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PART A
INFORMATION REQUIRED IN A PROSPECTUS
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PROSPECTUS
MAY 1, 1997
MERRILL LYNCH LIFE VARIABLE ANNUITY
SEPARATE ACCOUNT
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS--NONPARTICIPATING
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
Home Office: Little Rock, Arkansas 72201
Service Center: P.O. Box 44222, Jacksonville, Florida 32231-4222
4804 Deer Lake Drive East, Jacksonville, Florida 32246
Phone: (800) 535-5549
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
The individual deferred variable annuity contract described in this Prospectus
(the "Contract") is designed to provide comprehensive and flexible ways to
invest and to create a source of income protection for later in life through the
payment of annuity benefits. An annuity is intended to be a long term
investment. Contract owners should consider their need for deferred income
before purchasing the Contract. The Contract is designed to provide annuity
payments in connection with retirement plans that may or may not qualify for
special federal income tax treatment under the Internal Revenue Code.
Both accumulation of the contract values and annuity payments may be on either a
fixed or variable basis, or on a combination fixed and variable basis. Benefits
on a fixed basis are provided by premiums and contract values allocated to the
Fixed Account. (See THE FIXED ACCOUNT on page 22.) Benefits on a variable basis
are provided by premiums and contract values allocated to the Variable Account.
Such variable benefits are not guaranteed as to fixed-dollar amount and will
vary according to investment performance. THIS PROSPECTUS DESCRIBES ONLY THE
VARIABLE ACCOUNT FEATURES OF THE CONTRACT EXCEPT WHERE SPECIFIC REFERENCE IS
MADE TO THE FIXED ACCOUNT.
The Variable Account is a segregated investment account of Merrill Lynch Life
Insurance Company ("Merrill Lynch Life"), which has been named the Merrill Lynch
Life Variable Annuity Separate Account. Premiums and contract values allocated
to the Variable Account will be invested in certain Funds that the contract
owner is eligible to select from the Merrill Lynch Variable Series Funds, Inc.
The contract owner bears the full investment risk with respect to such
investments.
This Prospectus contains information about the Contract and the Variable Account
that a prospective contract owner should know before investing. It should be
read and retained for future reference. Additional information about the
Contract and Variable Account is contained in a Statement of Additional
Information, dated May 1, 1997, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. The Statement of
Additional Information is available on request and without charge by writing or
calling Merrill Lynch Life's Service Center at the address or phone number set
forth above. The table of contents for the Statement of Additional Information
is included on page 34 of this Prospectus.
THE PURCHASE OF THIS CONTRACT INVOLVES CERTAIN RISKS. BECAUSE IT IS A VARIABLE
ANNUITY, THE VALUE OF THE CONTRACT REFLECTS THE INVESTMENT PERFORMANCE OF THE
SELECTED INVESTMENT OPTIONS. INVESTMENT RESULTS CAN VARY BOTH UP AND DOWN AND
CAN EVEN DECREASE THE VALUE OF PREMIUM PAYMENTS. THEREFORE, CONTRACT OWNERS
COULD LOSE ALL OR PART OF THE MONEY THEY HAVE INVESTED. MERRILL LYNCH LIFE DOES
NOT GUARANTEE THE VALUE OF THE CONTRACT. RATHER, CONTRACT OWNERS BEAR ALL
INVESTMENT RISKS.
AN ANNUITY IS INTENDED TO BE A LONG TERM INVESTMENT. WITHDRAWALS OR SURRENDER OF
THE CONTRACT PREMATURELY MAY RESULT IN SUBSTANTIAL PENALTIES. CONTRACT OWNERS
SHOULD CONSIDER THEIR INCOME NEEDS BEFORE PURCHASING THE CONTRACT.
ALL WITHDRAWALS FROM AND SURRENDER OF THE CONTRACT ARE SUBJECT TO TAX, AND IF
TAKEN BEFORE AGE 59 1/2 MAY ALSO BE SUBJECT TO A 10% FEDERAL PENALTY TAX.
THIS CONTRACT PROVIDES A GUARANTEED DEATH BENEFIT THAT IS PAYABLE ONLY UPON THE
DEATH OF THE ANNUITANT OR CONTRACT OWNER.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS
ATTACHED TO A CURRENT PROSPECTUS FOR MERRILL LYNCH VARIABLE SERIES
FUNDS, INC., WHICH SHOULD ALSO BE READ AND KEPT FOR REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS........................................................................... 4
CAPSULE SUMMARY OF THE CONTRACT....................................................... 5
FEE TABLE............................................................................. 8
CONDENSED FINANCIAL INFORMATION....................................................... 10
MERRILL LYNCH LIFE INSURANCE COMPANY.................................................. 14
THE VARIABLE ACCOUNT.................................................................. 14
FINANCIAL STATEMENTS.................................................................. 14
THE REINSURANCE AGREEMENT............................................................. 15
INVESTMENTS OF THE VARIABLE ACCOUNT................................................... 15
Eligible Funds...................................................................... 15
Reserve Assets Fund.............................................................. 16
Prime Bond Fund.................................................................. 16
High Current Income Fund......................................................... 16
Quality Equity Fund.............................................................. 17
Equity Growth Fund............................................................... 17
Global Strategy Focus Fund....................................................... 17
Natural Resources Focus Fund..................................................... 17
American Balanced Fund........................................................... 18
Index 500 Fund................................................................... 18
International Equity Focus Fund.................................................. 18
Basic Value Focus Fund........................................................... 18
Reinvestment........................................................................ 18
Substitution of Investments......................................................... 18
CHARGES AND DEDUCTIONS................................................................ 18
Contingent Deferred Sales Charge.................................................... 18
Contract Administration Charge...................................................... 19
Waiver of Charges................................................................... 19
Expense Risk Charge................................................................. 19
Mortality Risk Charge............................................................... 20
Distribution Expense Charge......................................................... 20
Payments of Charges and Deductions.................................................. 20
Premium Taxes....................................................................... 20
Fund Expenses....................................................................... 20
DESCRIPTION OF THE CONTRACT........................................................... 21
Premiums............................................................................ 21
Accumulation Provisions............................................................. 21
Accumulation Units............................................................... 21
Value of an Accumulation Unit.................................................... 21
Net Investment Factor............................................................ 21
Valuation Periods................................................................ 22
The Fixed Account................................................................... 22
Payment on Death.................................................................... 22
Beneficiary......................................................................... 23
Ownership........................................................................... 23
Account Transfers................................................................... 23
Withdrawals......................................................................... 24
Suspension of Payments.............................................................. 24
</TABLE>
2
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Annuity Provisions.................................................................. 24
Variable Annuity................................................................. 24
Selection of Annuity Date and Annuity Options.................................... 24
Change of Annuity Date or Annuity Option......................................... 24
Annuity Options.................................................................. 25
Minimum Annuity Payments......................................................... 25
First Variable Annuity Payment................................................... 25
Age Adjustment................................................................... 25
Number of Annuity Units.......................................................... 26
Value of Each Annuity Unit....................................................... 26
Subsequent Variable Annuity Payments............................................. 26
Assumed Investment Rate.......................................................... 26
Proof of Age, Sex and Survival................................................... 26
Notices and Elections............................................................... 26
Amendment of Contract............................................................... 26
Ten Day Right to Review............................................................. 27
FEDERAL INCOME TAXES.................................................................. 27
Introduction........................................................................ 27
Merrill Lynch Life's Tax Status..................................................... 27
Taxation of Annuities............................................................... 27
In General....................................................................... 27
Required Distributions........................................................... 27
Non-natural Owners............................................................... 28
Distributions.................................................................... 28
Multiple Annuity Contracts....................................................... 28
Penalty Tax...................................................................... 29
Internal Revenue Service Diversification Standards.................................. 29
Transfers, Assignments, or Exchanges of a Contract.................................. 29
Possible Changes in Taxation........................................................ 30
Other Tax Consequences.............................................................. 30
Qualified Plans..................................................................... 30
Individual Retirement Annuities and Individual Retirement Accounts............... 30
Pension and Profit Sharing Plans................................................. 30
Tax-Sheltered Annuities.......................................................... 31
Section 457 Deferred Compensation ("Section 457") Plans.......................... 31
Withholding...................................................................... 32
VARIABLE ACCOUNT VOTING RIGHTS........................................................ 32
REPORTS TO CONTRACT OWNERS............................................................ 32
DISTRIBUTION OF CONTRACTS............................................................. 32
STATE REGULATION...................................................................... 33
LEGAL PROCEEDINGS..................................................................... 33
EXPERTS............................................................................... 33
REGISTRATION STATEMENTS............................................................... 33
LEGAL MATTERS......................................................................... 33
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.............................. 34
APPENDIX.............................................................................. 35
</TABLE>
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No person has been authorized to give any information or to make any
representation other than that contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any variable annuity contracts offered by this Prospectus in any
jurisdiction to anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
3
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DEFINITIONS
accumulation unit: An index used to compute the value of each contract owner's
interest in the Variable Account prior to the annuity date. (See page 21.)
annuitant: The person on whose continuation of life annuity payments may
depend.
annuity: A series of predetermined periodic payments.
annuity date: The date on which annuity payments are to begin. (See page 24.)
annuity unit: An index used to compute variable annuity payments. (See page
26.)
beneficiary: The person to whom payment is to be made on the death of the
contract owner or annuitant. There may be both a contract owner's beneficiary
and an annuitant's beneficiary if the contract owner is not the annuitant.
Contract: A Contract offered by this Prospectus.
contract owner: The person entitled to exercise all rights under a Contract.
(See page 23.)
contract value: The sum of the value of a contract owner's Fixed Account and a
contract owner's interest in the Variable Account.
Funds: The mutual funds, or separate investment portfolios within a series
mutual fund, designated as eligible investments for the Variable Account. (See
page 15.)
fixed annuity: A series of periodic payments of predetermined amounts that do
not vary with investment experience.
net investment factor: An index used to measure the investment performance of a
subaccount of the Variable Account from one valuation period to the next. (See
page 21.)
nonqualified contract: A Contract issued in connection with a nonqualified
plan.
nonqualified plan: A retirement plan other than a qualified plan.
premiums: The money the contract owner pays Merrill Lynch Life for a Contract.
(See page 21.)
qualified contract: A Contract issued in connection with a qualified plan.
qualified plan: A retirement plan that receives favorable tax treatment under
Section 401, 403, 404, 408, 457 or any similar provision of the Internal Revenue
Code. (See page 30.)
Variable Account: A segregated investment account of Merrill Lynch Life
Insurance Company, named the Merrill Lynch Life Variable Annuity Separate
Account. (See page 14.)
subaccount: A division of the Variable Account consisting of the shares of a
particular Fund held by the Variable Account for all Contracts having a similar
tax status. (See page 14.)
valuation period: The interval from one valuation day of a Fund to the next
valuation day, measured from the time each day the Fund is valued. (See page
22.)
variable annuity: A series of periodic payments that vary in amount according
to investment experience. (See page 24.)
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CAPSULE SUMMARY OF THE CONTRACT
The following capsule summary is intended to provide a brief overview of the
Contract. More detailed information about the Contract can be found in the
sections of this Prospectus that follow, all of which should be read in their
entirety.
THE VARIABLE ACCOUNT
Premiums will be allocated to the Merrill Lynch Life Variable Annuity Separate
Account (the "Variable Account") a segregated investment account, or to the
Fixed Account described on page 22, as directed by the contract owner. The
Variable Account is divided into subaccounts corresponding to the Funds in which
premiums may be invested. For the first 14 days following the date of issue, all
premiums allocable to the Variable Account will be allocated to the Reserve
Assets Fund subaccount. Thereafter, the contract owner's interest in the
Variable Account will be reallocated to the subaccounts selected by the contract
owner. In the Commonwealth of Pennsylvania, all premiums will be invested as of
the date of issue in the subaccounts selected by the contract owner. The
contract owner may change the selection later, subject to certain conditions.
The contract value and the amount of the monthly annuity payments will reflect
the investment performance of the Funds selected. (See THE VARIABLE ACCOUNT on
page 14 and ACCOUNT TRANSFERS on page 23.)
THE FUNDS
The Funds in which premiums currently may be invested are certain separate
investment portfolios of the Merrill Lynch Variable Series Funds, Inc. They are
the Merrill Lynch Reserve Assets Fund, Prime Bond Fund, High Current Income
Fund, Quality Equity Fund, Equity Growth Fund, Global Strategy Focus Fund,
Natural Resources Focus Fund, American Balanced Fund, Index 500 Fund,
International Equity Focus Fund, and Basic Value Focus Fund. (See INVESTMENTS OF
THE VARIABLE ACCOUNT on page 15.)
RETIREMENT PLANS
The Contract may be issued pursuant to nonqualified retirement plans or plans
qualifying for special tax treatment as "H.R. 10" plans, Individual Retirement
Annuities or Individual Retirement Accounts, corporate pension and
profit-sharing plans, Tax-Sheltered Annuities or Section 457 deferred
compensation ("Section 457") plans. For each Fund, there is one subaccount for
nonqualified plans and one subaccount for qualified plans. (See QUALIFIED PLANS
on page 30.)
PREMIUMS
The full amount of all premiums will be invested initially. There is no
"front-end load." However, certain charges and deductions will be made from the
contract value. (See CHARGES AND DEDUCTIONS below.)
The Contract permits premiums to be paid on a flexible basis at any time in any
amount meeting Merrill Lynch Life's minimum requirements. The minimum initial
premium Merrill Lynch Life will accept is $1,500 for nonqualified Contracts and
$10 for qualified Contracts. For subsequent premiums, the minimum amount for
nonqualified Contracts is $300 ($50 in Tennessee) and the minimum amount for
qualified Contracts is the same as for the initial premium. (See PREMIUMS on
page 21.)
CHARGES AND DEDUCTIONS
A contingent deferred sales charge is deducted in the event of withdrawal of
contract values, subject to certain exceptions. If the contingent deferred sales
charge applies, it will equal the lesser of (a) 5% of the sum of the premiums
paid within 7 years prior to the date of withdrawal, adjusted for any prior
withdrawals, or (b) 5% of the amount withdrawn. This charge is paid to permit
Merrill Lynch Life to recover sales expenses it has incurred. Under no
circumstances will the charges ever exceed 5% of total premiums. (See CONTINGENT
DEFERRED SALES CHARGE on page 18.)
On each contract anniversary on or prior to the annuity date, Merrill Lynch Life
will deduct a contract administration charge of $30 from the contract value. It
will also be deducted upon full withdrawal of the
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contract value if such withdrawal is not on a contract anniversary. This charge
is made to reimburse Merrill Lynch Life for expenses related to administration
of the Contracts. (See CONTRACT ADMINISTRATION CHARGE on page 19.)
Merrill Lynch Life will deduct a daily expense risk charge. For nonqualified
Contracts, the charge will be equal to an annual rate of 0.50% of the sum of the
daily net asset values of all nonqualified subaccounts. For qualified Contracts,
the rate will be 0.20% of the sum of the daily net asset values of all qualified
subaccounts. This charge is made to compensate Merrill Lynch Life for the risk
of guaranteeing not to increase the contract administration charge regardless of
actual administrative costs. (See EXPENSE RISK CHARGE on page 19.)
Merrill Lynch Life will deduct a daily distribution expense charge equal to an
annual rate of 0.05% of the daily net asset value of the Variable Account. This
charge compensates Merrill Lynch Life in part for expenses incurred distributing
the Contracts. (See DISTRIBUTION EXPENSE CHARGE on page 20.) Merrill Lynch Life
will also deduct a daily mortality risk charge equal to an annual rate of 0.75%
of the daily net asset value of the Variable Account. This charge is made to
compensate Merrill Lynch Life for the mortality guarantees made under the
Contract. (See MORTALITY RISK CHARGE on page 20.)
Premium taxes payable to any government entity will be deducted at the annuity
date. Currently, premium taxes range from 0% to 5%. In those jurisdictions that
do not allow an insurance company to reduce its current taxable premium income
by the amount of any withdrawal, surrender or death benefit paid, Merrill Lynch
Life will also deduct a charge for these taxes on any withdrawal, surrender or
death benefit effected under the Contract. (See PREMIUM TAXES on page 20.)
ANNUITY PAYMENTS
Monthly annuity payments will start on the annuity date. The contract owner may
select the annuity date. He or she may also select an annuity payment option and
a different payment frequency. The contract owner may change his or her
selections later. (See CHANGE OF ANNUITY DATE OR ANNUITY OPTION on page 24.) The
amount of each variable annuity payment will depend on the investment
performance of the Funds the contract owner selects.
If the net contract value at the annuity date is less than $5,000 ($3,500 for
qualified Contracts), Merrill Lynch Life may pay the contract value in a lump
sum in lieu of annuity payments. For tax consequences of a lump sum payment, see
TAXATION OF ANNUITIES on page 27. If any annuity payment would be less than $50,
Merrill Lynch Life may change the frequency of payments to such intervals as
will result in payments of at least $50. (See MINIMUM ANNUITY PAYMENTS on page
25.)
ACCOUNT TRANSFERS
The contract owner may transfer all or part of the contract value between the
Variable Account and the Fixed Account and among subaccounts of the Variable
Account, subject to certain limitations. (See ACCOUNT TRANSFERS on page 23.) For
Contracts issued prior to April 30, 1986 and reinsured by Merrill Lynch Life,
see the Appendix for special provisions.
PAYMENT ON DEATH
If either the annuitant or the contract owner dies prior to the annuity date,
Merrill Lynch Life will pay the greater of (a) the sum of all premiums paid
(adjusted for any withdrawals) or (b) the then current contract value. No
contingent deferred sales charge will be imposed. (See PAYMENT ON DEATH on page
22.)
WITHDRAWALS
The contract owner may withdraw all or part of the accumulated contract value
prior to the earlier of the annuity date or the death of the annuitant. The
amount the contract owner withdraws must be at least $500. If the Contract is to
continue in force, the remaining contract value must be at least $500. If these
dollar limitations relating to partial withdrawals would prevent the contract
owner from making a partial withdrawal, he or she may nevertheless make a full
withdrawal of the contract value. A contingent deferred sales charge and a
contract administration charge may be imposed. (See WITHDRAWALS on page 24.)
Withdrawals will
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decrease the contract value. Withdrawals are subject to tax and prior to age
59 1/2 may also be subject to a 10% federal penalty tax. Revenue Code (see
TAXATION OF ANNUITIES on page 27), and withdrawals under Tax-Sheltered Annuities
are restricted (see TAX-SHELTERED ANNUITIES on page 31).
TEN DAY REVIEW
When the contract owner receives the Contract, it should be reviewed carefully
to make sure it is what the contract owner intended to purchase. Generally,
within 10 days after the contract owner receives the Contract, he or she may
return it for a refund. Some states allow a longer period of time to return the
Contract. The Contract must be delivered to Merrill Lynch Life's Service Center
or to the Financial Consultant who sold it for a refund to be made. Merrill
Lynch Life will then refund to the contract owner the greater of all premiums
paid into the Contract or the contract value as of the date the Contract is
returned. For contracts issued in the Commonwealth of Pennsylvania, Merrill
Lynch Life will refund the contract owner's premiums allocated to the Fixed
Account plus the value of the contract owner's interest in the Variable Account
as of the date the Contract is returned. The Contract will then be deemed void.
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FEE TABLE
<TABLE>
<CAPTION>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
----------------------------------------------------------------------------------------------------
HIGH GLOBAL
RESERVE CURRENT QUALITY EQUITY STRATEGY NATURAL
ASSET PRIME INCOME EQUITY GROWTH FOCUS RESOURCES
FUND BOND FUND FUND FUND FUND FUND(F) FOCUS FUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTRACT OWNER TRANSACTION
EXPENSES:
Contingent Deferred Sales
Charge (as a percentage
of purchase payments or
amount withdrawn, as
applicable)(a).......... 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
ANNUAL CONTRACT
ADMINISTRATION CHARGE(B).. $30.00 $30.00 $30.00 $30.00 $30.00 $30.00 $30.00
SEPARATE ACCOUNT ANNUAL
EXPENSES (AS A PERCENTAGE
OF NET ASSETS):
Expense Risk Charge(c).... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Mortality Risk Charge(d).. 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Distribution Expense
Charge(d)............... 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05%
----- ----- ----- ----- ----- ----- -----
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES........... 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
===== ===== ===== ===== ===== ===== =====
<CAPTION>
INTERNATIONAL BASIC
AMERICAN EQUITY VALUE
BALANCED INDEX 500 FOCUS FOCUS
FUND FUND FUND FUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
CONTRACT OWNER TRANSACTION
EXPENSES:
Contingent Deferred Sales
Charge (as a percentage
of purchase payments or
amount withdrawn, as
applicable)(a).......... 5.00% 5.00% 5.00% 5.00%
ANNUAL CONTRACT
ADMINISTRATION CHARGE(B).. $30.00 $30.00 $30.00 $30.00
SEPARATE ACCOUNT ANNUAL
EXPENSES (AS A PERCENTAGE
OF NET ASSETS):
Expense Risk Charge(c).... 0.50% 0.50% 0.50% 0.50%
Mortality Risk Charge(d).. 0.75% 0.75% 0.75% 0.75%
Distribution Expense
Charge(d)............... 0.05% 0.05% 0.05% 0.05%
----- ----- ------ -----
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES........... 1.30% 1.30% 1.30% 1.30%
===== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
-------------------------------------------------------------------------------------------
HIGH GLOBAL NATURAL
RESERVE PRIME CURRENT QUALITY EQUITY STRATEGY RESOURCES AMERICAN
ASSETS BOND INCOME EQUITY GROWTH FOCUS FOCUS BALANCED
FUND FUND FUND FUND FUND FUND(F) FUND FUND
------- ----- ------- ------- ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC. ANNUAL
EXPENSES FOR THE YEAR
ENDED DECEMBER 31, 1995
(AS A PERCENTAGE OF
PORTFOLIO COMPANY NET
ASSETS):
Investment Advisory
Fees(e)................. 0.50% 0.44% 0.49% 0.44% 0.75% 0.65% 0.65% 0.55%
Other Expenses............ 0.11% 0.05% 0.05% 0.05% 0.06% 0.06% 0.13% 0.05%
------- ----- ------- ------- ------ --- --- ---
TOTAL MERRILL LYNCH
VARIABLE SERIES FUNDS,
INC. ANNUAL OPERATING
EXPENSES.................. 0.61% 0.49% 0.54% 0.49% 0.81% 0.71% 0.78% 0.60%
======= ====== ======= ======= ======= ======== ========= =========
<CAPTION>
INTERNATIONAL BASIC
INDEX EQUITY VALUE
500 FOCUS FOCUS
FUND(G) FUND FUND
------- ------------- -----
<S> <C> <C> <C>
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC. ANNUAL
EXPENSES FOR THE YEAR
ENDED DECEMBER 31, 1995
(AS A PERCENTAGE OF
PORTFOLIO COMPANY NET
ASSETS):
Investment Advisory
Fees(e)................. 0.30% 0.75% 0.60%
Other Expenses............ 0.30% 0.14% 0.06%
------- --- -----
TOTAL MERRILL LYNCH
VARIABLE SERIES FUNDS,
INC. ANNUAL OPERATING
EXPENSES.................. 0.60% 0.89% 0.66%
======== ============ ======
</TABLE>
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(a) A contingent deferred sales charge is imposed upon withdrawal of all or part
of the contract value. The charge is 5%, applied to the lesser of premiums
paid within the past 7 years (adjusted for any prior withdrawals) or the
amount withdrawn. There will be no charge for such part of the first
withdrawal in a contract year as does not exceed 10% of the premiums paid
prior to the date of withdrawal. (See page 18.)
(b) A contract administration charge of $30 per contract year is deducted from
each Contract. It is deducted from the contract value on each contract
anniversary on or prior to the annuity date and at full withdrawal if made
other than on a contract anniversary.
(c) The expense risk charge is stated as an annual percentage of the daily net
asset value of the Variable Account. The rate indicated is for nonqualified
Contracts. For qualified Contracts, the rate is 0.20%. (See page 19.)
(d) The mortality risk charge and the distribution expense charge are each
stated as an annual percentage of the daily net asset value of the Variable
Account. (See page 20.)
(e) See "Investments of the Variable Account" on page 15.
(f) Effective following the close of business on December 6, 1996, the Flexible
Strategy Fund was merged with and into the Global Strategy Focus Fund. See
the accompanying prospectus for Merrill Lynch Variable Series Funds, Inc.
for additional information regarding this change.
(g) The Fee Table does not reflect any fees waived or expenses assumed by
Merrill Lynch Asset Management, L.P. ("MLAM") during the year ended December
31, 1996 with respect to any Fund because such waivers and assumption of
expenses were made on a voluntary basis and MLAM may discontinue or reduce
any such waiver or assumption of expenses at any time without notice. During
the fiscal year ended December 31, 1996, MLAM waived management fees and
reimbursed expenses totaling 0.60% for the Index 500 Fund after which the
Fund's total expense ratio, net of reimbursement, was 0.00%.
8
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<TABLE>
<CAPTION>
HIGH GLOBAL NATURAL
RESERVE CURRENT QUALITY EQUITY STRATEGY RESOURCES
ASSETS PRIME INCOME EQUITY GROWTH FOCUS FOCUS
FUND BOND FUND FUND FUND FUND FUND FUND
EXAMPLE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
If the contract owner
surrenders his or her
Contract at the end of the
applicable time period,
the contract owner would
pay the following expenses
on a $1,000 investment,
assuming 5% annual return
on assets:
1-year................. $ 70 $ 69 $ 69 $ 69 $ 72 $ 71 $ 72
3-year................. 112 108 109 108 118 115 117
5-year................. 156 150 152 150 166 161 165
10-year................. 229 216 221 216 250 239 247
If the contract owner
annuitizes, or does not
surrender, at the end of
the applicable time
period, the contract owner
would pay the following
expenses on a $1,000
investment, assuming 5%
annual return on assets:
1-year................. $ 20 $ 19 $ 19 $ 19 $ 22 $ 21 $ 22
3-year................. 62 58 59 58 68 65 67
5-year................. 106 100 102 100 116 111 115
10-year................. 229 216 221 216 250 239 247
<CAPTION>
INTERNATIONAL BASIC
AMERICAN EQUITY VALUE
BALANCED INDEX 500 FOCUS FOCUS
FUND FUND FUND FUND
EXAMPLE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
If the contract owner
surrenders his or her
Contract at the end of the
applicable time period,
the contract owner would
pay the following expenses
on a $1,000 investment,
assuming 5% annual return
on assets:
1-year................. $ 70 $ 70 $ 73 $ 70
3-year................. 111 111 120 113
5-year................. 155 155 170 158
10-year................. 228 228 258 234
If the contract owner
annuitizes, or does not
surrender, at the end of
the applicable time
period, the contract owner
would pay the following
expenses on a $1,000
investment, assuming 5%
annual return on assets:
1-year................. $ 20 $ 20 $ 23 $ 20
3-year................. 61 61 70 63
5-year................. 105 105 120 108
10-year................. 228 228 258 234
</TABLE>
The foregoing Fee Table and Example are intended to assist investors in
understanding the costs and expenses that a contract owner in the Merrill Lynch
Life Variable Annuity Separate Account will bear directly or indirectly with
respect to each Fund. The Fee Table and Example include charges and expenses of
the Variable Account as well as the Merrill Lynch Variable Series Funds, Inc.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR ANNUAL RATES OF RETURN OF ANY FUND. ACTUAL EXPENSES AND ANNUAL RATES
OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR THE PURPOSE OF THE EXAMPLE.
The Fee Table and Example do not include charges to contract owners for
reimbursement of premium taxes paid with respect to the Contract. Premium taxes
may be applicable. Refer to PREMIUM TAXES on page 20 for further information.
In the Example, the $30 contract administration charge was converted to a
percentage charge by dividing the total administration charges collected during
1996 by the average total contract values (excluding the value of the Contracts
in the annuity period) during 1996. Contract values and administration charges
collected include amounts allocated to the Variable Account only. The percentage
charge so determined was multiplied by the average annual assets of the
hypothetical account to determine the annual charge. The average annual assets
were calculated reflecting the daily deduction of the Total Separate Account
Annual Expenses (1.30%) and total Fund expenses (0.49% to 0.89% depending on the
Fund).
9
<PAGE> 11
CONDENSED FINANCIAL INFORMATION
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
SCHEDULE OF ACCUMULATION UNIT VALUES*
FOR THE PERIOD JANUARY 1, 1987 THROUGH DECEMBER 31, 1996
*The accumulation unit values listed below for the periods January 1, 1987
through August 31, 1991 are for periods when the Contracts were funded through
the Merrill Lynch Variable Annuity Account of Family Life Insurance Company
("FLIC"). See page 14. On September 1, 1991, Merrill Lynch Life assumption
reinsured certain of FLIC's variable annuity contracts (see THE REINSURANCE
AGREEMENT on page 15). The financial performance of the Contracts shown in the
Schedule of Accumulation Unit Values, below, includes the performance of the
Contracts for periods prior to September 1, 1991 while part of the FLIC separate
account.
<TABLE>
<CAPTION>
NONQUALIFIED
CONTRACTS: 1987 1988 1989 1990 1991 1992 1993 1994
------ ------ ------ ------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve Assets Fund
January 1 value............. 14.728 15.407 16.252 17.44 18.55 19.38 19.76 20.04
December 31 value........... 15.407 16.252 17.439 18.55 19.38 19.76 20.04 20.54
Total units outstanding at
December 31............... 756,930.2 542,420.0 437,996.5 492,365.6
Prime Bond Fund
January 1 value............. 19.205 18.750 19.764 22.10 23.38 26.86 28.45 31.46
December 31 value........... 18.750 19.764 22.103 23.38 26.86 28.45 31.46 29.57
Total units outstanding at
December 31............... 618,656.9 667,898.6 741,333.5 610,532.0
High Current Income Fund
January 1 value............. 19.637 20.127 22.632 23.76 21.62 30.51 36.15 42.06
December 31 value........... 20.127 22.632 23.760 21.62 30.51 36.15 42.06 40.03
Total units outstanding at
December 31............... 181,893.1 182,229.2 245,495.0 198,985.9
Quality Equity Fund
January 1 value............. 20.594 20.188 22.626 29.21 29.03 37.30 37.81 42.76
December 31 value........... 20.188 22.626 29.210 29.03 37.30 37.81 42.76 41.71
Total units outstanding at
December 31............... 674,488.8 681,947.8 790,434.5 701,903.6
Equity Growth Fund
January 1 value............. 17.835 13.681 14.079 16.20 13.99 20.73 20.35 23.66
December 31 value........... 13.681 14.079 16.205 13.99 20.73 20.35 23.66 21.66
Total units outstanding at
December 31............... 269,251.3 310,826.6 336,594.9 314,670.5
Flexible Strategy Fund
April 30 (commencement).....
January 1 value............. 10.132 10.245 11.252 13.36 13.82 17.06 17.55 20.07
December 31 value........... 10.245 11.252 13.362 13.82 17.06 17.55 20.07 18.98
Total units outstanding at
December 31............... 1,491,361.1 1,536,734.4 1,689,884.9 1,451,982.2
American Balanced Fund
May 31 (commencement)....... 10.000
January 1 value............. 10.332 12.05 12.04 14.34 14.96 16.76
December 31 value........... 10.332 12.047 12.04 14.34 14.96 16.76 15.85
Total units outstanding at
December 31............... 226,441.1 309,664.2 344,819.9 282,733.9
Natural Resources Focus Fund
May 31 (commencement)....... 10.000
January 1 value............. 9.508 11.10 10.27 10.28 10.29 11.22
December 31 value........... 9.508 11.097 10.27 10.28 10.29 11.22 11.23
Total units outstanding at
December 31............... 36,077.3 50,350.7 97,956.9 92,609.5
<CAPTION>
NONQUALIFIED
CONTRACTS: 1995 1996
----------- -----------
<S> <C> <C>
Reserve Assets Fund
January 1 value............. 20.54 21.41
December 31 value........... 21.41 22.23
Total units outstanding at
December 31............... 350,130.6 297,045.1
Prime Bond Fund
January 1 value............. 29.57 35.07
December 31 value........... 35.07 35.38
Total units outstanding at
December 31............... 510,791.1 488,173.0
High Current Income Fund
January 1 value............. 40.03 46.32
December 31 value........... 46.32 50.87
Total units outstanding at
December 31............... 175,671.0 161,397.6
Quality Equity Fund
January 1 value............. 41.71 50.48
December 31 value........... 50.48 58.75
Total units outstanding at
December 31............... 648,031.6 596,734.7
Equity Growth Fund
January 1 value............. 21.66 31.20
December 31 value........... 31.20 33.30
Total units outstanding at
December 31............... 324,219.4 301,378.9
Flexible Strategy Fund
April 30 (commencement).....
January 1 value............. 18.98 21.99
December 31 value........... 21.99 **
Total units outstanding at
December 31............... 1,178,582.2 0.0
American Balanced Fund
May 31 (commencement).......
January 1 value............. 15.85 18.91
December 31 value........... 18.91 20.48
Total units outstanding at
December 31............... 237,332.7 225,557.1
Natural Resources Focus Fund
May 31 (commencement).......
January 1 value............. 11.23 12.49
December 31 value........... 12.49 14.00
Total units outstanding at
December 31............... 81,046.5 69,028.9
</TABLE>
**Effective following the close of business on December 6, 1996, the Flexible
Strategy Fund was merged with and into the Global Strategy Focus Fund.
10
<PAGE> 12
<TABLE>
<CAPTION>
NONQUALIFIED
CONTRACTS: 1996
-----------
<S> <C>
Global Strategy Focus Fund
January 1 value.............. 0.00
December 31 value............ 10.06
Total units outstanding at
December 31................ 2,546,221,8
Index 500 Fund
January 1 value.............. 0.00
December 31 value............ 10.12
Total units outstanding at
December 31................ 4,247.5
International Equity Fund
January 1 value.............. 0.00
December 31 value............ 10.05
Total units outstanding at
December 31................ 723.7
Basic Value Focus Fund
January 1 value.............. 0.00
December 31 value............ 9.83
Total units outstanding at
December 31................ 17,412.4
</TABLE>
11
<PAGE> 13
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
SCHEDULE OF ACCUMULATION UNIT VALUES*
FOR THE PERIOD JANUARY 1, 1987 THROUGH DECEMBER 31, 1996
*The accumulation unit values listed below for the periods January 1, 1987
through August 31, 1991 are for periods when the Contracts were funded through
the Merrill Lynch Variable Annuity Account of Family Life Insurance Company
("FLIC"). See page 14. On September 1, 1991, Merrill Lynch Life assumption
reinsured certain of FLIC's variable annuity contracts (see THE REINSURANCE
AGREEMENT on page 15). The financial performance of the Contracts shown in the
Schedule of Accumulation Unit Values, below, includes the performance of the
Contracts for periods prior to September 1, 1991 while part of the FLIC separate
account.
<TABLE>
<CAPTION>
QUALIFIED CONTRACTS: 1987 1988 1989 1990 1991 1992 1993 1994
------ ------ ------ ------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve Assets Fund
January 1 value............. 14.933 15.668 16.577 17.84 19.04 19.94 20.39 20.75
December 31 value........... 15.668 16.577 17.840 19.04 19.94 20.39 20.75 21.32
Total units outstanding at
December 31............... 574,284.7 370,601.0 308,644.8 252,365.2
Prime Bond Fund
January 1 value............. 19.649 19.241 20.347 22.82 24.21 27.90 29.64 32.87
December 31 value........... 19.241 20.347 22.823 24.21 27.90 29.64 32.87 30.98
Total units outstanding at
December 31............... 428,447.8 478,220.2 477,582.5 358,718.0
High Current Income Fund
January 1 value............. 20.428 21.000 23.687 24.94 22.76 32.22 38.29 44.68
December 31 value........... 21.000 23.687 24.941 22.76 32.22 38.29 44.68 42.65
Total units outstanding at
December 31............... 74,457.7 73,582.5 93,456.4 92,839.7
Quality Equity Fund
January 1 value............. 21.918 21.549 24.224 31.37 31.26 40.29 40.96 46.46
December 31 value........... 21.549 24.224 31.366 31.26 40.29 40.96 46.46 45.45
Total units outstanding at
December 31............... 432,953.7 457,836.2 516,176.0 469,259.2
Equity Growth Fund
January 1 value............. 19.318 14.862 15.341 17.71 15.33 22.79 22.44 26.17
December 31 value........... 14.862 15.341 17.710 15.33 22.79 22.44 26.17 24.03
Total units outstanding at
December 31............... 139,492.7 156,274.5 195,677.9 184,213.2
Flexible Strategy Fund
April 30 (commencement).....
January 1 value............. 10.152 10.295 11.341 13.51 14.02 17.35 17.90 20.53
December 31 value........... 10.295 11.341 13.508 14.02 17.35 17.90 20.53 19.47
Total units outstanding at
December 31............... 1,139,762.3 1,085,349.8 1,225,420.9 1,076,826.3
American Balanced Fund
May 31 (commencement)....... 10.000
January 1 value............. 10.350 12.10 12.13 14.49 15.17 17.04
December 31 value........... 10.350 12.104 12.13 14.49 15.17 17.04 16.17
Total units outstanding at
December 31............... 79,728.3 155,312.1 200,913.9 171,872.9
Natural Resources Focus Fund
May 31 (commencement)....... 10.000
January 1 value............. 9.524 11.15 10.35 10.39 10.43 11.40
December 31 value........... 9.524 11.149 10.35 10.39 10.43 11.40 11.45
Total units outstanding at
December 31............... 28,823.5 27,220.0 40,239.5 44,876.1
<CAPTION>
QUALIFIED CONTRACTS: 1995 1996
--------- ---------
<S> <C> <C>
Reserve Assets Fund
January 1 value............. 21.32 22.30
December 31 value........... 22.30 23.21
Total units outstanding at
December 31............... 194,679.2 186,463.2
Prime Bond Fund
January 1 value............. 30.98 36.86
December 31 value........... 36.86 37.30
Total units outstanding at
December 31............... 303,333.0 287,481.4
High Current Income Fund
January 1 value............. 42.65 49.49
December 31 value........... 49.49 54.52
Total units outstanding at
December 31............... 79,516.1 73,108.5
Quality Equity Fund
January 1 value............. 45.45 55.18
December 31 value........... 55.18 64.41
Total units outstanding at
December 31............... 412,217.8 395,390.6
Equity Growth Fund
January 1 value............. 24.03 34.71
December 31 value........... 34.71 37.15
Total units outstanding at
December 31............... 188,466.9 209,262.6
Flexible Strategy Fund
April 30 (commencement).....
January 1 value............. 19.47 22.63
December 31 value........... 22.63 **
Total units outstanding at
December 31............... 934,036.1 0.0
American Balanced Fund
May 31 (commencement).......
January 1 value............. 16.17 19.34
December 31 value........... 19.34 21.01
Total units outstanding at
December 31............... 154,870.7 162,879.1
Natural Resources Focus Fund
May 31 (commencement).......
January 1 value............. 11.45 12.78
December 31 value........... 12.78 14.36
Total units outstanding at
December 31............... 39,692.2 36,777.8
</TABLE>
**Effective following the close of business on December 6, 1996, the Flexible
Strategy Fund was merged with and into the Global Strategy Focus Fund.
12
<PAGE> 14
<TABLE>
<CAPTION>
QUALIFIED CONTRACTS: 1996
-----------
<S> <C>
Global Strategy Focus Fund
January 1 value................. 0.00
December 31 value............... 10.07
Total units outstanding at
December 31................... 1,987,382.0
Index 500 Fund
January 1 value................. 0.00
December 31 value............... 10.12
Total units outstanding at
December 31................... 0.00
International Equity Fund
January 1 value................. 0.00
December 31 value............... 10.05
Total units outstanding at
December 31................... 529.5
Basic Value Focus Fund
January 1 value................. 0.00
December 31 value............... 9.83
Total units outstanding at
December 31................... 27,787.1
</TABLE>
13
<PAGE> 15
MERRILL LYNCH LIFE INSURANCE COMPANY
Merrill Lynch Life Insurance Company ("Merrill Lynch Life") is a stock life
insurance company organized under the laws of the State of Washington in 1986
and redomesticated under the laws of the State of Arkansas in 1991. Merrill
Lynch Life is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.,
a corporation whose common stock is traded on the New York Stock Exchange.
Merrill Lynch Life is authorized to sell life insurance and annuity contracts.
Merrill Lynch Life is admitted to do business in 49 states, Guam, the U.S.
Virgin Islands, and the District of Columbia.
All communications, including inquiries, concerning the Contract should be
addressed to Merrill Lynch Life's Service Center at the address printed on the
first page of this Prospectus.
On October 1, 1991, Tandem Insurance Group, Inc. (adba Tandem Life Insurance
Company) ("Tandem"), an affiliate of Merrill Lynch Life, merged with and into
Merrill Lynch Life. Merrill Lynch Life is the surviving company.
As a result of the merger, all contracts previously afforded by Tandem are now
afforded by Merrill Lynch Life. Thus, contract owners maintain their identical
coverage through Merrill Lynch Life.
In addition, the Tandem Variable Annuity Separate Account (the "Tandem Account")
was combined with the Variable Account. Assets of the Tandem Account have become
assets of the Merrill Lynch Life Account. These assets are segregated from all
of Merrill Lynch Life's other assets. The combination of accounts maintained all
investment options and had no adverse impact (including federal tax) on any
contract owners nor any impact on accumulation units, annuity units, or unit
values.
THE VARIABLE ACCOUNT
The establishment of the Variable Account was approved by Merrill Lynch Life's
Board of Directors on March 15, 1991. The Variable Account is registered with
the Securities and Exchange Commission as a unit investment trust pursuant to
the provisions of the Investment Company Act of 1940. Such registration does not
involve any supervision by the Securities and Exchange Commission of the
investment practices or policies of the Variable Account. The Variable Account
meets the definition of a separate account under the federal securities laws.
While the assets of the Variable Account are Merrill Lynch Life's property, as a
segregated investment account, Arkansas insurance law provides that assets of
the Variable Account equal to its reserves and other liabilities are not
chargeable with liabilities arising out of any other business Merrill Lynch Life
may conduct; however, obligations under the Contract are obligations of Merrill
Lynch Life. Income, gains and losses, whether or not realized, from assets
allocated to the Variable Account are, in accordance with the Contracts,
credited to or charged against the Variable Account without regard to other
income, gains or losses of Merrill Lynch Life. Merrill Lynch Life does not
guarantee the investment performance under the Contracts. Both the variable
contract value prior to the annuity date and the amount of any variable annuity
payments will vary with the performance of the investments selected by the
contract owner.
There are two subaccounts for each Fund. One subaccount is for qualified
Contracts and the other is for nonqualified Contracts. No transfers may be made
between a qualified and a nonqualified subaccount.
FINANCIAL STATEMENTS
Financial statements for Merrill Lynch Life and the Variable Account can be
found in the Statement of Additional Information. Because the Variable Account
acquired a majority of the assets of Merrill Lynch Variable Annuity Account of
Family Life Insurance Company ("FLIC") in connection with Merrill Lynch Life's
assumption reinsurance of certain variable annuity contracts of FLIC commencing
on September 1, 1991, the financial statements of the Variable Account include
the financial operations of the FLIC separate account for periods prior to
September 1, 1991. The Statement of Additional Information is available upon
request and without charge. This information can be obtained by writing to or
calling Merrill Lynch Life's Service Center at the address or telephone number
set forth on the first page of this Prospectus.
14
<PAGE> 16
THE REINSURANCE AGREEMENT
On March 22, 1991, Merrill Lynch Life and certain affiliated life insurance
companies entered into an assumption reinsurance agreement with Family Life
Insurance Company ("FLIC") relating to various policies including the FLIC
Contracts. The assumption reinsurance of the FLIC Contracts will take place in
several transactions. The first transaction was effected as of September 1,
1991, when Merrill Lynch Life assumption reinsured Contracts in 37 states, Guam
and the Virgin Islands. There have been various assumption reinsurance
transactions subsequent to September 1, 1991.
The FLIC Contracts, which participate in FLIC's Merrill Lynch Variable Annuity
Account, are identical to the Contracts described in this Prospectus, except
that the FLIC Contracts provide for a higher mortality risk charge (.80%
annually under the FLIC Contracts versus .75% annually under the Contracts
described in this Prospectus), but no distribution expense charge. Pursuant to
the agreement, FLIC agreed to transfer and Merrill Lynch Life agreed to assume
on an assumption reinsurance basis all of FLIC's obligations and liabilities
under certain of the Contracts to the maximum extent permitted by law. To
reflect its assumption of the FLIC Contracts, Merrill Lynch Life will issue a
certificate of assumption to the owners of the FLIC Contracts informing them of
Merrill Lynch Life's assumption of FLIC's liabilities under the Contract and of
the change in the components of the charges against separate account assets.
At such time as a Contract is assumption reinsured, assets held in FLIC's
Merrill Lynch Variable Annuity Account equal to the contract liabilities
attributable to the variable portion of the Contract will be transferred to the
Variable Account. Thereafter, the contract owner will deal directly with Merrill
Lynch Life and future premiums will be forwarded directly to Merrill Lynch Life.
The assumption reinsurance of the FLIC Contracts will not change the number of
accumulation or annuity units credited under the Contracts or the value of such
units, which will continue to be affected only by the investment performance of
the Funds. Contract values will be the same as they would have been had the
assumption reinsurance transaction not occurred, and there will be no adverse
tax consequences to a contract owner as a result of the assumption reinsurance
of his or her Contract.
INVESTMENTS OF THE VARIABLE ACCOUNT
ELIGIBLE FUNDS
Premiums will be allocated among one or more subaccounts for investment at net
asset value in shares of the Funds selected by the contract owner. No fee,
penalty or other charge will be imposed. To reduce Merrill Lynch Life's market
risk for cancellations during the TEN DAY RIGHT TO REVIEW described on page 27,
all premiums allocable to the Variable Account will be allocated to the Reserve
Assets Fund subaccount for the first 14 days following the date of issue.
Thereafter, the contract owner's interest in the Variable Account will be
reallocated to the subaccounts selected by the contract owner. In the
Commonwealth of Pennsylvania, all premiums will be invested as of the date of
issue in the subaccounts selected by the contract owner. Therefore, Pennsylvania
contract owners will bear the market risk during the right to review period.
Merrill Lynch Life may make additions to or deletions from the list of eligible
Funds as permitted by law. (See SUBSTITUTION OF INVESTMENTS on page 18.) The
contract owner may transfer all or part of his or her contract value from one
subaccount to another, except no transfer may be made within 30 days of the date
of issue. Transfers must be at least 30 days apart.
The Variable Account purchases Class A shares of the Funds. Each Fund is a
separate investment portfolio of Merrill Lynch Variable Series Funds, Inc., an
open-end management investment company registered with the Securities and
Exchange Commission. Shares of the Merrill Lynch Variable Series Funds, Inc. are
currently sold only to Merrill Lynch Life, ML Life Insurance Company of New
York, and several insurance companies not affiliated with Merrill Lynch Life or
Merrill Lynch & Co., Inc. to fund benefits under certain variable annuity and
variable life insurance contracts. Shares of each Portfolio of the Funds may be
made available to the separate accounts of additional insurance companies in the
future.
It is conceivable that material conflicts could arise as a result of both
variable annuity and variable life insurance separate accounts investing in the
Funds. Although no material conflicts are foreseen, the
15
<PAGE> 17
participating insurance companies will monitor events in order to identify any
material conflicts between variable annuity and variable life insurance contract
owners to determine what action, if any, should be taken. Material conflicts
could result from such things as (1) changes in state insurance law, (2) changes
in federal income tax law or (3) differences between voting instructions given
by variable annuity and variable life insurance contract owners. If a conflict
occurs, Merrill Lynch Life may be required to eliminate one or more subaccounts
of the Variable Account or substitute a new subaccount. In responding to any
conflict, Merrill Lynch Life will take the action which it believes necessary to
protect its contract owners.
Each Fund receives investment advice from Merrill Lynch Asset Management, L.P.
("MLAM") which is paid fees by the Funds for its services. The fees charged to
each of the Funds are set forth in the summary of investment objectives below.
MLAM is a worldwide mutual fund leader with more than $196.4 billion in assets
under management. It is registered as an investment adviser under the Investment
Advisers Act of 1940. MLAM is an indirect subsidiary of Merrill Lynch & Co.,
Inc. MLAM's principal business address is 800 Scudders Mill Road, Plainsboro,
New Jersey 08536.
MLAM has entered into an agreement with Merrill Lynch Insurance Group, Inc.
("MLIG"), an affiliate of Merrill Lynch Life, with respect to administration
services for the Funds in connection with the Contracts and other variable life
insurance and variable annuity contracts issued by Merrill Lynch Life. Under
this agreement, MLAM pays compensation to MLIG in an amount equal to a portion
of the annual gross investment advisory fees paid by the Funds to MLAM
attributable to contracts issued by Merrill Lynch Life.
A summary of investment objectives of each Fund follows. There is no guarantee
that any Fund will meet its investment objective. Meeting the objectives depends
upon how well the Funds' management anticipates changing economic conditions.
More detailed information, including the risks associated with each Fund
(including any risks associated with investment in the High Current Income Fund)
and deductions from and expenses paid out of the assets of the Funds, may be
found in the current prospectus for the Merrill Lynch Variable Series Funds,
Inc. which is in the back of this booklet. Both prospectuses should be read in
full for a complete evaluation of the Contract.
Reserve Assets Fund
The Fund seeks preservation of capital, liquidity, and the highest possible
current income consistent with the foregoing objectives by investing in
short-term money market securities. The Fund invests in short-term United States
government securities; government agency securities; bank certificates of
deposit and bankers' acceptances; short-term corporate debt securities such as
commercial paper and variable amount master demand notes; repurchase agreements
and other money market instruments. MLAM receives from the Fund an advisory fee
at the annual rate of 0.50% of the first $500 million of the Fund's average
daily net assets; 0.425% of the next $250 million; 0.375% of the next $250
million; 0.35% of the next $500 million; 0.325% of the next $500 million; 0.30%
of the next $500 million; and 0.275% of the average daily net assets in excess
of $2.5 billion.
Prime Bond Fund
The Fund seeks to obtain as high a level of current income as is consistent with
the investment policies of the Fund and with prudent investment management, and
capital appreciation to the extent consistent with the foregoing objective. The
Fund invests primarily in long-term corporate bonds in the top three ratings
categories by established rating services. MLAM receives from the Fund an
advisory fee at the annual rate of 0.50% of the first $250 million of the
combined average daily net assets of the Fund and High Current Income Fund;
0.45% of the next $250 million; 0.40% of the next $250 million; and 0.35% of the
combined average daily net assets in excess of $750 million. The reduction of
the advisory fee applicable to the Fund is determined on a uniform percentage
basis as described in the Statement of Additional Information for the Funds.
High Current Income Fund
The Fund seeks to obtain as high a level of current income as is consistent with
the investment policies of the Fund and with prudent investment management, and
capital appreciation to the extent consistent with the
16
<PAGE> 18
foregoing objective. The Fund invests principally in fixed-income securities
that are rated in the lower rating categories of the established rating services
or in unrated securities of comparable quality (commonly known as "junk bonds").
Because investment in such securities entails relatively greater risk of loss of
income or principal, an investment in the High Current Income Fund may not be
appropriate as the exclusive investment to fund a Contract. In an effort to
minimize risk, the Fund will diversify its holdings among many issuers. However,
there can be no assurance that diversification will protect the Fund from
widespread defaults during periods of sustained economic downturn. MLAM receives
from the Fund an advisory fee at the annual rate of 0.55% of the first $250
million of the combined average daily net assets of the Fund and Prime Bond
Fund; 0.50% of the next $250 million; 0.45% of the next $250 million; and 0.40%
of the combined average daily net assets in excess of $750 million. The
reduction of the advisory fee applicable to the Fund is determined on a uniform
percentage basis as described in the Statement of Additional Information for the
Funds.
Quality Equity Fund
The Fund seeks to attain the highest total investment return consistent with
prudent risk. The Fund employs a fully managed investment policy utilizing
equity securities, primarily common stocks of large-capitalization companies, as
well as investment grade debt and convertible securities. Management of the Fund
will shift the emphasis among investment alternatives for capital growth,
capital stability, and income as market trends change. MLAM receives from the
Fund an advisory fee at the annual rate of 0.50% of the first $250 million of
average daily net assets; 0.45% of the next $50 million; 0.425% of the next $100
million; and 0.40% of the average daily net assets in excess of $400 million.
Equity Growth Fund
The Fund seeks to attain long-term growth of capital by investing primarily in
common stocks, of relatively small companies that management of the Fund
believes have special investment value and emerging growth companies regardless
of size. Such companies are selected by management on the basis of their
long-term potential for expanding their size and profitability or for gaining
increased market recognition for their securities. Current income is not a
factor in such selection. MLAM receives from the Fund an advisory fee at the
annual rate of 0.75% of the average daily net assets of the Fund. This is a
higher fee than that of many other mutual funds, but management of the Fund
believes it is justified by the high degree of care that must be given to the
initial selection and continuous supervision of the types of portfolio
securities in which the Fund invests.
Global Strategy Focus Fund
This Fund 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. The Fund seeks to achieve its objective
by investing primarily in securities of issuers located in the United States,
Canada, Western Europe, the Far East and Latin America. MLAM receives from the
Fund an advisory fee at the annual rate of 0.65% of the average daily net assets
of the Fund.
Effective following the close of business on December 6, 1996, the Flexible
Strategy Fund was merged with and into the Global Strategy Focus Fund.
Natural Resources Focus Fund
The Fund seeks to attain 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. MLAM receives from the Fund an advisory fee at the annual rate of 0.65%
of the average daily net assets of the Fund.
Merrill Lynch Life and Merrill Lynch Life Variable Annuity Separate Account
reserve the right to suspend the sale of units of the Natural Resources
subaccount in response to conditions in the securities markets or otherwise.
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American Balanced Fund
The Fund 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 is normally available from an
investment solely in debt securities by investing in a balanced portfolio of
fixed income and equity securities. MLAM receives from the Fund an advisory fee
at the annual rate of 0.55% of the average daily net assets of the Fund.
Index 500 Fund
This Fund seeks 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"). MLAM receives from the Fund an advisory
fee at an annual rate of 0.30% of the Fund's average daily net assets.
International Equity Focus Fund
This Fund seeks to obtain capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity securities of issuers located in
countries other than the United States. Under normal conditions, at least 65% of
the Fund's net assets will be invested in such equity securities. MLAM receives
from the Fund an advisory fee at the annual rate of 0.75% of the average daily
net assets of the Fund.
Basic Value Focus Fund
This Fund seeks to attain capital appreciation, and secondarily, income by
investing in securities, primarily equities, that management of the Fund
believes are undervalued and therefore represent basic investment value.
Particular emphasis is placed on securities which provide an above-average
dividend return and sell at a below-average price/earnings ratio. MLAM receives
from the Fund an advisory fee at the annual rate of 0.60% of the average daily
net assets of the Fund.
REINVESTMENT
Fund distributions to the Variable Account are automatically reinvested in
additional Fund shares at net asset value.
SUBSTITUTION OF INVESTMENTS
Merrill Lynch Life may at its discretion substitute a different mutual fund for
any of the Funds shown on the Schedule page of a contract owner's Contract.
Substitution may be made with respect to both existing investments and the
investment of future premiums. However, no such substitution will be made
without any necessary approval of the Securities and Exchange Commission and
applicable state insurance departments. Contract owners will be notified of any
substitutions. Merrill Lynch Life may also add other Funds as eligible
investments of the Variable Account.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
Merrill Lynch Life does not make any deductions from premiums paid at the time
of purchase. The contingent deferred sales charge, when applicable, permits
Merrill Lynch Life to recover a portion of the expenses relating to the sale of
the Contract, including commissions, preparation of sales literature and other
promotional activity.
The contingent deferred sales charge is imposed at withdrawal of all or part of
the contract value. It will be the lesser of (a) 5% of the sum of the premiums
paid within 7 years prior to the date of withdrawal, adjusted for any prior
withdrawals, or (b) 5% of the amount withdrawn. The cumulative sum of all
contingent deferred sales charges made within 7 years prior to the date of
withdrawal will never be more than 5% of the sum of all premiums paid during the
same period. No charge will be made for such part of the first withdrawal in a
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<PAGE> 20
contract year as does not exceed 10% of the sum of premiums paid prior to the
date of withdrawal. Withdrawals will be deemed made first from premiums on a
first-in, first-out basis and then from any gain. Under no circumstances will
the cumulative sum of the contingent deferred sales charges ever exceed 5% of
total premiums. No charge will be imposed on any payment made due to death of
the annuitant or contract owner. (See PAYMENT ON DEATH on page 22.)
The contingent deferred sales charge may be reduced when sales of Contracts are
made to a trustee, employer or similar party pursuant to a retirement plan or
similar arrangement for sales of Contracts to a group of individuals if such
program results in a savings of sales expenses. The amount of reduction will
depend on such factors as the size of the group, the total amount of premiums
and other relevant factors that might tend to reduce expenses incurred in
connection with such sales. This reduction will not be unfairly discriminatory
to any contract owner. (See ACCUMULATION UNITS on page 21 for a discussion of
the effect the deduction of this charge may have on the number of accumulation
units credited to the Contract.)
Merrill Lynch Life's sales expenses relating to all Contracts will initially be
provided for out of Merrill Lynch Life's surplus. Any contingent deferred sales
charge imposed at withdrawal from a Contract is expected to recover only a
portion of the sales expenses relating to that Contract. Other sales expenses
will be recovered through the distribution expense charge described below. Sales
expenses not recovered through the contingent deferred sales charge and the
distribution expense charge will be recovered from profits derived primarily
from the mortality risk charge and expense risk charge described below.
CONTRACT ADMINISTRATION CHARGE
Merrill Lynch Life imposes a contract administration charge of $30 per contract
year for administration of the Contracts. It is deducted from the contract value
on each contract anniversary on or prior to the annuity date and at full
withdrawal if made other than on a contract anniversary. Such administration
includes issuing Contracts, maintenance of contract owner records, accounting,
valuation, regulatory compliance and reporting. Even though Merrill Lynch Life's
expenses may increase, the amount of the charge will not change. (See
ACCUMULATION UNITS on page 21 for a discussion of the effect the deduction of
this charge may have on the number of accumulation units credited to the
Contract.)
WAIVER OF CHARGES
When permitted by the laws of the state in which the Contract is issued, the
contingent deferred sales charge and the contract administration charge will be
waived under a Contract issued by a trustee, employer or similar party pursuant
to a retirement plan or similar arrangement for the benefit of a group of
individuals where the initial premium is in the amount of $500,000 or more. As a
condition to the waiver, the contract owner must agree to a Contract endorsement
prohibiting the allocation of premiums and the transfer of contract values to
the Fixed Account.
EXPENSE RISK CHARGE
Merrill Lynch Life guarantees that the contract administration charge will not
increase, regardless of its actual expenses. To compensate for assuming this
expense risk, Merrill Lynch Life deducts an expense risk charge from the
Variable Account.
The charge is computed and deducted on a daily basis from each subaccount. For
nonqualified Contracts, on an annual basis it equals 0.5% of the daily net asset
value of the Variable Account. For qualified Contracts, the rate is 0.2% of the
daily net asset value of the Variable Account. If the expense risk charge is
insufficient to cover the actual cost of the expense risk, Merrill Lynch Life
will bear the loss. Conversely, if it is more than sufficient, the excess will
be part of Merrill Lynch Life's profit. The rate of the expense risk charge will
not change.
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MORTALITY RISK CHARGE
Although variable annuity payments will vary according to the performance of the
investments selected by the contract owner, annuity payments will not be
affected by the mortality experience (death rate) of persons receiving such
payments or of the general population. Merrill Lynch Life assumes this mortality
risk by virtue of annuity rates in the Contract that cannot be changed. Merrill
Lynch Life also guarantees a minimum payment on death of the annuitant or
contract owner prior to the annuity date. (See PAYMENT ON DEATH on page 22.) As
compensation for assuming these mortality risks, Merrill Lynch Life deducts a
mortality risk charge from the Variable Account.
This charge is computed and deducted on a daily basis from each subaccount, but
on an annual basis it equals 0.75% of the daily net asset value of the Variable
Account. If the amount is insufficient to cover the actual cost of the mortality
risk, Merrill Lynch Life bears the loss. Conversely, if the amount proves more
than sufficient, as anticipated, the excess will be part of Merrill Lynch Life's
profit. The amount of the mortality risk charge will not change.
DISTRIBUTION EXPENSE CHARGE
Merrill Lynch Life anticipates that the cost of distributing the Contracts will
exceed the amounts it receives from deferred sales charges. Merrill Lynch Life
deducts a distribution expense charge from the Variable Account to compensate
for some of the distribution costs it incurs in connection with the Contracts.
The distribution expense charge is computed and deducted on a daily basis from
each subaccount, but on an annual basis it equals 0.05% of the daily net asset
value of the Variable Account.
PAYMENTS OF CHARGES AND DEDUCTIONS
The expense risk charge, the mortality risk charge and the distribution expense
charge will be computed and deducted from each subaccount of the Variable
Account for each day the Contract is in force. The contract administration
charge and the contingent deferred sales charge will be deducted from the Fixed
Account and from each subaccount of the Variable Account in the ratio of each
contract owner's interest in each to his or her contract value.
PREMIUM TAXES
Various jurisdictions impose a premium tax on annuity purchase payments received
by insurance companies. Other jurisdictions impose a premium tax on the contract
value on the annuity date. These taxes will be paid by Merrill Lynch Life when
due. The dollar amount of any premium tax will be deducted from the contract
value at the annuity date. (See ACCUMULATION UNITS on page 21 for a discussion
of the effect the deduction of this charge may have on the number of
accumulation units credited to the Contract.) In those jurisdictions that do not
allow an insurance company to reduce its current taxable premium income by the
amount of any withdrawal, surrender or death benefit paid, Merrill Lynch Life
will also deduct a charge for these taxes on any withdrawal, surrender or death
benefit effected under the Contract. Premium taxes currently range from 0% to
5%.
Premium tax rates are subject to change by law, administrative interpretations
or court decisions. Premium tax amounts will depend on, among other things, the
contract owner's state of residence, Merrill Lynch Life's status within that
state and the premium tax laws of that state.
FUND EXPENSES
Merrill Lynch Variable Series Funds, Inc., in calculating the net asset values
of the Funds, deducts advisory fees and operating expenses from the assets of
each Fund. Information about those fees and expenses can be found in the
attached prospectus for the Funds and in its Statement of Additional
Information.
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DESCRIPTION OF THE CONTRACT
PREMIUMS
The minimum initial premium for nonqualified Contracts is $1,500. For qualified
Contracts it is $10. The minimum subsequent premium for nonqualified Contracts
is $300 ($50 in Tennessee) and for qualified Contracts it is the same as for the
initial premium. Subsequent premiums may be paid at any time without prior
notice to Merrill Lynch Life. Merrill Lynch Life's consent for subsequent
premiums is required only for Tax-Sheltered Annuities where there has been a
prior withdrawal from the Contract. The Contract will not be in default even if
no subsequent premiums are paid.
Application for a Contract or acceptance of the first premium is subject to
Merrill Lynch Life's underwriting rules for such transactions. Merrill Lynch
Life reserves the right to reject any application. A properly completed
application that is accompanied by the first premium and all information
necessary for the processing of the application will normally be accepted within
2 business days. If an application is not completed properly and therefore,
cannot be processed, and necessary information is not obtained within 5 business
days, Merrill Lynch Life will offer to return the premium.
ACCUMULATION PROVISIONS
Accumulation Units
Premiums are allocated to the subaccounts in accordance with the contract
owner's selection, except during the first 14 days following the date of issue
of the Contract when premiums directed to the Variable Account will be allocated
to the Reserve Assets Fund subaccount. (See discussion under ELIGIBLE FUNDS on
page 15.) At the end of the 14-day period, contract values will be reallocated
to each subaccount selected. In the Commonwealth of Pennsylvania, all premiums
will be invested as of the date of issue in the subaccounts selected by the
contract owner. Upon allocation, premiums are converted into accumulation units
for that subaccount. The number of accumulation units is determined by dividing
the amount allocated by the value of an accumulation unit for the valuation
period in which the premium is received at Merrill Lynch Life's Service Center
or, in the case of the first premium, is accepted by Merrill Lynch Life. The
number of accumulation units will not change as a result of investment
experience. However, accumulation units will be canceled in connection with any
withdrawal or transfer from a subaccount, the assessment of all or a portion of
the contract administration charge, contingent deferred sales charge or premium
taxes against the subaccount, or upon the payment of a death benefit or
commencement of annuity payments.
Value of an Accumulation Unit
For each subaccount, the value of an accumulation unit was set at the value of
the corresponding unit of the Merrill Lynch Variable Annuity Account of FLIC as
of the date of the first transfer of assets and liabilities pursuant to the
assumption reinsurance agreement between FLIC and Merrill Lynch Life described
on page 13. The value of an accumulation unit may increase or decrease from one
valuation period to the next. The value for any valuation period is determined
by multiplying the value of an accumulation unit for the last prior valuation
period by the net investment factor for that subaccount for the current
valuation period. It reflects the investment performance and expenses of the
Funds and the deduction of the daily expense, mortality and distribution
charges.
Net Investment Factor
The net investment factor is an index used to measure the investment performance
of a subaccount from one valuation period to the next. For any subaccount, the
net investment factor for a valuation period is determined by dividing (a) by
(b) and subtracting (c):
Where (a) is:
The net asset value per share of the Fund held in the subaccount, as of
the end of the valuation period;
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Plus
The per-share amount of any dividend or capital gain distributions by
the Fund if the "ex-dividend" date occurs in the valuation period.
Where (b) is:
The net asset value per share of the Fund held in the subaccount as of
the end of the last prior valuation period.
Where (c) is:
The sum of the daily expense risk charge, the daily mortality risk
charge and the daily distribution expense charge. (See CHARGES AND
DEDUCTIONS on page 18.) For nonqualified Contracts, on an annual basis
the amount of such charges equals 1.3% of the daily net asset value of
the Variable Account. For qualified Contracts, the amount equals 1.0% of
the daily net asset value of the Variable Account.
The net investment factor may be greater or less than one; therefore, the value
of an accumulation unit may increase or decrease. Merrill Lynch Life may adjust
the net investment factor to make provisions for any change in the law that
requires it to pay tax on capital gains in the Variable Account. (See FEDERAL
INCOME TAXES on page 27.)
Valuation Periods
A valuation period is the interval from one valuation day of a Fund to the next
valuation day, measured from the time each day the Fund is valued.
THE FIXED ACCOUNT
In addition to providing for the allocation of premiums to the subaccounts of
the Variable Account, the Contract also provides for allocation of premiums and
transfer of contract values to the Fixed Account, which accumulate at a
guaranteed interest rate and become part of Merrill Lynch Life's general
account. In the case of qualified contracts, loans also may be taken based on
Fixed Account contract values. (See TAX-SHELTERED ANNUITIES on page 31.) The
interests of contract owners arising from the allocation of premiums or the
transfer of contract values to the Fixed Account are not registered under the
Securities Act of 1933. Merrill Lynch Life's general account is not registered
as an investment company under the Investment Company Act of 1940. Accordingly,
the Fixed Account contract values are not subject to the provisions that would
apply if registration under such acts were required.
Merrill Lynch Life has been advised that the staff of the Securities and
Exchange Commission has not reviewed the disclosures in this Prospectus that
relate to the Fixed Account. Disclosures regarding the Fixed Account and the
general account, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in the Prospectus.
PAYMENT ON DEATH
If either the annuitant or the contract owner dies prior to the annuity date,
Merrill Lynch Life will pay to the beneficiary, upon receipt of due proof of
death, the greater of (a) the sum of all premiums (adjusted for any withdrawals)
or (b) the contract value for the valuation period in which such proof is
received at Merrill Lynch Life's Service Center.
An annuitant's beneficiary may choose a lump sum or payment under any of the
annuity options of the Contract. A contract owner's beneficiary may receive
payment only as follows:
A surviving spouse of a deceased contract owner may choose a lump sum or payment
under any of the annuity options of the Contract. If the surviving spouse of the
deceased contract owner is both the contract owner's beneficiary and a
contingent owner (if a contingent owner has been named), he or she may choose to
continue the Contract in force after the contract owner's death. A contract
owner's beneficiary who is not the surviving spouse of the deceased contract
owner may choose (a) a lump sum, which must be paid within five years of
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the contract owner's death, (b) a life annuity option without guaranteed
payments, or (c) a life annuity option with guaranteed payments or a fixed
period annuity option where the period required for full distribution of the
payments guaranteed does not exceed the life expectancy of the contract owner's
beneficiary. Payment under (b) or (c), above, must start within one year of the
contract owner's death.
If all or part of a lump sum payment to a contract owner's beneficiary or
annuitant's beneficiary is used within 30 days as the premium for a new Contract
issued to the beneficiary, then the new Contract will be deemed a continuation
of the old Contract in computing withdrawal charges under the new Contract. For
tax consequences of lump sum payment, see TAXATION OF ANNUITIES on page 27.
If either the annuitant or the contract owner dies after the annuity date, any
guaranteed amounts remaining unpaid will continue to be paid pursuant to the
annuity option in force at the date of death, unless the beneficiary chooses to
receive the present value of the remaining guaranteed payments in a lump sum.
(See ANNUITY PROVISIONS on page 24.)
BENEFICIARY
The beneficiary is named in the application. If the contract owner is not the
annuitant, there may be one beneficiary to receive payment on the annuitant's
death and a different beneficiary to receive payment on the contract owner's
death. Unless the beneficiary has been irrevocably designated, the beneficiary
may be changed during the lifetime of the annuitant or contract owner, as the
case may be. The estate or heirs of a beneficiary who dies before payment is due
have no rights under the Contract. If no beneficiary survives when payment is
due, payment will be made to the contract owner or to the contract owner's
estate.
OWNERSHIP
The contract owner is the person entitled to exercise all rights under the
Contract. The annuitant is the contract owner unless otherwise designated in the
application or by endorsement. Only a contract owner who is not also the
annuitant may designate a contingent owner; however, a contract owner who is
also the annuitant may name his or her spouse as a contingent owner. A
contingent owner is the person who is to become contract owner at the death of
the prior contract owner if the Contract continues in force after the death of
the prior contract owner. Ownership of the Contract may be transferred to a new
contract owner. Such a transfer of ownership cancels any designation of
contingent owner, but does not affect a designation of beneficiary. If the
Contract is issued pursuant to a qualified plan, it may not be assigned, pledged
or transferred, unless permitted by law. A collateral assignment does not change
contract ownership. The rights of a collateral assignee have priority over the
rights of a beneficiary. Contract owners should consult a competent tax advisor
before making any such designations, transfers or assignments.
ACCOUNT TRANSFERS
The contract owner may transfer all or part of the contract value among the
Fixed Account and the subaccounts of the Variable Account, subject to the
following restrictions. No transfer may be made from one subaccount of the
Variable Account to another within 30 days of the date of issue or within 30
days of a prior transfer. A transfer from the Fixed Account to any subaccount of
the Variable Account may not be made within six months of the date of issue or
within six months of the date of any prior transfer to the Fixed Account except
for one transfer from the Fixed Account to one or more subaccounts of the
Variable Account in January of each year. Transfers from the Variable Account to
the Fixed Account must be at least 30 days apart. No transfers may be made
between the Fixed Account and the Variable Account after the annuity date.
For Contracts issued prior to April 30, 1986 and reinsured by Merrill Lynch
Life, see the Appendix on page 35 for special provisions. Contract owners may
make transfer requests in writing or by telephone, once Merrill Lynch Life
receives proper telephone transfer authorization. Transfer requests may also be
made through a Merrill Lynch Financial Consultant, once Merrill Lynch Life
receives proper authorization. Transfers will take effect as of the end of the
valuation period on the date the request is received at Merrill Lynch Life's
Service Center. Telephone transfer requests received after 4:00 p.m. (ET) will
be deemed to have been received the following business day.
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WITHDRAWALS
The contract owner may withdraw all or part of the contract value, less any
charges. For full withdrawal, the election must be accompanied by the Contract.
The election must be received by Merrill Lynch Life prior to the earlier of the
annuity date or the death of the annuitant. Under certain qualified plans, the
consent of the contract owner's spouse may be required.
On receipt of such an election, Merrill Lynch Life will cancel the number of
accumulation units necessary to equal the dollar amount of the withdrawal plus
any applicable contingent deferred sales charge or contract administration
charge. (See CHARGES AND DEDUCTIONS on page 18.) Unless otherwise requested,
partial withdrawals will be deducted from the Fixed Account and subaccounts of
the Variable Account in which the contract owner has an interest in the ratio of
his or her interest therein to the total contract value. Withdrawals and related
charges will be based on values for the valuation period in which the election
(and the Contract, if required) are received at Merrill Lynch Life's Service
Center. A withdrawal may be effected by telephone, once a proper authorization
form is submitted to Merrill Lynch Life's Service Center, if the amount
withdrawn is to be paid into a Merrill Lynch, Pierce, Fenner & Smith
Incorporated brokerage account. Otherwise, a withdrawal request must be
submitted by the contract owner in writing to Merrill Lynch Life's Service
Center. Telephone withdrawal requests received after 4:00 p.m. (ET) will be
deemed to have been received the following business day. A partial withdrawal
must be at least $500, and the remaining contract value must be at least $500;
otherwise, the partial withdrawal will not be permitted. Payment of withdrawals
may be deferred (see SUSPENSION OF PAYMENTS below and FEDERAL INCOME TAXES on
page 27), and withdrawals under Tax-Sheltered Annuities are restricted (see
TAX-SHELTERED ANNUITIES on page 31). Withdrawals will decrease the contract
value. Withdrawals are subject to tax and prior to age 59 1/2 may also be
subject to a 10% federal penalty tax. (See TAXATION OF ANNUITIES on page 27.)
SUSPENSION OF PAYMENTS
Payment of withdrawals will normally be made within 7 days. However, Merrill
Lynch Life reserves the right to defer any withdrawal payment or transfer of
values if (a) the New York Stock Exchange is closed (other than customary
weekend and holiday closings); (b) trading on the Exchange is restricted by the
Securities and Exchange Commission; (c) 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
its assets; or (d) the Securities and Exchange Commission by order so permits
for the protection of security holders.
ANNUITY PROVISIONS
Variable Annuity
A variable annuity is an annuity with payments that are not predetermined as to
dollar amount. Payments will vary according to the investment results of the
applicable subaccount. Annuity payments will be made to the contract owner
unless he or she specifies otherwise in writing. The contract owner may or may
not be the annuitant. The choice is made by the contract owner in the
application.
Selection of Annuity Date and Annuity Options
The contract owner may select the annuity date and an annuity option in the
application. If the contract owner does not do so, the annuity date will be the
first day of the next month after the annuitant's 75th birthday and the annuity
option will be a life annuity with a 10 year guarantee. The annuity date may not
be later than the first day of the next month after the annuitant's 85th
birthday. (For qualified Contracts, the annuity date may not be later than April
1 of the calendar year after the calendar year in which the annuitant attains
age 70.)
Change of Annuity Date or Annuity Option
The contract owner may change the annuity date or the annuity option by
telephone or written notice received at Merrill Lynch Life's Service Center at
least 30 days prior to the current annuity date.
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Annuity Options
The contract owner may select any one of the following variable annuity options
or any other option satisfactory to the contract owner and Merrill Lynch Life.
- - PAYMENTS FOR A FIXED PERIOD -- Payments will be made for the period chosen.
The period must be at least 5 years. With respect to the Variable Account
only, this option is not available until 3 years after the last premium
payment is made for this Contract, and the contract owner may at any time
choose to receive in a lump sum the present value of the remaining payments
commuted at 4% interest. Such lump sum payment will be considered a
withdrawal that may be subject to the contingent deferred sales charge. (See
WITHDRAWALS on page 24.) The contingent deferred sales charge does not apply
to any other variable annuity option. The mortality risk charge will continue
to be deducted under this option, as other options, even though under this
option Merrill Lynch Life assumes no mortality risk.
- - *LIFE ANNUITY -- Payments will be made for the life of the annuitant.
Payments will cease with the last payment due prior to the annuitant's death.
- - *JOINT AND SURVIVOR LIFE ANNUITY -- Payments will be made during the
lifetimes of the annuitant and a designated second person. Payments will
continue as long as either is living.
- - LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS -- Payments will be
made for the life of the annuitant. A guaranteed payment period of either 10
or 20 years may be selected. If the annuitant dies during the guaranteed
period, the beneficiary may elect to receive in a lump sum the present value
of the remaining guaranteed payments computed at the interest rate in effect
when annuity payments began.
*These options are life annuities. It is possible under these options for a
payee to receive only one annuity payment if the annuitant (or the annuitant and
a designated second person) dies after the first payment, or to receive only two
annuity payments if the annuitant (or the annuitant and a designated second
person) dies after the second payment, and so on.
Minimum Annuity Payments
Annuity payments will be made monthly. The contract owner may elect quarterly,
semi-annual or annual payments, in which case the calculation of the periodic
annuity payments will be based on the monthly amount, adjusted by a factor that
takes into account the longer interval between payments. If any payment would be
less than $50 Merrill Lynch Life may change the frequency so payments are at
least $50 each. If the net contract value to be applied at the annuity date is
less than $5,000 ($3,500 for qualified Contracts), Merrill Lynch Life may elect
to pay such amount in a lump sum. For tax consequences of a lump sum payment,
see TAXATION OF ANNUITIES on page 27.
First Variable Annuity Payment
The dollar amount of the first monthly variable annuity payment will be
determined by applying the contract owner's interest in the Variable Account,
less any premium taxes, to the annuity table for the annuity option chosen. The
annuity tables are in the Contract. The tables are based on the 1983 Table "a"
for Individual Annuity Valuation with interest at 4% and the annuitant's age set
back one year.
Age Adjustment
The Contract contains a formula for adjusting the age of the annuitant based on
the annuity date for purposes of determining the dollar amount of the first
monthly annuity payment for each $1,000 applied under an annuity option. If the
annuity date is between the years 1990 and 1999, the annuitant's age is reduced
one year. For each decade thereafter, the annuitant's age is reduced one
additional year. The maximum age adjustment is five years.
An age adjustment results in a reduction in the monthly annuity payments that
would otherwise be made. It may be advantageous, therefore, for the contract
owner to designate an annuity date that immediately precedes the date on which
an age adjustment would occur under the Contract. For example, annuity payment
rates for an annuitant with an annuity date in the year 2000 will be the same as
those for the year 1999, even
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though the annuitant is one year older, because the new decade results in the
annuitant's age being reduced by an additional year.
Number of Annuity Units
The number of Annuity Units for each applicable subaccount is the amount of the
first monthly annuity payment attributable to that subaccount divided by the
value of an annuity unit for that subaccount as of the annuity date. The amount
of the first payment attributable to a subaccount is based on the ratio of each
contract owner's interest in that subaccount at the annuity date to his or her
interest in all subaccounts. The number will not change as a result of
investment experience.
Value of Each Annuity Unit
For each subaccount the value of an annuity unit was set at the value of the
corresponding unit of the Merrill Lynch Variable Annuity Account of FLIC as of
the date of the first transfer of assets and liabilities pursuant to the
assumption reinsurance agreement between FLIC and Merrill Lynch Life described
on page 15. The value may increase or decrease from one valuation period to the
next. For any valuation period, the value of an annuity unit for a particular
subaccount is the value of an annuity unit for that subaccount for the last
prior valuation period multiplied by the net investment factor for that
subaccount for the current valuation period. The result is then multiplied by a
factor to neutralize the assumed investment rate of 4% built into the annuity
tables.
Subsequent Variable Annuity Payments
Subsequent variable annuity payments will vary in amount according to the
investment performance of the applicable subaccounts within the Variable
Account. The amount of subsequent annuity payments, which may change from month
to month, is equal to the number of annuity units for each subaccount chosen
multiplied by the value of an annuity unit for such subaccount for the valuation
period in which payment is due. Merrill Lynch Life guarantees that the amount of
each subsequent annuity payment will not be affected by variations in expenses
or mortality experience.
Assumed Investment Rate
A 4% assumed investment rate is built into the annuity tables in the Contract. A
higher assumption would mean a higher first annuity payment but more slowly
rising and more rapidly falling subsequent payments. A lower assumption would
have the opposite effect. If the actual net investment rate is 4% annually,
annuity payments will be level.
Proof of Age, Sex and Survival
Merrill Lynch Life may require proof of age, sex or survival of any person upon
whose continuation of life annuity payments depend.
NOTICES AND ELECTIONS
Generally, all notices and elections under the Contract must be in writing,
signed by the proper party and must be received at Merrill Lynch Life's Service
Center to be effective. However, reallocations, account transfers, withdrawals,
and changes of annuity date or annuity option may be made in writing or by
telephone, once Merrill Lynch Life receives proper telephone transfer
authorization. Merrill Lynch Life is not responsible for their validity. If
acceptable to Merrill Lynch Life, notices or elections relating to beneficiaries
and ownership will take effect as of the date such a request is signed unless
Merrill Lynch Life has already acted in reliance on the prior status.
AMENDMENT OF CONTRACT
At any time Merrill Lynch Life may amend the Contract as required to make it
conform with any law, regulation or ruling issued by any government agency to
which the Contract is subject.
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TEN DAY RIGHT TO REVIEW
When the owner receives the Contract, it should be reviewed carefully to make
sure it is what the contract owner intended to purchase. Generally, within 10
days after the contract owner receives the Contract, it may be returned for a
refund. Some states allow a longer period of time to return the Contract. The
Contract must be delivered to Merrill Lynch Life's Service Center or to the
Financial Consultant who sold it for a refund to be made. Merrill Lynch Life
will then refund to the contract owner the greater of all premiums paid into the
Contract or the contract value as of the date the Contract is returned. For
Contracts issued in the Commonwealth of Pennsylvania, Merrill Lynch Life will
refund the contract owner's premiums allocated to the Fixed Account plus the
value of the contract owner's interest in the Variable Account as of the date
the Contract is returned. The Contract will then be deemed void.
FEDERAL INCOME TAXES
INTRODUCTION
The Contracts are designed for use in connection with retirement plans that may
or may not be qualified plans under the provisions of the Internal Revenue Code.
The ultimate effect of federal income taxes on contract value, on annuity
payments and on the economic benefit to the contract owner, annuitant or
beneficiary depends on the type of retirement plan for which the Contract is
purchased, on whether the investments of the Variable Account meet Internal
Revenue Service diversification standards (discussed below) and on the tax and
employment status of the individual concerned. The following discussion is
general in nature and is not intended as tax advice. Each person concerned
should consult a competent tax advisor. This discussion is based on Merrill
Lynch Life's understanding of current federal income tax laws as currently
interpreted. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of the current interpretations by the
Internal Revenue Service. MERRILL LYNCH LIFE DOES NOT MAKE ANY GUARANTEE
REGARDING THE TAX STATUS OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
MERRILL LYNCH LIFE'S TAX STATUS
Merrill Lynch Life is taxed as a life insurance company under the Internal
Revenue Code. The Variable Account is not a separate entity, and for tax
purposes its operations are a part of Merrill Lynch Life's. Therefore, Merrill
Lynch Life will be liable for any taxes attributable to the Variable Account.
(See THE VARIABLE ACCOUNT on page 14.)
Under existing federal income tax law, although investment income of the
Variable Account is includible in Merrill Lynch Life's gross income, no income
tax on such income is payable by Merrill Lynch Life. Merrill Lynch Life reserves
the right, however, to deduct from the Variable Account any such taxes imposed
in the future.
TAXATION OF ANNUITIES
In General
Section 72 of the Internal Revenue Code governs taxation of annuities in
general. With respect to contracts held by natural persons, no taxes are imposed
on increases in the value of a contract until distribution occurs, either in the
form of a withdrawal or as annuity payments under the annuity option elected.
The taxable portion of a distribution (in the form of a single sum payment or an
annuity) is taxable as ordinary income. Additionally, certain transfers of a
Contract for less than adequate consideration, such as a gift, will trigger tax
on the excess of the net contract value over the contract owner's investment in
the Contract.
Required Distributions
In order to be treated as an annuity contract for federal income tax purposes,
Section 72(s) of the Code requires any nonqualified contract to provide that (a)
if any contract owner dies on or after the annuity commencement date but prior
to the time the entire interest in the Contract has been distributed, the
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<PAGE> 29
remaining portion of such interest will be distributed at least as rapidly as
under the method of distribution being used as of the date of that contract
owner's death; and (b) if any contract owner dies prior to the annuity
commencement date, the entire interest in the Contract will be distributed
within five years after the date of the contract owner's death. These
requirements will be considered satisfied as to any portion of the contract
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
owner's death. The contract owner's "designated beneficiary" (referred to herein
as the "Owner's Beneficiary") is the person designated by such contract owner as
a beneficiary and to whom ownership of the Contract passes by reason of death
and must be a natural person. However, if the contract owner's "designated
beneficiary" is the surviving spouse of the contract owner, the Contract may be
continued with the surviving spouse as the new owner.
The nonqualified contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. Merrill Lynch Life intends
to review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by regulation
or otherwise. Other rules may apply to qualified contracts.
Non-natural Owners
Nonqualified contracts held by other than a natural person generally are not
treated as annuities, and the contract owner generally must include in income
any increase in the excess of the contract value over the contract owner's
investment in the contract. This is not applicable to trusts or other entities
acting as an agent for a natural person, and there are certain other exceptions
to this rule. Prospective contract owners who are not natural persons should
consult a competent tax advisor.
Distributions
The taxable portion of annuity payments is generally determined by a formula
that establishes the ratio that the cost basis of the contract bears to the
expected return under the contract. After such time as the sum of the nontaxable
portion of annuity payments received equals the sum of premium payments
(adjusted for any withdrawals or outstanding loans), all subsequent annuity
payments are fully taxable as ordinary income.
With respect to nonqualified plans, partial withdrawals of contract value are
treated as taxable income to the extent that the contract value just before the
withdrawal exceeds the investment in the contract. In the case of a withdrawal
under a qualified plan, a ratable portion of the amount received is taxable,
generally based on the ratio of the investment in the contract to the
individual's total accrued benefit under the retirement plan. The assignment or
pledge (or agreement to assign or pledge) of any portion of the value of the
Contract shall be treated as a withdrawal subject to this rule. Full withdrawals
are treated as taxable income to the extent that the net contract value
withdrawn exceeds the investment in the contract. Amounts may be distributed
from the Contract because of the death of an owner or the annuitant. Generally,
such amounts are includible in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full surrender
as described above, or (2) if distributed under an annuity option, they are
taxed in the same manner as annuity payments, as described above.
For both withdrawals and annuity payments under some types of qualified plans,
there may be no investment in the contract within the meaning of Section 72 of
the Internal Revenue Code, and the total amount received may be taxable.
Contract owners, annuitants and beneficiaries should seek competent financial
advice about the tax consequences of distributions under the retirement plan in
connection with which the Contracts are purchased.
Multiple Annuity Contracts
All nonqualified annuity contracts entered into after October 21, 1988 that are
issued by Merrill Lynch Life (or its affiliates) to the same owner during any
calendar year are treated as one annuity contract for purposes of determining
the amount includable in gross income under Section 72(e) of the Internal
Revenue Code. In
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addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of Section 72(e) through the serial purchase of
annuity contracts or otherwise. Congress has also indicated that the Treasury
Department may have authority to treat the combination purchase of an immediate
annuity contract and a separate deferred annuity contract as a single annuity
contract under its general authority to prescribe rules as may be necessary to
enforce the income tax laws.
Penalty Tax
A penalty tax is imposed equal to 10% of the taxable income portion of a
withdrawal. The penalty tax applies to both nonqualified and qualified
contracts, with different exceptions for each. The exceptions applicable to both
nonqualified and qualified contracts include (a) distributions made at or after
the contract owner's age 59 1/2, (b) distributions made on or after the contract
owner's death, (c) distributions attributable to the contract owner's
disability, and (d) substantially equal periodic payments for the contract
owner's life or life expectancy (or joint life or joint life expectancy of the
contract owner and a second person). There is an additional exception for
distributions under an immediate annuity contract applicable to nonqualified
contracts and Section 457 plans. Finally, there is an exception unique to
qualified contracts (not applicable to Individual Retirement Annuities and
Accounts) for distributions made to an employee after separation from service
after age 55. (For the tax treatment of any premiums paid prior to August 14,
1982, consult a tax advisor.)
INTERNAL REVENUE SERVICE DIVERSIFICATION STANDARDS
The Internal Revenue Service has published regulations prescribing
diversification standards to be met by nonqualified variable annuity contracts
as a condition to being taxed as annuities under Section 72 of the Internal
Revenue Code. The standards provide that investments of a subaccount of the
Variable Account are adequately diversified if no more than (a) 55% of the value
of its assets is represented by any one investment, (b) 70% is represented by
any two investments, (c) 80% is represented by any three investments, and (d)
90% is represented by any four investments. Each Fund is obligated to comply
with the diversification standards imposed by the Internal Revenue Service.
The Treasury Department has announced that the diversification regulations do
not provide guidance concerning the extent to which contract owners may direct
their investments to particular subaccounts of a separate account. Such guidance
will be included in regulations or Revenue Rulings under Section 817(d) of the
Internal Revenue Code relating to the definition of a variable contract. It is
unknown what standards will be adopted in such regulations. Merrill Lynch Life,
however, believes that according to current law the Contract will be treated as
an annuity for federal income tax purposes and that the Company, not the
contract owner, will be treated as the owner of the contract investments.
The ownership rights under the Contract are similar to, but different in certain
respects from, those described by the Internal Revenue Service in rulings in
which it determined that the owners were not owners of separate account assets.
For example, the owner of the Contract has additional flexibility in allocating
premium payments and account values. These differences could result in the owner
being treated as the owner of the assets of the Variable Account. Merrill Lynch
Life reserves the right to modify the Contract as necessary to prevent the
contract owner from being considered the owner of the assets of the Variable
Account for federal tax purposes. Any such changes will apply uniformly to
affected contract owners and will be made with such notice to affected contract
owners as is feasible under the circumstances.
TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF A CONTRACT
A transfer of ownership of the Contract, the designation of an annuitant who is
not also the owner, or the exchange of the Contract (or this Contract along with
one or more other annuity contracts) for one or more new annuity contracts may
result in certain tax consequences to the contract owner that are not discussed
herein. A contract owner contemplating any such transfer, assignment, or
exchange should contact a competent tax advisor with respect to the potential
tax effects of such a transaction.
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POSSIBLE CHANGES IN TAXATION
In past years, legislation has been proposed that would have adversely modified
the federal taxation of certain annuities. For example, one such proposal would
have changed the tax treatment of non-qualified annuities that did not have
"substantial life contingencies" by taxing income as it is credited to the
annuity. Although, as of the date of this prospectus, Congress is not actively
considering any legislation regarding the taxation of annuities, there is always
the possibility that the tax treatment of annuities could change by legislation
or other means (such as IRS regulations, revenue rulings, judicial decisions,
etc.). Moreover, it is also possible that any change could be retroactive (that
is, effective prior to the date of the change).
OTHER TAX CONSEQUENCES
Merrill Lynch Life does not make any guarantee regarding the tax status of the
Contract or any transaction regarding the Contract. As noted above, the
foregoing discussion of the income tax consequences under the Contract is not
exhaustive and special rules are provided with respect to other tax situations
not discussed in the Prospectus. Further, the income tax consequences discussed
herein reflect the Company's understanding of current law and the law may
change. Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of distributions under the Contract depend
on the individual circumstances of each contract owner or recipient of the
distribution. A competent tax advisor should be consulted for further
information.
QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in such qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified plans. Contract owners, annuitants
and beneficiaries are cautioned that the rights of any person to any benefits
under such qualified plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the Contract. Some
retirement plans are subject to distribution and other requirements that are not
incorporated into our Contract administration procedures. Contract owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. Following are brief descriptions of the
various types of qualified plans in connection with which Merrill Lynch Life
will issue a Contract. When issued in connection with qualified plans, a
Contract will be amended as necessary to conform to the requirements of the
Internal Revenue Code.
Individual Retirement Annuities and Individual Retirement Accounts
Section 408 of the Internal Revenue Code permits eligible individuals to
contribute to an individual retirement program known as an Individual Retirement
Annuity or Individual Retirement Account (each hereafter referred to as "IRA").
IRAs are subject to limits on the amount that may be contributed, the
contributions that may be deducted from taxable income, the persons who may be
eligible and on the time when distributions may commence. Also, distributions
from certain other types of qualified plans may be "rolled over" on a
tax-deferred basis into an IRA. Sales of the Contract for use with IRAs may be
subject to special disclosure requirements of the Internal Revenue Service.
Purchasers of the Contract for use with IRAs will be provided with supplemental
information required by the Internal Revenue Service or other appropriate
agency. Such purchasers will have the right to revoke the Contract within 7 days
of the earlier of the establishment of the IRA or the purchase of the Contract.
Purchasers should seek competent advice as to the suitability of the Contract
for use with IRAs.
Pension and Profit Sharing Plans
Sections 401(a) and 403(a) of the Internal Revenue Code permit corporate
employers to establish various types of retirement plans for employees. These
plans are limited by law as to maximum permissible contributions, distribution
dates, nonforfeitability of interest and tax rates applicable to distributions.
These retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans.
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Adverse tax or other legal consequences to the plan, to the participant or to
both may result if this Contract is assigned or transferred to any individual as
a means to provide benefit payments, unless the plan complies with all legal
requirements applicable to such benefits prior to transfer of the Contract.
Employers intending to use the Contracts in connection with such plans should
seek competent advice.
Tax-Sheltered Annuities
Section 403(b) of the Internal Revenue Code permits public school employees and
employees of certain types of charitable, educational and scientific
organizations specified in Section 501(c)(3) of the Code to purchase annuity
contracts and, subject to certain limitations, exclude the amount of premiums
from gross income for tax purposes. These annuity contracts are commonly
referred to as "Tax-Sheltered Annuities." Premiums excluded from gross income
will be subject to FICA taxes. Purchasers using the Contracts as a Tax-Sheltered
Annuity should seek competent advice as to eligibility, limitations on
permissible amounts or premiums, and restrictions and tax consequences on
distribution. The restrictions on distributions include a PROHIBITION AGAINST
DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO CONTRIBUTIONS MADE PURSUANT TO A
SALARY REDUCTION AGREEMENT, unless made:
(a) After the contract owner attains age 59 1/2;
(b) Upon separation from service;
(c) Upon death or disability, or
(d) For an amount not greater than the total of such contributions in the case
of hardship.
The above restrictions apply to distributions of employee contributions made
after December 31, 1988, earnings on those contributions, and earnings on
amounts attributable to employee contributions that are held as of December 31,
1988. They do not apply to distributions of any employer or other after-tax
contributions, employee contributions made on or before December 31, 1988, and
earnings credited to employee contributions before December 31, 1988.
Owners of Tax-Sheltered Annuities may receive Contract loans. Contract
loans that satisfy certain requirements with respect to loan amount and
repayment are not treated as taxable distributions. If these requirements are
not satisfied, or if the Contract terminates while a loan is outstanding, the
loan balance will be treated as a taxable distribution and may be subject to
penalty tax, and the treatment of the Contract under section 403(b) may be
adversely affected. In addition, if the section 403(b) plan is subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"), a Contract loan will
be treated as a "prohibited transaction" subject to certain penalties unless
additional ERISA requirements are satisfied. The Owner of a Tax-Sheltered
Annuity should seek competent advice before requesting a Contract loan.
Section 457 Deferred Compensation ("Section 457") Plans
Under Section 457 of the Internal Revenue Code, employees and independent
contractors who perform services for tax-exempt employers may participate in a
Section 457 plan of their employer allowing them to defer part of their salary
or other compensation. The amount deferred and any income on such amount will
not be taxable until paid or otherwise made available to the employee.
The maximum amount that can be deferred under a Section 457 plan in any tax year
is ordinarily one-third of the employee's includible compensation, up to $7,500.
Includible compensation means earnings for services rendered to the employer
which is includible in the employee's gross income, but excluding any
contributions under the Section 457 plan or a Tax-Sheltered Annuity. During the
last three years before an individual attains normal retirement age additional
"catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase the Contracts. For
a non-governmental plan, the Contracts will be owned by the employer and will be
subject to the claims of the employer's creditors and the employee has no rights
or vested interest in the Contract. The employee is only entitled to payment in
accordance with the Section 457 plan provisions. Present federal income tax law
does not allow tax-free transfers or rollovers for amounts accumulated in a
Section 457 plan except for transfers to other Section 457 plans in certain
limited cases.
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Withholding
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions, except certain distributions under certain qualified Contracts.
VARIABLE ACCOUNT VOTING RIGHTS
In accordance with its view of present applicable law, Merrill Lynch Life will
vote the shares of the Funds held in the Variable Account at any special
meetings of the shareholders of the Funds according to instructions received
from persons having a voting interest in the Variable Account. Merrill Lynch
Life will vote shares attributable to Contracts for which it has not received
instructions in the same proportion as it votes shares for which it has received
instructions. Shares not attributable to Contracts will also be voted in the
same proportion as shares in the respective subaccounts for which instructions
are received. If, however, the Investment Company Act of 1940 should be amended,
or if the present interpretation thereof should change, and as a result Merrill
Lynch Life determines that it is permitted to vote the shares of the Funds in
its own right, Merrill Lynch Life may elect to do so.
The person having the voting interest under a Contract is the contract owner.
Prior to the annuity date, the number of shares of each Fund for which voting
instructions may be given by a contract owner is determined by dividing the
contract owner's interest in the applicable subaccount by the net asset value
per share of that Fund. After the annuity date, the number of shares of each
Fund for which voting instruction may be given is determined by dividing the
reserve for such Contract allocated to the applicable subaccount by the net
asset value per share of that Fund. The votes attributable to such a Contract
will decrease as the reserves underlying the Contract decrease.
The number of Fund shares for which voting instructions may be given will be
determined as of a date to be chosen by Merrill Lynch Life, not more than 90
days prior to the meeting of the Fund.
Each person having a voting interest in the Variable Account will receive
periodic reports relating to the Funds in which he or she has an interest,
including proxy material and a form with which to give voting instructions.
REPORTS TO CONTRACT OWNERS
Merrill Lynch Life will mail to each contract owner at his or her last address
on record at least annually prior to the annuity date a report containing such
information as may be required by any applicable law or regulation and a
statement showing the current number of accumulation units attributable to the
Contract, the value per accumulation unit, the value of his or her interest in
the Variable Account and the total contract value.
DISTRIBUTION OF CONTRACTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the principal
underwriter of the Contract. It was organized in 1958 under the laws of the
state of Delaware and is registered as a broker-dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc. ("NASD"). MLPF&S' principal business address is World Financial
Center, 250 Vesey Street, New York, New York 10281.
Contracts are sold by registered representatives (Financial Consultants) of
MLPF&S who are also licensed through various Merrill Lynch Life Agencies
("MLLA") as insurance agents for Merrill Lynch Life. Merrill Lynch Life has
entered into a distribution agreement with MLPF&S and a companion sales
agreement with MLLA through which agreements the Contracts are sold and the
Financial Consultants are compensated by MLLA and/or MLPF&S. The maximum
compensation paid to the Financial Consultant is 2.3% of each premium. In
addition, on the annuity date, the Financial Consultant will receive additional
compensation of no
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more than 1.4% of the contract value. Additional annual compensation of no more
than 0.10% of the contract value may also be paid to the Financial Consultant.
The maximum commission Merrill Lynch Life will pay to MLLA to be used to pay
commissions to Financial Consultants is 5% of each premium.
MLPF&S may arrange for sales of the Contract by other broker-dealers who are
registered under the Securities Act of 1934 and are members of the NASD.
Registered representatives of these other broker-dealers may be compensated on a
different basis than MLPF&S registered representatives.
STATE REGULATION
Merrill Lynch Life is subject to the laws of the State of Arkansas and to the
regulations of the Arkansas Insurance Department. It is also subject to the
insurance laws and regulations of all jurisdictions in which it is licensed to
do business.
An annual statement in the prescribed form is filed with the insurance
departments of jurisdictions where Merrill Lynch Life does business disclosing
the Company's operations for the preceding year and its financial condition as
of the end of that year. Insurance department regulation includes periodic
examination to verify Contract liabilities and reserves and to determine
solvency and compliance with all insurance laws and regulations. Merrill Lynch
Life's books and accounts are subject to insurance department review at all
times. A full examination of Merrill Lynch Life's operations is conducted
periodically by the Arkansas Insurance Department and under the auspices of the
National Association of Insurance Commissioners.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. Merrill Lynch Life and
MLPF&S are engaged in various kinds of routine litigation that, in the Company's
judgment, is not of material importance in relation to Merrill Lynch Life's
total assets. No such litigation relates to the Variable Account.
EXPERTS
The financial statements of Merrill Lynch Life as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 and of the
Accounts as of December 31, 1996 and for the periods presented in the Statement
of Additional Information have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing therein, and are
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 10281-1420.
REGISTRATION STATEMENTS
Registration statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 and the Investment Company Act of
1940 that relate to the Contract and its investment options. This Prospectus
does not contain all of the information in the registration statements as
permitted by Securities and Exchange Commission regulations. The omitted
information can be obtained from the Securities and Exchange Commission's
principal office in Washington, D.C., upon payment of a prescribed fee.
LEGAL MATTERS
The organization of the Company, its authority to issue the Contract, and the
validity of the form of the Contract have been passed upon by Barry G. Skolnick,
Merrill Lynch Life's Senior Vice President and General Counsel. Sutherland,
Asbill & Brennan, L.L.P. of Washington, D.C. has provided advice on certain
matters relating to federal securities laws.
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TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Principal Underwriter
Financial Statements
Administrative Services Arrangements
Financial Statements of Merrill Lynch Life Variable Annuity
Separate
Account
Financial Statements of Merrill Lynch Life Insurance Company
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APPENDIX
APPLICABLE ONLY TO CONTRACTS ISSUED PRIOR TO APRIL 30, 1986
If the contract owner's Contract was issued prior to April 30, 1986 and
assumption reinsured by Merrill Lynch Life ("old Contract"), the contract owner
may transfer all of the contract value at net asset value to a new Contract
described in this Prospectus. No contingent deferred sales charge will be
imposed on such transfer, and the new Contract will be deemed a continuation of
the old Contract in computing withdrawal charges under the new Contract.
Contracts issued prior to April 30, 1986, contain variable contract charges
identical in aggregate amount to the charges contained in the new Contracts,
except that the contingent deferred sales charge applies with respect to the old
Contracts to withdrawals of any amount during the first contract year. The new
Contracts provide that the contingent deferred sales charge does not apply to a
withdrawal up to 10% of the sum of premiums paid during the first contract year.
After the first contract year, both the old and new Contracts permit
withdrawals, without charge, of up to 10% of the sum of premiums paid prior to
the date of withdrawal.
In all other respects, both old and new Contracts are substantially similar,
except as follows:
1. The old Contracts do not provide for a Fixed Account (see THE FIXED ACCOUNT
on page 22).
2. The old Contracts do not provide for an annuity option of payments for a
fixed period (see ANNUITY OPTIONS on page 25).
3. The old Contracts contain different annuity tables for use in determining the
amount of the first variable annuity payment under the annuity options offered.
The annuity tables in the old Contracts are more favorable to contract owners
than the new Contracts' annuity tables and do not provide for an age adjustment
based on the year in which annuity payments commence. The annuity tables for
both new and old Contracts provide minimum guarantees.
4. Old Contracts, unlike new Contracts, permit a contract owner to transfer all
or part of his or her contract value to or from certain other fixed annuity
contracts issued or reinsured by Merrill Lynch Life to the contract owner.
Transfers must be at least $300, and for a partial transfer the remaining
contract value must be at least $100. All transfers must be at least 6 months
apart and must be made prior to the death of the annuitant and at least 30 days
prior to the annuity date. The primary purpose of this transfer provision is to
provide the contract owner with a means for transfer in and out of Merrill Lynch
Life's companion fixed annuity, a feature unnecessary with respect to the new
Contracts, because of the existence of the Fixed Account.
Any contract owner contemplating an exchange of Contracts should carefully
consider the potential adverse effect on the level of future annuity payments
that may result from an exchange to a new Contract.
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PART B
INFORMATION REQUIRED IN A STATEMENT
OF ADDITIONAL INFORMATION
<PAGE> 38
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS--NONPARTICIPATING
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
Home Office: Little Rock, Arkansas 72201
Service Center: P.O. Box 44222, Jacksonville, FL 32231-4222
4804 Deer Lake Drive East, Jacksonville, Florida 32246
Phone: (800) 535-5549
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Premiums for the Contract described in the Prospectus will be allocated to the
Merrill Lynch Life Variable Annuity Separate Account ("Variable Account"), a
segregated investment account of Merrill Lynch Life Insurance Company ("Merrill
Lynch Life"), unless allocation to the Fixed Account is selected. Premiums and
contract values allocated to the Variable Account will be invested in certain
Funds selected by the contract owner of the Merrill Lynch Variable Series Funds,
Inc., except that, for the first 14 days following the date of issue, such
premiums will be allocated to the Reserve Assets Fund Subaccounts. In the
Commonwealth of Pennsylvania, all premiums will be invested as of the date of
issue in the subaccounts selected by the contract owner. The contract owner
bears the full investment risk with respect to such investments.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of the Variable Account, dated May 1, 1997.
The Prospectus may be obtained without charge by writing to or calling Merrill
Lynch Life's Service Center at the address or phone number set forth above.
<PAGE> 39
TABLE OF CONTENTS
<TABLE>
<S> <C>
Principal Underwriter................................................. 2
Financial Statements.................................................. 2
Administrative Services Arrangements.................................. 2
Financial Statements of Merrill Lynch Life Variable Annuity Separate
Account............................................................. S-1
Financial Statements of Merrill Lynch Life Insurance Company.......... G-1
</TABLE>
PRINCIPAL UNDERWRITER
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of
Merrill Lynch Life performs all sales and distribution functions regarding the
Contracts and may be deemed the principal underwriter of Merrill Lynch Life
Variable Annuity Separate Account (the "Variable Account") under the Investment
Company Act of 1940. The offering of the Contracts relates to Merrill Lynch
Life's assumption reinsurance of the Contracts previously issued by Family Life
Insurance Company ("FLIC") and offers may also be made from time to time to the
general public. The offering of the interests under the Contracts is continuous.
For the years ended December 31, 1996, 1995 and 1994, MLPF&S received in
connection with the sale of the Contracts $0.7 million, $0.7 million and $0.8
million, respectively.
FINANCIAL STATEMENTS
The financial statements of Merrill Lynch Life included in this Statement of
Additional Information should be distinguished from the financial statements of
the Variable Account and should be considered only as bearing upon the ability
of Merrill Lynch Life to meet any obligations it may have under the Contract.
Because the Variable Account acquired a majority of the assets of Merrill Lynch
Variable Annuity Account of FLIC in connection with Merrill Lynch Life's
assumption reinsurance of certain variable annuity contracts of FLIC commencing
on September 1, 1991, the financial statements of the Variable Account include
the financial operations of the FLIC separate account for periods prior to
September 1, 1991.
ADMINISTRATIVE SERVICES ARRANGEMENTS
Merrill Lynch Life has entered into a Service Agreement with its parent, Merrill
Lynch Insurance Group, Inc. ("MLIG") pursuant to which Merrill Lynch Life can
arrange for MLIG to provide directly or through affiliates certain services.
Pursuant to this agreement, Merrill Lynch Life has arranged for MLIG to provide
administrative services for the Variable Account and the Contracts, and MLIG, in
turn, has arranged for a subsidiary, Merrill Lynch Insurance Group Services,
Inc. ("MLIG Services"), to provide these services. Compensation for these
services, which will be paid by Merrill Lynch Life, will be based on the charges
and expenses incurred by MLIG Services, and will reflect MLIG Services' actual
costs. For the years ended December 31, 1996, 1995 and 1994, Merrill Lynch Life
paid administrative services fees of $44.5 million, $43.0 million and $44.2
million, respectively.
2
<PAGE> 40
<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 Annuity Separate Account (the
"Account") as of December 31, 1996 and the related
statements of operations and changes in net assets for each
of the two years in the period then ended. These financial
statements are the responsibility of the management of
Merrill Lynch Life Insurance Company. Our responsibility is
to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of mutual fund securities owned at December 31, 1996. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Account
at December 31, 1996 and the results of its operations and
the changes in its net assets for the above periods in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole.
The supplemental schedules included herein are presented for
the purpose of additional analysis and are not a required
part of the basic financial statements. These schedules are
the responsibility of the Company's management. Such
schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects
when considered in relation to the basic financial
statements taken as a whole.
January 21, 1997
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Market
Cost Shares Value
======================= ======================= =======================
<S> <C> <C> <C>
ASSETS:
Investments in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Reserve Assets Fund $ 10,935,020 10,935,020 $ 10,935,020
Prime Bond Fund 28,446,931 2,351,348 28,004,551
High Current Income Fund 12,149,863 1,071,164 12,200,554
Quality Equity Fund 50,206,739 1,844,245 60,546,570
Equity Growth Fund 14,923,106 679,491 17,816,254
Global Strategy Focus Fund 42,742,857 3,290,835 45,643,886
International Equity Focus Fund 12,523 1,083 12,599
Basic Value Focus Fund 452,782 30,153 444,460
Index 500 Fund 42,456 4,229 43,001
American Balanced Fund 6,949,194 502,456 8,044,326
Natural Resources Focus Fund 1,343,667 113,953 1,495,066
----------------------- -----------------------
TOTAL ASSETS $ 168,205,138 185,186,287
======================= -----------------------
LIABILITIES:
Due to Merrill Lynch Life Insurance Company 65,243
-----------------------
TOTAL LIABILITIES 65,243
-----------------------
NET ASSETS $ 185,121,044
=======================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
================================================================================
<TABLE>
<CAPTION>
1996 1995
======================= =======================
<S> <C> <C>
Investment Income:
Reinvested Dividends $ 22,406,930 $ 8,474,693
Mortality and Expense Charges (Note 4) (2,092,213) (2,068,466)
----------------------- -----------------------
Net Investment Income 20,314,717 6,406,227
----------------------- -----------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains 4,140,155 3,562,843
Net Unrealized Gains (Losses) (6,787,305) 20,887,037
----------------------- -----------------------
Net Realized and Unrealized Gains (Losses) (2,647,150) 24,449,880
----------------------- -----------------------
Increase in Net Assets
Resulting from Operations 17,667,567 30,856,107
----------------------- -----------------------
Changes from Principal Transactions:
Transfer of Net Premiums 2,062,421 2,148,026
Transfer of Contract Owner Withdrawals (24,552,979) (27,074,144)
Transfers In (Out) - Net 519,795 (243,238)
Transfer of Benefit Payments on Annuitized Contracts (201,169) (152,562)
Transfer of Contract Administration Charges (Note 4) (120,774) (120,746)
Net Assets Transferred under Assumption Reinsurance Agreement (Note 2) 8,568,806 0
----------------------- -----------------------
Decrease in Net Assets
Resulting from Principal Transactions (13,723,900) (25,442,664)
----------------------- -----------------------
Increase in Net Assets 3,943,667 5,413,443
Net Assets Beginning Balance 181,177,377 175,763,934
----------------------- -----------------------
Net Assets Ending Balance $ 185,121,044 $ 181,177,377
======================= =======================
Comprised of:
Contracts in the Accumulation Period $ 183,817,151 $ 179,813,386
Contracts in the Annuity Period 1,303,893 1,363,991
----------------------- -----------------------
Total Contract Owners' Balance $ 185,121,044 $ 181,177,377
======================= =======================
</TABLE>
See Notes to Financial Statements
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Merrill Lynch Life Variable Annuity Separate Account
("Account"), a separate account of Merrill Lynch Life
Insurance Company ("Merrill Lynch Life"), was
established to support Merrill Lynch Life's operations
with respect to certain variable annuity 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. The
Account is a registered unit investment trust under the
Investment Company Act of 1940 and consists of eleven
investment divisions. The investment divisions each
invest in the securities of a single mutual fund
portfolio of the Merrill Lynch Variable Series Funds,
Inc. At any point in time, the Account may or may not
be invested in all available divisions.
The assets of the Account are registered in the name of
Merrill Lynch Life. The Account's assets are not
chargeable with liabilities arising out of any other
business Merrill Lynch Life may conduct. There are two
sub-accounts for each investment division. One sub-
account is for Contracts issued in connection with
retirement plans that are qualified under the Internal
Revenue Code, and the other is for non-qualified
Contracts. No transfers may be made between a qualified
and a non-qualified sub-account.
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 annuity 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. As a result of an Assumption Reinsurance Agreement
between Family Life Insurance Company ("Family Life")
and Merrill Lynch Life, assets along with related
contractual liabilities of approximately $8,569,000 were
transferred to the Account from Family Life's Merrill
Lynch Variable Annuity Account on November 22, 1996.
3. The following is a summary of significant accounting
policies of the Account:
Investments in the divisions are included in the
statement of net assets at the net asset values of the
shares held.
Dividend income is recognized on the ex-dividend date.
All dividends are automatically reinvested.
Realized gains and losses on the sales of investments are
computed on the first in first out method.
The operations of the Account are included in the Federal
income tax return of Merrill Lynch Life. Under the
provisions of the Contracts, Merrill Lynch Life has the
right to charge the Account for any Federal income tax
attributable to the Account. No charge is currently being
made against the Account for such tax since, under
current tax law, Merrill Lynch Life pays no tax on
investment income and capital gains reflected in variable
annuity Contract reserves. However, Merrill Lynch Life
retains the right to charge for any Federal income tax
incurred which is attributable to the Account if the law
is changed. Charges for state and local taxes, if any,
attributable to the Account may also be made.
4. Merrill Lynch Life deducts a contract administration
charge of $30 for each Contract on each Contract's
anniversary on or prior to the annuity date and upon full
withdrawal if made other than on a Contract anniversary.
The contract administration charge is borne by Contract
owners by redeeming accumulation units with a value equal
to the charge.
Merrill Lynch Life deducts a daily expense risk charge.
For non-qualified Contracts, the charge is equal to an
annual rate of 0.5% of the sum of the daily net asset
values of all non-qualified sub-accounts. For qualified
Contracts, the rate is 0.2% of the sum of the daily net
asset values of all qualified sub-accounts. This charge
is made to compensate Merrill Lynch Life for the risk of
guaranteeing not to increase the contract administration
charge regardless of actual administrative costs.
Merrill Lynch Life deducts a daily distribution expense
charge equal to an annual rate of 0.05% of the daily net
asset value of the Account. This charge compensates
Merrill Lynch Life in part for expenses it incurs in
distributing the Contracts.
Merrill Lynch Life deducts a daily mortality risk charge
equal to an annual rate of 0.75% of the daily net asset
value of the Account. This charge is made to compensate
Merrill Lynch Life for the mortality guarantees it makes
under the Contract.
5. Effective following the close of business on December 6,
1996, the Flexible Strategy Fund was merged with and into
the Global Strategy Focus Fund.
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Total
Total Non- Total
Separate Qualified Qualified
Account Contracts Contracts
======================= ======================= =======================
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 22,406,930 $ 13,119,150 $ 9,287,780
Mortality and Expense Charges (2,092,213) (1,361,598) (730,615)
----------------------- ----------------------- -----------------------
Net Investment Income 20,314,717 11,757,552 8,557,165
----------------------- ----------------------- -----------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains 4,140,155 2,803,919 1,336,236
Net Unrealized Losses (6,787,305) (4,436,527) (2,350,778)
----------------------- ----------------------- -----------------------
Net Realized and Unrealized Losses (2,647,150) (1,632,608) (1,014,542)
----------------------- ----------------------- -----------------------
Increase in Net Assets
Resulting from Operations 17,667,567 10,124,944 7,542,623
----------------------- ----------------------- -----------------------
Changes from Principal Transactions:
Transfer of Net Premiums 2,062,421 249,732 1,812,689
Transfer of Contract Owner Withdrawals (24,552,979) (15,250,832) (9,302,147)
Transfers In (Out) - Net 519,795 (324,703) 844,498
Transfer of Benefit Payments on Annuitized Contracts (201,169) (147,076) (54,093)
Transfer of Contract Administration Charges (120,774) (62,542) (58,232)
Net Assets Transferred under Assumption Reinsurance Agreement 8,568,806 6,219,595 2,349,211
----------------------- ----------------------- -----------------------
Decrease in Net Assets
Resulting from Principal Transactions (13,723,900) (9,315,826) (4,408,074)
----------------------- ----------------------- -----------------------
Increase in Net Assets 3,943,667 809,118 3,134,549
Net Assets Beginning Balance 181,177,377 107,792,355 73,385,022
----------------------- ----------------------- -----------------------
Net Assets Ending Balance $ 185,121,044 $ 108,601,473 $ 76,519,571
======================= ======================= =======================
Comprised of:
Contracts in the Accumulation Period $ 183,817,151 $ 107,726,729 $ 76,090,422
Contracts in the Annuity Period 1,303,893 874,744 429,149
----------------------- ----------------------- -----------------------
Total Contract Owners' Balance $ 185,121,044 $ 108,601,473 $ 76,519,571
======================= ======================= =======================
</TABLE>
NOTE: A Qualified contract is a contract issued in connection with a retirement
plan that receives a favorable tax treatment under sections 401, 403,
408, or 457 or any similar provision of the Internal Revenue Code. A
Nonqualified contract is a contract other than a Qualified contract.
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Total
Total Non- Total
Separate Qualified Qualified
Account Contracts Contracts
======================= ======================= =======================
<S> <C> <C> <C>
Investment Income:
Reinvested Dividends $ 8,474,693 $ 5,128,563 $ 3,346,130
Mortality and Expense Charges (2,068,466) (1,362,484) (705,982)
----------------------- ----------------------- -----------------------
Net Investment Income 6,406,227 3,766,079 2,640,148
----------------------- ----------------------- -----------------------
Realized and Unrealized Gains:
Net Realized Gains 3,562,843 1,935,122 1,627,721
Net Unrealized Gains 20,887,037 12,423,909 8,463,128
----------------------- ----------------------- -----------------------
Net Realized and Unrealized Gains 24,449,880 14,359,031 10,090,849
----------------------- ----------------------- -----------------------
Increase in Net Assets
Resulting from Operations 30,856,107 18,125,110 12,730,997
----------------------- ----------------------- -----------------------
Changes from Principal Transactions:
Transfer of Net Premiums 2,148,026 263,025 1,885,001
Transfer of Contract Owner Withdrawals (27,074,144) (15,281,007) (11,793,137)
Transfers In (Out) - Net (243,238) (432,545) 189,307
Transfer of Benefit Payments on Annuitized Contracts (152,562) (114,164) (38,398)
Transfer of Contract Administration Charges (120,746) (62,199) (58,547)
----------------------- ----------------------- -----------------------
Decrease in Net Assets
Resulting from Principal Transactions (25,442,664) (15,626,890) (9,815,774)
----------------------- ----------------------- -----------------------
Increase in Net Assets 5,413,443 2,498,220 2,915,223
Net Assets Beginning Balance 175,763,934 105,294,135 70,469,799
----------------------- ----------------------- -----------------------
Net Assets Ending Balance $ 181,177,377 $ 107,792,355 $ 73,385,022
======================= ======================= =======================
Comprised of:
Contracts in the Accumulation Period $ 179,813,386 $ 106,859,122 $ 72,954,264
Contracts in the Annuity Period 1,363,991 933,233 430,758
----------------------- ----------------------- -----------------------
Total Contract Owners' Balance $ 181,177,377 $ 107,792,355 $ 73,385,022
======================= ======================= =======================
</TABLE>
NOTE: A Qualified contract is a contract issued in connection with a retirement
plan that receives a favorable tax treatment under sections 401, 403,
408, or 457 or any similar provision of the Internal Revenue Code. A
Nonqualified contract is a contract other than a Qualified contract.
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================================
Total High
Non- Reserve Prime Current
qualified Assets Bond Income
Contracts Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 13,119,150 $ 327,618 $ 1,120,095 $ 748,075
Mortality and Expense Charges (1,361,598) (84,957) (220,033) (103,160)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) 11,757,552 242,661 900,062 644,915
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 2,803,919 0 (2,745) (70,077)
Net Unrealized Gains (Losses) (4,436,527) 0 (782,945) 171,949
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains (Losses) (1,632,608) 0 (785,690) 101,872
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Operations 10,124,944 242,661 114,372 746,787
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 249,732 (18,127) 53,401 7,300
Transfer of Contract Owner Withdrawals (15,250,832) (2,162,926) (2,491,305) (1,453,839)
Transfers In (Out) - Net (324,703) 741,228 293,343 325,071
Transfer of Benefit Payments on Annuitized Contract (147,076) (6,597) (20,839) (8,288)
Transfer of Contract Administration Charges (62,542) (4,402) (9,210) (4,378)
Transfer of Merged Funds (Note 5) 0 0 0 0
Net Assets Transferred Under Assumption Reinsurance 6,219,595 315,181 1,418,355 460,560
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (9,315,826) (1,135,643) (756,255) (673,574)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 809,118 (892,982) (641,883) 73,213
Net Assets Beginning Balance 107,792,355 7,496,296 17,913,442 8,137,081
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 108,601,473 $ 6,603,314 $ 17,271,559 $ 8,210,294
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 107,726,729 $ 6,558,591 $ 17,147,744 $ 8,143,512
Contracts in the Annuity Period 874,744 44,723 123,815 66,782
-------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 108,601,473 $ 6,603,314 $ 17,271,559 $ 8,210,294
==================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 295,033.3 484,673.4 160,084.8
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 2,011.8 3,499.6 1,312.8
-------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1996 297,045.1 488,173.0 161,397.6
==================== ==================== ====================
Accumulation Unit Value at December 31, 1996 $ 22.23 $ 35.38 $ 50.87
==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================================
Global
Quality Equity Flexible Strategy
Equity Growth Strategy Focus
Fund Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 4,961,389 $ 1,347,135 $ 4,409,315 $ 0
Mortality and Expense Charges (425,084) (129,671) (304,515) (22,496)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) 4,536,305 1,217,464 4,104,800 (22,496)
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,248,099 877,389 541,111 42,802
Net Unrealized Gains (Losses) (860,135) (1,467,438) (1,778,353) 141,762
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains (Losses) 387,964 (590,049) (1,237,242) 184,564
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Operations 4,924,269 627,415 2,867,558 162,068
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 122,411 44,260 29,926 0
Transfer of Contract Owner Withdrawals (3,993,789) (1,227,807) (3,292,834) (136,833)
Transfers In (Out) - Net (754,855) (191,752) (698,258) 15,769
Transfer of Benefit Payments on Annuitized Contract (58,313) (19,714) (29,909) 0
Transfer of Contract Administration Charges (19,477) (5,848) (14,240) (2,146)
Transfer of Merged Funds (Note 5) 0 0 (25,576,133) 25,576,133
Net Assets Transferred Under Assumption Reinsurance 2,125,280 693,717 796,868 0
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (2,578,743) (707,144) (28,784,580) 25,452,923
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 2,345,526 (79,729) (25,917,022) 25,614,991
Net Assets Beginning Balance 32,712,637 10,115,645 25,917,022 0
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 35,058,163 $ 10,035,916 $ (0) $ 25,614,991
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 34,727,601 $ 9,921,482 $ 0 $ 25,446,669
Contracts in the Annuity Period 330,562 114,434 0 168,322
-------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 35,058,163 $ 10,035,916 $ 0 $ 25,614,991
==================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 591,108.1 297,942.4 0.0 2,529,490.0
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 5,626.6 3,436.5 0.0 16,731.8
-------------------- -------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1996 596,734.7 301,378.9 0.0 2,546,221.8
==================== ==================== ==================== ====================
Accumulation Unit Value at December 31, 1996 $ 58.75 $ 33.30 $ 0.00 $ 10.06
==================== ==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================================
International Basic
Equity Value Index American
Focus Focus 500 Balanced
Fund Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 0 $ 170,007
Mortality and Expense Charges (6) (145) (20) (57,111)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) (6) (145) (20) 112,896
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 0 0 0 98,627
Net Unrealized Gains (Losses) 44 (2,606) 546 123,042
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains (Losses) 44 (2,606) 546 221,669
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Operations 38 (2,751) 526 334,565
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 0 0 0 8,381
Transfer of Contract Owner Withdrawals 0 0 0 (354,786)
Transfers In (Out) - Net 7,235 173,915 42,459 (184,296)
Transfer of Benefit Payments on Annuitized Contract 0 0 0 (3,416)
Transfer of Contract Administration Charges 0 0 0 (2,267)
Transfer of Merged Funds (Note 5) 0 0 0 0
Net Assets Transferred Under Assumption Reinsurance 0 0 0 333,268
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions 7,235 173,915 42,459 (203,116)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 7,273 171,164 42,985 131,449
Net Assets Beginning Balance 0 0 0 4,487,961
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 7,273 $ 171,164 $ 42,985 $ 4,619,410
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 7,273 $ 171,164 $ 42,985 $ 4,593,304
Contracts in the Annuity Period 0 0 0 26,106
-------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 7,273 $ 171,164 $ 42,985 $ 4,619,410
==================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 723.7 17,412.4 4,247.5 224,282.4
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 0.0 0.0 0.0 1,274.7
-------------------- -------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1996 723.7 17,412.4 4,247.5 225,557.1
==================== ==================== ==================== ====================
Accumulation Unit Value at December 31, 1996 $ 10.05 $ 9.83 $ 10.12 $ 20.48
==================== ==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
======================
Natural
Resources
Focus
Fund
=====================
<S> <C>
Investment Income (Loss):
Reinvested Dividends $ 35,516
Mortality and Expense Charges (14,400)
---------------------
Net Investment Income (Loss) 21,116
---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 68,713
Net Unrealized Gains (Losses) 17,607
---------------------
Net Realized and Unrealized Gains (Losses) 86,320
---------------------
Increase (Decrease) in Net Assets
Resulting from Operations 107,436
---------------------
Changes from Principal Transactions:
Transfer of Net Premiums 2,180
Transfer of Contract Owner Withdrawals (136,713)
Transfers In (Out) - Net (94,562)
Transfer of Benefit Payments on Annuitized Contract 0
Transfer of Contract Administration Charges (574)
Transfer of Merged Funds (Note 5) 0
Net Assets Transferred Under Assumption Reinsurance 76,366
---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (153,303)
---------------------
Increase (Decrease) in Net Assets (45,867)
Net Assets Beginning Balance 1,012,271
---------------------
Net Assets Ending Balance $ 966,404
=====================
Comprised of:
Contracts in the Accumulation Period $ 966,404
Contracts in the Annuity Period 0
--------------------
Total Contract Owners' Balance $ 966,404
====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 69,028.9
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 0.0
--------------------
Total Units Outstanding at December 31, 1996 69,028.9
====================
Accumulation Unit Value at December 31, 1996 $ 14.00
====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================================
High
Total Reserve Prime Current
Nonqualified Assets Bond Income
Contracts Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 5,128,563 $ 487,528 $ 1,231,311 $ 815,424
Mortality and Expense Charges (1,362,484) (114,650) (225,357) (105,441)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) 3,766,079 372,878 1,005,954 709,983
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,935,122 0 (27,549) (80,626)
Net Unrealized Gains 12,423,909 0 2,008,443 553,216
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains 14,359,031 0 1,980,894 472,590
--------------------- -------------------- -------------------- --------------------
Increase in Net Assets
Resulting from Operations 18,125,110 372,878 2,986,848 1,182,573
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 263,025 13,282 39,737 17,750
Transfer of Contract Owner Withdrawals (15,281,007) (1,915,410) (2,181,449) (1,571,554)
Transfers In (Out) - Net (432,545) (1,074,629) (956,699) 555,255
Transfer of Benefit Payments on Annuitized Contract (114,164) (6,594) (16,263) (7,778)
Transfer of Contract Administration Charges (62,199) (5,191) (9,315) (4,525)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (15,626,890) (2,988,542) (3,123,989) (1,010,852)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 2,498,220 (2,615,664) (137,141) 171,721
Net Assets Beginning Balance 105,294,135 10,111,960 18,050,583 7,965,360
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 107,792,355 $ 7,496,296 $ 17,913,442 $ 8,137,081
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 106,859,122 $ 7,446,719 $ 17,769,487 $ 8,068,308
Contracts in the Annuity Period 933,233 49,577 143,955 68,773
--------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 107,792,355 $ 7,496,296 $ 17,913,442 $ 8,137,081
===================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1995 347,815.0 506,686.3 174,186.3
Units Allocable to Contracts in the Annuity
Period at December 31, 1995 2,315.6 4,104.8 1,484.7
Total Units Outstanding at December 31, 1995
-------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1995 350,130.6 510,791.0 175,671.0
==================== ==================== ====================
Accumulation Unit Value at December 31, 1995 $ 21.41 $ 35.07 $ 46.32
==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
===============================================================
Quality Equity Flexible
Equity Growth Strategy
Fund Fund Fund
===================== ==================== ====================
<S> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 1,104,008 $ 31,147 $ 1,257,059
Mortality and Expense Charges (403,324) (103,585) (340,597)
--------------------- -------------------- ---------------------
Net Investment Income (Loss) 700,684 (72,438) 916,462
--------------------- ------------------------------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 978,150 319,960 657,622
Net Unrealized Gains 4,309,779 2,582,532 2,309,994
--------------------- -------------------- --------------------
Net Realized and Unrealized Gains 5,287,929 2,902,492 2,967,616
--------------------- -------------------- --------------------
Increase in Net Assets
Resulting from Operations 5,988,613 2,830,054 3,884,078
--------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 75,288 41,770 64,192
Transfer of Contract Owner Withdrawals (3,460,102) (614,431) (5,143,297)
Transfers In (Out) - Net 898,354 1,060,737 (401,958)
Transfer of Benefit Payments on Annuitized Contract (44,141) (14,450) (22,762)
Transfer of Contract Administration Charges (18,954) (4,643) (16,614)
--------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (2,549,555) 468,983 (5,520,439)
--------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 3,439,058 3,299,037 (1,636,361)
Net Assets Beginning Balance 29,273,579 6,816,608 27,553,383
--------------------- -------------------- --------------------
Net Assets Ending Balance $ 32,712,637 $ 10,115,645 $ 25,917,022
===================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 32,373,253 $ 9,989,413 $ 25,739,147
Contracts in the Annuity Period 339,384 126,232 177,875
--------------------- -------------------- --------------------
Total Contract Owners' Balance $ 32,712,637 $ 10,115,645 $ 25,917,022
===================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1995 641,308.5 320,173.5 1,170,493.3
Units Allocable to Contracts in the Annuity
Period at December 31, 1995 6,723.1 4,045.9 8,088.9
Total Units Outstanding at December 31, 1995
--------------------- ------------------- --------------------
Total Units Outstanding at December 31, 1995 648,031.6 324,219.4 1,178,582.2
===================== =================== ====================
Accumulation Unit Value at December 31, 1995 $ 50.48 $ 31.20 $ 21.99
===================== =================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - NONQUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
==========================================
Natural
American Resources
Balanced Focus
Fund Fund
===================== ====================
<S> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 182,255 $ 19,831
Mortality and Expense Charges (57,244) (12,286)
--------------------- ---------------------
Net Investment Income (Loss) 125,011 7,545
--------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 91,096 (3,531)
Net Unrealized Gains 564,537 95,408
--------------------- ---------------------
Net Realized and Unrealized Gains 655,633 91,877
--------------------- ---------------------
Increase in Net Assets
Resulting from Operations 780,644 99,422
--------------------- ---------------------
Changes from Principal Transactions:
Transfer of Net Premiums 8,206 2,800
Transfer of Contract Owner Withdrawals (355,102) (39,662)
Transfers In (Out) - Net (423,463) (90,142)
Transfer of Benefit Payments on Annuitized Contract (2,176) 0
Transfer of Contract Administration Charges (2,516) (441)
--------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (775,051) (127,445)
--------------------- ---------------------
Increase (Decrease) in Net Assets 5,593 (28,023)
Net Assets Beginning Balance 4,482,368 1,040,294
--------------------- ---------------------
Net Assets Ending Balance $ 4,487,961 $ 1,012,271
===================== =====================
Comprised of:
Contracts in the Accumulation Period $ 4,460,524 $ 1,012,271
Contracts in the Annuity Period 27,437 0
--------------------- --------------------
Total Contract Owners' Balance $ 4,487,961 $ 1,012,271
===================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1995 235,881.8 81,046.5
Units Allocable to Contracts in the Annuity
Period at December 31, 1995 1,450.9 0.0
Total Units Outstanding at December 31, 1995
--------------------- --------------------
Total Units Outstanding at December 31, 1995 237,332.7 81,046.5
===================== ====================
Accumulation Unit Value at December 31, 1995 $ 18.91 $ 12.49
===================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - QUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================================
High
Total Reserve Prime Current
Qualified Assets Bond Income
Contracts Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 9,287,780 $ 212,997 $ 687,239 $ 355,664
Mortality and Expense Charges (730,615) (42,618) (103,825) (37,853)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) 8,557,165 170,379 583,414 317,811
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,336,236 0 27,706 (29,689)
Net Unrealized Gains (Losses) (2,350,778) 0 (502,107) 80,696
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains (Losses) (1,014,542) 0 (474,401) 51,007
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets
Resulting from Operations 7,542,623 170,379 109,013 368,818
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 1,812,689 106,086 326,051 89,533
Transfer of Contract Owner Withdrawals (9,302,147) (558,295) (1,450,302) (647,270)
Transfers In (Out) - Net 844,498 (26,118) 158,580 216,464
Transfer of Benefit Payments on Annuitized Contract (54,093) (2,391) (13,382) 0
Transfer of Contract Administration Charges (58,232) (4,409) (7,431) (2,565)
Transfer of Merged Funds (Note 5) 0 0 0 0
Net Assets Transferred Under Assumption Reinsurance 2,349,211 301,212 419,670 25,643
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets
Resulting from Principal Transactions (4,408,074) (183,915) (566,814) (318,195)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets 3,134,549 (13,536) (457,801) 50,623
Net Assets Beginning Balance 73,385,022 4,341,346 11,180,856 3,935,250
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 76,519,571 $ 4,327,810 $ 10,723,055 $ 3,985,873
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 76,090,422 $ 4,308,168 $ 10,667,214 $ 3,985,873
Contracts in the Annuity Period 429,149 19,642 55,841 0
--------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 76,519,571 $ 4,327,810 $ 10,723,055 $ 3,985,873
===================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 185,616.9 285,984.3 73,108.5
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 846.3 1,497.1 0.0
-------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1996 186,463.2 287,481.4 73,108.5
==================== ==================== ====================
Accumulation Unit Value at December 31, 1996 $ 23.21 $ 37.30 $ 54.52
==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - QUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
=============================================================== ====================
Global
Quality Equity Flexible Strategy
Equity Growth Strategy Focus
Fund Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 3,476,818 $ 875,065 $ 3,546,381 $ 0
Mortality and Expense Charges (233,262) (72,857) (189,959) (13,559)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) 3,243,556 802,208 3,356,422 (13,559)
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 512,925 203,224 494,139 50,339
Net Unrealized Gains (Losses) (163,114) (531,237) (1,474,358) 96,918
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains (Losses) 349,811 (328,013) (980,219) 147,257
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets
Resulting from Operations 3,593,367 474,195 2,376,203 133,698
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 536,997 208,367 455,858 18,434
Transfer of Contract Owner Withdrawals (2,648,274) (466,655) (3,127,504) (51,110)
Transfers In (Out) - Net 299,517 857,617 (1,103,939) (170,148)
Transfer of Benefit Payments on Annuitized Contract (33,218) 0 (5,102) 0
Transfer of Contract Administration Charges (18,494) (5,817) (15,899) (1,124)
Transfer of Merged Funds (Note 5) 0 0 (20,083,186) 20,083,186
Net Assets Transferred Under Assumption Reinsurance 991,033 164,710 366,331 0
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets
Resulting from Principal Transactions (872,439) 758,222 (23,513,441) 19,879,238
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets 2,720,928 1,232,417 (21,137,238) 20,012,936
Net Assets Beginning Balance 22,746,179 6,541,687 21,137,238 0
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 25,467,107 $ 7,774,104 $ (0) $ 20,012,936
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 25,157,796 $ 7,774,104 $ 0 $ 19,968,581
Contracts in the Annuity Period 309,311 0 0 44,355
--------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 25,467,107 $ 7,774,104 $ 0 $ 20,012,936
===================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 390,588.4 209,262.6 0.0 1,982,977.3
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 4,802.2 0.0 0.0 4,404.7
--------------------- -------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1996 395,390.6 209,262.6 0.0 1,987,382.0
===================== ==================== ==================== ====================
Accumulation Unit Value at December 31, 1996 $ 64.41 $ 37.15 $ 0.00 $ 10.07
===================== ==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - QUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
========================================== ==================== ====================
International Basic Natural
Equity Value American Resources
Focus Focus Balanced Focus
Fund Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 0 $ 0 $ 116,812 $ 16,804
Mortality and Expense Charges (4) (180) (31,489) (5,009)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) (4) (180) 85,323 11,795
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 0 (38) 59,456 18,174
Net Unrealized Gains (Losses) 32 (5,717) 121,793 26,316
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains (Losses) 32 (5,755) 181,249 44,490
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets
Resulting from Operations 28 (5,935) 266,572 56,285
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 69 26 61,719 9,549
Transfer of Contract Owner Withdrawals 0 0 (260,658) (92,079)
Transfers In (Out) - Net 5,224 279,056 311,315 16,930
Transfer of Benefit Payments on Annuitized Contract 0 0 0 0
Transfer of Contract Administration Charges 0 0 (1,985) (508)
Transfer of Merged Funds (Note 5) 0 0 0 0
Net Assets Transferred Under Assumption Reinsurance 0 0 49,926 30,686
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets
Resulting from Principal Transactions 5,293 279,082 160,317 (35,422)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) In Net Assets 5,321 273,147 426,889 20,863
Net Assets Beginning Balance 0 0 2,995,200 507,266
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 5,321 $ 273,147 $ 3,422,089 $ 528,129
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 5,321 $ 273,147 $ 3,422,089 $ 528,129
Contracts in the Annuity Period 0 0 0 0
--------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 5,321 $ 273,147 $ 3,422,089 $ 528,129
===================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1996 529.5 27,787.1 162,879.1 36,777.8
Units Allocable to Contracts in the Annuity
Period at December 31, 1996 0.0 0.0 0.0 0.0
--------------------- -------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1996 529.5 27,787.1 162,879.1 36,777.8
===================== ==================== ==================== ====================
Accumulation Unit Value at December 31, 1996 $ 10.05 $ 9.83 $ 21.01 $ 14.36
===================== ==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - QUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
====================================================================================
High
Total Reserve Prime Current
Qualified Assets Bond Income
Contracts Fund Fund Fund
===================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 3,346,130 $ 266,215 $ 779,205 $ 393,672
Mortality and Expense Charges (705,982) (48,317) (109,227) (39,102)
--------------------- -------------------- -------------------- --------------------
Net Investment Income (Loss) 2,640,148 217,898 669,978 354,570
--------------------- -------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 1,627,721 0 20,009 (29,616)
Net Unrealized Gains 8,463,128 0 1,248,712 265,190
--------------------- -------------------- -------------------- --------------------
Net Realized and Unrealized Gains 10,090,849 0 1,268,721 235,574
--------------------- -------------------- -------------------- --------------------
Increase in Net Assets
Resulting from Operations 12,730,997 217,898 1,938,699 590,144
--------------------- -------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 1,885,001 163,971 335,187 84,878
Transfer of Contract Owner Withdrawals (11,793,137) (1,384,792) (1,800,688) (697,898)
Transfers In (Out) - Net 189,307 (29,963) (388,386) 1,344
Transfer of Benefit Payments on Annuitized Contract (38,398) (2,383) (11,120) 0
Transfer of Contract Administration Charges (58,547) (4,808) (7,460) (2,535)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (9,815,774) (1,257,975) (1,872,467) (614,211)
--------------------- -------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 2,915,223 (1,040,077) 66,232 (24,067)
Net Assets Beginning Balance 70,469,799 5,381,423 11,114,624 3,959,317
--------------------- -------------------- -------------------- --------------------
Net Assets Ending Balance $ 73,385,022 $ 4,341,346 $ 11,180,856 $ 3,935,250
===================== ==================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 72,954,264 $ 4,320,130 $ 11,111,954 $ 3,935,250
Contracts in the Annuity Period 430,758 21,216 68,902 0
--------------------- -------------------- -------------------- --------------------
Total Contract Owners' Balance $ 73,385,022 $ 4,341,346 $ 11,180,856 $ 3,935,250
===================== ==================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1995 193,727.8 301,463.8 79,516.1
Units Allocable to Contracts in the Annuity
Period at December 31, 1995 951.4 1,869.3 0.0
-------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1995 194,679.2 303,333.0 79,516.1
==================== ==================== ====================
Accumulation Unit Value at December 31, 1995 $ 22.30 $ 36.86 $ 49.49
==================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - QUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
===============================================================
Quality Equity Flexible
Equity Growth Strategy
Fund Fund Fund
===================== ==================== ====================
<S> <C> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 796,672 $ 21,350 $ 961,624
Mortality and Expense Charges (218,042) (49,985) (206,592)
--------------------- -------------------- --------------------
Net Investment Income (Loss) 578,630 (28,635) 755,032
--------------------- -------------------- --------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 822,264 281,374 444,026
Net Unrealized Gains 2,865,864 1,753,667 1,926,979
--------------------- -------------------- --------------------
Net Realized and Unrealized Gains 3,688,128 2,035,041 2,371,005
--------------------- -------------------- --------------------
Increase in Net Assets
Resulting from Operations 4,266,758 2,006,406 3,126,037
--------------------- -------------------- --------------------
Changes from Principal Transactions:
Transfer of Net Premiums 565,557 166,027 495,856
Transfer of Contract Owner Withdrawals (3,110,527) (765,885) (3,508,036)
Transfers In (Out) - Net (265,737) 713,692 79,148
Transfer of Benefit Payments on Annuitized Contract (20,186) 0 (4,709)
Transfer of Contract Administration Charges (18,748) (4,795) (17,621)
--------------------- -------------------- --------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (2,849,641) 109,039 (2,955,362)
--------------------- -------------------- --------------------
Increase (Decrease) in Net Assets 1,417,117 2,115,445 170,675
Net Assets Beginning Balance 21,329,062 4,426,242 20,966,563
--------------------- -------------------- --------------------
Net Assets Ending Balance $ 22,746,179 $ 6,541,687 $ 21,137,238
===================== ==================== ====================
Comprised of:
Contracts in the Accumulation Period $ 22,449,586 $ 6,541,687 $ 21,093,191
Contracts in the Annuity Period 296,593 0 44,047
--------------------- -------------------- --------------------
Total Contract Owners' Balance $ 22,746,179 $ 6,541,687 $ 21,137,238
===================== ==================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1995 406,842.8 188,466.9 932,089.7
Units Allocable to Contracts in the Annuity
Period at December 31, 1995 5,375.0 0.0 1,946.4
--------------------- -------------------- --------------------
Total Units Outstanding at December 31, 1995 412,217.8 188,466.9 934,036.1
===================== ==================== ====================
Accumulation Unit Value at December 31, 1995 $ 55.18 $ 34.71 $ 22.63
===================== ==================== ====================
</TABLE>
<PAGE>
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
MERRILL LYNCH LIFE INSURANCE COMPANY
SUPPLEMENTAL CONSOLIDATING SCHEDULE OF OPERATIONS AND
CHANGES IN NET ASSETS - QUALIFIED CONTRACTS
FOR THE YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Divisions Investing In
==========================================
Natural
American Resources
Balanced Focus
Fund Fund
===================== ====================
<S> <C> <C>
Investment Income (Loss):
Reinvested Dividends $ 116,670 $ 10,722
Mortality and Expense Charges (29,343) (5,374)
--------------------- ---------------------
Net Investment Income (Loss) 87,327 5,348
--------------------- ---------------------
Realized and Unrealized Gains (Losses):
Net Realized Gains (Losses) 84,660 5,004
Net Unrealized Gains 354,234 48,482
--------------------- ---------------------
Net Realized and Unrealized Gains 438,894 53,486
--------------------- ---------------------
Increase in Net Assets
Resulting from Operations 526,221 58,834
--------------------- ---------------------
Changes from Principal Transactions:
Transfer of Net Premiums 62,918 10,607
Transfer of Contract Owner Withdrawals (428,250) (97,061)
Transfers In (Out) - Net 57,844 21,365
Transfer of Benefit Payments on Annuitized Contract 0 0
Transfer of Contract Administration Charges (2,065) (515)
--------------------- ---------------------
Increase (Decrease) in Net Assets
Resulting from Principal Transactions (309,553) (65,604)
--------------------- ---------------------
Increase (Decrease) in Net Assets 216,668 (6,770)
Net Assets Beginning Balance 2,778,532 514,036
--------------------- ---------------------
Net Assets Ending Balance $ 2,995,200 $ 507,266
===================== =====================
Comprised of:
Contracts in the Accumulation Period $ 2,995,200 $ 507,266
Contracts in the Annuity Period 0 0
--------------------- --------------------
Total Contract Owners' Balance $ 2,995,200 $ 507,266
===================== ====================
Units Allocable to Contracts in Accumulation
Period at December 31, 1995 154,870.7 39,692.2
Units Allocable to Contracts in the Annuity
Period at December 31, 1995 0.0 0.0
--------------------- --------------------
Total Units Outstanding at December 31, 1995 154,870.7 39,692.2
===================== ====================
Accumulation Unit Value at December 31, 1995 $ 19.34 $ 12.78
===================== ====================
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill Lynch
Life Insurance Company (the "Company"), a wholly-owned subsidiary
of Merrill Lynch Insurance Group, Inc., as of December 31, 1996
and 1995, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
February 24, 1997
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets
- ------
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 1996 - $3,232,643; 1995 - $3,648,983) $ 3,301,588 $ 3,807,870
Equity securities, at estimated fair value
(cost: 1996 - $32,988; 1995 - $19,683) 35,977 21,433
Mortgage loans 70,503 121,248
Real estate held-for-sale 28,851 5,874
Policy loans on insurance contracts 1,092,071 1,039,267
-------------- --------------
Total Investments 4,528,990 4,995,692
-------------- --------------
CASH AND CASH EQUIVALENTS 94,991 48,924
ACCRUED INVESTMENT INCOME 86,186 91,942
DEFERRED POLICY ACQUISITION COSTS 366,461 372,418
FEDERAL INCOME TAXES - DEFERRED - 2,222
REINSURANCE RECEIVABLES 2,642 1,552
OTHER ASSETS 42,861 54,900
SEPARATE ACCOUNTS ASSETS 7,615,362 6,834,353
-------------- --------------
TOTAL ASSETS $ 12,737,493 $ 12,402,003
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(continued)(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,480,048 $ 4,851,718
Claims and claims settlement expenses 39,666 29,812
-------------- --------------
Total policy liabilities and accruals 4,519,714 4,881,530
OTHER POLICYHOLDER FUNDS 19,420 13,607
LIABILITY FOR GUARANTY FUND ASSESSMENTS 18,773 21,144
FEDERAL INCOME TAXES - DEFERRED 6,714 -
FEDERAL INCOME TAXES - CURRENT 20,968 7,033
AFFILIATED PAYABLES - NET 6,164 2,429
OTHER LIABILITIES 50,726 53,566
SEPARATE ACCOUNTS LIABILITIES 7,605,194 6,825,857
-------------- --------------
Total Liabilities 12,247,673 11,805,166
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 402,937 501,455
Retained earnings 79,387 76,482
Net unrealized investment gain on investment securities 5,496 16,900
-------------- --------------
Total Stockholder's Equity 489,820 596,837
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,737,493 $ 12,402,003
============== ==============
</TABLE>
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 336,661 $ 376,166 $ 433,536
Net realized investment gains (losses) 8,862 4,525 (14,543)
Policy charge revenue 158,829 141,722 126,284
----------- ----------- -----------
Total Revenues 504,352 522,413 545,277
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 235,255 261,760 313,585
Market value adjustment expense 6,071 5,805 6,307
Policy benefits (net of reinsurance recoveries: 1996 - $8,317;
1995 - $6,482; 1994 - $6,338) 21,052 19,374 16,858
Reinsurance premium ceded 15,582 13,896 13,909
Amortization of deferred policy acquisition costs 62,036 58,669 69,662
Insurance expenses and taxes 47,077 44,124 35,073
----------- ----------- -----------
Total Benefits and Expenses 387,073 403,628 455,394
----------- ----------- -----------
Earnings Before Federal Income Tax Provision 117,279 118,785 89,883
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION:
Current 22,814 38,335 22,503
Deferred 15,078 3,968 1,375
----------- ----------- -----------
Total Federal Income Tax Provision 37,892 42,303 23,878
----------- ----------- -----------
NET EARNINGS $ 79,387 $ 76,482 $ 66,005
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 2,000 $ 637,590 $ 47,860 $ (395) $ 687,055
Dividend to Parent (102,140) (47,860) (150,000)
Net earnings 66,005 66,005
Net unrealized investment loss (43,489) (43,489)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 2,000 535,450 66,005 (43,884) 559,571
Dividend to Parent (33,995) (66,005) (100,000)
Net earnings 76,482 76,482
Net unrealized investment gain 60,784 60,784
------------ ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1995 2,000 501,455 76,482 16,900 596,837
Dividend to Parent (98,518) (76,482) (175,000)
Net earnings 79,387 79,387
Net unrealized investment loss (11,404) (11,404)
------------ ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1996 $ 2,000 $ 402,937 $ 79,387 $ 5,496 $ 489,820
============ ============ ============= ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 79,387 $ 76,482 $ 66,005
Adjustments to reconcile net earnings to net cash and
cash equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 62,036 58,669 69,662
Capitalization of policy acquisition costs (43,668) (54,014) (108,829)
Amortization, (accretion) and depreciation of investments (4,836) (6,763) (4,516)
Net realized investment (gains) losses (8,862) (4,525) 14,543
Interest credited to policyholders' account balances 235,255 261,760 313,585
Provision for deferred Federal income tax 15,078 3,968 1,375
Changes in operating assets and liabilities:
Accrued investment income 5,756 3,191 25,204
Affiliated payables - net 3,735 5,542 (2,324)
Claims and claims settlement expenses 9,854 3,635 5,882
Federal income taxes - current 13,935 4,759 (7,848)
Other policyholder funds 5,813 (7,614) (7,547)
Liability for guaranty fund assessments (2,371) (3,630) (3,309)
Policy loans on insurance contracts (52,804) (54,054) (60,634)
Trading investment securities - - 11,352
Other, net 8,106 (9,296) (39,206)
Net cash and cash equivalents provided ----------- ----------- ----------
by operating activities 326,414 278,110 273,395
----------- ----------- ----------
</TABLE>
(Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued) (Dollars In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Sales of available-for-sale securities $ 834,120 $ 633,824 $ 864,095
Maturities of available-for-sale securities 536,449 570,923 1,323,705
Purchases of available-for-sale securities (954,368) (832,519) (678,974)
Mortgage loans principal payments received 22,789 30,767 32,341
Purchases of mortgage loans - (3,608) -
Sales of real estate held-for-sale 5,407 9,710 25,346
Improvements to real estate held-for-sale - improvements acquired - (683) (1,060)
Recapture of investment in Separate Accounts 8,829 6,559 -
Investment in Separate Accounts (10,063) (377) (15,212)
------------- ------------- -------------
Net cash and cash equivalents provided by investing activities 443,163 414,596 1,550,241
------------- ------------- -------------
FINANCING ACTIVITIES:
Dividends paid to parent (175,000) (100,000) (150,000)
Policyholders' account balances:
Deposits 542,062 567,430 966,861
Withdrawals (net of transfers to/from Separate Accounts) (1,090,572) (1,250,299) (2,623,628)
------------- ------------ ------------
Net cash and cash equivalents used by financing activities (723,510) (782,869) (1,806,767)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 46,067 (90,163) 16,869
CASH AND CASH EQUIVALENTS
Beginning of year 48,924 139,087 122,218
------------- ------------ ------------
End of year $ 94,991 $ 48,924 $ 139,087
============= ============ ============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 8,880 $ 33,576 $ 30,351
Intercompany interest 988 1,310 679
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: Merrill Lynch Life Insurance Company (the
"Company") is a wholly-owned subsidiary of Merrill Lynch
Insurance Group, Inc. ("MLIG"). The Company is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch & Co.").
The Company sells non-participating life insurance and annuity
products which comprise one business segment. The primary
products that the Company currently markets are immediate
annuities, market value adjusted annuities, variable life
insurance and variable annuities. The Company is currently
licensed to sell insurance in forty-nine states, the District
of Columbia, the U.S. Virgin Islands and Guam. The Company
markets its products solely through the retail network of
Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("MLPF&S"),
a wholly-owned subsidiary of Merrill Lynch & Co.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles and
prevailing industry practices, both of which require management
to make estimates that affect the reported amounts and
disclosure of contingencies in the financial statements. Actual
results could differ from those estimates.
Revenue Recognition: Revenues for the Company's interest-
sensitive life, interest-sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholders' account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest-crediting rates for the
Company's fixed-rate products are as follows:
Interest-sensitive life products 4.00% - 5.75%
Interest-sensitive deferred annuities 3.20% - 8.77%
Immediate annuities 3.00% - 10.00%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are
unreported.
Reinsurance: In the normal course of business, the Company
seeks to limit its exposure to loss on any single insured life
and to recover a portion of benefits paid by ceding reinsurance
to other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and
coinsurance agreements. The maximum amount of mortality risk
retained by the Company is approximately $500 on a single life.
Indemnity reinsurance agreements do not relieve the Company
from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses to the Company.
The Company regularly evaluates the financial condition of its
reinsurers so as to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under
reinsurance agreements in the form of letters of credit and
funds withheld totaling $576 that can be drawn upon for
delinquent reinsurance recoverables.
As of December 31, 1996, the Company had life insurance in-
force that was ceded to other life insurance companies of
$2,511,780.
Deferred Policy Acquisition Costs: Policy acquisition costs for
life and annuity contracts are deferred and amortized based on
the estimated future gross profits for each group of contracts.
These future gross profit estimates are subject to periodic
evaluation by the Company, with necessary revisions applied
against amortization to date. It is reasonably possible that
estimates of future gross profits could be reduced in the
future, resulting in a material reduction in the carrying
amount of deferred policy acquisition costs.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, that are primarily
related to and vary with the production of new business.
Certain costs and expenses reported in the statements of
earnings are net of amounts deferred. Policy acquisition costs
can also arise from the acquisition or reinsurance of existing
in-force policies from other insurers. These costs include
ceding commissions and professional fees related to the
reinsurance assumed. The deferred costs are amortized in
proportion to the estimated future gross profits over the
anticipated life of the acquired insurance contracts utilizing
an interest methodology.
The Company has entered into an assumption reinsurance
agreement with an unaffiliated insurer. The acquisition costs
relating to this agreement are being amortized over a twenty-
year period using an effective interest rate of 9.01%. This
reinsurance agreement provides for payment of contingent ceding
commissions based upon the persistency and mortality experience
of the insurance contracts assumed. Any payments made for the
contingent ceding commissions will be capitalized and amortized
using an identical methodology as that used for the initial
acquisition costs. The following is a reconciliation of the
acquisition costs related to the reinsurance agreement for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 124,833 $ 133,388 $ 139,647
Capitalized amounts 5,077 13,708 12,517
Interest accrued 10,669 11,620 12,582
Amortization (28,330) (33,883) (31,358)
----------- ----------- -----------
Ending balance $ 112,249 $ 124,833 $ 133,388
=========== =========== ===========
</TABLE>
The following table presents the expected amortization, net of
interest accrued, of these deferred acquisition costs over the
next five years. The amortization may be adjusted based on
periodic evaluation of the expected gross profits on the
reinsured policies.
1997 $12,547
1998 8,958
1999 8,474
2000 8,142
2001 7,811
Investments: The Company's investments in fixed maturity and
equity securities are classified as available-for-sale
securities, which are carried at estimated fair value with
unrealized gains and losses included in stockholder's equity.
If a decline in value of a security is determined by management
to be other-than-temporary, the carrying value is adjusted to
the estimated fair value at the date of this determination and
recorded in theas net realized investment gains (losses).
During 1994, the Company classified certain of its investments
as trading securities, which were carried at estimated fair
value with unrealized gains and losses included in the
statements of earnings. All securities that were classified as
trading securities on November 1, 1994 were transferred to the
available-for-sale classification at their respective estimated
fair values on that date. The difference between the market
value at November 1, 1994 and par value is being amortized into
income based on the Company's premium amortization and discount
accretion policies.
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accreted to
the maturity date, and interest income is accrued daily. For
equity securities, dividends are recognized on the ex-dividend
date. Realized gains and losses on the sale or maturity of the
investments are determined on the basis of identified cost.
Fixed maturity securities may contain securities which are
considered non-investment grade. The Company defines non-
investment grade fixed maturity securities as unsecured
corporate debt obligations that do not have a rating equivalent
to Standard and Poor's (or similar rating agency) BBB or higher
and are not guaranteed by an agency of the Federal government.
The Company has outstanding certain interest rate swap
contracts that are carried at estimated fair value and recorded
as a component of fixed maturity securities. Interest income
and realized and unrealized gains and losses are recorded on
the same basis as fixed maturity securities available-for-sale.
Mortgage loans are stated at unpaid principal balances, net of
valuation allowances. Such valuation allowances are based on
the decline in value expected to be realized on mortgage loans
that may not be collectible in full. In establishing valuation
allowances, management considers, among other things, the
estimated fair value of the underlying collateral.
The Company recognizes income from mortgage loans based on the
cash payment interest rate of the loan, which may be different
from the accrual interest rate of the loan for certain
outstanding mortgage loans. The Company will recognize a
realized gain at the date of the satisfaction of the loan at
contractual terms for loans where there is a difference between
the cash payment interest rate and the accrual interest rate.
For all loans the Company stops accruing income when an
interest payment default either occurs or is probable.
Impairments of mortgage loans are established as valuation
allowances and recorded to net realized investment gains or
losses.
The Company has previously made commercial mortgage loans
collateralized by real estate. The return on and the ultimate
recovery of these loans are generally dependent on the
successful operation, sale or refinancing of the real estate.
The Company monitors the effects of current and expected real
estate market conditions and other factors when assessing the
collectibility of mortgage loans. When, in management's
judgment, these assets are impaired, appropriate losses are
recorded. Such estimates necessarily include assumptions, which
may include anticipated improvements in selected market
conditions for real estate, which may or may not occur. The
more significant assumptions management considers involve
estimates of the following: lease absorption and sales rate;
real estate values and rates of return; operating expenses;
required capital improvements; inflation; and sufficiency of
any collateral independent of the real estate. Management
believes that the carrying value approximates the fair value of
these investments.
Real estate held-for-sale, is stated at cost less valuation
allowances and estimated selling costs.
Policy loans on insurance contracts are stated at unpaid
principal balances.
Income Taxes: The results of operations of the Company are
included in the consolidated Federal income tax return of
Merrill Lynch & Co. The Company has entered into a tax-sharing
agreement with Merrill Lynch & Co. whereby the Company will
calculate its current tax provision based on its operations.
Under the agreement, the Company periodically remits to Merrill
Lynch & Co. its current Federal tax liability.
The Company uses the asset and liability method in providing
income taxes on all transactions that have been recognized in
the financial statements. The asset and liability method
requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or
realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other
changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums
and in substantially all states are exempt from state income
taxes.
Separate Accounts: Separate Accounts are established in
conformity with Arkansas State Insurance law, the Company's
domiciliary state, and are generally not chargeable with
liabilities that arise from any other business of the Company.
Separate Accounts assets may be subject to general claims of
the Company only to the extent the value of such assets exceeds
Separate Accounts liabilities.
Assets and liabilities of Separate Accounts, representing net
deposits and accumulated net investment earnings less fees,
held primarily for the benefit of policyholders, are shown as
separate captions in the balance sheets.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that
approximate the fair value. The carrying value of financial
instruments as of December 31 were:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets:
Fixed maturity securities:
Securities (1) $ 3,301,858 $ 3,807,310
Interest rate swaps (2) (270) 560
-------------- --------------
Total fixed maturity securities 3,301,588 3,807,870
-------------- --------------
Equity securities (1) 35,977 21,433
Mortgage loans (3) 70,503 121,248
Policy loans on insurance contracts (4) 1,092,071 1,039,267
Cash and cash equivalents (5) 94,991 48,924
Separate Accounts assets (6) 7,615,362 6,834,353
-------------- ---------------
Total financial instruments recorded as assets $ 12,210,492 $ 11,873,095
============== ===============
</TABLE>
(1) For publicly traded securities, the estimated fair value
is determined using quoted market prices. For securities
without a readily ascertainable market value, the Company
has determined an estimated fair value using a discounted
cash flow model, including provision for credit risk,
based upon the assumption that such securities will be
held to maturity. Such estimated fair values do not
necessarily represent the values for which these
securities could have been sold at the dates of the
balance sheets. At December 31, 1996 and 1995, securities
without a readily ascertainable market value, having an
amortized cost of $338,515, and $425,469, had an estimated
fair value of $348,066, and $448,785, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cash flow model.
(3) The estimated fair value of mortgage loans approximates
the carrying value. See Note 1 for a discussion of the
Company's valuation process.
(4) The Company estimates the fair value of policy loans as
equal to the book value of the loans. Policy loans are
fully collateralized by the account value of the
associated insurance contracts, and the spread between the
policy loan interest rate and the interest rate credited
to the account value held as collateral is fixed.
(5) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(6) Assets held in Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity securities and equity securities as of December
31 were:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Corporate debt securities $ 2,652,225 $ 67,590 $ 11,765 $ 2,708,050
Mortgage-backed securities 503,997 12,447 1,948 514,496
U.S. Government and agencies 54,386 2,303 158 56,531
Foreign governments 18,111 182 140 18,153
Municipals 3,924 434 - 4,358
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 3,232,643 $ 82,956 $ 14,011 $ 3,301,588
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 30,554 $ 2,983 $ 85 $ 33,452
Common stocks 2,434 91 - 2,525
--------------- -------------- -------------- --------------
Total equity securities $ 32,988 $ 3,074 $ 85 $ 35,977
=============== ============== ============== ==============
1995
------------------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Fixed maturity securities:
Corporate debt securities $ 2,917,628 $ 138,159 $ 7,526 $ 3,048,261
Mortgage-backed securities 625,866 22,098 717 647,247
U.S. Government and agencies 95,002 6,061 - 101,063
Foreign governments 6,210 280 - 6,490
Municipals 4,277 532 - 4,809
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 3,648,983 $ 167,130 $ 8,243 $ 3,807,870
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 16,937 $ 1,428 $ 113 $ 18,252
Common stocks 2,746 498 63 3,181
-------------- -------------- -------------- --------------
Total equity securities $ 19,683 $ 1,926 $ 176 $ 21,433
============== ============== ============== ==============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996 by contractual maturity were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Fixed maturity securities:
Due in one year or less $ 270,571 $ 271,303
Due after one year through five years 1,486,819 1,521,334
Due after five years through ten years 763,475 781,372
Due after ten years 207,781 213,083
------------- -------------
2,728,646 2,787,092
Mortgage-backed securities 503,997 514,496
------------- -------------
Total fixed maturity securities $ 3,232,643 $ 3,301,588
============= =============
</TABLE>
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996 by rating agency equivalent
were:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
AAA $ 716,749 $ 730,513
AA 181,962 185,000
A 910,355 932,417
BBB 1,245,457 1,272,901
Non-investment grade 178,120 180,757
------------- -------------
Total fixed maturity securities $ 3,232,643 $ 3,301,588
============= =============
</TABLE>
<PAGE>
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in
connection with investments classified as available-for-sale.
The Company adjusts those assets and liabilities as if the
unrealized investment gains or losses from securities
classified as available-for-sale had actually been realized,
with corresponding credits or charges reported directly to
stockholder's equity. The following reconciles the net
unrealized investment gain on investment securities classified
as available-for-sale as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Assets:
Fixed maturity securities $ 68,945 $ 158,887
Equity securities 2,989 1,750
Deferred policy acquisition costs (4,630) (17,041)
Federal income taxes - deferred (2,959) (9,100)
Separate Accounts assets 168 (164)
------------- -------------
64,513 134,332
------------- -------------
Liabilities:
Policyholders' account balances 59,017 117,432
------------- -------------
Stockholder's equity:
Net unrealized investment gain on investment securities $ 5,496 $ 16,900
============= =============
</TABLE>
The Company has entered into interest rate swap contracts for
the purpose of minimizing exposure to fluctuations in interest
rates related to specific investment securities held.
The notional amount of such swaps outstanding at December 31,
1996 and 1995 was approximately $9,000 and $30,000,
respectively. The swaps were transacted with investment
grade counterparties. As of December 31, 1996, the Company's
interest rate swap contract was in a $270 unrealized loss
position. There were no outstanding interest rate swaps in a
loss position at December 31, 1995. During 1994, net realized
investment gains of $470 were recorded in connection with
interest rate swap activity. During 1996 and 1995, there
were no realized investment gains or losses recorded.
Proceeds and gross realized investment gains and losses from
the sale of available-for-sale securities for the years ended
December 31 were:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Proceeds $ 834,120 $ 633,824 $ 864,095
Gross realized investment gains 19,078 14,196 11,091
Gross realized investment losses 10,749 10,813 11,026
</TABLE>
During 1994, $7,285 of unrealized holding losses from
investment trading securities were recorded in net realized
investment gains (losses).
The Company owned investment securities with a carrying
value of $27,726 and $28,166 that were deposited with
insurance regulatory authorities at December 31, 1996 and
1995, respectively.
At December 31, 1996 and 1995, the Company had invested
$10,168 and $8,496 in Separate Accounts, including unrealized
gains (losses) of $168 and $(164), respectively. The
investments in Separate Accounts are for the purpose of
providing original funding of certain mutual fund portfolios
available as investment options to variable life and annuity
policyholders.
The Company's investment in mortgage loans are principally
collateralized by commercial real estate. The largest
concentrations of commercial real estate mortgage loans at
December 31, 1996, as measured by the outstanding principal
balance, are for properties located in Illinois ($27,877 or
32%), Rhode Island ($19,291 or 22%) and California ($11,953 or
14%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1996
and 1995 are:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Carrying value $ 44,239 $ 88,068
Valuation allowance 17,652 35,881
</TABLE>
Additional information on impaired loans for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Average investment in impaired loans $ 61,891 $ 123,949 $ 112,043
Interest income recognized (cash-basis) 4,848 5,482 6,542
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, $28,555,
$1,300 and $4,652, respectively, of real estate held-for-sale
was acquired in satisfaction of debt.
<PAGE>
Net investment income arose from the following sources for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities $ 266,916 $ 305,648 $ 368,023
Equity securities 1,876 1,329 2,408
Mortgage loans 9,764 12,250 15,014
Real estate held-for-sale 563 153 406
Policy loans on insurance contracts 56,512 53,576 50,232
Cash and cash equivalents 6,710 8,463 5,936
Other 899 1,753 (447)
----------- ----------- ------------
Gross investment income 343,240 383,172 441,572
Less investment expenses (6,579) (7,006) (8,036)
----------- ----------- ------------
Net investment income $ 336,661 $ 376,166 $ 433,536
=========== =========== ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturity securities $ 4,690 $ 1,908 $ (13,314)
Equity securities 3,639 1,475 910
Investment in Separate Accounts 106 (369) -
Mortgage loans 599 334 (4,967)
Real estate held-for-sale (171) 1,177 2,828
Cash and cash equivalents (1) - -
----------- ----------- -----------
Net realized investment gains (losses) $ 8,862 $ 4,525 $ (14,543)
=========== =========== ===========
</TABLE>
The following is a reconciliation of the change in valuation
allowances that have been recorded to reflect other-than-
temporary declines in estimated fair value of mortgage loans
and real estate held-for-sale for the years ended December 31:
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Mortgage loans:
1996 $ 35,881 $ - $ 18,229 $ 17,652
1995 40,070 - 4,189 35,881
1994 45,924 4,966 10,820 40,070
Real estate held-for-sale:
1996 2,200 - - 2,200
1995 5,766 - 3,566 2,200
1994 7,628 - 1,862 5,766
</TABLE>
<PAGE>
The Company held investments at December 31, 1996 of $1,182
which have been non-income producing for the preceding twelve
months.
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1996, $2,027 has been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income
taxes based on earnings before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Provision for income taxes computed at Federal statutory rate $ 41,048 $ 41,575 $ 31,459
Increase (decrease) in income taxes resulting from:
Release of policyholders' surplus - 1,991 -
Tax deductible interest - (718) -
Dividend received deduction (3,135) (532) (7,363)
Other (21) (13) (218)
----------- ----------- -----------
Federal income tax provision $ 37,892 $ 42,303 $ 23,878
=========== =========== ===========
</TABLE>
The Federal statutory rate for each of the three years in the
period ended December 31, 1996 was 35%.
The Company provides for deferred income taxes resulting from
temporary differences that arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Deferred policy acquisition costs $ (5,770) $ (2,179) $ 6,416
Policyholders' account balances 15,004 66 5,322
Liability for guaranty fund assessments 760 249 (153)
Investment adjustments 5,122 5,563 3,276
Other (38) 269 (13,486)
------------ ----------- -----------
Deferred Federal income tax provision $ 15,078 $ 3,968 $ 1,375
============ =========== ===========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31 are
determined as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 79,083 $ 94,087
Investment adjustments 5,671 10,793
Liability for guaranty fund assessments 6,571 7,331
----------- -----------
Total deferred tax assets 91,325 112,211
=========== ===========
Deferred tax liabilities:
Deferred policy acquisition costs 91,092 96,862
Net unrealized investment gain on investment securities 2,959 9,100
Other 3,988 4,027
----------- -----------
Total deferred tax liabilities 98,039 109,989
----------- -----------
Net deferred tax asset (liability) $ (6,714) $ 2,222
=========== ===========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized; therefore no valuation allowance has been provided.
<PAGE>
NOTE 5. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain accounting, data processing,
legal, actuarial, management, advertising and other services to
the Company. Expenses incurred by MLIG in relation to this
service agreement are reimbursed by the Company on an allocated
cost basis. Charges billed to the Company by MLIG pursuant to
the agreement were $43,515, $41,729 and $43,497 for the years
ended December 31, 1996, 1995 and 1994, respectively. The
Company is allocated interest expense on its accounts payable
to MLIG which approximates the daily Federal funds rate. Total
intercompany interest paid was $988, $1,310 and $679 for 1996,
1995 and 1994, respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM")
are parties to a service agreement whereby MLAM has agreed to
provide certain invested asset management services to the
Company. The Company pays a fee to MLAM for these services
through the MLIG service agreement. Charges attributable to
this agreement and allocated to the Company by MLIG were
$2,279, $2,635 and $2,732 for 1996, 1995 and 1994,
respectively.
MLAM and MLIG have entered into an agreement with respect to
administrative services for the Merrill Lynch Series Fund, Inc.
("Series Fund") and Merrill Lynch Variable Series Funds, Inc.
("Variable Series Funds"). The Company invests in the various
mutual fund portfolios of the Series Fund and the Variable
Series Funds in connection with the variable life and annuities
the Company has in-force. Under this agreement, MLAM pays
compensation to MLIG in an amount equal to a portion of the
annual gross investment advisory fees paid by the Series Fund
and the Variable Series Funds to MLAM. The Company received
from MLIG its allocable share of such compensation in the
amount of $16,514, $13,293 and $12,600 during 1996, 1995 and
1994, respectively.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S, who are the Company's licensed insurance agents,
solicit applications for contracts to be issued by the Company.
MLLA is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were $42,639, $43,984 and $84,231 for
1996, 1995 and 1994, respectively. Substantially all of these
commissions were capitalized as deferred policy acquisition
costs and are being amortized in accordance with the policy
discussed in Note 1.
The Company has entered into interest rate swap contracts with
Merrill Lynch Capital Services, Inc. ("MLCS") with a guarantee
from Merrill Lynch & Co. As of December 31, 1996 and 1995, the
notional amount of such interest rate swap contracts
outstanding was $9,000 and $10,000, respectively. During 1994,
the Company and MLCS terminated certain interest rate swap
contracts resulting in the Company paying a net consideration
of $2,043. Net interest received from these interest rate swap
contracts was $(117), $256, and $782 for 1996, 1995 and 1994,
respectively.
<PAGE>
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1996, 1995, and 1994 the Company paid dividends of
$175,000, $100,000, and $150,000, respectively, to MLIG. Of
these stockholder's dividends, $175,000, $73,757, and $112,779,
respectively, were extraordinary dividends as defined by
Arkansas Insurance Law and were paid pursuant to approval
granted by the Arkansas Insurance Commissioner.
At December 31, 1996 and 1995, approximately $24,970 and
$30,195, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1996 and 1995, was $251,697 and $303,950,
respectively.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial
statements by charging policy acquisition costs to expense as
incurred, establishing future policy benefit reserves using
different actuarial assumptions, not providing for deferred
income taxes, and valuing securities on a different basis. The
Company's statutory net income for 1996, 1995 and 1994 was
$93,532, $121,451 and $42,382, respectively.
The National Association of Insurance Commissioners ("NAIC")
utilizes the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital which
a life insurance company should have based upon that company's
risk profile. As of December 31, 1996 and 1995, based on the
RBC formula, the Company's total adjusted capital level was
403% and 395%, respectively, of the minimum amount of capital
required to avoid regulatory action.
NOTE 7. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result
of the insolvency of an insurer. At the time an insolvency
occurs, the guaranty association assesses the remaining members
of the association an amount sufficient to satisfy the
insolvent insurer's policyholder obligations (within specified
limits). During 1991, and to a lesser extent 1992, there were
certain highly publicized life insurance insolvencies. The
Company has utilized public information to estimate what future
assessments it will incur as a result of these insolvencies. At
December 31, 1996 and 1995, the Company has established an
estimated liability for future guaranty fund assessments of
$18,773 and $21,144, respectively. The Company regularly
monitors public information regarding insurer insolvencies and
will adjusts its estimated liability as appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
* * * * * *
