NEW YORK PREFERRED ADVISOR PROSPECTUS
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VARIABLE ACCOUNT-K
AND
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
The variable annuity contract (form number FLEX(4V)NY, referred to as the
"Contract") described in this prospectus provides for accumulation of
Contract Values on a variable basis and the payment of periodic annuity
payments on a fixed and/or a variable basis. The Contract is designed for use
by individuals for retirement planning purposes.
Purchase payments will be allocated to a segregated investment account of
Liberty Life Assurance Company of Boston ("Liberty Life"), designated the
Variable Account-K ("Variable Account"). The Variable Account currently
invests in shares of the following Eligible Funds of SteinRoe Variable
Investment Trust ("SteinRoe Trust") at their respective net asset values:
Cash Income Fund ("CIF"); Mortgage Securities Income Fund ("MSIF"); Managed
Assets Fund ("MAF"); Managed Growth Stock Fund ("MGSF"); and Capital
Appreciation Fund ("CAF"). The Variable Account also invests in shares of the
following Eligible Funds of Keyport Variable Investment Trust ("Keyport
Trust") at their net asset value: Colonial-Keyport Growth and Income Fund
("CKGIF"); Colonial-Keyport Strategic Income Fund ("CKSIF"); Colonial-Keyport
Utilities Fund ("CKUF"); Colonial-Keyport U.S. Stock Fund ("CKUSF"); Colonial-
Keyport International Fund for Growth ("CKIFG") and Newport-Keyport Tiger
Fund ("NKTF").
Liberty Life may also offer group variable annuity contracts issued with
respect to the Variable Account. Any such group contract would be offered by
a separate prospectus.
A Statement of Additional Information dated the same as this prospectus has
been filed with the Securities and Exchange Commission and is herein
incorporated by reference. It is available, at no charge, by writing the
Distributor, Keyport Financial Services Corp. at 125 High Street, Boston, MA
02110, by calling Liberty Life's Service Office at (800) 437-4466, or by
returning the postcard on the back cover of this prospectus. A table of
contents for the Statement of Additional Information is on Page 23.
The Contract may be sold by or through banks or other depository
institutions. The Contract: is not insured by the FDIC; is not a deposit or
other obligation of, or guaranteed by, the depository institution; and is
subject to investment risks, including the possible loss of principal amount
invested.
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.
THIS PROSPECTUS SETS FORTH THE INFORMATION A PROSPECTIVE INVESTOR SHOULD KNOW
BEFORE INVESTING. THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE OR JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED BY
LIBERTY LIFE TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING,
AND IF GIVEN OR MADE, SUCH UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD
NOT BE RELIED UPON.
The date of this prospectus is May 1, 1997
TABLE OF CONTENTS
Page
Glossary of Special Terms 3
Summary of Expenses 4
Synopsis 6
Condensed Financial Information 7
Liberty Life and the Variable Account 8
Purchase Payments and Applications 9
Investments of the Variable Account 9
Allocations of Purchase Payments 9
Eligible Funds 10
Dollar Cost Averaging 11
Transfer of Contract Value 12
Substitution of Eligible Funds and Other Variable
Account Changes 13
Deductions 13
Deductions for Contract Maintenance Charge 13
Deductions for Mortality and Expense Risk Charge 13
Deductions for Daily Sales Charge 14
Deductions for Contingent Deferred Sales Charge 14
Deductions for Transfers of Contract Value 15
Deductions for Premium Taxes 15
Deductions for Income Taxes 15
Total Expenses 15
The Contracts 15
Contract Value 15
Valuation Periods 15
Net Investment Factor 15
Modification of the Contract 16
Right to Revoke 16
Death Provisions for Non-Qualified Contracts 16
Death Provisions for Qualified Contracts 17
Ownership 17
Assignment 18
Surrenders 18
Annuity Provisions 18
Annuity Benefits 18
Income Date and Settlement Option 18
Change in Income Date and Settlement Option 18
Settlement Options 18
Variable Annuity Payment Values 19
Fixed Annuity Payment Values 20
Proof of Age, Sex, and Survival of Annuitant 20
Suspension of Payments 20
Tax Status 20
Introduction 20
Taxation of Annuities in General 20
Qualified Plans 21
Tax-Sheltered Annuities 22
Individual Retirement Annuities 22
Corporate Pension and Profit-Sharing Plans 22
Deferred Compensation Plans with Respect to
Service for State and Local Governments 22
Variable Account Voting Rights 22
Distribution of the Contract 23
Legal Proceedings 23
Inquiries by Contract Owners 23
Table of Contents_Statement of Additional Information 23
Appendix A_Telephone Instructions 24
Appendix B_Dollar Cost Averaging 25
GLOSSARY OF SPECIAL TERMS
Accumulation Unit: An accounting unit of measure used to calculate Contract
Value.
Annuitant: The Annuitant is the natural person to whom any annuity payments
will be made starting on the Income Date. The Annuitant may not be over age
80 on the Issue Date (age 75 for Qualified Contracts).
Contract Anniversary: The same month and day as the Issue Date in each
subsequent year of the Contract.
Contract Owner: The person (or persons in the case of joint ownership) who
possesses all the ownership rights under the Contract. An owner may not be
over age 80 on the Issue Date (age 75 for Qualified Contracts).
Contract Value: The sum of all amounts under the Contract, prior to the
Income Date, less any surrenders.
Contract Year: Any period of 12 months commencing with the Issue Date and
each Contract Anniversary thereafter shall be a Contract Year.
Designated Beneficiary: The person who may be entitled to receive benefits
following the death of the Annuitant or Contract Owner. The Designated
Beneficiary will be the first person among the following who is alive on the
date of death: primary owner; joint owner; primary beneficiary; contingent
beneficiary; and if no one is alive, the primary owner's estate. If the
primary owner and joint owner are both alive, they will be the Designated
Beneficiary together.
Eligible Funds: The mutual funds that are eligible investments for the
Variable Account.
In Force: The status of the Contract before the Income Date so long as it is
not totally surrendered and there has not been a death of the Annuitant or
any Contract Owner that will cause the Contract to end within at most five
years of the date of death.
Income Date: The date on which annuity payments are to begin.
Issue Date: The effective date of the Contract; it is shown on Page 3 of the
Contract.
Non-Qualified Contract: Any Contract that is not issued under a Qualified
Plan.
Qualified Contract: Contracts issued under Qualified Plans.
Qualified Plan: A retirement plan established pursuant to the provisions of
Sections 401, 403 or 408 of the Internal Revenue Code. Liberty Life treats
Section 457 plans as Qualified Plans.
Service Office: Liberty Life's Service Office, which is 125 High Street,
Boston, Massachusetts 02110.
Surrender Value: The Contract Value less deductions made upon a total
surrender of the Contract. See "Surrenders" on Page 18.
Variable Account: A separate investment account of Liberty Life, designated
Variable Account-K, into which purchase payments may be allocated. The
Variable Account is divided into Sub-Accounts ("Sub-Account" or "Investment
Account") that correspond to the Eligible Funds in which they invest.
Written Request: A request written on a form satisfactory to Liberty Life,
signed by the Contract Owner and a disinterested witness, and filed at its
Service Office.
SUMMARY OF EXPENSES
The expense summary format below, including the examples, was adopted by the
Securities and Exchange Commission to assist the owner of a variable annuity
contract in understanding the transaction and operating expenses the owner
will directly or indirectly bear under a contract. The values reflect
expenses of the Variable Account as well as the Eligible Funds. The expenses
shown for the Eligible Funds are from 1996 and the examples should not be
considered a representation of future expenses.
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of purchase payments): 7%1
Years from Date of Payment Sales Charge
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 or later 0%
Maximum Total Contract Owner Transaction Expenses2
(as a percentage of purchase payments): 7%
Annual Contract Fee $36
Variable Account Annual Expenses
(as a percentage of average net assets)
Mortality and Expense Risk Charge: 1.25%
Asset-based Sales Charge: .15%
Total Variable Account Annual Expenses 1.40%
SteinRoe Trust and Keyport Trust Annual Expenses3,4
(as a percentage of average net assets)
Management Other Total Fund
Fund Fees Expenses Operating Expenses
CIF .50% .15% .65%
MSIF .55 .15 .70 (.72)4
CKGIF .65 .14 .79
CKSIF .65 .15 .80 (.86%)3
MAF .60 .07 .67
CKUF .65 .16 .81
MGSF .65 .08 .73
CKUSF .80 .15 .95
CAF .65 .10 .75
CKIFG .90 .50 1.40
NKTF .90 .37 1.27
Example #1_Assuming surrender of the Contract at the end of the periods
shown.5
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
CIF $ 91 $ 118 $ 155 $ 303
MSIF 92 120 157 309
CKUSF 94 127 171 341
CKGIF 93 123 163 321
MAF 92 119 156 305
CKSIF 93 123 163 322
CKUF 93 123 164 323
MGSF 92 121 159 313
CAF 93 122 162 319
CKIFG 99 141 196 396
NKTF 98 137 189 381
Example #2_Assuming annuitization of the Contract at the end of the periods
shown.5
A $1,000 investment in each Sub-Account listed would be subject to the
expenses shown, assuming 5% annual return on assets.
Sub-Account 1 Year 3 Years 5 Years 10 Years
CIF $ 21 $ 69 $ 125 $ 303
MSIF 22 71 127 309
CKUSF 24 79 141 341
CKGIF 23 74 133 321
MAF 22 70 126 305
CKSIF 23 74 133 322
CKUF 23 74 134 323
MGSF 22 71 129 313
CAF 22 72 130 319
CKIFG 29 93 166 396
NKTF 28 89 159 381
Example #3_Assuming the Contract stays in force through the periods shown.
A $1,000 investment in each Sub-Account listed would be subject to the same
expenses shown in Example #2, assuming 5% annual return on assets.
1Contingent Deferred Sales Charges are deducted only if the Contract is fully
or partially surrendered. A surrender will not incur the charge percentage
shown to the extent the amount of that surrender does not exceed the
Contract's increase in value at the time of surrender or, after the first
Contract Year, 10% of the Contract Value on the prior Contract Anniversary if
this 10% amount is greater. The full amount of the Contingent Deferred Sales
Charge will not be deducted if (a) such amount plus any prior Contingent
Deferred Sales Charges plus the cumulative .15% asset-based sales charge
exceeds (b) the Contract's maximum cumulative sales charge of 8.5% of the
total purchase payments made to the Contract. If the (a) amount exceeds the
(b) amount, the full amount of the Charge will be reduced by the excess
amount.
2Liberty Life reserves the right to impose a transfer fee after prior notice
to Contract Owners, but currently does not impose any charge. Premium taxes
are not shown. Liberty Life deducts the amount of premium taxes, if any, when
paid unless Liberty Life elects to defer such deduction.
3Keyport Trust's manager has agreed until 4/30/98 to reimburse all expenses,
including management fees, in excess of the following percentage of the
average annual net assets of each Fund, so long as such reimbursement would
not result in the Fund's inability to qualify as a regulated investment
company under the Internal Revenue Code: .80% for CKSIF; 1.75% for CKIFG and
NKTF, and 1.00% for CKUF, CKGIF and CKUSF. For CKSIF, the .80% shown in the
table is after expense reimbursement and the .86% shown in the parentheses is
what the total would have been in the absence of expense reimbursement.
4SteinRoe Trust's adviser has voluntarily agreed until 4/30/98 to reimburse
all expenses, including management fees, in excess of the following
percentage of the average annual net assets of each Fund, so long as such
reimbursement would not result in the Fund's inability to qualify as a
regulated investment company under the Internal Revenue Code: .65% for CIF;
.70% for MSIF; .75% for MAF; .80% for MGSF and CAF. For MSIF, the .70% shown
in the table is after expense reimbursement and the .72% shown in the
parentheses is what the total would have been in the absence of expense
reimbursement.
5The annuity is designed for retirement planning purposes. Surrenders prior
to the Income Date are not consistent with the long-term purposes of the
Contract and the applicable tax laws.
The examples should not be considered a representation of past or future
expenses and charges of the Sub-Accounts. Actual expenses may be greater or
less than those shown. Similarly, the assumed 5% annual rate of return is not
an estimate or a guarantee of future investment performance. See "Deductions"
in this prospectus, "How the Funds are Managed" in the prospectus for
SteinRoe Variable Investment Trust, and "Trust Management Organizations" and
"Expenses of the Funds" in the prospectus for Keyport Variable Investment
Trust.
SYNOPSIS
The Contract allows Contract Owners to allocate purchase payments to the
Variable Account only. The Variable Account is a separate investment account
maintained by Liberty Life. Contract Owners may receive annuity payments from
the Variable Account and/or Fixed Account. The Fixed Account is part of
Liberty Life's "general account", which consists of all Liberty Life's assets
except the Variable Account and the assets of other separate accounts
maintained by Liberty Life. The Contract Value and annuity payments made from
the Variable Account will fluctuate according to the investment performance
of the Eligible Funds chosen. If the Contract Owner selects a fixed annuity
payment option from the Fixed Account, annuity payments will be of a fixed
amount.
The Contract permits purchase payments to be made on a flexible purchase
payment basis. The minimum initial payment is $5,000. The minimum amount for
each subsequent payment is $1,000 or such lesser amounts as Liberty Life may
permit from time to time for certain types of contracts (currently $250).
(See "Purchase Payments and Applications" on Page 9.)
There are no deductions made from purchase payments for sales charges at the
time of purchase. A Contingent Deferred Sales Charge may be deducted in the
event of a total or partial surrender (see "Surrenders" on Page 18). The
Contingent Deferred Sales Charge is based on a graded table of charges. The
charge will not exceed 7% of that portion of the amount surrendered that
represents purchase payments made during the seven years immediately
preceding the request for surrender. (See "Deductions for Contingent Deferred
Sales Charge" on Page 14.) Liberty Life deducts a sales charge which is equal
on an annual basis to .15% of the average daily net asset values in the
Variable Account attributable to the Contracts. (See "Deductions for Daily
Sales Charge" on Page 14.)
Liberty Life deducts a Mortality and Expense Risk Charge, which is equal on
an annual basis to 1.25% of the average daily net asset values in the
Variable Account attributable to the Contracts. (See "Deductions for
Mortality and Expense Risk Charge" on Page 13.)
Liberty Life deducts an annual Contract Maintenance Charge (currently $36.00)
from the Contract Value for administrative expenses. Prior to the Income
Date, Liberty Life reserves the right to change this charge for future years.
(See "Deductions for Contract Maintenance Charge" on Page 13.)
Premium taxes will be charged against Contract Value. Currently such premium
taxes range from 0% to 5.0%. (See "Deductions for Premium Taxes" on Page 15.)
There are no federal income taxes on increases in the value of a Contract
until a distribution occurs, in the form of a lump sum payment, annuity
payments, or the making of a gift or assignment of the Contract. A federal
penalty tax (currently 10%) may also apply. (See "Tax Status" on Page 20.)
The Contract allows the Contract Owner to revoke the Contract within 10 days
of delivery (see "Right to Revoke" on Page 16). Since Liberty Life will
refund the Contract Value, the Contract Owner bears the investment risk
during the revocation period.
CONDENSED FINANCIAL INFORMATION
Accumulation Unit Values*
Accumulation Unit Values*
Accumulation Accumulation Number of
Unit Value Unit Value Accumulation
Beginning End Units End
Sub-Account of Year** of Year of Year Year
Cash Income $12.833 $13.288 64,556 1996
Fund ("CIF") 12.322 12.833 54,470 1995
12.036 12.322 110,638 1994
11.883 12.036 19,344 1993
Mortgage Securities 16.099 16.621 162,281 1996
Income Fund 14.104 16.099 232,298 1995
("MSIF") 14.529 14.104 141,459 1994
13.930 14.529 161,996 1993
Colonial-Keyport 13.097 15.214 134,025 1996
Growth and Income 10.205 13.097 113,172 1995
Fund ("CKGIF") 10.426 10.205 87,234 1994
10.000 10.426 34,520 1993
Managed Assets 18.650 21.264 351,846 1996
Fund ("MAF") 15.071 18.650 307,463 1995
15.785 15.071 202,386 1994
14.644 15.785 106,655 1993
Colonial-Keyport 11.497 12.077 149,283 1996
Utilities Fund 8.625 11.497 180,656 1995
("CKUF") 9.747 8.625 207,084 1994
10.000 9.747 218,876 1993
Managed Growth 22.780 27.242 98,750 1996
Stock Fund ("MGSF") 16.770 22.780 70,419 1995
18.158 16.770 60,134 1994
17.451 18.158 39,837 1993
Capital Appreciation 23.357 29.237 160,317 1996
Fund ("CAF") 21.192 23.357 142,813 1995
21.236 21.192 149,229 1994
15.765 21.236 65,816 1993
Colonial-Keyport
Strategic Income 11.684 12.642 41,378 1996
Fund ("CKSIF") 10.000 11.684 29,737 1995
Colonial-Keyport
U.S. Stock Fund 13.263 15.935 9,787 1996
("CKUSF") 10.000 13.263 0 1995
Available in 1995 but no accumulation units were purchased.
Colonial-Keyport 9.723 10.075 31,533 1996
International Fund 9.314 9.723 19,912 1995
for Growth ("CKIFG") 10.000 9.314 20,356 1994
Newport-Keyport 11.445 12.555 26,389 1996
Tiger Fund ("NKTF") 10.000 11.445 2,242 1995
*Accumulation Unit values are rounded to the nearest tenth of a cent and
numbers of accumulation units are rounded to the nearest whole number.
**Except for the six Keyport Trust Funds, each initial unit value is as of
January 1, 1993, which precedes the February 15, 1993 date beginning of
operations of the Sub-Accounts. The $10.00 value for CKGIF, CKUF, CKSIF,
CKIFG, CKUSF and NKTF is as of the date the Fund Sub-Account first became
available: July 23, 1993; July 13, 1993; May 2, 1994; October 13, 1995;
October 13, 1995; and October 13, 1995, respectively.
The full financial statements for the Variable Account and Liberty Life are
in the Statement of Additional Information.
The Variable Account may from time to time advertise certain performance
information concerning its various Sub-Accounts.
This performance information is not intended to indicate either past
performance under an actual Contract or future performance.
The Sub-Accounts, other than CIF Sub-Account, may advertise total return
information for various periods of time. Total return performance information
is based on the overall percentage change in value of a hypothetical
investment in the specific Sub-Account over a given period of time.
Average annual total return information shows the average percentage change
in the value of an investment in the Sub-Account from the beginning date of
the measuring period to the end of that period. This standardized version of
average annual total return reflects all historical investment results, less
all charges and deductions applied against the Sub-Account and a Contract
(including any Contingent Deferred Sales Charge that would apply if a
Contract Owner surrendered the Contract at the end of each period indicated).
Average total return does not take into account any premium taxes and would
be lower if these taxes were included.
In order to calculate average annual total return, Liberty Life divides the
change in value of a Sub-Account under a Contract surrendered on a particular
date by a hypothetical $1,000 investment in the Sub-Account made by the
Contract Owner at the beginning of the period illustrated. The resulting
total rate for the period is then annualized to obtain the average annual
percentage change during the period. Annualization assumes that the
application of a single rate of return each year during the period will
produce the ending value, taking into account the effect of compounding.
The Sub-Accounts may present additional total return information computed on
a different basis.
First, the Sub-Accounts may present total return information computed on the
same basis as described above, except deductions will not include the
Contingent Deferred Sales Charge. This presentation assumes that the
investment in the Contract continues beyond the period when the Contingent
Deferred Sales Charge applies, consistent with the long-term investment and
retirement objectives of the Contract. The total return percentage will thus
be higher under this method than the standard method described above.
Second, the Sub-Accounts may present total return information calculated by
dividing the change in a Sub-Account's Accumulation Unit value over a
specified time period by the Accumulation Unit value of that Sub-Account at
the beginning of the period. This computation results in a 12-month change
rate or, for longer periods, a total rate for the period which Liberty Life
annualizes in order to obtain the average annual percentage change in the
Accumulation Unit value for that period. The change percentages do not take
into account the Contingent Deferred Sales Charge, the Contract Maintenance
Charge and premium taxes. The percentages would be lower if these charges
were included.
Third, the Sub-Accounts may present total return information for the SteinRoe
Trust's Funds for periods prior to the date the Variable Account began
operations. For such periods, any total return information for the Sub-
Accounts will be calculated based on the actual performance of the Funds and
on the assumption that the Sub-Accounts and the Contract were in existence
since the inception date of the Funds.
The CIF Sub-Account is a money market Sub-Account that may advertise yield
and effective yield information. The yield of the Sub-Account refers to the
income generated by an investment in the Sub-Account over a specifically
identified 7-day period. This income is annualized by assuming that the
amount of income generated by the investment during that week is generated
each week over a 52-week period and is shown as a percentage. The yield
reflects the deduction of all charges assessed against the Sub-Account and a
Contract but does not take into account Contingent Deferred Sales Charges and
premium taxes. The yield would be lower if these charges were included.
The effective yield of the Sub-Account is calculated in a similar manner but,
when annualizing such yield, income earned by the Sub-Account is assumed to
be reinvested. This compounding effect causes effective yield to be higher
than yield.
LIBERTY LIFE AND THE VARIABLE ACCOUNT
Liberty Life Assurance Company of Boston was incorporated on September 17,
1963 as a stock life insurance company. Its executive and administrative
offices are at 175 Berkeley Street, Boston, Massachusetts 02117.
Liberty Life writes individual life insurance on both a participating and a
non-participating basis and group life and health insurance and individual
and group annuity contracts on a non-participating basis. The variable
annuity contracts described in this prospectus are issued on a non-
participating basis. Liberty Life is licensed to do business in all states
and in the District of Columbia. However, the contracts described in this
prospectus are currently offered only in New York. Liberty Life has been
rated "A" by A.M. Best and Company, independent analysts of the insurance
industry. The Best's A rating is in the second highest rating category, which
also includes a lower rating of A-. Best's Ratings merely reflect Best's
opinion as to the relative financial strength of Liberty Life and Liberty
Life's ability to meet its contractual obligations to its policyholders. Even
though assets in the Variable Account are held separately from Liberty Life's
other assets, ratings of Liberty Life may still be relevant to Contract
Owners since not all of Liberty Life's contractual obligations relate to
payments based on those segregated assets (e.g., see "Death Provisions" on
pages 16-17 for Liberty Life's obligation after certain deaths to increase
the Contract Value if it is less than the guaranteed minimum death value
amount).
Liberty Life is a wholly-owned subsidiary of Liberty Mutual Insurance Company
and Liberty Mutual Fire Insurance Company. Liberty Mutual Insurance Company
is a multi-line insurance company.
The Variable Account was established by Liberty Life pursuant to the
provisions of Massachusetts Law on September 13, 1989. The Variable Account
meets the definitions of "separate account" under the federal securities
laws. The Variable Account was registered with the Securities and Exchange
Commission as a unit investment trust under the Investment Company Act of
1940 on June 12, 1991. Such registration does not involve supervision of the
management of the Variable Account or Liberty Life by the Securities and
Exchange Commission, and the Variable Account is subject to regulation as an
investment company.
Obligations under the Contracts are the obligations of Liberty Life. Although
the assets of the Variable Account are the property of Liberty Life, these
assets are held separately from the other assets of Liberty Life and are not
chargeable with liabilities arising out of any other business Liberty Life
may conduct. Income, capital gains and/or capital losses, whether or not
realized, from assets allocated to the Variable Account are credited to or
charged against the Variable Account without regard to the income, capital
gains, and/or capital losses arising out of any other business Liberty Life
may conduct. The Contract Value and the amount of variable annuity payments
will vary with the investment performance of the investments in the Variable
Account. Liberty Life does not guarantee the investment performance of the
Variable Account.
PURCHASE PAYMENTS AND APPLICATIONS
The initial purchase payment is due on the Issue Date. The minimum initial
purchase payment is $5,000. Additional purchase payments can be made at the
Contract Owner's option. Each subsequent purchase payment must be at least
$1,000 or such lesser amount as Liberty Life may permit from time to time for
certain types of contracts (currently $250). Liberty Life may reject any
purchase payment.
If the application for a Contract is in good order, Liberty Life will apply
the initial purchase payment to the Variable Account as instructed by the
Contract Owner and credit the Contract with Accumulation Units within two
business days of receipt. If the application for a Contract is not in good
order, Liberty Life will attempt to get it in good order within five business
days. If it is not complete at the end of this period, Liberty Life will
inform the applicant of the reason for the delay and that the purchase
payment will be returned immediately unless the applicant specifically
consents to Liberty Life keeping the purchase payment until the application
is complete. Once it is complete, the purchase payment will be applied within
two business days of its completion. Liberty Life has reserved the right to
reject any application.
Liberty Life confirms, in writing, to the Contract Owner the allocation of
all purchase payments and the re-allocation of values after any requested
transfer. Liberty Life must be notified immediately by the Contract Owner of
any processing error.
Liberty Life will permit others to act on behalf of an applicant in two
instances. First, Liberty Life will accept an application for a Contract that
contains a signature signed under a power of attorney if a copy of that power
of attorney is submitted with the application. Second, Liberty Life will
issue a Contract that is replacing an existing life insurance or annuity
policy that was issued by either Liberty Life or an affiliated company
without having previously received a signed application from the applicant.
Certain dealers will inform Liberty Life of an applicant's answers to the
questions in the application by telephone or by order ticket and cause the
initial purchase payment to be paid to Liberty Life. If the information is in
good order, Liberty Life will issue the Contract with a copy of an
application completed with that information. The Contract will be delivered
to the Contract Owner with a letter from Liberty Life that will give the
Contract Owner an opportunity to respond to Liberty Life if any of the
application information is incorrect. Alternatively, Liberty Life's letter
may request the Contract Owner to confirm the correctness of the information
by signing either a copy of the application or a Contract delivery receipt
that ratifies the application in all respects (in either case, a copy of the
signed document would be returned to Liberty Life for its permanent records).
All purchases are confirmed, in writing, to the applicant. Liberty Life's
liability under a Contract extends only to amounts so confirmed.
INVESTMENTS OF THE VARIABLE ACCOUNT
Allocations of Purchase Payments
Purchase payments will be invested in one or more of the Eligible Fund Sub-
Accounts designated as permissible investments in accordance with the
selection made by the Contract Owner in the application. Any selection must
specify the percentage of the purchase payment that is allocated to each Sub-
Account. The percentage for each Sub-Account, if not zero, must be at least
10% and must be a whole number. A Contract Owner may change the allocation
percentages without fee, penalty or other charge. Allocation changes must be
made by Written Request unless the Contract Owner has by Written Request
authorized Liberty Life to accept telephone allocation instructions from the
Contract Owner or from a person acting for the Contract Owner as an attorney-
in-fact under a power of attorney. By authorizing Liberty Life to accept
telephone changes, a Contract Owner agrees to accept and be bound by the
conditions and procedures established by Liberty Life from time to time. The
current conditions and procedures are described in Appendix A and Contract
Owners authorizing telephone allocation instructions will be notified, in
advance, of any changes.
The Variable Account is segmented into Sub-Accounts. Each Sub-Account invests
in the shares of one of the Eligible Funds and such shares are purchased at
net asset value. Eligible Funds and Sub-Accounts may be added or withdrawn as
permitted by applicable law. The Sub-Accounts of the Variable Account and the
corresponding Eligible Funds currently are as follows:
Eligible Funds of SteinRoe Variable Investment Trust Sub-Accounts
Cash Income Fund ("CIF") CIF Sub-Account
Mortgage Securities Income Fund ("MSIF") MSIF Sub-Account
Managed Assets Fund ("MAF") MAF Sub-Account
Managed Growth Stock Fund ("MGSF") MGSF Sub-Account
Capital Appreciation Fund ("CAF") CAF Sub-Account
Eligible Funds of Keyport Variable Investment Trust Sub-Accounts
Colonial-Keyport Growth and Income Fund ("CKGIF") CKGIF Sub-Account
Colonial-Keyport Strategic Income Fund ("CKSIF") CKSIF Sub-Account
Colonial-Keyport Utilities Fund ("CKUF") CKUF Sub-Account
Colonial-Keyport U.S. Stock Fund ("CKUSF") CKUSF Sub-Account
Colonial-Keyport International Fund for Growth ("CKIFG") CKIFG Sub-Account
Newport-Keyport Tiger Fund ("NKTF") NKTF Sub-Account
Eligible Funds
The Eligible Funds which are the permissible investments of the Variable
Account are the separate funds of SteinRoe Variable Investment Trust, the
separate funds of Keyport Variable Investment Trust, and any other mutual
funds with which Liberty Life and the Variable Account may enter into a
participation agreement for the purpose of making such mutual funds available
as Eligible Funds under certain Contracts.
Stein Roe & Farnham Incorporated ("Stein Roe") is the investment adviser for
each Eligible Fund of SteinRoe Trust. In 1986, Stein Roe was organized and
succeeded to the business of Stein Roe & Farnham, a partnership. Stein Roe is
an affiliate of Liberty Life. Stein Roe and its predecessor have provided
investment advisory and administrative services since 1932.
Keyport Advisory Services Corp. ("KASC"), an affiliate of Liberty Life, is
the manager for Keyport Trust and its Eligible Funds. Colonial Management
Associates, Inc. ("Colonial"), an affiliate of Liberty Life, serves as sub-
adviser for the Eligible Funds (except for Newport-Keyport Tiger Fund).
Colonial has provided investment advisory services since 1931. Newport Fund
Management, Inc., an affiliate of Liberty Life, serves as sub-adviser for the
Newport-Keyport Tiger Fund.
The investment objectives of the Eligible Funds are briefly described below.
More detailed information, including investor considerations related to the
risks of investing in a particular Eligible Fund, may be found in the current
prospectus for that Fund. An investor should read that prospectus carefully
before selecting a fund for investing. The prospectus is available, at no
charge, from a salesperson or by writing the Distributor, Keyport Financial
Services Corp. at 125 High Street, Boston, MA 02110 or by calling (800) 437-
4466.
Eligible Funds of SteinRoe
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Cash Income Fund
(CIF Sub-Account) High current income from
short-term money market instruments while
emphasizing preservation of capital and
maintaining excellent liquidity.
Mortgage Securities Income Fund
(MSIF Sub-Account) Highest possible level of
current income consistent with safety of
principal and maintenance of liquidity
through investment primarily in mortgage-
backed securities.
Managed Assets Fund
(MAF Sub-Account) High total investment
return through investment in a changing
mix of securities.
Managed Growth Stock Fund
(MGSF Sub-Account) Long-term growth of capital
through investment primarily in common
stocks.
Capital Appreciation Fund
(CAF Sub-Account) Capital growth by investing
primarily in common stocks, convertible
securities and other securities selected
for prospective capital growth.
Eligible Funds of Keyport
Variable Investment Trust and
Variable Account Sub-Accounts Investment Objective
Colonial-Keyport Growth and Income Fund
(CKGIF Sub-Account) Primarily income and long-term
capital growth and, secondarily,
preservation of capital.
Colonial-Keyport Strategic Income
Fund (CKSIF Sub-Account) A high level
of current income, as is
consistent with the prudent
risk, and maximizing total
return, by diversifying
investments primarily in U.S.
and foreign government and high
yield, high risk corporate debt
securities. The Fund may invest
a substantial portion of its
assets in high yield, high risk
bonds (commonly referred to as
"junk bonds").
Colonial-Keyport Utilities Fund
(CKUF Sub-Account) Primarily current income and,
secondarily, long-term capital
growth.
Colonial-Keyport U.S. Stock Fund
(CKUSF Sub-Account) Growth
exceeding over time the S&P 500
Index (Standard & Poor's 500
Corporation Composite Stock
Price Index) performance.
Colonial-Keyport International Fund
for Growth (CKIFG Sub-Account) Long-term capital
growth, by investing primarily
in non-U.S. equity securities.
The Fund is non-diversified and
may invest more than 5% of its
total assets in the securities
of a single issuer, thereby
increasing the risk of loss
compared to a diversified fund.
Newport-Keyport Tiger Fund
(NKTF Sub-Account) Long-term capital growth by
investing primarily in
equity securities
of companies located in the four
Tigers of Asia (Hong Kong,
Singapore, South Korea and
Taiwan) and other mini-Tigers of
Asia (Malaysia, Thailand,
Indonesia, China and the
Philippines).
There is no assurance that the Eligible Funds will achieve their stated
objectives.
SteinRoe Variable Investment Trust is a funding vehicle for variable annuity
contracts offered by the separate accounts of Liberty Life and of insurance
companies affiliated and unaffiliated with Liberty Life. Keyport Variable
Investment Trust is a funding vehicle for variable annuity contracts offered
by the separate accounts of Liberty Life and of insurance companies
affiliated with Liberty Life. Both Trusts also are funding vehicles for
variable life insurance policies offered by the separate accounts of
insurance companies affiliated with Liberty Life. The risks involved in this
"mixed and shared funding" are disclosed in the Trusts' prospectuses under
the caption "The Trust".
Dollar Cost Averaging
Liberty Life offers a dollar cost averaging program that Contract Owners may
participate in by Written Request. The program periodically transfers
Accumulation Units from the CIF Sub-Account to other Sub-Accounts selected by
the Contract Owner. The program allows a Contract Owner to invest in non-
"money market" Sub-Accounts over time rather than having to invest in those
Sub-Accounts all at once. The program is available for initial and subsequent
purchase payments and for Contract Value transferred into the CIF Sub-
Account. Under the program, Liberty Life makes automatic transfers on a
periodic basis out of the Sub-Account into one or more of the other Sub-
Accounts (Liberty Life reserves the right to limit the number of Sub-Accounts
the Contract Owner can choose but there are currently no limits). A transfer
under the program will not be counted as a transfer for the purposes of the
limitations in "Transfer of Contract Value" below. The automatic transfer
program does not guarantee a profit nor does it protect against loss in
declining markets. The program is described in detail in Appendix B on Page
25.
Transfer of Contract Value
Contract Owners may transfer Contract Value from one Sub-Account to another
Sub-Account.
The Contract allows Liberty Life to charge a transfer fee and to limit the
number of transfers that can be made in a specified time period. Contract
Owners should be aware that transfer limitations may prevent an Owner from
making a transfer on the date he or she wants to, with the result that the
Owner's future Contract Value may be lower than it would have been had the
transfer been made on the desired date.
Currently, Liberty Life is not charging a transfer fee but it is limiting
transfers to 12 per calendar year except as follows. For transfers under
different Contracts that are being requested under powers of attorney with a
common attorney-in-fact or that are, in Liberty Life's determination, based
on the recommendation of a common investment adviser or broker/dealer, the
transfer limitation is instead one transfer every 30 days.
Regardless of which transfer limitation is applicable, Liberty Life is also
limiting each transfer to a maximum of $500,000. All transfers requested for
a Contract on the same day will be treated as a single transfer and the total
combined transfer amount will be subject to the $500,000 limitation. If the
$500,000 limitation is exceeded, no amount of the transfer will be executed
by Liberty Life.
In applying the limitation of 12 transfers in a year of up to $500,000
apiece, Liberty Life may treat as one transfer all transfers requested by a
Contract Owner for multiple Contracts he or she owns. If the $500,000
limitation is exceeded for multiple transfers requested on the same day that
are treated as a single transfer, no amount of the transfer will be executed
by Liberty Life.
In applying the limitation of one $500,000 transfer every 30 days, Liberty
Life will treat as one transfer all transfers requested under different
Contracts that are being requested under powers of attorney with a common
attorney-in-fact or that are, in Liberty Life's determination, based on the
recommendation of a common investment adviser or broker/dealer. If the
$500,000 limitation is exceeded for multiple transfers requested on the same
day that are treated as a single transfer, no amount of the transfer will be
executed by Liberty Life. If a transfer is executed under one Contract and,
within the next 30 days, a transfer request for another Contract is
determined by Liberty Life to be related to the executed transfer under this
paragraph's rules, the transfer request will not be executed by Liberty Life
(in order for it to be executed, it would need to be requested again after
the 30 day period and it, along with any other transfer requests that are
collectively treated as a single transfer, would need to total less than
$500,000).
Liberty Life's interest in applying these limitations is to protect the
interests of both Contract Owners who are not engaging in significant
transfer activity and Contract Owners who are engaging in such activity.
Liberty Life has determined that the actions of Contract Owners engaging in
significant transfer activity among Sub-Accounts may cause an adverse affect
on the performance of the underlying Fund for the Sub-Account involved. The
movement of Sub-Account values from one Sub-Account to another may prevent
the appropriate underlying Fund from taking advantage of investment
opportunities because it must maintain a liquid position in order to handle
redemptions. Such movement may also cause a substantial increase in Fund
transaction costs which must be indirectly borne by Contract Owners.
Contract Owners will be notified, in advance, of the imposition of any
transfer fee or of a change in the limitation on the number of transfers. Any
fee will not exceed $25 per transfer and the fee will not exceed the cost of
effecting a transfer.
Transfers must be made by Written Request unless the Contract Owner has by
Written Request authorized Liberty Life to accept telephone transfer requests
from the Contract Owner or from a person acting for the Contract Owner as an
attorney-in-fact under a power of attorney. By authorizing Liberty Life to
accept telephone transfer instructions, a Contract Owner agrees to accept and
be bound by the conditions and procedures established by Liberty Life from
time to time. The current conditions and procedures are in Appendix A and
Contract Owners authorizing telephone transfers will be notified, in advance,
of any changes. Written transfer requests may be made by a person acting for
the Contract Owner as an attorney-in-fact under a power of attorney.
Transfer requests received by Liberty Life's Service Office before the close
of regular trading on the New York Stock Exchange (currently 4:00 PM Eastern
Time) will be initiated at the close of business that day. Any requests
received later will be initiated at the close of the next business day. Each
request from a Contract Owner to transfer value will be executed by both
redeeming and acquiring Accumulation Units on the day Liberty Life's Service
Office initiates the transfer.
If 100% of any Sub-Account's value is transferred and the allocation formula
for purchase payments includes that Sub-Account, then the allocation formula
for future purchase payments will automatically change unless the Contract
Owner instructs otherwise. For example, if the allocation formula is 50% to
Sub-Account A and 50% to Sub-Account B and all of Sub-Account A's value is
transferred to Sub-Account B, the allocation formula will change to 100% to
Sub-Account B unless the Contract Owner instructs otherwise.
Substitution of Eligible Funds and Other Variable Account Changes
If the shares of any of the Eligible Funds should no longer be available for
investment by the Variable Account or if in the judgment of Liberty Life's
management further investment in such fund shares should become inappropriate
in view of the purpose of the Contract, Liberty Life may add or substitute
shares of another Eligible Fund or of another mutual fund for Eligible Fund
shares already purchased under the Contract. No substitution of Fund shares
in any Sub-Account may take place without prior approval of the Securities
and Exchange Commission and notice to Contract Owners, to the extent required
by the Investment Company Act of 1940.
Liberty Life has also reserved the right, subject to compliance with the law
as currently applicable or subsequently changed:(a) to operate the Variable
Account in any form permitted under the Investment Company Act of 1940 or in
any other form permitted by law; (b) to take any action necessary to comply
with or obtain and continue any exemptions from the Investment Company Act of
1940 or to comply with any other applicable law; (c) to transfer any assets
in any Sub-Account to another Sub-Account, or to one or more separate
investment accounts, or to Liberty Life's general account; or to add, combine
or remove Sub-Accounts in the Variable Account; and (d) to change the way
Liberty Life assesses charges, so long as the aggregate amount is not
increased beyond that which may be charged to the Variable Account and the
Eligible Funds in connection with the Contracts.
DEDUCTIONS
Deductions for Contract Maintenance Charge
Liberty Life has responsibility for providing all administration of the
Contracts and the Variable Account. Liberty Life has sub-contracted to an
affiliate the actual day to day administration of the Contract, owner
accounting and administration for a fee. This administration includes, but is
not limited to, preparation of the Contracts, maintenance of Contract Owners'
records, and all accounting, valuation, regulatory and reporting
requirements. Liberty Life has contracted with Keyport Life Insurance
Company, an affiliate, to provide all administration for the Contracts, as
its agent. Liberty Life makes a Contract Maintenance Charge for such
services. At the present time the Contract Maintenance Charge is $36.00 per
Contract Year. PRIOR TO THE INCOME DATE THE CONTRACT MAINTENANCE CHARGE IS
NOT GUARANTEED AND MAY BE CHANGED BY LIBERTY LIFE. The amount of the charge
will not exceed $100.
Prior to the Income Date, the full amount of the charge will be deducted from
the Contract Value on each Contract Anniversary and on the date of any total
surrender not falling on the Contract Anniversary. On the Income Date, a pro-
rata portion of the charge due on the next Contract Anniversary will be
deducted from the Contract Value. This pro-rata charge covers the period from
the prior Contract Anniversary to the Income Date. For example, if the Income
Date occurs 73 days after that prior anniversary, then one-fifth (i.e., 73
days/365 days) of the annual charge would be deducted on the Income Date. The
charge will be deducted from each Sub-Account in the proportion that the
value of each bears to the Contract Value.
Once annuity payments begin on the Income Date or once they begin after
surrender benefits are applied under a settlement option, the yearly cost of
the Contract Maintenance Charge for a payee's annuity will be the same as the
yearly amount in effect immediately before the annuity payments begin.
Liberty Life may not later change the amount of the Contract Maintenance
Charge deducted from the annuity payments. The charge will be deducted on a
pro-rata basis from each annuity payment.
For example, if annuity payments are monthly, then one-twelfth of the annual
charge will be deducted from each payment.
Deductions for Mortality and Expense Risk Charge
Although variable annuity payments made to Annuitants will vary in accordance
with the investment performance of the investments of the Variable Account,
they will not be affected by the mortality experience (death rate) of persons
receiving such payments or of the general population. Liberty Life guarantees
certain total surrenders after the death of the Annuitant or Contract Owner
will not result in payments that are reduced by a Contingent Deferred Sales
Charge or in payments that are lower than the amount of purchase payments
less any prior partial surrenders. Liberty Life assumes an expense risk since
the Contract Maintenance Charge after the Income Date will stay the same and
not be affected by variations in expenses.
To compensate it for assuming these mortality and expense risks, Liberty Life
deducts from each Sub-Account for each Valuation Period, a Mortality and
Expense Risk Charge equal on an annual basis to 1.25% of the average daily
net asset value of the Sub-Account. The charge is deducted during both the
accumulation and annuity periods (i.e., both before and after the Income
Date).
Deductions for Daily Sales Charge
Liberty Life also deducts from each Sub-Account each Valuation Period a sales
charge equal on an annual basis to 0.15% of the average daily net asset value
of the Sub-Account. This charge compensates Liberty Life for certain sales
distribution expenses relating to the Contract. This charge will not be
deducted from Sub-Account values attributable to Contracts that have reached
the maximum cumulative sales charge limit defined in the next section. The
charge is also not deducted from Sub-Account values attributable to Annuity
Units.
Deductions for Contingent Deferred Sales Charge
A sales charge is not deducted from the Contract's purchase payments when
initially received. However, a Contingent Deferred Sales Charge may be
deducted upon a surrender.
In order to determine whether a Contingent Deferred Sales Charge will be due
upon a partial or total surrender, Liberty Life maintains a separate set of
records. These records identify the date and amount of each purchase payment
made to the Contract and the Contract Value over time.
A surrender in any Contract Year will be free of Contingent Deferred Sales
Charge to the extent the surrender amount does not exceed the Contract's
increase in value at that time. The increase in value is equal to: the
Contract Value at the time of surrender; less that portion of purchase
payments that are still remaining at the time of surrender.
After the first Contract Year, Liberty Life guarantees that a minimum amount
of Contract Value will be free of Contingent Deferred Sales Charge each year.
This amount is equal to 10% of the Contract Value at the beginning of each
Contract Year (i.e., on the Contract Anniversary). This 10% amount will be
reduced by the amount of each surrender in a year that represents the
Contract's increase in value. The portion of any surrender in excess of this
increase in value but not in excess of the remaining 10% amount will be free
of Contingent Deferred Sales Charge. This portion will be deducted from the
purchase payments in chronological order from the oldest to the most recent
until the amount is fully deducted. Any amount so deducted will not be
subject to a charge.
The following additional amounts will be deducted from the purchase payments
in the same chronological order: the amount of any surrender in the first
Contract Year in excess of the Contract's increase in value at the time of
surrender; and the amount of any surrender in any later Contract Year in
excess of the Contract's increase in value at the time of surrender (or in
excess of the 10% limit if it applies). The Contingent Deferred Sales Charge
for each purchase payment from which a deduction is made will be equal to (a)
multiplied by (b), where:
(a) is the amount so deducted; and
(b) is the applicable percentage for the number of years that have elapsed
from the date of that payment to the date of surrender. Years are
measured from the month and day of payment to the same month and day in
each subsequent calendar year. The percentages applicable to each
purchase payment during the seven years after the date of its payment
are: 7% during Year 1; 6% during Year 2; 5% during Year 3; 4% during
Year 4; 3% during Year 5; 2% during Year 6; 1% during Year 7; and 0%
thereafter.
The applicable Contingent Deferred Sales Charges for each purchase payment
are then totalled. The lesser of this total amount and the Contract's maximum
cumulative sales charge will be deducted from the Contract Value in the same
manner as the surrender amount. The maximum cumulative sales charge is equal
to (a) less (b), where (a) is 8.5% of the total purchase payments made to the
Contract and (b) is the sum of all prior Contingent Deferred Sales Charge
deductions from the Contract Value and all prior Variable Account sales
charges applicable to the Contract from the 0.15% sales charge factor. After
each surrender, Liberty Life records will be adjusted to reflect any
deductions made from the applicable purchase payments.
Example: Two purchase payments were made one year apart for $5,000 and
$7,000. The Contract Value has grown to an assumed $13,200 when the Owner
decides to withdraw $8,000. The Contract Value at the beginning of the
Contract Year of surrender was $13,000. The Contingent Deferred Sales Charge
percentages at the time of surrender are an assumed 5% for the $5,000 payment
and 6% for the $7,000 payment. The portion of the surrender representing the
Contract's increase in value ($13,200 less $12,000, or $1,200) would not be
subject to charges. Since $1,200 is less than the amount guaranteed not to
have charges (10% of $13,000, or $1,300) an additional $100 would not be
subject to charges. This $100 would be deducted from the oldest purchase
payment, reducing it from $5,000 to $4,900. The $1,200 increase in value plus
the additional $100 leaves $6,700 ($8,000 - 1,200 - 100) to be deducted. This
$6,700 would be deducted from the $4,900 of the first payment still left and
$1,800 of the second payment. The total Contingent Deferred Sales Charge
would be $4,900 multiplied by the applicable 5% and $1,800 times the
applicable 6%, or a total of $353. The sales charge records would now reflect
$0 for the 1st payment and $5,200 for the 2nd payment. The $8,000 requested
plus the $353 charge would be deducted from Contract Values under the rules
specified in the "Surrenders" section on Page 18.
The Contingent Deferred Sales Charge, when it is applicable, will be used to
cover the expenses of selling the Contract, including compensation paid to
selling dealers and the cost of sales literature. Any expenses not covered by
the Charge will be paid from Liberty Life's general account, which may
include monies deducted from the Variable Account for the Mortality and
Expense Risk Charge. A dealer selling the Contract can receive up to 6% of
purchase payments.
Liberty Life may establish a program to allow a Contract Owner to request
systematic partial surrenders in the first Contract Year up to a total of 10%
of the initial purchase payment to the Contract. Under such a program,
Liberty Life may waive the Contingent Deferred Sales Charge on the amount of
any partial surrender that is in excess of the Contract's increase in value
(defined in the third paragraph of this section) at the time the surrender
occurs. Any such excess surrender amount will not be deducted from the
initial purchase payment under the procedure described in the fourth
paragraph of this section. This means that the waiver of Contingent Deferred
Sales Charge is not a permanent waiver and the Charge can potentially be
collected by Liberty Life in the event the Contract Owner later makes a non-
systematic partial or total surrender.
Deductions for Transfers of Contract Value
The Contract allows Liberty Life to charge a transfer fee. Currently no fee
is being charged. Contract Owners will be notified, in advance, of the
imposition of any fee. Any fee will not exceed $25 per transfer and the fee
will not exceed the cost of effecting a transfer.
Deductions for Premium Taxes
Liberty Life deducts the amount of any premium taxes levied by any state or
governmental entity when paid unless Liberty Life elects to defer such
deduction. Such premium taxes may depend, among other things, on the type of
Contract (Qualified or Non-Qualified), on the state of residence of the
Contract Owner, the state of residence of the Annuitant, the status of
Liberty Life within such states, and the insurance tax laws of such states.
For New York Contracts, the current premium tax rate is 0%.
Deductions for Income Taxes
Liberty Life will deduct from any amount payable under the Contract any
income taxes that a governmental authority requires Liberty Life to withhold
with respect to that amount.
See "Income Tax Withholding" on Page 21 and "Tax-Sheltered Annuities" on Page
22.
Total Expenses
The Variable Account's total expenses in relation to the Contract will be the
Contract Maintenance Charge, the Mortality and Expense Risk Charge, and the
Daily Sales Charge.
The value of the assets in the Variable Account will reflect the value of
Eligible Fund shares and therefore the deductions from and expenses paid out
of the assets of the Eligible Funds. These deductions and expenses are
described in the Eligible Fund prospectus.
THE CONTRACTS
Contract Value
The Contract Value for a Contract is the sum of the value of each Sub-Account
to which values are allocated under a Contract. The value of each Sub-Account
is determined at any time by multiplying the number of Accumulation Units
attributable to that Sub-Account by the Accumulation Unit value for that Sub-
Account at the time of determination. The Accumulation Unit value is an
accounting unit of measure used to determine the change in an Accumulation
Unit's value from Valuation Period to Valuation Period.
Each purchase payment that is made results in additional Accumulation Units
being credited to the Contract and the appropriate Sub-Account thereunder.
The number of additional units for any Sub-Account will equal the amount
allocated to that Sub-Account divided by the Accumulation Unit value for that
Sub-Account at the time of investment.
Valuation Periods
The Variable Account is valued each Valuation Period using the net asset
value of the Eligible Fund shares. A Valuation Period is the period
commencing at the close of regular trading on the New York Stock Exchange on
each Valuation Date and ending at the close of regular trading for the next
succeeding Valuation Date. A Valuation Date is each day that the New York
Stock Exchange is open for business. The New York Stock Exchange is currently
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net Investment Factor
Contract Value will fluctuate in accordance with the investment results of
the underlying Eligible Funds. In order to determine how these fluctuations
affect value, Liberty Life utilizes an Accumulation Unit value. Each Sub-
Account has its own Accumulation Units and value per Unit. The Unit value
applicable during any Valuation Period is determined at the end of that
period.
On January 1, 1993, Liberty Life valued each Accumulation Unit as follows:
CIF_$11.882756; MSIF_$13.930256; MAF_$14.643832; MGSF_ $17.450604 and
CAF_$15.765195. The Accumulation Units for CKUF, CKGIF, CKIFG, CKSIF, CKUSF
and NKTF were valued at $10.000000 when Liberty Life first purchased these
Eligible Fund shares on behalf of the Variable Account. The Unit value for
each Sub-Account in any Valuation Period thereafter is determined by
multiplying the value for the prior period by a net investment factor. This
factor may be greater or less than 1.0; therefore, the Accumulation Unit may
increase or decrease from Valuation Period to Valuation Period. Liberty Life
calculates a net investment factor for each Sub-Account by dividing (a) by
(b) and then subtracting (c) (i.e., (a/b) - c), where:
(a) is equal to:
(i) the net asset value per share of the Eligible Fund at the end
of the Valuation Period; plus
(ii) the per share amount of any distribution made by the Eligible
Fund if the "ex-dividend" date occurs during that same Valuation
Period.
(b) is the net asset value per share of the Eligible Fund at the end of the
prior Valuation Period.
(c) is equal to:
(i) the Valuation Period equivalent of the 1.25% per
year Mortality and Expense Risk Charge; plus
(ii) the Valuation Period equivalent of the .15% per year
Daily Sales Charge; plus
(iii) a charge factor, if any, for any tax provision
established by Liberty Life as a result of the operations of
that Sub-Account.
If a Contract ever reaches the maximum cumulative sales charge limit defined
in "Deductions for Contingent Deferred Sales Charge", Unit values without
(c)(ii) above will be used thereafter.
Modification of the Contract
Only Liberty Life's President or Secretary may agree to alter the Contract or
waive any of its terms. Any changes must be made in writing and with the
Contract Owner's consent, except as may be required by applicable law.
Right to Revoke
The Contract Owner may return the Contract within 10 days after he or she
receives it by delivering or mailing it to Liberty Life's Service Office. The
return of the Contract by mail will be effective when the postmark is affixed
to a properly addressed and postage-prepaid envelope. The returned Contract
will be treated as if Liberty Life never issued it and Liberty Life will
refund the Contract Value.
DEATH PROVISIONS FOR NON-QUALIFIED CONTRACTS
Death of Primary Owner, Joint Owner or Annuitant
These provisions apply if, before the Income Date while the Contract is In
Force, the primary Owner, any joint Owner, or the Annuitant dies. The
Designated Beneficiary will control the Contract after such death.
The Contract Value will be increased, as provided below, if it is less than
the guaranteed minimum death value amount ("GMDV"). The GMDV is the greater
of the following two amounts: (a) Liberty Life will add up all purchase
payments made through the date of death, and then subtract all partial
surrenders made through the date of death and (b) Liberty Life will compute
an "Anniversary Value" for each Contract Anniversary (if any) before the 81st
birthday of the covered person and Liberty Life will use the greatest of such
"Anniversary Values". The covered person is the Primary Owner or, if there
is a non-natural Owner such as a trust, the Annuitant is the covered person.
The "Anniversary Value" for each applicable Contract Anniversary initially
equals the Contract Value on that Anniversary. It is then increased by any
purchase payments made from that Anniversary until the date of death, and
decreased by the following amount at the time of each partial surrender made
from that Anniversary until the date of death: the partial surrender amount
divided by the Contract Value right before the surrender, multiplied by the
"Anniversary Value" right before the surrender.
For any Contract issued before November 1, 1995, the GMDV is the greatest of
(a) and (b) above and (c) the Contract Value on the seventh Contract
Anniversary, plus any purchase payments made from that Anniversary until the
date of death, less any partial surrenders made from that Anniversary until
the date of death.
When Liberty Life receives due proof of death, Liberty Life will compare, as
of the date of death, the Contract Value to the GMDV. If the Contract Value
was less than the GMDV, Liberty Life will increase the current Contract Value
by the amount of the difference. Note that while the amount of the difference
is determined as of the date of death, that amount is not added to the
Contract Value until Liberty Life receives due proof of death. The amount to
be credited will be allocated to the Variable Account based on the purchase
payment allocation selection that is in effect when Liberty Life receives due
proof of death. Whether or not the Contract Value is increased because of
this minimum death provision, the Designated Beneficiary may surrender the
Contract within 90 days of the date of death for the Contract Value (i.e.,
any applicable Contingent Deferred Sales Charge will be waived). For a
surrender after 90 days, the Surrender Value is payable instead. If the
Contract is not surrendered, it will stay in force for the time period
specified below.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
primary owner as of the Annuitant's date of the death. And, if the Annuitant
is the decedent, the new Annuitant will be any living contingent Annuitant,
otherwise the surviving spouse. The Contract can stay in force until another
death occurs (i.e., until the death of the Annuitant, primary Owner or joint
Owner). Except for this paragraph, all of "Death Provisions" will apply to
that subsequent death.
In all other cases, the Contract can stay in force up to five years from the
date of death. During this period, the Designated Beneficiary may exercise
all ownership rights, including the right to make transfers or partial
surrenders or the right to totally surrender the Contract for its Surrender
Value. If the Contract is still in force at the end of the five-year period,
Liberty Life will automatically end it then by paying the Contract Value to
the Designated Beneficiary. If the Designated Beneficiary is not alive then,
Liberty Life will pay any person(s) named by the Designated Beneficiary in a
Written Request; otherwise the Designated Beneficiary's estate.
Payment of Benefits
Instead of receiving a lump sum, the Owner or any Designated Beneficiary may
direct by Written Request that Liberty Life pay any benefit of $2,000 or more
under an annuity payment option that meets the following: (a) the first
payment to the Designated Beneficiary must be made no later than one year
after the date of death; (b) payments must be made over the life of the
Designated Beneficiary or over a period not extending beyond that person's
life expectancy; and (c) any payment option that provides for payments to
continue after the death of the Designated Beneficiary will not allow the
successor payee to extend the period of time over which the remaining
payments are to be made.
DEATH PROVISIONS FOR QUALIFIED CONTRACTS
Death of Annuitant
If the Annuitant dies before the Income Date while the Contract is In Force,
the Designated Beneficiary will control the Contract after such a death. The
Contract Value will be increased, as provided below, if it is less than the
guaranteed minimum death value amount ("GMDV"). The GMDV is the amount
defined on page __.
When Liberty Life receives due proof of the Annuitant's death, Liberty Life
will compare, as of the date of death, the Contract Value to the GMDV. If the
Contract Value was less than the GMDV, Liberty Life will increase the current
Contract Value by the amount of the difference. Note that while the amount of
the difference is determined as of the date of death, that amount is not
added to the Contract Value until Liberty Life receives due proof of death.
The amount to be credited will be allocated to the Variable Account based on
the purchase payment allocation selection that is in effect when Liberty Life
receives due proof of death. Whether or not the Contract Value is increased
because of this minimum death provision, the Designated Beneficiary may
surrender the Contract within 90 days of the date of the Annuitant's death
for the Contract Value (i.e., any applicable Contingent Deferred Sales Charge
will be waived). For a surrender after 90 days, the Surrender Value is
payable instead.
If the Contract is not surrendered, it can stay in force for the time period
permitted by the Internal Revenue Code provisions applicable to the
particular Qualified Plan. During this period, the Designated Beneficiary may
exercise all ownership rights, including the right to make transfers or
partial surrenders or the right to totally surrender the Contract for its
Surrender Value. If the Contract is still in force at the end of the period,
Liberty Life will automatically end it then by paying the Contract Value to
the Designated Beneficiary. If the Designated Beneficiary is not alive then,
Liberty Life will pay any person(s) named by the Designated Beneficiary in a
Written Request; otherwise the Designated Beneficiary's estate.
Payment of Benefits
Instead of receiving a lump sum, the Owner or any Designated Beneficiary may
direct by Written Request that Liberty Life pay any benefit of $2,000 or more
under an annuity payment option that meets the following: (a) the first
payment to the Designated Beneficiary must be made no later than one year
after the date of death; (b) payments must be made over the life of the
Designated Beneficiary or over a period not extending beyond that person's
life expectancy; and (c) any payment option that provides for payments to
continue after the death of the Designated Beneficiary will not allow the
successor payee to extend the period of time over which the remaining
payments are to be made.
OWNERSHIP
The Contract Owner shall be the person designated in the application. The
Contract Owner may exercise all the rights of the Contract.
Joint Owners are permitted but not contingent Owners.
The Contract Owner may by Written Request change the Owner, primary
beneficiary, contingent beneficiary or contingent annuitant. An irrevocably-
named person may be changed only with the written consent of such person.
Because a change of Owner by means of a gift (i.e., a transfer without full
and adequate consideration) may be a taxable event, a Contract Owner should
consult a competent tax adviser as to the tax consequences resulting from
such a transfer.
Any Qualified Contract may have limitations on transfer of ownership. A
Contract Owner should consult a competent tax adviser as to the tax
consequences resulting from such a transfer.
ASSIGNMENT
The Contract Owner may assign the Contract at any time. A copy of any
assignment must be filed with Liberty Life's Service Office. The Contract
Owner's rights and those of any revocably-named person will be subject to the
assignment. Any Qualified Contract may have limitations on assignability.
Because an assignment may be a taxable event, a Contract Owner should consult
a competent tax adviser as to the tax consequences resulting from any such
assignment.
SURRENDERS
The Contract Owner may partially surrender the Contract. Liberty Life's
Service Office must receive a Written Request and the minimum amount to be
surrendered must be at least $300 or such lesser amount as Liberty Life may
permit in conjunction with a program of systematic partial surrenders. If the
Contract Value after a partial surrender would be below $2,500, Liberty Life
will treat the request as a surrender of only the excess amount over $2,500.
The amount surrendered will include any applicable Contingent Deferred Sales
Charge and therefore the amount actually surrendered may be greater than the
amount of the surrender check requested. Unless the request specifies
otherwise, the total amount surrendered will be deducted from all Sub-
Accounts of the Variable Account in the proportion that the value in each Sub-
Account bears to the total Contract Value.
The Contract Owner may totally surrender the Contract by making a Written
Request. Surrendering the Contract will end it. The Surrender Value is equal
to the Contract Value for the Valuation Period during which Liberty Life's
Service Office has received the request less: the Contract Maintenance
Charge; any applicable Contingent Deferred Sales Charge; and any applicable
premium taxes not previously deducted.
Liberty Life will pay the amount of any surrender within seven days of
receipt of such request. Alternatively, the Contract Owner may purchase for
himself or herself an annuity payment option with any surrender benefit of at
least $2,000. Liberty Life's consent is needed to choose an option if the
Contract Owner is not a natural person.
Settlement Options based on life contingencies cannot be surrendered after
annuity payments have begun. Settlement Option 1, which is not based on life
contingencies, may be surrendered as described on Page 19.
Because of the potential tax consequences of a full or partial surrender, a
Contract Owner should consult a competent tax adviser regarding a surrender.
ANNUITY PROVISIONS
Annuity Benefits
If the Annuitant is alive on the Income Date and the Contract is In Force,
payments will begin under the payment option or options the Contract Owner
has chosen. The amount of the payments will be determined by applying the
Contract Value (less any premium taxes not previously deducted and less any
applicable Contract Maintenance Charge) on the Income Date in accordance with
the option selected.
Income Date and Settlement Option
The Contract Owner may select an Income Date and Settlement Option at the
time of application. If the Contract Owner does not select a Settlement
Option, Option 2 will automatically be designated. If the Contract Owner does
not select an Income Date for the Annuitant, the Income Date will
automatically be the first day of the calendar month following the later of
the Annuitant's 75th birthday or the 10th Contract Anniversary.
Change in Income Date and Settlement Option
The Contract Owner may choose or change a Settlement Option or the Income
Date by making a Written Request to Liberty Life's Service Office at least 30
days prior to the Income Date. However, any Income Date must be: (a) for
variable annuity payment options, not earlier than the second calendar month
after the Issue Date (e.g., if the Issue Date is in January, the earliest
Income Date is March 1); (b) for fixed annuity options, not earlier than the
first calendar month after the end of the first Contract Year; (c) not later
than the calendar month after the Annuitant's 85th birthday; and (d) the
first day of a calendar month.
Settlement Options
The payment options are: Option 1: Income for a Fixed Number of Years; Option
2: Life Income with 10 Years of Payments Guaranteed; and Option 3: Joint and
Last Survivor Income. Other options may be arranged by mutual consent. Each
option is available in two forms_as a variable annuity for use with the
Variable Account and as a fixed annuity for use with the Fixed Account.
Variable annuity payments will fluctuate while fixed annuity payments will
not. Unless the Owner chooses otherwise, Contract Value will be applied to a
variable annuity option. Whether variable or fixed, the same Contract Value
amount applied to each option will produce a different initial annuity
payment as well as different subsequent payments.
The payee is the person who will receive the sum payable under a payment
option. Any payment option that provides for payments to continue after the
death of the payee will not allow the successor payee to extend the period of
time over which the remaining payments are to be made.
If the amount available to apply under any variable or fixed option is less
than $2,000, Liberty Life has reserved the right to pay such amount in one
sum to the payee in lieu of the payment otherwise provided for.
Annuity payments will be made monthly unless quarterly, semi-annual or annual
payments are chosen by written request. However, if any payment provided for
would be or becomes less than $100, Liberty Life has the right to reduce the
frequency of payments to such an interval as will result in each payment
being at least $100.
Option 1: Income For a Fixed Number of Years. Liberty Life will pay an
annuity for a chosen number of years, not less than 5 nor over 50 (a period
of years over 30 may be chosen only if it does not exceed the difference
between age 100 and the Annuitant's age on the date of the first payment).
At any time while variable annuity payments are being made, the payee may
elect to receive the following amount: (a) the present value of the remaining
payments, commuted at the interest rate used to create the annuity factor for
this option (this interest rate is 5% per year unless 3% per year is chosen
by Written Request); less (b) any Contingent Deferred Sales Charge due by
treating the value defined in (a) as a total surrender. (See "Deductions for
Contingent Deferred Sales Charge" on Page 14). Instead of receiving a lump
sum, the payee can elect another payment option and the amount applied to the
option will not be reduced by the charge defined in (b) above. If, at the
death of the payee, Option 1 payments have been made for less than the chosen
number of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option. For the variable annuity,
this interest rate is 5% per year unless 3% per year is chosen by
Written Request. For variable annuity payments under Option 1, the
Mortality and Expense Risk Charge is deducted during the payment period
but Liberty Life has no mortality risk during this period.
The Mortality and Expense Risk Charge is deducted during the Option 1 payment
period but Liberty Life has no mortality risk during this period.
Liberty Life has available a "level monthly" payment option that can be
chosen for variable payments under Option 1. Under this option, the monthly
payment amount changes every 12 months instead of every month as would be the
case under the standard monthly payment frequency. The "level monthly" option
converts an annual payment amount into 12 equal monthly payments as follows.
Each annual payment will be determined as described in "Variable Annuity
Payment Values" on page 29. Each annual payment will then be placed in
Liberty Life's general account, from which it will be paid out in twelve
equal monthly payments. The sum of the twelve monthly payments will exceed
the annual payment amount because of an interest rate factor used by Liberty
Life that will vary from year to year. If the payments are commuted, (1) the
commutation method described above for calculating the present value of
remaining payments applies to any remaining annual payments and (2) any
unpaid monthly payments out of the current twelve will be commuted at the
interest rate that was used to determine those twelve current monthly
payments.
See "Annuity Payments" on page 21 for the manner in which Option 1 may be
taxed.
Option 2: Life Income with 10 Years of Payments Guaranteed. Liberty Life will
pay an annuity during the lifetime of the payee. If, at the death of the
payee, payments have been made for less than 10 years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) that successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the interest rate used to
create the annuity factor for this option. For the variable annuity,
this interest rate is 5% per year unless 3% per year is chosen by
Written Request. The amount of the annuity payments will depend on the
age of the payee at the time annuity payments are to begin and it may
also depend on the payee's sex.
Option 3: Joint and Last Survivor Income. Liberty Life will pay an annuity
for as long as either the payee or a designated second natural person is
alive. The amount of the annuity payments will depend on the age of both
persons at the time annuity payments are to begin and it may also depend on
each person's sex. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE
ANNUITY PAYMENT IF BOTH PAYEES DIE AFTER THE RECEIPT OF THE FIRST PAYMENT OR
TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE PAYEES BOTH DIE AFTER RECEIPT OF
THE SECOND PAYMENT AND SO ON.
Variable Annuity Payment Values
The amount of the first variable annuity payment is determined by Liberty
Life using an annuity purchase rate that is currently based on an assumed
annual investment return of 5%, unless 3% is chosen by Written Request.
Subsequent variable annuity payments will fluctuate in amount and reflect
whether the actual investment return of the selected Sub-Account(s) (after
deducting the Mortality and Expense Risk Charge) is better or worse than the
assumed investment return. The total dollar amount of each variable annuity
payment will be equal to: (a) the sum of all Sub-Account payments; less (b)
the pro-rata amount of the annual Contract Maintenance Charge. A payee can
instruct Liberty Life's Service Office to change the Sub-Account(s) used to
determine the amount of the variable annuity payments. Any change requested
must be at least six months after a prior selection.
Fixed Annuity Payment Values
The dollar amount of each fixed annuity payment will be determined by
deducting from the value being applied to the Fixed Account any premium taxes
not previously deducted and then dividing the remaining value by $1,000 and
multiplying the result by the greater of: (a) the applicable factor shown in
the appropriate table in the Contract; or (b) the factor currently offered by
Liberty Life at the time annuity payments begin. This current factor may be
based on the sex of the payee unless to do so would be prohibited by law.
Proof of Age, Sex, and Survival of Annuitant
Liberty Life may require proof of age, sex or survival of any payee upon
whose age, sex or survival payments depend. If the age or sex has been
misstated, Liberty Life will compute the amount payable based on the correct
age and sex. If income payments have begun, any underpayments Liberty Life
may have made will be paid in full with the next annuity payment. Any
overpayments, unless repaid in one sum, will be deducted from future annuity
payments until Liberty Life is repaid in full.
SUSPENSION OF PAYMENTS
Liberty Life reserves the right to suspend or postpone any type of payment
from the Variable Account for any period when: (a) the New York Stock
Exchange is closed other than customary weekend or holiday closings; (b)
trading on the Exchange is restricted; or (c) an emergency exists as a result
of which it is not reasonably practicable to dispose of securities held in
the Variable Account; or determine their value. The applicable rules and
regulations of the Securities and Exchange Commission shall govern as to
whether the conditions described in (b) and (c) exist.
TAX STATUS
Introduction
The Contract is designed for use by individuals in retirement plans which may
or may not be Qualified Plans under the provisions of the Internal Revenue
Code (the "Code"). The ultimate effect of federal income taxes on the
Contract Value, on annuity payments, and on the economic benefit to the
Contract Owner, Annuitant or Designated Beneficiary depends on the type of
retirement plan for which the Contract is purchased and upon the tax and
employment status of the individual concerned. The discussion contained
herein is general in nature and is not intended as tax advice. Each person
concerned should consult a competent tax adviser. No attempt is made to
consider any applicable state or other tax laws. Moreover, the discussion
herein is based upon Liberty Life's understanding of current federal income
tax laws as they are currently interpreted. No representation is made
regarding the likelihood of continuation of those current federal income tax
laws or of the current interpretations by the Internal Revenue Service.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities in general. There are no
income taxes on increases in the value of a Contract until a distribution
occurs, in the form of a full surrender, a partial surrender, an assignment
or gift of the Contract, or annuity payments. A trust or other entity owning
a Non-Qualified Contract other than as an agent for an individual is taxed
differently; increases in the value of a contract are taxed yearly whether or
not a distribution occurs.
Surrenders, Assignments and Gifts. A Contract Owner who fully surrenders his
or her Contract is taxed on the portion of the payment that exceeds his or
her cost basis in the Contract. For Non-Qualified Contracts, the cost basis
is generally the amount of the purchase payments made for the Contract and
the taxable portion of the surrender payment is taxed as ordinary income. For
Qualified Contracts, the cost basis is generally zero and the taxable portion
of the surrender payment is generally taxed as ordinary income subject to
special 5-year income averaging for lump-sum distributions received before
January 1, 2000. A Designated Beneficiary receiving a lump sum surrender
benefit after the death of the Annuitant or Owner is taxed on the portion of
the amount that exceeds the Contract Owner's cost basis in the Contract. If
the Designated Beneficiary elects to receive annuity payments within 60 days
of the decedent's death, different tax rules apply. See "Annuity Payments" on
page 21. For Non-Qualified Contracts, the tax treatment applicable to
Designated Beneficiaries may be contrasted with the income-tax-free treatment
applicable to persons inheriting and then selling mutual fund shares with
date-of-death value in excess of their basis.
Partial surrenders received under Non-Qualified Contracts prior to
annuitization are first included in gross income to the extent Contract Value
exceeds purchase payments. Then, to the extent the Contract Value does not
exceed purchase payments, such surrenders are treated as a non-taxable return
of principal to the Contract Owner. For partial surrenders under a Qualified
Contract, payments are treated first as a non-taxable return of principal up
to the cost basis and then a taxable return of income. Since the cost basis
of Qualified Contracts is generally zero, partial surrender amounts will
generally be fully taxed as ordinary income.
A Contract Owner who assigns or pledges a Non-Qualified Contract is treated
as if he or she had received the amount assigned or pledged and thus is
subject to taxation under the rules applicable to surrenders. A Contract
Owner who gives away the Contract (i.e., transfers it without full and
adequate consideration) to anyone other than his or her spouse is treated for
income tax purposes as if he or she had fully surrendered the Contract.
A special computational rule applies if Liberty Life issues to the Contract
Owner, during any calendar year, (a) two or more Contracts or (b) one or more
Contracts and one or more of Liberty Life's other annuity contracts. Under
this rule, the amount of any distribution includable in the Contract Owner's
gross income is to be determined under Section 72(e) of the Code by treating
all the Liberty Life contracts as one contract. Liberty Life believes that
this means the amount of any distribution under one contract will be
includable in gross income to the extent that at the time of distribution the
sum of the values for all the contracts exceeds the sum of the cost bases for
all the contracts.
Annuity Payments. The non-taxable portion of each variable annuity payment is
determined by dividing the cost basis of the Contract that is allocated to
variable payments by the total number of expected payments while the non-
taxable portion of each fixed annuity payment is determined by an "exclusion
ratio" formula which establishes the ratio that the cost basis of the
Contract that is allocated to fixed payments bears to the total expected
value of annuity payments for the term of the annuity. The remaining portion
of each payment is taxable. Such taxable portion is taxed at ordinary income
rates. For Qualified Contracts, the cost basis is generally zero. With
annuity payments based on life contingencies, the payments will become fully
taxable once the payee lives longer than the life expectancy used to
calculate the non-taxable portion of the prior payments. Because variable
annuity payments can increase over time and because certain payment options
provide for a lump sum right of commutation, it is possible that the IRS
could determine that variable annuity payments under commutable options
should not be taxed as described above but instead should be taxed as if they
were received under an agreement to pay interest. This determination would
result in a higher amount (up to 100%) of certain payments being taxable.
With respect to the "level monthly" payment option available under Option 1,
pursuant to which each annual payment is placed in Liberty Life's general
account and paid out with interest in twelve equal monthly payments, it is
possible the IRS could determine that receipt of the first monthly payout of
each annual payment is constructive receipt of the entire annual payment.
Thus, the total taxable amount for each annual payment would be accelerated
to the time of the first monthly payout and reported in the tax year in which
the first monthly payout is received.
Penalty Tax. Payments received by Owners, Annuitants, and Designated
Beneficiaries under Contracts may be subject to both ordinary income taxes
and a penalty tax equal to 10% of the amount received that is includable in
income. The penalty tax is not imposed on amounts received: (a) after the
taxpayer attains age 59-1/2; (b) in a series of substantially equal payments
made for life or life expectancy; (c) after the death of the Contract Owner
(or, where the Owner is not a human being, after the death of the Annuitant);
(d) if the taxpayer becomes totally and permanently disabled; or (e) under a
Non-Qualified Contract's annuity payment option that provides for a series of
substantially equal payments, provided only one purchase payment is made to
the Contract, the Contract is not issued as a result of a Section 1035
exchange, and the first annuity payment begins in the first Contract Year.
Income Tax Withholding. Liberty Life is required to withhold federal income
taxes on taxable amounts paid under the Contract unless the recipient elects
not to have withholding apply. Liberty Life will notify recipients of their
right to elect not to have withholding apply.
Section 1035 Exchanges. A Non-Qualified Contract may be purchased with
proceeds from the surrender of an existing annuity contract. Such a
transaction may qualify as a tax-free exchange pursuant to Section 1035 of
the Code. It is Liberty Life's understanding that in such an event: (a) the
new Contract will be subject to the distribution-at-death rules described in
the "Death Provisions for Non-Qualified Contracts" section on Page 16; (b)
purchase payments made between 8/14/82 and 1/18/85 and the income allocable
to them will, following an exchange, no longer be covered by a
"grandfathered" exception to the penalty tax for a distribution of income
that is allocable to an investment made over ten years prior to the
distribution; and (c) purchase payments made before 8/14/82 and the income
allocable to them will, following an exchange, continue to receive the
following "grandfathered" tax treatment under prior law: (i) the penalty tax
does not apply to any distribution; (ii) partial surrenders are treated first
as a non-taxable return of principal and then a taxable return of income; and
(iii) assignments are not treated as surrenders subject to taxation. Liberty
Life's understanding of the above is principally based on legislative reports
prepared by the Staff of the Congressional Joint Committee on Taxation.
Diversification Standards. The U.S. Secretary of the Treasury has issued
regulations that set standards for diversification of the investments
underlying variable annuity contracts (other than pension plan contracts).
The Eligible Funds are designed to be managed to meet the diversification
requirements for the Contract as those requirements may change from time to
time. If the diversification requirements are not satisfied, the Contract
would not be treated as an annuity contract. As a consequence to the Contract
Owner, income earned on a Contract would be taxable to the Contract Owner in
the year in which diversification requirements were not satisfied, including
previously non-taxable income earned in prior years. As a further
consequence, Liberty Life would be subjected to federal income taxes on
assets in the Variable Account.
The Secretary of the Treasury announced in September 1986 that he expects to
issue regulations which will prescribe the circumstances in which a Contract
Owner's control of the investments of a segregated asset account may cause
the Contract Owner, rather than the insurance company, to be treated as the
owner of the assets of the account. The regulations could impose requirements
that are not reflected in the Contract. Liberty Life, however, has reserved
certain rights to alter the Contract and investment alternatives so as to
comply with such regulations. Since the regulations have not been issued,
there can be no assurance as to the content of such regulations or even
whether application of the regulations will be prospective. For these
reasons, Contract Owners are urged to consult with their own tax advisers.
Qualified Plans
The Contract is 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 herein to provide more than general information
about the use of the Contract with the various types of Qualified Plans.
Participants under such Qualified Plans as well as Contract Owners,
Annuitants, and Designated 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 issued in connection therewith. Following are brief
descriptions of the various types of Qualified Plans and of the use of the
Contract in connection therewith. Purchasers of the Contract should seek
competent advice concerning the terms and conditions of the particular
Qualified Plan and use of the Contract with that Plan.
Tax-Sheltered Annuities
Section 403(b) of the 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 contribution limitations, exclude the amount of purchase
payments from gross income for tax purposes. However, such purchase payments
may be subject to Social Security (FICA) taxes. This type of annuity contract
is commonly referred to as a "Tax-Sheltered Annuity" (TSA).
Section 403(b)(11) of the Code contains distribution restrictions.
Specifically, benefits may be paid, through surrender of the Contract or
otherwise, only (a) when the employee attains age 59-1/2, separates from
service, dies or becomes totally and permanently disabled (within the meaning
of Section 72(m)(7) of the Code) or (b) in the case of hardship. A hardship
distribution must be of employee contributions only and not of any income
attributable to such contributions. Section 403(b)(11) does not apply to
distributions attributable to assets held as of December 31, 1988. Thus, it
appears that the law's restrictions would apply only to distributions
attributable to contributions made after 1988, to earnings on those
contributions, and to earnings on amount held as of December 31, 1988. The
Internal Revenue Service has indicated that the distribution restrictions of
Section 403(b)(11) are not applicable when TSA funds are being transferred
tax-free directly to another TSA issuer, provided the transferred funds
continue to be subject to the Section 403(b)(11) distribution restrictions.
Liberty Life will notify a Contract Owner who has requested a distribution
from a Contract if all or part of such distribution is eligible for rollover
to another TSA or to an individual retirement annuity or account (IRA). Any
amount eligible for rollover treatment will be subject to mandatory federal
income tax withholding at a 20% rate if the Contract Owner receives the
amount rather than directing Liberty Life by Written Request to transfer the
amount as a direct rollover to another TSA or IRA.
Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity".
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on the
time when distributions may commence. In addition, distributions from certain
types of Qualified Plans may be placed on a tax-deferred basis into an
Individual Retirement Annuity.
Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of retirement plans for employees. Such retirement
plans may permit the purchase of the Contract to provide benefits under the
plans.
Deferred Compensation Plans With Respect to Service for State and Local
Governments
Section 457 of the Code, while not actually providing for a Qualified Plan as
that term is normally used, provides for certain deferred compensation plans
that enjoy special income tax treatment with respect to service for tax-
exempt organizations, state governments, local governments, and agencies and
instrumentalities of such governments. The Contract can be used with such
plans. Under such plans, a participant may specify the form of investment in
which his or her participation will be made. However, all such investments
are owned by and subject to the claims of general creditors of the sponsoring
employer.
VARIABLE ACCOUNT VOTING RIGHTS
In accordance with its view of present applicable law, Liberty Life will vote
the shares of the Eligible Funds held in the Variable Account at regular and
special meetings of the shareholders of the Eligible Funds in accordance with
instructions received from persons having the voting interest in the Variable
Account. Liberty Life will vote shares for which it has not received
instructions in the same proportion as it votes shares for which it has
received instructions.
However, if the Investment Company Act of 1940 or any regulation thereunder
should be amended or if the present interpretation thereof should change, and
as a result Liberty Life determines that it is permitted to vote the shares
of the Eligible Funds in its own right, it may elect to do so.
The person having the voting interest under a Contract shall be the Contract
Owner. The number of shares held in each Sub-Account which are attributable
to each Contract Owner is determined by dividing the Contract Owner's
interest in each Sub-Account by the net asset value of the applicable share
of the Eligible Fund. The person having the voting interest under an annuity
payment option shall be the payee. The number of shares held in the Variable
Account which are attributable to each payee is determined by dividing the
reserve for the annuity payments by the net asset value of one share. During
the annuity payment period, the votes attributable to a payee decrease as the
reserves underlying the payments decrease.
The number of shares which a person has a right to vote will be determined as
of the date coincident with the date established by the respective Eligible
Fund for determining shareholders eligible to vote at the meeting of the Fund
and voting instructions will be solicited by written communication prior to
such meeting in accordance with the procedures established by the Eligible
Fund.
Each person having the voting interest in the Variable Account will receive
periodic reports relating to the Eligible Fund(s) in which he or she has an
interest, proxy material and a form with which to give such voting
instructions with respect to the proportion of the Eligible Fund shares held
in the Variable Account corresponding to his or her interest in the Variable
Account.
DISTRIBUTION OF THE CONTRACT
Keyport Financial Services Corp. ("KFSC") serves as the Principal Underwriter
for the Contract described in this prospectus. The Contract will be sold by
salespersons who represent Liberty Life as variable annuity agents and who
are registered representatives of broker/dealers who have entered into
distribution agreements with KFSC. KFSC is registered under the Securities
Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. It is located at 125 High Street, Boston,
Massachusetts 02110.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account or the Principal
Underwriter are a party. Liberty Life is engaged in various kinds of routine
litigation which in its judgment is not of material importance in relation to
the total capital and surplus of Liberty Life.
INQUIRIES BY CONTRACT OWNERS
Contract Owners with questions about their Contracts can write Liberty Life
Service Office, 125 High Street, Boston, MA 02110, or call (800) 367-3653.
TABLE OF CONTENTS_STATEMENT OF ADDITIONAL INFORMATION
Page
Liberty Life Assurance Company of Boston 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Principal Underwriter 4
Custodian 4
Experts 4
Investment Performance 5
Average Annual Total Return for a Contract that is
Surrendered and for a Contract that Continues 6
Change in Accumulation Unit Value 8
Yields for CIF Sub-Account 9
Financial Statements 11
Liberty Life Assurance Company of Boston 11
Variable Account-K 37
APPENDIX A
TELEPHONE INSTRUCTIONS
Telephone Transfers of Contract Values
1. If there are joint Contract Owners, both must authorize Liberty Life to
accept telephone instructions but either Owner can give Liberty Life
telephone instructions.
2. All callers will be required to identify themselves. Liberty Life
reserves the right to refuse to act upon any telephone instructions in cases
where the caller has not sufficiently identified himself/herself to Liberty
Life's satisfaction.
3. Neither Liberty Life nor any person acting on its behalf shall be
subject to any claim, loss, liability, cost or expense if it or such person
acted in good faith upon a telephone instruction, including one that is
unauthorized or fraudulent; however, Liberty Life will employ reasonable
procedures to confirm that a telephone instruction is genuine and, if Liberty
Life does not, Liberty Life may be liable for losses due to an unauthorized
or fraudulent instruction. The Contract Owner thus bears the risk that an
unauthorized or fraudulent instruction that is executed may cause the
Contract Value to be lower than it would be had no instruction been executed.
4. All conversations will be recorded with disclosure at the time of the
call.
5. The application for the Contract may allow a Contract Owner to create a
power of attorney by authorizing another person to give telephone
instructions. Unless prohibited by state law, such power will be treated as
durable in nature and shall not be affected by the subsequent incapacity,
disability or incompetency of the Contract Owner. Either Liberty Life or the
authorized person may cease to honor the power by sending written notice to
the Contract Owner at the Contract Owner's last known address. Neither
Liberty Life nor any person acting on its behalf shall be subject to
liability for any act executed in good faith reliance upon a power of
attorney.
6. Telephone authorization shall continue in force until (a) Liberty Life
receives the Contract Owner's written revocation, (b) Liberty Life
discontinues the privilege, or (c) Liberty Life receives written evidence
that the Contract Owner has entered into a market timing or asset allocation
agreement with an investment adviser or with a broker-dealer.
7. Telephone transfer instructions received by Liberty Life's Service
Office at 800-367-3653 before the close of regular trading on the New York
Stock Exchange (currently 4:00 P.M. Eastern Time) will be initiated that day
based on the unit value prices calculated at the close of that day.
Instructions received after the close of trading on the NYSE will be
initiated the following business day.
8. Once instructions are accepted by Liberty Life, they may not be
canceled.
9. All transfers must be made in accordance with the terms of the Contract
and current prospectus. If the transfer instructions are not in good order,
Liberty Life will not execute the transfer and will notify the caller within
48 hours.
10. If 100% of any Sub-Account's value is transferred and the allocation
formula for purchase payments includes that Sub-Account, then the allocation
formula for future purchase payments will change accordingly unless Liberty
Life receives telephone instructions to the contrary. For example, if the
allocation formula is 50% to Sub-Account A and 50% to Sub-Account B and all
of Sub-Account A's value is transferred to Sub-Account B, the allocation
formula will change to 100% to Sub-Account B unless Liberty Life is
instructed otherwise.
Telephone Changes to Purchase Payment Allocation Percentages
Numbers 1 - 6 above are applicable.
APPENDIX B
DOLLAR COST AVERAGING
Liberty Life offers a dollar cost averaging program that Contract Owners may
participate in by Written Request. The program periodically transfers
Accumulation Units from the CIF Sub-Account to other Sub-Accounts selected by
the Contract Owner. The program allows a Contract Owner to invest in non-
"money market" Sub-Accounts over time rather than having to invest in those
Sub-Accounts all at once.
The program is available for initial and subsequent purchase payments and for
Contract Value transferred into the CIF Sub-Account. Under the program,
Liberty Life makes automatic transfers on a periodic basis out of the CIF Sub-
Account into one or more of the other Sub-Accounts (Liberty Life reserves the
right to limit the number of Sub-Accounts the Contract Owner can choose but
there are currently no limits). The automatic transfer program does not
guarantee a profit nor does it protect against loss in declining markets.
The Contract Owner by Written Request must specify the monthly amount to be
transferred (minimum $150) and the Sub-Account(s) to which transfers are to
be made from the CIF Sub-Account. The first transfer will occur at the close
of the Valuation Period that includes the 30th day after receipt of the
Contract Owner's Written Request. Each succeeding transfer will occur one
month later (e.g., if the 30th day after the Issue Date is April 8, the
second transfer will occur at the close of the Valuation Period that includes
May 8). When the remaining Sub-Account value is less than the monthly
transfer amount, that remaining value will be transferred and the program
will end. Before this final transfer, the Contract Owner may extend the
program by allocating additional purchase payments to the CIF Sub-Account or
by transferring Contract Value to the CIF Sub-Account. The Contract Owner may
by Written Request or by telephone change the monthly amount to be
transferred, change the Sub-Account(s) to which the transfers are to be made,
or end the program. The program will automatically end if the Income Date
occurs. Liberty Life reserves the right to end the program at any time by
sending the Contract Owner a notice one month in advance.
Written or telephone instructions must be received by Liberty Life by the end
(currently 5:00 P.M. Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer. Telephone
instructions are subject to the conditions and procedures established by
Liberty Life from time to time. The current conditions and procedures appear
below and Contract Owners in a dollar cost averaging program will be
notified, in advance, of any changes.
1. If there are joint Contract Owners, either Owner can give Liberty Life
telephone transfer instructions.
2. All callers will be required to identify themselves. Liberty Life
reserves the right to refuse to act upon any telephone instructions in cases
where the caller has not sufficiently identified himself/herself to Liberty
Life's satisfaction.
3. Neither Liberty Life nor any person acting on its behalf shall be
subject to any claim, loss, liability, cost or expense if it or such person
acted in good faith upon a telephone instruction, including one that is
unauthorized or fraudulent; however, Liberty Life will employ reasonable
procedures to confirm that a telephone instruction is genuine and, if Liberty
Life does not, Liberty Life may be liable for losses due to an unauthorized
or fraudulent instruction. The Contract Owner thus bears the risk that an
unauthorized or fraudulent instruction that is executed may cause the
Contract Value to be lower than it would be had no instruction been executed.
4. All conversations will be recorded with disclosure at the time of the
call.
5. Telephone authorization shall continue in force until (a) Liberty Life
receives the Contract Owner's written revocation, (b) Liberty Life
discontinues the privilege, or (c) Liberty Life receives written evidence
that the Contract Owner has entered into a market timing or asset allocation
agreement with an investment adviser or with a broker-dealer.
6. Telephone instructions must be received by Liberty Life's Service Office
at 800-367-3653 before the end (currently 5:00 P.M. Eastern Time) of the
business day preceding the next scheduled transfer in order to be in effect
for that transfer.
7. Once instructions are accepted by Liberty Life, they may not be
canceled. New telephone instructions may be given on the following business
day.
8. All instructions must be made in accordance with the terms of the
Contract and current prospectus. If the instructions are not in good order,
Liberty Life will not execute them and will notify the caller within 48
hours.
[NEW YORK PREFERRED ADVISOR LOGO]
NEW YORK PREFERRED ADVISOR
PROSPECTUS
MAY 1, 1997
NOT May lose value
FDIC- No bank guarnatee
INSURED
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
[LIBERTY LOGO]
Issued by:
Liberty Life Assurance Company of Boston
175 Berkeley Street
Boston, Massachusetts 02117
Liberty Life Service Office
125 High Street
Boston, MA 02110-2712
Service Hotline 800-367-3653 (Press 3)
Preferred Advisor used by permission
PAP/NY 5/97
Yes. I would like to receive the Liberty Life Variable Annuity Statement of
Additional Information.
Yes. I would like to receive the SteinRoe Variable Investment Trust Statement
of Additional Information.
Yes. I would like to receive the Keyport Variable Investment Trust Statement
of Additional Information.
Name
Address
City State Zip
BUSINESS REPLY MAIL FIRST CLASS MAIL
PERMIT NO. 6719 BOSTON, MA
POSTAGE WILL BE PAID BY ADDRESSEE
LIBERTY LIFE SERVICE OFFICE
125 HIGH STREET
BOSTON MA 02110-9773
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
VARIABLE ACCOUNT - K
AND
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON ("Liberty Life")
This Statement of Additional Information is not a prospectus but it relates
to, and should be read in conjunction with, the variable annuity prospectus
dated May 1, 1997. The prospectus is available, at no charge, by writing
Keyport Financial Services Corp. at 125 High Street, Boston, MA 02110 or by
calling (800)-437-4466.
TABLE OF CONTENTS
Page
Liberty Life Assurance Company of Boston 2
Variable Annuity Benefits 2
Variable Annuity Payment Values 2
Re-Allocating Sub-Account Payments 3
Principal Underwriter 4
Custodian 4
Experts 4
Investment Performance 5
Average Annual Total Return for a Contract that is Surrendered
and for a Contract that Continues 6
Change in Accumulation Unit Value 8
Yield for CIF Sub-Account 9
Financial Statements 11
Liberty Life Assurance Company of Boston 11
Variable Account - K 37
The date of this statement of additional information is May 1, 1997.
LIFE1997.SAI
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
Liberty Life Assurance Company of Boston is a wholly-owned subsidiary of
Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company.
Liberty Mutual Insurance Company is a multi-line insurance company. For
additional information about Liberty Life, see page 8 of the prospectus.
VARIABLE ANNUITY BENEFITS
Variable Annuity Payment Values
For each variable payment option, the total dollar amount of each periodic
payment will be equal to: (a) the sum of all Sub-Account payments; less (b)
the pro-rata amount of the annual Contract Maintenance Charge.
The first payment for each Sub-Account will be determined by deducting any
applicable Contract Maintenance Charge and any applicable state premium taxes
and then dividing the remaining value of that Sub-Account by $1,000 and
multiplying the result by the greater of: (a) the applicable factor from the
Contract's annuity table for the particular payment option; or (b) the factor
currently offered by Liberty Life at the time annuity payments begin. This
current factor may be based on the sex of the payee unless to do so would be
prohibited by law.
The number of Annuity Units for each Sub-Account will be determined by
dividing such first payment by the Sub-Account Annuity Unit value for the
Valuation Period that includes the date of the first payment. The number of
Annuity Units remains fixed for the annuity payment period. Each Sub-Account
payment after the first one will be determined by multiplying (a) by (b),
where: (a) is the number of Sub-Account Annuity Units; and (b) is the Sub-
Account Annuity Unit value for the Valuation Period that includes the date of
the particular payment.
Variable annuity payments will fluctuate in accordance with the investment
results of the underlying Eligible Funds. In order to determine how these
fluctuations affect annuity payments, Liberty Life uses an Annuity Unit
value. Each Sub-Account has its own Annuity Units and value per Unit. The
Unit value applicable using any Valuation Period is determined at the end of
such period.
Liberty Life initially valued each Annuity Unit as follows: January 1, 1993:
CIF - 11.883555; MSIF - 13.864802; MAF - 14.646064; MGSF - 17.540544 and CAF
- - 15.871076; which precede the February 15, 1993 date beginning of operations
of the Sub-Accounts; July 13, 1993: CKUF -$10.00; July 23, 1993: CKGIF -
$10.00; May 3, 1994: CKIFG - $10.00; October 13, 1995: CKSIF - $10.00;
October 13, 1995: CKUSF - $10.00; October 13, 1995: NKTF - $10.00. The Unit
value for each Sub-Account in any Valuation Period after the initial period
is determined by multiplying the value for the prior period by a net
investment factor. This factor may be greater or less than 1.0; therefore,
the Annuity Unit may increase or decrease from Valuation Period to Valuation
Period. For each assumed annual investment rate (AIR), Liberty Life
calculates a net investment factor for each Sub-Account by dividing (a) by
(b), where:
(a) is equal to the net investment factor defined on page 15 of
the prospectus without any deduction for the sales charge defined
in (c)(ii) on that page; and
(b) is the assumed investment factor for the current Valuation
Period. The assumed investment factor adjusts for the interest
assumed in determining the first variable annuity payment. Such
factor for any Valuation Period shall be the accumulated value, at
the end of such period, of $1.00 deposited at the beginning of such
period at the assumed annual investment rate (AIR). The AIR for
Annuity Units based on the Contract's annuity tables is 5% per
year. An AIR of 3% per year is also currently available upon
Written Request.
With a particular AIR, payments after the first one will increase or decrease
from month to month based on whether the actual annualized investment return
of the selected Sub-Account(s) (after deducting the Mortality and Expense
Risk Charge) is better or worse than the assumed AIR percentage. If a given
amount of Sub-Account value is applied to a particular payment option, the
initial payment will be smaller if a 3% AIR is selected instead of 5% AIR
but, all other things being equal, the subsequent 3% AIR payments have the
potential for increasing in amount by a larger percentage and for decreasing
in amount by a smaller percentage. For example, consider what would happen
if the actual annualized investment return (see the first sentence of this
paragraph) is 7%, 5%, 3%, or 1% between the time of the first and second
payments. With an actual 7% return, the 3% AIR and 5% AIR payments would
both increase in amount but the 3% AIR payment would increase by a larger
percentage. With an actual 5% return, the 3% AIR payment would increase in
amount while the 5% AIR payment would stay the same. With an actual return
of 3%, the 3% AIR payment would stay the same while the 5% AIR payment would
decrease in amount. Finally, with an actual return of 1%, the 3% AIR and 5%
AIR payments would both decrease in amount but the 3% AIR payment would
decrease by a smaller percentage. Note that the changes in payment amount
described above are on a percentage basis and thus do not illustrate when, if
ever, the 3% AIR payment amount might become larger than the 5% AIR payment
amount. Note though that if Option 1 (Income for a Fixed Number of Years) is
selected and payments continue for the entire period, the 3% AIR payment
amount will start out being smaller than the 5% AIR payment amount but
eventually the 3% AIR payment amount will become larger than the 5% AIR
payment amount.
Re-Allocating Sub-Account Payments
The number of Annuity Units for each Sub-Account under any variable annuity
option will remain fixed during the entire annuity payment period unless the
payee makes a written request for a change. Any change requested must be at
least six months after a prior selection. The payee's request must specify
the percentage of the annuity payment that is to be based on the investment
performance of each Sub-Account. The percentage for each Sub-Account, if not
zero, must be at least 10% and must be a whole number. At the end of the
Valuation Period during which Liberty Life receives the request, Liberty Life
will: (a) value the Annuity Units for each Sub-Account to create a total
annuity value; (b) apply the new percentages the payee has selected to this
total value; and (c) recompute the number of Annuity Units for each Sub-
Account. This new number of units will remain fixed for the remainder of the
payment period unless the payee requests another change.
PRINCIPAL UNDERWRITER
The Contract, which is offered continuously, is distributed by Keyport
Financial Services Corp. ("KFSC"), which is an affiliate of Liberty Life.
During the fiscal year ended December 31, 1995 and 1994, Liberty Life paid
KFSC underwriting commissions for the Contract of $0.00 and $0.00,
respectively.
CUSTODIAN
The custodian of the assets of the Variable Account - K is Liberty Life.
Liberty Life has responsibility for providing all administration of the
Contracts and the Variable Account. This administration includes, but is not
limited to, preparation of the Contracts, maintenance of Contract Owners'
records, and all accounting, valuation, regulatory and reporting
requirements. Liberty Life has contracted with Keyport Life Insurance
Company, an affiliate, to provide all administration for the Contracts, as
its agent. Keyport Life Insurance Company's compensation is based on the
number of Contracts and on the Contract Value of these Contracts.
EXPERTS
The financial statements of Liberty Life Assurance Company of Boston at
December 31, 1996, and for the year then ended, and the financial statements
of Liberty Life Assurance Company of Boston-Variable Account K as of December
31, 1996 and for the year then ended appearing in this Statement of
Additional Information have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The financial statements of Liberty Life Assurance Company of Boston as
of December 31, 1995 and for each of the years in the two-year period ended
December 31, 1995 included herein, and the financial statements of Liberty
Life Assurance Company of Boston - Variable Account K for the year, or other
period as applicable, ended December 31, 1995 have been included herein
in reliance on the report of KPMG Peat Marwick LLP, independent certified
public accountants, and upon the authority of said firm as experts in
accounting and auditing.
INVESTMENT PERFORMANCE
The Variable Account may from time to time quote performance information
concerning its various Sub-Accounts. A Sub-Account's performance may also be
compared to the performance of sub-accounts used with variable annuities
offered by other insurance companies. This comparative information may be
expressed as a ranking prepared by Financial Planning Resources, Inc. of
Miami, FL (The VARDS Report) or by Morningstar, Inc. of Chicago, IL
(Morningstar's Variable Annuity Performance Report), which are independent
services that compare the performance of variable annuity sub-accounts. The
rankings are done on the basis of changes in accumulation unit values over
time and do not take into account any charges (such as sales charges or
administrative charges) that are deducted directly from contract values.
Ibbotson Associates of Chicago, IL provides historical returns from 1926 on
capital markets in the United States. The Variable Account may quote the
performance of its Sub-Accounts in conjunction with the long-term performance
of capital markets in order to illustrate general long-term risk versus
reward investment scenarios. Capital markets tracked by Ibbotson Associates
include common stocks, small company stocks, long-term corporate bonds, long-
term government bonds, U.S. Treasury Bills, and the U.S. inflation rate.
Historical total returns are determined by Ibbotson Associates for: Common
Stocks, represented by the Standard and Poor's Composite Index (an unmanaged
weighted index of 90 stocks prior to March 1957 and 500 stocks thereafter of
industrial, transportation, utility and financial companies widely regarded
by investors as representative of the stock market); Small Company Stocks,
represented by the fifth capitalization quintile (i.e., the ninth and tenth
deciles) of stocks on the New York Stock Exchange for 1926-1981 and by the
performance of the Dimensional Fund Advisors Small Company 9/10 (for ninth
and tenth deciles) Fund thereafter; Long Term Corporate Bonds, represented
beginning in 1969 by the Salomon Brothers Long-Term High-Grade Corporate Bond
Index, which is an unmanaged index of nearly all Aaa and Aa rated bonds,
represented for 1946-1968 by backdating the Salomon Brothers Index using
Salomon Brothers' monthly yield data with a methodology similar to that used
by Salomon Brothers in computing its Index, and represented for 1925-1945
through the use of the Standard and Poor's monthly High-Grade Corporate
Composite yield data, assuming a 4% coupon and a 20-year maturity; Long-Term
Government Bonds, measured each year using a portfolio containing one U.S.
government bond with a term of approximately twenty years and a reasonably
current coupon; U.S. Treasury Bills, measured by rolling over each month a
one-bill portfolio containing, at the beginning of each month, the shortest-
term bill having not less than one month to maturity; Inflation, measured by
the Consumer Price Index for all Urban Consumers, not seasonably adjusted,
since January, 1978 and by the Consumer Price Index before then. The stock
capital markets may be contrasted with the corporate bond and U.S. government
securities capital markets. Unlike an investment in stock, an investment in
a bond that is held to maturity provides a fixed rate of return. Bonds have a
senior priority to common stocks in the event the issuer is liquidated and
interest on bonds is generally paid by the issuer before it makes any
distributions to common stock owners. Bonds rated in the two highest rating
categories are considered high quality and present minimal risk of default.
An additional advantage of investing in U.S. government securities and
Treasury bills is that they are backed by the full faith and credit of the
U.S. government and thus have virtually no risk of default. Although
government securities fluctuate in price, they are highly liquid.
The tables below provide performance results for each Sub-Account through
December 31, 1996. The results shown in this section are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Contract Owner.
The Sub-Accounts, other than Cash Income Fund Sub-Account, may advertise
total return information for various periods of time. Total return
performance information is based on the overall percentage change in value of
a hypothetical investment in the specific Sub-Account over a given period of
time.
Average Annual Total Return for a Contract that is Surrendered and for a
Contract that Continues
An average annual total return assuming the Contract is surrendered is
calculated using the method prescribed by the Securities and Exchange
Commission. This method illustrates each Sub-Account's average annual total
return, assuming a single $1,000 initial purchase payment and the surrender
of the contract at the end of the period being calculated. The Sub-Account's
average annual total return is the annual rate that would be necessary to
achieve the ending value of an investment kept in the Sub-Account for the
period.
Each calculation assumes that the $1,000 initial purchase payment was
allocated to only one Sub-Account and no transfers or additional purchase
payments were made. The rate of return reflects all charges assessed against
a Contract and the Sub-Account except for any premium taxes that may be
payable. The charges reflected are: a Contingent Deferred Sales Charge that
applies when the hypothetical Contract is surrendered; the annual l.25%
Mortality and Expense Risk Charge and the annual 0.15% Sales Charge; and, on
an allocated basis, the Contract's Contract Maintenance Charge that is
deducted at the end of each year and upon surrender. The Contingent Deferred
Sales Charge used in the calculations for a particular Sub-Account is equal
to the percentage charge in effect at the end of the period multiplied by:
the assumed $1,000 payment less any amount of that payment that is free of
Contingent Deferred Sales Charge under the Contract's surrender provisions.
The percentage charge declines from 7% to 1% over 7 years by 1% per year. The
Contract Maintenance Charge used in the calculations for a particular Sub-
Account is equal to a dollar and time-weighted average for that Sub-Account
based on a yearly charge of $30 for the portion of the period shown that is
before 7/1/94 and $36 for any later portion of that period. A particular Sub-
Account's pro-rated portion is then equated to a $1,000 basis by multiplying
it by a fraction equal to $1,000 divided by the average Contract Value in
that Sub-Account during the period shown.
A second type of average annual return is calculated in the same manner as
the first except no Contingent Deferred Sales Charge is deducted since it is
assumed the Contract continues through the end of the period.
Total Return for a Contract Total Return for a Contract
Surrendered on 12/31/96 Still in force on 12/31/96
Hypothetical $1,000 Purchase Payment* Hypothetical $1,000 Purchase Payment*
Length of Investment Period Length of Investment Period
Since Contract Since Contract
Sub-Account One Year Inception Shown One Year Inception Shown
MSIF -2.35% 3.73% (1/1/93) 3.22% 4.62% (1/1/93)
MAF 7.96 8.96 (1/1/93) 13.96 9.73 (1/1/93)
MGSF 13.54 10.87 (1/1/93) 19.54 11.59 (1/1/93)
CAF 19.12 15.83 (1/1/93) 25.12 16.47 (1/1/93)
CKUF -0.66 4.54 (7/13/93) 5.01 5.57 (7/13/93)
CKSIF 2.32 9.95 (10/13/95) 8.17 8.82 (10/13/95)
CKGIF 10.13 12.07 (7/23/93) 16.13 12.94 (7/23/93)
CKIFG -2.00 -1.45 (5/3/94) 3.60 0.26 (5/3/94)
CKUSF N/A 13.96**(1/05/96) N/A 20.96**(1/05/96)
NKTF 3.77 6.34 (12/18/95) 9.69 12.12 (12/18/95)
* See footnote 4 on page 6 of the prospectus for the expense reimbursement
percentages applicable to all the SteinRoe Trust Funds beginning May 1, 1993.
Before then, the expense reimbursement was applicable to MSIF to the extent
expenses, including management fees, exceeded 1.00% of average annual assets.
For expense reimbursement applicable to the Keyport Trust Funds beginning
July 1, 1993, see footnote 3 on page 5 of the prospectus. The return
percentages would be lower without this expense reimbursement.
** Non-annualized total returns are shown since this Sub-Account has been
in existence for less than one year.
Change in Accumulation Unit Value
The change in Accumulation Unit values for each Sub-Account is computed
differently than the standardized average annual total return information.
A Sub-Account's change in Accumulation Unit values is the rate at which the
value of a Unit changes over the time period illustrated. For time periods
prior to the date the Variable Account commenced operations, Accumulation
Unit values are calculated based on the performance of the SteinRoe Trust
Funds and the assumption that the Sub-Accounts and the Contract were in
existence since the inception date of the Funds. Rates of change in
Accumulation Unit values reflect the Contract's annual 1.25% Mortality and
Expense Risk Charge and the annual .15% Sales Charge. They do not reflect
deductions for any Contingent Deferred Sales Charges, Contract Maintenance
Charges, and premium taxes. The rates of change would be lower if these
charges were included.
Average Annual Change 12-Month Period Change
In Accumulation Unit in Accumulation Unit Value*
Sub- Value Since 1/1/89*
Account 1989 1990 1991 1992 1993 1994 1995 1996
MSIF 6.82% 11.40% 7.59% 12.90% 4.49% 4.79% -2.93% 14.15% 3.24%
MAF 10.98 21.10 -2.11 26.17 6.04 7.78 -4.52 23.75 10.98
MGSF 14.70 29.64 -3.04 45.98 5.16 3.52 -7.64 35.84 19.59
CAF 15.95 29.39 -10.29 35.36 12.90 33.80 -0.21 10.21 25.18
CKUF 5.59 -2.53**-11.51 33.29 5.04
CKSIF 21.20 16.84** 8.20
CKGIF 12.96 4.26** -2.12 28.34 16.16
CKIFG 0.28 -6.86** 4.39 3.61
CKUSF 20.96 20.96**
NKTF 24.50 14.45** 9.70
* See footnote 4 on page 6 of the prospectus for the expense reimbursement
percentages applicable to all the SteinRoe Trust Funds beginning May 1, 1993.
Before then, the expense reimbursement was applicable to MSIF to the extent
expenses, including management fees, exceeded 1.00% of average annual assets.
For expense reimbursement applicable to the Keyport Trust Funds beginning
July 1, 1993, see footnote 3 on page 5 of the prospectus. The return
percentages would be lower without this expense reimbursement.
** Percentage of change is for less than 12 months; it is for the period
from the inception date to the end of that year (CKUF - 7/13/93; CKGIF -
7/23/93; CKIFG - 5/3/94; CKSIF - 10/13/95 NKTF - 12/18/95 and CKUSF - (1/5/96).
Yield for CIF Sub-Account
Yield and effective yield percentages for the CIF Sub-Account are calculated
using the method prescribed by the Securities and Exchange Commission. The
yield reflects the deduction of the annual l.40% asset-based Contract
charges. The yield also reflects, on an allocated basis, the Contract's
annual $36 Contract Maintenance Charge. The yield does not reflect
Contingent Deferred Sales Charges and premium taxes. The yield would be
lower if these charges were included. The following are the standardized
formulas:
Yield equals: (A - B - 1) X 365
C 7
Effective Yield Equals: (A - B)365/7 - 1
C
Where: A = the Accumulation Unit value at the end of the 7-day
period.
B = hypothetical Contract Maintenance Charge for the 7-
day period. The assumed annual CIF charge is equal to the $36
Contract charge multiplied by a fraction equal to the average
number of Contracts with CIF Sub-Account value during the 7-
day period divided by the average total number of Contracts
during the 7-day period. This annual amount is converted to a
7-day charge by multiplying it by 7/365. It is then equated
to an Accumulation Unit size basis by multiplying it by a
fraction equal to the average value of one CIF Accumulation
Unit during the 7-day period divided by the average Contract
Value in CIF Sub-Account during the 7-day period.
C = the Accumulation Unit value at the beginning of the
7-day period.
The yield formula assumes that the weekly net income generated by an
investment in the CIF Sub-Account will continue over an entire year. The
effective yield formula also annualizes seven days of net income but it
assumes that the net income is reinvested over the year. This compounding
effect causes effective yield to be higher than the yield.
For the 7-day period ended 12/31/96, the yield for the CIF Sub-Account was
3.70% and the effective yield was 3.77%.
Report of Independent Auditors
The Board of Directors
Liberty Life Assurance Company of Boston
We have audited the accompanying balance sheet of Liberty Life Assurance
Company of Boston (the Company) as of December 31, 1996, and the related
statements of income, stockholders' equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty Life Assurance
Company of Boston at December 31, 1996, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
February 28, 1997 Ernst & Young LLP
Boston, Massachusetts
Independent Auditors' Report
The Board of Directors
Liberty Life Assurance Company of Boston:
We have audited the accompanying balance sheet of Liberty Life Assurance
Company of Boston as of December 31, 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the years in the two-
year period then ended. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty Life Assurance
Company of Boston as of December 31, 1995 and the results of its operations
and its cash flows for each of the years in the two-year period then ended,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
Liberty Life Assurance Company of Boston
Balance Sheets
December 31
1996 1995
(In Thousands)
Assets
Investments:
Fixed maturities, available for sale $1,737,187 $1,522,447
Equity securities, available for sale 4,122 4,191
Policy loans 45,345 40,672
Short-term investments 78,715 121,471
Other invested assets 38,281 32,339
Total investments 1,903,650 1,721,120
Cash and cash equivalents 34,372 64,801
Amounts recoverable from reinsurers 48,800 36,919
Premiums receivable 8,421 4,974
Investment income due and accrued 20,820 17,275
Deferred policy acquisition costs 77,424 62,762
Other assets 7,050 7,545
Assets held in separate accounts 1,097,040 899,519
Total assets $3,197,577 $2,814,915
Liabilities and Stockholders' Equity:
Liabilities:
Future Policy benefits $ 936,842 $ 809,042
Policyholders' and beneficiaries' funds 548,153 441,619
Policy and contract claims 30,394 19,344
Dividends to policyholders 12,919 12,309
Experience rating refund reserves 2,400 1,190
Liability for participating policies 68,504 65,256
Federal income taxes payable 542 -
Deferred federal income taxes 73,973 93,158
Due to Parent 8,907 9,334
Accrued expenses and other liabilities 117,144 191,894
Liabilities related to separate accounts 1,097,040 899,519
Total liabilities 2,896,818 2,542,665
Stockholders' equity:
Common stock, $312.50 par value; 8,000
shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 52,500 2,500
Net unrealized gains on investments,
net of federal income taxes of $43,793
and $66,391 81,330 122,875
Cumulative foreign currency translations,
net of federal income taxes of $612 and $515 1,139 957
Retained earnings 163,290 143,418
Total stockholders' equity 300,759 272,250
Total liabilities and stockholders' equity $3,197,577 $2,814,915
See accompanying notes to financial statements.
Liberty Life Assurance Company of Boston
Statements of Income
Year Ended December 31
1996 1995 1994
(In Thousands)
Revenues:
Premiums, net $283,965 $197,017 $130,606
Net investment income 122,527 108,721 97,022
Realized gains on investments 6,722 5,091 3,043
Contractholder charges and assessments 5,759 5,428 4,943
Other revenues 4,469 4,323 3,776
Total revenues 423,442 320,580 239,390
Benefits and expenses:
Death and other policy benefits 173,281 126,029 110,158
Recoveries from reinsurers on ceded claims (11,454) (10,489) (5,858)
Provision for future policy benefits and
other policy liabilities 121,347 88,903 41,609
Interest credited to policyholders 32,252 27,527 18,347
Change in deferred policy acquisition
costs (15,247) (11,101) (9,921)
General expenses 69,926 52,555 38,381
Insurance taxes and licenses 6,956 4,997 3,550
Dividends to policyholders 12,610 12,277 11,671
Total benefits and expenses 389,671 290,698 207,937
Income from continuing operations before
federal income taxes and earnings of
participating policies 33,771 29,882 31,453
Federal income taxes 10,327 10,782 11,003
Income from continuing operations before
earnings of participating policies 23,444 19,100 20,450
Earnings of participating policies net
of federal income tax benefit of $2,514
in 1996, $2,581 in 1995 and $835 in 1994 3,247 3,397 1,545
Income from continuing operations 20,197 15,703 18,905
Discontinued operations:
Loss from operations on discontinued
group health, net of federal income
(benefits) taxes of ($175) in 1996, ($1,236)
in 1995 and $100 in 1994 (325) (2,267) 24
Net income $ 19,872 $ 13,436 $ 18,929
See accompanying notes to financial statements.
Liberty Life Assurance Company of Boston
Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
Net
Unrealized Cumulative
Additional Gains Foreign
Common Paid-In (losses) on Currency Retained
Stock Capital Investments Translations Earnings Total
Balance at
January 1, 1994 $2,500 2,500 105,774 203 111,053 $222,030
Net income 18,929 18,929
Net unrealized
gains (losses) on
investments, net
of deferred
federal income
taxes of ($425) (93,500) (93,500)
Cumulative foreign
currency translations,
net of deferred
federal income taxes
of ($140) 260 260
Balance at
December 31, 1994 2,500 2,500 12,274 463 129,982 147,719
Net income 13,436 13,436
Net unrealized
gains (losses) on
investments, net
of deferred
federal income
taxes of ($59,758) 110,601 110,601
Cumulative foreign
currency translations,
net of deferred
federal income taxes
of ($267) 494 494
Balance at
December 31, 1995 2,500 2,500 122,875 957 143,418 272,250
Additional Paid-In
Capital 50,000 50,000
Net income 19,872 19,872
Net unrealized
gains (losses) on
investments, net
of deferred
federal income
taxes of $22,598 (41,545) (41,545)
Cumulative foreign
currency translations,
net of deferred federal
income taxes
of ($97) 182 182
Balance at
December 31, 1996 $2,500 52,500 81,330 1,139 163,290 $300,759
See accompanying notes to financial statements.
Liberty Life Assurance Company of Boston
Statements of Cash Flows
Years ended December 31
1996 1995 1994
(In Thousands)
Cash flows from operating activities:
Premiums collected $ 280,613 $ 197,607 $ 127,716
Investment income received 98,899 89,412 80,817
Other considerations received 10,331 9,421 22,599
Policyholder claims paid (124,297) (96,494) (123,676)
Surrender benefits paid (33,748) (5,927) (5,317)
Policyholder dividends paid (12,008) (11,685) (11,081)
General expenses paid (67,834) (56,736) (41,915)
Insurance taxes and licenses paid (3,959) (6,000) (6,346)
Federal income taxes paid, including
capital gains taxes (5,858) (12,878) (4,897)
Intercompany net receipts (426) 9,201 (16,620)
Other receipts (payments) 12,218 (2,782) (6,904)
Net cash flows provided by operating
activities 153,931 113,139 14,376
Cash flows from investing activities:
Proceeds from fixed maturities sold 128,493 41,763 66,835
Proceeds from fixed maturities matured 91,292 75,084 124,347
Cost of fixed maturities acquired (480,206) (224,725) (315,121)
Proceeds from equity securities sold 125,997 87,449 45,632
Cost of equity securities acquired (122,197) (86,390) (45,898)
Change in policy loans (4,673) (4,087) (3,827)
Investment cash in transit 126 (182) 34
Proceeds from short-term investments
sold or matured 833,144 485,257 902,371
Cost of short-term investments acquired (790,040) (566,870) (879,643)
Proceeds from other long-term investments
sold 5,997 4,320 2,657
Cost of other long-term investments
acquired (6,904) (13,427) (5,772)
Net cash used in investing activities (218,971) (201,808) (108,385)
Cash flows from financing activities:
Additional paid-in capital 50,000 - -
Policyholders' deposits on investment
contracts 139,579 62,019 124,565
Policyholders' withdrawals from
investment contracts (65,343) (62,314) (30,608)
Change in securities loaned (89,625) 148,710 93,957
Net cash provided by financing activities 34,611 148,415 (52)
Change in cash and cash equivalents (30,429) 59,746 5,107
Cash and cash equivalents,
beginning of year 64,801 5,055 -
Cash and cash equivalents, end of year $ 34,372 $ 64,801 $ 5,055
Reconciliation of net income to net cash
flows from operating activities:
Net income $ 19,872 $ 13,436 $ 18,929
Adjustments to reconcile net income to
net cash flows from operating
activities:
Realized capital gains on investments (6,722) (5,091) (3,211)
Accretion of bond discount (20,271) (17,822) (16,297)
Interest credited to policyholders 32,252 27,543 18,347
Changes in assets and liabilities:
Proceeds from securities loaned 89,625 (148,710) -
Amounts recoverable from reinsurers (11,881) 4,897 (16,735)
Premiums receivable (3,447) 413 (418)
Investment income due and accrued (3,545) (1,409) (1,336)
Deferred policy acquisition costs (15,247) (10,888) (9,921)
Other assets 495 1,354 (1,846)
Future policy benefits 127,800 88,924 45,660
Policy and contract claims 11,050 (1,523) (494)
Dividends to policyholders 610 567 590
Experience rating refund liabilities 1,210 (510) 550
Liability for participating policies 3,248 3,397 1,544
Federal income taxes payable 542 (5,830) 4,643
Deferred federal income taxes 3,805 3,235 1,563
Due to Parent (427) 9,201 (16,620)
Accrued expenses and other liabilities (75,038) 151,955 (5,454)
Net cash flows provided by
operating activities $ 153,931 $ 113,139 $ 14,376
See accompanying notes to financial statements.
Liberty Life Assurance Company of Boston
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(In Thousands)
1. Nature of Operations and Significant Accounting Policies
Organization
Liberty Life Assurance Company of Boston ("The Company") is domiciled in the
Commonwealth of Massachusetts. The Company is directly owned 100% by Liberty
Mutual Property-Casualty Holding Corporation, a subsidiary directly owned 90%
by Liberty Mutual Insurance Company and 10% by Liberty Mutual Fire Insurance
Company ("Liberty Mutual").
The Company insures life, annuity and accident and health risks for groups
and individuals. The Company also issues structured settlement contracts and
administers separate account contracts. The Company is licensed and sells its
products in all 50 states, the District of Columbia, and Canada.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. 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 as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
year. Actual amounts could subsequently differ from such estimates.
Investments
Fixed maturity and equity securities are classified as available for sale and
are carried at fair value. Unrealized gains and losses on fixed maturity and
equity securities are reported as a separate component of stockholders'
equity, net of applicable deferred income taxes.
For the mortgage-backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustments are
included in investment income.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Other invested assets, specifically investments in limited partnerships, are
accounted for using the equity method.
Policy loans are reported at unpaid loan balances.
Realized capital gains and losses are determined on the specific
identification basis.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. Such
costs include commissions, costs of policy underwriting, and variable agency
expenses. Acquisition costs related to traditional life insurance and certain
long-duration group accident and health insurance, to the extent recoverable
from future policy revenues, are deferred and amortized over the premium-
paying period of the related policies using assumptions consistent with those
used in computing policy benefit reserves. For universal life insurance and
investment products, to the extent recoverable from future gross profits,
deferred policy acquisition costs are amortized generally in proportion to
the present value of expected gross profits from surrender charges and
investment, mortality, and expense margins. Deferred policy acquisition costs
are adjusted for amounts relating to unrealized gains and losses on fixed
maturity and equity securities the Company has designated as available for
sale. This adjustment, net of tax, is included with the change in net
unrealized gains or losses that is credited or charged directly to
stockholders' equity. Deferred policy acquisition costs have decreased for
this adjustment by $585 and $2,834 at December 31, 1996 and 1995,
respectively.
The Company began deferring acquisition costs relating to group life and
disability insurance as of January 1, 1995. Costs relating to these policies
are amortized straight line over a five year period. Anticipated premium
revenue was estimated using the same assumptions which were used for
computing liabilities for future policy benefits.
Recognition of Traditional Life Premium Revenue and Related Expenses
Premiums on traditional life insurance policies are recognized as revenue
when due. Benefits and expenses are associated with premiums so as to result
in the recognition of profits over the life of the policies. This association
is accomplished by providing liabilities for future policy benefits and the
deferral and subsequent amortization of acquisition costs.
Recognition of Universal Life Revenue and Policy Account Balances
Revenues from universal life policies represent investment income from the
related invested assets and amounts assessed against policyholders. Included
in such assessments are mortality charges, surrender charges paid and
administrative fees. Policy account balances consist of consideration
received plus credited interest, less accumulated policyholder charges,
assessments and withdrawals. Credited interest rates were between 5.75% and
6.3% in 1996 and between 6.3% and 6.5% in 1995 and 1994.
Investment Contracts
The Company writes certain annuity and structured settlement contracts
without mortality risk which are accounted for as investment contracts.
Revenues for investment contracts consist of investment income from the
related invested assets, with profits recognized to the extent investment
income earned exceeds the amount credited to the contract. This method of
computing the liability for future policy benefits effectively results in
recognition of profits over the benefit period. Policy account balances
consist of consideration received plus credited interest less policyholder
withdrawals. Credited interest rates were between 5.35% and 7.05% in 1996,
between 5.6% and 7.25% in 1995, and between 5.0% and 5.25% in 1994 for
annuity contracts. Credited interest rates were between 6.2% and 11.4% in
1996, 1995 and 1994 for structured settlement contracts.
Future Policy Benefits
Liabilities for future policy benefits for traditional life policies have
been computed using the net level premium method based on estimated future
investment yield, mortality and withdrawal experience. Interest rate
assumptions were between 4.5% and 10.25% for all years of issue. Mortality
assumptions have been calculated principally on an experience multiple
applied to the 1955-60 and 1965-70 Select and Ultimate Basic Tables for
issued prior to 1986, the 1986 Bragg Non-Smoker/Smoker Select and Ultimate
Basic Tables for 1986 to 1992 issues, and the 1991 Bragg Non-Smoker/Smoker
Select and Ultimate Basic Tables for 1993 and subsequent issues. Withdrawal
assumptions are generally based on the Company's experience.
The liability for future policy benefits with respect to structured
settlement contracts with life contingencies and single premium group
annuities (group pension) is determined based on interest crediting rates
between 6.2% and 11.4%, and the mortality assumptions are based on the 1971
GAM and IAM tables.
Future policy benefits for long-term disability cases are computed using the
1987 Commissioners' Group Disability Table adjusted for the Company's
experience.
Policy and Contract Claims
Accident and health business policy and contract claims principally include
claims in course of settlement and claims incurred but not reported, which
are determined based on a formula derived as a result of the Company's past
experience. Claims liabilities may be more or less than the amounts paid when
the claims are ultimately settled. Such differences are considered changes in
estimates and are recorded in the statement of income in the year the claims
are settled.
Reinsurance
All assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis in the accompanying balance sheets. The
accompanying statements of operations reflect premiums, benefits and
settlement expenses net of reinsurance ceded.
Reinsurance premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for original policies issued and the terms of
the reinsurance contracts.
Federal Income Taxes
The Company has adopted the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes
the enactment date.
Participating Policies
Participating policies approximate 33% and 35% of life insurance in force at
December 31, 1996 and 1995, respectively, and 18% and 56% of individual life
insurance premium revenue in 1996 and 1995, respectively. Dividends to
participating policyholders are calculated as the sum of the difference
between the assumed mortality, interest and loading, and the actual
experience of the Company relating to participating policyholders. As a
result of statutory regulations, the major portion of earnings from
participating policies inures to the benefit of the participating
policyholders and is not available to stockholders. Undistributed earnings of
the participating block of business is represented by the liability for
participating policies in the accompanying balance sheets. The payment of
dividends to stockholders is further restricted by insurance laws of the
Commonwealth of Massachusetts.
Foreign Currency Translations
The Company enters into certain transactions that are denominated in a
currency other than the U.S. dollar. Functional currencies are assigned to
foreign currencies. The resulting translation adjustments from such
transactions are accumulated and then converted to U.S. dollars. The
unrealized gain or loss from this translation is recorded as a separate
component of stockholders' equity, net of deferred federal income taxes. The
translations are calculated using current exchange rates for the balance
sheet and average exchange rates for the statement of operations.
Separate Accounts
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than Liberty Life
Assurance, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of Liberty Life Assurance.
Separate account assets are reported at market value. The operations of the
separate accounts are not included in the accompanying financial statements.
Fees charged on separate account policyholder deposits are included in other
income.
Reclassification
Certain 1995 balances have been reclassified to permit comparison with the
1996 presentation.
2. Investments
Fixed Maturities
The amortized cost, gross unrealized gains and losses, and fair value of
investments in fixed maturities are summarized as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S government
corporations and agencies $ 408,214 $ 86,080 $ (1,195) $ 493,099
Debt securities issued by
foreign governments 24,762 87 (256) 24,593
Corporate securities 614,901 29,667 (3,864) 640,704
U.S. government guaranteed
mortgage-backed securities 567,343 16,402 (4,954) 578,791
Total fixed maturities $1,615,220 $132,236 $(10,269) $1,737,187
At December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S government
corporations and agencies $ 380,296 $116,737 $ (37) $ 496,996
Debt securities issued by
foreign governments 19,651 1,839 (7) 21,483
Corporate securities 313,686 18,727 (2,797) 329,616
U.S. government guaranteed
mortgage-backed securities 621,282 53,523 (453) 674,352
Total fixed maturities $1,334,915 $190,826 $ (3,294) $1,522,447
The amortized cost and fair value of the Company's investment in fixed
maturities by contractual maturity is summarized as follows:
At December 31, 1996
Amortized Fair
Cost Value
Maturity in one year or less $ 29,651 $ 30,279
Maturity after one year through five years 169,258 172,798
Maturity after five years through ten years 313,404 335,973
Maturity after ten years 535,564 619,346
U.S. government guaranteed mortgage-
backed securities 567,343 578,791
Total fixed maturities $1,615,220 $1,737,187
The expected maturities in the foregoing table may differ from contractual
maturities because certain borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Gross gains of $1,462 and $811, and gross losses of $1,411, and $445 were
realized on the sales of fixed maturities respectively.
At December 31, 1996, bonds with an admitted asset value of $14,232 were on
deposit with state insurance departments to satisfy regulatory requirements.
Equity Securities and Other Invested Assets
Unrealized gains and losses on investments in equity securities, available
for sale and other invested assets are recorded in a separate component of
stockholders' equity and do not affect operations. The cost, gross unrealized
gains and losses on, and the fair value of, those investments are summarized
as follows:
At December 31, 1996
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities $ 3,098 $ 1,241 $ (217) $ 4,122
Other invested assets 32,729 6,462 (910) 38,281
Total $35,827 $ 7,703 $(1,127) $42,403
At December 31, 1995
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
Equity securities $ 3,086 $ 1,105 -- $ 4,191
Other invested assets 28,874 4,045 $ (580) 32,339
Total $31,960 $ 5,150 $ (580) $36,530
Net Investment Income
Major categories of the Company's net investment income are summarized as
follows:
Year ended December 31
1996 1995 1994
Investment income:
Fixed maturities $118,365 $104,779 $ 95,837
Equity securities 83 214 22
Policy loans 2,672 2,397 2,111
Short-term investments and cash equivalents 1,633 2,034 1,711
Other invested assets 1,476 878 342
Gross investment income 124,229 110,302 100,023
Less: Investment expenses 1,702 1,581 1,942
Discontinued operations -- -- 1,059
Net investment income $122,527 $108,721 $ 97,022
Realized Capital Gains on Investments
Realized capital gains on investments were derived from the following
sources:
Year ended December 31
1996 1995 1994
Fixed maturities $ 61 $ 366 $ 1,752
Equity securities 3,812 3,441 434
Short-term investments -- -- (4)
Other invested assets 2,849 1,284 1,029
Less: Discontinued operations -- 168
Realized capital gains on investments $ 6,722 $ 5,091 $ 3,043
Concentration of Investments
There were no investments in a single entity's fixed maturities in excess of
ten percent of stockholders' equity at December 31, 1996 and 1995,
respectively.
3. Reinsurance
Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. Reinsurance assumed is not
significant. The ceded reinsurance agreements provide the Company with
increased capacity to write larger risks and maintain its exposure to loss
within capital resources.
The Company generally reinsures risks on life insurance policies over two
hundred fifty thousand dollars as well as selected risks of lesser amounts.
Life insurance in force and premium information is summarized as follows:
Year ended December 31, 1996
Assumed Ceded to
Direct From Other Other Net
Amount Companies Companies Amount
Life insurance in force $25,127,732 $64,767 $1,699,677 $23,492,822
Premiums:
Group life and disability $ 193,209 $ 55 10,070 183,194
Individual life and annuity 103,191 2,939 5,536 100,594
Group pension 177 - - 177
Total premiums $ 296,577 $ 2,994 $ 15,606 $ 283,965
Year ended December 31, 1995
Assumed Ceded to
Direct From Other Other Net
Amount Companies Companies Amount
Life insurance in force $17,374,371 $56,753 $1,110,191 $16,320,933
Premiums:
Group life and disability $ 105,415 $ 68 $ 12,223 $ 93,260
Individual life and annuity 103,732 123 2,477 101,378
Group pension 2,379 - - 2,379
Total premiums $ 211,526 $ 191 $ 14,700 $ 197,017
Amounts payable or recoverable for reinsurance on policy and contract
liabilities are not subject to periodic or maximum limits. At December 31,
1996, the Company's reinsurance recoverables are not material and no
individual reinsurer owed the Company an amount that was equal to or greater
than 3% of the Company's surplus.
Amounts recoverable from reinsurers are presented as an asset in the
accompanying financial statements and are summarized as follows:
At December 31
1996 1995
Group life and health $ 25,952 $ 19,377
Individual life and annuity 22,848 17,542
Total amounts recoverable from reinsurers $ 48,800 $ 36,919
4. Federal Income Taxes
The Company is included in a consolidated federal income tax return with
Liberty Mutual and its other subsidiaries. Under a written tax sharing
agreement, approved by the Board of Directors, Liberty Mutual collects from
and refunds to the subsidiaries the amount of taxes or benefits determined as
if Liberty Mutual and the subsidiaries filed separate returns.
Federal income tax expense (benefit) attributable to income from operations
was composed of the following:
Year ended December 31
1996 1995 1994
Continuing operations:
Current $ 7,011 $ 7,848 $ 9,559
Deferred 3,316 2,934 1,444
Federal income tax (benefit) expense $10,327 10,782 $11,003
Year ended December 31
1996 1995 1994
Discontinued operations:
Current $ (175) $ (1,236) $ (19)
Deferred 0 0 119
Federal income tax (benefit) expense $ (175) $ (1,236) $ 100
A reconciliation of federal income tax expense as recorded in the statements
of income with expected federal income tax expense computed at the applicable
federal tax rate of 35% is summarized as follows:
Year ended December 31
1996 1995 1994
Expected income tax expense $ 11,820 $ 10,458 $11,009
Adjustments to income taxes resulting from:
Reconciliation of prior year tax return (1,226) 401 -
Other, net (267) (77) (6)
Federal income tax expense $ 10,327 $10,782 $11,003
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred liabilities are summarized as
follows:
Year ended December 31
1996 1995 1994
Deferred tax assets:
Dividends to policyholders $ 3,349 $ 3,230 $ 3,242
Experience rating reserves - 14 102
Unearned interest on policy loans 303 283 -
Unearned group premium adjustment 962 585 448
Accrued surrender charges on deposit funds 401 - -
1987 disability reserve tax adjustment - 215 334
Other 60 29 281
Total deferred tax assets 5,075 4,356 4,407
Deferred tax liabilities:
Future policy benefits (11,760) (11,181) (12,002)
Deferred acquisition costs (18,818) (16,201) (13,742)
Bonds purchased at market discount (2,273) (1,769) (1,509)
Bonds market valuation adjustment (41,493) (64,788) (5,916)
Unrealized gain on other long-term
investments (2,300) (1,603) (717)
Reconciliation of taxes on other long-term
investments (951) (829) (134)
Cumulative foreign currency translations (612) (515) (248)
Deferred and uncollected premium adjustment (653) (565) (337)
Experience rating reserves (133) 0 0
Other (55) (63) -
Total deferred tax liabilities $(79,048) $(97,514) $(34,605)
Net deferred tax liability $(73,973) $(93,158) $(30,198)
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax assets, and, therefore, no such
valuation allowance has been established.
Prior to 1984, a portion of the Company's income was not taxed, but was
accumulated in a "policyholders' surplus account". In the event that those
amounts are distributed to stockholders', or the balance of the account
exceeds certain limitations under the Internal Revenue Code, the excess
amounts would become taxable at current rates. The policyholders' surplus
account balance at December 31, 1996 was approximately $4,000. Management
does not intend to take actions nor does management expect any events to
occur that would cause federal income taxes to become payable on that amount.
However, if such taxes were assessed, the amount of taxes payable would be
approximately $1,400.
5. Unpaid Claims Liability for Group Accident and Health Business
The following table provides a reconciliation of the beginning and ending
balances of unpaid claim liabilities, net of reinsurance recoverables:
Year ended December 31
1996 1995
Unpaid claim liabilities, at beginning of year $ 102,089 $ 76,630
Less: reinsurance recoverables 203 444
Net balance at beginning of year 101,886 76,186
Claims incurred related to:
Current year 104,526 52,747
Prior years 18,176 6,813
Total incurred 122,702 59,560
Claims paid related to:
Current year 34,342 15,413
Prior years 27,449 18,447
Total paid 61,791 33,860
Net balance at end of year 162,797 101,886
Plus: reinsurance recoverables 238 203
Balance, Unpaid claim liabilities,at end of year $ 163,035 $ 102,089
During 1996, approximately $17,000 of long-term disability business was
accepted from unaffiliated companies through buyout contracts. In return for
future premiums, as underwritten by the Company, the Company accepted the
risk for covered lines under those contacts, including certain claims which
were already in payment status. These claims, which were incurred in 1995 or
earlier, were not included in the December 31, 1995 claim reserves and
liabilities but are included as prior years incurred claims at December 31,
1996. The claims incurred related to prior years increased by $6,813 in 1995
due to changes in estimates of prior year insured events.
6. Risk-Based Capital and Retained Earnings
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1996, the Company meets the RBC requirements.
The payment of dividends by the Company to stockholders is limited and cannot
be made except from earned profits. The maximum amount of dividends that may
be paid by life insurance companies without prior approval of the
Commonwealth of Massachusetts Insurance Commissioner is subject to
restrictions relating to statutory surplus and net gain from operations.
According to a resolution voted by the Board of Directors of Liberty Life
Assurance, not more than the larger of 10% of statutory profits on
participating business or fifty cents per thousand dollars of participating
business in force in a given year may accrue to the benefit of stockholders.
The amount of statutory unassigned surplus (deficit) held for the benefit of
participating policyholders is $(1,245) and for the stockholders is $83,428
at December 31, 1996. Dividends paid to policyholders were $12,008 and there
were no dividends paid to stockholders in 1996.
7. Commitments and Contingencies
The Company is named as a defendant in various legal actions arising
principally from claims made under insurance policies and contracts. Those
actions are considered by the Company in estimating reserves for policy and
contract liabilities. The Company's management believes that the resolution
of those actions will not have a material effect on the Company's financial
position or results of operations.
The Company is subject to insurance guaranty fund laws in the states in which
it does business. These laws assess insurance companies amounts to be used to
pay benefits to policyholders and claimants of insolvent insurance companies.
Many states allow these assessments to be credited against future premium
taxes. At December 31, 1996 and 1995, the Company has accrued $888 and $842,
respectively, of premium tax deductions. The Company recognizes its
obligations for guaranty fund assessments when it receives notice that an
amount is payable to a guaranty fund. Expenses incurred for guaranty fund
assessments were $150 and $472 in 1996 and 1995, respectively.
8. Separate Accounts
Separate Accounts held by the Company represent primarily funds which are
administered for pension plans. The assets consist of common stock, long-term
bonds, real estate and short-term investments. Except for long-term bonds
which are carried at amortized cost, the assets are carried at estimated fair
value. Investment income and changes in asset values do not affect the
operating results of the Company. Separate Accounts business is maintained
independently from the general account of the Company. The Company provides
administrative services for these contracts. Fees earned by the Company
related to these contracts included in other considerations were $1,503 and
$1,434 for the years ended December 31, 1996 and 1995, respectively.
9. Employee Benefits
The Company shares personnel with Liberty Mutual which has a non-contributory
defined benefit pension plan covering employees who have attained age twenty-
one and have completed one year of service. Benefits are based on years of
service and the employee's "final average compensation" which is the
employee's average annual compensation for the highest five consecutive
calendar years during the ten years immediately preceding retirement. Liberty
Mutual's funding and accounting policies are to contribute annually the
maximum amount that can be deducted for federal income tax purposes and to
charge such contributions to expense in the year deductible for income tax
purposes. Liberty Mutual's pension cost charged to operations for the entire
plan in 1996 and 1995 was $15,541 and $26,432 respectively. The Company's
allocated pension cost in 1996 and 1995 was $395 and $628, respectively.
As of January 1, 1996 and 1995, the actuarial present value of accumulated
vested and nonvested benefits for the entire plan, based on a valuation
interest rate of 8% in 1996 and 1995, approximated $657,550 and $607,595,
respectively, and the net assets, at fair market value, available for plan
benefits approximated $994,643 and $776,859 in 1996 and 1995, respectively.
Assets of the plan consist primarily of investments in life insurance company
separate accounts and a collective investment trust fund. At January 1, 1996
and 1995, separate account investments of the Company, included in plan
assets at fair market value, amounted to approximately $696,384 and $521,220
respectively.
10. Postretirement Benefits
Liberty Mutual provides certain health care and life insurance benefits
("postretirement") for retired employees. Substantially all employees may
become eligible for these benefits if they reach retirement age while working
for the Liberty Companies. Alternatively, retirees may elect certain prepaid
health care benefit plans. Life insurance benefits are based upon a
participant's final compensation subject to the plan maximum.
Liberty Mutual records the costs of its postretirement benefits by the
accrual accounting method and has elected to amortize its transition
obligation for retirees and fully eligible or vested employees over 20 years.
The unamortized transition obligation was $155,840 and $165,580 at December
31, 1996 and 1995, respectively.
Net postretirement benefit costs for Liberty Mutual were approximately
$26,239 in 1996 and $30,979 in 1995 and includes the expected cost of such
benefits for newly eligible or vested employees, interest cost, gains and
losses arising from differences between actuarial assumptions and actual
experience, and amortization of the transition obligation. Liberty Mutual
made payments of $13,000 in 1996 and $14,000 in 1995, as claims were
incurred.
At December 31, 1996 and December 31, 1995, the accrued unfunded
postretirement benefit obligation for Liberty Mutual's retirees and other
fully eligible plan participants was $59,023 and $45,848, respectively. The
accumulated benefit obligation for non-vested employees was $96,742 and
$86,357 at December 31, 1996 and 1995, respectively. The discount rates used
in determining the accumulated postretirement benefit obligation were 7.25%
and 7% in 1996 and 1995, respectively, and the health care cost trend rates
were 10.75% and 11.25%, graded to 5% over 10 years, in 1996 and 1995,
respectively.
The Company's share of postretirement benefit costs were approximately $236
and $282 for 1996 and 1995, respectively.
The health care cost trend rate assumption has a significant effect on the
amount reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the postretirement
benefit obligation of the entire plan as of December 31, 1996 by
approximately $13,899, and the estimated eligibility cost and interest cost
components of net periodic postretirement benefit cost for 1996 by
approximately $1,699.
11. Related Party Transactions
Under a Service Agreement between the Company and Liberty Mutual, the latter
provides personnel, office space, equipment, computer processing and other
services. The Company reimburses Liberty Mutual for these services at cost,
and for any other special services supplied at the Company's request.
Substantially all of the Company's insurance expenses incurred in 1996 and
1995 related to this agreement.
The Company insures the group term life and disability risks for Liberty
Mutual employees. Premiums associated with these policies amounted to $13,903
and $14,755 in 1996 and 1995, respectively.
The Company insures key officers of Liberty Mutual Group under an Optional
Life Insurance Plan. Premiums associated with this plan amounted to $4,967
and $4,278 in 1996 and 1995, respectively.
Liberty Mutual purchased structured settlement annuity contracts, with and
without life contingencies, from the Company. Premiums under these contracts
amounted to $91,754 and $78,567 in 1996 and 1995, respectively. The related
policy and contract reserves with respect to all structured settlement
annuity contracts purchased by Liberty Mutual amounted to $441,220 and
$386,565 at December 31, 1996 and 1995, respectively.
Liberty Mutual deposited $16,107 and $2,761 with the Company in 1996 and
1995, respectively, to fund certain Liberty Mutual environmental claim
transactions. Such amounts have been included in deposit type fund revenues
for the years ended December 31, 1996 and 1995, as well as in the liability
for premium and other deposit funds.
In 1996, Keyport Life Insurance Company began ceding 100% of the premiums and
benefits of certain structured settlement annuity contracts, with and without
life contingencies, to the Company. Premiums under these contracts amounted
to $3,194 in 1996. The related policy and contract reserves with respect to
these structured settlement annuity contracts assumed by the Company amounted
to $2,601 at December 31, 1996.
12. Fair Value of Financial Instruments
Fair values generally represent quoted market value prices for securities
traded in the public marketplace, or analytically determined values using bid
or closing prices for securities not traded in the public marketplace.
The following methods and assumptions were used by the Company in estimating
the "fair value" disclosures for financial instruments in the accompanying
financial statements and notes thereto:
Fixed Maturities
Fair values for publicly traded fixed maturities are determined using values
reported by an independent pricing service. Fair values of private placement
fixed maturities are determined by obtaining market indications from various
broker-dealers.
Cash and Short-term Investments
The carrying amounts reported in the accompanying balance sheets for these
financial instruments approximate their fair values.
Policy Loans
The carrying amounts reported in the accompanying balance sheets for these
financial instruments approximate their fair values.
Investment Contracts
The fair values for the Company's liabilities under investment-type insurance
contracts are estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
Policy Account Balances
The fair values of the Company's liabilities for insurance contracts other
than investment-type contracts are not required to be disclosed. However, the
fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk, such
that the Company's exposure to changing interest rates is minimized through
the matching of investment maturities with amounts due under insurance
contracts.
The carrying amount and fair value of the Company's financial instruments are
summarized a follows:
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Fixed maturities $1,737,187 $1,737,187 $1,522,447 $1,522,447
Equity securities 4,122 4,122 4,191 4,191
Other invested assets 38,281 38,281 32,339 32,339
Policy loans 45,345 45,345 40,672 40,672
Short-term investments 78,715 78,715 121,471 121,471
Individual and group annuities 153,927 153,742 150,562 149,223
Other policyholder funds
left on deposit 8,009 8,009 7,527 7,527
13. Deferred Policy Acquisition Costs
Details with respect to deferred policy acquisition costs are summarized as
follows:
Year ended December 31
1996 1995
Balance, beginning of year $ 62,762 $ 54,283
Additions 16,114 14,143
Amortization (867) (2,830)
Valuation adjustment for unrealized
gain on fixed maturities (585) (2,834)
Balance, end of year $ 77,424 $ 62,762
14. Segment Information
Revenues and income from continuing operations before federal income taxes
and earnings of participating policies for each of the Company's segments are
summarized as follows:
Year ended December 31
1996 1995 1994
Revenues from continuing operations:
Group life and disability $203,911 $108,132 $ 84,872
Individual life and annuity 186,696 175,960 116,966
Group pension 32,835 36,488 37,552
Total revenues from continuing operations $423,442 $320,580 $239,390
Income from continuing operations before federal
income taxes and earnings from participating
policies:
Group life and disability $ 8,377 $ 5,723 $ 11,559
Individual life and annuity 24,319 22,444 18,284
Group pension 1,075 1,715 1,610
Total income from continuing operations
before federal income taxes and
earnings of participating policies $ 33,771 $ 29,882 $ 31,453
15. Reconciliation to Statutory-Basis Accounting
The Company is required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare
statutory financial statements differ from the financial statements reported
herein which are prepared on the basis of generally accepted accounting
principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in
the accompanying financial statements are summarized as follows:
Year ended December 31
Net income: 1996 1995 1994
Statutory basis, net income $ 3,554 $ 6,952 $ 4,289
Increases/(decreases)
Deferred policy acquisition costs 15,247 11,101 9,921
Policy reserves 9,631 2,779 8,971
Participating policies (3,248) (3,397) (1,545)
Deferred federal income taxes (3,316) (2,934) (1,563)
Deferred premiums (1,859) (1,763) (1,644)
Interest maintenance reserve (526) (439) 687
Other 389 1,137 (187)
Net income as reported herein $ 19,872 $ 13,436 $ 18,929
Year ended December 31
Stockholders' equity: 1996 1995 1994
Statutory basis, capital and surplus $137,933 $ 84,441 $ 76,434
Increases/(decreases)
Deferred policy acquisition costs 77,424 65,597 54,283
Policy reserves 102,214 92,583 88,531
Participating policies (68,504) (65,256) (61,859)
Asset valuation reserve 11,773 9,372 6,969
Interest maintenance reserve 4,327 4,853 5,292
Deferred federal income taxes (73,973) (93,158) (30,198)
Deferred premiums (17,346) (15,487) (9,970)
Net unrealized gain on fixed maturities 121,967 184,696 17,077
Other 4,944 4,609 1,160
Stockholders' equity as reported herein $300,759 $272,250 $147,719
16. Discontinued Operations
On December 31, 1993, the Company discontinued its Group Medical insured and
administrative services line of business. Substantially all of the insured
operating assets and future policy liabilities, as of December 31, 1993, were
ceded to Liberty Mutual effective January 1, 1994, until the termination date
of the contracts. After termination there is no additional insurance risk
associated with this particular line of business and all insured operating
assets and future policy liabilities will be extinguished.
Report of Independent Auditors
To the Board of Directors of Liberty Life Assurance Company
of Boston and Contract Owners of Variable Account K
We have audited the accompanying statement of assets and liabilities of
Liberty Life Assurance Company of Boston - Variable Account K as of December
31, 1996 and the related statement of operations and changes in net assets
for the year then ended. These financial statements are the responsibility
of Liberty Life Assurance Company of Boston's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty Life Assurance
Company of Boston - Variable Account K at December 31, 1996 and the results
of its operations and changes in net assets for the year then ended, in
conformity with generally accepted accounting principles.
March 14, 1997 ERNST & YOUNG LLP
Boston, Massachusetts
Independent Auditors' Report
The Contract Owners of
Liberty Life Assurance Company's
Variable Account K:
We have audited the accompanying statement of operations and changes in net
assets of the sub-accounts comprising Liberty Life Assurance Company's
Variable Account K for the year, or other period as applicable, ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and changes in net assets of
the sub-accounts comprising Liberty Life Assurance Company's Variable Account
K for the year, or other periods as applicable, ended December 31, 1995 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 5, 1996
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Assets and Liabilities
December 31, 1996
Assets
Investments at market value:
SteinRoe Variable Investment Trust
Cash Income Fund - 864,690 shares (cost $864,690) $ 864,690
Capital Appreciation Fund - 237,360 shares (cost $3,981,388) 4,920,464
Managed Assets Fund - 467,955 shares (cost $6,366,918) 7,618,304
Mortgage Securities Income Fund - 274,849 shares
(cost $2,903,051) 2,704,512
Managed Growth Stock Fund - 97,246 shares (cost $2,110,769) 2,782,196
Keyport Variable Investment Trust
Colonial-Keyport Growth and Income Fund - 148,392 shares
(cost $1,676,257) 2,071,555
Colonial-Keyport Utilities Fund - 168,888 shares
(cost $1,731,734) 1,807,103
Colonial-Keyport International Fund for Growth - 163,311
shares (cost $324,144) 318,456
Colonial-Keyport U.S. Stock Fund - 10,993 shares
(cost $151,413) 156,320
Colonial-Keyport Strategic Income Fund - 47,543 shares
(cost $535,312) 524,400
Newport-Keyport Tiger Fund - 131,780 shares (cost $323,371) 332,086
Total assets $24,100,086
Net assets
Variable annuity contracts (Note 6) $23,584,059
Annuity reserves (Note 2) 455,129
Due to Liberty Life Assurance Company (Note 2) 55,971
Retained by Liberty Life Assurance Company (Note 5) 4,927
Total net assets $24,100,086
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Cash Income Fund Capital Appreciation Fund
1996 1995 1996 1995
Income
Dividends $ 35,124 $ 54,010 $ - $ 29,587
Expenses (Note 3)
Mortality and expense
risk and
administrative charges 10,620 14,172 64,178 50,366
Net investment income
(expense) 24,504 39,838 (64,178) (20,779)
Realized gain (loss) - - 4,697 26,355
Unrealized appreciation
(depreciation) during
the period - - 992,721 326,488
Net increase in net assets
from operations 24,504 39,838 933,240 332,064
Purchase payments from
contract owners 55,074 57,768 539,379 449,730
Transfers between accounts 120,046 (441,588) 277,664 2,631
Contract terminations and
annuity payouts (40,614) (319,947) (298,419) (512,498)
Other transfers (to) from
Liberty Life
Assurance Company 812 (1,766) 10,825 -
Net increase (decrease) in
net assets from
contract transactions 135,318 (705,533) 529,449 (60,137)
Net assets at beginning
of period 704,868 1,370,563 3,457,775 3,185,848
Net assets at end of
period $ 864,690 $ 704,868 $4,920,464 $3,457,775
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Managed Assets Mortgage Securities
Fund Income Fund
1996 1995 1996 1995
Income
Dividends $ - $ 451,389 $ 202,815 $ 201,991
Expenses (Note 3)
Mortality and expense risk
and administrative
charges 100,378 63,729 48,052 35,114
Net investment income
(expense) (100,378) 387,660 154,763 166,877
Realized gain (loss) 2,717 30,181 (13,052) (13,318)
Unrealized appreciation
(depreciation) during
during the period 985,896 487,959 (52,558) 147,134
Net increase in net assets
from operations 888,235 905,800 89,153 300,693
Purchase payments from
contract owners 1,287,808 396,921 87,676 131,005
Transfers between accounts 107,364 1,752,337 (743,709) 1,772,609
Contract terminations and
annuity payouts (442,872) (368,735) (475,542) (459,682)
Other transfers (to) from
Liberty Life Assurance
Company 17,350 - 7,226 -
Net increase (decrease)
in net assets from
from contract
transactions 969,650 1,780,523 (1,124,349) 1,443,932
Net assets at beginning
of period 5,760,419 3,074,096 3,739,708 1,995,083
Net assets at end of
period $ 7,618,304 $5,760,419 $2,704,512 $3,739,708
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Managed Growth Strategic Managed
Stock Fund Assets Fund
1996 1995 1996 1995
Income
Dividends $ - $ 90,954 $ - $ 178,612
Expenses (Note 3)
Mortality and expense risk
and administrative charges 33,803 19,473 - 16,781
Net investment income
(expense) (33,803) 71,481 - 161,831
Realized gain (loss) 587 4,957 - (32,728)
Unrealized appreciation
(depreciation)during
the period 433,842 316,567 - 101,065
Net increase in net assets
from operations 400,626 393,005 - 230,168
Purchase payments from
contract owners 593,198 387,886 - -
Transfers between accounts 243,437 64,056 - (1,837,317)
Contract terminations and
annuity payouts (142,275) (172,425) - (118,819)
Other transfers (to) from
Liberty Life Assurance
Company 6,254 - - -
Net increase (decrease) in
net assets from
from contract transactions 700,614 279,517 - (1,956,136)
Net assets at beginning of
period 1,680,956 1,008,434 - 1,725,968
Net assets at end of period $2,782,196 $1,680,956 $ - $ -
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Colonial-Keyport
Managed Income Fund Growth and Income Fund
1996 1995 1996 1995
Income
Dividends $ - $ 22,292 $ 125,220 $ 50,977
Expenses (Note 3)
Mortality and expense
risk and
administrative charges - 4,673 27,121 18,137
Net investment income
(expense) - 17,619 98,099 32,840
Realized gain (loss) - (17,936) 2,514 570
Unrealized appreciation
(depreciation)
during the period - 54,726 168,380 258,287
Net increase in net assets
from operations - 54,409 268,993 291,697
Purchase payments from
contract owners - 720 381,898 102,994
Transfers between accounts - (401,874) (5,286) 277,588
Contract terminations and
annuity payouts - (42,850) (87,955) (77,001)
Other transfers (to) from
Liberty Life Assurance
Company - - 4,938 -
Net increase (decrease) in
net assets from contract
transactions - (444,004) 293,595 303,581
Net assets at beginning of
period - 389,595 1,508,967 913,689
Net assets at end of
period $ - $ - $2,071,555 $1,508,967
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Colonial-Keyport Colonial-Keyport
Utilities Fund U.S. Government Fund
1996 1995 1996 1995
Income
Dividends $ 79,164 $ 87,293 $ - $ 67,205
Expenses (Note 3)
Mortality and expense risk
and administrative charges 29,045 28,188 - 14,975
Net investment income
(expense) 50,119 59,105 - 52,230
Realized gain (loss) 23,189 (3,211) - (44,909)
Unrealized appreciation
(depreciation) during
the period 9,494 479,794 - 118,297
Net increase in net assets
from operations 82,802 535,688 - 125,618
Purchase payments from
contract owners 34,145 23,398 - 960
Transfers between accounts (164,685) (110,036) - (1,415,016)
Contract terminations and
annuity payouts (226,361) (158,229) - (71,579)
Other transfers (to) from
Liberty Life Assurnace
Company 4,275 - - -
Net increase (decrease) in
net assets from
contract transactions (352,626) (244,867) - (1,485,635)
Net assets at beginning of
period 2,076,927 1,786,106 - 1,360,017
Net assets at end of
period $ 1,807,103 $ 2,076,927 $ - $ -
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Colonial-Keyport
InternationalFund Colonial-Keyport
for Growth U.S. Stock Fund *
1996 1995 1996
Income
Dividends $ 18,462 $ 1,952 $ 8,823
Expenses (Note 3)
Mortality and expense risk
and administrative charges 3,966 2,911 1,013
Net investment income
(expense) 14,496 (959) 7,810
Realized gain (loss) (96) 2,047 -
Unrealized appreciation
(depreciation) during
during the period (6,358) 8,712 4,907
Net increase in net assets
from operations 8,042 9,800 12,717
Purchase payments from
contract owners 115,287 25,390 137,076
Transfers between accounts 5,497 (29,407) 6,167
Contract terminations and
annuity payouts (4,757) (1,770) -
Other transfers (to) from
Liberty Life Assurance
Company 775 - 360
Net increase (decrease) in
net assets from contract
transactions 116,802 (5,787) 143,603
Net assets at beginning of
period 193,612 189,599 -
Net assets at end of period $ 318,456 $ 193,612 $ 156,320
* Commencement of operations - October 13, 1995
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Colonial-Keyport Newport-Keyport
Strategic Income Fund* Tiger Fund*
1996 1995 1996 1995
Income
Dividends $ 44,772 $ 17,720 $ 3,585 $ 223
Expenses (Note 3)
Mortality and expense risk
and administrative charges 6,382 1,101 3,103 11
Net investment income
(expense) 38,390 16,619 482 212
Realized gain (loss) 34 51 (203) -
Unrealized appreciation
(depreciation) during
the period (2,550) (8,362) 8,269 446
Net increase in net assets
from operations 35,874 8,308 8,548 658
Purchase payments from
contract owners 137,864 - 144,620 -
Transfers between accounts 22,405 345,654 153,996 25,000
Contract terminations and
annuity payouts (20,476) (6,520) (1,495) -
Other transfers (to) from
Liberty Life Assurance
Company 291 - 759 -
Net increase (decrease) in
net assets from contract
transactions 141,084 339,134 297,880 25,000
Net assets at beginning of
period 347,442 - 25,658 -
Net assets at end of period $ 524,400 $ 347,442 $ 332,086 $ 25,658
* Commencement of operations - October 13, 1995
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
VARIABLE ACCOUNT K
Statement of Operations and Changes in Net Assets
for the Periods ended December 31, 1996 and 1995
Total Total
1996 1995
Income
Dividends $ 517,965 $ 1,254,205
Expenses (Note 3)
Mortality and expense risk
and administrative charges 327,661 269,631
Net investment income (expense) 190,304 984,574
Realized gain (loss) 20,387 (47,941)
Unrealized appreciation (depreciation)
during the period 2,542,043 2,291,113
Net increase in net assets
from operations 2,752,734 3,227,746
Purchase payments from contract owners 3,514,025 1,576,772
Transfers between accounts 22,896 4,637
Contract terminations and annuity payouts (1,740,766) (2,310,055)
Other transfers (to) from Liberty Life
Assurance Company 54,865 (1,766)
Net increase (decrease) in net assets
from contract transactions 1,851,020 (730,412)
Net assets at beginning of period 19,496,332 16,998,998
Net assets at end of period $ 24,100,086 $ 19,496,332
See accompanying notes.
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON -
VARIABLE ACCOUNT K
Notes to Financial Statements
December 31, 1996
1. Organization
Variable Account - K (the "Variable Account") is a separate investment
account established by Liberty Life Assurance Company (the "Company") to
receive and invest premium payments under flexible purchase payment deferred
and immediate variable annuity contracts issued by the Company. The Variable
Account operates as a Unit Investment Trust under the Investment Company Act
of 1940 and invests in eligible mutual funds.
There are currently two funding vehicles available to the Variable Account,
the SteinRoe Variable Investment Trust ("SRVIT") and the Keyport Variable
Investment Trust ("KVIT"). There are currently eleven available sub-accounts
within the Variable Account to which contract funds may be allocated. The
Colonial-Keyport Strategic Income Fund, the Colonial-Keyport U.S.Stock Fund,
and the Newport-Keyport Tiger Fund were made available to contractholders on
October 13, 1995.
On October 13, 1995, the Securities and Exchange Commission approved the
substitution of shares from the Strategic Managed Assets Fund, the Managed
Income Fund, and the Colonial-Keyport U.S. Government Fund to shares in the
Managed Assets Fund, the Colonial-Keyport Strategic Income Fund, and the
Mortgage Securities Income Fund, respectively. On December 6, 1996, the fund
name Colonial-Keyport U.S. Fund for Growth was changed to Colonial-Keyport
U.S. Stock Fund.
2. Significant Accounting Policies
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported therein. Although
actual results could differ from these estimates, any such differences are
expected to be immaterial to the Variable Account.
Shares of the SRVIT and KVIT are sold to the Variable Account at the reported
net asset values. Transactions are recorded on the trade date. Income from
dividends is recorded on the ex-dividend date. Realized gains and losses on
sales of investments are computed on the basis of identified cost of the
investments sold.
Annuity reserves are computed for contracts in the income stage according to
the 1983a Individual Annuity Mortality Table. The assumed investment rate is
either 4.0% or 6.0% unless the annuitant elects otherwise, in which case the
rate may vary from 3.0% to 6.0%, as regulated by the laws of the respective
states. The mortality risk is fully borne by the Company and may result in
additional amounts being transferred into the Variable Account by the
Company.
Amounts due to Liberty Life Assurance Company represent mortality and expense
risk charges earned by the Company in 1996 but not transferred to the Company
until January 1997.
The operations of the Variable Account are included in the federal income tax
return of the Company, which is taxed as a Life Insurance Company under the
provisions of the Internal Revenue Code. The Company anticipates no tax
liability resulting from the operations of the Variable Account. Therefore,
no provision for income taxes has been charged against the Variable Account.
3. Expenses
There are no deductions made from purchase payments for sales charges at the
time of purchase. In the event of a contract termination, a contingent
deferred sales charge, based on a graded table of charges, is deducted. An
annual contract maintenance charge to cover the cost of contract
administration is deducted from each contractholder's account on the contract
anniversary date. Daily deductions are made from each sub-account for
assumption of mortality and expense risk fees at an effective annual rate of
1.25% of contract value. A daily sales charge is also deducted at an
effective annual rate of 0.15% of contract value.
4. Affiliated Company Transactions
Administrative services necessary for the operation of the Variable Account
are provided by Keyport Life Insurance Company (Keyport Life), an affiliate
of the Company. The Company has absorbed all organizational expenses
including the fees of registering the Variable Account and its contracts for
distribution under federal and state securities laws. Stein Roe & Farnham,
Inc., an affiliate of the Company, is the investment advisor to the SRVIT.
Keyport Advisory Services Corporation, a wholly-owned subsidiary of Keyport
Life, is the investment advisor to the KVIT. Colonial Management Associates,
Inc., an affiliate of the Company, is the investment sub-advisor to the KVIT.
Keyport Financial Services Corporation, a wholly-owned subsidiary of Keyport
Life, is the principal underwriter for SRVIT and KVIT. The investment
advisors' compensation is derived from the mutual funds.
5. Amounts Retained by Liberty Life Assurance Company
If a contractholder's financial transaction is not executed on the
appropriate investment date, a correcting buy or sell of shares is required
by the Company in order to make the contractholder whole. The resulting risk
of a gain or loss has no effect on the contractholder's account and is fully
assumed by the Company. Amounts retained by the Company are invested in the
Variable Account for this purpose.
6. Unit Values
A summary of the accumulation unit values at December 31, 1996 and 1995 and
the accumulation units and dollar value outstanding at December 31, 1996 are
as follows:
1995 1996
Unit Unit
Value Value Units Dollars
Cash Income Fund $12.833324 $13.288489 64,555.6466 $ 857,847
Capital Appreciation Fund 23.356516 29.237169 160,317.3344 4,687,225
Managed Assets Fund 18.649799 21.263714 351,845.7312 7,481,547
Mortgage Securities
Income Fund 16.098763 16.621076 162,280.9498 2,697,284
Managed Growth Stock Fund 22.779503 27.242475 98,749.7281 2,690,187
Colonial-Keyport Growth
and Income Fund 13.097361 15.214080 134,024.7981 2,039,064
Colonial-Keyport Utilities
Fund 11.496571 12.076555 149,283.3014 1,802,828
Colonial-Keyport
International Fund for
Growth 9.723230 10.074536 31,533.0651 317,681
Colonial-Keyport U.S. Stock
Fund - 15.935084 9,787.2092 155,960
Colonial-Keyport Strategic
Income Fund 11.684000 12.642128 41,378.2395 523,109
Newport-Keyport Tiger Fund 11.445356 12.555053 26,389.9324 331,327
1,230,145.9358 $23,584,059
7. Purchases and Sales of Securities
The cost of shares purchased and proceeds from shares sold by the Variable
Account during the year ended December 31,1996 are shown below:
Purchases Sales
Cash Income Fund $ 343,354 $ 183,532
Capital Appreciation Fund 816,344 351,073
Managed Assets Fund 1,474,631 605,359
Mortgage Securities Income Fund 506,322 1,475,908
Managed Growth Stock Fund 850,198 183,387
Colonial-Keyport Growth and Income Fund 557,570 165,876
Colonial-Keyport Utilities Fund 101,614 404,121
Colonial-Keyport International Fund for Growth 151,787 20,489
Colonial-Keyport Strategic Income Fund 152,084 671
Colonial-Keyport U.S. Stock Fund 200,949 21,475
Newport-Keyport Tiger Fund 314,988 16,626
$5,469,841 $3,428,517
8. Diversification Requirements
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal tax purposes for any period for which the investments of
the segregated asset account on which the contract is based are not
adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a
statutory safe harbor test or diversification requirements set forth in
regulations issued by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. Liberty Life Assurance Company of Boston believes that the
Variable Account satisfies the current requirements of the regulations, and
it intends that the Variable Account will continue to meet such requirements.
