<PAGE>
PROSPECTUS
May 1, 1999
Merrill Lynch Life Variable Life Separate Account II
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by
MERRILL LYNCH LIFE INSURANCE COMPANY
Home Office: Little Rock, Arkansas 72201
Service Center: P.O. Box 9025
Springfield, Massachusetts 01102-9025
1414 Main Street
Springfield, Massachusetts 01144-1007
Phone: (800) 354-5333
offered through
Merrill Lynch, Pierce, Fenner & Smith Incorporated
This Prospectus describes a single premium variable life insurance policy
Merrill Lynch Life Insurance Company issues. We do not currently offer this
policy for sale to new purchasers.
Until the end of the "free look" period, we will invest your initial payment in
the investment division of the Merrill Lynch Life Variable Life Separate Account
II (the "Separate Account") investing in the Money Reserve Portfolio. Afterward,
you may reallocate your investment base to any five of the investment divisions
of the Separate Account. We then invest each investment division's assets in
corresponding portfolios of the following:
- - MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- Basic Value Focus Fund
- Global Bond Focus Fund
- Global Utility Focus Fund
- International Equity Focus Fund
- Developing Capital Markets Focus Fund
- Special Value Focus Fund
- Index 500 Fund
- - MERRILL LYNCH SERIES FUND, INC.
- Money Reserve Portfolio
- Intermediate Government Bond Portfolio
- Long-Term Corporate Bond Portfolio
- High Yield Portfolio
- Capital Stock Portfolio
- Growth Stock Portfolio
- Multiple Strategy Portfolio
- Natural Resources Portfolio
- Global Strategy Portfolio
- Balanced Portfolio
- - AIM VARIABLE INSURANCE FUNDS, INC.
- AIM V.I. Capital Appreciation Fund
- AIM V.I. Value Fund
- - ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
- Premier Growth Portfolio
- - MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST-SM-
- MFS Emerging Growth Series
- MFS Research Series
- - MERRILL LYNCH FUND OF STRIPPED ("ZERO")
U.S. TREASURY SECURITIES
Fourteen maturity dates ranging from February 15, 2000 -- February 15, 2014
Currently, you may change your investment allocation as often as you like.
We guarantee that regardless of investment results, insurance coverage will
continue for the insured's life, or, as you may select, for a shorter time if
the face amount chosen is above the minimum face amount required for the initial
payment. During this guarantee period, we will terminate the policy only if any
loan debt exceeds certain policy values. After the guarantee period ends, the
policy will remain in effect as long as the net cash surrender value is
sufficient to cover all charges due. While the policy is in effect, the death
benefit may vary to reflect the investment results of the investment divisions
chosen, but will never be less than the face amount.
<PAGE>
You may:
- make additional payments subject to certain conditions
- redeem the policy for its net cash surrender value
- borrow up to the loan value of your policy
The net cash surrender value will vary with the investment results of the
investment divisions chosen. We don't guarantee any minimum cash surrender
value.
Within certain limits, you may return the policy or exchange it for a policy
with benefits that don't vary with the investment results of a separate account.
It may not be advantageous to replace existing insurance with the policy.
PURCHASING THIS CONTRACT INVOLVES CERTAIN RISKS. INVESTMENT RESULTS CAN VARY
BOTH UP AND DOWN AND CAN EVEN DECREASE THE VALUE OF PREMIUM PAYMENTS. THEREFORE,
YOU COULD LOSE ALL OR PART OF THE MONEY YOU INVEST. EXCEPT FOR THE GUARANTEED
DEATH BENEFIT WE PROVIDE, YOU BEAR ALL INVESTMENT RISKS. WE DO NOT GUARANTEE HOW
ANY OF THE INVESTMENT DIVISIONS OR FUNDS WILL PERFORM.
LIFE INSURANCE IS INTENDED TO BE A LONG TERM INVESTMENT. YOU SHOULD EVALUATE
YOUR INSURANCE NEEDS AND THE CONTRACT'S LONG-TERM INVESTMENT POTENTIAL AND RISKS
BEFORE PURCHASING THE CONTRACT.
CURRENT PROSPECTUSES FOR THE MERRILL LYNCH SERIES FUND, INC; THE MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.; THE AIM VARIABLE INSURANCE FUNDS, INC.; THE
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.; THE MFS-REGISTERED TRADEMARK-
VARIABLE INSURANCE TRUST-SM-; THE HOTCHKIS AND WILEY VARIABLE TRUST; THE MERCURY
ASSET MANAGEMENT V.I. FUNDS, INC.; AND THE MERRILL LYNCH FUND OF STRIPPED
("ZERO") U.S. TREASURY SECURITIES MUST ACCOMPANY THIS PROSPECTUS. PLEASE READ
THESE DOCUMENTS CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE POLICIES OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
IMPORTANT TERMS.................................................................................. 5
SUMMARY OF THE POLICY............................................................................ 6
What the Policy Provides..................................................................... 6
Availability and Payments.................................................................... 6
The Investment Base.......................................................................... 7
The Investment Divisions..................................................................... 7
Illustrations ............................................................................... 7
Replacement of Existing Coverage............................................................. 7
Right to Cancel ("Free Look" Period) or Exchange............................................. 7
Distributions From The Policy................................................................ 8
Fees and Charges............................................................................. 8
FACTS ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY, MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, THE SEPARATE ACCOUNT, THE FUNDS, AND THE TRUSTS ................................. 9
Merrill Lynch Life Insurance Company......................................................... 9
Merrill Lynch, Pierce, Fenner & Smith Incorporated........................................... 9
Assumption of Previously Issued Policies and Subsequent Merger............................... 9
The Separate Account......................................................................... 10
Net Rate of Return for an Investment Division................................................ 11
Changes Within the Account................................................................... 11
THE FUNDS ....................................................................................... 12
The Series Fund.............................................................................. 12
The Variable Series Funds.................................................................... 13
The AIM V.I. Funds........................................................................... 14
The Alliance Fund............................................................................ 15
The MFS Trust................................................................................ 16
The Hotchkis and Wiley Trust................................................................. 16
The Mercury V.I. Funds....................................................................... 17
Special Risks In Certain Funds............................................................... 17
The Operation of the Funds................................................................... 18
The Trusts .................................................................................. 20
FACTS ABOUT THE POLICY........................................................................... 21
Who May be Covered........................................................................... 21
Initial Payment.............................................................................. 22
Right to Cancel ("Free Look" Period)......................................................... 22
Making Additional Payments................................................................... 23
Investment Base.............................................................................. 24
Charges ..................................................................................... 24
Charges Deducted from the Investment Base.................................................... 25
Charges to the Separate Account.............................................................. 26
Charges to Fund Assets....................................................................... 27
Guarantee Period............................................................................. 28
Net Cash Surrender Value..................................................................... 29
Policy Loans................................................................................. 29
Death Benefit Proceeds....................................................................... 30
Payment of Death Benefit Proceeds............................................................ 31
Dollar Cost Averaging........................................................................ 31
Right to Exchange Policy..................................................................... 32
Income Plans................................................................................. 32
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Reports to Policy Owners..................................................................... 33
MORE ABOUT THE POLICY............................................................................ 34
Using the Policy............................................................................. 34
Some Administrative Procedures............................................................... 36
Other Policy Provisions...................................................................... 37
Group or Sponsored Arrangements.............................................................. 37
Unisex Legal Considerations for Employers.................................................... 38
Selling the Policies......................................................................... 38
Tax Considerations........................................................................... 39
Merrill Lynch Life Insurance Company's Income Taxes.......................................... 42
Reinsurance ................................................................................. 42
ILLUSTRATIONS.................................................................................... 42
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY.................................................. 49
Directors and Executive Officers............................................................. 49
Services Arrangement......................................................................... 49
State Regulation............................................................................. 50
Year 2000 ................................................................................... 50
Legal Proceedings............................................................................ 50
Experts ..................................................................................... 50
Legal Matters................................................................................ 51
Registration Statements...................................................................... 51
Financial Statements......................................................................... 51
Financial Statements of Merrill Lynch Life Variable Life Separate Account II................. S-1
Financial Statements of Merrill Lynch Life Insurance Company................................. G-1
</TABLE>
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. We have not authorized any person to
make any representations in connection with this offering other than those
contained in this prospectus.
4
<PAGE>
IMPORTANT TERMS
ATTAINED AGE: is the issue age of the insured plus the number of full years
since the policy date.
CASH SURRENDER VALUE: is equal to the investment base less the deferred policy
loading and, depending on the date it is calculated, less all or a portion of
certain other charges not yet deducted, plus any loan debt.
FACE AMOUNT: is the minimum death benefit as long as the policy remains in
force. The face amount may increase as a result of an additional payment.
GUARANTEE PERIOD: is the time guaranteed that the policy will remain in force
regardless of investment experience, unless loan debt exceeds certain policy
values. It is the period that a comparable fixed life insurance 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 a policy for investment in the
Separate Account at any time.
ISSUE AGE: is the insured's age as of his or her birthday nearest the policy
date.
LOAN DEBT: is the sum of all outstanding loans on a policy plus accrued
interest.
MONTHIVERSARY: is the same day each month as the policy date.
NET CASH SURRENDER VALUE: is equal to cash surrender value less any loan debt.
NET SINGLE PREMIUM FACTOR: We use this factor in the calculation of the variable
insurance amount to make sure that the policy always meets the guidelines of
what constitutes a life insurance policy under the Internal Revenue Code (IRC).
POLICY DATE: is used to determine processing dates, policy years and policy
anniversaries. It is usually the business day next following the receipt of the
single premium payment at the Service Center.
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 charges from the investment base and redetermine the death
benefit.
PROCESSING PERIOD: is the period between consecutive policy processing dates.
TABULAR VALUE: is equal to the cash surrender value when we issue your policy.
From then on, it is equal to the cash surrender value for a comparable fixed
life policy with the same face amount, single premium, loading, and guarantee
period (based on a 4% interest and the guaranteed mortality table). The tabular
value equals zero after the 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.
VARIABLE INSURANCE AMOUNT: is determined on each processing date by multiplying
the cash surrender value by the net single premium factor.
5
<PAGE>
SUMMARY OF THE POLICY
WHAT THE POLICY PROVIDES
The 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 guarantee that policy values will increase. Depending on the investment
results of the investment divisions you select, the investment base, net cash
surrender value and death benefit may go up or down on any day. You bear the
investment risk for any amount allocated to an investment division.
DEATH BENEFIT. The death benefit equals the face amount or variable insurance
amount, whichever is larger. The variable insurance amount increases or
decreases on each policy processing date depending on the investment results of
the investment divisions you select. We will reduce the death benefit by any
loan debt.
TAX BENEFITS AND TAX CONSIDERATIONS. We believe the policy generally provides a
death benefit that cannot be less than the minimum death benefit required under
federal tax law. By satisfying this requirement, the policy provides two
important tax benefits:
1) Its death benefit is generally not subject to income tax;
2) Any increases in the policy's cash surrender value are not taxable until
distributed from the policy.
GUARANTEE PERIOD. Generally, during the guarantee period, we guarantee the
policy will remain in effect and provide the death benefit regardless of
investment performance, unless loan debt exceeds certain policy values. (See
"Policy Loans" for an explanation of how any loan debt affects the policy's
value.) A guarantee period may last for the insured's lifetime or a shorter
period. The chart below shows how the face amount of your policy (assuming the
same premium) affects the guarantee period.
INSURED MALE AGE 60
INITIAL PREMIUM 100,000
<TABLE>
<CAPTION>
LENGTH OF GUARANTEE PERIOD (YEARS) FACE AMOUNT
- -------------------------------------------------------- ------------
<S> <C>
5 $1,103,366
10 512,940
20 240,607
30 164,843
Insured's lifetime 162,034
</TABLE>
AVAILABILITY AND PAYMENTS
We will issue a policy for an insured up to age 75. The minimum single payment
for a policy is the lesser of (a) $5,000 for an insured under age 20 and $10,000
for an insured age 20 and over, or (b) the payment required to purchase a face
amount of at least $100,000.
Subject to certain conditions, you may make additional unplanned payments (See
"Making Additional Payments.")
6
<PAGE>
The policy is not available to insure residents of certain municipalities in
Kentucky where premium taxes in excess of a certain level are imposed.
We are not currently offering the policies for sale to new purchasers.
THE INVESTMENT BASE
A policy's investment base is the amount available for investment at any time.
On the policy date (usually the next business day after our Service Center
receives your single premium), the investment base is equal to the single
premium. Afterwards, it varies daily based on the investment performance of your
selected investment divisions. You bear the risk of poor investment performance
and receive the benefit of favorable investment performance. You may wish to
consider diversifying your investment in the policy by allocating the investment
base to two or more investment divisions.
THE INVESTMENT DIVISIONS
Payments are invested in investment divisions of the Separate Account.
Generally, until the end of the "free look" period, the initial payment will be
invested only in the investment division of the Separate Account investing in
the Money Reserve Portfolio. Afterwards, the investment base is reallocated to
up to five of the investment divisions. (See "Changing the Allocation.")
ILLUSTRATIONS
Illustrations in this Prospectus or used in connection with the purchase of the
policy are based on hypothetical investment rates of return. We don't guarantee
these rates. They are illustrative only, and not a representation of past or
future performance. Actual rates of return may be more or less than those shown
in the illustrations. Actual values will be different than those illustrated.
REPLACEMENT OF EXISTING COVERAGE
Generally, it is not advisable to purchase an insurance policy as a replacement
for existing coverage. Before you buy a Policy, ask your Merrill Lynch Financial
Consultant if changing, or adding to, current insurance coverage would be
advantageous. Don't base your decision to replace existing coverage solely on a
comparison of policy illustrations.
RIGHT TO CANCEL ("FREE LOOK" PERIOD) OR EXCHANGE
Once you receive the policy, review it carefully to make sure it is what you
want. Generally, you may return a policy for a refund within ten days after you
receive it. Some states allow a longer period of time to return the policy. If
required by your state, you may return the policy within the later of ten days
after receiving it or 45 days from the date the application is completed. If you
return the policy during the "free look" period, we will refund the payment
without interest.
You may also exchange your policy within 18 months for a policy with benefits
that do not vary with the investment results of a separate account.
7
<PAGE>
DISTRIBUTIONS FROM THE POLICY
SURRENDERS. You may surrender your policy at any time and receive the net cash
surrender value. On a policy processing date which is also your policy
anniversary, the net cash surrender value equals the investment base minus the
balance of any deferred policy loading not yet deducted.
- If we calculate the net cash surrender value on a date that is not a
policy processing date, we also subtract a pro-rata mortality cost.
- If we calculate the net cash surrender value on a date that is not a
policy anniversary and you have loan debt we will also subtract any
pro-rata net loan cost.
Surrendering your policy may have tax consequences. (See "Tax Considerations".)
LOANS. You may borrow money from us, using your policy as collateral, subject to
limits. We deduct loan debt from the amount payable on surrender of the policy
and from any death benefit payable. Loan interest accrues daily and, IF IT IS
NOT PAID EACH YEAR, IT IS CAPITALIZED AND ADDED TO THE OUTSTANDING LOAN AMOUNT.
Depending upon investment performance of the investment divisions and the
amounts borrowed, loans may cause a policy to lapse. If the policy lapses with
loan debt outstanding, adverse tax consequences may result. Loan debt is
considered part of cash surrender value which is used to calculate taxable gain.
Loans may have other adverse tax consequences. (See "Loans" and "Tax
Considerations -- Tax Treatment of Loans and Other Distributions.")
FEES AND CHARGES
INVESTMENT BASE CHARGES. We invest the entire amount of all premium payments in
the Separate Account. We then deduct certain charges from your investment base
on policy processing dates. These charges are:
- DEFERRED POLICY LOADING equal to 7% of each payment we receive in the
first year. It consists of a sales load of 4.0%, a charge for
administrative expenses during the first year of .5%, and a state and
local premium tax charge of 2.5%. The deferred policy loading for any
additional payment we receive after the first year equals 6.5%. It
consists of a sales load of 4.0% and a state and local premium tax charge
of 2.5%. We deduct the deferred policy loading in equal installments of
.70% of each payment we receive during the first policy year and .65% of
each payment thereafter. We make this deduction on the ten policy
anniversaries following the date we receive and accept the payment.
However, in determining a policy's net cash surrender value, we subtract
the balance of the deferred policy loading not yet deducted.
- MORTALITY COST -- on all policy processing dates after the policy date, we
deduct a cost for the life insurance coverage we provide (see "Mortality
Cost"); and
- 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.")
- NET LOAN COST -- on each policy anniversary, if there has been any loan
debt during the prior year, we deduct a net loan cost. It equals a maximum
of .75% of the loan debt per year for the first ten policy years and .60%
thereafter (see "Charges Deducted From the Investment Base" and "Net Loan
Cost").
SEPARATE ACCOUNT CHARGES. We deduct certain charges daily from the investment
results of the investment divisions in the Separate Account. These charges are:
8
<PAGE>
- A MORTALITY AND EXPENSE RISK CHARGE deducted from all investment
divisions. It is equivalent to .60% annually at the beginning of the year;
and
- A TRUST CHARGE deducted from only those investment divisions investing in
the Trusts. It is currently equivalent to .34% annually at the beginning
of the year. It will never exceed .50% annually.
ADVISORY FEES AND FUND EXPENSES. The portfolios in the Funds pay monthly
advisory fees and other expenses. (See "Charges to Fund Assets.")
THIS SUMMARY PROVIDES ONLY A BRIEF OVERVIEW OF THE MORE SIGNIFICANT ASPECTS OF
THE POLICY. THIS PROSPECTUS AND THE POLICY PROVIDE FURTHER DETAIL. YOU SHOULD
RETAIN THE POLICY TOGETHER WITH ITS ATTACHED APPLICATIONS, MEDICAL EXAM(S),
AMENDMENTS, RIDERS, AND ENDORSEMENTS. THESE ARE THE ENTIRE AGREEMENT BETWEEN YOU
AND US.
FOR THE DEFINITIONS OF SOME IMPORTANT TERMS USED IN THIS PROSPECTUS, SEE
"IMPORTANT TERMS."
FACTS ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
THE SEPARATE ACCOUNT, THE FUNDS, AND THE TRUSTS
MERRILL LYNCH LIFE INSURANCE COMPANY
Merrill Lynch Life Insurance Company is a stock life insurance company organized
under the laws of the State of Washington on January 27, 1986 and redomesticated
under the laws of the State of Arkansas on August 31, 1991. We are an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc. We are authorized to sell
life insurance and annuities in 49 states, Guam, the U.S. Virgin Islands and the
District of Columbia. We are also authorized to sell variable life insurance and
variable annuities in most jurisdictions.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S")
MLPF&S provides a world-wide broad range of securities brokerage and investment
banking services. It provides marketing services for us and is the principal
underwriter of the policies issued through the Separate Account. We retain
MLPF&S to provide services relating to the policies under a distribution
agreement. (See "Selling the Policies".)
ASSUMPTION OF PREVIOUSLY ISSUED POLICIES AND SUBSEQUENT MERGER
Monarch Life Insurance Company ("Monarch") originally issued the policies. On
November 14, 1990, we entered into an indemnity reinsurance and assumption
agreement with Monarch and certain other Merrill Lynch insurance companies.
Under this 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 Monarch issued through its
Variable Account A, including the policies described in this prospectus. On
October 1, 1991, Tandem was merged with and into us (the "merger"), and we
succeeded to all of Tandem's liabilities and obligations. Thus, we have all the
liabilities and obligations under the policies. All further payments made under
the policies will be made directly to or by us.
You have the same rights and values under your policy as you did before the
merger transaction. However, you will look to us instead of to Monarch or Tandem
to fulfill the terms of your policy. Pursuant to the reinsurance and assumption
agreement, all 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 our separate
account.
9
<PAGE>
THE SEPARATE ACCOUNT
Tandem established the Separate Account, a separate investment account, on
November 19, 1990. We acquired it on October 1, 1991 in the merger. It is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. This registration does not
involve any supervision by the Securities and Exchange Commission over the
investment policies or practices of the Separate Account. The Separate Account
meets the definition of a separate account under the federal securities laws. We
use the Separate Account to support the policy as well as other variable life
insurance policies we issue. The Separate Account is also governed by the laws
of the State of Arkansas, our state of domicile.
We own all of the assets in the Separate Account. We keep the Separate Account's
assets apart from our general account and any other separate accounts we may
have. Arkansas insurance law provides that the Separate Account's assets, to the
extent of its reserves and liabilities, may not be charged with liabilities
arising out of any other business we conduct.
Obligations to policy owners and beneficiaries that arise under the policy are
our obligations. Income, gains, and losses, whether or not realized, from assets
allocated to the Separate Account are, in accordance with the policies, credited
to or charged against the Separate Account without regard to our other income,
gains or losses. The assets in the Separate Account will always be at least
equal to the reserves and other liabilities of the Separate Account. If the
Separate Account's assets exceed the required reserves and other policy
liabilities, we may transfer the excess to our general account.
There are currently 36 investment divisions in the Separate Account.
- Seven invest in shares of a specific portfolio of the Merrill Lynch
Variable Series Funds, Inc. (the "Variable Series Funds").
- Ten invest in shares of a specific portfolio of the Merrill Lynch Series
Fund, Inc. (the "Series Fund").
- Two invest in shares of a specific portfolio of the AIM Variable Insurance
Funds, Inc. (the "AIM V.I. Funds").
- One invests in shares of a portfolio of the Alliance Variable Products
Series Fund, Inc. (the "Alliance Fund").
- Two invest in shares of a specific portfolio of the
MFS-Registered Trademark- Variable Insurance Trust-SM- (the "MFS Trust").
- Fourteen invest in specific units of The Merrill Lynch Fund of Stripped
("Zero") U.S. Treasury Securities (the "Trust").
On or about July 22, 1999, six additional investment divisions become available
in the Separate Account.
- Two invest in Class A shares of a specific portfolio of the Variable
Series Funds.
- One invests in shares of an additional portfolio of the Alliance Fund.
- One invests in shares of a portfolio of the Hotchkis and Wiley Variable
Trust (the "Hotchkis and Wiley Trust").
10
<PAGE>
- One invests in Class A shares of a portfolio of the Mercury Asset
Management V.I. Funds, Inc. (the "Mercury V.I. Funds").
- One invests in units of a Zero Trust maturing on February 15, 2019.
On or about July 22, 1999, two investment divisions previously available under
the Separate Account (the International Equity Focus Fund and the Global Bond
Focus Fund) close to allocations of premiums and investment base.
For more information, see "The Funds" below. You'll find complete information
about the Funds and the Trusts, including the risks associated with each
portfolio in the accompanying prospectuses. They should be read along with this
Prospectus.
Although the investment objectives and policies of certain Funds are similar to
the investment objectives and policies of other portfolios that may be managed
or sponsored by the same investment adviser, manager, or sponsor, we do not
represent or assure that the investment results will be comparable to any other
portfolio, even where the investment advisors or manager is the same.
Differences in portfolio size, actual investments held, fund expenses, and other
factors all contribute to differences in fund performance. For all of these
reasons, you should expect investment results to differ. In particular, certain
Funds available only through the policy have names similar to funds not
available through the policy. The performance of any fund not available through
the policy is not indicative of performance of the similarly named fund
available through the policy.
NET RATE OF RETURN FOR AN INVESTMENT DIVISION
Each investment division has a distinct unit value (also referred to as "price"
or "separate account index" in reports we furnish to you). When we allocate your
payments or investment base to an investment division, we purchase units based
on the value of a unit of the investment division as of the end of the valuation
period during which the allocation occurs. When we transfer or deduct amounts
out of an investment division, we redeem units in a similar manner. A valuation
period is each business day together with any non-business days before it. A
business day is any day the New York Stock Exchange is open or there's enough
trading in portfolio securities to materially affect the unit value of an
investment division.
For each investment division, the separate account index was initially set at
$10.00. The separate account index for each subsequent valuation period
fluctuates based upon the net rate of return for that period. We determine the
net rate of return of an investment division at the end of each valuation
period. The net rate of return reflects the investment performance of the
investment division for the valuation period and the charges to the Separate
Account.
For investment divisions investing in the Funds, shares are valued at net asset
value and reflect reinvestment of any dividends or capital gains distributions
declared by the Funds.
For investment divisions investing in the Trusts, units of each Trust are valued
at the sponsor's repurchase price, as explained in the prospectus for the
Trusts.
CHANGES WITHIN THE SEPARATE ACCOUNT
We may add new investment divisions. We can also eliminate investment divisions,
combine two or more investment divisions, or 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
11
<PAGE>
restrictions, or because the portfolio is no longer available for investment, or
for some other reason. If necessary, we would get prior approval from the
Arkansas State Insurance Department and the Securities and Exchange Commission
and any other required approvals before making such a substitution.
Subject to any required regulatory approvals, we can transfer assets of the
Separate Account or of any of the investment divisions to another separate
account or investment division.
When permitted by law, we also can:
- 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 policy owners, or other persons
who have voting rights as to the Separate Account; and
- combine the Separate Account with other separate accounts.
THE FUNDS
Below we list the funds into which the investment divisions may invest. There is
no guarantee that any fund or portfolio will be able to meet its investment
objective.
THE SERIES FUND
The Series Fund is registered with the Securities and Exchange Commission as an
open-end management investment company and its investment adviser is Merrill
Lynch Asset Management, L.P. ("MLAM"). All of its ten mutual fund portfolios are
currently available through the Separate Account. The investment objectives and
certain investment policies of the Series Fund portfolios are described below.
MONEY RESERVE PORTFOLIO seeks to preserve capital, maintain liquidity and
achieve the highest possible current income consistent with those objectives by
investing in short-term money market securities.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO seeks to obtain the highest level of
current income consistent with the protection of capital afforded by investing
in intermediate-term debt securities issued or guaranteed by the U.S. Government
or its agencies. The Portfolio will invest in such securities with a maximum
maturity of 15 years.
LONG-TERM CORPORATE BOND PORTFOLIO primarily seeks to provide as high a level of
current income as is believed to be consistent with prudent investment risk. In
addition, the Portfolio seeks the preservation of capital. In seeking to achieve
these objectives, under normal circumstances the Portfolio invests at least 80%
of the value of its total assets in debt securities that have a rating within
the three highest grades of Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's").
HIGH YIELD PORTFOLIO primarily seeks as high a level of current income as is
believed to be consistent with prudent management. Secondarily, the Portfolio
seeks capital appreciation when consistent with its primary objective. The
Portfolio seeks to achieve its investment objective by investing principally in
fixed-income securities rated in the lower categories of the established rating
services or in unrated securities of comparable quality (including securities
commonly known as "junk bonds").
12
<PAGE>
CAPITAL STOCK PORTFOLIO seeks long-term growth of capital and income, plus
moderate current income. It generally invests in equity securities considered to
be of good or improving quality or considered to be undervalued based on
criteria such as historical price/book value and price/earnings ratios.
GROWTH STOCK PORTFOLIO seeks long-term growth of capital by investing in a
diversified portfolio of securities, primarily common stocks, of aggressive
growth companies considered to have special investment value.
MULTIPLE STRATEGY PORTFOLIO seeks a high total investment return consistent with
prudent risk through a fully managed investment policy utilizing equity
securities, intermediate and long-term debt securities and money market
securities.
NATURAL RESOURCES PORTFOLIO seeks long-term growth of capital and protection of
the purchasing power of shareholders' capital by investing primarily in equity
securities of domestic and foreign companies with substantial natural resource
assets.
GLOBAL STRATEGY PORTFOLIO seeks high total investment return by investing
primarily in a portfolio of equity and fixed-income securities, including
convertible securities, of U.S. and foreign issuers.
BALANCED PORTFOLIO seeks a level of current income and a degree of stability of
principal not normally available from an investment solely in equity securities
and the opportunity for capital appreciation greater than that normally
available from an investment solely in debt securities by investing in a
balanced portfolio of fixed-income and equity securities.
MLAM is indirectly owned and controlled by Merrill Lynch & Co., Inc. and is a
registered adviser under the Investment Advisers Act of 1940. The Series Fund,
as part of its operating expenses, pays an investment advisory fee to MLAM. (See
"Charges to Fund Assets".)
THE VARIABLE SERIES FUNDS
The Variable Series Funds is registered with the Securities and Exchange
Commission as an open-end management investment company and its investment
adviser is MLAM. Seven of its portfolios are currently available through the
Separate Account. Two additional portfolios become available on or about July
22, 1999. The investment objectives and certain investment policies of these
Variable Series Funds portfolios are described below.
BASIC VALUE FOCUS FUND seeks capital appreciation and, secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value. The
Fund seeks special opportunities in securities that are selling at a discount,
either from book value or historical price-earnings ratios, or seem capable of
recovering from temporarily out of favor considerations. Particular emphasis is
placed on securities that provide an above-average dividend return and sell at a
below-average price/earnings ratio.
GLOBAL BOND FOCUS FUND (FORMERLY THE WORLD INCOME FOCUS FUND) seeks to provide
high total investment return by investing in a global portfolio of fixed-income
securities denominated in various currencies, including multinational currency
units. The Fund will invest in fixed-income securities that have a credit rating
of A or better by Standard & Poor's or by Moody's or commercial paper rated A-1
by Standard & Poor's or Prime-1 by Moody's or obligations that MLAM has
determined to be of similar creditworthiness.
The investment division corresponding to this Fund closes to allocations of
premiums and investment base on or about July 22, 1999.
13
<PAGE>
GLOBAL UTILITY FOCUS FUND seeks both capital appreciation and current income
through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the opinion of
MLAM, primarily engaged in the ownership or operation of facilities used to
generate, transmit or distribute electricity, telecommunications, gas or water.
INTERNATIONAL EQUITY FOCUS FUND seeks capital appreciation and, secondarily,
income by investing in a diversified portfolio of equity securities of issuers
located in countries other than the United States. Under normal conditions, at
least 65% of the Fund's net assets will be invested in such equity securities
and at least 65% of the Fund's total assets will be invested in the securities
of issuers from at least three different foreign countries.
The investment division corresponding to this Fund closes to allocations of
premiums and investment base on or about July 22, 1999.
DEVELOPING CAPITAL MARKETS FOCUS FUND seeks long-term capital appreciation by
investing in securities, principally equities, of issuers in countries having
smaller capital markets. For purposes of its investment objective, the Fund
considers countries having smaller capital markets to be all countries other
than the four countries having the largest equity market capitalizations.
SPECIAL VALUE FOCUS FUND (FORMERLY THE EQUITY GROWTH FUND) seeks long-term
growth of capital by investing in a diversified portfolio of securities,
primarily common stocks, of relatively small companies that management of the
Variable Series Funds believes have special investment value, and of emerging
growth companies regardless of size. Companies are selected by management on the
basis of their long-term potential for expanding their size and profitability or
for gaining increased market recognition for their securities. Current income is
not a factor in the selection of securities.
INDEX 500 FUND seeks to provide investment results that, before expenses,
correspond to the aggregate price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index").
CAPITAL FOCUS FUND seeks to achieve the highest total investment return
consistent with prudent risk. To do this, management of the Fund uses a flexible
"fully managed" investment policy that shifts the emphasis among equity, debt
(including money market), and convertible securities.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and investment base on or about July 22, 1999.
GLOBAL GROWTH FOCUS FUND seeks long-term growth of capital. The Fund invests in
a diversified portfolio of equity securities of issuers located in various
countries and the United States, placing particular emphasis on companies that
have exhibited above-average growth rates in earnings.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and investment base on or about July 22, 1999.
The Variable Series Funds, as part of its operating expenses, pays an investment
advisory fee to MLAM. (See "Charges to Fund Assets".)
THE AIM V.I. FUNDS
The AIM V.I. Funds is registered with the Securities and Exchange Commission as
an open-end management investment company and its investment adviser is A I M
Advisors, Inc. ("AIM"). Two of its mutual fund
14
<PAGE>
portfolios are currently available through the Separate Account. The investment
objectives of the two available AIM V.I. Funds portfolios are described below.
AIM V.I. CAPITAL APPRECIATION FUND seeks growth of capital through investments
in common stocks, with emphasis on medium and small-sized growth companies. AIM
will be particularly interested in companies that are likely to benefit from new
or innovative products, services or processes, as well as those that have
experienced above-average, long-term growth in earnings and have excellent
prospects for future growth.
AIM V.I. VALUE FUND seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by AIM to be undervalued relative to AIM's
appraisal of the current or projected earnings of the companies issuing the
securities, or relative to current market values of assets owned by the
companies issuing the securities or relative to the equity markets generally.
Income is a secondary objective.
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173 has served as an
investment advisor since its organization in 1976. Today, AIM, together with its
subsidiaries, advises or manages over 110 investment portfolios, including the
Funds, encompassing a broad range of investment objectives. The AIM V.I. Funds,
as part of its operating expenses, pays an investment advisory fee to AIM. (See
"Charges to Fund Assets".)
THE ALLIANCE FUND
The Alliance Fund is registered with the Securities and Exchange Commission as
an open-end management investment company and its investment adviser is Alliance
Capital Management L.P. ("Alliance"). One of its mutual fund portfolios is
currently available through the Separate Account. One additional portfolio
becomes available on or about July 22, 1999. The investment objectives of these
Alliance Fund portfolios are described below.
PREMIER GROWTH PORTFOLIO seeks growth of capital by pursuing aggressive
investment policies. Since investments will be made based upon their potential
for capital appreciation, current income is incidental to the objective of
capital growth. Because of the market risks inherent in any investment, the
selection of securities on the basis of their appreciation possibilities cannot
ensure against possible loss in value. This Fund is therefore not intended for
policy owners whose principal objective is assured income and conservation of
capital.
QUASAR PORTFOLIO seeks growth of capital by pursuing aggressive investment
policies. The Fund invests principally in a diversified portfolio of equity
securities of any company and industry and in any type of security which is
believed to offer possibilities for capital appreciation, and invests only
incidentally for current income. The selection of securities based on the
possibility of appreciation cannot prevent loss in value. Moreover, because the
Fund's investment policies are aggressive, an investment in the Fund is risky
and is not intended for policy owners who want assured income or preservation of
capital.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and investment base on or about July 22, 1999.
Alliance is a Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105. Alliance Capital Management
Corporation ("ACMC"), the sole general partner of Alliance, is an indirect
wholly owned subsidiary of The Equitable Life Assurance Society of the United
States, which is in turn a wholly owned subsidiary of the Equitable Companies
Incorporated, a holding company which is controlled by AXA, a French insurance
holding company. The Alliance Fund, as part of its operating expenses, pays an
investment advisory fee to Alliance. (See "Charges to Fund Assets".)
15
<PAGE>
THE MFS TRUST
The MFS Trust is registered with the Securities and Exchange Commission as an
open-end management investment company and its investment adviser is
Massachusetts Financial Services Company ("MFS"). Two of its mutual fund
portfolios are currently available through the Separate Account. The investment
objectives of the available MFS Trust portfolios are described below.
MFS EMERGING GROWTH SERIES will seek long-term growth of capital. The series
invests, under normal market conditions, at least 65% of its total assets in
common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities, of emerging growth
companies. These companies are companies that the series' adviser believes are
either early in their life cycle but have the potential to become major
enterprises or are major enterprises whose rates of earnings growth are expected
to accelerate.
MFS RESEARCH SERIES will seek to provide long-term growth of capital and future
income. The series invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts. The series focuses on companies
that the series' adviser believes have favorable prospects for long-term growth,
attractive valuations based on current and expected earnings or cash flow,
dominant or growing market share and superior management.
MFS, a Delaware corporation, 500 Boylston Street, Boston, Massachusetts 02116,
is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which, in turn, is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada. The MFS Trust, as part of its operating expenses, pays an
investment advisory fee to MFS. (See "Charges to Fund Assets".)
THE HOTCHKIS AND WILEY TRUST
The Hotchkis and Wiley Trust is registered with the Securities and Exchange
Commission as an open-end management investment company, and its adviser is
Hotchkis and Wiley. One if its mutual fund portfolios becomes available through
the Separate Account on or about July 22, 1999. The investment objective of this
Hotchkis and Wiley Trust portfolio is described below.
HOTCHKIS AND WILEY INTERNATIONAL VIP PORTFOLIO seeks to provide current income
and long-term growth of income, accompanied by growth of capital. The Fund
invests at least 65% of its total assets in stocks in at least ten foreign
markets. Ordinarily, the Fund invests in stocks of companies located in the
developed foreign markets and invests at least 80% of its total assets in stocks
that pay dividends. It also may invest in stocks that don't pay dividends or
interest, but have growth potential unrecognized by the market or changes in
business or management that indicate growth potential. In investing the Fund,
Hotchkis and Wiley follows a value style. This means that it buys stocks that it
believes are currently undervalued by the market and thus have a lower price
than their true worth. Typical value characteristics include:
- low price-to-earnings ratio relative to the market
- high dividend yield relative to the market
- low price-to-book value ratio relative to the market
- financial strength
16
<PAGE>
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, individual
companies may have high rates of growth of earnings and be financially sound. At
the same time, the price of their common stock may be depressed because
investors associate the companies with their industries. The value discipline
sometimes prevents investments in stocks that are in well-known indexes, like
the S&P 500 or similar foreign indexes.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and investment base on or about July 22, 1999.
Hotchkis and Wiley, 725 S. Figueroa Street, Suite 4000, Los Angeles, California
90017-5400, is a division of MLAM. The Hotchkis and Wiley Trust, as part of its
operating expenses, pays an investment advisory fee to Hotchkis and Wiley. (See
"Charges to Fund Assets".)
THE MERCURY V.I. FUNDS
The Mercury V.I. Funds is registered with the Securities and Exchange Commission
as an open-end management investment company, and its adviser is Mercury Asset
Management International Ltd. Class A shares of one of its mutual fund
portfolios become available through the Separate Account on or about July 22,
1999. The investment objective of the Mercury V.I. U.S. Large Cap Fund is
described below.
MERCURY V.I. US. LARGE CAP FUND'S main goal is long-term capital growth. The
Fund invests primarily in a diversified portfolio of equity securities of large
cap companies (which are companies whose market capitalization is at least $5
billion) located in the U.S. that Fund management believes are undervalued or
have good prospects for earnings growth. The Fund may also invest up to 10% of
its assets in stocks of companies located in Canada.
The investment division corresponding to this Fund becomes available for
allocations of premium payments and investment base on or about July 22, 1999.
Mercury Asset Management International Ltd. is located at 33 King William
Street, London EC4R 9AS, England. Its intermediate parent is Mercury Asset
Management Group Ltd. a London-based holding company. The ultimate parent of
Mercury Asset Management Group Ltd. is Merrill Lynch & Co., Inc. The Mercury
V.I. U.S. Large Cap Fund, as part of its operating expenses, pays an investment
advisory fee to Mercury Asset Management International Ltd. (See "Charges to
Fund Assets".)
SPECIAL RISKS IN CERTAIN FUNDS
Investment in lower-rated debt securities, such as those in which the High Yield
Portfolio of the Series Fund, and the Developing Capital Markets Focus and
International Equity Focus Funds of the Variable Series Funds, expect to invest,
entails relatively greater risk of loss of income or principal. The Developing
Capital Markets Focus Fund of the Variable Series Funds has no established
rating criteria for the debt securities in which it may invest, and will rely on
MLAM's judgment in evaluating the creditworthiness of an issuer of such
securities. In an effort to minimize risk, these portfolios will diversify
holdings among many issuers. However, there can be no assurance that
diversification will protect these portfolios from widespread defaults during
periods of sustained economic downturn.
Because a substantial portion of the Global Growth Focus Fund's assets may be
invested on an international basis, you should be aware of certain risks, such
as fluctuations in foreign exchange rates, future political and economic
developments, different legal systems, and the possible imposition of exchange
controls or other
17
<PAGE>
foreign government laws or restrictions. An investment in the Fund may be
appropriate only for long-term investors who can assume the risk of loss of
principal, and do not seek current income.
In seeking to protect the purchasing power of capital, the Natural Resources
Portfolio of the Series Fund reserves the right, when management anticipates
significant economic, political, or financial instability, such as high
inflationary pressures or upheaval in foreign currency exchange markets, to
invest a majority of its assets in companies that explore for, extract, process
or deal in gold or in asset-based securities indexed to the value of gold
bullion. The Natural Resources Portfolio will not concentrate its investments in
such securities until it has been advised that the Policies' federal tax status
will not be adversely affected as a result.
For the MFS Emerging Growth Series, the nature of investing in emerging growth
companies involves greater risk than is customarily associated with investments
in more established companies. Emerging growth companies often have limited
product lines, markets or financial resources, and they may be dependent on one-
person management. In addition, there may be less research available on many
promising small and medium-sized emerging growth companies, making it more
difficult to find and analyze these companies. The securities of emerging growth
companies may have limited marketability and may be subject to abrupt or erratic
market movements than securities of larger, more established growth companies or
the market averages in general. Shares of the MFS Emerging Growth Series,
therefore, are subject to greater fluctuation in value than shares of a
conservative equity fund or of a growth fund which invests entirely in proven
growth stocks.
For the Hotchkis and Wiley International VIP Portfolio, investing in emerging
market and other foreign securities involves certain risk considerations not
typically associated with investing in securities of U.S. issuers, including
currency devaluations and other currency exchange rate fluctuations, political
uncertainty and instability, more substantial government involvement in the
economy, higher rates of inflation, less government supervision and regulation
of the securities markets and participants in those markets, controls on foreign
investment and limitations on repatriation of invested capital and on the Fund's
ability to exchange local currencies for U.S. dollars, greater price volatility,
substantially less liquidity and significantly smaller capitalization of
securities markets, absence of uniform accounting and auditing standards,
generally higher commission expenses, delay in settlement of securities
transactions, and greater difficulty in enforcing shareholder rights and
remedies.
Investment in these portfolios entails relatively greater risk of loss of income
or principal. In addition, as described in the accompanying prospectus for the
portfolios, many portfolios should be considered a long-term investment and a
vehicle for diversification, and not as a balanced investment program. It may
not be appropriate to allocate all payments and investment base to a single
investment division.
THE OPERATION OF THE FUNDS
BUYING AND REDEEMING SHARES. The Funds sell and redeem their shares at net asset
value. Any dividend or capital gain distribution will be reinvested at net asset
value in shares of the same portfolio.
VOTING RIGHTS. We are the legal owner of all Fund shares held in the Separate
Account. We have the right to vote on any matter put to vote at the Funds'
shareholder meetings. However, we will vote all Fund shares attributable to
policies according to instructions we receive from policy owners. We will vote
shares attributable to policies for which we receive no voting instructions in
the same proportion as shares in the respective investment divisions for which
we receive instructions. We will also vote shares not attributable to policies
in the same proportion as shares in the respective divisions for which we
received instructions. We may vote Fund shares in our own right if any federal
securities laws or regulations, or their present interpretation, change to
permit us to do so.
18
<PAGE>
We determine the number of shares attributable to you by dividing your policy's
investment base in a division by the net asset value of one share of the
corresponding portfolio. We count fractional votes.
Under certain circumstances, state regulatory authorities may require us to
disregard voting instructions. This may happen if following the instructions
would mean voting to change the sub-classification or investment objectives of
the portfolios, or to approve or disapprove an investment advisory policy.
We may also disregard instructions to vote for changes in the investment policy
or the investment adviser if it disapproves of the proposed changes. We would
disapprove a proposed change only if it was:
- contrary to state law;
- prohibited by state regulatory authorities; or
- decided by management that the change would result in overly speculative
or unsound investments.
If we disregard voting instructions, we will include a summary of our actions in
the next semi-annual report.
RESOLVING MATERIAL CONFLICTS. Shares of the Series Fund are available for
investment by us, ML Life Insurance Company of New York (an indirect wholly
owned subsidiary of Merrill Lynch & Co., Inc.) and Monarch. Shares of the
Variable Series Funds, the AIM V.I. Funds, the Alliance Fund, the MFS Trust and
the Hotchkis and Wiley Trust are sold to separate accounts of ours, ML Life
Insurance Company of New York, and insurance companies not affiliated with us or
Merrill Lynch & Co., Inc. to fund benefits under variable life insurance and
variable annuity policies, and may be sold to certain qualified plans. Shares of
the Mercury V.I. Funds are sold to separate accounts of ours, ML Life Insurance
Company of New York, and may in the future be sold to insurance companies not
affiliated with us or Merrill Lynch & Co., Inc. to fund benefits under variable
life insurance and variable annuity policies, and may be sold to certain
qualified plans.
It is possible that differences might arise between our Separate Account and one
or more of the other separate accounts which invest in the Funds. In some cases,
it is possible that the differences could be considered "material conflicts."
Such a "material conflict" could also arise due to changes in the law (such as
state insurance law or federal tax law) which affect these different variable
life insurance and variable annuity separate accounts. It could also arise by
reason of differences in voting instructions from our policy owners and those of
the other insurance companies, or for other reasons. We will monitor events to
determine how to respond to conflicts. If a conflict occurs, we may need to
eliminate one or more investment divisions of the Separate Account which invest
in the Funds or substitute a new portfolio for a portfolio in which a division
invests. In responding to any conflict, we will take the action we believe
necessary to protect you consistent with applicable legal requirements.
ADMINISTRATIVE SERVICE ARRANGEMENTS. MLAM has entered into an agreement with
Merrill Lynch Insurance Group, Inc. ("MLIG"), our parent, for administration
services for the Series Fund and the Variable Series Funds in connection with
the policies and other variable life insurance and variable annuity policies we
issued. Under this agreement, MLAM compensates MLIG in an amount equal to a
portion of the annual gross investment advisory fees paid by the Series Fund and
the Variable Series Funds to MLAM attributable to variable policies issued.
AIM has entered into an agreement with us for administrative services for the
AIM V.I. Funds in connection with the policies. Under this agreement, AIM
compensates us in an amount equal to a percentage of the average net assets of
the AIM V.I. Funds attributable to the policies.
19
<PAGE>
Alliance Fund Distributors, Inc. ("AFD"), an affiliate of Alliance, has entered
into an agreement with us for administrative services for the Alliance Fund in
connection with the policies. Under this agreement, AFD compensates us in an
amount equal to a percentage of the average net assets of the Alliance Fund
attributable to the policies.
MFS has entered into an agreement with MLIG for administrative services for the
MFS Trust in connection with the policies, certain other policies issued by us,
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.
Hotchkis and Wiley has entered into an agreement with MLIG with respect to
administrative services for the Hotchkis and Wiley Trust in connection with the
policies, certain other policies issued by us, and certain policies issued by ML
Life Insurance Company of New York. Under this agreement, Hotchkis and Wiley
pays compensation to MLIG is an amount equal to a portion of the annual gross
investment advisory fees paid by the Hotchkis and Wiley International VIP
Portfolio to Hotchkis and Wiley attributable to such policies.
Mercury Asset Management International Ltd. has entered into an agreement with
MLIG with respect to administrative services for the Mercury V.I. Funds in
connection with the policies, certain other policies issued by us, and certain
policies issued by ML Life Insurance Company of New York. Under this agreement,
Mercury Asset Management International Ltd. pays compensation to MLIG in an
amount equal to a portion of the annual gross investment advisory fees paid by
the Mercury V.I. U.S. Large Cap Fund to Mercury Asset Management International
Ltd. attributable to such policies.
THE TRUSTS
The Trusts are intended to provide safety of capital and a competitive yield to
maturity. The Trusts purchase at a deep discount U.S. Government-backed
investments which make no periodic interest payments. When held to maturity the
investments should receive approximately a fixed yield. The value of Trust units
before maturity varies more than it would if the Trusts contained
interest-bearing U.S. Treasury securities of comparable maturities.
The Trust portfolios consist mainly of:
- bearer debt obligations issued by the U.S. Government stripped of their
unmatured interest coupons;
- coupons stripped from U.S. debt obligations; and
- receipts and certificates for such stripped debt obligations and coupons.
20
<PAGE>
The Trusts currently available are shown below:
<TABLE>
<CAPTION>
TARGETED
RATE OF
RETURN TO
MATURITY
AS OF
APRIL 9,
TRUST MATURITY DATE 1999
- ----- ----------------- ----------
<S> <C> <C>
2000 February 15, 2000 3.15%
2001 February 15, 2001 3.37%
2002 February 15, 2002 3.65%
2003 August 15, 2003 3.71%
2004 February 15, 2004 3.82%
2005 February 15, 2005 3.72%
2006 February 15, 2006 3.55%
2007 February 15, 2007 3.72%
2008 February 15, 2008 4.08%
2009 February 15, 2009 4.14%
2010 February 15, 2010 4.31%
2011 February 15, 2011 4.29%
2013 February 15, 2013 4.45%
2014 February 15, 2014 4.58%
</TABLE>
An additional Trust maturing on February 15, 2019 becomes available for
allocations of premium payments and investment base on or about July 22, 1999.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of
Merrill Lynch & Co., Inc., is the sponsor for the Trusts. The sponsor will sell
units of the Trusts to the Separate Account and has agreed to repurchase units
we need to sell them to pay benefits and make reallocations. We pay the sponsor
a fee for these transactions and are reimbursed through the trust charge
assessed to the divisions investing in the Trusts. (See "Charges to Divisions
Investing in the Trusts".)
TARGETED RATE OF RETURN TO MATURITY. Because the underlying securities in the
Trusts will grow to their face value on the maturity date, we can estimate a
compound rate of return to maturity for the Trust units. But because the
Separate Account held the units, we need to take into account the asset charge
and the trust charge (described in "Charges to the Separate Account") in
estimating the net rate of return. It depends on the compound rate of return
adjusted for these charges. It does not, however, represent the actual return on
a payment that we might receive under the policy on that date, since it does not
reflect the charges deducted from a policy's investment base (described in
"Charges Deducted from the Investment Base").
Since the value of the Trust units will vary daily to reflect the market value
of the underlying securities, the compound rate of return to maturity for the
Trust units and the net rate of return to maturity for the Separate Account will
vary correspondingly.
FACTS ABOUT THE POLICY
WHO MAY BE COVERED
We are no longer selling the policies.
We use two methods of underwriting:
- simplified underwriting, with no physical exam; and
- para-medical or medical underwriting with a physical exam.
21
<PAGE>
The single premium and the age of the insured determine whether we do
underwriting on a simplified or medical basis. The chart below shows the maximum
premium that we'll underwrite on a simplified basis:
<TABLE>
<CAPTION>
AGE MAXIMUM
- ---------- --------
<S> <C>
0-14...... $ 25,000
15-29..... 50,000
30-39..... 75,000
40-49..... 100,000
50-75..... 150,000
</TABLE>
However, if you select the maximum face amount (see "Selecting the Initial Face
Amount" below), we take "the net amount at risk" into account in determining the
method of underwriting. The net amount at risk is the death benefit minus the
cash surrender value.
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 we use 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 we may issue policies either in the standard or non-smoker
underwriting class. We may also issue policies on insureds in a "substandard"
underwriting class. Individuals in substandard classes have health or lifestyle
factors less favorable than the average person. For a discussion of the effect
of underwriting classification on mortality cost deductions, see "Mortality
Cost".
INITIAL PAYMENT
MINIMUM. To purchase a policy, you must complete an application and make a
payment. We require the payment to put the policy into effect. The minimum
single payment for a policy is the lesser of (a) $5,000 for an insured under age
20 and $10,000 for an insured age 20 and over, or (b) the payment required to
purchase a face amount of at least $100,000. You may make additional payments.
(See "Making Additional Payments".)
SELECTING THE INITIAL FACE AMOUNT. Your initial payment determines the face
amount. For a given initial payment you may choose your initial face amount. The
minimum face amount is the amount which will provide a guarantee period for the
insured's entire life. The maximum face amount is the amount which will give you
the minimum guarantee period we require for the insured's age, sex, and
underwriting class. As the face amount is increased for a given single premium,
the guarantee period becomes shorter and the mortality costs in the early policy
years are larger to cover the increased amounts of insurance.
GUARANTEE PERIOD. The guarantee period is the period of time we guarantee that
the policy will remain in force regardless of investment experience unless loan
debt exceeds certain policy values. We base the guarantee period on the
guaranteed maximum mortality rates in the policy, the deferred policy loading
and a 4% interest assumption. This means that for a given payment and face
amount different insureds will have different guarantee periods depending on
their age, sex and underwriting class. For example, an older insured will have a
shorter guarantee period than a younger insured of the same sex and in the same
underwriting class.
RIGHT TO CANCEL ("FREE LOOK" PERIOD)
You may cancel your policy during the "free look" period by returning it for a
refund. Generally, the "free look" period ends 10 days after you receive the
policy. Some states allow a longer period of time to return the policy. If
required by your state, the "free look" period ends the later of 10 days after
you receive the policy and 45 days from the date you execute the application. To
cancel the policy during the "free look" period, you must mail or deliver the
policy to our Service Center or to the registered representative who sold it. We
will refund your payment without interest. We may require you to wait six months
before applying for another policy.
22
<PAGE>
Corporations that purchase one or more policies at the same time with an
aggregate single premium of at least $250,000, where the investment base has at
all times been allocated in the division investing in the Money Reserve
Portfolio and where no additional payments have been made nor policy loans
taken, may cancel a policy(ies) and receive the greater of the premium paid
without interest and the net cash surrender value.
MAKING ADDITIONAL PAYMENTS
After the end of the "free look" period, you may make additional payments any
time you choose up to four times a policy year. In Kentucky, you cannot make
additional payments until after the first policy year. The minimum additional
payment we will accept is $1,000. We may require satisfactory evidence of
insurability before we accept a payment if the payment increases the net amount
at risk under the policy, or if the guarantee period at the time of payment is
less than one year. You must submit a form when you make additional payments.
If an additional payment requires evidence of insurability, we will invest that
payment in the division investing in the Money Reserve Portfolio on the next day
after we receive it. Once we complete the underwriting and accept the payment,
we will credit the payment to your contract and allocate the payment either
according to your instructions or, if we don't get instructions, proportionately
to the investment base in the policy's investment divisions.
EFFECT OF ADDITIONAL PAYMENTS. Currently, we will generally accept any
additional payment not requiring evidence of insurability the day we receive it.
On the date we accept an additional payment we will:
- increase the policy's investment base by the amount of the payment; and
- increase the deferred policy loading (see "Deferred Policy Loading").
If an additional payment requires evidence of insurability, once we complete
underwriting and accept the payment, the additional payment will be reflected in
policy values as described above.
As of the processing date on or next following receipt and acceptance of an
additional payment, we will reflect the payment in the calculation of the
variable insurance amount (see "Variable Insurance Amount") and increase either
the guarantee period or face amount or both. If the guarantee period before
acceptance of an additional payment is less than for life, we will first use
payments to extend the guarantee period. Any amount greater than that required
to extend the guarantee period to the insured's lifetime or any subsequent
additional payment will be used to increase the policy's face amount.
If the insured dies after we receive and accept an additional payment and before
the next policy processing date, we'll pay the beneficiary the larger of:
- The amount of the death benefit we calculate as of the prior policy
processing date plus the amount of the additional payment; and
- The cash surrender value as of the date we receive and accept the
additional payment multiplied by the net single premium factor as of such
date (see "Net Single Premium Factor").
We will reduce the death benefit by any loan debt and any overdue charges if the
policy is in grace period. (See "Guarantee Period".)
Unless you specify otherwise, if there is any loan debt, we will apply any
unplanned payment made first as a loan repayment and we will return any excess
amount to you. (See "Policy Loans".)
23
<PAGE>
GUARANTEE OF INSURABILITY RIDER. This rider gives you guaranteed options to make
certain additional payments 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
A policy's investment base is the sum of the amounts invested in each of the
investment divisions. We adjust the investment base daily to reflect the
investment performance of the investment divisions you've selected. (See "Net
Rate of Return for an Investment Division".)
Certain charges and policy loans decrease the investment base. (See "Charges
Deducted from the Investment Base" and "Policy Loans".) Loan repayments and
additional payments increase it. You may elect in writing from which investment
divisions loans are taken and to which investment divisions repayments and
additional payments are added. If you don't make an election, we will allocate
increases and decreases proportionately to your investment base in the
investment divisions selected.
INVESTMENT BASE ALLOCATION DURING THE "FREE LOOK" PERIOD. We will place the
single premium you submit 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. Afterward, we'll
reallocate the investment base to the investment divisions you've selected. You
may invest in up to five of the investment divisions.
CHANGING THE ALLOCATION. Currently, you may change investment allocations as
often as you wish. However, we may limit the number of changes permitted but not
to less than five each policy year. We'll notify you if we impose any
limitations. We may assess a charge for each allocation change in excess of five
per policy year. To change your investment base allocation, call or write our
Service Center. (See "Some Administrative Procedures".) A dollar cost averaging
feature may also be available. (See "Dollar Cost Averaging".)
TRUST ALLOCATIONS. If your investment base is in any of the Trusts, we'll notify
you 30 days before that Trust matures. Tell us in writing at least seven days
before the maturity date how to reinvest the proceeds. If you don't tell us,
we'll move the proceeds to the investment division investing in the Money
Reserve Portfolio, and it will not count as one of the five allocations in a
policy year. When we receive a request for allocation, units of a specific Trust
may no longer be available. Should this occur, we'll attempt to notify you
immediately so that you can change the request.
ALLOCATION TO THE DIVISION INVESTING IN THE NATURAL RESOURCES PORTFOLIO. We
reserve the right to suspend the sale of units of the investment division
investing in the Natural Resources Portfolio in response to conditions in the
securities markets or otherwise.
CHARGES
We deduct the charges described below to cover costs and expenses, services
provided, and risks assumed under the policies. The amount of a charge may not
necessarily correspond to the costs associated with providing the services or
benefits indicated by the designation of the charge or associated with the
particular policy. For example, the sales load may not fully cover all of the
sales and distribution expenses we actually incur. We may
24
<PAGE>
use proceeds from other charges, including the mortality and expense risk
charge, in part to cover such expenses.
We deduct certain charges from the investment base on policy processing dates.
(See "Charges Deducted from the Investment Base".) We also deduct certain
charges daily from the investment results of each investment division in the
Separate Account in determining its net rate of return. (See "Charges to the
Separate Account".) The portfolios in the Funds also pay monthly advisory fees
and other expenses. (See "Charges to Fund Assets".)
CHARGES DEDUCTED FROM THE INVESTMENT BASE
DEFERRED POLICY LOADING. We assess a deferred policy loading charge of 7% of
each payment made in the first year, and 6.5% of each payment made after the
first. This charge consists of a sales load, first year administrative expense
(not assessed against additional payments we receive after the first policy
year), and a state and local premium tax charge.
The sales load is equal to a maximum of 4.0% of the single premium and any
additional payments. It compensates us for sales expenses. The first year
administrative expense is equal to a maximum of .5% of the single premium and
any additional payments we receive in the first policy year. It compensates us
for the expenses associated with issuing the policies. We may reduce the sales
load and first year administrative expense if cumulative payments are
sufficiently high to reach certain breakpoints, and in certain group or
sponsored arrangements.
The state and local premium tax charge is equal to 2.5% of the single premium
and any additional payments.
Although chargeable to each payment, we advance the amount of the deferred
policy loading to the Separate Account as part of your investment base. We then
take back these funds in equal installments on the ten policy anniversaries
following the date we receive and accept a payment. However, in determining the
amount payable on surrender of the Policy, we subtract from the investment base
the balance of the deferred policy loading chargeable to any payment made that
has not yet been deducted.
We currently do not make any charges for administrative expenses beyond the
first year. We will not impose any in the future.
MORTALITY COST (COST OF INSURANCE). We deduct a mortality cost from the
investment base on each processing date after the policy date. This charge
compensates us for the cost of providing life insurance coverage on the insured.
It is based on the insured's underwriting class, sex (except for Montana and
Massachusetts) and attained age, and the policy's net amount at risk. (See
"Legal Considerations for Employers".)
To determine the mortality cost, we multiply the current cost of insurance rate
by the policy's net amount at risk. The net amount at risk is the difference, as
of the previous processing date, between the death benefit and the cash
surrender value adjusted for interest at 4%.
Current mortality rates may be equal to or less than the guaranteed mortality
rates. For insureds age 20 and over, current mortality rates also distinguish
between insureds in a smoker (standard) underwriting class and insureds in a
non-smoker underwriting class. 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.
We guarantee that the current mortality rates will never exceed the maximum
guaranteed rates shown in the policy. We use the 1980 Commissioners Standard
Ordinary Mortality Table (1980 CSO Table) for policies
25
<PAGE>
underwritten on a medical basis and the 1980 Commissioners Extended Term
mortality Table (1980 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 substandard
basis we use a multiple of the 1980 CSO Table. 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 current mortality rates we use 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:
- we ever increased the current mortality rates above the 1980 CSO Table for
those insureds in the non-smoker simplified underwriting class, or
- the insured is underwritten under the simplified method but is not in the
non-smoker class.
During the period between processing dates, the net cash surrender value takes
the mortality cost into account on a pro-rated basis.
MAXIMUM MORTALITY COST. During the guarantee period, we limit the deduction for
mortality cost if investment results are unfavorable. We do this by substituting
in our calculation, the tabular value for the cash surrender value in
determining the net amount at risk, and multiplying by the guaranteed maximum
mortality rate. We will deduct this alternate amount from the investment base
when it is less than the mortality cost that we would have otherwise deducted.
(See "The Policy's Fixed Base".)
REALLOCATION CHARGES. We may deduct reallocation charges 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 you make during
a policy processing period, which exceeds five for the policy year.
NET LOAN COST. The net loan cost is explained under "Policy Loans".
CHARGES TO THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. Each day we deduct an asset charge from each
division of the Separate Account to cover our mortality, expense, and guaranteed
benefits risks. The total amount of this charge is .60% annually at the
beginning of the year.
- The mortality risk is the risk we assume that insureds as a group will
live for a shorter time than actuarial tables predict. As a result, we
would be paying more in death benefits than planned.
- The expense risk is the risk we assume that it will cost us more to issue
and administer the policies than expected.
- The guaranteed benefits risks are the risks we assume for 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" above).
26
<PAGE>
If the mortality and expense risk charge is not enough to cover the actual
expenses of mortality, maintenance, and administration, we will bear the loss.
If the charge exceeds the actual expenses, the excess will be added to our
profit and may be used to finance distribution expenses. We cannot increase the
total charge.
CHARGES TO DIVISIONS INVESTING IN THE 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 paid to MLPF&S when units are sold to
the Separate Account. The trust charge is currently equivalent to .34% annually
at the beginning of the year. We may increase it, but it won't exceed .50%
annually at the beginning of the year. The charge is based on cost with no
expected profit.
CHARGES TO FUND ASSETS
CHARGES TO SERIES FUND ASSETS. The Series Fund incurs operating expenses and
pays a monthly advisory fee to MLAM. This fee equals an annual rate of:
- .50% of the first $250 million of the aggregate average daily net assets
of the Series Fund;
- .45% of the next $50 million of such assets;
- .40% of the next $100 million of such assets;
- .35% of the next $400 million of such assets; and
- .30% of such assets over $800 million.
We have agreed to reimburse the Series Fund so that the ordinary expenses of
each portfolio (which include the monthly advisory fee) do not exceed .50% of
the portfolio's average daily net assets.
CHARGES TO VARIABLE SERIES FUNDS ASSETS. The Variable Series Funds incurs
operating expenses and pays a monthly advisory fee to MLAM at an annual rate of
the average daily net assets of each portfolio. The fee for each is shown as
follows:
<TABLE>
<CAPTION>
ADVISORY
PORTFOLIO NAME FEE
- -------------------------------------------------- -----------
<S> <C>
Basic Value Focus Fund............................ .60%
Global Utility Focus Fund......................... .60%
Global Bond Focus Fund............................ .60%
Index 500 Fund.................................... .30%
International Equity Focus Fund................... .75%
Developing Capital Markets Focus Fund............. 1.00%
Special Value Focus Fund.......................... .75%
Capital Focus Fund................................ .60%
Global Growth Focus Fund.......................... .75%
</TABLE>
MLAM and Merrill Lynch Life Agency, Inc. have entered into agreements which
limit the operating expenses, exclusive of any distribution fees imposed on
Class B shares, paid by each fund in a given year to 1.25% of its average daily
net assets. These reimbursement agreements provide that any such expenses
greater than 1.25% of average daily net assets will be reimbursed to the fund by
MLAM which, in turn, will be reimbursed by Merrill Lynch Life Agency, Inc.
27
<PAGE>
CHARGES TO AIM V.I. FUNDS ASSETS. The AIM V.I. Funds incurs operating expenses
and pays a monthly advisory fee to AIM at an annual rate of .65% of the first
$250 million of each fund's average daily net assets and .60% of each fund's
average daily net assets in excess of $250 million.
CHARGES TO ALLIANCE FUND ASSETS. The Alliance Fund incurs operating expenses and
pays a monthly advisory fee to Alliance at an annual rate of 1.00% of each of
the Alliance Premier Growth Portfolio's and the Alliance Quasar Portfolio's
average daily net assets.
CHARGES TO MFS TRUST ASSETS. The MFS Trust incurs operating expenses and pays a
monthly advisory fee to MFS at an annual rate of .75% of the average daily net
assets of each of the MFS Emerging Growth Series and MFS Research Series.
CHARGES TO HOTCHKIS AND WILEY TRUST ASSETS. The Hotchkis and Wiley Trust incurs
operating expenses and pays a monthly advisory fee to Hotchkis and Wiley at an
annual rate of .75% of the average daily net assets of the Hotchkis and Wiley
International VIP Portfolio.
CHARGES TO MERCURY V.I. FUNDS ASSETS. The Mercury V.I. Funds incurs operating
expenses and pays a monthly advisory fee to Mercury Asset Management
International Ltd. at an annual rate of .65% of the average daily net assets of
the Mercury V.I. U.S. Large Cap Fund.
Mercury Asset Management International Ltd. has agreed to limit the operating
expenses paid by the Mercury V.I. U.S. Large Cap Fund for one year to 1.25% of
its average daily net assets.
GUARANTEE PERIOD
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 loan
debt exceeds certain policy values. We hold a reserve in our general account to
support this guarantee.
WHEN THE GUARANTEE PERIOD IS LESS THAN FOR LIFE. After the end of the guarantee
period, we will cancel the policy if the net cash surrender value on a policy
processing date won't cover the charges due. (See "Charges Deducted from the
Investment Base".)
We will notify you before canceling the policy. You will then have 61 days to
pay us three times the charges due on the policy processing date when your net
cash surrender value became insufficient. If we haven't received the required
payment by the end of this grace period, we'll cancel the policy. We will treat
any excess payment above the overdue charges as an additional payment.
If we cancel a 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 reinstated policy's effective date.
We will treat your premium payment as an additional payment requiring
underwriting.
28
<PAGE>
The effective date of a reinstated policy is the processing date on or next
following the date the reinstatement application is approved
NET CASH SURRENDER VALUE
Because investment results vary daily, we don't guarantee any minimum net cash
surrender value. On a 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 which has not yet been
deducted from the investment base (see "Deferred policy loading").
If the date of calculation is not a processing date, we also subtract a pro-rata
portion of the mortality cost. If there is any existing loan debt, we will also
subtract a pro-rata net loan cost on dates other than the policy anniversary.
CANCELLING TO RECEIVE NET CASH SURRENDER VALUE. A policy owner may cancel the
policy at any time while the insured is living to receive the net cash surrender
value in a lump sum or under an income plan. You must make the request in
writing in a form satisfactory to us. All rights to the death benefit will end
on the date you send the written request to us. Cancelling the policy may have
tax consequences. See "Tax Considerations."
POLICY LOANS
You may use the policy as collateral to borrow funds from us. The minimum loan
is $1,000 unless you are borrowing to make a payment on another of our variable
life insurance contracts. 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 loan debt any time
during the insured's lifetime. Each repayment must be for at least $1,000 or the
amount of the loan debt, if less. Certain states won't permit a minimum amount
that can be borrowed or repaid.
When you take a loan, we transfer from your investment base the amount of the
loan and hold it as collateral in our general account. You may select the
divisions you want to borrow from, and the divisions you want to repay
(including interest payments). If you don't specify, we'll take the borrowed
amounts proportionately from and make repayments proportionately to your
investment base as then allocated to the investment divisions.
EFFECT ON DEATH BENEFIT AND CASH SURRENDER VALUE. Whether or not you repay loan
debt, taking a loan will have a permanent effect on a policy's cash surrender
value and may have a permanent effect on its death benefit. This is because the
collateral for a loan does not participate in the performance of the investment
divisions while the loan is outstanding. If the amount credited to the
collateral is more than what is earned in the investment divisions, the cash
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 a 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.
29
<PAGE>
In certain states, the loan value may differ from that above for particular
years. The sum of all outstanding loan amounts plus accrued interest is called
loan debt. The maximum amount that can be borrowed at any time is the difference
between the loan value and the loan debt. The cash surrender value is the net
cash surrender value plus any loan debt.
INTEREST. While a loan remains unpaid, we charge 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 UNPAID LOAN AMOUNT.
Loan debt is considered part of cash surrender value which is used to calculate
gain. Interest paid on a policy loan is not tax-deductible.
The amount held in our general account as collateral for a loan earns interest
at a minimum rate of 4% annually for the first ten policy years and 4.15%
thereafter.
NET LOAN COST. In addition to the loan interest we charge, on each policy
anniversary we reduce the investment base by the net loan cost (the difference
between the interest charged and the earnings on the amount held as collateral
in the general account) and add that amount to the amount held in the general
account as collateral for the loan. For the first ten policy years, the net loan
cost equals .75% of the loan 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%. We will not increase the net loan cost. We
take the net loan cost into account in determining the net cash surrender value
of the policy if the date of surrender is not a policy anniversary.
CANCELLATION DUE TO EXCESS DEBT. If the loan debt exceeds the larger of the cash
surrender value and the tabular value, we'll mail you a notice of our intent to
cancel the policy, specifying the minimum repayment amount. We will cancel the
Policy 61 days after we mail a notice of intent to terminate the Policy to you
unless we have received at least the minimum repayment amount specified in the
notice. Depending upon the investment performance of the divisions and the
amounts you borrow, loans may cause the policy to lapse. If the policy lapses
with loan debt outstanding, adverse tax consequences may result. (See "Tax
Considerations".)
DEATH BENEFIT PROCEEDS
We will pay the death benefit proceeds to the beneficiary when we receive all
information needed to process the payment, including due proof of the insured's
death. When we first receive reliable notification of the insured's death by a
representative of the owner or the insured, we may transfer the investment base
to the division investing in the Money Reserve Portfolio, pending payment of
death benefit proceeds.
AMOUNT OF DEATH BENEFIT PROCEEDS. The death benefit proceeds equal:
- the death benefit, which is the larger of the current face amount and the
variable insurance amount; less
- any loan debt; and less
- any overdue charges if the policy is in a grace period (see "When Your
Guarantee Period is Less Than for Life").
The values used in calculating the death benefit proceeds are 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.
30
<PAGE>
The amount we pay on death will be greater when we receive and accept an
additional payment during a policy processing period and the insured dies prior
to the next policy processing date (see "Making Additional Payments").
VARIABLE INSURANCE AMOUNT. We determine the variable insurance amount on each
policy processing date by multiplying the cash surrender value by the net single
premium factor.
NET SINGLE PREMIUM FACTOR
The net single premium factor is based on the
insured's sex, underwriting class, and attained age on
the policy processing date. It decreases as the
insured's age increases. As a result, the variable
insurance amount will decrease in relationship to the
policy's cash surrender value. Also, net single
premium factors may be higher for a woman than for a
man of the same age. Your policy contains a table of
net single premium factors as of each anniversary.
<TABLE>
<CAPTION>
TABLE OF ILLUSTRATIVE NET SINGLE PREMIUM FACTORS
ON POLICY ANNIVERSARIES
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 generally pay the death benefit proceeds to the beneficiary within seven
days after we receive all the information needed to process the payment. We may
delay payment, however, if we are contesting the policy or under the
circumstances described in "Using the Policy" and "Other Policy Provisions".
We will add interest from the date of the insured's death to the date of payment
at an annual rate of at least 4%. The beneficiary may elect to receive the
proceeds either in a single payment or under one or more income plans described
below.
DOLLAR COST AVERAGING
WHAT IS IT? Once the feature is available in your state, the policy will offer
an optional transfer feature called Dollar Cost Averaging ("DCA"). Contact the
Service Center about availability. This feature allows you to make automatic
monthly transfers from the Money Reserve Portfolio to up to four other
investment divisions depending on your current allocation of investment base.
The DCA program will terminate and no transfers will be made if transfers under
DCA would cause you to be invested in more than 5 divisions.
The DCA feature is intended to reduce the effect of short-term price
fluctuations on investment cost. Since the same dollar amount is transferred to
selected divisions each month, more units of a division are purchased
31
<PAGE>
when their value is low and fewer units are purchased when their value is high.
Therefore, over the long haul a DCA program may let you buy units at a lower
average cost. However, a DCA program does not assure a profit or protect against
a loss in declining markets.
Once available, you can choose the DCA feature any time. Once you start using
it, you must continue it for at least three months. You can select a duration in
months for the DCA program. If you do not choose a duration we will make
reallocations at monthly intervals until the balance in the Money Reserve
Portfolio is zero. While the DCA program is in place any amount in the Money
Reserve Portfolio is available for transfer.
MINIMUM AMOUNTS. To elect DCA, you need to have a minimum amount in the Money
Reserve Portfolio. We determine the amount required by multiplying the specified
length of your DCA program in months by your specified monthly transfer amount.
If you do not select a duration we determine the minimum amount required by
multiplying your monthly transfer amount by 3 months. You must specify at least
$100 for transfer each month. Allocations may be made in specific whole dollar
amounts or in percentage increments of 1%. We reserve the right to change these
minimums.
Should the amount in your Money Reserve Portfolio be less than the selected
monthly transfer amount, we'll notify you that you need to put more money in the
Money Reserve Portfolio to continue DCA. If you do not specify a duration or the
specified duration has not been reached and the amount in the Money Reserve
Portfolio is less than the monthly transfer amount, the entire amount will be
transferred. Transfers are made based on your selected DCA percentage
allocations or are made pro-rata based on your specified DCA transfer amounts.
WHEN DO WE MAKE DCA TRANSFERS? We'll make the first DCA transfer on the first
monthiversary date after the later of the date our Service Center receives your
election or fourteen days after the in force date. We'll make additional DCA
transfers on each subsequent monthiversary. We don't charge for DCA transfers.
These transfers are in addition to reallocations permitted under the policy.
RIGHT TO EXCHANGE POLICY
Within 18 months of the issue date you may exchange your policy for a policy
with benefits that do not vary with the investment results of a separate
account. Your request must be in writing. Also, you must return the original
policy.
The new policy will have the same owner and beneficiary as those of the original
policy on the date of the exchange. It will also have the same issue age, issue
date, face amount, cash surrender value, benefit riders and underwriting class
as the original policy. Any loan debt will be carried over to the new policy.
We won't require evidence of insurability to exchange for a new "fixed" policy.
INCOME PLANS
We offer several income plans to provide for payment of the death benefit
proceeds to the beneficiary. Payments under these plans do not depend on the
investment results of a separate account. You may choose one or more income
plans at any time during the insured's lifetime. If you haven't selected a plan,
when the insured dies the beneficiary has one year to apply the death benefit
proceeds either paid or payable to one or more of the plans. In addition, if you
cancel the policy for its net cash surrender value, you may also choose one or
more income plans for payment of the proceeds.
We need to approve any plan where any income payment would be less than $100.
32
<PAGE>
Income plans include:
- ANNUITY PLAN. An amount can be used to purchase a single premium immediate
annuity.
- INTEREST PAYMENT. You can leave amounts with us to earn interest at an
annual rate of at least 3%.
- INCOME FOR A FIXED PERIOD. We make payments in equal installments for up
to 30 years.
- INCOME FOR LIFE. We make payments in equal monthly installments until the
death of a named person or the end of a designated period, whichever is
later. The designated period may be for 10 or 20 years. Other designated
periods and payment schedules may be available on request.
- INCOME OF A FIXED AMOUNT. We make payments in equal installments until
proceeds applied under this option and interest on the unpaid balance at
not less than 3% per year are exhausted.
- JOINT LIFE INCOME. We make payments in monthly installments as long as at
least one of two named persons is living. Other payment schedules may be
available on request. While both are living, we make full payments. If one
dies, we make payments of at least two-thirds of the full amount. Payments
end completely when both named persons die.
UNDER THE INCOME FOR LIFE AND JOINT LIFE INCOME OPTIONS, OUR POLICY OBLIGATION
MAY BE SATISFIED WITH ONLY ONE PAYMENT IF AFTERWARD THE NAMED PERSON OR PERSONS
DIES. IN ADDITION, ONCE IN EFFECT, SOME OF THE INCOME PLANS MAY NOT PROVIDE ANY
SURRENDER RIGHTS.
REPORTS TO POLICY OWNERS
After the end of each policy quarter, we will send you a statement showing the
allocation of your investment base, death benefit, net cash surrender value, any
loan debt and, if there has been a change, new 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 you make additional payments. The statement will also include any other
information that may be currently required by your state.
You will receive confirmation of all financial transactions. These confirmations
will show the price per unit of each of your investment divisions, the number of
units you have in the investment division and the value of the investment
division computed by multiplying the quantity of units by the price per unit.
(See "Net Rate of Return for an Investment Division".)
We will also send you semi-annual reports containing financial statements 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 your state allows, you may have added
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.
33
<PAGE>
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. You can also choose one of the options available
upon surrender of the rider.
The rider won't have any effect on your policy's loan value.
We hold the reserves for this rider in our general account.
If you pledge, assign, or gift a policy with a SPIAR, you may have tax
consequences. We advise you 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 Consequences."
MORE ABOUT THE POLICY
USING THE POLICY
OWNERSHIP. The policy owner is the insured, unless someone other than the
insured has been named as the owner in the application. The policy owner has all
rights and options described in the policy.
If you are not the insured, you may want to name a contingent owner. If you die
before the insured, the contingent owner will own your interest in the policy
and have all your rights. If you don't name a contingent owner, your estate will
then own your interest in the policy at your death.
If there is more than one policy owner, we will treat the owners as joint
tenants with rights of survivorship unless the ownership designation provides
otherwise. We may require completion of additional forms. The owners must
exercise their rights and options jointly, except that any one of the owners may
reallocate the policy's investment base by phone if the owner provides the
personal identification number as well as the policy number. One policy owner
must be designated, in writing, to receive all notices, correspondence and tax
reporting to which policy owners are entitled under the policy.
CHANGING THE OWNER. During the insured's 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 date the notice
is signed, but will not affect any payment we've made or action we've taken
before our Service Center receives the notice of the change.
ASSIGNING THE POLICY AS COLLATERAL. You may assign the 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 satisfactory written notice at our Service Center
in order to make or release an assignment. We are not responsible for the
validity of any assignment.
NAMING BENEFICIARIES. We will pay the primary beneficiary the death benefit
proceeds of the policy on the insured's death. If the primary beneficiary has
died before the insured, we will pay the contingent beneficiary. If no
contingent beneficiary is living, we will pay the insured's estate.
34
<PAGE>
You may name more than one person as primary or contingent beneficiaries. We
will pay proceeds in equal shares to the surviving beneficiaries unless the
beneficiary designation provides differently.
You have the right to change beneficiaries during the insured's lifetime.
However, if your primary beneficiary designation is irrevocable, the primary
beneficiary must consent when you exercise certain policy rights and options. If
you change the beneficiary, the change will take effect as of the date the
notice is signed, but will not affect any payment we've made or action we've
taken before our Service Center receives the notice of the change.
CHANGING THE INSURED. Subject to certain requirements, you may request a change
of insured once each policy year. We must receive a written request signed by
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 loan debt must first
be repaid and the policy cannot be under a collateral assignment. If we approve
the request for change, insurance coverage 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 at that time and the policy is still in
force.
We will change the policy 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;
- we will deduct a charge for changing the insured 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 charge of $200 and a maximum of
$1,500;
- the variable insurance amount will reflect the change of insured; and
- the policy's issue date will be the effective date of the change.
We may also change the face amount or guarantee period on the effective date
depending on the new insured's age, sex and underwriting class.
MATURITY PROCEEDS. The maturity date is the policy anniversary nearest the
insured's 100th birthday. On the maturity date, we will pay you the net cash
surrender value, provided the insured is still living at that time and the
policy is in effect.
WHEN WE MAKE PAYMENTS. We generally pay death benefit proceeds, loans and net
cash surrender value on cancellation within seven days after our Service Center
receives all the information needed to process the payment. However, we may
delay payment if it isn't practical for us to value or dispose of Trust units or
Fund shares because:
- the New York Stock Exchange is closed, other than for a customary weekend
or holiday; or
- trading on the New York Stock Exchange is restricted; or
35
<PAGE>
- the Securities and Exchange Commission declares that an emergency exists
such that it is not reasonably practical to dispose of securities held in
the Separate Account or to determine the value of their assets; or
- the Securities and Exchange Commission by order so permits for the
protection of policy owners.
SOME ADMINISTRATIVE PROCEDURES
We reserve the right to modify or eliminate the procedures described below. For
administrative and tax purposes, we may from time to time require that specific
forms be completed for certain transactions, including surrenders.
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 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;
- multiple owner form; and
- telephone authorization forms if not submitted with your application.
PERSONAL IDENTIFICATION CODE. We will send you a four-digit personal
identification code shortly after the policy is placed in force and before the
end of the "free look" period. You must give this number when you call the
Service Center to get information about the policy, to make a loan (if an
authorization is on file), or to make other requests.
REALLOCATING THE INVESTMENT BASE. Policy owners can reallocate their investment
base either in writing in a form satisfactory to us or by telephone. If you
request the reallocation by telephone, you must give your personal
identification code as well as your policy number. We will give a confirmation
number over the telephone and then follow up in writing.
REQUESTING A LOAN. You may request a loan in writing or, if all required forms
are on file with us, by telephone. Once our Service Center receives the
authorization, you can call the Service Center, give your policy number, name
and personal identification code, and tell us the loan amount and the divisions
from which the loan should be taken.
Upon request, we will wire the funds to the account at the financial institution
named on your authorization. We will generally wire the funds within two working
days of receipt of the request.
TELEPHONE REQUESTS. A telephone request for a 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. We reserve
the right to change procedures or discontinue the ability to make telephone
transfers.
36
<PAGE>
We will employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. These procedures may include, but are not limited to,
possible recording of telephone calls and obtaining appropriate identification
before effecting any telephone transactions. We will not be liable for following
telephone instructions that we reasonably believe to be genuine.
OTHER POLICY PROVISIONS
IN CASE OF ERRORS IN THE APPLICATION. If an age or sex stated in the application
is wrong, it could mean that the face amount, guarantee period, or any other
policy benefit is wrong. We will pay what the premium would have bought for the
true age or sex assuming the same guarantee period.
INCONTESTABILITY. We will 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 application. In
addition, we can contest any amount of death benefit attributable to an
additional payment 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 the 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
the policy's issue date, we will pay only a limited death benefit. The benefit
will be equal to the amount of the payments made. If the insured commits suicide
within two years of any date we receive and accept an additional payment, any
amount of death benefit attributable to the additional payment will be limited
to the amount of the payment. The death benefit will be reduced by any loan
debt.
POLICY CHANGES -- APPLICABLE FEDERAL TAX LAW. To receive the tax treatment
accorded to life insurance under federal income tax law, the policy must qualify
initially and continue to qualify as life insurance under the Internal Revenue
Code or successor law. We reserve the right to make changes in the policy or its
riders or to make distributions from the policy to the extent necessary to
continue to qualify the policy as life insurance. Any 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 is issued.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce the sales load,
first-year administrative expense, mortality cost, and the minimum payment, and
may modify 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.
37
<PAGE>
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 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 make any reductions according to 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.
UNISEX LEGAL CONSIDERATIONS
In 1983 the Supreme Court held in ARIZONA GOVERNING COMMITTEE V. NORRIS that
optional annuity benefits provided under an employee's deferred compensation
plan could not, under Title VII of the Civil Rights Act of 1964, vary between
men and women. In addition, legislative, regulatory or decisional authority of
some states may prohibit use of sex-distinct mortality tables under certain
circumstances.
The policies offered by this Prospectus are 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 these policies.
Some states prohibit the use of actuarial tables that distinguish between men
and women in determining payments and policy benefits for policies issued on the
lives of their residents. (Previously, certain policies we issue on the life of
a Massachusetts resident were also issued on a unisex basis.) Therefore,
policies offered in this Prospectus to insure residents of Montana will have
payments and benefits which are based on actuarial tables that do not
differentiate on the basis of sex. You should consult the policy.
SELLING THE POLICIES
MLPF&S is the principal underwriter of the policy. It was organized in 1958
under the laws of the state of Delaware and is registered as a broker-dealer
under the Securities Exchange Act of 1934. It is a member of the National
Association of Securities Dealers, Inc. ("NASD"). The principal business address
of MLPF&S is World Financial Center, 250 Vesey Street, New York, New York 10281.
MLPF&S also acts as principal underwriter of other variable life insurance and
variable annuity policies we issue, as well as variable life insurance and
variable annuity policies issued by ML Life Insurance Company of New York, an
affiliate of ours. MLPF&S also acts as principal underwriter of certain mutual
funds managed by Merrill Lynch Asset Management, the investment adviser for the
Series Fund and the Variable Series Funds.
We have companion sales agreements with MLPF&S and various Merrill Lynch Life
Agencies. Under these agreements, financial consultants of MLPF&S solicit
applications for the policies. 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 financial
consultants will, in no event, exceed 3.1%. Additional annual compensation of no
more than .13% of the investment base may also be paid to your financial
consultant. Commissions may be paid in the form of non-cash compensation,
subject to applicable regulatory requirements.
38
<PAGE>
The maximum commission we will pay to the applicable insurance agency to be used
to pay commissions to financial consultants is 7% of each premium paid and up to
.10% of the investment base.
The amounts paid under the distribution and sales agreements for the Separate
Account for the year ended December 31, 1998, December 31, 1997, and December
31, 1996 were $190,553, $273,924, and $634,950, respectively.
TAX CONSIDERATIONS
INTRODUCTION. The following summary discussion is based on our understanding of
current Federal income tax law as the Internal Revenue Service (IRS) now
interprets it. We can't guarantee that the law or the IRS's interpretation won't
change. It does not purport to be complete or to cover all tax situations. This
discussion is not intended as tax advice. Counsel or other tax advisors should
be consulted for further information.
We haven't considered any applicable federal gift, estate or any state or other
tax laws. Of course, your own tax status or that of your beneficiary can affect
the tax consequences of ownership or receipt of distributions.
TAX STATUS OF THE POLICY. 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 Federal Tax Law").
DIVERSIFICATION REQUIREMENTS. IRC section 817(h) and the regulations under it
provide that separate account investments underlying a policy must be
"adequately diversified" for it to qualify as a life insurance policy under IRC
section 7702. The separate account intends to comply with the diversification
requirements of the regulations under section 817(h). This will affect how we
make investments.
In certain circumstances, owners of variable life policies have been considered
for Federal income tax purposes to be the owners of the assets of the separate
account supporting their policies due to their ability to exercise investment
control over those assets. Where this is the case, the policy owners have been
currently taxed on income and gains attributable to the separate account assets.
There is little guidance in this area, and some features such as the flexibility
of an owner to allocate premium payments and transfer policy accumulation values
have not been explicitly addressed in published rulings. While we believe that
the policies do not give
39
<PAGE>
owners investment control over variable account assets, we reserve the right to
modify the policies as necessary to prevent an owner from being treated as the
owner of the variable account assets supporting the policy.
The following discussion assumes that the policy will qualify as a life
insurance policy for Federal income tax purposes.
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
40
<PAGE>
on the contract. Specifically, if we or any of our 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 us 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 us, 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 loan 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 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
41
<PAGE>
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.
In recent years, moreover, Congress has adopted new rules relating to life
insurance owned by businesses. Any business should consult a tax advisor
regarding possible tax consequences associated with a policy prior to the
acquisition of this policy and also before entering into any subsequent changes
to or transactions under this policy.
POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the policy
could change by legislation or otherwise. It is possible that any legislative
change could be retroactive (that is, effective prior to the date of the
change). Consult a tax advisor with respect to legislative developments and
their effect on the policy.
We don't 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 adviser. Although this tax discussion is based on our
understanding of federal income tax laws as they are currently interpreted, we
can't guarantee that those laws or interpretations will remain unchanged.
MERRILL LYNCH LIFE 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 we do not
currently deduct charges for Federal income taxes from the separate account.
Changes in Federal tax treatment of variable life insurance or in our 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.
Any tax charges we impose will not 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 to reinsured some of the risks assumed under the policies.
ILLUSTRATIONS
ILLUSTRATIONS OF DEATH BENEFITS, INVESTMENT BASE, CASH SURRENDER VALUES AND
ACCUMULATED PAYMENTS
The tables below demonstrate the way in which the policy works. The tables
are based on the following ages, face amounts, payments and guarantee periods.
1. The illustration on page 41 is for a policy issued to a male age 5 in
the standard-simplified underwriting class with a single payment of $5,000, a
face amount of $40,057 and a guarantee period for life.
42
<PAGE>
2. The illustration on page 42 is for a policy issued to a male age 40 in
the standard-simplified underwriting class with a single payment of $10,000, a
face amount of $28,477 and a guarantee period for life.
3. The illustration on page 43 is for a policy issued to a male age 55 in
the standard-simplified underwriting class with a single payment of $10,000, a
face amount of $18,386 and a guarantee period for life.
4. The illustration on page 44 is for a policy issued to a female age 65 in
the standard-simplified underwriting class with a single payment of $10,000, a
face amount of $16,308 and a guarantee period for life.
5. The illustration on page 45 is for a policy issued to a male age 40 in
the standard-simplified underwriting class with a single payment 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 a 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 asset charge
in the Separate Account equivalent to .60% (annually at the beginning of the
year) of assets attributable to the policies at the beginning of the year.
The amounts shown in the tables also assume an additional charge of .58%. This
charge assumes that investment base is allocated equally among all investment
divisions and is based on the 1998 expenses (including monthly advisory fees)
for the Funds, and the current trust charge. This charge also reflects expense
reimbursements made in 1998 (or estimated for 1999) to certain portfolios by the
investment adviser to the respective portfolio. These reimbursements amounted to
.17%, .13%, .03%, .35%, and .98% of the average daily net assets of the
Developing Capital Markets Focus Fund, the Natural Resources Portfolio, the
Alliance Premier Growth Portfolio, the Alliance Quasar Portfolio, and the
Mercury V.I. U.S. Large Cap Fund, respectively. (See "Charges to Fund Assets".)
The actual charge under a policy for Fund expenses and the trust charge will
depend on the actual allocation of the investment base and may be higher or
lower depending on how the investment base is allocated.
Taking into account the .60% asset charge in the Separate Account and the .58%
charge described above, the gross annual rates of investment return of 0%, 4%,
8% and 12% correspond to net annual rates of--1.18%, 2.8%, 6.78% and 10.75%,
respectively. The gross returns are before any deductions and should not be
compared to rates which reflect deduction of charges.
The hypothetical returns shown on the tables are without any income tax charges
that may be attributable to the Separate Account in the future. In order to
produce after tax returns of 0%, 4%, 8% and 12%, the Funds 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 was invested to earn interest (after taxes)
at 5% compounded annually.
We will furnish upon request a personalized illustration reflecting the proposed
insured's age, face amount and the payment amounts requested. The illustration
will also use current cost of insurance rates and will assume that the proposed
insured is in a standard underwriting class. In addition, if a purchase is made,
a personal illustration will be included at the delivery of a policy reflecting
the insured's actual underwriting class.
43
<PAGE>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 5
$5,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $40,057 GUARANTEE PERIOD: FOR LIFE
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
TOTAL END OF YEAR
PREMIUMS DEATH BENEFIT (2)
PAID PLUS ASSUMING HYPOTHETICAL GROSS (AFTER TAX)
INTEREST AT 5% ANNUAL INVESTMENT RETURN OF
AS OF END OF ----------------------------------------------
END OF POLICY YEAR PAYMENTS (1) YEAR 0% 4% 8% 12%
- -------------------- ------------ --------------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1................... $5,000 $ 5,250 $40,057 $40,057 $ 41,328 $ 42,980
2................... 0 5,513 40,057 40,057 42,607 46,054
3................... 0 5,788 40,057 40,057 43,897 49,289
4................... 0 6,078 40,057 40,057 45,199 52,700
5................... 0 6,381 40,057 40,057 46,514 56,298
6................... 0 6,700 40,057 40,057 47,844 60,098
7................... 0 7,036 40,057 40,057 49,191 64,114
8................... 0 7,387 40,057 40,057 50,555 68,363
9................... 0 7,757 40,057 40,057 51,939 72,863
10.................. 0 8,144 40,057 40,057 53,344 77,630
15.................. 0 10,395 40,057 40,057 60,877 106,418
20.................. 0 13,266 40,057 40,057 69,471 145,874
30.................. 0 21,610 40,057 40,057 90,452 273,963
60.................. 0 93,396 40,057 40,057 199,770 1,817,512
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS (AFTER ASSUMING HYPOTHETICAL GROSS (AFTER
TAX) 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................... $4,848 $5,046 $ 5,243 $ 5,440 $4,533 $4,731 $ 4,928 $ 5,125
2................... 4,700 5,095 5,503 5,926 4,420 4,815 5,223 5,646
3................... 4,555 5,147 5,780 6,460 4,310 4,902 5,535 6,215
4................... 4,413 5,202 6,076 7,050 4,203 4,992 5,866 6,840
5................... 4,275 5,261 6,393 7,700 4,100 5,086 6,218 7,525
6................... 4,138 5,321 6,729 8,416 3,998 5,181 6,589 8,276
7................... 4,002 5,382 7,085 9,202 3,897 5,277 6,980 9,097
8................... 3,865 5,442 7,460 10,063 3,795 5,372 7,390 9,993
9................... 3,725 5,498 7,851 11,000 3,690 5,463 7,816 10,965
10.................. 3,581 5,551 8,260 12,021 3,581 5,551 8,260 12,021
15.................. 2,986 5,947 10,803 18,885 2,986 5,947 10,803 18,885
20.................. 2,398 6,370 14,183 29,782 2,398 6,370 14,183 29,782
30.................. 1,395 7,502 25,194 76,308 1,395 7,502 25,194 76,308
60.................. 0 8,221 128,593 1,169,947 0 8,221 128,593 1,169,947
</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 US 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>
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>
TOTAL END OF YEAR
PREMIUMS DEATH BENEFIT (2)
PAID PLUS ASSUMING HYPOTHETICAL GROSS (AFTER
INTEREST AT TAX)
5% AS ANNUAL INVESTMENT RETURN OF
OF END OF -----------------------------------
END OF POLICY YEAR PAYMENTS (1) YEAR 0% 4% 8% 12%
- -------------------- ------------ ------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
1................... $10,000 $10,500 $28,477 $28,477 $29,379 $ 30,553
2................... 0 11,025 28,477 28,477 30,287 32,734
3................... 0 11,576 28,477 28,477 31,203 35,032
4................... 0 12,155 28,477 28,477 32,127 37,453
5................... 0 12,763 28,477 28,477 33,061 40,008
6................... 0 13,401 28,477 28,477 34,006 42,707
7................... 0 14,071 28,477 28,477 34,962 45,561
8................... 0 14,775 28,477 28,477 35,931 48,580
9................... 0 15,513 28,477 28,477 36,915 51,777
10.................. 0 16,289 28,477 28,477 37,913 55,165
15.................. 0 20,789 28,477 28,477 43,267 75,620
20.................. 0 26,533 28,477 28,477 49,379 103,679
25.................. 0 33,864 28,477 28,477 56,359 142,176
30.................. 0 43,219 28,477 28,477 64,333 195,011
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS (AFTER ASSUMING HYPOTHETICAL GROSS (AFTER
TAX) 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................... $9,738 $10,134 $10,530 $ 10,925 $9,108 $ 9,504 $ 9,900 $ 10,295
2................... 9,473 10,267 11,087 11,938 8,913 9,707 10,527 11,378
3................... 9,206 10,397 11,674 13,046 8,716 9,907 11,184 12,556
4................... 8,936 10,526 12,291 14,258 8,516 10,106 11,871 13,838
5................... 8,664 10,651 12,939 15,584 8,314 10,301 12,589 15,234
6................... 8,388 10,774 13,620 17,033 8,108 10,494 13,340 16,753
7................... 8,109 10,893 14,335 18,618 7,899 10,683 14,125 18,408
8................... 7,826 11,010 15,087 20,349 7,686 10,870 14,947 20,209
9................... 7,541 11,123 15,878 22,243 7,471 11,053 15,808 22,173
10.................. 7,252 11,232 16,708 24,310 7,252 11,232 16,708 24,310
15.................. 6,066 12,054 21,885 38,251 6,066 12,054 21,885 38,251
20.................. 4,667 12,689 28,341 59,507 4,667 12,689 28,341 59,507
25.................. 3,016 13,054 36,279 91,520 3,016 13,054 36,279 91,520
30.................. 1,033 13,005 45,783 138,782 1,033 13,005 45,783 138,782
</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 US 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>
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)
PREMIUMS ASSUMING HYPOTHETICAL GROSS (AFTER
PAID PLUS TAX)
INTEREST AT 5% ANNUAL INVESTMENT RETURN OF
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 $18,386 $18,386 $18,969 $ 19,727
2................... 0 11,025 18,386 18,386 19,556 21,139
3................... 0 11,576 18,386 18,386 20,149 22,626
4................... 0 12,155 18,386 18,386 20,748 24,194
5................... 0 12,763 18,386 18,386 21,353 25,848
6................... 0 13,401 18,386 18,386 21,965 27,597
7................... 0 14,071 18,386 18,386 22,585 29,445
8................... 0 14,775 18,386 18,386 23,213 31,401
9................... 0 15,513 18,386 18,386 23,850 33,472
10.................. 0 16,289 18,386 18,386 24,497 35,666
15.................. 0 20,789 18,386 18,386 27,963 48,921
20.................. 0 26,533 18,386 18,386 31,921 67,115
30.................. 0 43,219 18,386 18,386 41,614 126,423
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
---------------------------------- ----------------------------------
END OF POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
- -------------------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... $9,690 $10,085 $10,480 $ 10,874 $9,060 $ 9,455 $ 9,850 $ 10,244
2................... 9,375 10,165 10,979 11,822 8,815 9,605 10,419 11,262
3................... 9,056 10,239 11,499 12,853 8,566 9,749 11,009 12,363
4................... 8,733 10,306 12,041 13,971 8,313 9,886 11,621 13,551
5................... 8,405 10,368 12,606 15,186 8,055 10,018 12,256 14,836
6................... 8,074 10,423 13,193 16,504 7,794 10,143 12,913 16,224
7................... 7,737 10,471 13,803 17,932 7,527 10,261 13,593 17,722
8................... 7,394 10,509 14,436 19,479 7,254 10,369 14,296 19,339
9................... 7,045 10,538 15,092 21,152 6,975 10,468 15,022 21,082
10.................. 6,688 10,556 15,769 22,959 6,688 10,556 15,769 22,959
15.................. 5,135 10,839 19,900 34,815 5,135 10,839 19,900 34,815
20.................. 3,363 10,827 24,754 52,046 3,363 10,827 24,754 52,046
30.................. 0 9,539 36,435 110,689 0 9,539 36,435 110,689
</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 US 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>
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)
PREMIUMS ASSUMING HYPOTHETICAL GROSS (AFTER
PAID PLUS TAX)
INTEREST AT 5% ANNUAL INVESTMENT RETURN OF
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 $16,308 $16,308 $16,826 $17,499
2................... 0 11,025 16,308 16,308 17,347 18,751
3................... 0 11,576 16,308 16,308 17,873 20,071
4................... 0 12,155 16,308 16,308 18,405 21,462
5................... 0 12,763 16,308 16,308 18,941 22,930
6................... 0 13,401 16,308 16,308 19,485 24,482
7................... 0 14,071 16,308 16,308 20,035 26,122
8................... 0 14,775 16,308 16,308 20,592 27,857
9................... 0 15,513 16,308 16,308 21,157 29,695
10.................. 0 16,289 16,308 16,308 21,731 31,642
15.................. 0 20,789 16,308 16,308 24,807 43,405
20.................. 0 26,533 16,308 16,308 28,321 59,559
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
--------------------------------- ---------------------------------
END OF POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
- -------------------- ------ ------- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... $9,680 $10,076 $10,470 $10,864 $9,050 $ 9,446 $ 9,840 $10,234
2................... 9,356 10,146 10,959 11,801 8,796 9,586 10,399 11,241
3................... 9,029 10,211 11,469 12,818 8,539 9,721 10,979 12,328
4................... 8,700 10,271 12,001 13,925 8,280 9,851 11,581 13,505
5................... 8,369 10,327 12,557 15,128 8,019 9,977 12,207 14,778
6................... 8,035 10,378 13,138 16,435 7,755 10,098 12,858 16,155
7................... 7,697 10,423 13,742 17,854 7,487 10,213 13,532 17,644
8................... 7,352 10,458 14,369 19,389 7,212 10,318 14,229 19,249
9................... 6,999 10,481 15,014 21,045 6,929 10,411 14,944 20,975
10.................. 6,636 10,491 15,677 22,827 6,636 10,491 15,677 22,827
15.................. 5,011 10,683 19,646 34,375 5,011 10,683 19,646 34,375
20.................. 3,127 10,517 24,170 50,830 3,127 10,517 24,170 50,830
</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 US 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>
SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 40
$10,000 SINGLE PREMIUM FOR STANDARD-SIMPLIFIED UNDERWRITING RISK
FACE AMOUNT: $123,712 GUARANTEE PERIOD AT ISSUE: 15 YEARS
BASED ON MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
END OF YEAR
DEATH BENEFIT (2)
TOTAL ASSUMING HYPOTHETICAL GROSS (AFTER
PREMIUMS 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 $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 51,657 123,712 123,712 123,712 139,259
20.................. 1,500 74,632 123,712 123,712 123,712 207,626
25.................. 1,500 103,954 123,712 123,712 131,827 299,503
30.................. 0 132,675 * 123,712 150,627 411,064
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR END OF YEAR
INVESTMENT BASE (2) CASH SURRENDER VALUE (2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
------------------------------------ ------------------------------------
END OF POLICY YEAR 0% 4% 8% 12% 0% 4% 8% 12%
- -------------------- ------- ------- -------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1................... $ 9,364 $ 9,755 $ 10,146 $ 10,538 $ 8,734 $ 9,125 $ 9,516 $ 9,908
2................... 10,170 10,997 11,857 12,750 9,523 10,349 11,209 12,102
3................... 10,923 12,229 13,641 15,158 10,268 11,574 12,985 14,503
4................... 11,620 13,448 15,499 17,783 10,966 12,794 14,845 17,129
5................... 12,257 14,649 17,435 20,647 11,614 14,006 16,793 20,004
6................... 12,833 15,829 19,451 23,775 12,211 15,208 18,830 23,153
7................... 13,349 16,989 21,556 27,200 12,759 16,398 20,966 26,610
8................... 13,804 18,125 23,753 30,956 13,254 17,575 23,204 30,407
9................... 14,200 19,239 26,054 35,086 13,701 18,740 25,555 34,587
10.................. 14,526 20,318 28,455 39,626 14,088 19,879 28,016 39,187
15.................. 15,416 25,459 42,679 70,880 14,977 25,020 42,240 70,441
20.................. 13,922 28,811 60,889 119,607 13,483 28,373 60,451 119,168
25.................. 9,022 28,857 85,297 193,232 8,584 28,418 84,859 192,793
30.................. * 12,929 107,294 292,640 * 12,832 107,197 292,543
</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 US 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.
48
<PAGE>
MORE ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their positions with us are as
follows:
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE COMPANY
- ------------------------------------ -----------------------------------------------------------------------
<S> <C>
Anthony J. Vespa.................... Chairman of the Board, President, and Chief Executive Officer
Joseph E. Crowne, Jr................ Director, Senior Vice President, Chief Financial Officer, Chief
Actuary, and Treasurer
Barry G. Skolnick................... Director, Senior Vice President, General Counsel, and Secretary
David M. Dunford.................... Director, Senior Vice President, and Chief Investment Officer
Gail R. Farkas...................... Director and Senior Vice President
Robert J. Boucher................... Senior Vice President, Variable Life Administration
</TABLE>
Each director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and shall have qualified. Each has held
various executive positions with insurance company subsidiaries of our indirect
parent, Merrill Lynch & Co., Inc. The principal positions of our directors and
executive officers for the past five years are listed below:
Mr. Vespa joined Merrill Lynch Life in January 1994. Since February 1994, he has
held the position of Senior Vice President of MLPF&S.
Mr. Crowne joined Merrill Lynch Life in June 1991.
Mr. Skolnick joined Merrill Lynch Life in November 1990. Since May 1992, he has
held the position of Assistant General Counsel of Merrill Lynch & Co., Inc. and
First Vice President and Assistant General Counsel of MLPF&S.
Mr. Dunford joined Merrill Lynch Life in July 1990.
Ms. Farkas joined Merrill Lynch Life in August 1995. Prior to August 1995, she
held the position of Director of Market Planning of MLPF&S.
Mr. Boucher joined Merrill Lynch Life in May 1992.
None of our shares are owned by any of our officers or directors, as it is a
wholly owned subsidiary of MLIG. Our officers and directors, both individually
and as a group, own less than one percent of the outstanding shares of common
stock of Merrill Lynch & Co., Inc.
SERVICES ARRANGEMENT
We and MLIG are parties to a service agreement pursuant to which MLIG has agreed
to provide certain data processing, legal, actuarial, management, advertising
and other services to us, including services related to the Separate Account and
the policies. We reimburse expenses incurred by MLIG under this service
agreement on an allocated cost basis. Charges billed to us by MLIG under the
agreement were $43.2 million for the year ended December 31, 1998.
49
<PAGE>
STATE REGULATION
We are subject to the laws of the State of Arkansas and to the regulations of
the Arkansas Insurance Department (the "Insurance Department"). We file a
detailed financial statement in the prescribed form (the "Annual Statement")
with the Insurance Department each year covering our operations for the
preceding year and our financial condition as of the end of that year.
Regulation by the Insurance Department includes periodic examination to
determine policy liabilities and reserves so that the Insurance Department may
certify that these items are correct. Our books and accounts are subject to
review by the Insurance Department at all times. A full examination of our
operations is conducted periodically by the Insurance Department and under the
auspices of the National Association of Insurance Commissioners. We are also
subject to the insurance laws and regulations of all jurisdictions in which we
are licensed to do business.
YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment companies and
financial and business organizations, the Separate Account could be adversely
affected if the computer systems we or the other service providers use do not
properly address this problem before January 1, 2000. Merrill Lynch & Co., Inc.
has established a dedicated group to analyze these issues and to implement any
systems modifications necessary to prepare for the Year 2000. Substantial
resources are being devoted to this effort. It is difficult to predict whether
the amount of resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on us. Currently, we don't anticipate that the
transition to the 21st century will have any material impact on our ability to
continue to service the policies at current levels. In addition, we have sought
assurances from the other service providers that they are taking all necessary
steps to ensure that their computer systems will accurately reflect the Year
2000. We will continue to monitor the situation. At this time, however, we
cannot give assurance that the other service providers have anticipated every
step necessary to avoid any adverse effect on the Separate Account attributable
to the Year 2000 Problem.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. We and MLPF&S are engaged
in various kinds of routine litigation that, in our judgment, is not material to
our total assets or to MLPF&S.
EXPERTS
Our financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 and of the Separate Account as
of December 31, 1998 and for the periods presented, included in this Prospectus,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. Deloitte & Touche LLP's principal business address is Two World
Financial Center, New York, New York 10281-1433.
Actuarial matters included in this Prospectus have been examined by Joseph E.
Crowne, Jr., F.S.A., our Chief Actuary and Chief Financial Officer, as stated in
his opinion filed as an exhibit to the registration statement.
50
<PAGE>
LEGAL MATTERS
Our organization, its authority to issue the policy, and the validity of the
form of the policy have been passed upon by Barry G. Skolnick, our Senior Vice
President and General Counsel.
REGISTRATION STATEMENTS
We have filed a Registration statement with the Securities and Exchange
Commission under the Securities Act of 1933 and the Investment Company Act of
1940 that relate to the policy and its investment options. This Prospectus does
not contain all of the information in the registration statement as permitted by
Securities and Exchange Commission regulations. The omitted information can be
obtained from the Securities and Exchange Commission's principal office in
Washington, D.C., upon payment of a prescribed fee.
FINANCIAL STATEMENTS
Our financial statements, included herein, should be distinguished from the
financial statements of the Separate Account and should be considered only as
bearing upon our ability to meet our obligations under the policies.
51
<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, 1998 and the related
statements of operations and changes in net assets for each
of the three years in the period then ended. These financial
statements are the responsibility of the management of
Merrill Lynch Life Insurance Company ( the "Company" ).
Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of mutual fund and unit investment trust securities owned at
December 31, 1998. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Account
at December 31, 1998 and the results of its operations and
the changes in its net assets for each of the three years in
the period then ended in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole.
The supplemental schedules included herein are presented for
the purpose of additional analysis and are not a required
part of the basic financial statements. These schedules are
the responsibility of the Company's management. Such
schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects
when considered in relation to the basic financial
statements taken as a whole.
February 4, 1999
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS: Cost Shares Market Value
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in Merrill Lynch Series Fund, Inc. (Note 1):
Money Reserve Portfolio $ 395,462,870 395,462,870 $ 395,462,870
Intermediate Government Bond Portfolio 186,476,357 16,585,556 187,748,491
Long-Term Corporate Bond Portfolio 89,436,669 7,638,473 90,974,218
Capital Stock Portfolio 206,835,456 9,358,278 252,954,268
Growth Stock Portfolio 239,493,336 8,787,861 322,514,512
Multiple Strategy Portfolio 997,995,392 61,721,713 1,121,483,532
High Yield Portfolio 88,003,137 9,850,566 77,819,474
Natural Resources Portfolio 11,417,307 1,310,868 8,992,556
Global Strategy Portfolio 147,892,654 9,818,447 157,095,154
Balanced Portfolio 75,460,864 5,369,124 86,872,427
--------------------- ---------------------
2,438,474,042 2,701,917,502
--------------------- ---------------------
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Global Utility Focus Fund 5,465,443 360,870 6,163,661
International Equity Focus Fund 6,199,932 625,946 6,685,106
Global Bond Focus Fund 2,405,794 243,479 2,410,445
Basic Value Focus Fund 38,956,082 2,685,922 39,402,475
Developing Capital Markets Focus Fund 3,387,805 400,774 2,576,977
Special Value Focus Fund 8,420,951 386,324 7,707,156
Index 500 Fund 14,412,000 1,027,729 16,679,156
--------------------- ---------------------
79,248,007 81,624,976
--------------------- ---------------------
Investments in Alliance
Variable Products Series Fund, Inc. (Note 1):
Premier Growth Portfolio 18,917,513 721,290 22,381,633
--------------------- ---------------------
18,917,513 22,381,633
--------------------- ---------------------
Investments in MFS Variable Insurance Trust (Note 1):
MFS Emerging Growth Series 6,033,523 320,841 6,888,457
MFS Research Series 4,581,695 268,315 5,111,397
--------------------- ---------------------
10,615,218 11,999,854
--------------------- ---------------------
Investments in AIM Variable Insurance Funds, Inc. (Note 1):
AIM V.I. Value Fund 7,254,926 321,398 8,436,691
AIM V.I. Capital Appreciation Fund 1,837,551 79,302 1,998,421
--------------------- ---------------------
9,092,477 10,435,112
--------------------- ---------------------
</TABLE>
(continued)
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998 (continued)
<TABLE>
<CAPTION>
Cost Units Market Value
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investments in the Merrill Lynch Fund of Stripped ("Zero")
U.S. Treasury Securities, Series A through K (Note 1):
1999 Trust 17,306,441 21,637,909 21,538,807
2000 Trust 16,102,008 20,247,739 19,298,323
2001 Trust 26,695,669 48,413,674 44,121,802
2002 Trust 7,098,602 10,344,255 8,988,950
2003 Trust 21,611,590 49,944,293 40,506,820
2004 Trust 5,068,391 7,819,014 6,171,626
2005 Trust 12,879,292 26,496,210 20,067,435
2006 Trust 4,751,515 8,464,634 6,225,569
2007 Trust 7,448,607 18,827,910 13,085,585
2008 Trust 11,368,108 32,749,285 21,140,974
2009 Trust 5,194,697 15,278,219 9,314,824
2010 Trust 6,846,168 14,137,055 8,027,303
2011 Trust 1,261,068 3,352,970 1,808,894
2013 Trust 991,564 2,872,192 1,363,487
2014 Trust 18,566,568 43,523,085 19,220,229
--------------------- ---------------------
163,190,288 240,880,628
--------------------- ---------------------
TOTAL ASSETS $ 2,719,537,545 3,069,239,705
===================== ---------------------
LIABILITIES:
Payable to Merrill Lynch Life Insurance Company 26,453,113
---------------------
TOTAL LIABILITIES 26,453,113
---------------------
NET ASSETS $ 3,042,786,592
=====================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH VARIABLE LIFE SEPARATE ACCOUNT II
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 321,150,328 $ 176,227,584 $ 227,773,709
Mortality and Expense Charges (Note 3) (17,510,372) (17,016,044) (16,019,207)
Transaction Charges (Note 3) (824,591) (947,805) (1,107,972)
--------------------- --------------------- ---------------------
Net Investment Income 302,815,365 158,263,735 210,646,530
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses) on Investments:
Net Realized Gains 52,231,626 67,234,138 49,679,613
Net Change in Unrealized Gains (Losses) (32,996,170) 167,676,700 (9,165,154)
--------------------- --------------------- ---------------------
Net Gain on Investments 19,235,456 234,910,838 40,514,459
--------------------- --------------------- ---------------------
Increase in Net Assets
Resulting from Operations 322,050,821 393,174,573 251,160,989
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 3,482,872 4,950,624 8,662,019
Transfers of Policy Loading, Net (Note 3) (1,324,685) (6,035,984) (10,715,483)
Transfers Due to Deaths (39,819,853) (43,538,236) (28,915,284)
Transfers Due to Other Terminations (90,700,621) (101,614,610) (86,971,795)
Transfers Due to Policy Loans (37,691,032) (37,908,300) (46,911,839)
Transfers of Cost of Insurance (49,969,775) (46,195,634) (41,882,708)
Transfers of Loan Processing Charges (5,473,279) (5,517,788) (5,817,667)
--------------------- --------------------- ---------------------
Decrease in Net Assets
Resulting from Principal Transactions (221,496,373) (235,859,928) (212,552,757)
--------------------- --------------------- ---------------------
Increase in Net Assets 100,554,448 157,314,645 38,608,232
Net Assets Beginning Balance 2,942,232,144 2,784,917,499 2,746,309,267
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,042,786,592 $ 2,942,232,144 $ 2,784,917,499
===================== ===================== =====================
</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. ORGANIZATION
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 Merrill Lynch Life's operations with respect
to certain variable life insurance contracts
("Contracts"). The Account is governed by Arkansas State
Insurance Law. Merrill Lynch Life is an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co."). The Account is registered as a unit
investment trust under the Investment Company Act of 1940
and consists of thirty-seven investment divisions(thirty-
eight during the year). The investment divisions are as
follows:
Merrill Lynch Series Fund, Inc.: Ten of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the Merrill Lynch Series Fund,
Inc. ("Merrill Series Fund"). The investment advisor to
the funds of the Merrill Series Fund is Merrill Lynch
Asset Management, L.P. ("MLAM"), an indirect subsidiary
of Merrill Lynch & Co.
Merrill Lynch Variable Series Funds, Inc: Seven of the
investment divisions each invest in the securities of a
single mutual fund portfolio of the Merrill Lynch
Variable Series Funds, Inc. ("Merrill Variable Funds").
The investment advisor to the funds of the Merrill
Variable funds is MLAM.
Alliance Variable Products Series Fund, Inc.:One of the
investment divisions invests in the securities of a
single mutual fund portfolio of the Alliance Variable
Products Series Fund, Inc. ("Alliance Variable Fund").
The investment advisor to the fund of the Alliance
Variable Fund is Alliance Capital Management L.P.
MFS Variable Insurance Trust : Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the MFS Variable Insurance
Trust ("MFS Variable Trust"). The investment advisor to
the funds of the MFS Variable Trust is Massachusetts
Financial Services Company.
AIM Variable Insurance Funds: Two of the investment
divisions each invest in the securities of a single
mutual fund portfolio of the AIM Variable Insurance
Funds, Inc. (" AIM Variable Funds "). The investment
advisor to the funds of the AIM Variable Funds is AIM
Advisors, Inc.
The Merrill Lynch Fund of Stripped ("Zero") U.S.Treasury
Securities , Series A through K : Fifteen of the
investment divisions ( sixteen during the year) each
invest in the securities of a single trust of the
Merrill Lynch Fund of Stripped (" Zero") U.S. Treasury
Securities, Series A through K ("Merrill Zero Trusts").
Each trust of the Merrill Zero Trusts consists of
Stripped Treasury Securities with a fixed maturity date
and a Treasury Note deposited to provide income to pay
expenses of the trust . Merrill Zero Trusts are
sponsored by Merrill Lynch, Pierce, Fenner & Smith Inc.
(" MLPF&S"), a wholly - owned subsidiary of Merrill
Lynch & Co.
The assets of the Account are registered in the name of
Merrill Lynch Life. The portion of the Account's assets
applicable to the Contracts are not chargeable with
liabilities arising out of any other business Merrill
Lynch Life may conduct.
The change in net assets accumulated in the Account
provides the basis for the periodic determination of the
amount of increased or decreased benefits under the
Contracts.
The net assets may not be less than the amount required
under Arkansas State Insurance Law to provide for death
benefits (without regard to the minimum death benefit
guarantee) and other Contract benefits.
The financial statements included herein have been
prepared in accordance with generally accepted accounting
principles for variable life separate accounts registered
as unit investment trusts. The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Investments in the divisions are included in the
statement of net assets at the net asset value of the
shares and units held.
Dividend income is recognized on the ex-dividend date.
All dividends are automatically reinvested.
Realized gains and losses on the sales of investments are
computed on the first in first out method.
Investment transactions are recorded on the trade date.
The operations of the Account are included in the Federal
income tax return of Merrill Lynch Life. Under the
provisions of the Contracts, Merrill Lynch Life has the
right to charge the Account for any Federal income tax
attributable to the Account. No charge is currently being
made against the Account for such tax since, under
current tax law, Merrill Lynch Life pays no tax on
investment income and capital gains reflected in variable
life insurance contract reserves. However, Merrill Lynch
Life retains the right to charge for any Federal income
tax incurred that is attributable to the Account if the
law is changed. Charges for state and local taxes, if
any, attributable to the Account may also be made.
3. CHARGES AND FEES
Merrill Lynch Life assumes mortality and expense risks
related to Contracts investing in the Account and deducts
daily charges to cover these risks. The daily charges
vary by Contract form and are equal to a rate of .5% to
.9% (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 is deducted on the dates
specified by the Contract. This cost will vary dependent
upon the insured's underwriting class, sex (except where
unisex rates are required by state law), attained age of
each insured and the Contract's net amount at risk.
Merrill Lynch Life pays all transaction charges to MLPF&S
on the sale of Zero 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.
4. OTHER
Effective following the close of business on August 15,
1997,the Equity Growth Fund was renamed the Special Value
Focus Fund. The Fund's investment objective was not
modified.
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
-----------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 321,150,328 $ 20,678,114 $ 11,475,201 $ 5,926,204
Mortality and Expense Charges (17,510,372) (2,249,595) (1,030,845) (524,731)
Transaction Charges (824,591) 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 302,815,365 18,428,519 10,444,356 5,401,473
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 52,231,626 0 (600,422) (269,151)
Net Change in Unrealized Gains (Losses) (32,996,170) 0 4,453,077 1,724,133
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 19,235,456 0 3,852,655 1,454,982
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 322,050,821 18,428,519 14,297,011 6,856,455
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 3,482,872 555,705 114,665 162,859
Transfers of Policy Loading, Net (1,324,685) (244,326) (89,096) (85,645)
Transfers Due to Deaths (39,819,853) (4,820,301) (4,442,359) (3,528,512)
Transfers Due to Other Terminations (90,700,621) (23,048,228) (4,916,714) (3,085,640)
Transfers Due to Policy Loans (37,691,032) (2,912,946) (1,694,516) (1,194,310)
Transfers of Cost of Insurance (49,969,775) (7,457,822) (3,212,738) (1,647,093)
Transfers of Loan Processing Charges (5,473,279) (1,182,832) (308,332) (188,169)
Transfers Among Investment Divisions 0 38,073,723 12,218,112 802,692
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (221,496,373) (1,037,027) (2,330,978) (8,763,818)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 100,554,448 17,391,492 11,966,033 (1,907,363)
Net Assets Beginning Balance 2,942,232,144 352,371,762 175,784,547 92,837,342
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 3,042,786,592 $ 369,763,254 $ 187,750,580 $ 90,929,979
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 30,927,009 $ 46,256,867 $ 151,199,931 $ 8,760,965
Mortality and Expense Charges (1,436,412) (1,588,346) (6,531,140) (526,424)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 29,490,597 44,668,521 144,668,791 8,234,541
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 1,706,117 11,954,687 11,189,802 (974,358)
Net Change in Unrealized Gains (Losses) 1,569,698 30,827,591 (48,157,613) (11,945,860)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 3,275,815 42,782,278 (36,967,811) (12,920,218)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 32,766,412 87,450,799 107,700,980 (4,685,677)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 470,411 683,266 572,128 75,167
Transfers of Policy Loading, Net (127,810) (122,883) (280,850) (37,405)
Transfers Due to Deaths (4,111,483) (1,741,038) (13,332,620) (1,716,016)
Transfers Due to Other Terminations (7,272,716) (7,583,699) (26,960,777) (2,526,549)
Transfers Due to Policy Loans (3,435,978) (5,837,705) (16,638,598) (554,991)
Transfers of Cost of Insurance (3,932,588) (4,166,919) (18,102,289) (1,568,731)
Transfers of Loan Processing Charges (382,319) (490,222) (1,669,708) (177,326)
Transfers Among Investment Divisions (4,837,855) 12,016,644 (24,176,895) (5,916,293)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (23,630,338) (7,242,556) (100,589,609) (12,422,144)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,136,074 80,208,243 7,111,371 (17,107,821)
Net Assets Beginning Balance 243,746,955 242,259,653 1,114,165,000 95,117,051
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 252,883,029 $ 322,467,896 $ 1,121,276,371 $ 78,009,230
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 295,735 $ 28,859,400 $ 7,796,601 $ 369,297
Mortality and Expense Charges (65,299) (1,009,977) (503,589) (31,109)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 230,436 27,849,423 7,293,012 338,188
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (861,047) 226,854 813,943 575,857
Net Change in Unrealized Gains (Losses) (894,630) (14,358,244) 2,025,583 144,165
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (1,755,677) (14,131,390) 2,839,526 720,022
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (1,525,241) 13,718,033 10,132,538 1,058,210
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums (32,124) 329,419 223,756 (118,070)
Transfers of Policy Loading, Net (10,607) (124,001) (62,361) (1,556)
Transfers Due to Deaths (140,807) (2,671,667) (713,815) (1,695)
Transfers Due to Other Terminations (202,118) (4,528,086) (2,599,930) (261,846)
Transfers Due to Policy Loans (59,308) 93,652 (977,153) (78,949)
Transfers of Cost of Insurance (195,114) (2,702,639) (1,384,923) (80,351)
Transfers of Loan Processing Charges (27,036) (303,009) (133,352) (9,606)
Transfers Among Investment Divisions (2,151,088) (25,003,853) 1,569,260 611,261
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (2,818,202) (34,910,184) (4,078,518) 59,188
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (4,343,443) (21,192,151) 6,054,020 1,117,398
Net Assets Beginning Balance 13,183,328 178,261,257 80,822,630 5,044,984
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 8,839,885 $ 157,069,106 $ 86,876,650 $ 6,162,382
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
International Global Basic Developing
Equity Bond Value Capital
Focus Focus Focus Markets Focus
Fund Fund Fund Fund
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 633,707 $ 57,468 $ 4,933,777 $ 67,994
Mortality and Expense Charges (43,831) (6,852) (229,235) (22,837)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 589,876 50,616 4,704,542 45,157
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (1,339,664) 46,244 (29,666) (1,573,036)
Net Change in Unrealized Gains (Losses) 1,244,281 (844) (2,208,967) 164,025
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (95,383) 45,400 (2,238,633) (1,409,011)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 494,493 96,016 2,465,909 (1,363,854)
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 35,113 0 70,734 16,106
Transfers of Policy Loading, Net 46,169 (622) (68,983) (2,777)
Transfers Due to Deaths (4,251) 0 (122,131) (5,813)
Transfers Due to Other Terminations (145,932) (327) (983,077) (116,926)
Transfers Due to Policy Loans (84,776) (28,995) (393,756) (14,940)
Transfers of Cost of Insurance (102,625) (22,471) (681,065) (33,195)
Transfers of Loan Processing Charges (12,206) (2,396) (71,510) (1,310)
Transfers Among Investment Divisions (888,388) 1,904,807 7,414,298 (1,576,257)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (1,156,896) 1,849,996 5,164,510 (1,735,112)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets (662,403) 1,946,012 7,630,419 (3,098,966)
Net Assets Beginning Balance 7,246,058 463,870 31,674,335 5,675,151
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 6,583,655 $ 2,409,882 $ 39,304,754 $ 2,576,185
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
Special MFS
Value Index Premier Emerging
Focus 500 Growth Growth
Fund Fund Portfolio Series
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 1,818,795 $ 515,219 $ 11,772 $ 41,223
Mortality and Expense Charges (52,093) (83,454) (80,288) (30,583)
Transaction Charges 0 0 0 0
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 1,766,702 431,765 (68,516) 10,640
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) (2,087,273) 579,886 1,423,553 443,717
Net Change in Unrealized Gains (Losses) (333,085) 1,864,515 3,487,885 948,500
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (2,420,358) 2,444,401 4,911,438 1,392,217
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (653,656) 2,876,166 4,842,922 1,402,857
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 65,817 10,854 35,369 40,962
Transfers of Policy Loading, Net (3,934) (5,494) (4,940) 41
Transfers Due to Deaths (59,874) (135,263) 0 0
Transfers Due to Other Terminations (494,849) (60,016) (202,870) (104,667)
Transfers Due to Policy Loans (164,639) (440,700) (23,246) (172,836)
Transfers of Cost of Insurance (147,166) (246,788) (283,236) (84,714)
Transfers of Loan Processing Charges (14,771) (32,803) (41,235) (8,306)
Transfers Among Investment Divisions 1,482,866 5,812,842 13,107,698 3,096,665
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 663,450 4,902,632 12,587,540 2,767,145
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 9,794 7,778,798 17,430,462 4,170,002
Net Assets Beginning Balance 7,694,905 8,896,987 4,735,075 2,660,813
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 7,704,699 $ 16,675,785 $ 22,165,537 $ 6,830,815
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
AIM V.I.
MFS AIM V.I. Capital
Research Value Appreciation 1998
Series Fund Fund Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 85,951 $ 385,764 $ 53,334 $ 0
Mortality and Expense Charges (25,034) (36,291) (10,111) (32,049)
Transaction Charges 0 0 0 (17,357)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) 60,917 349,473 43,223 (49,406)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 235,100 139,588 (81,454) 13,149,461
Net Change in Unrealized Gains (Losses) 461,499 1,226,265 280,707 (12,886,503)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 696,599 1,365,853 199,253 262,958
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 757,516 1,715,326 242,476 213,552
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 6,472 12,006 5,071 23,247
Transfers of Policy Loading, Net (1,208) (3,183) (591) (4,103)
Transfers Due to Deaths 0 0 0 (130,963)
Transfers Due to Other Terminations 168,252 (140,038) 1,283 (618,533)
Transfers Due to Policy Loans (103,998) (64,577) 1,734 35,724
Transfers of Cost of Insurance (62,638) (99,492) (29,088) 116,216
Transfers of Loan Processing Charges (5,099) (8,382) (2,609) 27,635
Transfers Among Investment Divisions 1,703,313 3,515,520 407,169 (43,723,866)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,705,094 3,211,854 382,969 (44,274,643)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 2,462,610 4,927,180 625,445 (44,061,091)
Net Assets Beginning Balance 2,647,249 3,507,814 1,372,547 44,061,091
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 5,109,859 $ 8,434,994 $ 1,997,992 $ 0
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
1999 2000 2001 2002
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (125,929) (113,813) (255,426) (55,318)
Transaction Charges (73,103) (70,818) (150,775) (30,602)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (199,032) (184,631) (406,201) (85,920)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 520,461 1,154,251 2,900,990 414,829
Net Change in Unrealized Gains (Losses) 699,517 257,855 560,436 389,212
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 1,219,978 1,412,106 3,461,426 804,041
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 1,020,946 1,227,475 3,055,225 718,121
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 4,162 2,877 28,246 16,304
Transfers of Policy Loading, Net (18,805) (6,644) (29,427) (10,308)
Transfers Due to Deaths (87,151) (71,859) (299,937) (121,002)
Transfers Due to Other Terminations (198,303) (237,538) (688,786) (140,660)
Transfers Due to Policy Loans (437,860) (418,753) (452,423) (78,937)
Transfers of Cost of Insurance (340,232) (448,477) (726,398) (133,712)
Transfers of Loan Processing Charges (15,388) (62,825) (90,526) (7,773)
Transfers Among Investment Divisions 1,662,726 1,197,040 (978,928) 537,194
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 569,149 (46,179) (3,238,179) 61,106
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance 1,590,095 1,181,296 (182,954) 779,227
19,940,341 18,302,756 44,283,048 8,206,556
Net Assets Ending Balance --------------------- --------------------- --------------------- ---------------------
$ 21,530,436 $ 19,484,052 $ 44,100,094 $ 8,985,783
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2003 2004 2005 2006
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (224,497) (34,774) (108,106) (38,906)
Transaction Charges (135,613) (20,725) (67,209) (21,264)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (360,110) (55,499) (175,315) (60,170)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 2,433,398 358,332 1,197,539 348,194
Net Change in Unrealized Gains (Losses) 1,824,577 304,776 1,147,202 469,450
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 4,257,975 663,108 2,344,741 817,644
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 3,897,865 607,609 2,169,426 757,474
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 25,400 133 6,923 4,012
Transfers of Policy Loading, Net (17,519) (2,978) (4,976) (5,644)
Transfers Due to Deaths (306,451) (4,475) (524,022) (71,502)
Transfers Due to Other Terminations (848,746) (58,681) (566,679) (379,827)
Transfers Due to Policy Loans (443,142) (268,556) 224,375 (44,859)
Transfers of Cost of Insurance (574,718) (82,182) (322,238) (102,635)
Transfers of Loan Processing Charges (61,898) (4,510) (32,168) (13,817)
Transfers Among Investment Divisions (1,214,099) (5,190) (65,544) 1,045
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (3,441,173) (426,439) (1,284,329) (613,227)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 456,692 181,170 885,097 144,247
Net Assets Beginning Balance 40,019,989 5,988,195 19,174,908 6,079,196
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 40,476,681 $ 6,169,365 $ 20,060,005 $ 6,223,443
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<TABLE>
<CAPTION>
Divisions Investing In
---------------------------------------------------------------------------------------
2007 2008 2009 2010
Trust Trust Trust Trust
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (71,267) (123,327) (51,858) (45,889)
Transaction Charges (41,982) (72,219) (31,400) (25,707)
--------------------- --------------------- --------------------- ---------------------
Net Investment Income (Loss) (113,249) (195,546) (83,258) (71,596)
--------------------- --------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 500,487 2,393,322 711,997 516,279
Net Change in Unrealized Gains (Losses) 1,216,659 669,805 676,721 597,563
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 1,717,146 3,063,127 1,388,718 1,113,842
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 1,603,897 2,867,581 1,305,460 1,042,246
--------------------- --------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums (640) 15,924 6,739 5,588
Transfers of Policy Loading, Net (4,780) (11,717) (11,973) 16,721
Transfers Due to Deaths (96,760) (326,661) (69,148) (76,841)
Transfers Due to Other Terminations (49,315) (1,453,318) (67,993) (335,341)
Transfers Due to Policy Loans (61,399) (226,463) (146,568) (210,478)
Transfers of Cost of Insurance (191,992) (334,781) (138,259) (108,779)
Transfers of Loan Processing Charges (18,264) (38,690) (22,061) (10,101)
Transfers Among Investment Divisions (11,436) (40,261) (521,149) 448,495
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (434,586) (2,415,967) (970,412) (270,736)
--------------------- --------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 1,169,311 451,614 335,048 771,510
Net Assets Beginning Balance 11,913,023 20,683,748 8,976,658 7,251,114
--------------------- --------------------- --------------------- ---------------------
Net Assets Ending Balance $ 13,082,334 $ 21,135,362 $ 9,311,706 $ 8,022,624
===================== ===================== ===================== =====================
</TABLE>
<PAGE>
MERRILL LYNCH 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, 1998
<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 (8,834) (7,697) (94,606)
Transaction Charges (5,582) (4,206) (56,029)
--------------------- --------------------- ---------------------
Net Investment Income (Loss) (14,416) (11,903) (150,635)
--------------------- --------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 48,511 32,283 4,032,015
Net Change in Unrealized Gains (Losses) 195,957 144,866 (1,786,944)
--------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 244,468 177,149 2,245,071
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 230,052 165,246 2,094,436
--------------------- --------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 3,057 5,214
Transfers of Policy Loading, Net (2,563) (2,185) 24,278
Transfers Due to Deaths 0 0 (85,436)
Transfers Due to Other Terminations (15,382) (14,661) 38,612
Transfers Due to Policy Loans 5,441 (4,933) (380,670)
Transfers of Cost of Insurance (24,092) (20,208) (293,603)
Transfers of Loan Processing Charges (2,970) (4,655) (42,730)
Transfers Among Investment Divisions 179,803 140,314 3,207,615
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 140,237 96,729 2,473,280
--------------------- --------------------- ---------------------
Increase (Decrease) in Net Assets 370,289 261,975 4,567,716
Net Assets Beginning Balance 1,438,041 1,100,957 14,643,210
--------------------- --------------------- ---------------------
Net Assets Ending Balance $ 1,808,330 $ 1,362,932 $ 19,210,926
===================== ===================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
------------------------------------------------------------------
Intermediate Long-Term
Total Money Government Corporate
Separate Reserve Bond Bond
Account Portfolio Portfolio Portfolio
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 176,227,584 $ 21,213,583 $ 11,594,375 $ 6,088,474
Mortality and Expense Charges (17,016,044) (2,298,940) (992,286) (519,554)
Transaction Charges (947,805) 0 0 0
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) 158,263,735 18,914,643 10,602,089 5,568,920
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 67,234,138 0 (536,012) (202,327)
Net Change in Unrealized Gains (Losses) 167,676,700 0 2,841,385 1,667,812
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 234,910,838 0 2,305,373 1,465,485
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 393,174,573 18,914,643 12,907,462 7,034,405
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 4,950,624 922,857 176,978 157,118
Transfers of Policy Loading, Net (6,035,984) (1,053,155) (319,746) (203,834)
Transfers Due to Deaths (43,538,236) (8,941,317) (2,645,616) (2,101,271)
Transfers Due to Other Terminations (101,614,610) (34,270,609) (3,912,704) (3,195,304)
Transfers Due to Policy Loans (37,908,300) (6,763,568) (2,241,546) (445,239)
Transfers of Cost of Insurance (46,195,634) (7,238,423) (3,040,500) (1,617,653)
Transfers of Loan Processing Charges (5,517,788) (1,190,728) (319,093) (199,477)
Transfers Among Investment Divisions 0 (4,943,163) (3,629,315) 2,574,418
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (235,859,928) (63,478,106) (15,931,542) (5,031,242)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets 157,314,645 (44,563,463) (3,024,080) 2,003,163
Net Assets Beginning Balance 2,784,917,499 396,935,225 178,808,627 90,834,179
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 2,942,232,144 $ 352,371,762 $ 175,784,547 $ 92,837,342
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
Capital Growth Multiple High
Stock Stock Strategy Yield
Portfolio Portfolio Portfolio Portfolio
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 12,675,284 $ 20,622,707 $ 71,122,460 $ 9,066,397
Mortality and Expense Charges (1,387,710) (1,252,620) (6,353,925) (550,327)
Transaction Charges 0 0 0 0
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) 11,287,574 19,370,087 64,768,535 8,516,070
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 2,726,110 14,671,250 12,219,045 255,516
Net Change in Unrealized Gains (Losses) 32,159,657 24,491,367 105,219,211 278,817
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 34,885,767 39,162,617 117,438,256 534,333
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 46,173,341 58,532,704 182,206,791 9,050,403
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 705,796 664,878 888,824 135,115
Transfers of Policy Loading, Net (400,938) (365,380) (2,172,146) (197,142)
Transfers Due to Deaths (2,898,417) (592,259) (16,781,483) (945,220)
Transfers Due to Other Terminations (5,969,862) (6,065,008) (26,195,818) (2,465,877)
Transfers Due to Policy Loans (3,110,133) (3,209,089) (12,908,502) (1,158,020)
Transfers of Cost of Insurance (3,459,733) (3,121,225) (16,311,336) (1,584,770)
Transfers of Loan Processing Charges (371,651) (427,880) (1,652,130) (198,000)
Transfers Among Investment Divisions (3,680,138) 17,777,082 (9,715,041) 3,210,811
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (19,185,076) 4,661,119 (84,847,632) (3,203,103)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets 26,988,265 63,193,823 97,359,159 5,847,300
Net Assets Beginning Balance 216,758,690 179,065,830 1,016,805,841 89,269,751
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 243,746,955 $ 242,259,653 $ 1,114,165,000 $ 95,117,051
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
Global
Natural Global Utility
Resources Strategy Balanced Focus
Portfolio Portfolio Portfolio Fund
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 146,805 $ 12,186,241 $ 9,158,614 $ 98,907
Mortality and Expense Charges (106,143) (1,101,352) (473,700) (19,124)
Transaction Charges 0 0 0 0
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) 40,662 11,084,889 8,684,914 79,783
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 1,250,455 2,988,707 856,330 281,175
Net Change in Unrealized Gains (Losses) (2,950,582) 5,048,808 2,241,158 463,824
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments (1,700,127) 8,037,515 3,097,488 744,999
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (1,659,465) 19,122,404 11,782,402 824,782
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 38,729 407,005 431,275 (338)
Transfers of Policy Loading, Net (48,932) (418,516) (171,342) (7,574)
Transfers Due to Deaths (43,017) (1,802,611) (308,819) (114,448)
Transfers Due to Other Terminations (3,004,997) (3,798,969) (2,906,310) (113,070)
Transfers Due to Policy Loans (137,531) (2,502,144) (1,018,448) (27,685)
Transfers of Cost of Insurance (329,596) (2,795,548) (1,278,950) (64,163)
Transfers of Loan Processing Charges (44,801) (343,216) (136,795) (10,019)
Transfers Among Investment Divisions (1,207,293) (3,610,208) (1,499,738) 3,086,114
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (4,777,438) (14,864,207) (6,889,127) 2,748,817
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets (6,436,903) 4,258,197 4,893,275 3,573,599
Net Assets Beginning Balance 19,620,231 174,003,060 75,929,355 1,471,385
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 13,183,328 $ 178,261,257 $ 80,822,630 $ 5,044,984
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
International Global Basic Developing
Equity Bond Value Capital
Focus Focus Focus Markets Focus
Fund Fund Fund Fund
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 148,700 $ 9,273 $ 1,612,440 $ 97,685
Mortality and Expense Charges (49,257) (1,098) (152,629) (39,352)
Transaction Charges 0 0 0 0
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) 99,443 8,175 1,459,811 58,333
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 325,480 1,454 727,907 459,449
Net Change in Unrealized Gains (Losses) (841,569) 5,496 1,987,339 (1,005,989)
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments (516,089) 6,950 2,715,246 (546,540)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations (416,646) 15,125 4,175,057 (488,207)
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 54,121 0 61,979 34,730
Transfers of Policy Loading, Net (21,996) 10 (48,577) (15,276)
Transfers Due to Deaths (29,555) 0 (113,962) (16,443)
Transfers Due to Other Terminations (287,498) (198) (754,283) (146,567)
Transfers Due to Policy Loans (201,975) (44,372) 35,172 161,435
Transfers of Cost of Insurance (128,576) (5,825) (484,795) (102,461)
Transfers of Loan Processing Charges (24,133) (503) (63,036) (18,068)
Transfers Among Investment Divisions 2,762,679 499,633 14,257,019 1,972,259
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,123,067 448,745 12,889,517 1,869,609
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets 1,706,421 463,870 17,064,574 1,381,402
Net Assets Beginning Balance 5,539,637 0 14,609,761 4,293,749
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 7,246,058 $ 463,870 $ 31,674,335 $ 5,675,151
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
Special MFS
Value Index Premier Emerging
Focus 500 Growth Growth
Fund Fund Portfolio Series
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 238,803 $ 0 $ 1,695 $ 0
Mortality and Expense Charges (43,470) (25,511) (12,300) (7,579)
Transaction Charges 0 0 0 0
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) 195,333 (25,511) (10,605) (7,579)
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 1,107,846 240,708 197,369 152,212
Net Change in Unrealized Gains (Losses) (577,332) 402,640 (23,765) (93,567)
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 530,514 643,348 173,604 58,645
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 725,847 617,837 162,999 51,066
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 15,267 6,334 8,073 5,044
Transfers of Policy Loading, Net (17,188) (13,603) (2,778) (2,656)
Transfers Due to Deaths (42,910) 0 0 0
Transfers Due to Other Terminations (320,218) (15,312) 24,325 (87,864)
Transfers Due to Policy Loans (133,481) (1,123,409) 11,709 (96,940)
Transfers of Cost of Insurance (127,361) (115,166) (55,503) (31,012)
Transfers of Loan Processing Charges (17,968) (24,182) (7,186) (3,825)
Transfers Among Investment Divisions 3,054,418 9,564,488 4,593,436 2,827,000
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,410,559 8,279,150 4,572,076 2,609,747
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets 3,136,406 8,896,987 4,735,075 2,660,813
Net Assets Beginning Balance 4,558,499 0 0 0
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 7,694,905 $ 8,896,987 $ 4,735,075 $ 2,660,813
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
AIM V.I.
MFS AIM V.I. Capital
Research Value Appreciation 1997
Series Fund Fund Trust
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 127,008 $ 18,133 $ 0
Mortality and Expense Charges (6,766) (8,585) (4,590) (31,836)
Transaction Charges 0 0 0 (17,304)
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) (6,766) 118,423 13,543 (49,140)
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 15,185 28,775 100,992 11,566,369
Net Change in Unrealized Gains (Losses) 68,203 (44,501) (119,837) (11,354,855)
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 83,388 (15,726) (18,845) 211,514
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 76,622 102,697 (5,302) 162,374
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 0 3,236 2,373 0
Transfers of Policy Loading, Net (2,260) (1,362) (3) (31,889)
Transfers Due to Deaths 0 0 0 (84,833)
Transfers Due to Other Terminations (5,555) (17,171) (6,787) (486,121)
Transfers Due to Policy Loans (29,399) 8,271 (2,210) (24,648)
Transfers of Cost of Insurance (27,509) (38,956) (19,577) 107,440
Transfers of Loan Processing Charges (3,089) (4,503) (1,928) 25,831
Transfers Among Investment Divisions 2,638,439 3,455,602 1,405,981 (42,396,388)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 2,570,627 3,405,117 1,377,849 (42,890,608)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets 2,647,249 3,507,814 1,372,547 (42,728,234)
Net Assets Beginning Balance 0 0 0 42,728,234
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 2,647,249 $ 3,507,814 $ 1,372,547 $ 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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
1998 1999 2000 2001
Trust Trust Trust Trust
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (277,826) (120,276) (103,802) (255,658)
Transaction Charges (160,720) (69,356) (64,372) (151,310)
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) (438,546) (189,632) (168,174) (406,968)
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 4,091,112 754,488 1,092,862 2,349,203
Net Change in Unrealized Gains (Losses) (1,474,929) 461,970 144,981 860,524
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 2,616,183 1,216,458 1,237,843 3,209,727
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 2,177,637 1,026,826 1,069,669 2,802,759
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums
Transfers of Policy Loading, Net 47,972 15,159 2,288 10,495
Transfers Due to Deaths (105,793) (33,971) (26,959) (105,748)
Transfers Due to Other Terminations (2,334,896) (467,250) (818,931) (725,610)
Transfers Due to Policy Loans (1,309,737) (692,897) (445,376) (1,129,431)
Transfers of Cost of Insurance (827,862) (225,135) (98,758) (553,455)
Transfers of Loan Processing Charges (762,689) (315,001) (324,228) (685,356)
Transfers Among Investment Divisions (71,863) (15,196) (32,725) (89,625)
(1,240,567) 362,885 1,203,708 (214,148)
Increase (Decrease) in Net Assets --------------------- --------------------- ---------------------- ---------------------
Resulting from Principal Transactions
(6,605,435) (1,371,406) (540,981) (3,492,878)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Net Assets Beginning Balance (4,427,798) (344,580) 528,688 (690,119)
48,488,889 20,284,921 17,774,068 44,973,167
Net Assets Ending Balance --------------------- --------------------- ---------------------- ---------------------
$ 44,061,091 $ 19,940,341 $ 18,302,756 $ 44,283,048
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
2002 2003 2004 2005
Trust Trust Trust Trust
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (48,919) (223,768) (36,558) (100,390)
Transaction Charges (27,036) (134,983) (21,874) (62,211)
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) (75,955) (358,751) (58,432) (162,601)
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 230,324 2,426,429 585,298 790,502
Net Change in Unrealized Gains (Losses) 407,649 1,288,892 44,569 1,221,187
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 637,973 3,715,321 629,867 2,011,689
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 562,018 3,356,570 571,435 1,849,088
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 35,200 24,539 133 11,398
Transfers of Policy Loading, Net (16,795) (65,200) (12,848) (21,873)
Transfers Due to Deaths (37,976) (573,873) (327,703) (77,144)
Transfers Due to Other Terminations (81,477) (1,033,889) (568,721) (156,388)
Transfers Due to Policy Loans (82,988) (576,893) (2,318) 63,930
Transfers of Cost of Insurance (117,529) (567,371) (91,824) (299,398)
Transfers of Loan Processing Charges (6,964) (61,272) (3,617) (31,554)
Transfers Among Investment Divisions 1,394,701 (814,619) (620,543) 68,219
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 1,086,172 (3,668,578) (1,627,441) (442,810)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets 1,648,190 (312,008) (1,056,006) 1,406,278
Net Assets Beginning Balance 6,558,366 40,331,997 7,044,201 17,768,630
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 8,206,556 $ 40,019,989 $ 5,988,195 $ 19,174,908
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
2006 2007 2008 2009
Trust Trust Trust Trust
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (37,153) (62,635) (116,169) (48,754)
Transaction Charges (20,251) (36,950) (67,581) (29,532)
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) (57,404) (99,585) (183,750) (78,286)
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 416,172 480,658 1,537,236 568,213
Net Change in Unrealized Gains (Losses) 265,927 913,567 1,170,201 679,339
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 682,099 1,394,225 2,707,437 1,247,552
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 624,695 1,294,640 2,523,687 1,169,266
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 3,808 261 19,743 21,574
Transfers of Policy Loading, Net (12,988) (19,117) (46,781) (20,551)
Transfers Due to Deaths (28,273) (100,211) (158,434) (356,038)
Transfers Due to Other Terminations (127,220) (173,162) (635,296) (237,890)
Transfers Due to Policy Loans (75,259) (154,216) (208,286) (232,394)
Transfers of Cost of Insurance (90,209) (178,874) (313,300) (144,364)
Transfers of Loan Processing Charges (12,754) (18,776) (40,832) (22,514)
Transfers Among Investment Divisions (725,102) 1,685,825 (677,734) (74,001)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (1,067,997) 1,041,730 (2,060,920) (1,066,178)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets (443,302) 2,336,370 462,767 103,088
Net Assets Beginning Balance 6,522,498 9,576,653 20,220,981 8,873,570
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 6,079,196 $ 11,913,023 $ 20,683,748 $ 8,976,658
===================== ===================== ====================== =====================
</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, 1997
<TABLE>
<CAPTION>
Divisions Investing In
----------------------------------------------------------------------------------------
2010 2011 2013 2014
Trust Trust Trust Trust
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 0
Mortality and Expense Charges (44,793) (7,219) (6,535) (86,935)
Transaction Charges (24,828) (4,584) (3,627) (51,286)
--------------------- --------------------- ---------------------- ---------------------
Net Investment Income (Loss) (69,621) (11,803) (10,162) (138,221)
--------------------- --------------------- ---------------------- ---------------------
Realized and Unrealized Gains (Losses)
on Investments:
Net Realized Gains (Losses) 896,111 63,186 66,735 1,451,614
Net Change in Unrealized Gains (Losses) 160,358 148,573 128,789 1,391,383
--------------------- --------------------- ---------------------- ---------------------
Net Gain (Loss) on Investments 1,056,469 211,759 195,524 2,842,997
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 986,848 199,956 185,362 2,704,776
--------------------- --------------------- ---------------------- ---------------------
Changes from Principal Transactions:
Transfers of Net Premiums 5,440 303 3,136 29,781
Transfers of Policy Loading, Net (21,141) (6,932) (4,003) 999
Transfers Due to Deaths 0 0 (69,716) 0
Transfers Due to Other Terminations (113,472) 2,446 (14,158) (896,165)
Transfers Due to Policy Loans (44,250) 4,179 14,890 52,267
Transfers of Cost of Insurance (93,136) (21,676) (19,094) (300,387)
Transfers of Loan Processing Charges (11,581) (2,513) (4,833) (54,789)
Transfers Among Investment Divisions (722,894) (111,110) (28,014) (2,484,701)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (1,001,034) (135,303) (121,792) (3,652,995)
--------------------- --------------------- ---------------------- ---------------------
Increase (Decrease) in Net Assets (14,186) 64,653 63,570 (948,219)
Net Assets Beginning Balance 7,265,300 1,373,388 1,037,387 15,591,429
--------------------- --------------------- ---------------------- ---------------------
Net Assets Ending Balance $ 7,251,114 $ 1,438,041 $ 1,100,957 $ 14,643,210
===================== ===================== ====================== =====================
</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
-----------------------------------------------------------------
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)
on Investments:
Net Realized Gains (Losses) 49,679,613 0 (282,198) 291,252
Net Change in Unrealized Gains (Losses) (9,165,154) 0 (8,158,746) (4,360,593)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) (1,638,056) 18,072,991 3,085,165 (1,174,521)
Net Change in Unrealized Gains (Losses) 479,168 5,789,893 (1,587,213) 2,751,515
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (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)
on Investments:
Net Realized Gains (Losses) 1,112,437 1,223,465 1,690,930 (9,982)
Net Change in Unrealized Gains (Losses) 1,005,764 15,354,296 826,925 90,229
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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 Special
Equity Value Capital Value
Focus Focus Markets Focus Focus
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)
on Investments:
Net Realized Gains (Losses) (36,377) 51,188 (43,537) (195,124)
Net Change in Unrealized Gains (Losses) 82,463 668,021 31,136 196,622
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 10,552,702 2,408,744 2,559,946 561,971
Net Change in Unrealized Gains (Losses) (10,323,182) (200,742) (304,097) 215,793
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 771,962 2,724,905 259,068 2,554,241
Net Change in Unrealized Gains (Losses) (237,828) (1,734,751) (169,982) (2,458,890)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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)
on Investments:
Net Realized Gains (Losses) 214,440 1,414,745 466,065 493,764
Net Change in Unrealized Gains (Losses) (168,339) (1,566,025) (395,373) (685,261)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments 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
Transfers of Policy Loading, Net 133 89,826 11,938 874
Transfers Due to Deaths (16,566) (47,479) (25,595) (30,603)
Transfers Due to Other Terminations 0 (36,362) 0 (113,435)
Transfers Due to Policy Loans (5,588) (396,304) (88,963) (54,645)
Transfers of Cost of Insurance 34,337 (648,326) (19,454) (288,956)
Transfers of Loan Processing Charges (94,514) (272,209) (101,781) (136,458)
Transfers Among Investment Divisions (6,924) (29,781) (16,885) (15,294)
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
Net Assets Beginning Balance 1,421,702 (1,251,139) 2,226,823 (618,201)
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)
on Investments:
Net Realized Gains (Losses) 1,807,273 557,333 448,525 73,132
Net Change in Unrealized Gains (Losses) (2,524,477) (863,586) (708,269) (122,891)
--------------------- --------------------- --------------------- ---------------------
Net Gain (Loss) on Investments (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 38,452 42,330 62,527 900
Transfers of Policy Loading, Net (81,762) (37,828) (19,742) (3,497)
Transfers Due to Deaths (86,281) (241,181) (1,017) (18,966)
Transfers Due to Other Terminations (629,178) (145,607) (536,506) 14
Transfers Due to Policy Loans (415,931) (97,994) (43,879) (11,739)
Transfers of Cost of Insurance (312,779) (114,443) (99,938) (20,237)
Transfers of Loan Processing Charges (46,530) (20,311) (16,765) (2,730)
Transfers Among Investment Divisions (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 (3,259,129) (998,232) (205,665) (93,413)
Net Assets Beginning Balance 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)
on Investments:
Net Realized Gains (Losses) 148,597 (485,433)
Net Change in Unrealized Gains (Losses) (240,740) 154,006
--------------------- ---------------------
Net Gain (Loss) on Investments (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>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill Lynch
Life Insurance Company (the "Company"), a wholly-owned subsidiary
of Merrill Lynch Insurance Group, Inc., as of December 31, 1998
and 1997, and the related statements of earnings, comprehensive
income, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted
accounting principles.
February 22, 1999
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------- ------------- -------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1998 - $2,504,599; 1997 - $2,927,562) $ 2,543,097 $ 3,008,608
Equity securities, at estimated fair value
(cost: 1998 - $162,710; 1997 - $72,599) 158,591 73,612
Trading account securities, at estimated fair value 17,280 15,625
Real estate held-for-sale 25,960 31,805
Policy loans on insurance contracts 1,139,456 1,118,139
------------- -------------
Total Investments 3,884,384 4,247,789
CASH AND CASH EQUIVALENTS 95,377 86,388
ACCRUED INVESTMENT INCOME 73,459 78,224
DEFERRED POLICY ACQUISITION COSTS 405,640 365,105
FEDERAL INCOME TAXES - DEFERRED 9,403 -
REINSURANCE RECEIVABLES 2,893 1,617
AFFILIATED RECEIVABLES - NET - 166
RECEIVABLES FROM SECURITIES SOLD 14,938 75,820
OTHER ASSETS 46,512 49,353
SEPARATE ACCOUNTS ASSETS 10,571,489 9,149,119
------------- -------------
TOTAL ASSETS $ 15,104,095 $ 14,053,581
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------ ------------- -------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,816,744 $ 4,188,110
Claims and claims settlement expenses 63,925 50,574
------------- -------------
Total policy liabilities and accruals 3,880,669 4,238,684
OTHER POLICYHOLDER FUNDS 20,802 27,160
LIABILITY FOR GUARANTY FUND ASSESSMENTS 13,864 15,374
FEDERAL INCOME TAXES - DEFERRED - 1,183
FEDERAL INCOME TAXES - CURRENT 15,840 24,438
AFFILIATED PAYABLES - NET 822 -
PAYABLES FOR SECURITIES PURCHASED 10,541 95,135
UNEARNED POLICY CHARGE REVENUE 55,235 32,102
OTHER LIABILITIES 24,273 22,332
SEPARATE ACCOUNTS LIABILITIES 10,559,459 9,149,119
------------- -------------
Total Liabilities 14,581,505 13,605,527
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 347,324 347,324
Retained earnings 173,496 80,735
Accumulated other comprehensive income (loss) (230) 17,995
------------- -------------
Total Stockholder's Equity 522,590 448,054
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,104,095 $ 14,053,581
============= =============
</TABLE>
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 272,038 $ 308,702 $ 336,661
Net realized investment gains 12,460 13,289 8,862
Policy charge revenue 197,662 178,933 158,829
------------ ------------ ------------
Total Revenues 482,160 500,924 504,352
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 195,676 209,542 235,255
Market value adjustment expense 5,528 4,079 6,071
Policy benefits (net of reinsurance recoveries: 1998 - $9,761;
1997 - $10,439; 1996 - $8,317) 31,891 27,029 21,052
Reinsurance premium ceded 19,972 17,879 15,582
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Insurance expenses and taxes 51,735 49,105 47,077
------------ ------------ ------------
Total Benefits and Expenses 349,637 379,745 387,073
------------ ------------ ------------
Earnings Before Federal Income Tax Provision 132,523 121,179 117,279
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 40,535 52,705 22,814
Deferred (773) (12,261) 15,078
------------ ------------ ------------
Total Federal Income Tax Provision 39,762 40,444 37,892
------------ ------------ ------------
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET EARNINGS $ 92,761 $ 80,735 $ 79,387
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the period (31,718) 22,347 (79,749)
Reclassification adjustment for gains included in net earnings (15,932) (12,390) (8,622)
------------ ------------ ------------
Net unrealized gains (losses) on investment securities (47,650) 9,957 (88,371)
Adjustments for:
Policyholder liabilities 14,483 10,094 58,415
Deferred policy acquisition costs 5,129 (822) 12,411
Income tax (expense) benefit related to items of
other comprehensive income 9,813 (6,730) 6,141
------------ ------------ ------------
Other comprehensive income (loss), net of tax (18,225) 12,499 (11,404)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 74,536 $ 93,234 $ 67,983
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholder's
Stock Capital Earnings Income (loss) Equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 2,000 $ 501,455 $ 76,482 $ 16,900 $ 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Other comprehensive loss, net of tax (11,404) (11,404)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1996 2,000 402,937 79,387 5,496 498,820
Dividend to Parent (55,613) (79,387) (135,000)
Net earnings 80,735 80,735
Other comprehensive income, net of tax 12,499 12,499
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1997 2,000 347,324 80,735 17,995 448,054
Net earnings 92,761 92,761
Other comprehensive loss, net of tax (18,225) (18,225)
----------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1998 $ 2,000 $ 347,324 $ 173,496 $ (230) $ 522,590
=========== =========== =========== ============ =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 92,761 $ 80,735 $ 79,387
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 44,835 72,111 62,036
Capitalization of policy acquisition costs (80,241) (71,577) (43,668)
Amortization (accretion) of investments (5,350) (4,672) (4,836)
Net realized investment gains (12,460) (13,289) (8,862)
Interest credited to policyholders' account balances 195,676 209,542 235,255
Provision (benefit) for deferred Federal income tax (773) (12,261) 15,078
Changes in operating assets and liabilities:
Accrued investment income 4,765 7,962 5,756
Claims and claims settlement expenses 13,351 10,908 9,854
Federal income taxes - current (8,598) 3,470 13,935
Other policyholder funds (6,358) 7,740 5,813
Liability for guaranty fund assessments (1,510) (3,399) (2,371)
Affiliated receivables/payables 988 (6,330) 3,735
Policy loans on insurance contracts (21,317) (26,068) (52,804)
Trading account securities (287) (14,928) -
Unearned policy charge revenue 23,133 11,269 7,801
Other, net 3,506 452 (10,194)
Net cash and cash equivalents provided ----------- ----------- -----------
by operating activities 242,121 251,665 315,915
----------- ----------- -----------
INVESTING ACTIVITIES:
Sales of available-for-sale securities 893,619 846,041 847,091
Maturities of available-for-sale securities 451,759 595,745 536,449
Purchases of available-for-sale securities (1,028,086) (1,156,222) (956,840)
Mortgage loans principal payments received - 68,864 22,789
Purchases of mortgage loans - (5,375) -
Sales of real estate held-for-sale 14,135 6,060 5,407
Recapture of investment in Separate Accounts - 11,026 8,829
Investment in Separate Accounts (12,000) (21) (10,063)
Net cash and cash equivalents provided ----------- ----------- -----------
by investing activities 319,427 366,118 453,662
----------- ----------- -----------
</TABLE>
See notes to financial statements.
(Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Dividends paid to parent $ - $ (135,000) $ (175,000)
Policyholders' account balances:
Deposits 1,042,509 1,101,934 542,062
Withdrawals (including transfers to/from Separate Accounts) (1,595,068) (1,593,320) (1,090,572)
Net cash and cash equivalents used ------------ ------------ ------------
by financing activities (552,559) (626,386) (723,510)
============ ============ ============
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,989 (8,603) 46,067
CASH AND CASH EQUIVALENTS
Beginning of year 86,388 94,991 48,924
------------ ------------ ------------
End of year $ 95,377 $ 86,388 $ 94,991
============ ============ ============
Supplementary Disclosure of Cash Flow Information
Cash paid to affiliates for:
Federal income taxes $ 49,133 $ 49,235 $ 8,880
Interest 860 842 988
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Merrill Lynch Life Insurance Company
(the "Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co.").
The Company sells non-participating life insurance and annuity
products primarily variable life insurance, variable annuities,
market value adjusted annuities and immediate annuities. The
Company is currently licensed to sell insurance in forty-nine
states, the District of Columbia, the U.S. Virgin Islands and
Guam. The Company markets its products solely through the
retail network of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated ("MLPF&S"), a wholly-owned broker-dealer
subsidiary of Merrill Lynch & Co.
Basis of Reporting: The accompanying financial statements have
been prepared in conformity with generally accepted accounting
principles and prevailing industry practices, both of which
require management to make estimates that affect the reported
amounts and disclosure of contingencies in the financial
statements. Actual results could differ from those estimates.
For the purpose of reporting cash flows, cash and cash
equivalents include cash on hand and on deposit and short-term
investments with original maturities of three months or less.
To facilitate comparisons with the current year, certain
amounts in the prior years have been reclassified.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for mortality
risk and the cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Investments: The Company's investments in debt and equity
securities are classified as either available-for-sale or
trading and are reported at estimated fair value. Unrealized
gains and losses on available-for-sale securities are included
in stockholder's equity as a component of accumulated other
comprehensive income (loss), net of tax. Unrealized gains and
losses on trading account securities are included in net
realized investment gains (losses). If a decline in value of a
security is determined by management to be other-than-
temporary, the carrying value is adjusted to the estimated fair
value at the date of this determination and recorded as net
realized investment gains (losses).
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted to
the maturity date, and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of specific identification.
Certain fixed maturity securities are considered non-investment
grade. The Company defines non-investment grade fixed maturity
securities as unsecured debt obligations that do not have a rating
equivalent to Standard and Poor's (or similar rating agency)
BBB- or higher.
All outstanding mortgage loans were repaid during 1997. The
Company recognized income from mortgage loans based on the cash
payment interest rate of the loan, which may have been
different from the accrual interest rate of the loan for
certain mortgage loans. The Company recognized a realized gain
at the date of the satisfaction of the loan at contractual
terms for loans where there was a difference between the cash
payment interest rate and the accrual interest rate. For all
loans the Company stopped accruing income when an interest
payment default either occurred or was probable. Impairments of
mortgage loans were established as valuation allowances and
recorded to net realized investment gains (losses).
Real estate held-for-sale is stated at estimated fair value
less estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Investments in limited partnerships are carried at cost.
Deferred Policy Acquisition Costs: Policy acquisition costs for
life and annuity contracts are deferred and amortized based on
the estimated future gross profits for each group of contracts.
These future gross profit estimates are subject to periodic
evaluation by the Company, with necessary revisions applied
against amortization to date. It is reasonably possible that
estimates of future gross profits could be reduced in the
future, resulting in a material reduction in the carrying
amount of deferred policy acquisition costs.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance that are primarily
related to and vary with the production of new business.
Certain costs and expenses reported in the statements of
earnings are net of amounts deferred. Policy acquisition costs
can also arise from the acquisition or reinsurance of existing
in-force policies from other insurers. These costs include
ceding commissions and professional fees related to the
reinsurance assumed. The deferred costs are amortized in
proportion to the estimated future gross profits over the
anticipated life of the acquired insurance contracts utilizing
an interest methodology.
<PAGE>
The Company has entered into an assumption reinsurance
agreement with an unaffiliated insurer. The acquisition costs
relating to this agreement are being amortized over a twenty-
year period using an effective interest rate of 7.5%. This
reinsurance agreement provides for payment of contingent ceding
commissions based upon the persistency and mortality experience
of the insurance contracts assumed. Any payments made for the
contingent ceding commissions are capitalized and amortized
using an identical methodology as that used for the initial
acquisition costs. The following is a reconciliation of the
acquisition costs related to the reinsurance agreement for the
years ended December 31:
1998 1997 1996
----------- ----------- -----------
Beginning balance $ 102,252 $ 112,249 $ 124,833
Capitalized amounts 6,085 5,077 5,077
Interest accrued 7,669 9,653 10,669
Amortization (14,213) (24,727) (28,330)
----------- ----------- -----------
Ending balance $ 101,793 $ 102,252 $ 112,249
=========== =========== ===========
The following table presents the expected amortization, net of
interest accrued, of these deferred acquisition costs over the
next five years. The amortization may be adjusted based on
periodic evaluation of the expected gross profits on the
reinsured policies.
1999 $ 7,045
2000 $ 6,110
2001 $ 5,670
2002 $ 5,400
2003 $ 5,386
Separate Accounts: Separate Accounts are established in
conformity with Arkansas State Insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to general claims of
the Company only to the extent the value of such assets exceeds
Separate Accounts liabilities. At December 31, 1998, the
$12,030 excess of Separate Accounts Assets over Separate
Accounts liabilities represents the Company's temporary
investment in certain investment divisions that were made to
facilitate the establishment of those investment divisions.
Net investment income and net realized and unrealized gains
(losses) attributable to Separate Accounts assets accrue
directly to the policyholder and are not reported as revenue in
the Company's Statement of Earnings.
Assets and liabilities of Separate Accounts, representing net
deposits and accumulated net investment earnings less fees,
held primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest-crediting rates for the
Company's fixed-rate products are as follows:
<PAGE>
Interest-sensitive life products 4.00% - 5.70%
Interest-sensitive deferred annuities 3.40% - 8.69%
Immediate annuities 3.00% - 10.00%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Claims and Claims Settlement Expenses: For life insurance
products, the liability equals the death benefit for claims
that have been reported to the Company and an estimate based
upon prior experience for unreported claims. For annuity
products, the liability equals the guaranteed minimum death
benefit reserve.
Income Taxes: The results of operations of the Company are
included in the consolidated Federal income tax return of
Merrill Lynch & Co. The Company has entered into a tax-sharing
agreement with Merrill Lynch & Co. whereby the Company will
calculate its current tax provision based on its operations.
Under the agreement, the Company periodically remits to Merrill
Lynch & Co. its current Federal tax liability.
The Company uses the asset and liability method in providing
income taxes on all transactions that have been recognized in
the financial statements. The asset and liability method
requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or
realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums
and in substantially all states are exempt from state income
taxes.
Unearned Policy Charge Revenue: Certain variable life insurance
products contain policy charges that are assessed at policy
issuance. These policy charges are deferred and amortized into
policy charge revenue based on the estimated future gross
profits for each group of contracts. The Company records a
liability equal to the unamortized balance of these policy
charges.
Accounting Pronouncements: During 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This pronouncement requires a Company to
present disaggregated information based on the internal
segments used in managing its business. Adoption did not impact
the Company's financial position or results of operations, but
it did affect the presentation of the Company's disclosures
(See Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities". This
pronouncement will be effective for annual periods beginning
after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial
position or results of operations.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that
approximate fair value. The carrying value of financial
instruments as of December 31 were:
1998 1997
------------ -------------
Assets:
Fixed maturity securities (1) $ 2,543,097 $ 3,008,608
Equity securities (1), (2) 158,591 73,612
Trading account securities (1) 17,280 15,625
Policy loans on insurance contracts (3) 1,139,456 1,118,139
Cash and cash equivalents (4) 95,377 86,388
Separate Accounts assets (5) 10,571,489 9,149,119
------------- -------------
Total financial instruments $ 14,525,290 $ 13,451,491
============= =============
(1) For publicly traded securities, the estimated fair value is
determined using quoted market prices. For securities without a
readily ascertainable market value, the Company has determined an
estimated fair value using a discounted cash flow model,
including provision for credit risk, based upon the assumption
that such securities will be held to maturity. Such estimated
fair values do not necessarily represent the values for which
these securities could have been sold at the dates of the balance
sheets. At December 31, 1998 and 1997, securities without a
readily ascertainable market value, having an amortized cost of
$376,993 and $389,728, had an estimated fair value of $375,470
and $396,253, respectively.
(2) The Company has investments in two limited partnerships that
do not have readily ascertainable market values. Management has
estimated the fair value as equal to cost based on the review of
the underlying investments of the partnerships. At December 31,
1998 and 1997, the Company's limited partnership investments were
$11,569 and $4,744, respectively.
(3) The Company estimates the fair value of policy loans as
equal to the book value of the loans. Policy loans are fully
collateralized by the account value of the associated insurance
contracts, and the spread between the policy loan interest rate
and the interest rate credited to the account value held as
collateral is fixed.
(4) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(5) Assets held in Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity securities and equity securities (excluding
trading account securities) as of December 31 were:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,079,867 $ 56,703 $ 29,078 $ 2,107,492
Mortgage-backed securities 229,197 7,908 43 237,062
U.S. Government and agencies 150,500 6,393 1,328 155,565
Foreign governments 21,157 35 2,996 18,196
Municipals 23,878 905 1 24,782
------------ ------------ ------------ ------------
Total fixed maturity securities $ 2,504,599 $ 71,944 $ 33,446 $ 2,543,097
============ ============ ============ ============
Equity securities:
Non-redeemable preferred stocks $ 151,130 $ 699 $ 4,823 $ 147,006
Limited partnerships 11,569 - - 11,569
Common stocks 11 5 - 16
------------ ------------ ------------ ------------
Total equity securities $ 162,710 $ 704 $ 4,823 $ 158,591
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,412,171 $ 73,318 $ 6,963 $ 2,478,526
Mortgage-backed securities 339,015 12,320 224 351,111
U.S. Government and agencies 119,107 2,767 111 121,763
Foreign governments 36,585 198 1,125 35,658
Municipals 20,684 866 - 21,550
------------ ------------ ------------ ------------
Total fixed maturity securities $ 2,927,562 $ 89,469 $ 8,423 $ 3,008,608
============ ============ ============ ============
Equity securities:
Non-redeemable preferred stocks $ 67,845 $ 1,187 $ 185 $ 68,847
Limited partnerships 4,744 - - 4,744
Common stocks 10 11 - 21
------------ ------------ ------------ ------------
Total equity securities $ 72,599 $ 1,198 $ 185 $ 73,612
============ ============ ============ ============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1998 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
------------ ------------
Fixed maturity securities:
Due in one year or less $ 383,825 $ 383,628
Due after one year through five years 926,665 950,938
Due after five years through ten years 599,278 610,339
Due after ten years 365,634 361,130
------------ ------------
2,275,402 2,306,035
Mortgage-backed securities 229,197 237,062
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1998 by rating agency equivalent
were:
Estimated
Amortized Fair
Cost Value
------------ ------------
AAA $ 479,923 $ 495,661
AA 146,703 148,169
A 756,880 773,977
BBB 992,041 1,005,835
Non-investment grade 129,052 119,455
------------ ------------
Total fixed maturity securities $ 2,504,599 $ 2,543,097
============ ============
<PAGE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with investments classified as available-for-sale.
The Company adjusts those assets and liabilities as if the
unrealized investment gains or losses from available-for-sale
investments had actually been realized, with corresponding
credits or charges reported in stockholder's equity as a
component of accumulated other comprehensive income (loss), net
of taxes. The following reconciles net unrealized investment
gains (losses) on available-for-sale investments at December 31:
1998 1997
------------ ------------
Assets:
Fixed maturity securities $ 38,498 $ 81,046
Equity securities (4,119) 1,013
Deferred policy acquisition costs (323) (5,452)
Federal income taxes - deferred 124 -
Separate Accounts assets 30 -
------------ ------------
34,210 76,607
------------ ------------
Liabilities:
Policyholders' account balances 34,440 48,923
Federal income taxes - deferred - 9,689
------------ ------------
34,440 58,612
------------ ------------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ (230) $ 17,995
============ ============
During the third quarter 1997, the Company provided $15,000
initial funding for a trading portfolio, composed of
convertible debt and equity securities. The net unrealized
holdings gains on trading account securities included in net
realized investment gains were $932 and $520 at December 31,
1998 and 1997, respectively.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
1998 1997 1996
---------- ---------- ----------
Proceeds $ 893,619 $ 846,041 $ 847,091
Gross realized investment gains 20,232 16,783 19,078
Gross realized investment losses 17,429 7,193 10,749
<PAGE>
The Company had investment securities with a carrying value of
$27,189 and $26,508 that were deposited with insurance
regulatory authorities at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the Company's $12,030 investment in
Separate Account assets included $30 of unrealized gains.
During 1997, the Company realized a $1,005 gain on the sale of
its investment in the Separate Accounts.
All outstanding mortgage loans were repaid during 1997.
Information on impaired loans for the years ended December 31
follows:
1997 1996
----------- -----------
Average investment in impaired loans $ 30,945 $ 79,668
Interest income recognized (cash basis) 2,830 4,848
For the years ended December 31, 1997 and 1996, $7,891 and
$28,555, respectively, of real estate held-for-sale was
acquired in satisfaction of debt.
Net investment income arose from the following sources for the
years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 202,313 $ 236,325 $ 266,916
Equity securities 9,234 3,020 1,876
Mortgage loans - 4,627 9,764
Real estate held-for-sale 2,264 1,939 563
Policy loans on insurance contracts 59,236 57,998 56,512
Cash and cash equivalents 3,912 9,570 6,710
Other 761 709 899
------------ ----------- -----------
Gross investment income 277,720 314,188 343,240
Less investment expenses (5,682) (5,486) (6,579)
------------ ----------- -----------
Net investment income $ 272,038 $ 308,702 $ 336,661
============ =========== ===========
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
1998 1997 1996
------------ ----------- -----------
Fixed maturity securities $ 2,617 $ 6,149 $ 4,690
Equity securities 186 3,441 3,639
Trading account securities 1,368 697 -
Investment in Separate Accounts - 1,005 106
Mortgage loans - 6,252 599
Real estate held-for-sale 8,290 (4,252) (171)
Cash and cash equivalents (1) (3) (1)
------------ ----------- -----------
Net realized investment gains $ 12,460 $ 13,289 $ 8,862
============ =========== ===========
<PAGE>
The following is a reconciliation of the change in valuation
allowances that were recorded to reflect other-than-temporary
declines in the estimated fair value of mortgage loans for the
years ended December 31, 1997 and 1996.
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
----------- ----------- ----------- -----------
1997 $ 17,652 $ - $ 17,652 $ -
1996 35,881 - 18,229 17,652
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income
taxes based on earnings before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Provision for income taxes computed at
Federal statutory rate $ 46,383 $ 42,413 $ 41,048
Decrease in income taxes resulting from:
Dividend received deduction (3,664) (1,969) (3,135)
Foreign tax credit (2,957) - -
Other - - (21)
------------ ------------ ------------
Federal income tax provision $ 39,762 $ 40,444 $ 37,892
============ ============ ============
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1998 was 35%.
The Company provides for deferred income taxes resulting from
temporary differences that arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 11,062 $ (2,422) $ (5,770)
Policyholders' account balances (10,950) (16,099) 15,004
Liability for guaranty fund assessments 529 1,190 760
Investment adjustments (1,350) 5,070 5,122
Other (64) - (38)
------------ ------------ ------------
Deferred Federal income tax
provision (benefit) $ (773) $ (12,261) $ 15,078
============ ============ ============
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 106,132 $ 95,182
Investment adjustments 1,951 601
Liability for guaranty fund assessments 4,852 5,381
Net unrealized investment loss on investment securities 124 -
------------ ------------
Total deferred tax assets 113,059 101,164
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 99,732 88,670
Net unrealized investment gain on investment securities - 9,689
Other 3,924 3,988
------------ ------------
Total deferred tax liabilities 103,656 102,347
------------ ------------
Net deferred tax (asset) liability $ (9,403) $ 1,183
============ ============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
NOTE 5. REINSURANCE
In the normal course of business, the Company seeks to limit
its exposure to loss on any single insured life and to recover
a portion of benefits paid by ceding reinsurance to other
insurance enterprises or reinsurers under indemnity reinsurance
agreements, primarily excess coverage and coinsurance
agreements. The maximum amount of mortality risk retained by
the Company is approximately $750 on a single life.
Indemnity reinsurance agreements do not relieve the Company
from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses to the Company.
The Company regularly evaluates the financial condition of its
reinsurers so as to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under
reinsurance agreements in the form of letters of credit and
funds withheld totaling $589 that can be drawn upon for
delinquent reinsurance recoverables.
<PAGE>
As of December 31, 1998, the Company had the following life
insurance in-force:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $13,124,108 $ 3,259,006 $ 1,771 $ 9,866,872 0%
</TABLE>
The Company has entered into an indemnity reinsurance agreement
with an unaffiliated insurer whereby the Company coinsures, on
a modified coinsurance basis, 50% of the unaffiliated insurer's
variable annuity premiums sold through the Merrill Lynch & Co.
distribution system.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain accounting, data processing,
legal, actuarial, management, advertising and other services to
the Company. Expenses incurred by MLIG in relation to this
service agreement are reimbursed by the Company on an allocated
cost basis. Charges billed to the Company by MLIG pursuant to
the agreement were $43,179, $43,028 and $43,515 for the years
ended December 31, 1998, 1997 and 1996, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG that approximates the daily Federal funds rate. Total
intercompany interest paid was $860, $842 and $988 for 1998,
1997 and 1996, respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM")
are parties to a service agreement whereby MLAM has agreed to
provide certain invested asset management services to the
Company. The Company pays a fee to MLAM for these services
through the MLIG service agreement. Charges attributable to
this agreement and allocated to the Company by MLIG were
$1,915, $1,913 and $2,279 for 1998, 1997 and 1996,
respectively.
MLIG has entered into agreements with MLAM and Hotchkis & Wiley
("H&W"), a division of MLAM, with respect to administrative
services for the Merrill Lynch Series Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., and Hotchkis & Wiley Variable
Trust (collectively, "the Funds"). The Company invests in the
various mutual fund portfolios of the Funds in connection with
the variable life insurance and annuity contracts the Company
has in-force. Under this agreement, MLAM and H&W pay
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Funds to MLAM
and H&W. The Company received from MLIG its allocable share of
such compensation in the amount of $20,289, $19,057 and $16,514
during 1998, 1997 and 1996, respectively.
<PAGE>
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S, who are the Company's licensed insurance agents,
solicit applications for contracts to be issued by the Company.
MLLA is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were $79,117, $72,729 and $42,639 for
1998, 1997 and 1996, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisitions
costs and are being amortized in accordance with the policy
discussed in Note 1.
Affiliated agreements generally contain reciprocal indemnity
provisions pertaining to each party's representations and
contractual obligations thereunder.
During 1997, the Company sold its investment in 2141 E.
Camelback, Corp. to Merrill Lynch Mortgage Capital, Inc. The
investment was sold at its carrying value of $5,375.
NOTE 7. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
The Company paid no dividends in 1998. During 1997 and 1996,
the Company paid dividends of $135,000 and $175,000,
respectively, to MLIG. Of these stockholders' dividends,
$110,030 and $175,000 respectively, were extraordinary
dividends as defined by Arkansas Insurance Law and were paid
pursuant to approval granted by the Arkansas Insurance
Commissioner.
At December 31, 1998 and 1997, approximately $29,707 and
$24,304, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1998 and 1997, were $299,069 and $245,042,
respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial
statements by charging policy acquisition costs to expense as
incurred, establishing future policy benefit reserves using
different actuarial assumptions, not providing for deferred
income taxes, and valuing securities on a different basis. The
Company's statutory net income for 1998, 1997 and 1996 was
$55,813, $81,963 and $93,532, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital that
a life insurance company should have based upon that company's
risk profile. As of December 31, 1998 and 1997, based on the
RBC formula, the Company's total adjusted capital level was
473% and 394%, respectively, of the minimum amount of capital
required to avoid regulatory action.
<PAGE>
In March 1998, the NAIC adopted the Codification of Statutory
Accounting Principles ("Codification"). The Codification,
which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be
effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if,
the state of Arkansas will require adoption of Codification for
the preparation of statutory financial statements.
Codification is not expected to have a material impact on the
Company's capital requirements or statutory financial
statements.
NOTE 8. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result
of the insolvency of an insurer. At the time an insolvency
occurs, the guaranty association assesses the remaining members
of the association an amount sufficient to satisfy the
insolvent insurer's policyholder obligations (within specified
limits). The Company has utilized public information to
estimate what future assessments it will incur as a result of
insolvencies. At December 31, 1998 and 1997, the Company has
established an estimated liability for future guaranty fund
assessments of $13,864 and $15,374, respectively. The Company
regularly monitors public information regarding insurer
insolvencies and adjusts its estimated liability as
appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1998, $6,569 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 9. SEGMENT INFORMATION
In reporting to management, the Company's operating results are
categorized into two business segments: Life Insurance and
Annuities. The Company's Life Insurance segment consists of
variable life insurance products and interest-sensitive life
products. The Company's Annuity segment consists of variable
annuities and interest sensitive annuities
<PAGE>
The Company's organization is structured in accordance with its
two business segments. Each segment has its own administrative
service center that provides product support to the Company and
customer service support to the Company's policyholders.
Additionally, marketing and sales management functions, within
MLIG, are organized according to these two business segments.
The accounting policies of the business segments are the same
as those described in the summary of significant accounting
policies. All revenue and expense transactions are recorded at
the product level and accumulated at the business segment level
for review by management.
The "Other" category, presented in the following segment
financial information, represents assets and related earnings
that do not support policyholder liabilities.
The following table summarizes each business segment's
contribution to the consolidated amounts:
<TABLE>
<CAPTION>
Life
1998 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 35,228 $ 32,765 $ 8,369 $ 76,362
Other revenues 84,836 124,864 422 210,122
------------ ------------ ------------ ------------
Net revenues 120,064 157,629 8,791 286,484
------------ ------------ ------------ ------------
Policy benefits 18,397 13,494 - 31,891
Reinsurance premiums ceded 19,972 - - 19,972
DAC amortization 13,040 31,795 - 44,835
Other non-interest expenses 18,030 39,233 - 57,263
------------ ------------ ------------ ------------
Total non-interest expenses 69,439 84,522 - 153,961
------------ ------------ ------------ ------------
Net earnings before Federal income
tax provision 50,625 73,107 8,791 132,523
Income tax expense 16,033 20,653 3,076 39,762
------------ ------------ ------------ ------------
Net earnings $ 34,592 $ 52,454 $ 5,715 $ 92,761
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 6,069,649 $ 8,885,981 $ 148,465 $15,104,095
Deferred policy acquisition costs $ 207,713 $ 197,927 $ - $ 405,640
Policy liabilities and accruals $ 2,186,001 $ 1,694,668 $ - $ 3,880,669
Other policyholder funds $ 16,033 $ - $ 4,769 $ 20,802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
1997 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 38,826 $ 47,973 $ 12,361 $ 99,160
Other revenues 86,301 102,782 3,139 192,222
------------ ------------ ------------ ------------
Net revenues 125,127 150,755 15,500 291,382
------------ ------------ ------------ ------------
Policy benefits 15,876 11,153 - 27,029
Reinsurance premiums ceded 17,879 - - 17,879
DAC amortization 36,180 35,931 - 72,111
Other non-interest expenses 16,545 36,639 - 53,184
------------ ------------ ------------ ------------
Total non-interest expenses 86,480 83,723 - 170,203
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 38,647 67,032 15,500 121,179
Income tax expense 12,753 22,265 5,426 40,444
------------ ------------ ------------ ------------
Net earnings $ 25,894 $ 44,767 $ 10,074 $ 80,735
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,925,872 $ 7,998,461 $ 129,248 $14,053,581
Deferred policy acquisition costs $ 182,610 $ 182,495 $ - $ 365,105
Policy liabilities $ 2,229,533 $ 2,009,151 $ - $ 4,238,684
Other policyholder funds $ 18,788 $ - $ 8,372 $ 27,160
</TABLE>
<TABLE>
<CAPTION>
Life
1996 Insurance Annuities Other Total
- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net interest spread (a) $ 40,805 $ 44,994 $ 15,607 $ 101,406
Other revenues 78,759 86,430 2,502 167,691
------------ ------------ ------------ ------------
Net revenues 119,564 131,424 18,109 269,097
------------ ------------ ------------ ------------
Policy benefits 12,150 8,902 - 21,052
Reinsurance premiums ceded 15,582 - - 15,582
DAC amortization 30,988 31,048 - 62,036
Other non-interest expenses 18,169 34,979 - 53,148
------------ ------------ ------------ ------------
Total non-interest expenses 76,889 74,929 - 151,818
------------ ------------ ------------ ------------
Net earnings before Federal
income tax provision 42,675 56,495 18,109 117,279
Income tax expense 13,895 17,658 6,339 37,892
------------ ------------ ------------ ------------
Net earnings $ 28,780 $ 38,837 $ 11,770 $ 79,387
============ ============ ============ ============
Balance Sheet Information:
Total assets $ 5,623,370 $ 6,957,228 $ 156,895 $12,737,493
Deferred policy acquisition costs $ 194,979 $ 171,482 $ - $ 366,461
Policy liabilities and accruals $ 2,638,177 $ 1,881,537 $ - $ 4,519,714
Other policyholder funds $ 16,256 $ - $ 3,164 $ 19,420
</TABLE>
<PAGE>
(a) Management considers investment income net of interest
credited to policyholders' account balances in evaluating
results.
The table below summarizes the Company's net revenues by
product for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Life Insurance
Variable life insurance $ 91,806 $ 92,245 $ 89,897
Interest-sensitive life insurance 28,258 32,882 29,667
------------ ------------ ------------
Total Life Insurance 120,064 125,127 119,564
------------ ------------ ------------
Annuities
Variable annuities 105,545 88,509 70,116
Interest-sensitive annuities 52,084 62,246 61,308
------------ ------------ ------------
Total Annuities 157,629 150,755 131,424
------------ ------------ ------------
Other 8,791 15,500 18,109
------------ ------------ ------------
Total $ 286,484 $ 291,382 $ 269,097
============ ============ ============
</TABLE>
