized Gains (Losses) (5,382,943) (17,605) (2,251,937) (529,058)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (3,662,905) (21,871) (1,472,033) (340,495)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (4,020,157) (31,991) (1,606,639) (370,426)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 43,741 133 10,218 12,632
Transfers of Policy Loading, Net (238,948) 3,413 (93,434) (34,677)
Transfers Due to Deaths (182,764) 0 (191,171) 0
Transfers Due to Other Terminations (375,361) (46,454) (28,632) 459
Transfers Due to Policy Loans (554,846) (25,793) (64,283) (158,577)
Transfers of Cost of Insurance (440,510) (32,097) (181,280) (41,992)
Transfers of Loan Processing Charges (36,935) (4,280) (20,774) (8,081)
Transfers Among Investment Divisions (1,468,172) 3,259,970 41,963 54,352
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (3,253,795) 3,154,892 (527,393) (175,884)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (7,273,952) 3,122,901 (2,134,032) (546,310)
Net Assets Beginning Balance 44,813,910 0 17,226,236 3,780,331
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 37,539,958 $ 3,122,901 $ 15,092,204 $ 3,234,021
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------------
2007 2008 2009 2010
Trust Trust Trust Trust
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (51,878) (116,499) (47,163) (34,197)
Transaction Charges (30,272) (68,364) (28,372) (19,078)
----------------- ----------------- ----------------- -----------------
Net Investment Income (Loss) (82,150) (184,863) (75,535) (53,275)
----------------- ----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 546,264 1,428,719 794,192 (608,414)
Net Unrealized Gains (Losses) (1,592,369) (3,897,784) (1,783,335) (8,357)
----------------- ----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (1,046,105) (2,469,065) (989,143) (616,771)
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (1,128,255) (2,653,928) (1,064,678) (670,046)
----------------- ----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 390 39,379 51,966 69,760
Transfers of Policy Loading, Net (62,092) (183,199) (52,927) (13,802)
Transfers Due to Deaths 0 (77,631) (22,465) 0
Transfers Due to Other Terminations (222,712) (317,191) (700,372) (129,666)
Transfers Due to Policy Loans (117,156) (179,952) (141,670) (99,420)
Transfers of Cost of Insurance (108,096) (258,534) (117,050) (78,631)
Transfers of Loan Processing Charges (13,521) (35,908) (18,290) (10,853)
Transfers Among Investment Divisions (456,913) (1,891,494) (101,158) 981,746
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (980,100) (2,904,530) (1,101,966) 719,134
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (2,108,355) (5,558,458) (2,166,644) 49,088
Net Assets Beginning Balance 10,475,911 23,945,275 9,850,595 6,144,179
----------------- ----------------- ----------------- -----------------
Net Assets Ending Balance $ 8,367,556 $ 18,386,817 $ 7,683,951 $ 6,193,267
================= ================= ================= =================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------
2011 2013 2014
Trust Trust Trust
----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0
Mortality and Expense Charges (13,735) (11,206) (6,619)
Transaction Charges (8,220) (6,936) (4,188)
----------------- ----------------- -----------------
Net Investment Income (Loss) (21,955) (18,142) (10,807)
----------------- ----------------- -----------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 167,451 (249,550) (133,030)
Net Unrealized Gains (Losses) (512,426) 30,870 201,156
----------------- ----------------- -----------------
Net Realized and Unrealized Gains (Losses) (344,975) (218,680) 68,126
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Operations (366,930) (236,822) 57,319
----------------- ----------------- -----------------
Changes from Principal Transactions:
Transfers of Net Premiums 86 53,725 8,283
Transfers of Policy Loading, Net (35,384) (28,951) (11,856)
Transfers Due to Deaths (8,332) 0 0
Transfers Due to Other Terminations (54,698) (710) (1,833)
Transfers Due to Policy Loans (23,522) 58,884 8,653
Transfers of Cost of Insurance (25,602) (47,138) (30,205)
Transfers of Loan Processing Charges (2,081) (10,611) (5,970)
Transfers Among Investment Divisions (699,655) 1,603,377 3,934,553
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (849,188) 1,628,576 3,901,625
----------------- ----------------- -----------------
Increase (Decrease) in Net Assets (1,216,118) 1,391,754 3,958,944
Net Assets Beginning Balance 3,191,301 779,105 0
----------------- ----------------- -----------------
Net Assets Ending Balance $ 1,975,183 $ 2,170,859 $ 3,958,944
================= ================= =================
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill Lynch
Life Insurance Company (the "Company"), a wholly-owned subsidiary
of Merrill Lynch Insurance Group, Inc., as of December 31, 1996
and 1995, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
February 24, 1997
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1996 - $3,232,643; 1995 - $3,648,983) $ 3,301,588 $ 3,807,870
Equity securities, at estimated fair value
(cost: 1996 - $32,988; 1995 - $19,683) 35,977 21,433
Mortgage loans 70,503 121,248
Real estate held-for-sale 28,851 5,874
Policy loans on insurance contracts 1,092,071 1,039,267
-------------- --------------
Total Investments 4,528,990 4,995,692
-------------- --------------
CASH AND CASH EQUIVALENTS 94,991 48,924
ACCRUED INVESTMENT INCOME 86,186 91,942
DEFERRED POLICY ACQUISITION COSTS 366,461 372,418
FEDERAL INCOME TAXES - DEFERRED - 2,222
REINSURANCE RECEIVABLES 2,642 1,552
OTHER ASSETS 42,861 54,900
SEPARATE ACCOUNTS ASSETS 7,615,362 6,834,353
-------------- --------------
TOTAL ASSETS $ 12,737,493 $ 12,402,003
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(continued)(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,480,048 $ 4,851,718
Claims and claims settlement expenses 39,666 29,812
-------------- --------------
Total policy liabilities and accruals 4,519,714 4,881,530
OTHER POLICYHOLDER FUNDS 19,420 13,607
LIABILITY FOR GUARANTY FUND ASSESSMENTS 18,773 21,144
FEDERAL INCOME TAXES - DEFERRED 6,714 -
FEDERAL INCOME TAXES - CURRENT 20,968 7,033
AFFILIATED PAYABLES - NET 6,164 2,429
OTHER LIABILITIES 50,726 53,566
SEPARATE ACCOUNTS LIABILITIES 7,605,194 6,825,857
-------------- --------------
Total Liabilities 12,247,673 11,805,166
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 402,937 501,455
Retained earnings 79,387 76,482
Net unrealized investment gain on investment securities 5,496 16,900
-------------- --------------
Total Stockholder's Equity 489,820 596,837
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,737,493 $ 12,402,003
============== ==============
</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, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 336,661 $ 376,166 $ 433,536
Net realized investment gains (losses) 8,862 4,525 (14,543)
Policy charge revenue 158,829 141,722 126,284
----------- ----------- -----------
Total Revenues 504,352 522,413 545,277
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 235,255 261,760 313,585
Market value adjustment expense 6,071 5,805 6,307
Policy benefits (net of reinsurance recoveries: 1996 - $8,317;
1995 - $6,482; 1994 - $6,338) 21,052 19,374 16,858
Reinsurance premium ceded 15,582 13,896 13,909
Amortization of deferred policy acquisition costs 62,036 58,669 69,662
Insurance expenses and taxes 47,077 44,124 35,073
----------- ----------- -----------
Total Benefits and Expenses 387,073 403,628 455,394
----------- ----------- -----------
Earnings Before Federal Income Tax Provision 117,279 118,785 89,883
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION:
Current 22,814 38,335 22,503
Deferred 15,078 3,968 1,375
----------- ----------- -----------
Total Federal Income Tax Provision 37,892 42,303 23,878
----------- ----------- -----------
NET EARNINGS $ 79,387 $ 76,482 $ 66,005
=========== =========== ===========
</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, 1996, 1995 AND 1994
(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, 1994 $ 2,000 $ 637,590 $ 47,860 $ (395) $ 687,055
Dividend to Parent (102,140) (47,860) (150,000)
Net earnings 66,005 66,005
Net unrealized investment loss (43,489) (43,489)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 2,000 535,450 66,005 (43,884) 559,571
Dividend to Parent (33,995) (66,005) (100,000)
Net earnings 76,482 76,482
Net unrealized investment gain 60,784 60,784
------------ ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1995 2,000 501,455 76,482 16,900 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Net unrealized investment loss (11,404) (11,404)
------------ ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1996 $ 2,000 $ 402,937 $ 79,387 $ 5,496 $ 489,820
============ ============ ============= ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 79,387 $ 76,482 $ 66,005
Adjustments to reconcile net earnings to net cash and
cash equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 62,036 58,669 69,662
Capitalization of policy acquisition costs (43,668) (54,014) (108,829)
Amortization, (accretion) and depreciation of investments (4,836) (6,763) (4,516)
Net realized investment (gains) losses (8,862) (4,525) 14,543
Interest credited to policyholders' account balances 235,255 261,760 313,585
Provision for deferred Federal income tax 15,078 3,968 1,375
Changes in operating assets and liabilities:
Accrued investment income 5,756 3,191 25,204
Affiliated payables - net 3,735 5,542 (2,324)
Claims and claims settlement expenses 9,854 3,635 5,882
Federal income taxes - current 13,935 4,759 (7,848)
Other policyholder funds 5,813 (7,614) (7,547)
Liability for guaranty fund assessments (2,371) (3,630) (3,309)
Policy loans on insurance contracts (52,804) (54,054) (60,634)
Trading investment securities - - 11,352
Other, net 8,106 (9,296) (39,206)
Net cash and cash equivalents provided ----------- ----------- ----------
by operating activities 326,414 278,110 273,395
----------- ----------- ----------
</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, 1996, 1995 AND 1994
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Sales of available-for-sale securities $ 834,120 $ 633,824 $ 864,095
Maturities of available-for-sale securities 536,449 570,923 1,323,705
Purchases of available-for-sale securities (954,368) (832,519) (678,974)
Mortgage loans principal payments received 22,789 30,767 32,341
Purchases of mortgage loans - (3,608) -
Sales of real estate held-for-sale 5,407 9,710 25,346
Improvements to real estate held-for-sale - improvements acquired - (683) (1,060)
Recapture of investment in Separate Accounts 8,829 6,559 -
Investment in Separate Accounts (10,063) (377) (15,212)
------------- ------------- -------------
Net cash and cash equivalents provided by investing activities 443,163 414,596 1,550,241
------------- ------------- -------------
FINANCING ACTIVITIES:
Dividends paid to parent (175,000) (100,000) (150,000)
Policyholders' account balances:
Deposits 542,062 567,430 966,861
Withdrawals (net of transfers to/from Separate Accounts) (1,090,572) (1,250,299) (2,623,628)
------------- ------------ ------------
Net cash and cash equivalents used by financing activities (723,510) (782,869) (1,806,767)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 46,067 (90,163) 16,869
CASH AND CASH EQUIVALENTS
Beginning of year 48,924 139,087 122,218
------------- ------------ ------------
End of year $ 94,991 $ 48,924 $ 139,087
============= ============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 8,880 $ 33,576 $ 30,351
Intercompany interest 988 1,310 679
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: Merrill Lynch Life Insurance Company (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co.").
The Company sells non-participating life insurance and annuity
products which comprise one business segment. The primary
products that the Company currently markets are 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 retail network of
Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("MLPF&S"),
a wholly-owned subsidiary of Merrill Lynch & Co.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles and
prevailing industry practices, both of which require management
to make estimates that affect the reported amounts and
disclosure of contingencies in the financial statements. Actual
results could differ from those estimates.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest-crediting rates for the
Company's fixed-rate products are as follows:
Interest-sensitive life products 4.00% - 5.75%
Interest-sensitive deferred annuities 3.20% - 8.77%
Immediate annuities 3.00% - 10.00%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are
unreported.
Reinsurance: In the normal course of business, the Company
seeks to limit its exposure to loss on any single insured life
and to recover a portion of benefits paid by ceding reinsurance
to other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
Indemnity reinsurance agreements do not relieve the Company
from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses to the Company.
The Company regularly evaluates the financial condition of its
reinsurers so as to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under
reinsurance agreements in the form of letters of credit and
funds withheld totaling $576 that can be drawn upon for
delinquent reinsurance recoverables.
As of December 31, 1996, the Company had life insurance in-
force that was ceded to other life insurance companies of
$2,511,780.
Deferred Policy Acquisition Costs: Policy acquisition costs for
life and annuity contracts are deferred and amortized based on
the estimated future gross profits for each group of contracts.
These future gross profit estimates are subject to periodic
evaluation by the Company, with necessary revisions applied
against amortization to date. It is reasonably possible that
estimates of future gross profits could be reduced in the
future, resulting in a material reduction in the carrying
amount of deferred policy acquisition costs.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, that are primarily
related to and vary with the production of new business.
Certain costs and expenses reported in the statements of
earnings are net of amounts deferred. Policy acquisition costs
can also arise from the acquisition or reinsurance of existing
in-force policies from other insurers. These costs include
ceding commissions and professional fees related to the
reinsurance assumed. The deferred costs are amortized in
proportion to the estimated future gross profits over the
anticipated life of the acquired insurance contracts utilizing
an interest methodology.
The Company has entered into an assumption reinsurance
agreement with an unaffiliated insurer. The acquisition costs
relating to this agreement are being amortized over a twenty-
year period using an effective interest rate of 9.01%. This
reinsurance agreement provides for payment of contingent ceding
commissions based upon the persistency and mortality experience
of the insurance contracts assumed. Any payments made for the
contingent ceding commissions 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 related to the reinsurance agreement for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 124,833 $ 133,388 $ 139,647
Capitalized amounts 5,077 13,708 12,517
Interest accrued 10,669 11,620 12,582
Amortization (28,330) (33,883) (31,358)
----------- ----------- -----------
Ending balance $ 112,249 $ 124,833 $ 133,388
=========== =========== ===========
</TABLE>
The following table presents the expected amortization, net of
interest accrued, of these deferred acquisition costs over the
next five years. The amortization may be adjusted based on
periodic evaluation of the expected gross profits on the
reinsured policies.
1997 $12,547
1998 8,958
1999 8,474
2000 8,142
2001 7,811
Investments: The Company's investments in fixed maturity and
equity securities are classified as available-for-sale
securities, which are carried at estimated fair value with
unrealized gains and losses included in stockholder's equity.
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 theas net realized investment gains (losses).
During 1994, the Company classified certain of its investments
as trading securities, which were carried at estimated fair
value with unrealized gains and losses included in the
statements of earnings. All securities that were classified as
trading securities on November 1, 1994 were transferred to the
available-for-sale classification at their respective estimated
fair values on that date. The difference between the market
value at November 1, 1994 and par value is being amortized into
income based on the Company's premium amortization and discount
accretion policies.
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted to
the maturity date, and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of identified cost.
Fixed maturity securities may contain securities which are
considered non-investment grade. The Company defines non-
investment grade fixed maturity securities as unsecured
corporate debt obligations that 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.
The Company has outstanding certain interest rate swap
contracts that are carried at estimated fair value and recorded
as a component of fixed maturity securities. Interest income
and realized and unrealized gains and losses are recorded on
the same basis as fixed maturity securities available-for-sale.
Mortgage loans are stated at unpaid principal balances, net of
valuation allowances. Such valuation allowances are based on
the decline in value expected to be realized on mortgage loans
that may not be collectible in full. In establishing valuation
allowances, management considers, among other things, the
estimated fair value of the underlying collateral.
The Company recognizes income from mortgage loans based on the
cash payment interest rate of the loan, which may be different
from the accrual interest rate of the loan for certain
outstanding mortgage loans. The Company will recognize a
realized gain at the date of the satisfaction of the loan at
contractual terms for loans where there is a difference between
the cash payment interest rate and the accrual interest rate.
For all loans the Company stops accruing income when an
interest payment default either occurs or is probable.
Impairments of mortgage loans are established as valuation
allowances and recorded to net realized investment gains or
losses.
The Company has previously made commercial mortgage loans
collateralized by real estate. The return on and the ultimate
recovery of these loans are generally dependent on the
successful operation, sale or refinancing of the real estate.
The Company monitors the effects of current and expected real
estate market conditions and other factors when assessing the
collectibility of mortgage loans. 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. Management
believes that the carrying value approximates the fair value of
these investments.
Real estate held-for-sale, is stated at cost less valuation
allowances and estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Income Taxes: The results of operations of the Company are
included in the consolidated Federal income tax return of
Merrill Lynch & Co. The Company has entered into a tax-sharing
agreement with Merrill Lynch & Co. whereby the Company will
calculate its current tax provision based on its operations.
Under the agreement, the Company periodically remits to Merrill
Lynch & Co. its current Federal tax liability.
The Company uses the asset and liability method in providing
income taxes on all transactions that have been recognized in
the financial statements. The asset and liability method
requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or
realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums
and in substantially all states are exempt from state income
taxes.
Separate Accounts: Separate Accounts are established in
conformity with Arkansas State Insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to general claims of
the Company only to the extent the value of such assets exceeds
Separate Accounts liabilities.
Assets and liabilities of Separate Accounts, representing net
deposits and accumulated net investment earnings less fees,
held primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that
approximate the fair value. The carrying value of financial
instruments as of December 31 were:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities:
Securities (1) $ 3,301,858 $ 3,807,310
Interest rate swaps (2) (270) 560
-------------- --------------
Total fixed maturity securities 3,301,588 3,807,870
-------------- --------------
Equity securities (1) 35,977 21,433
Mortgage loans (3) 70,503 121,248
Policy loans on insurance contracts (4) 1,092,071 1,039,267
Cash and cash equivalents (5) 94,991 48,924
Separate Accounts assets (6) 7,615,362 6,834,353
-------------- ---------------
Total financial instruments recorded as assets $ 12,210,492 $ 11,873,095
============== ===============
</TABLE>
(1) For publicly traded securities, the estimated fair value
is determined using quoted market prices. For securities
without a readily ascertainable market value, the Company
has determined an estimated fair value using a discounted
cash flow model, including provision for credit risk,
based upon the assumption that such securities will be
held to maturity. Such estimated fair values do not
necessarily represent the values for which these
securities could have been sold at the dates of the
balance sheets. At December 31, 1996 and 1995, securities
without a readily ascertainable market value, having an
amortized cost of $338,515, and $425,469, had an estimated
fair value of $348,066, and $448,785, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cash flow model.
(3) The estimated fair value of mortgage loans approximates
the carrying value. See Note 1 for a discussion of the
Company's valuation process.
(4) The Company estimates the fair value of policy loans as
equal to the book value of the loans. Policy loans are
fully collateralized by the account value of the
associated insurance contracts, and the spread between the
policy loan interest rate and the interest rate credited
to the account value held as collateral is fixed.
(5) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(6) Assets held in Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity securities and equity securities as of December
31 were:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,652,225 $ 67,590 $ 11,765 $ 2,708,050
Mortgage-backed securities 503,997 12,447 1,948 514,496
U.S. Government and agencies 54,386 2,303 158 56,531
Foreign governments 18,111 182 140 18,153
Municipals 3,924 434 - 4,358
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 3,232,643 $ 82,956 $ 14,011 $ 3,301,588
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 30,554 $ 2,983 $ 85 $ 33,452
Common stocks 2,434 91 - 2,525
--------------- -------------- -------------- --------------
Total equity securities $ 32,988 $ 3,074 $ 85 $ 35,977
=============== ============== ============== ==============
1995
------------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Fixed maturity securities:
Corporate debt securities $ 2,917,628 $ 138,159 $ 7,526 $ 3,048,261
Mortgage-backed securities 625,866 22,098 717 647,247
U.S. Government and agencies 95,002 6,061 - 101,063
Foreign governments 6,210 280 - 6,490
Municipals 4,277 532 - 4,809
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 3,648,983 $ 167,130 $ 8,243 $ 3,807,870
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 16,937 $ 1,428 $ 113 $ 18,252
Common stocks 2,746 498 63 3,181
-------------- -------------- -------------- --------------
Total equity securities $ 19,683 $ 1,926 $ 176 $ 21,433
============== ============== ============== ==============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996 by contractual maturity were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Fixed maturity securities:
Due in one year or less $ 270,571 $ 271,303
Due after one year through five years 1,486,819 1,521,334
Due after five years through ten years 763,475 781,372
Due after ten years 207,781 213,083
------------- -------------
2,728,646 2,787,092
Mortgage-backed securities 503,997 514,496
------------- -------------
Total fixed maturity securities $ 3,232,643 $ 3,301,588
============= =============
</TABLE>
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996 by rating agency equivalent
were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
AAA $ 716,749 $ 730,513
AA 181,962 185,000
A 910,355 932,417
BBB 1,245,457 1,272,901
Non-investment grade 178,120 180,757
------------- -------------
Total fixed maturity securities $ 3,232,643 $ 3,301,588
============= =============
</TABLE>
<PAGE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with investments classified as available-for-sale.
The Company adjusts those assets and liabilities as if the
unrealized investment gains or losses from securities
classified as available-for-sale had actually been realized,
with corresponding credits or charges reported directly to
stockholder's equity. The following reconciles the net
unrealized investment gain on investment securities classified
as available-for-sale as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Assets:
Fixed maturity securities $ 68,945 $ 158,887
Equity securities 2,989 1,750
Deferred policy acquisition costs (4,630) (17,041)
Federal income taxes - deferred (2,959) (9,100)
Separate Accounts assets 168 (164)
------------- -------------
64,513 134,332
------------- -------------
Liabilities:
Policyholders' account balances 59,017 117,432
------------- -------------
Stockholder's equity:
Net unrealized investment gain on investment securities $ 5,496 $ 16,900
============= =============
</TABLE>
The Company has entered into interest rate swap contracts for
the purpose of minimizing exposure to fluctuations in interest
rates related to specific investment securities held.
The notional amount of such swaps outstanding at December 31,
1996 and 1995 was approximately $9,000 and $30,000,
respectively. The swaps were transacted with investment
grade counterparties. As of December 31, 1996, the Company's
interest rate swap contract was in a $270 unrealized loss
position. There were no outstanding interest rate swaps in a
loss position at December 31, 1995. During 1994, net realized
investment gains of $470 were recorded in connection with
interest rate swap activity. During 1996 and 1995, there
were no realized investment gains or losses recorded.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Proceeds $ 834,120 $ 633,824 $ 864,095
Gross realized investment gains 19,078 14,196 11,091
Gross realized investment losses 10,749 10,813 11,026
</TABLE>
During 1994, $7,285 of unrealized holding losses from
investment trading securities were recorded in net realized
investment gains (losses).
The Company owned investment securities with a carrying
value of $27,726 and $28,166 that were deposited with
insurance regulatory authorities at December 31, 1996 and
1995, respectively.
At December 31, 1996 and 1995, the Company had invested
$10,168 and $8,496 in Separate Accounts, including unrealized
gains (losses) of $168 and $(164), respectively. The
investments in Separate Accounts are for the purpose of
providing original funding of certain mutual fund portfolios
available as investment options to variable life and annuity
policyholders.
The Company's investment in mortgage loans are principally
collateralized by commercial real estate. The largest
concentrations of commercial real estate mortgage loans at
December 31, 1996, as measured by the outstanding principal
balance, are for properties located in Illinois ($27,877 or
32%), Rhode Island ($19,291 or 22%) and California ($11,953 or
14%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1996
and 1995 are:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Carrying value $ 44,239 $ 88,068
Valuation allowance 17,652 35,881
</TABLE>
Additional information on impaired loans for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Average investment in impaired loans $ 61,891 $ 123,949 $ 112,043
Interest income recognized (cash-basis) 4,848 5,482 6,542
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, $28,555,
$1,300 and $4,652, respectively, of real estate held-for-sale
was acquired in satisfaction of debt.
<PAGE>
Net investment income arose from the following sources for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities $ 266,916 $ 305,648 $ 368,023
Equity securities 1,876 1,329 2,408
Mortgage loans 9,764 12,250 15,014
Real estate held-for-sale 563 153 406
Policy loans on insurance contracts 56,512 53,576 50,232
Cash and cash equivalents 6,710 8,463 5,936
Other 899 1,753 (447)
----------- ----------- ------------
Gross investment income 343,240 383,172 441,572
Less investment expenses (6,579) (7,006) (8,036)
----------- ----------- ------------
Net investment income $ 336,661 $ 376,166 $ 433,536
=========== =========== ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities $ 4,690 $ 1,908 $ (13,314)
Equity securities 3,639 1,475 910
Investment in Separate Accounts 106 (369) -
Mortgage loans 599 334 (4,967)
Real estate held-for-sale (171) 1,177 2,828
Cash and cash equivalents (1) - -
----------- ----------- -----------
Net realized investment gains (losses) $ 8,862 $ 4,525 $ (14,543)
=========== =========== ===========
</TABLE>
The following is a reconciliation of the change in valuation
allowances that have been recorded to reflect other-than-
temporary declines in estimated fair value of mortgage loans
and real estate held-for-sale for the years ended December 31:
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Mortgage loans:
1996 $ 35,881 $ - $ 18,229 $ 17,652
1995 40,070 - 4,189 35,881
1994 45,924 4,966 10,820 40,070
Real estate held-for-sale:
1996 2,200 - - 2,200
1995 5,766 - 3,566 2,200
1994 7,628 - 1,862 5,766
</TABLE>
<PAGE>
The Company held investments at December 31, 1996 of $1,182
which have been non-income producing for the preceding twelve
months.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1996, $2,027 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income
taxes based on earnings before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal statutory rate $ 41,048 $ 41,575 $ 31,459
Increase (decrease) in income taxes resulting from:
Release of policyholders' surplus - 1,991 -
Tax deductible interest - (718) -
Dividend received deduction (3,135) (532) (7,363)
Other (21) (13) (218)
----------- ----------- -----------
Federal income tax provision $ 37,892 $ 42,303 $ 23,878
=========== =========== ===========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1996 was 35%.
The Company provides for deferred income taxes resulting from
temporary differences that arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (5,770) $ (2,179) $ 6,416
Policyholders' account balances 15,004 66 5,322
Liability for guaranty fund assessments 760 249 (153)
Investment adjustments 5,122 5,563 3,276
Other (38) 269 (13,486)
------------ ----------- -----------
Deferred Federal income tax provision $ 15,078 $ 3,968 $ 1,375
============ =========== ===========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 79,083 $ 94,087
Investment adjustments 5,671 10,793
Liability for guaranty fund assessments 6,571 7,331
----------- -----------
Total deferred tax assets 91,325 112,211
=========== ===========
Deferred tax liabilities:
Deferred policy acquisition costs 91,092 96,862
Net unrealized investment gain on investment securities 2,959 9,100
Other 3,988 4,027
----------- -----------
Total deferred tax liabilities 98,039 109,989
----------- -----------
Net deferred tax asset (liability) $ (6,714) $ 2,222
=========== ===========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
<PAGE>
NOTE 5. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain accounting, data processing,
legal, actuarial, management, advertising and other services to
the Company. Expenses incurred by MLIG in relation to this
service agreement are reimbursed by the Company on an allocated
cost basis. Charges billed to the Company by MLIG pursuant to
the agreement were $43,515, $41,729 and $43,497 for the years
ended December 31, 1996, 1995 and 1994, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG which approximates the daily Federal funds rate. Total
intercompany interest paid was $988, $1,310 and $679 for 1996,
1995 and 1994, respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM")
are parties to a service agreement whereby MLAM has agreed to
provide certain invested asset management services to the
Company. The Company pays a fee to MLAM for these services
through the MLIG service agreement. Charges attributable to
this agreement and allocated to the Company by MLIG were
$2,279, $2,635 and $2,732 for 1996, 1995 and 1994,
respectively.
MLAM and MLIG have entered into an agreement with respect to
administrative services for the Merrill Lynch Series Fund, Inc.
("Series Fund") and Merrill Lynch Variable Series Funds, Inc.
("Variable Series Funds"). The Company invests in the various
mutual fund portfolios of the Series Fund and the Variable
Series Funds in connection with the variable life and annuities
the Company has in-force. Under this agreement, MLAM pays
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Series Fund
and the Variable Series Funds to MLAM. The Company received
from MLIG its allocable share of such compensation in the
amount of $16,514, $13,293 and $12,600 during 1996, 1995 and
1994, respectively.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S, who are the Company's licensed insurance agents,
solicit applications for contracts to be issued by the Company.
MLLA is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were $42,639, $43,984 and $84,231 for
1996, 1995 and 1994, 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.
The Company has entered into interest rate swap contracts with
Merrill Lynch Capital Services, Inc. ("MLCS") with a guarantee
from Merrill Lynch & Co. As of December 31, 1996 and 1995, the
notional amount of such interest rate swap contracts
outstanding was $9,000 and $10,000, respectively. During 1994,
the Company and MLCS terminated certain interest rate swap
contracts resulting in the Company paying a net consideration
of $2,043. Net interest received from these interest rate swap
contracts was $(117), $256, and $782 for 1996, 1995 and 1994,
respectively.
<PAGE>
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1996, 1995, and 1994 the Company paid dividends of
$175,000, $100,000, and $150,000, respectively, to MLIG. Of
these stockholder's dividends, $175,000, $73,757, and $112,779,
respectively, were extraordinary dividends as defined by
Arkansas Insurance Law and were paid pursuant to approval
granted by the Arkansas Insurance Commissioner.
At December 31, 1996 and 1995, approximately $24,970 and
$30,195, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1996 and 1995, was $251,697 and $303,950,
respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial
statements by charging policy acquisition costs to expense as
incurred, establishing future policy benefit reserves using
different actuarial assumptions, not providing for deferred
income taxes, and valuing securities on a different basis. The
Company's statutory net income for 1996, 1995 and 1994 was
$93,532, $121,451 and $42,382, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital which
a life insurance company should have based upon that company's
risk profile. As of December 31, 1996 and 1995, based on the
RBC formula, the Company's total adjusted capital level was
403% and 395%, respectively, of the minimum amount of capital
required to avoid regulatory action.
NOTE 7. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result
of the insolvency of an insurer. At the time an insolvency
occurs, the guaranty association assesses the remaining members
of the association an amount sufficient to satisfy the
insolvent insurer's policyholder obligations (within specified
limits). During 1991, and to a lesser extent 1992, there were
certain highly publicized life insurance insolvencies. The
Company has utilized public information to estimate what future
assessments it will incur as a result of these insolvencies. At
December 31, 1996 and 1995, the Company has established an
estimated liability for future guaranty fund assessments of
$18,773 and $21,144, respectively. The Company regularly
monitors public information regarding insurer insolvencies and
will adjusts its estimated liability as appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
* * * * * *
