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ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
DELAWARE MEDALLION III
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1998 POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
THE DELAWARE MEDALLION III VARIABLE ANNUITY CONTRACT. THE
CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
PLEASE READ THE PROSPECTUS CAREFULLY.
1. THE DELAWARE MEDALLION III VARIABLE ANNUITY CONTRACT
The Delaware Medallion III variable annuity contract is a contract between you
and Allmerica Financial Life Insurance and Annuity Company. It is designed to
help you accumulate assets for your retirement or other important financial
goals on a tax-deferred basis. Delaware Medallion III combines the concept of
professional money management with the attributes of an annuity contract.
Delaware Medallion III offers a diverse selection of investment portfolios. You
may allocate your payments among any of 16 investment portfolios of the Delaware
Group Premium Fund, Inc., the Guarantee Period Accounts and the Fixed Account
(the Guarantee Period Accounts and/or the Fixed Account may not be available in
certain jurisdictions.) This range of investment choices enables you to allocate
your money to meet your particular investment needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an ANNUITY PAYOUT
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
withdraw money from your contract during the ACCUMULATION PHASE. However, as
with other tax-deferred investments, you pay taxes on earnings and any untaxed
payments to the contract when you withdraw them. A federal tax penalty may apply
if you withdraw prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the annuity payout phase will, in part, be determined by your
contract's growth during the accumulation phase.
2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) monthly payments for your lifetime; (2) monthly payments for your
lifetime, but for not less than 10 years; (3) monthly payments for your lifetime
with the guarantee that if payments to you are less than the accumulated value a
refund of the remaining value will be paid; (4) monthly payments for your
lifetime and your survivor's lifetime; (5) monthly payments for your lifetime
and your survivor's lifetime with the payment to the survivor being reduced to
2/3; and (6) monthly payments for a specified period of 1 to 30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making payments
into this contract. Payments are not limited as to frequency, but there are
certain limitations as to amount. Currently, the initial payment must be at
least $600 ($1,000 in Washington). In all cases, each subsequent payment must be
at least $50.
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4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following investment series:
<TABLE>
<S> <C>
Decatur Total Return Emerging Markets Series
Series
Devon Series Delaware Series
DelCap Series Convertible Securities
Series
Social Awareness Series Delchester Series
REIT Series Capital Reserves Series
Small Cap Value Series Strategic Income Series
Trend Series Cash Reserve Series
International Equity Global Bond Series
Series
</TABLE>
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods during which interest rates are guaranteed. The Fixed Account
guarantees principal and a minimum rate of interest (never less than 3%
compounded annually).
5. EXPENSES
Each year and upon surrender, a $30 contract fee is deducted from your contract.
The contract fee is waived if the value of the contract is $50,000 or more or if
the contract is issued to and maintained by the Trustees of a 401(k) plan. We
also deduct insurance charges which amount to 1.40% annually of the daily value
of your contract value allocated to the variable investment options. The
insurance charges include a mortality and expense risk charge of 1.25% and an
administrative expense charge of 0.15%. There are also investment management
fees and other series operating expenses that vary by investment series.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 1% and
7% of the payment withdrawn, based on when your payments were made. In states
where premium taxes are imposed, a premium tax charge will be deducted either
when withdrawals are made or annuity payments commence. There is currently no
charge for processing investment option transfers. We reserve the right to
assess a charge, not to exceed $25, for transfers after your 12 free transfers.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" shows the total of the $30 contract
fee (which is represented as 0.03%), the 1.40% insurance charges and the
investment charges for each investment series. The next two columns show you two
examples of the charges, in dollar amounts, you would pay under a contract. The
examples assume you invest $1,000 in an investment series which earns 5%
annually and that you withdraw your money: (1) at the end of year 1, and (2) at
the end of year 10. For year 1, the Total Annual Charges are assessed as well as
the surrender charges.
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For year 10, the example shows the aggregate of all the annual charges assessed
for 10 years, but there is no surrender charge. The premium tax is assumed to be
0% in both examples.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL
EXPENSE AT THE
END OF
TOTAL ANNUAL -----------------
TOTAL ANNUAL INVESTMENT TOTAL ANNUAL (1) (2)
INVESTMENT SERIES INSURANCE CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
---------------------------------------- ----------------- ----------------- ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Decatur Total Return Series............. 1.43% 0.71% 2.14% $83 $244
Devon Series............................ 1.43% 0.80% 2.23% $83 $253
DelCap Series........................... 1.43% 0.85% 2.28% $84 $258
Social Awareness Series................. 1.43% 0.85% 2.28% $84 $258
REIT Series*............................ 1.43% 0.85% 2.28% $84 $258
Small Cap Value Series.................. 1.43% 0.85% 2.28% $84 $258
Trend Series............................ 1.43% 0.85% 2.28% $84 $258
International Equity Series............. 1.43% 0.90% 2.33% $84 $263
Emerging Markets Series................. 1.43% 1.50% 2.93% $90 $322
Delaware Series......................... 1.43% 0.67% 2.10% $82 $240
Convertible Securities Series........... 1.43% 0.85% 2.28% $84 $258
Delchester Series....................... 1.43% 0.70% 2.13% $83 $243
Capital Reserves Series................. 1.43% 0.75% 2.18% $83 $248
Strategic Income Series................. 1.43% 0.80% 2.23% $83 $253
Cash Reserve Series..................... 1.43% 0.64% 2.07% $82 $237
Global Bond Series...................... 1.43% 0.85% 2.28% $84 $258
</TABLE>
* For this newly formed Fund, the charges have been estimated.
The charges reflect any expense reimbursement or fee waiver. For more detailed
information, see the Fee Table in the Prospectus.
6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your investment and partly earnings. You will be
subject to income taxes on the earnings portion of each payment. However, if
your contract is funded with pre-tax or tax deductible dollars (such as a
pension or profit sharing plan contribution), then the entire payment will be
taxable.
7. WITHDRAWALS
You can withdraw money from your contract at any time during the accumulation
phase. Any payment invested for more than seven years can be withdrawn without a
surrender charge. For amounts invested seven year or less, you can withdraw,
without a charge, the GREATEST of: (1) 100% of cumulative earnings; (2) 15% of
the contract value per calendar year; or (3) if you are the Owner and Annuitant,
an amount based on your life expectancy. (Similarly, no surrender charge will
apply if an amount is withdrawn based on the Annuitant's life expectancy if the
Owner is a trust or other non-natural person.)
Where permitted by state law, the surrender charges are also waived if after the
contract is issued, the owner (1) is diagnosed with a fatal illness, (2) becomes
disabled (before age 65) or (3) is confined in a medical care facility for the
later of one year from issue or 90 days.
Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
guarantee period will be subject to a market value adjustment which may increase
or decrease the value in the account. This adjustment
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will never impact your original investment, nor will earnings in the GPA amount
to less than an effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the investment series you choose. The following chart illustrates
past returns for each investment series based on the Sub-Account inception date.
The performance figures reflect the contract fee, the insurance charges, the
investment charges and all other expenses of the investment series. They do not
reflect the surrender charges and if applied would reduce such performance. Past
performance is not a guarantee of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
------------------------------------------
INVESTMENT SERIES 1997 1996 1995 1994 1993
---------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Decatur Total Return Series............. 29.19% 19.00% 34.24% -1.61% 13.83%
Devon Series............................ N/A N/A N/A N/A N/A
DelCap Series........................... 13.28% 12.83% 27.74% -4.90% 10.01%
Social Awareness Series................. N/A N/A N/A N/A N/A
REIT Series............................. N/A N/A N/A N/A N/A
Small Cap Value Series.................. 31.06% 20.81% 22.12% -0.64% N/A
Trend Series............................ 19.66% 9.41% 37.29% -1.90% N/A
International Equity Series............. 5.10% 18.32% 12.29% 1.20% 14.35%
Emerging Markets Series................. N/A N/A N/A N/A N/A
Delaware Series......................... 24.64% 14.25% 24.82% -1.55% 6.66%
Convertible Securities Series........... N/A N/A N/A N/A N/A
Delchester Series....................... 12.04% 11.17% 13.89% -4.23% 14.71%
Capital Reserves Series................. 6.09% 2.55% 12.57% -4.05% 6.32%
Strategic Income Series................. N/A N/A N/A N/A N/A
Cash Reserve Series..................... 3.62% 3.43% 4.09% 2.21% 1.04%
Global Bond Series...................... -0.54% N/A N/A N/A N/A
</TABLE>
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATEST of: (a) the
accumulated value increased for any positive market value adjustment; (b) gross
payments compounded daily at an annual rate of 5%, decreased proportionately to
reflect any prior withdrawals; or (c) the death benefit that would have been
payable on the most recent contract anniversary, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5% or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary while the Contract remains
in force and prior to the Annuity Date. As noted above, the values of (b) and
(c) will be decreased proportionately if withdrawals are taken.
10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine Provision."
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DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Capital Reserves Series, Cash Reserve Series, Strategic
Income Series or Fixed Account to one or more of the other investment options.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
11. INQUIRIES
If you need more information you may contact us at 1-800-533-2124 or send
correspondence to:
Delaware Medallion
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts, issued either on a group basis or as
individual contracts by Allmerica Financial Life Insurance and Annuity Company
(the "Company") to individuals and businesses in connection with retirement
plans which may or may not qualify for special federal income tax treatment.
(For information about the tax status when used with a particular type of plan,
see "FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are referred to herein collectively as the "Contract(s)."
The following is a summary of information about the Contract. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as Separate Account VA-K. The assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in shares of one of the
following series of Delaware Group Premium Fund, Inc. ("DGPF"):
<TABLE>
<S> <C> <C>
Decatur Total Return Trend Series Delchester Series
Series
Devon Series International Equity Capital Reserves
Series Series
DelCap Series Emerging Markets Series Strategic Income
Series
Social Awareness Series Delaware Series Cash Reserve Series
REIT Series Convertible Securities Global Bond Series
Series
Small Cap Value Series
</TABLE>
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and, during the
accumulation phase, to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in a Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period,
the value may be increased or decreased by a Market Value Adjustment. Amounts
allocated to the Guarantee Period Accounts in the accumulation phase are held in
the Company's Separate Account GPA.
Additional information is contained in a Statement of Additional Information
("SAI"), dated May 1, 1998, as may be amended from time to time, filed with the
Securities and Exchange Commission and incorporated herein by reference. The
Table of Contents of the SAI is listed on page 4 of this Prospectus. The SAI is
available upon request and without charge. To obtain the SAI, fill out and
return the attached request card, or contact Annuity Client Services, telephone
1-800-533-2124.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC. INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED MAY 1, 1998
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THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................................. 4
SPECIAL TERMS......................................................................... 5
SUMMARY............................................................................... 7
ANNUAL AND TRANSACTION EXPENSES....................................................... 12
CONDENSED FINANCIAL INFORMATION....................................................... 15
PERFORMANCE INFORMATION............................................................... 17
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND,
INC.................................................................................. 21
INVESTMENT OBJECTIVES AND POLICIES.................................................... 22
INVESTMENT ADVISORY SERVICES TO DGPF.................................................. 24
DESCRIPTION OF THE CONTRACT........................................................... 24
A. Payments........................................................................ 24
B. Right to Revoke Individual Retirement Annuity................................... 25
C. Right to Revoke All Other Contracts............................................. 25
D. Transfer Privilege.............................................................. 25
Automatic Transfers and Automatic Account Rebalancing Options................. 26
E. Surrender....................................................................... 26
F. Withdrawals..................................................................... 27
Systematic Withdrawals........................................................ 27
Life Expectancy Distributions................................................. 28
G. Death Benefit................................................................... 28
Death of the Annuitant Prior to the Annuity Date.............................. 28
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date..... 29
Payment of the Death Benefit Prior to the Annuity Date........................ 29
Death of the Annuitant On or After the Annuity Date........................... 29
H. The Spouse of the Owner as Beneficiary.......................................... 29
I. Assignment...................................................................... 30
J. Electing the Form of Annuity and the Annuity Date............................... 30
K. Description of Variable Annuity Payout Options.................................. 31
L. Annuity Benefit Payments........................................................ 32
The Annuity Unit.............................................................. 32
Determination of the First and Subsequent Annuity Benefit Payments............ 32
M. NORRIS Decision.................................................................. 33
N. Computation of Values........................................................... 33
The Accumulation Unit......................................................... 33
Net Investment Factor......................................................... 33
CHARGES AND DEDUCTIONS................................................................ 34
A. Variable Account Deductions..................................................... 34
Mortality and Expense Risk Charge............................................. 34
Administrative Expense Charge................................................. 34
Other Charges................................................................. 34
B. Contract Fee.................................................................... 35
C. Premium Taxes................................................................... 35
D. Contingent Deferred Sales Charge................................................ 35
Charge for Surrender and Withdrawal........................................... 36
Reduction or Elimination of Surrender Charge.................................. 36
Withdrawal Without Surrender Charge........................................... 37
Surrenders.................................................................... 38
Charge at the Time Annuity Benefit Payments Begin............................. 38
E. Transfer Charge................................................................. 38
</TABLE>
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<TABLE>
<S> <C>
GUARANTEE PERIOD ACCOUNTS............................................................. 38
FEDERAL TAX CONSIDERATIONS............................................................ 41
A. Qualified and Non-Qualified Contracts........................................... 41
B. Taxation of the Contracts in General............................................ 41
Withdrawals Prior to Annuitization............................................ 42
Annuity Payouts After Annuitization........................................... 42
Penalty on Distribution....................................................... 42
Assignments or Transfers...................................................... 42
Non-Natural Owners............................................................ 43
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 43
C. Tax Withholding................................................................. 43
D. Provisions Applicable to Qualified Employer Plans............................... 43
Corporate and Self-Employed Pension and Profit Sharing Plans.................. 43
Individual Retirement Annuities............................................... 44
Tax-Sheltered Annuities....................................................... 44
Texas Optional Retirement Program............................................. 44
REPORTS............................................................................... 44
LOANS (QUALIFIED CONTRACTS ONLY)...................................................... 44
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 45
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 45
VOTING RIGHTS......................................................................... 45
DISTRIBUTION.......................................................................... 46
LEGAL MATTERS......................................................................... 46
FURTHER INFORMATION................................................................... 46
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................................ A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT....................... B-1
APPENDIX C -- THE DEATH BENEFIT....................................................... C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY...................................................... 2
TAXATION OF THE CONTRACT, THE SEPARATE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................................. 3
UNDERWRITERS......................................................................... 3
ANNUITY BENEFIT PAYMENTS............................................................. 4
EXCHANGE OFFER....................................................................... 6
PERFORMANCE INFORMATION.............................................................. 8
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
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SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed interest rate, and to which all or a portion of a payment
or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period, and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Contract. Joint Owners are permitted if one of the two is
the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding series
of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, International Equity Series, Emerging Markets Series, Delaware
Series, Convertible Securities Series, Delchester Series, Capital Reserves
Series, Strategic Income Series, Cash Reserve Series, and Global Bond Series of
Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading and, on such other days (other than a day
during
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which no payment, withdrawal or surrender of a Contract was received) when there
is a sufficient degree of trading in an Underlying Fund's portfolio securities
such that the current net asset value of the Sub-Accounts may be affected
materially.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain
Underlying Funds.
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SUMMARY
WHAT IS THE DELAWARE MEDALLION III VARIABLE ANNUITY?
The Delaware Medallion III variable annuity contract is an insurance contract
designed to help you, the Owner, accumulate assets for your retirement or other
important financial goals on a tax-deferred basis. The Contract combines the
concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- - a customized investment portfolio;
- - experienced professional investment advisers;
- - tax deferral on earnings;
- - guarantees that can protect your family during the accumulation phase;
- - income that can be guaranteed for life;
- - issue age up to your 90th birthday.
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated among
the Sub-Accounts investing in series of the Delaware Group Premium Fund, Inc.
("DGPF), to the Guarantee Period Accounts, and to the Fixed Account. You select
the investment options most appropriate for your investment needs. As those
needs change, you may also change your allocation without incurring any tax
consequences. The Contract's Accumulated Value is based on the investment
performance of the Funds and any accumulations in the Guarantee Period and Fixed
Accounts. No income taxes are paid on any earnings under the Contract unless and
until Accumulated Values are withdrawn. In addition, during the accumulation
phase, the beneficiaries receive certain protections and guarantees in the event
of the Annuitant's death. See discussion below: "WHAT HAPPENS UPON MY DEATH
DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years; and
- - periodic payments over a specified number of years (1-30); under this option
you may reserve the right to convert remaining payments to a lump-sum payout
by electing a "commutable" option.
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<PAGE>
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (the "Company"). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two must be the Annuitant), an
Annuitant and one or more beneficiaries. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual who receives annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of payments are flexible, subject only to a $600
minimum for the initial payment ($1,000 in Washington) and a $50 minimum for any
additional payments. (A lower initial payment amount is permitted for certain
qualified plans and where monthly payments are being forwarded directly from a
financial institution.) In addition, a minimum of $1,000 is always required to
establish a Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account.
YOU HAVE A CHOICE OF 16 SUB-ACCOUNTS INVESTING IN THE FOLLOWING SERIES OF DGPF:
<TABLE>
<S> <C>
Decatur Total Return Series Emerging Markets Series
Devon Series Delaware Series
DelCap Series Convertible Securities
Series
Social Awareness Series Delchester Series
REIT Series Capital Reserves Series
Small Cap Value Series Strategic Income Series
Trend Series Cash Reserve Series
International Equity Series Global Bond Series
</TABLE>
Each Underlying Fund operates pursuant to different investment objectives,
discussed below, and this range of investment options enables you to allocate
your money among the Funds to meet your particular investment needs.
SOME FUNDS MAY NOT BE AVAILABLE IN ALL STATES.
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently offers nine Guarantee Periods ranging from two to ten
years in duration. Once declared, the Guaranteed Interest Rate will not change
during the duration of the Guarantee Period. If amounts allocated to a Guarantee
Period Account are transferred, surrendered or applied to any annuity option at
any time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
account's value; however, this adjustment will never be applied against your
principal. In addition, earnings in the Guarantee Period Accounts after
application of the Market Value Adjustment will not be less than an effective
annual rate of 3%. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES.
8
<PAGE>
FIXED ACCOUNT. The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account, see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO IS THE INVESTMENT ADVISER?
Delaware Management Company, Inc. ("Delaware Management") is the investment
adviser for the Decatur Total Return Series, Devon Series, DelCap Series, Social
Awareness Series, REIT Series, Small Cap Value Series, Trend Series, Delaware
Series, Convertible Securities Series, Delchester Series, Capital Reserves
Series, Strategic Income Series, and Cash Reserve Series. The investment adviser
for the International Equity Series, Emerging Markets Series and the Global Bond
Series is Delaware International Advisers Ltd. ("Delaware International").
CAN I MAKE TRANSFERS AMONG THE FUNDS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts, the
Guarantee Period Accounts, and the Fixed Account. You will incur no current
taxes on transfers while your money remains in the Contract. See "D. Transfer
Privilege." The first 12 transfers in a Contract year are guaranteed to be free
of a transfer charge. For each subsequent transfer in a Contract year, the
Company does not currently charge but reserves the right to assess a processing
charge guaranteed never to exceed $25.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before your annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy and the Owner is a trust or other
non-natural person.) A 10% tax penalty may apply on all amounts deemed to be
earnings if you are under age 59 1/2. Additional amounts may be withdrawn at any
time but may be subject to the surrender charge for payments that have not been
invested in the Contract for more than seven years. (A Market Value Adjustment
may apply to any withdrawal made from a Guarantee Period Account prior to the
expiration of the Guarantee Period.)
In addition, except where prohibited by state law, you may withdraw all or a
portion of your money without a surrender charge if, after the Contract is
issued, you are admitted to a medical care facility, become disabled or are
diagnosed with a fatal illness. For details and restrictions, see "Reduction or
Elimination of Surrender Charge."
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
highest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, with interest accumulating daily at an annual rate of 5%
starting on the date each payment is applied, and continuing throughout your
investments' entire accumulation phase, decreased proportionately to reflect
withdrawals; or
- - The death benefit that would have been payable on the most recent contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
9
<PAGE>
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5% or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary while the Contract remains
in force and prior to the Annuity Date. As noted above, the values of (b) and
(c) will be decreased proportionately if withdrawals are taken.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Accumulated Value of the Contract
increased by any positive Market Value Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $50,000 on each Contract anniversary and
upon surrender, a $30 Contract fee will be deducted from the Contract. The
Contract fee is waived for Contracts issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity payout options, you may be subject to a
contingent deferred sales charge. If applicable, this charge will be between 1%
and 7% of payments withdrawn, based on when the payments were made.
A deduction for state and local premium taxes, if any, may be made as described
under "C. Premium Taxes."
The Company will deduct a daily Mortality and Expense Risk Charge and
Administrative Expense Charge equal to 1.25% and 0.15%, respectively, of the
average daily net assets invested in each Underlying Fund. The Funds will incur
certain management fees and expenses which are more fully described in "Other
Charges" and in the DGPF prospectus which accompanies this Prospectus.
CAN I EXAMINE THE CONTRACT?
Yes. The Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of the Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires or if the Contract was issued as an Individual Retirement
Annuity ("IRA"), you will generally receive a refund of your entire payment. (In
certain states this refund may be the greater of (1) your payment or (2) the
amounts allocated to the Fixed and Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted.) See "B. Right to Revoke Individual Retirement Annuity."
10
<PAGE>
CAN I MAKE FUTURE CHANGES UNDER THE CONTRACT?
There are several changes you can make after receiving the Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
11
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and are deducted as
described under "Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
CONTRACT CHARGES: PAYMENT CHARGE
------------ -----------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7.0%
This charge may be assessed upon surrender, 2 6.0%
withdrawal or annuitization under any commutable 3 5.0%
period certain option or a noncommutable period 4 4.0%
certain option of less than ten years. The 5 3.0%
charge is a percentage of payments applied to 6 2.0%
the amount surrendered (in excess of any amount 7 1.0%
that is free of surrender charge) within the More than 7 0%
indicated time period.
TRANSFER CHARGE: None
The Company currently makes no charge for
processing transfers and guarantees that the
first 12 transfers in a Contract year will not
be subject to a transfer charge. For each
subsequent transfer, the Company reserves the
right to assess a charge, guaranteed never to
exceed $25, to reimburse the Company for the
costs of processing the transfer.
CONTRACT FEE: $30
The fee is deducted annually and upon surrender
prior to the Annuity Date when Accumulated Value
is less than $50,000. The fee is waived for
Contracts issued to and maintained by the
trustee of a 401(k) plan.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average daily
net assets)
Mortality and Expense Risk Charge 1.25%
Administrative Expense Charge 0.15%
-----------
Total Asset Charge 1.40%
</TABLE>
12
<PAGE>
FUND EXPENSES: The following table shows the expenses of the Underlying Funds as
of December 31, 1997 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1998.) For more information concerning fees and
expenses, see the prospectus of the Underlying Funds.
<TABLE>
<CAPTION>
OTHER EXPENSES (AFTER
MANAGEMENT ANY APPLICABLE TOTAL
FUND FEES REIMBURSEMENTS) EXPENSES
- ------------------------------------------------------------------ --------------- ----------------------- -------------
<S> <C> <C> <C>
Decatur Total Return Series....................................... 0.60% 0.11% 0.71%(2)
Devon Series...................................................... 0.54% 0.26% 0.80%(1)(2)
DelCap Series..................................................... 0.63% 0.22% 0.85%(1)(2)
Social Awareness Series........................................... 0.20% 0.65% 0.85%(1)(2)
REIT Series@...................................................... 0.75% 0.10% 0.85%(1)(2)
Small Cap Value Series............................................ 0.60% 0.25% 0.85%(1)(2)
Trend Series...................................................... 0.62% 0.23% 0.85%(1)(2)
International Equity Series....................................... 0.75% 0.15% 0.90%(2)(3)
Emerging Markets Series........................................... 0.30% 1.20% 1.50%(1)(2)
Delaware Series................................................... 0.60% 0.07% 0.67%(2)
Convertible Securities Series..................................... 0.05% 0.80% 0.85%(1)(2)
Delchester Series................................................. 0.60% 0.10% 0.70%(2)
Capital Reserves Series........................................... 0.60% 0.15% 0.75%(2)
Strategic Income Series........................................... 0.22% 0.58% 0.80%(1)(2)
Cash Reserve Series............................................... 0.50% 0.14% 0.64%(2)
Global Bond Series................................................ 0.52% 0.33% 0.85%(1)(2)
</TABLE>
(@) Estimated after expense reimbursement.
(1) For the fiscal year ended December 31, 1997, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.91% for Devon Series, 0.87% for DelCap
Series, 1.40% for Social Awareness Series (formerly known as "Quantum Series"),
0.90% for Small Cap Value Series (formerly known as "Value Series"), 0.88% for
Trend Series, 90% for International Equity Series, 2.45% for Emerging Markets
Series, 2.30% for Convertible Securities Series, 1.23% for Strategic Income
Series and 1.08% for Global Bond Series.
(2) The investment adviser for the Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, Delaware Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, and Cash Reserve Series is
Delaware Management Company, Inc. ("Delaware Management"). The Investment
Adviser for the International Equity Series, Emerging Markets Series and the
Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International"). Effective May 1, 1998 through October 31, 1998, the investment
advisers for the Series of DGPF have agreed voluntarily to waive their
management fees and reimburse each Series for expenses to the extent that total
expenses will not exceed 1.50% for the Emerging Markets Series; 0.95% for the
International Equity Series; 85% for DelCap Series, Social Awareness Series,
REIT Series, Small Cap Value Series, Trend Series, Convertible Securities Series
and Global Bond Series and 0.80% for all other Series. The fee ratios shown
above have been restated, if necessary, to assume that the new voluntary
limitations took effect on January 1, 1997. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds.
(3) Effective July 1, 1997, the management fee of the International Equity
Series was voluntarily limited to a rate of 0.95% of the average daily net
assets, replacing a prior limitation of 0.80%. In 1997, the total annual
expenses of the International Equity Series was 0.90% and the management fee was
0.75%.
The following examples demonstrate the cumulative expenses which would be paid
by the Owner at 1-year, 3-year, 5-year, and 10-year intervals under certain
contingencies. Each example assumes a $1,000 investment in a Sub-Account and a
5% annual return on assets. Because the expenses of the Underlying Funds differ,
separate examples are used to illustrate the expenses incurred by an Owner on an
investment in the various Sub-Accounts.
13
<PAGE>
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF
LESSER THAN THOSE SHOWN.
(a) If, at the end of the applicable time period, you surrender your Contract or
annuitize* under a commutable period certain option of less than ten years, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Decatur Total Return Series............. $83 $112 $143 $244
Devon Series............................ $83 $115 $147 $253
DelCap Series........................... $84 $116 $150 $258
Social Awareness Series................. $84 $116 $150 $258
REIT Series............................. $84 $116 $150 $258
Small Cap Value Series.................. $84 $116 $150 $258
Trend Series............................ $84 $116 $150 $258
International Equity Series............. $84 $118 $152 $263
Emerging Markets Series................. $90 $135 $181 $322
Delaware Series......................... $82 $111 $141 $240
Convertible Securities Series........... $84 $116 $150 $258
Delchester Series....................... $83 $112 $142 $243
Capital Reserves Series................. $83 $113 $145 $248
Strategic Income Series................. $83 $115 $147 $253
Cash Reserve Series..................... $82 $110 $139 $237
Global Bond Series...................... $84 $116 $150 $258
</TABLE>
(b) If, at the end of the applicable time period, you annuitize* under a life
option or any non-commutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Decatur Total Return Series............. $21 $66 $113 $244
Devon Series............................ $22 $69 $118 $253
DelCap Series........................... $23 $70 $120 $258
Social Awareness Series................. $23 $70 $120 $258
REIT Series............................. $23 $70 $120 $258
Small Cap Value Series.................. $23 $70 $120 $258
Trend Series............................ $23 $70 $120 $258
International Equity Series............. $23 $72 $123 $263
Emerging Markets Series................. $29 $90 $153 $322
Delaware Series......................... $21 $65 $111 $240
Convertible Securities Series........... $23 $70 $120 $258
Delchester Series....................... $21 $66 $113 $243
Capital Reserves Series................. $22 $67 $115 $248
Strategic Income Series................. $22 $69 $118 $253
Cash Reserve Series..................... $21 $64 $110 $237
Global Bond Series...................... $23 $70 $120 $258
</TABLE>
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year under
an option, including a life contingency, or under any non-commutable period
certain option of ten years or more.
Pursuant to requirements of the Investment Company Act of 1940 ("1940 Act") the
Contract fee has been reflected in the examples by a method intended to show the
"average" impact of the Contract fee on an
14
<PAGE>
investment in the Variable Account. The total Contract fees collected under the
Contract by the Company are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.03, and the amount of the
Contract fee is assumed to be $0.30 in the examples. The Contract fee is
deducted only when the Accumulated Value is less than $50,000. Lower costs apply
to Contracts issued and maintained as part of a 401(k) plan.
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
DECATUR TOTAL RETURN SERIES
Unit Value:
Beginning of Period.............................. 1.883 1.582 1.178 1.197 1.051 1.000
End of Period.................................... 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of Period (in
thousands).......................................... 113,507 65,991 48,305 38,591 25,086 4,208
DEVON SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 11,585 N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period.............................. 1.616 1.432 1.121 1.178 1.070 1.000
End of Period.................................... 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of Period (in
thousands).......................................... 57,025 44,667 35,204 29,100 20,802 4,534
SOCIAL AWARENESS SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 4,515 N/A N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period.............................. 1.467 1.214 0.994 1.000 1.000 N/A
End of Period.................................... 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 43,269 15,725 9,467 6,040 6 N/A
TREND SERIES
Unit Value:
Beginning of Period.............................. 1.486 1.358 0.989 1.007 1.000 N/A
End of Period.................................... 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 33,256 21,711 13,410 6,197 50 N/A
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period.............................. 1.540 1.301 1.159 1.144 1.000 1.000
End of Period.................................... 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of Period (in
thousands).......................................... 48,813 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 4,545 N/A N/A N/A N/A N/A
DELAWARE SERIES
Unit Value:
Beginning of Period.............................. 1.616 1.414 1.133 1.150 1.078 1.000
End of Period.................................... 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of Period (in
thousands).......................................... 58,759 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.156 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,291 N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period.............................. 1.474 1.326 1.164 1.214 1.058 1.000
End of Period.................................... 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of Period (in
thousands).......................................... 56,733 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period.............................. 1.241 1.209 1.075 1.120 1.053 1.000
End of Period.................................... 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of Period (in
thousands).......................................... 20,234 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 5,381 N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period.............................. 1.124 1.087 1.044 1.021 1.010 1.000
End of Period.................................... 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of Period (in
thousands).......................................... 24,014 21,519 11,568 13,998 5,483 1,387
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL BOND SERIES
Unit Value:
Beginning of Period.............................. 1.107 1.000 1.000 N/A N/A N/A
End of Period.................................... 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 3,950 886 N/A N/A N/A N/A
</TABLE>
* The date of inception of the Sub-Accounts investing in the Devon Series, the
Social Awareness Series, the Emerging Markets Series, the Convertible Securities
Series and the Strategic Income Series was 5/1/97.
PERFORMANCE INFORMATION
The Delaware Medallion III Contract was first offered to the public in 1996. The
Company, however, may advertise "total return" and "average annual total return"
performance information based on the periods that the Sub-Accounts have been in
existence and the periods that the Underlying Funds have been in existence.
Performance results for all periods shown below are calculated with all charges
assumed to be those applicable to the Sub-Accounts, the Underlying Funds, and,
in Tables 1A and 2A, assuming that the Contract is surrendered at the end of the
applicable period and, alternatively, in Tables 1B and 2B, assuming that it is
not surrendered at the end of the applicable period. Both the total return and
yield figures are based on historical earnings and are not intended to indicate
future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Cash Reserve Series refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Cash Reserve
Series refers to the annualized income generated by an investment in the
Sub-Account over a specified 30-day or one-month period. The yield is calculated
by assuming that the income generated by the investment during that 30-day or
one-month period is generated each period over a 12-month period and is shown as
a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the $30
annual Contract fee, the Underlying Fund charges and the contingent deferred
sales charge which would be assessed if the investment were completely withdrawn
at the end of the specified period. Quotations of supplemental average total
returns, as shown in Table 1B, are calculated in exactly the same manner and for
the same periods of time except that it does not reflect the contingent deferred
sales charge but assumes that the Contract is not surrendered at the end of the
periods shown.
17
<PAGE>
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B respectively; however, the period of time is
based on the Underlying Fund's lifetime, which may predate the Sub-Account's
inception date. These performance calculations are based on the assumption that
the Sub-Account corresponding to the applicable Underlying Fund was actually in
existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
18
<PAGE>
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION
ENDED OF
NAME OF UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
---------------------------------------- ------------ ------- -----------
<S> <C> <C> <C>
Decatur Total Return Series............. 22.19% 17.93% 16.75%
Devon Series............................ N/A N/A 19.10%
DelCap Series........................... 6.54% 10.91% 10.90%
Social Awareness Series................. N/A N/A 20.19%
REIT Series............................. N/A N/A N/A
Small Cap Value Series.................. 24.06% N/A 17.14%
Trend Series............................ 12.66% N/A 14.80%
International Equity Series............. -1.15% 9.67% 9.47%
Emerging Markets Series................. N/A N/A -17.29%
Delaware Series......................... 17.64% 12.93% 12.92%
Convertible Securities Series........... N/A N/A 8.71%
Delchester Series....................... 5.37% 8.85% 8.98%
Capital Reserves Series................. -0.22% 4.03% 4.66%
Strategic Income Series................. N/A N/A -1.07%
Cash Reserve Series..................... -2.55% 2.32% 2.38%
Global Bond Series...................... -6.46% N/A 2.68%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION
ENDED OF
NAME OF UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
---------------------------------------- ------------ ------- -----------
<S> <C> <C> <C>
Decatur Total Return Series............. 29.19% 18.24% 16.92%
Devon Series............................ N/A N/A 26.10%
DelCap Series........................... 13.28% 11.30% 11.11%
Social Awareness Series................. N/A N/A 27.19%
REIT Series............................. N/A N/A N/A
Small Cap Value Series.................. 31.06% N/A 17.76%
Trend Series............................ 19.66% N/A 15.45%
International Equity Series............. 5.10% 10.08% 9.74%
Emerging Markets Series................. N/A N/A -12.05%
Delaware Series......................... 24.64% 13.29% 13.12%
Convertible Securities Series........... N/A N/A 15.59%
Delchester Series....................... 12.04% 9.28% 9.21%
Capital Reserves Series................. 6.09% 4.54% 4.94%
Strategic Income Series................. N/A N/A 5.19%
Cash Reserve Series..................... 3.62% 2.85% 2.69%
Global Bond Series...................... -0.54% N/A 5.96%
</TABLE>
19
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
TOTAL RETURN INCEPTION
FOR YEAR OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
---------------------------------------- ------------ ------- -----------
<S> <C> <C> <C>
Decatur Total Return Series............. 22.19% 17.93% 11.47%
Devon Series............................ N/A N/A 19.10%
DelCap Series........................... 6.54% 10.91% 10.72%
Social Awareness Series................. N/A N/A 20.19%
REIT Series............................. N/A N/A N/A
Small Cap Value Series.................. 24.06% N/A 17.22%
Trend Series............................ 12.66% N/A 14.93%
International Equity Series............. -1.15% 9.67% 9.47%
Emerging Markets Series................. N/A N/A -17.29%
Delaware Series......................... 17.64% 12.93% 12.28%
Convertible Securities Series........... N/A N/A 8.71%
Delchester Series....................... 5.37% 8.85% 8.97%
Capital Reserves Series................. -0.22% 4.03% 5.34%
Strategic Income Series................. N/A N/A -1.07%
Cash Reserve Series..................... -2.55% 2.32% 3.63%
Global Bond Series...................... -6.46% N/A 2.68%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
TOTAL RETURN INCEPTION
FOR YEAR OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
---------------------------------------- ------------ ------- -----------
<S> <C> <C> <C>
Decatur Total Return Series............. 29.19% 18.24% 11.47%
Devon Series............................ N/A N/A 26.10%
DelCap Series........................... 13.28% 11.30% 10.80%
Social Awareness Series................. N/A N/A 27.19%
REIT Series............................. N/A N/A N/A
Small Cap Value Series.................. 31.06% N/A 17.68%
Trend Series............................ 19.66% N/A 15.42%
International Equity Series............. 5.10% 10.08% 9.74%
Emerging Markets Series................. N/A N/A -12.05%
Delaware Series......................... 24.64% 13.29% 12.28%
Convertible Securities Series........... N/A N/A 15.59%
Delchester Series....................... 12.04% 9.28% 8.97%
Capital Reserves Series................. 6.09% 4.54% 5.34%
Strategic Income Series................. N/A N/A 5.19%
Cash Reserve Series..................... 3.62% 2.85% 3.63%
Global Bond Series...................... -0.54% N/A 5.96%
</TABLE>
20
<PAGE>
* The dates of inception of the Underlying Funds are: 10/29/92 for the
International Equity Series; 12/27/93 for the Small Cap Value and Trend Series;
7/02/91 for the DelCap Series; 7/28/88 for the Delaware Series, the Decatur
Total Return Series, the Delchester Series, the Capital Reserves Series, and the
Cash Reserve Series; 5/1/96 for Global Bond Series; and 5/1/97 for the Devon
Series, the Social Awareness Series, the Emerging Markets Series, the
Convertible Securities Series and the Strategic Income Series.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY. The Company is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office ("Principal Office") is located at
440 Lincoln Street, Worcester, MA 01653, Telephone 508-855-1000. The Company is
subject to the laws of the state of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1997, the
Company had over $9.4 billion in assets and over $26.6 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over $43.8
billion in life insurance in force.
The Company is a chartered member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT. The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contract are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 16 Sub-Accounts available under the Contract. Each
Sub-Account is administered and accounted for as part of the general business of
the Company, but the income, capital gains or capital losses of each Sub-Account
are allocated to such Sub-Account without regard to other income, capital gains,
or capital losses of the Company. Under Delaware law, the assets of the Variable
Account may not be charged with any liabilities arising out of any other
business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of a
"separate account" under federal securities law, and is registered with the SEC
as a unit investment trust under the 1940 Act. The registration of the Variable
Account and DGPF does not involve the supervision by the SEC of management or
investment practices or Contracts of the Variable Account, the Company, DGPF or
the Underlying Funds.
THE COMPANY OFFERS OTHER VARIABLE ANNUITY CONTRACTS INVESTING IN THE VARIABLE
ACCOUNT WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS. THE VARIABLE ACCOUNT ALSO
INVESTS IN OTHER UNDERLYING FUNDS WHICH ARE NOT AVAILABLE TO THE CONTRACT
DESCRIBED IN THIS PROSPECTUS.
21
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. ("DGPF") is
an open-end, diversified management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of DGPF or its separate investment series.
DGPF was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance contracts. DGPF
currently has 16 investment portfolios, each issuing a series of shares: Decatur
Total Return Series, Devon Series, DelCap Series, Social Awareness Series, REIT
Series, Small Cap Value Series, Trend Series, International Equity Series,
Emerging Markets Series, Delaware Series, Convertible Securities Series,
Delchester Series, Capital Reserves Series, Strategic Income Series, Cash
Reserve Series, and Global Bond Series (collectively, the "Underlying Funds").
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund have no effect on the
investment performance of another Underlying Fund. Shares of the Underlying
Funds are not offered to the general public but solely to separate accounts of
life insurance companies.
The investment adviser for the Decatur Total Return Series, Devon Series, DelCap
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, and Cash Reserve Series is
Delaware Management Company, Inc. ("Delaware Management"). The investment
adviser for the International Equity Series, Emerging Markets Series and the
Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International").
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds of DGPF is
set forth below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING FUNDS MAY BE FOUND IN THE
PROSPECTUSES OF THE FUNDS WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statement of Additional Information of DGPF is
available upon request.
DECATUR TOTAL RETURN SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Fund formerly was known as
the Equity/Income Series.
DEVON SERIES -- seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
exhibit the potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Fund formerly was known as the Growth Series.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of medium- to large-sized companies
expected to grow over time. This Fund was formerly known as the Quantum Series.
REIT SERIES -- seeks to achieve maximum long-term total return by investing in
securities of companies primarily engaged in the real estate industry.
SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in
small-to-mid cap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis also--will be
placed on securities of companies that temporarily may be out of favor or whose
value is not yet recognized by the market. This Fund was formerly known as the
Value Series.
22
<PAGE>
TREND SERIES -- seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective. This Fund formerly was known as
the Emerging Growth Series.
INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. The Series is an international fund. As such, under normal
market conditions, at least 65% of the Series' assets will be invested in equity
securities of issuers organized or having a majority of their assets or deriving
a majority of their operating income in at least three countries that are
considered to be emerging or developing.
DELAWARE SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Fund formerly was
known as the Multiple Strategy Series.
CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, which may include privately
placed convertible securities.
DELCHESTER SERIES -- seeks as high a current income as possible by investing in
rated and unrated corporate bonds (including high-yield bonds commonly known as
"junk bonds"), U.S. government securities and commercial paper. Please read the
Fund's prospectus disclosure regarding the risk factors before investing in this
Series. This Fund formerly was known as High Yield Series.
CAPITAL RESERVES SERIES -- seeks a high, stable level of current income while
minimizing fluctuations in principal by investing in a diversified portfolio of
short- and intermediate-term securities.
STRATEGIC INCOME SERIES -- seeks high current income and total return by using a
multi-sector investment approach, investing primarily in three sectors of the
fixed-income securities market: high yield, higher-risk securities; investment
grade fixed-income securities; and foreign government and other foreign
fixed-income securities. The Fund also may invest in U.S. equity securities.
CASH RESERVE SERIES -- seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments. This Fund formerly was known as Money Market Series.
GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
provide the potential for capital appreciation. At least 65% of the Series'
assets will be invested in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
There is no assurance that the investment objectives of the Underlying Funds
will be met. In the event of a material change in the investment policy of a
Sub-Account or the Fund in which it invests, you will be notified of the change.
No material changes in the investment policy of the Variable Account or any
Sub-Accounts will be made without approval pursuant to the applicable state
insurance laws. If you have Contract value in that Sub-Account, the Company will
transfer it without charge, on written request by you, to another Sub-Account or
to the General Account. The Company must receive your written request within
sixty (60) days of the later of (1) the effective date of such change in the
investment policy, or (2) the receipt of the notice of your right to transfer.
23
<PAGE>
INVESTMENT ADVISORY SERVICES TO DGPF
For managing the portfolios of the Underlying Funds and making the investment
decisions, investment advisers are paid an annual fee by their respective
Underlying Funds. For Delaware Management, this fee is equal to 0.50% of the
average daily net assets of the Cash Reserve Series; 0.60% of the average daily
net assets of the Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Delaware Series and Devon Series; 0.65% of the average daily
net assets of the Strategic Income Series and 0.75% of the average daily net
assets of the DelCap Series, Small Cap Value Series, Trend Series, Social
Awareness Series, REIT Series and Convertible Securities Series. For Delaware
International Advisors, Ltd., this fee is equal to 0.75% of the average daily
net assets of the International Equity Series and the Global Bond Series, and
1.25% of the Emerging Markets Series.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application for certain classes of
annuity Contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract and allocated among the
requested accounts as of the date that all underwriting requirements are
properly met. If all underwriting requirements are not complied with within five
business days of the Company's receipt of the initial payment, the payment will
be returned immediately unless the Owner specifically consents to the holding of
the initial payment until completion of any outstanding underwriting
requirements. Subsequent payments will be credited as of the Valuation Date
received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600
($1,000 in Washington). Under a salary deduction or monthly automatic payment
plan, the minimum initial payment is $50. In all cases, each subsequent payment
must be at least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Contract on the employee if the plan's average
annual contribution per eligible plan participant is at least $600. The minimum
allocation to a Guarantee Period Account is $1,000. If less than $1,000 is
allocated to a Guarantee Period Account, the Company reserves the right to apply
that amount to the Cash Reserve Series.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. The
Owner may change allocation instructions for new payments pursuant to a written
or telephone request. If telephone requests are elected by the Owner, a properly
completed authorization must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures the Company follows for transactions initiated by
telephone include requirements that callers on behalf of an Owner identify
themselves by name and identify the Annuitant by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded.
24
<PAGE>
B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may revoke the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to revoke the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to any local agency of the
Company. Mailing or delivery must occur within ten days after receipt of the
Contract for revocation to be effective.
Within seven days the Company will provide a refund equal to gross payment(s)
received. In some states, however, the refund may equal the greater of (a) gross
payments, or (b) the amounts allocated to the Fixed and Guarantee Period
Accounts plus the Accumulated Value of amounts in the Sub-Accounts plus any
amounts deducted under the Contract or by the Underlying Funds for taxes,
charges or fees. At the time the Contract is issued, the "Right to Examine
Contract" provision on the cover page of the Contract will specifically indicate
whether the refund will be equal to gross payments or equal to the greater of
(a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO REVOKE ALL OTHER CONTRACTS
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an Owner may
revoke the Contract at any time within ten days (20 in Idaho) after receipt of
the Contract and receive a refund as described under "B. Right to Revoke
Individual Retirement Annuity," above.
In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the Contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the payments received, including fees, and
any amount allocated to the Variable Account, and (2) the Accumulated Value of
amounts allocated to the Variable Account as of the date the request is
received. If the Contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.
D. TRANSFER PRIVILEGE
Prior to the Annuity Date, the Owner may transfer amounts among accounts at any
time upon written or telephone request to the Company. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored. Transfer values will be based on the
Accumulated Value next computed after receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Money Market Portfolio.
Currently, the Company makes no charge for transfers. The first twelve transfers
in a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company does not currently charge
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing transfers.
The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any third
parties to offer allocation or other investment services under this Contract,
does not endorse or review any allocation or transfer recommendations and is not
responsible for the investment results of such allocations or transfers
transacted on the Owner's behalf. In addition, the Company reserves the right to
discontinue services or limit the number of Funds that it may provide such
services for. The Company does not charge the Owner for providing additional
support services.
25
<PAGE>
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Capital Reserves Series, the Strategic
Income Series, the Cash Reserve Series, or the Fixed Account (the "source
account") to one or more of the Funds. Automatic transfers may not be made into
the Fixed Account, the Guarantee Period Accounts or, if applicable, the Fund
being used as the source account. If an automatic transfer would reduce the
balance in the source account to less than $100, the entire balance will be
transferred proportionately to the chosen Funds. Automatic transfers will
continue until the amount in the source account on a transfer date is zero or
the Owner's request to terminate the option is received by the Company. If
additional amounts are allocated to the source account after its balance has
fallen to zero, this option will not restart automatically and the Owner must
provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information, see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
percentage allocations specified by the Owner. As frequently as specified by the
Owner, the Company will review the percentage allocations in the Funds and, if
necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue in accordance with the most recent percentage allocation mix
received until the Owner's request to terminate or change the option is received
by the Company. As such, subsequent payments allocated in a manner different
from the percentage allocation mix in effect on the date the payment is received
will be reallocated in accordance with the existing mix on the next scheduled
date unless the Owner's request to change the mix is received by the Company.
The Company reserves the right to limit the number of Funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
E. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Surrender Value. The Owner must return the Contract and a signed,
written request for surrender, satisfactory to the Company, to the Principal
office. The amount payable to the Owner upon surrender will be based on the
Contract's Accumulated Value as of the Valuation Date on which the request and
the Contract are received at the Principal Office.
After the Annuity Date, only Contracts under which a commutable period certain
option was elected may be surrendered. The Surrender Amount is the commuted
value of any unpaid installments, computed on the basis of the assumed interest
rate incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
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The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must send a signed, written request for withdrawal, satisfactory to
the Company, to the Company's Principal Office. The written request must
indicate the dollar amount the Owner wishes to receive and the accounts from
which such amount is to be withdrawn. The amount withdrawn equals the amount
requested by the Owner plus any applicable contingent deferred sales charge, as
described under "CHARGES AND DEDUCTIONS." In addition, amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment, as described under "GUARANTEE
PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."
After the Annuity Date, only a Contract under which a commutable period certain
option was elected may have withdrawals taken. A withdrawal after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program." For important
tax consequences which may result from withdrawals, see "FEDERAL TAX
CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of withdrawals
("systematic withdrawals") from amounts in the Sub-Accounts and/or the Fixed
Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
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If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who is also
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option, by
returning a properly signed LED request form to the Principal Office. The LED
option permits the Owner to make systematic withdrawals from the Contract over
his or her lifetime. The amount withdrawn from the Contract changes each year,
because life expectancy changes each year that a person lives. For example,
actuarial tables indicate that a person age 70 has a life expectancy of 16
years, but a person who attains age 86 has a life expectancy of another 6.5
years.
If an Owner elects the LED option, in each Contract year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one), and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly,
semi-annual, or annual distributions, and may terminate the LED option at any
time. The Owner also may elect to receive distributions under an LED option
which is determined on the joint life expectancy of the Owner and a beneficiary.
The Company also may offer other systematic withdrawal options.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General."
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, and important tax considerations, see "E. Surrender" and "F.
Withdrawal" under "DESCRIPTION OF THE CONTRACT," and "FEDERAL TAX
CONSIDERATIONS."
G. DEATH BENEFIT
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (a) the Accumulated Value under the Contract increased by any
positive Market Value Adjustment; (b) gross payments compounded daily at an
annual rate of 5% starting on the date each payment is applied, decreased
proportionately to reflect withdrawals (for each withdrawal, the proportionate
reduction is calculated as the death benefit under this option immediately prior
to the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal); or (c) the death benefit
that would have been payable on the most recent contract anniversary, increased
for subsequent payments and decreased proportionately for subsequent
withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded at the annual rate of 5%. The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments compounded at the annual rate of 5% or (c) the
locked-in value of the death benefit at the first anniversary. The greatest of
(a), (b) or (c) will be locked in until the next Contract anniversary. This
calculation will then be repeated on each anniversary while the Contract remains
in force
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and prior to the Annuity Date. As noted above, the values of (b) and (c) will be
decreased proportionately if withdrawals are taken. See APPENDIX C, "THE DEATH
BENEFIT" for specific examples of death benefit calculations.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If an
Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period not more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Cash Reserve Series. The excess, if any, of the death benefit over the
Accumulated Value also will be added to the Cash Reserve Series. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon the death of
the Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Cash Reserve Series; (2) the excess, if any, of the death
benefit over the Contract's
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Accumulated Value also will be added to the Cash Reserve Series. Additional
payments may be made; however, a surrender charge will apply to these amounts.
All other rights and benefits provided in the Contract will continue, except
that any subsequent spouse of such new Owner will not be entitled to continue
the Contract upon such new Owner's death.
I. ASSIGNMENT
The Contract, other than that sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive. The Company will not be deemed to have knowledge of an
assignment unless it is made in writing and filed at the Principal Office. The
Company will not assume responsibility for determining the validity of any
assignment. If an assignment of the Contract is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that portion
of the Surrender Value of the Contract to which the assignee appears to be
entitled. The Company will pay the balance, if any, in one sum to the Owner in
full settlement of all liability under the Contract. The interest of the Owner
and of any beneficiary will be subject to any assignment. For important tax
consequences which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under; or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to the Principal Office at least one month before the
Annuity date. The new Annuity Date must be the first day of any month occurring
before the Annuitant's 90th birthday, and must be within the life expectancy of
the Annuitant. The Company shall determine such life expectancy at the time a
change in Annuity Date is requested. The Code and the terms of qualified plans
impose limitations on the age at which annuity benefit payments may commence and
the type of annuity option selected. See "FEDERAL TAX CONSIDERATIONS" for
further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the accounts
selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the Fixed Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout, a payment equal to the value of the fixed
number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
semi-annually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required under some state laws). The Company reserves
the right to increase these minimum amounts. If the annuity payout option
selected does not produce an initial payment which meets this minimum, a single
payment will be made. Once the Company begins making annuity benefit payments,
the Annuitant cannot make withdrawals or surrender the annuity except in the
case where a commutable period certain option has been elected. Only
beneficiaries entitled to receive remaining payments for a "period certain" may
elect to instead receive a lump sum settlement.
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If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company provides the variable annuity payout options described below.
Currently, variable annuity options may be funded through the Decatur Total
Return Series, the Delaware Series, and the Capital Reserves Series. The Company
also provides these same options funded through the Fixed Account (fixed annuity
payout option). Regardless of how payments were allocated during the
accumulation period, any of the variable annuity payout options or the fixed
payout options may be selected, or any of the variable annuity payout options
may be selected in combination with any of the fixed annuity payout options.
Other annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This is a
variable annuity payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is a variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2), then periodic variable annuity benefit payments will continue to
the beneficiary until the number of such payments equals the number determined
in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the
dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the
payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continuing during
the lifetime of the survivor. The amount of each payment to the survivor is
based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This is a variable annuity
payable jointly to two payees during their joint lifetime, and then continuing
thereafter during the lifetime of the survivor. The amount of each periodic
payment to the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant or the beneficiary in
the Contract. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity provides periodic
payments for a stipulated number of years ranging from one to 30. This option
may be commutable, that is, the payee reserves the right to receive a lump sum
in place of installments, or it becomes noncommutable. The payee must reserve
this right at the time benefits begin.
The period certain option does not involve a life contingency. In the
computation of the payments under this option, the charge for annuity rate
guarantees, which includes a factor for mortality risks, is made. Although not
contractually required to do so, the Company currently follows a practice of
permitting persons receiving
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payments under the period certain option to elect to convert to a variable
annuity involving a life contingency. The Company may discontinue or change this
practice at any time, but not with respect to election of the option made prior
to the date of any change in this practice. See "FEDERAL TAX CONSIDERATIONS" for
a discussion of the possible adverse tax consequences of selecting a period
certain option.
L. ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life option and non-commutable period certain options of ten or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than ten years, the value is the Surrender
Value less any premium tax. For a death benefit annuity, the annuity value will
be the amount of the death benefit. The annuity rates in the Contract are based
on a modification of the 1983(a) Individual Mortality Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
is determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than ten years, the Surrender Value less premium taxes, if any,
is used rather than the Accumulated Value. The dollar amount of the first
variable annuity benefit payment is then divided by the value of an Annuity Unit
of the selected Sub-Accounts to determine the number of Annuity Units
represented by the first payment. This number of Annuity Units remains fixed
under all annuity options except the joint and two-thirds survivor annuity
option. For each subsequent payment, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity unit on the applicable Valuation Date.
After the first payment, the dollar amount of each periodic variable annuity
benefit payment will vary with subsequent variations in the value of the Annuity
Unit of the selected Sub-Accounts. The dollar amount of
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each fixed amount annuity benefit payment is fixed and will not change, except
under the joint and two-thirds survivor annuity option.
From time to time, the Company may offer the Owner both fixed and variable
annuity rates more favorable than those contained in the Contract. Any such
rates will be applied uniformly to all Owners of the same class. For an
illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the Norris decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
N. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected by
the Owner. Allocations to the Sub-Accounts are credited to the Contract in the
form of Accumulation Units. Accumulation Units are credited separately for each
Sub-Account. The number of Accumulation Units of each Sub-Account credited to
the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal, or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account, and will reflect the investment performance,
expenses and charges of its Underlying Funds. The value of an Accumulation Unit
was set at $1.00 on the first Valuation Date for each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets, and
(4) is an administrative charge equal to 0.15% on an annual basis of the
daily value of the Sub-Account's assets.
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The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of an Accumulation Unit calculation using
an hypothetical example see the SAI. Subject to compliance with applicable state
and federal law, the Company reserves the right to change the methodology for
determining the net investment factor.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectus and the SAI of DGPF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
phase and the annuity payout phase. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives, and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
payout phase on all Contracts, including those that do not involve a life
contingency, even though the Company does not bear direct mortality risk with
respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (described under "B. Contract Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses, and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Funds, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Funds.
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The prospectus and SAI of DGPF contain additional information concerning
expenses of the Underlying Funds.
B. CONTRACT FEE
Currently, a $30 Contract fee is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract fee is waived for a Contract issued to and maintained by
the trustee of a 401(k) plan. Where Contract value has been allocated to more
than one account, a percentage of the total Contract fee will be deducted from
the value in each account. The portion of the charge deducted from each account
will be equal to the percentage which the value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the class of
"eligible persons" as defined in the "Reduction or Elimination of Surrender
Charge" provision below.
C. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for the Contract at the time the payments are
received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge, however, is deducted from the
Accumulated Value of the Contract in the case of surrender and/or withdrawal of
the Contract or at the time annuity benefit payments begin, within certain time
limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments -- accumulated payments not defined as New Payments;
and (3) the amount available under the Withdrawal Without Surrender Charge
provision. See "Withdrawal Without Surrender Charge" below. For purposes of
determining the amount of any contingent deferred sales charge, surrenders will
be deemed to be taken first from amounts available as a Withdrawal Without
Surrender Charge, if any, then from Old Payments, and then from New Payments.
Amounts available as a Withdrawal Without Surrender Charge followed by Old
Payments may be withdrawn from the Contract at any time
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without the imposition of a contingent deferred sales charge. If a withdrawal is
attributable all or in part to New Payments, a contingent deferred sales charge
may apply.
CHARGE FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered, or if New
Payments are withdrawn, while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
The contingent deferred sales charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -------------------------
<S> <C>
less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the charge,
if any. The charge is applied as a percentage of the New Payments withdrawn, but
in no event will the total contingent deferred sales charge exceed a maximum
limit of 7% of total gross New Payments. Such total charge equals the aggregate
of all applicable contingent deferred sales charges for surrender, withdrawals
and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Where permitted by state law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (1) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (2) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the Contract; or (3) physically disabled after
the issue date of the Contract and before attaining age 65. The Company may
require proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits, and reserves the right to obtain an examination by a licensed
physician of its choice and at its expense.
For purposes of the above provision, "medical care facility" means any
state-licensed facility (or, in a state that does not require licensing a
facility that is operating pursuant to state law), providing medically necessary
inpatient care which is prescribed by a licensed "physician" in writing and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment and is
acting within the scope of that license.
Where contingent deferred sales charges have been waived under any one of the
three situations discussed above, no additional payments under the Contract will
be accepted unless required by state law.
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In addition, from time to time the Company may allow a reduction in or
elimination of the contingent deferred sales charge, the period during which the
charge applies, or both, and/or credit additional amounts on the Contract when
the Contract is sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider factors such as the following:
(1) the size and type of group or class, and the persistency expected from that
group or class; (2) the total amount of payments to be received and the manner
in which payments are remitted; (3) the purpose for which the Contract is being
purchased and whether that purpose makes it likely that costs and expenses will
be reduced; (4) other transactions where sales expenses are likely to be
reduced; or (5) the level of commissions paid to selling broker-dealers or
certain financial institutions with respect to Contracts within the same group
or class (for example, broker-dealers who offer the Contract in connection with
financial planning services offered on a fee-for-service basis). The Company
also may reduce or waive the contingent sales charge and/or credit additional
amounts on the Contract where either the Owner or the Annuitant on the issue
date are within the following classes of individuals ("eligible persons"):
employees and registered representatives of any broker-dealer which has entered
into a sales agreement with the Company to sell the Contract; an employee of the
Company, its affiliates or subsidiaries; officers, directors, trustees and
employees of any of the Underlying Funds, investment managers or Sub-Advisers;
and the spouses of and immediate family members residing in the same household
with such eligible persons. "Immediate family members" means children, siblings,
parents and grandparents. Finally, if permitted under state law, contingent
deferred sales charges may be waived under Section 403(b) Contracts where the
amount withdrawn is being contributed to a life insurance policy issued by the
Company as part of the individual's Section 403(b) plan.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to the charge where prohibited
by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
annuity contracts issued by the Company for the Contract. See "EXCHANGE OFFER"
in the SAI.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is: The Accumulated Value as of the Valuation Date coincident
with or next following the date of receipt of the request for
withdrawal, reduced by total gross payments not previously
redeemed (Cumulative Earnings);
Where (2) is: 15% of the Accumulated Value as of the Valuation Date
coincident with or next following the date of receipt of the
request for withdrawal, reduced by the total amount of any
prior withdrawals made in the same calendar year to which no
contingent deferred sales charge was applied; and
Where (3) is: The amount calculated under the Company's life expectancy
distribution Option (see Life Expectancy Distributions)
whether or not the withdrawal was part of such distribution
(applies only if Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge Amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED of 10.2% of Accumulated Value ($1,530).
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<PAGE>
The Withdrawal Without Surrender Charge will be deducted first from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a LIFO basis. If more than one withdrawal is made during
the year, on each subsequent withdrawal the Company will waive the contingent
deferred sales charge, if any, until the entire Withdrawal Without Surrender
Charge has been withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding and adjusted for any applicable Market Value
Adjustment. Subject to the same rules that are applicable to withdrawals, the
Company will not assess a contingent deferred sales charge on an amount equal to
the greatest Withdrawal Without Surrender Charge amount available.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the Accumulated Value under the Contract to other
contracts issued by the Company and owned by the trustee, with no deduction for
any otherwise applicable contingent deferred sales charge. Any such reallocation
will be at the Accumulation Unit values for the Sub-Accounts as of the valuation
date on which a written, signed request is received at the Principal Office.
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS." If an owner of
an existing fixed annuity contract issued by the Company wishes to elect a
variable annuity option, the Company may permit such owner to exchange, at the
time of annuitization, the fixed contract for the Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any contingent deferred
sales charge applicable under the fixed contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
Owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 ("the 1933 Act") or the 1940 Act. Accordingly, the staff of the SEC
has not reviewed the disclosures in this Prospectus relating to the Guarantee
Period Accounts or the Fixed Account. Nevertheless, disclosures regarding the
Guarantee Period Accounts and the Fixed Account of this annuity Contract or any
benefits offered under these accounts may be subject to the provisions of the
1933 Act relating to the accuracy and completeness of statements made in this
Prospectus.
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<PAGE>
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when the Contract initially was issued, and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date (subject to the
Fixed Account limitations in some states; see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT"). Transfers from a Guarantee Period Account on any date
other than on the day following the expiration of that Guarantee Period will be
subject to a Market Value Adjustment. The Company establishes a separate
investment account each time the Owner allocates or transfers amounts to a
Guarantee Period except that amounts allocated to the same Guarantee Period on
the same day will be treated as one Guarantee Period Account. The minimum that
may be allocated to establish a Guarantee Period Account is $1,000. If less than
$1,000 is allocated, the Company reserves the right to apply that amount to the
Cash Reserve Series. The Owner may allocate amounts to any of the Guarantee
Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration, unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date, or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Cash Reserve Series. Where amounts
automatically have been renewed in a new Guarantee Period, it is the Company's
current practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment. This
practice may be discontinued or changed at the Company's discretion.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "G. Death Benefit." A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from
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<PAGE>
each Guarantee Period Account before deduction of any Surrender Charge by the
market value factor. The market value factor for each Guarantee Period Account
is equal to:
[(1+i)/(1+j)](n/365) - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example: 3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to
the next higher number of whole years. If that rate is not
available, the Company will use a suitable rate or index
allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation
Date to the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see "APPENDIX B."
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount then will be allocated to the
pre-selected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
owner, annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are diversified adequately if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on a contract, for any taxable year
of the owner, would be treated as ordinary income received or accrued by the
owner. It is anticipated that the Series of DGPF will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Contract modifications in order to remain in compliance
with the diversification standards, the Company will make reasonable efforts to
comply, and it reserves the right to make such changes as it deems appropriate
for that purpose.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see Section D below.
B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
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WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in the
Contract's Accumulated
Value is not taxable to the Owner until it is withdrawn from the Contract. If
the Contract is surrendered or amounts are withdrawn prior to the annuity date,
any withdrawal of investment gain in value over the cost basis of the Contract
will be taxed as ordinary income. Under the current provisions of the Code,
amounts received under an annuity contract prior to annuitization (including
payments made upon the death of the annuitant or owner), generally are first
attributable to any investment gains credited to the contract over the
taxpayer's "investment in the contract." Such amounts will be treated as gross
income subject to federal income taxation. "Investment in the Contract" is the
total of all payments to the Contract which were not excluded from the Owner's
gross income less any amounts previously withdrawn which were not included in
income. Section 72(e)(11)(A)(ii) requires that all non-qualified deferred
annuity contracts issued by the same insurance company to the same owner during
a single calendar year be treated as one contract in determining taxable
distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are commenced
under the Contract, generally a portion of each payment may be excluded from
gross income. The excludable portion generally is determined by a formula that
establishes the ratio that the investment in the Contract bears to the expected
return under the Contract. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all investment in the
Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the Owner (or, if the Owner is not an
individual, the death of the primary Annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
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NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 . In addition, plan assets are treated as property of the employer,
and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Contract
made before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to Owners of a non-qualified
Contract. Individuals purchasing a qualified Contract should review carefully
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
43
<PAGE>
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted
under Section 408(b) of the Code including Roth IRAs. IRAs are subject to limits
on the amounts that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, certain distributions
from other types of retirement plans may be "rolled over," on a tax-deferred
basis, to an IRA. Purchasers of an IRA Contract will be provided with
supplementary information as may be required by the IRS or other appropriate
agency, and will have the right to revoke the Contract as described in this
Prospectus. See "B. Right to Revoke Individual Retirement Annuities."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES (TSAS). Under the provisions of Section 403(b) of the
Code, payments made to annuity Contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company also will furnish an annual
report to the Owner containing a statement of his or her account, including unit
values and other information as required by applicable law, rules and
regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., Contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and
44
<PAGE>
repayments must be made quarterly and in substantially equal amounts. Repayments
will be allocated pro rata in accordance with the most recent payment
allocation, except that any allocations to a Guarantee Period Account will be
allocated instead to the Cash Reserve Sub-Account.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for, the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund no longer are available for investment or if, in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Variable Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Contract interest in a Sub-Account without notice
to the Owner and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law. The Variable
Account may, to the extent permitted by law, purchase other securities for other
Contracts or permit a conversion between Contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
underlying fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to separate accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Funds also are issued to other unaffiliated insurance
companies which issue variable annuities and variable life contracts ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life owners or variable annuity
owners. Although currently the Company and the DGPF do not foresee any such
disadvantages to either variable life insurance owners or variable annuity
owners, the Company and DGPF intend to monitor events in order to identify any
material conflicts between such Owners and to determine what action, if any,
should be taken in response thereto. If it were concluded that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change and will notify Owners of all such changes. If the Company deems it to be
in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Account may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest
45
<PAGE>
in a Sub-Account will be provided with proxy materials of the Underlying Fund,
together with a form with which to give voting instructions to the Company.
Shares for which no timely instructions are received will be voted in proportion
to the instructions which are received. The Company also will vote shares in a
Sub-Account that it owns and which are not attributable to the Contract in the
same proportion. If the 1940 Act or any rules thereunder should be amended, or
if the present interpretation of the 1940 Act or such rules should change, and
as a result the Company determines that it is permitted to vote shares in its
own right, whether or not such shares are attributable to the Contract, the
Company reserves the right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Fund. During the
accumulation period, the number of Underlying Fund shares attributable to each
Owner will be determined by dividing the dollar value of the Accumulation Units
of the Sub-Account credited to the Contract by the net asset value of one
Underlying Fund share.
During the annuity payout phase, the number of Underlying Fund shares
attributable to each Annuitant will be determined by dividing the reserve held
in each Sub-Account for the Annuitant's variable annuity by the net asset value
of one Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities and
Exchange Act of 1934 and members of the National Association of Securities
Dealers, Inc. (the "NASD.") The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contract. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
The Company pays commissions, not to exceed 6.0% of purchase payments, to
broker-dealers which sell the Contract. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of Contract value. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on a Contract will be retained by the Company.
Owners may direct any inquiries to their financial adviser or to Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-366-1492.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
46
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in the Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
separate account. Allocations to the Fixed Account become part of the assets of
the Company and are used to support insurance and annuity obligations. A portion
or all of net purchase payments may be allocated to accumulate at a fixed rate
of interest in the Fixed Account. Such net amounts are guaranteed by the Company
as to principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If a Contract is surrendered, or if an amount in excess of the Withdrawal
Without Surrender Charge is withdrawn, while the Contract is in force and before
the Annuity Date, a contingent deferred sales charge is imposed if such event
occurs before the payments attributable to the surrender or withdrawal have been
credited to the Contract for at least seven full Contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If a Contract is issued prior to the Annuitant's 60th birthday,
allocations to the Fixed Account will be permitted until the
Annuitant's 61st birthday. On and after the Annuitant's 61st
birthday, no additional Fixed Account allocations will be
accepted. If a Contract is issued on or after the Annuitant's 60th
birthday up through and including the Annuitant's 81st birthday,
Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no
additional allocations to the Fixed Account will be permitted. If
a Contract is issued after the Annuitant's 81st birthday, no
payments to the Fixed Account will be permitted at any time.
In Oregon, if the Contract is issued after the Annuitant's 81st birthday, no
payments or transfers to the Fixed Account will be permitted.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Cash Reserve
Series.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (dollar cost averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the sub-account(s)
transferred into. If the automatic transfer option is terminated prior to the
end of the six month period, the enhanced rate will no longer apply. The Company
reserves the right to extend the period of time that the enhanced rate will
apply.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge Amount is equal to the greater of 15% of the Accumulated Value
or the accumulated earnings in the Contract. The table below presents examples
of the surrender charge resulting from a full surrender based on hypothetical
Accumulated Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 45,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge Amount is equal to
the greater of 15% of the current Accumulated Value or the accumulated earnings
in the Contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals of the
Owner's account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- --------------- ------------ ------------ ----------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365) - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
B-1
<PAGE>
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.10)](2555/365) - 1
= (.98182)(7) - 1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.07)](2555/365) - 1
= (1.0093)(7) - 1
= .06694
The market value adjustment = the market value factor multiplied by the withdrawal
= .06694 X $62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.11)](2555/365) - 1
= (.97297)(7) - 1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the negative of the excess interest earned
over 3%
= Minimum (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
B-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.06)](2555/365) - 1
= (1.01887)(7) - 1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
The market value factor = Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-3
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- ------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield of 5%, reduced proportionately to
reflect withdrawals. Death Benefit (c) is the death benefit that would have been
payable on the most recent Contract anniversary, increased for subsequent
payments, and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below and that
the Death Benefit Effective Annual Yield is equal to 5%. The table below
presents examples of the Death Benefit based on the Hypothetical Accumulated
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) BENEFIT
- ------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 4,171.13 3,972.50 4,171.13
4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68
5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67
6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60
7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03
8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
</TABLE>
C-1
<PAGE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield of 5% reduced proportionately to
reflect withdrawals. Death Benefit (c) is the death benefit that would have been
payable on the most recent Contract anniversary, increased for subsequent
payments, and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals. The table below presents examples of
the death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
- ------------- ------------ ------------ ------------
<S> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INDIVIDUAL VARIABLE ANNUITY POLICIES FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus describes individual variable annuity policies and group
variable annuity policies, including certificates issued thereunder ("Policies")
offered by Allmerica Financial Life Insurance and Annuity Company ("Company") to
individuals and businesses in connection with retirement plans which may or may
not qualify for special federal income tax treatment. (For information about the
tax status when used with a particular type of plan, see "FEDERAL TAX
CONSIDERATIONS.") The following is a summary of information about these
Policies. More detailed information can be found under the referenced captions
in this Prospectus.
This Prospectus generally describes only the variable accumulation and variable
annuity aspects of the Policies, except where fixed values or fixed annuity
benefit payments are mentioned specifically. Allocations to and transfers to and
from the General Account of the Company are not permitted in certain states.
Certain additional information about the Policies is contained in a Statement of
Additional Information, dated May 1, 1998, as may be amended from time to time,
which has been filed with the Securities and Exchange Commission ("SEC"), and is
incorporated herein by reference. The Statement of Additional Information Table
of Contents is listed on page 3 of this Prospectus. The Statement of Additional
Information ("SAI") is available upon request and without charge. To obtain the
SAI, fill out and return the attached request card, or contact Annuity Client
Services, telephone 1-800-533-2124.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC. INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE POLICIES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICIES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................................. 3
SPECIAL TERMS......................................................................... 4
SUMMARY............................................................................... 5
ANNUAL AND TRANSACTION EXPENSES....................................................... 8
CONDENSED FINANCIAL INFORMATION....................................................... 11
PERFORMANCE INFORMATION............................................................... 13
WHAT IS AN ANNUITY?................................................................... 17
RIGHT TO REVOKE OR SURRENDER.......................................................... 17
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND
DELAWARE GROUP PREMIUM FUND, INC..................................................... 18
INVESTMENT OBJECTIVES AND POLICIES.................................................... 19
INVESTMENT ADVISORY SERVICES TO THE FUND.............................................. 21
CHARGES AND DEDUCTIONS................................................................ 21
A. Contingent Deferred Sales Charge................................................ 21
B. Premium Taxes................................................................... 24
C. Policy Fee...................................................................... 24
D. Annual Charges Against Separate Account Assets.................................. 24
THE VARIABLE ANNUITY POLICIES......................................................... 25
A. Purchase Payments............................................................... 25
B. Transfer Privilege.............................................................. 26
C. Surrender....................................................................... 27
D. Partial Redemption.............................................................. 28
E. Death Benefit................................................................... 28
F. The Spouse of the Owner as Beneficiary.......................................... 30
G. Assignment...................................................................... 30
H. Electing the Form of Annuity and the Annuity Date............................... 30
I. Description of Variable Annuity Options......................................... 31
J. NORRIS Decision................................................................. 32
K. Computation of Policy Values and Annuity Benefit Payments....................... 32
FEDERAL TAX CONSIDERATIONS............................................................ 34
A. Qualified and Non-Qualified Policies............................................ 35
B. Taxation of the Policies in General............................................. 35
Withdrawals Prior to Annuitization............................................ 35
Annuity Payouts After Annuitization........................................... 35
Penalty on Distribution....................................................... 35
Assignments or Transfers...................................................... 36
Non-Natural Owners............................................................ 36
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 36
C. Tax Withholding................................................................. 36
D. Provisions Applicable to Qualified Employer Plans............................... 36
Corporate and Self-Employed Pension and Profit Sharing Plans.................. 37
Individual Retirement Annuities............................................... 37
Tax-Sheltered Annuities....................................................... 37
Texas Optional Retirement Program............................................. 37
LOANS (QUALIFIED POLICIES ONLY)....................................................... 37
REPORTS............................................................................... 38
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 38
VOTING RIGHTS......................................................................... 39
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 39
LEGAL MATTERS......................................................................... 39
</TABLE>
2
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<TABLE>
<S> <C>
FURTHER INFORMATION................................................................... 39
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT.............................. A-1
APPENDIX B -- INFORMATION APPLICABLE ONLY TO POLICY NO. A3019-92
(AND STATE VARIATIONS)................................................ B-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY...................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................................. 3
UNDERWRITERS......................................................................... 3
ANNUITY BENEFIT PAYMENTS............................................................. 4
EXCHANGE OFFER....................................................................... 6
PERFORMANCE INFORMATION.............................................................. 8
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the General Account of the
Company then credited to the Policy, on any date before the date annuity benefit
payments are to begin.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Policy to whom the Annuity is to be
paid.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Policy.
FIXED ANNUITY PAYOUT: an Annuity payout providing for payments which remain
fixed in amount throughout the annuity benefit payment period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate investment account.
OWNER: the Owner of a Policy who may exercise all rights under the Policy,
subject to the consent of any irrevocable beneficiary. After the Annuity Date,
the Annuitant will be the Owner.
SEPARATE ACCOUNT: Separate Account VA-K of the Company, consisting of assets
segregated from other assets of the Company. The investment performance of the
assets of the Separate Account is determined separately from the other assets of
the Company. The assets of the Separate Account are not chargeable with
liabilities arising out of any other business which the Company may conduct.
SUB-ACCOUNT: a subdivision of Separate Account VA-K. Each Sub-Account available
under the Policies invests exclusively in the shares of a corresponding
investment series of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Policy minus any Policy fee and
contingent deferred sales charge applicable upon surrender.
UNDERLYING SERIES: the Decatur Total Return Series, Devon Series, DelCap Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Series,
Convertible Securities Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, Cash Reserve Series, and Global Bond Series of Delaware
Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Series is determined and Unit values of the Sub-Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Policy was
received) when there is a sufficient degree of trading in an Underlying Series
portfolio securities such that the current net asset value of the Sub-Accounts
may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ANNUITY PAYOUT: an Annuity payout providing for payments varying in
amount in accordance with the investment experience of certain Underlying
Series.
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SUMMARY
INVESTMENT OPTIONS. The Policies permit net purchase payments to be allocated
among Sub-Accounts available under the Policies, which are subdivisions of
Separate Account VA-K ("Separate Account"), a separate account of the Company
and, where available, a fixed interest account ("General Account") of the
Company (together "accounts"). The Separate Account is registered as a unit
investment trust under the Investment Company Act of 1940, as amended (the "1940
Act"), but such registration does not involve the supervision of the management
or investment practices or policies of the Separate Account by the SEC. For
information about the Separate Account and the Company, see "DESCRIPTION OF THE
COMPANY, THE SEPARATE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND, INC." For more
information about the General Account see APPENDIX A, "MORE INFORMATION ABOUT
THE GENERAL ACCOUNT."
Each Sub-Account available under the Policies invests its assets without sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. (the "Fund"). The Fund is an open-end, diversified series investment
company. The Fund consists of 16 different series: the Decatur Total Return
Series, Devon Series, DelCap Series, Social Awareness Series (formerly Quantum
Series), REIT Series, Small Cap Value Series (formerly Value Series), Trend
Series, International Equity Series, Emerging Markets Series, Delaware Series,
Convertible Securities Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, Cash Reserve Series, and Global Bond Series
("Underlying Series"). Each Underlying Series operates pursuant to different
investment objectives, discussed below. NOT ALL SUB-ACCOUNTS MAY BE AVAILABLE IN
ALL STATES.
INVESTMENT IN THE SUB-ACCOUNTS. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Series.
There can be no assurance that the investment objectives of the Underlying
Series can be achieved or that the value of a Policy will equal or exceed the
aggregate amount of the purchase payments made under the Policy. For more
information about the investments of the Underlying Series, see "DESCRIPTION OF
THE COMPANY, THE SEPARATE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND, INC." The
accompanying prospectus of the Fund describes the investment objectives and
risks of each of the Underlying Series.
Dividends or capital gains distributions received from an Underlying Series are
reinvested in additional shares of that Underlying Series, which are retained as
assets of the Sub-Account.
TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, the Policies permit
amounts to be transferred among the Sub-Accounts and, where available, between
the General Account and the Sub-Accounts, subject to certain limitations
described under "B. Transfer Privilege."
ANNUITY BENEFIT PAYMENTS. The Owner may select variable annuity benefit
payments based on certain Sub-Accounts, fixed-amount annuity benefit payments,
or a combination of fixed-amount and variable annuity benefit payments.
Fixed-amount annuity benefit payments are guaranteed by the Company.
See "THE VARIABLE ANNUITY POLICIES" for information about annuity benefit
payment options, selecting the Annuity Date, and how annuity benefit payments
are calculated.
REVOCATION RIGHTS. An individual purchasing a Policy intended to qualify as an
Individual Retirement Annuity ("IRA") may revoke the Policy at any time between
the date of the application and the date ten days after receipt of the Policy.
In certain states an Owner may have special revocation rights. For more
information about revocation rights, see "RIGHT TO REVOKE OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Policies, purchase payments are not
limited as to frequency and number, but no payments may be submitted within one
month of the Annuity Date. Generally, the
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initial purchase payment must be at least $600 and subsequent payments must be
at least $50. Under a monthly automatic payment plan, or a payroll deduction
plan, each purchase payment must be at least $50. In cases where the
contribution on behalf of an employee under an employer-sponsored retirement
plan is less than $600 but more than $300 annually, however, the Company may
issue a Policy on the employee if the plan's average annual contribution per
eligible plan participant is at least $600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Policy. In addition, the Internal Revenue Code (the
"Code") imposes maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. CONTINGENT DEFERRED SALES CHARGES
No sales charge is deducted from purchase payments at the time the payments are
made. Depending on the length of time that the payments to which the withdrawal
is attributed have remained credited under the Policy, however, a contingent
deferred sales charge of up to 7% may be assessed for a surrender, partial
redemption, or election of any commutable period certain option or a
non-commutable period certain for less than ten years.
B. ANNUAL POLICY FEE
A Policy fee equal to $30 will be deducted from the Accumulated Value under the
Policy for administrative expenses on the Policy anniversary, or upon full
surrender of the Policy during the year, when the Accumulated Value is $50,000
or less. The Policy fee currently is waived for policies issued to a trustee of
a 401(k) plan, but the Company reserves the right to impose the Policy fee on
such policies.
C. PREMIUM TAXES
A deduction for state and local premium taxes, if any, may be made as described
under "B. Premium Taxes." Premium taxes may range from 0 to 3.5%.
D. SEPARATE ACCOUNT ASSET CHARGES
A daily charge, equivalent to 1.25% per annum, is made on the value of each
Sub-Account at each Valuation Date. The charge is retained for the mortality and
expense risks the Company assumes. In addition, to cover administrative
expenses, the Company deducts a daily charge of 0.15% per annum of the value of
the average net assets in the Sub-Accounts available under the Policies.
E. TRANSFER CHARGE
The Company currently makes no charge for transfers. The Company guarantees that
the first 12 transfers in a Policy year will be free of charge. For each
subsequent transfer, the Company reserves the right to assess a charge,
guaranteed never to exceed $25, to reimburse the Company for the costs of
processing the transfer.
F. CHARGES OF THE UNDERLYING SERIES
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Series. These charges vary among the
Underlying Series, and may range from an annual rate of 0.64% to an annual rate
of 1.50% of average daily net assets.
SURRENDER OR PARTIAL REDEMPTIONS. At any time before the Annuity Date, the
Owner has the right either to surrender the Policy in full and receive its
current value, minus the Policy fee and any applicable contingent deferred sales
charge, or to redeem a portion of the Policy's value subject to certain limits
and any applicable contingent deferred sales charge. There may be tax
consequences for surrender or redemptions. For further information, see "C.
Surrender" and "D. Partial Redemption" under "THE VARIABLE ANNUITY POLICIES,"
"A. Contingent Deferred Sales Charge" under "CHARGES AND DEDUCTIONS," and
"FEDERAL TAX CONSIDERATIONS."
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DEATH BENEFIT. If the Annuitant or Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant,
the death benefit is equal to the greatest of (1) the Accumulated Value under
the Policy, or (2) the sum of the gross payments made under the Policy reduced
proportionally to reflect all partial redemptions, or (3) the death benefit that
would have been payable on the most recent fifth year Policy anniversary,
increased for subsequent purchase payments and reduced proportionally to reflect
withdrawals after that date. Upon death of the Owner, the death benefit is equal
to the Accumulated Value of the Policy.
SALES OF POLICIES. The Policies are sold by agents of the Company who are
authorized by applicable law to sell variable annuity policies. These agents are
registered representatives of broker-dealers which are members of the National
Association of Securities Dealers, Inc. See "Sales Expense."
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<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and are deducted as
described under "Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
CONTRACT CHARGES: PAYMENT CHARGE
------------ -----------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-3 7.0%
This charge may be assessed upon surrender, 4 6.0%
withdrawal or annuitization under any commutable 5 5.0%
period certain option or a non-commutable period 6 4.0%
certain option of less than ten years. The 7 3.0%
charge is a percentage of payments applied to More than 7 0%
the amount surrendered (in excess of any amount
that is free of surrender charge) within the
indicated time period.
TRANSFER CHARGE: None
The Company currently makes no charge for
processing transfers and guarantees that the
first 12 transfers in a Contract year will not
be subject to a transfer charge. For each
subsequent transfer, the Company reserves the
right to assess a charge, guaranteed never to
exceed $25, to reimburse the Company for the
costs of processing the transfer.
CONTRACT FEE: $30
The fee is deducted annually and upon surrender
prior to the Annuity Date when Accumulated Value
is $50,000 or less. The fee is waived for
Contracts issued to and maintained by the
trustee of a 401(k) plan.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average daily
net assets)
Mortality and Expense Risk Charge 1.25%
Administrative Expense Charge 0.15%
-----------
Total Asset Charge 1.40%
</TABLE>
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FUND EXPENSES: The following table shows the expenses of the Underlying Series
for 1997. For more information concerning fees and expenses, see the prospectus
of the Underlying Series.
<TABLE>
<CAPTION>
TOTAL
EXPENSES
MANAGEMENT OTHER EXPENSES (AFTER (AFTER APPLICABLE
FEES ANY APPLICABLE WAIVERS AND/OR
FUND (AFTER WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------------------------------------------------------- ----------------- ----------------------- -------------------
<S> <C> <C> <C>
Decatur Total Return Series.............................. 0.60% 0.11% 0.71%(2)
Devon Series............................................. 0.54% 0.26% 0.80%(1)(2)
DelCap Series............................................ 0.63% 0.22% 0.85%(1)(2)
Social Awareness Series.................................. 0.20% 0.65% 0.85%(1)(2)
REIT Series(@)........................................... 0.75% 0.10% 0.85%(1)(2)
Small Cap Value Series................................... 0.60% 0.25% 0.85%(1)(2)
Trend Series............................................. 0.62% 0.23% 0.85%(1)(2)
International Equity Series.............................. 0.75% 0.15% 0.90%(2)(3)
Emerging Markets Series.................................. 0.30% 1.20% 1.50%(1)(2)
Delaware Series.......................................... 0.60% 0.07% 0.67%(2)
Convertible Securities Series............................ 0.05% 0.80% 0.85%(1)(2)
Delchester Series........................................ 0.60% 0.10% 0.70%(2)
Capital Reserves Series.................................. 0.60% 0.15% 0.75%(2)
Strategic Income Series.................................. 0.22% 0.58% 0.80%(1)(2)
Cash Reserve Series...................................... 0.50% 0.14% 0.64%(2)
Global Bond Series....................................... 0.52% 0.33% 0.85%(1)(2)
</TABLE>
(@) Estimated after expense reimbursement.
(1) For the fiscal year ended December 31, 1997, before waiver and/or
reimbursement by the investment adviser, total series expenses as a percentage
of average daily net assets were 0.91% for Devon Series, 0.87% for DelCap
Series, 1.40% for Social Awareness Series (formerly known as "Quantum Series"),
0.90% for Small Cap Value Series (formerly known as "Value Series"), 0.88% for
Trend Series, 90% for International Equity Series, 2.45% for Emerging Markets
Series, 2.30% for Convertible Securities Series, 1.23% for Strategic Income
Series and 1.08% for Global Bond Series.
(2) The investment adviser for the Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, Delaware Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, and Cash Reserve Series is
Delaware Management Company, Inc. ("Delaware Management"). The Investment
Adviser for the International Equity Series, Emerging Markets Series and the
Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International"). Effective May 1, 1998 through October 31, 1998, the investment
advisers for the Series of DGPF have agreed voluntarily to waive their
management fees and reimburse each Series for expenses to the extent that total
expenses will not exceed 1.50% for the Emerging Markets Series; 0.95% for the
International Equity Series; 85% for DelCap Series, Social Awareness Series,
REIT Series, Small Cap Value Series; Trend Series; Convertible Securities Series
and Global Bond Series and 0.80% for all other Series. The fee ratios shown
above have been restated, if necessary, to assume that the new voluntary
limitations took effect on January 1, 1997. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Series.
(3) Effective July 1, 1997, the management fee of the International Equity
Series was voluntarily limited to a rate of 0.95% of the average daily net
assets, replacing a prior limitation of 0.80%. In 1997, the total annual
expenses of the International Equity Series was 0.90% and the management fee was
0.75%.
The following examples demonstrate the cumulative expenses which would be paid
by the Owner at 1-year, 3-year, 5-year, and 10-year intervals under certain
contingencies. Each example assumes a $1,000 investment in a Sub-Account and a
5% annual return on assets. Because the expenses of the Underlying Series
differ,
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separate examples are used to illustrate the expenses incurred by an Owner on an
investment in the various Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF
LESSER THAN THOSE SHOWN.
(a) If, at the end of the applicable period, you surrender your Contract or
annuitize* under a commutable period certain option of less than ten years, you
would pay the following expenses on a $1,000 investment, assuming 5% annual
return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Decatur Total Return Series............. $86 $135 $163 $244
Devon Series............................ $87 $137 $168 $253
DelCap Series........................... $88 $139 $170 $258
Social Awareness Series................. $88 $139 $170 $258
REIT Series............................. $88 $139 $170 $258
Small Cap Value Series.................. $88 $139 $170 $258
Trend Series............................ $88 $139 $170 $258
International Equity Series............. $88 $140 $173 $263
Emerging Markets Series................. $94 $157 $203 $322
Delaware Series......................... $86 $133 $161 $240
Convertible Securities Series........... $88 $139 $170 $258
Delchester Series....................... $86 $134 $163 $243
Capital Reserves Series................. $87 $136 $165 $248
Strategic Income Series................. $87 $137 $168 $253
Cash Reserve Series..................... $86 $133 $160 $237
Global Bond Series...................... $88 $139 $170 $258
</TABLE>
(b) If, at the end of the applicable time period, you annuitize* under a life
option or any non-commutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Decatur Total Return Series............. $21 $66 $113 $244
Devon Series............................ $22 $69 $118 $253
DelCap Series........................... $23 $70 $120 $258
Social Awareness Series................. $23 $70 $120 $258
REIT Series............................. $23 $70 $120 $258
Small Cap Value Series.................. $23 $70 $120 $258
Trend Series............................ $23 $70 $120 $258
International Equity Series............. $23 $72 $123 $263
Emerging Markets Series................. $29 $90 $153 $322
Delaware Series......................... $21 $65 $111 $240
Convertible Securities Series........... $23 $70 $120 $258
Delchester Series....................... $21 $66 $113 $243
Capital Reserves Series................. $22 $67 $115 $248
Strategic Income Series................. $22 $69 $118 $253
Cash Reserve Series..................... $21 $64 $110 $237
Global Bond Series...................... $23 $70 $120 $258
</TABLE>
Pursuant to requirements of the 1940 Act, the Policy fee has been reflected in
the Examples by a method intended to show the "average" impact of the Policy fee
on an investment in the Separate Account. The total Policy fees collected under
the Policies by the Company are divided by the total average net assets
attributable
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to the Policies. The resulting percentage is 0.03%, and the amount of the Policy
fee is assumed to be $0.30 in the Examples. The Policy fee is deducted only when
the accumulated value is $50,000 or less. Lower charges apply to Contracts
issued and maintained as part of a 401(k) plan.
* The Policy fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any policy year under
an option including a life contingency or under any non-commutable period
certain option of ten years or more.
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
DECATUR TOTAL RETURN SERIES
Unit Value:
Beginning of Period.............................. 1.883 1.582 1.178 1.197 1.051 1.000
End of Period.................................... 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of Period (in
thousands).......................................... 113,507 65,991 48,305 38,591 25,086 4,208
DEVON SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 11,585 N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period.............................. 1.616 1.432 1.121 1.178 1.070 1.000
End of Period.................................... 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of Period (in
thousands).......................................... 57,025 44,667 35,204 29,100 20,802 4,534
SOCIAL AWARENESS SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 4,515 N/A N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period.............................. 1.467 1.214 0.994 1.000 1.000 N/A
End of Period.................................... 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 43,269 15,725 9,467 6,040 6 N/A
TREND SERIES
Unit Value:
Beginning of Period.............................. 1.486 1.358 0.989 1.007 1.000 N/A
End of Period.................................... 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 33,256 21,711 13,410 6,197 50 N/A
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period.............................. 1.540 1.301 1.159 1.144 1.000 1.000
End of Period.................................... 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of Period (in
thousands).......................................... 48,813 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 4,545 N/A N/A N/A N/A N/A
DELAWARE SERIES
Unit Value:
Beginning of Period.............................. 1.616 1.414 1.133 1.150 1.078 1.000
End of Period.................................... 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of Period (in
thousands).......................................... 58,759 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.156 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,291 N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period.............................. 1.474 1.326 1.164 1.214 1.058 1.000
End of Period.................................... 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of Period (in
thousands).......................................... 56,733 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period.............................. 1.241 1.209 1.075 1.120 1.053 1.000
End of Period.................................... 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of Period (in
thousands).......................................... 20,234 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES*
Unit Value:
Beginning of Period.............................. N/A N/A N/A N/A N/A N/A
End of Period.................................... 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 5,381 N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period.............................. 1.124 1.087 1.044 1.021 1.010 1.000
End of Period.................................... 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of Period (in
thousands).......................................... 24,014 21,519 11,568 13,998 5,483 1,387
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GLOBAL BOND SERIES
Unit Value:
Beginning of Period.............................. 1.107 1.000 1.000 N/A N/A N/A
End of Period.................................... 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 3,950 886 0 N/A N/A N/A
</TABLE>
* The date of inception of the Sub-Accounts investing in the Devon Series, the
Social Awareness Series, the Emerging Markets Series, the Convertible Securities
Series and the Strategic income series was 5/1/97.
PERFORMANCE INFORMATION
The Delaware Medallion II Contract first was offered to the public in 1993.The
Company, however, may advertise "total return" and "average annual total return"
performance information based on the periods that the Sub-Accounts have been in
existence and the periods that the Underlying Series have been in existence.
Performance results for all periods shown below are calculated with all charges
assumed to be those applicable to the Sub-Accounts, the Underlying Series, and,
in Tables 1A and 2A, assuming that the Contract is surrendered at the end of the
applicable period and, alternatively, in Tables 1B and 2B, assuming that it is
not surrendered at the end of the applicable period. Both the total return and
yield figures are based on historical earnings and are not intended to indicate
future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Cash Reserve Series refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Series other than the Cash Reserve
Series refers to the annualized income generated by an investment in the
Sub-Account over a specified 30-day or one-month period. The yield is calculated
by assuming that the income generated by the investment during that 30-day or
one-month period is generated each period over a 12-month period and is shown as
a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the $30
annual Contract fee, the charges of the Underlying Series and the contingent
deferred sales charge which would be assessed if the investment were completely
withdrawn at the end of the specified period. Quotations of supplemental average
total returns, as shown in Table 1B, are calculated in exactly the same manner
and for the same periods of time except that it does not reflect the contingent
deferred sales charge but assumes that the Contract is not surrendered at the
end of the periods shown.
13
<PAGE>
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B respectively; however, the period of time is
based on the Underlying Series lifetime, which may predate the Sub-Account's
inception date. These performance calculations are based on the assumption that
the Sub-Account corresponding to the applicable Underlying Series was actually
in existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING SERIES IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Series.
14
<PAGE>
TABLE 1A
TOTAL ANNUAL RETURNS OF SUB-ACCOUNTS FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
ENDED INCEPTION OF
NAME OF UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------------------------- ------------- ----------- ------------
<S> <C> <C> <C>
Decatur Total Return Series................................................ 22.19% 17.73% 16.58%
Devon Series............................................................... N/A N/A 19.10%
DelCap Series.............................................................. 6.28% 10.64% 10.68%
Social Awareness Series.................................................... N/A N/A 20.19%
REIT Series................................................................ N/A N/A N/A
Small Cap Value Series..................................................... 24.06% N/A 16.83%
Trend Series............................................................... 12.66% N/A 14.47%
International Equity Series................................................ -1.52% 9.39% 9.21%
Emerging Markets Series.................................................... N/A N/A -17.59%
Delaware Series............................................................ 17.64% 12.68% 12.72%
Convertible Securities Series.............................................. N/A N/A 8.59%
Delchester Series.......................................................... 5.04% 8.57% 8.74%
Capital Reserves Series.................................................... -0.59% 3.69% 4.37%
Strategic Income Series.................................................... N/A N/A -1.44%
Cash Reserve Series........................................................ -2.91% 1.94% 2.06%
Global Bond Series......................................................... -6.81% N/A 1.90%
</TABLE>
TABLE 1B
SUPPLEMENTAL TOTAL ANNUAL RETURNS OF SUB-ACCOUNTS FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
ENDED INCEPTION OF
NAME OF UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------------------------- ------------- ----------- ------------
<S> <C> <C> <C>
Decatur Total Return Series................................................ 29.19% 18.24% 16.92%
Devon Series............................................................... N/A N/A 26.10%
DelCap Series.............................................................. 13.28% 11.30% 11.11%
Social Awareness Series.................................................... N/A N/A 27.19%
REIT Series................................................................ N/A N/A N/A
Small Cap Value Series..................................................... 31.06% N/A 17.76%
Trend Series............................................................... 19.66% N/A 15.45%
International Equity Series................................................ 5.10% 10.08% 9.74%
Emerging Markets Series.................................................... N/A N/A -12.05%
Delaware Series............................................................ 24.64% 13.29% 13.12%
Convertible Securities Series.............................................. N/A N/A 15.59%
Delchester Series.......................................................... 12.04% 9.28% 9.21%
Capital Reserves Series.................................................... 6.09% 4.54% 4.94%
Strategic Income Series.................................................... N/A N/A 5.19%
Cash Reserve Series........................................................ 3.62% 2.85% 2.69%
Global Bond Series......................................................... -0.54% N/A 5.96%
</TABLE>
15
<PAGE>
TABLE 2A
TOTAL ANNUAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SINCE
TOTAL RETURN INCEPTION
FOR YEAR OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
- ---------------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Decatur Total Return Series................................................. 22.19% 17.73% 11.47%
Devon Series................................................................ N/A N/A 19.10%
DelCap Series............................................................... 6.28% 10.64% 10.54%
Social Awareness Series..................................................... N/A N/A 20.19%
REIT Series................................................................. N/A N/A N/A
Small Cap Value Series...................................................... 24.06% N/A 16.91%
Trend Series................................................................ 12.66% N/A 14.60%
International Equity Series................................................. -1.52% 9.39% 9.21%
Emerging Markets Series..................................................... N/A N/A -17.59%
Delaware Series............................................................. 17.64% 12.68% 12.28%
Convertible Securities Series............................................... N/A N/A 8.59%
Delchester Series........................................................... 5.04% 8.57% 8.97%
Capital Reserves Series..................................................... -0.59% 3.69% 5.34%
Strategic Income Series..................................................... N/A N/A -1.44%
Cash Reserve Series......................................................... -2.91% 1.94% 3.63%
Global Bond Series.......................................................... -6.81% N/A 1.90%
</TABLE>
TABLE 2B
SUPPLEMENTAL TOTAL ANNUAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
- --------------------------------------------------------------------- --------------- ------------ --------------
<S> <C> <C> <C>
Decatur Total Return Series.......................................... 29.19% 18.24% 11.47%
Devon Series......................................................... N/A N/A 26.10%
DelCap Series........................................................ 13.28% 11.30% 10.80%
Social Awareness Series.............................................. N/A N/A 27.19%
REIT Series.......................................................... N/A N/A N/A
Small Cap Value Series............................................... 31.06% N/A 17.68%
Trend Series......................................................... 19.66% N/A 15.42%
International Equity Series.......................................... 5.10% 10.08% 9.74%
Emerging Markets Series.............................................. N/A N/A -12.05%
Delaware Series...................................................... 24.64% 13.29% 12.28%
Convertible Securities Series........................................ N/A N/A 15.59%
Delchester Series.................................................... 12.04% 9.28% 8.97%
Capital Reserves Series.............................................. 6.09% 4.54% 5.34%
Strategic Income Series.............................................. N/A N/A 5.19%
Cash Reserve Series.................................................. 3.62% 2.85% 3.63%
Global Bond Series................................................... -0.54% N/A 5.96%
</TABLE>
16
<PAGE>
* The dates of inception of the Underlying Funds are: 10/29/92 for the
International Equity Series; 12/27/93 for the Small Cap Value and Trend Series;
7/02/91 for the DelCap Series; 7/28/88 for the Delaware Series, the Decatur
Total Return Series, the Delchester Series, the Capital Reserves Series, and the
Cash Reserve Series; 5/1/96 for Global Bond Series; and 5/1/97 for the Devon
Series, the Social Awareness Series, the Emerging Markets Series, the
Convertible Securities Series and the Strategic Income Series.
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income in
the form of monthly payments for the lifetime of the purchaser or an individual
chosen by the purchaser. The retirement income payments are called "annuity
benefit payments," and the individual receiving the payments is called the
"annuitant." Annuity benefit payments may begin immediately after a lump sum
purchase is made or may begin after an investment period during which the amount
necessary to provide the desired amount of retirement income is accumulated.
Under an annuity policy, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity benefit payments will continue for the life of the annuitant,
regardless of how long the annuitant lives or how long all annuitants as a group
live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the policy,
regardless of actual costs of operations.
The owner's purchase payments, less any applicable deductions, are invested by
the insurance company. After retirement, annuity benefit payments are paid to
the annuitant for life or for such other period chosen by the owner. In the case
of a "fixed" annuity, the value of these annuity benefit payments is guaranteed
by the insurance company, which assumes the risk of making the investments to
enable it to make the guaranteed payments. For more information about fixed
annuities see APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
With a variable annuity, the value of the policy and the annuity benefit
payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the policy and in the annuity benefit payments. If the
portfolio increases in value, the value of the policy increases. If the
portfolio decreases in value, the value of the policy decreases.
RIGHT TO REVOKE OR SURRENDER
The Owner may revoke the Policy at any time between the date of the application
and the date ten days (or the number of days required by state law if more than
ten) after receipt of the Policy. Within seven days of receipt of the revocation
request, the Company will return an amount equal to the sum of (1) the
difference between the gross payment(s) received and any amounts allocated to
the Sub-Accounts, and (2) the Accumulated Value of amounts allocated to the
Sub-Accounts as of the date the request is received. If the Policy was purchased
as an IRA or if required by state law, the Company will refund the greater of
the amount described above or the entire purchase payment. In order to revoke
the Policy, the Owner must mail or deliver the Policy (if it has already been
received) to the agent through whom the Policy was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to any authorized
representative of the Company. Mailing or delivery must occur on or before ten
days after receipt of the Policy for revocation to be effective.
The liability of the Separate Accounts under this provision is limited to the
Owner's Accumulated Value in each Separate Account on the date of cancellation.
Any additional amounts refunded to the Owner will be paid by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Owner's bank.
17
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY. The Company is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office ("Principal Office") is located at
440 Lincoln Street, Worcester, MA 01653, Telephone 508-855-1000. The Company is
subject to the laws of the state of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1997, the
Company had over $9.4 billion in assets and over $26.6 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over $43.8
billion in life insurance in force.
The Company is a chartered member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT. Separate Account VA-K (the "Separate Account") is a
separate investment account of the Company. The assets used to fund the variable
portions of the Policies are set aside in the Sub-Accounts of the Separate
Account, and are kept separate from the general assets of the Company. There are
16 Sub-Accounts available under the Policies. Each Sub-Account is administered
and accounted for as part of the general business of the Company, but the
income, capital gains, or capital losses of each Sub-Account are allocated to
such Sub-Account without regard to other income, capital gains, or capital
losses of the Company. Under Delaware law, the assets of the Separate Account
may not be charged with any liabilities arising out of any other business of the
Company.
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Separate Account meets the definition of
"separate account" under federal securities laws, and is registered with the SEC
as a unit investment trust under the 1940 Act. Such registration does not
involve the supervision of management or investment practices or policies of the
Separate Account or the Company by the SEC. The Company reserves the right,
subject to compliance with applicable law, to change the names of the Separate
Account and the Sub-Accounts.
THE COMPANY OFFERS OTHER VARIABLE ANNUITY CONTRACTS INVESTING IN THE SEPARATE
ACCOUNT WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS. THE SEPARATE ACCOUNT ALSO
INVESTS IN OTHER UNDERLYING FUNDS WHICH ARE NOT AVAILABLE TO THE POLICIES
DESCRIBED IN THIS PROSPECTUS.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. (the "Fund")
is an open-end, diversified management investment company registered with the
SEC under the 1940 Act. Such registration does not involve supervision by the
SEC of the investments or investment policy of the Fund or its separate
investment series.
18
<PAGE>
The Fund was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance policies. The Fund
currently has 16 investment portfolios ("Underlying Series"), each issuing a
series of shares: Decatur Total Return Series, Devon Series, DelCap Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Series,
Convertible Securities Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, Cash Reserve Series, and Global Bond Series. The assets
of each Underlying Series are held separate from the assets of the other
Underlying Series. Each Underlying Series operates as a separate investment
vehicle, and the income or losses of one have no effect on the investment
performance of another Underlying Series. Shares of the Underlying Series are
not offered to the general public but solely to separate accounts of life
insurance companies.
The investment adviser for the Decatur Total Return Series, Devon Series, DelCap
Series, Social Awareness Series, Small Cap Value Series, REIT Series, Trend
Series, Delaware Series, Convertible Securities Series, Delchester Series,
Capital Reserves Series, Strategic Income Series, and Cash Reserve Series is
Delaware Management Company, Inc. ("Delaware Management"). The investment
adviser for the International Equity Series, Emerging Markets Series and the
Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International").
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Series is set forth
below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Series, and other
relevant information regarding the Underlying Series may be found in the
Prospectus of the Fund, which accompanies this Prospectus and should be read
carefully before investing. Also, the SAI of the Fund is available upon request.
DECATUR TOTAL RETURN SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Series formerly was known as
Equity/Income Series.
DEVON SERIES -- seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
exhibit the potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Series formerly was known as the Growth Series.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of medium- to large-sized companies
expected to grow over time. This Fund was formerly known as the Quantum Series.
REIT SERIES -- seeks to achieve maximum long-term total return by investing in
securities of companies primarily engaged in the real estate industry.
SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in
small-to-mid cap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis also--will be
placed on securities of companies that temporarily may be out of favor or whose
value is not yet recognized by the market. This Fund was formerly known as the
Value Series.
TREND SERIES -- seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been
19
<PAGE>
judged to be responsive to changes in the marketplace and to have fundamental
characteristics to support growth. Income is not an objective. This Series
formerly was known as Emerging Growth Series.
INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income
EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. The Series is an international fund. As such, under normal
market conditions, at least 65% of the Series' assets will be invested in equity
securities of issuers organized or having a majority of their assets or deriving
a majority of their operating income in at least three countries that are
considered to be emerging or developing.
DELAWARE SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Series formerly was
known as Multiple Strategy Series.
CONVERTIBLE SECURITIES SERIES -- seeks a high level of total return on its
assets through a combination of capital appreciation and current income by
investing primarily in convertible securities, including privately placed
convertible securities.
DELCHESTER SERIES -- seeks as high a current income as possible by investing in
rated and unrated corporate bonds (including high-yield bonds commonly known as
"junk bonds"), U.S. government securities and commercial paper. Please read the
Fund's prospectus disclosure regarding the risk factors before investing in this
Series. This Series formerly was known as High Yield Series.
CAPITAL RESERVES SERIES -- seeks a high, stable level of current income while
minimizing fluctuations in principal by investing in a diversified portfolio of
short- and intermediate-term securities.
STRATEGIC INCOME SERIES -- seeks high current income and total return by using a
multi-sector investment approach, investing primarily in three sectors of the
fixed-income securities market: high yield, higher-risk securities; investment
grade fixed-income securities; and foreign government and other foreign
fixed-income securities. The Series also may invest in U.S. equity securities.
CASH RESERVE SERIES -- seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments. This Series formerly was known as Money Market Series.
GLOBAL BOND SERIES -- seeks current income consistent with preservation of
principal by investing primarily in fixed-income securities that also may
provide the potential for capital appreciation. At least 65% of the Series'
assets will be invested in fixed-income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States. The Capital Reserves Series seeks a high, stable level of current income
while minimizing fluctuations in principal by investing in a diversified
portfolio of short- and intermediate-term securities.
There is no assurance that the investment objectives of the Underlying Series
will be met. In the event of a material change in the investment policy of a
Sub-Account or the Underlying Series in which it invests, you will be notified
of the change. If you have Policy value in that Sub-Account, the Company will
transfer it without charge on written request by you to another Sub-Account or
to the General Account, where available. The Company must receive your written
request within 60 days of the later of (1) the effective date of such change in
the investment policy, or (2) the receipt of the notice of your right to
transfer.
IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY OF
PARTICULAR SUB-ACCOUNTS.
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INVESTMENT ADVISORY SERVICES TO THE FUND
For managing the portfolios of the Underlying Series and making the investment
decisions, investment advisers are paid an annual fee by their respective
Underlying Series. For Delaware Management, this fee is equal to 0.50% of the
average daily net assets of the Cash Reserve Series; 0.60% of the average daily
net assets of the Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Delaware Series and Devon Series; 0.65% of the average daily
net assets of the Strategic Income Series and 0.75% of the average daily net
assets of the DelCap Series, Small Cap Value Series, Trend Series, Social
Awareness Series, REIT Series and Convertible Securities Series. For Delaware
International Advisors, Ltd., this fee is equal to 0.75% of the average daily
net assets of the International Equity Series and the Global Bond Series, and
1.25% of the Emerging Markets Series.
CHARGES AND DEDUCTIONS
Deductions under the Policies and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Series are described in the Prospectus and SAI of the Fund.
A. CONTINGENT DEFERRED SALES CHARGE
No charge for sales expense is deducted from purchase payments at the time the
payments are made. A contingent deferred sales charge is deducted from the
Accumulated Value of the Policy, however, in the case of surrender and/or
partial redemption of the Policy or at the time annuity benefit payments begin,
within certain time limits described below.
For purposes of determining the contingent deferred sales charge, the Policy
Value is divided into three categories: (1) New Payments -- purchase payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments -- purchase payments not defined as New Payments;
and (3) Earnings -- the amount of Policy Value in excess of all purchase
payments that have not been previously surrendered. For purposes of determining
the amount of any contingent deferred sales charge, surrenders will be deemed to
be taken first from Old Payments, then from New Payments. Old Payments may be
withdrawn from the Policy at any time without the imposition of a contingent
deferred sales charge. If a withdrawal is attributable all or in part to New
Payments, a contingent deferred sales charge may apply.
No contingent deferred sales charge is imposed, and no commissions are paid, on
Policies issued after December 20, 1993 where the Owner and Annuitant as of the
date of application are both within the following class of individuals:
All employees and registered representatives of any broker-dealer that has
entered into a sales agreement with the Company to sell the Policies; all
officers, directors, trustees and bona fide full-time employees (including
former officers and directors and former employees who had been employed for at
least ten years) of Delaware Management, its affiliates and subsidiaries, and of
any Underlying Series; and any spouses of the above persons or any children or
other legal dependents of the above persons who are under the age of 21.
CHARGES FOR SURRENDER AND PARTIAL REDEMPTION. If a Policy is surrendered, or if
New Payments are redeemed, while the Policy is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Policy. Any
Free Withdrawal Amount is deducted first as described below. Additional amounts
withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the FIFO method of accounting. (See "FEDERAL TAX CONSIDERATIONS" for
a discussion of how withdrawals are treated for income tax purposes.)
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The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- ---------------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
</TABLE>
The amount redeemed equals the amount requested by the Owner plus the charge, if
any, which is applied against the amount requested. For example, if the
applicable charge is 7% and the Owner has requested $200, the Owner will receive
$200 and the charge will be $14 (assuming no Free Withdrawal Amount, discussed
below) for a total withdrawal of $214. The charge is applied as a percentage of
the New Payments redeemed, but in no event will the total contingent deferred
sales charge exceed a maximum limit of 8% of total gross New Payments. Such
total charge equals the aggregate of all applicable contingent deferred sales
charges for surrender, partial redemptions, and annuitization.
In Maryland, a different contingent deferred sales charge applies to monies in
the General Account. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL
ACCOUNT."
FREE WITHDRAWAL AMOUNTS. In each calendar year, the Company will waive the
contingent deferred sales charge, if any, on an amount ("Free Withdrawal
Amount") equal to the greatest of (1), (2) or (3):
Where (1) is: The Accumulated Value as of the Valuation Date coincident
with or next following the date of receipt of the request for
withdrawal, reduced by total gross payments not previously
redeemed ("Cumulative Earnings");
Where (2) is: 10% of the Accumulated Value as of the Valuation Date
coincident with or next following the date of receipt of the
request for withdrawal, reduced by the total amount of any
prior partial redemptions made in the same calendar year to
which no contingent deferred sales charge was applied;
Where (3) is: The amount calculated under the Company's life expectancy
distribution (see "Life Expectancy Distributions," below),
whether or not the withdrawal was part of such distribution
(applies only if the Owner and Annuitant are the same
individual).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $1,530, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED of 10.2% of Accumulated Value ($1,530).
The Free Withdrawal Amount will be deducted first from Cumulative Earnings. If
the Free Withdrawal Amount exceeds Cumulative Earnings, the excess amount will
be deemed withdrawn from payments not previously redeemed on a last-in-first-out
("LIFO") basis. If more than one partial withdrawal is made during the year, on
each subsequent withdrawal the Company will waive the contingent deferred sales
load, if any, until the entire Free Withdrawal Amount has been redeemed.
LIFE EXPECTANCY DISTRIBUTIONS. An Owner who is also the Annuitant may elect to
make a series of systematic withdrawals from the Policy according to a life
expectancy distribution ("LED"), by returning a properly signed LED request form
to the Principal Office. The LED permits the Owner to make systematic
22
<PAGE>
withdrawals from the Policy over his or her lifetime. The amount withdrawn from
the Policy changes each year, because life expectancy changes each year that a
person lives. For example, actuarial tables indicate that a person age 70 has a
life expectancy of 16 years, but a person who attains age 86 has a life
expectancy of another 6.5 years.
If an Owner elects the LED option, in each Policy year a fraction of the
Accumulated Value is withdrawn from the Policy based on the Owner's then life
expectancy. The numerator of the fraction is 1 (one), and the denominator of the
fraction is the remaining life expectancy of the Owner, as determined annually
by the Company. The resulting fraction, expressed as a percentage, is applied to
the Accumulated Value of the Policy at the beginning of the year to determine
the amount to be distributed during the year. The Owner may elect monthly,
bi-monthly, quarterly, semi-annual, or annual distributions, and may terminate
the LED at any time. The Owner also may elect to receive distributions under a
LED which is determined on the joint life expectancy of the Owner and a
beneficiary. The Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the IRS as premature distributions from the
Policy. The payments would then be taxed on an "income first" basis, and be
subject to a 10% federal tax penalty. For more information, see "B. Taxation of
the Policies in General," under "FEDERAL TAX CONSIDERATIONS."
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Policy, net of the
applicable contingent deferred sales charge on New Payments, the Policy fee, and
any tax withholding, if applicable. Subject to the same rules that are
applicable to partial redemptions, the Company will not assess a contingent
deferred sales charge on a Free Withdrawal Amount. Because Old Payments count in
the calculation of the Free Withdrawal Amount, if Old Payments equal or exceed
the Free Withdrawal Amount, the Company may assess the full applicable
contingent deferred sales charge on New Payments.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Policy on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Policy to
other policies issued by the Company and owned by the trustee, with no deduction
for any otherwise applicable contingent deferred sales charge. Any such
reallocation will be at the unit values for the Sub-Accounts as of the valuation
date on which a written, signed request is received at the Principal Office.
For further information on surrender and partial redemption, including minimum
limits on amount redeemed and amount remaining under the Policy in the case of
partial redemption, and important tax considerations, see "C. Surrender" and "D.
Partial Redemption" under "THE VARIABLE ANNUITY POLICIES," and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If a period certain option is
chosen (Option V or the comparable fixed annuity option), a contingent deferred
sales charge will be deducted from the Accumulated Value of the Policy if the
Annuity Date occurs at any time during the surrender charge period. Such charge
is the same as that which would apply had the policy been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any policy year under an option involving a life contingency (Options I, II,
III, IV-A, IV-B or the comparable fixed annuity options) or involving a
non-commutable period certain of a duration of ten years or more.
SALES EXPENSE. The Company pays sales commissions, not to exceed 6% of purchase
payments, to entities which sell the Policies. To the extent permitted by NASD
rules, expense reimbursement allowances and additional payments for other
services not directly related to the sale of the Policies, including the
recruitment and training of personnel, production of promotional literature, and
similar services may also be made.
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<PAGE>
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges, described above,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to Owners or to the Separate Account. Any contingent
deferred sales charges assessed on a Policy will be retained by the Company.
Alternative commission schedules are available with lower initial commission
amounts based on purchase payments, plus ongoing annual compensation of up to 1%
of policy value.
B. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
policies. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, to the extent permitted in the Policy the premium tax charge is
deducted on a pro-rata basis when partial withdrawals are made, upon
surrender of the Policy, or when annuity benefit payments begin (the
Company reserves the right instead to deduct the premium tax charge for
these Policies at the time the purchase payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
If no amount for premium tax was deducted at the time the purchase
payment was received, but subsequently tax is determined to be due prior
to the Annuity Date, the Company reserves the right to deduct the premium
tax from the Policy value at the time such determination is made.
C. POLICY FEE
A $30 Policy fee currently is deducted on the Policy anniversary date and upon
full surrender of the Policy when the Accumulated Value is $50,000 or less. The
Policy fee is not deducted after annuitization. The Policy fee currently is
waived for Policies issued to a trustee of a 401(k) plan, but the Company
reserves the right to impose the Policy fee on such Policies.
Where Policy value has been allocated to more than one account (General Account
and/or one or more of the Sub-Accounts), a percentage of the total Policy fee
will be deducted from the Policy value in each account. The portion of the
charge deducted from each account will be equal to the percentage which the
Policy value in that account represents of the total Accumulated Value under the
Policy. The deduction of the Policy fee will result in cancellation of a number
of Accumulation Units equal in value to the percentage of the charge deducted
from that account.
D. ANNUAL CHARGES AGAINST SEPARATE ACCOUNT ASSETS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Policies. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
special death benefit guarantee and its guarantee that it will make annuity
benefit payments in accordance with annuity rate provisions established at the
time the Policy is issued for the life of the Annuitant (or in accordance with
the annuity option selected), no matter how long the Annuitant (or other payee)
lives and no matter how long all Annuitants as a class live. Therefore, the
mortality charge is deducted during the annuity phase on all Policies, including
those that do not involve a life contingency, even though the Company does not
bear direct mortality risk with respect to variable annuity settlement options
that do not involve life contingencies. The expense risk arises from the
Company's guarantee that the charges it makes will not exceed the limits
described in the Policies and in this Prospectus.
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<PAGE>
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account available
under the Policies with a daily charge at an annual rate of 0.15% of the average
daily net assets of the Sub-Account. The charge is imposed during both the
accumulation period and the annuity period. The daily administrative expense
charge is assessed to help defray administrative expenses actually incurred in
the administration of the Sub-Account, without profits. There is no direct
relationship, however, between the amount of administrative expenses imposed on
a given Policy and the amount of expenses actually attributable to that Policy.
Deductions for the Policy fee (described under "C. Policy Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Separate Account and the Policies include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
TRANSFER CHARGE. The Company currently makes no charge for transfers. The
Company guarantees that the first 12 transfers in a Policy year will be free of
charge, but reserves the right to assess a charge, guaranteed never to exceed
$25, for the thirteenth and each subsequent transfer in a Policy year. For more
information, see "B. Transfer Privilege" under "THE VARIABLE ANNUITY POLICIES."
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Fund, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Series. The prospectus and SAI of
the Fund contain additional information concerning expenses of the Underlying
Series.
THE VARIABLE ANNUITY POLICIES
The Policies are designed for use in connection with several types of retirement
plans, as well as for sale to individuals. Participants under such plans, as
well as Owners, and beneficiaries, are cautioned that the rights of any person
to any benefits under such Policies may be subject to the terms and conditions
of the plans themselves, regardless of the terms and conditions of the Policies.
The Policies offered by this Prospectus may be purchased from representatives of
Allmerica Investments, Inc. and certain independent broker-dealers that are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. (NASD). The principal
underwriter of the Policies is Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA, 01653, an indirect wholly owned subsidiary of First Allmerica.
Owners may direct any inquiries to Client Services, Allmerica Financial Life
Insurance and Annuity Company, 440 Lincoln Street, Worcester, MA 01653.
A. PURCHASE PAYMENTS
Purchase payments are payable to the Company. The initial payment will be
credited to the Policy as of the date that the properly completed application
which accompanies the payment is received by the Company at its Principal
Office. If an application is incomplete, or does not specify how payments are to
be allocated
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<PAGE>
among the Accounts, the initial purchase payment will be returned within five
business days. After a policy is issued, Accumulation Units will be credited to
the Policy at the unit value computed as of the Valuation Date that a purchase
payment is received at the Principal Office.
Purchase payments are not limited as to frequency and number, but there are
certain limitations as to amount. Generally, the initial payment must be at
least $600. Under a salary deduction or a monthly automatic payment plan, the
minimum initial payment is $50. In all cases, each subsequent payment must be at
least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Policy on the employee, if the plan's average
annual contribution per eligible plan participant is at least $600. Total
payments may not exceed the maximum limit specified in the Policy. If the
payments are divided among two or more accounts, a net amount of at least $10 of
each payment must be allocated to each account.
Generally, payments will be allocated among the Sub-Accounts according to the
Owner's instructions when the Policy is issued. If, however, the Policy is
issued in Georgia, Indiana, Michigan, Missouri, New York, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington, West Virginia or in
connection with an IRA, for the first 14 days following the date of issue, all
Separate Account allocations will be held in the Cash Reserve Series.
Thereafter, all amounts will be allocated according to the Owner's instructions.
The Owner may change allocation instructions for new payments pursuant to
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization form must be on file before telephone requests
will be honored. The policy of the Company and its agents and affiliates is that
they will not be responsible for losses resulting from acting upon telephone
requests reasonably believed to be genuine. The Company will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine;
otherwise, the Company may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures the Company follows for transactions
initiated by telephone include requirements that callers on behalf of an Owner
identify themselves by name and identify the Annuitant by name, date of birth
and social security number. All transfer instructions by telephone are tape
recorded.
B. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, subject to the Company's then current
rules, an Owner may have amounts transferred among the Sub-Accounts or between a
Sub-Account and the General Account, where available. Transfer values will be
effected at the Accumulation Value next computed after receipt of the transfer
order. The Company will make transfers pursuant to written request or, if a
properly completed authorization is on file, pursuant to a telephone request.
Currently, the Company makes no charge for transfers. The first 12 transfers in
a Policy year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Policy year, the Company reserves the right to assess a
charge, guaranteed not to exceed $25, to reimburse it for the expense of
processing transfers.
Except for transfers made under the automatic transfer option (DOLLAR COST
AVERAGING) and for transfers made under policies issued to residents of Texas,
no transfers from the General Account are permitted except during the 30-day
period beginning on each policy anniversary. During this 30-day "window" period,
any amount (up to 100%) of the policy value may be transferred. In Texas,
transfers from the Fixed Account are also permitted if there has been at least a
ninety day period since the last transfer from the General Account and the
amount of the transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value.
The Company reserves the right to impose limitations on transfers including, but
not limited to (1) the minimum amount that may be transferred, (2) the minimum
amount that may remain in a Sub-Account following a transfer from that
Sub-Account, (3) the minimum period of time between transfers involving the
General Account, and (4) the maximum amount that may be transferred each time
from the General Account.
The Owner may elect automatic transfers of a pre-determined dollar amount
(DOLLAR COST AVERAGING), not less than $100, on a periodic basis (monthly,
bi-monthly, quarterly, semi-annually or annually) from the Sub-
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<PAGE>
Account investing in the Capital Reserve Series, the Strategic Income Series, or
the Cash Reserve Series (the "source account") to one or more of the
Sub-Accounts. Automatic transfers may not be made into the General Account or,
if applicable, the Sub-Account being used as the source account. If an automatic
transfer would reduce the balance in the source account to less than $100, the
entire balance will be transferred proportionately to the chosen Sub-Accounts.
Automatic transfers will continue until the amount in the source account on a
transfer date is zero or the Owner's request to terminate the option is received
by the Company. If additional amounts are allocated to the source account after
its balance has fallen to zero, this option will not restart automatically and
the Owner must provide a new request to the Company.
The General Account may be used as the source account from which automatic
transfers can be made on a monthly, bi-monthly or quarterly basis provided that
(1) the amount of each monthly transfer cannot exceed 10% of the value in the
General Account as of the date of the first transfer; (2) the amount of each
bi-monthly transfer cannot exceed 20% of the value of the General Account as of
the date of the first transfer and (3) each quarterly transfer cannot exceed 25%
of the value in the General Account as of the date of the first transfer.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
percentage allocations specified by the Owner. As frequently as requested by the
Owner, the Company will review the percentage allocations in the Sub-Accounts
and, if necessary, transfer amounts to ensure conformity with the designated
percentage allocation mix. If the amount necessary to re-establish the mix on
any scheduled date is less than $100, no transfer will be made. Automatic
Account Rebalancing will continue until the Owner's request to terminate the
option is received by the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Policy year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge each Policy year. Currently, automatic transfers and automatic
rebalancing may not be in effect simultaneously.
C. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Policy and
receive its Accumulated Value, less applicable charges ("Surrender Amount"). The
Owner must return the Policy and a signed, written request for surrender,
satisfactory to the Company to the Principal Office. The amount payable to the
Owner upon surrender will be based on the Accumulated Value of the Policy as of
the Valuation Date on which the request and the Policy are received at the
Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Policy is surrendered if payments have been credited to the Policy during the
last seven full Policy years. See "CHARGES AND DEDUCTIONS." The Policy fee will
be deducted upon surrender of the Policy.
After the Annuity Date, only Policies under which future annuity benefit
payments are limited to a specified period (as specified in Annuity Option V)
may be surrendered. The Surrender Amount is the commuted value of any unpaid
installments, computed on the basis of the assumed interest rate incorporated in
such annuity benefit payments. No contingent deferred sales charge is imposed
after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and partial redemptions of amounts in each Sub-Account during
any period which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each Separate Account is not reasonably
practicable.
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<PAGE>
The right is reserved by the Company to defer surrenders and partial redemptions
of amounts allocated to the Company's General Account for a period not to exceed
six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
D. PARTIAL REDEMPTION
At any time prior to the Annuity Date, an Owner may redeem a portion of the
Accumulated Value of his or her Policy, subject to the limits stated below. The
Owner must file a signed, written request for redemption, satisfactory to the
Company, at the Principal Office. The written request must indicate the dollar
amount the Owner wishes to receive and the account from which such amount is to
be redeemed. The amount redeemed equals the amount requested by the Owner plus
any applicable contingent deferred sales charge, as described under "CHARGES AND
DEDUCTIONS."
Where allocations have been made to more than one account, a percentage of the
partial redemption may be allocated to each such account. A partial redemption
from a Sub-Account will result in cancellation of a number of units equivalent
in value to the amount redeemed, computed as of the Valuation Date that the
request is received at the Principal Office.
Each partial redemption must be in a minimum amount of $100. No partial
redemption will be permitted if the Accumulated Value remaining under the Policy
would be reduced to less than $1,000. Partial redemptions will be paid in
accordance with the time limitations described under "C. Surrender."
After the Annuity Date, only Policies under which a period certain option has
been elected may be partially redeemed. A partial redemption after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from partial redemptions, see
"FEDERAL TAX CONSIDERATIONS."
E. DEATH BENEFIT
If the Annuitant dies (or an Owner predeceases the Annuitant) prior to the
Annuity Date while the Policy is in force, a death benefit will be paid to the
beneficiary, except where the Policy continues as provided in "F. The Spouse of
the Owner as Beneficiary." Upon death of the Annuitant (including an Owner who
is also the Annuitant), the death benefit is equal to the greatest of (1) the
Accumulated Value under the Policy next determined following receipt of due
proof of death at the Principal Office, or (2) the total amount of gross
payments made under the Policy reduced proportionally to reflect the amount of
all prior partial withdrawals, or (3) the death benefit that would have been
payable on the most recent fifth year Policy anniversary, increased for
subsequent purchase payments and reduced proportionally to reflect withdrawals
after that date. A partial withdrawal will reduce the gross payments available
as a death benefit under (2) in the same proportion that the Accumulated Value
was reduced on the date of withdrawal. For each withdrawal, the reduction is
calculated by multiplying the total amount of gross payments by a fraction, the
numerator of which is the amount of the partial withdrawal and the denominator
of which is the Accumulated Value immediately prior to the withdrawal. For
example, if gross payments total $8,000 and a $3,000 withdrawal is
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made when the Accumulated Value is $12,000, the proportional reduction of gross
payments available as a death benefit is calculated as follows: The Accumulated
Value is reduced by 1/4 (3,000 divided by 12,000); therefore, the gross amount
available as a death benefit under (2) also will be reduced by 1/4 (8,000 times
1/4 equals $2,000), so that the $8,000 gross payments are reduced to $6,000.
Payments made after a withdrawal will increase the death benefit available under
(2) by the amount of the payment.
A partial withdrawal after the most recent fifth year Policy anniversary will
decrease the death benefit available under (3) in the same proportion that the
Accumulated Value was reduced on the date of the withdrawal. For example, if the
death benefit that would have been payable on the most recent fifth year Policy
anniversary is $12,000 and partial withdrawals totaling $5,000 are made
thereafter when the Accumulated Value is $15,000, the proportional reduction of
death benefit available under (3) is calculated as follows: The Accumulated
Value is reduced by 1/3 (5,000 divided by 15,000); therefore, the death benefit
that would have been payable on the most recent fifth year Policy anniversary
will also be reduced by 1/3 (12,000 times 1/3 or $4,000), so that the death
benefit available under (3) will be $8,000 ($12,000 minus $4,000). Payments made
after the most recent fifth year Policy anniversary will increase the death
benefit available under (3) by the amount of the payment. Upon death of an Owner
who is not the Annuitant, the death benefit is equal to the Accumulated Value of
the Policy next determined following receipt of due proof of death received at
the Principal Office.
The death benefit generally will be paid to the beneficiary in one sum. The
beneficiary may, however, by written request, elect one of the following
options:
(1) The payment of the one sum may be delayed for a period not to exceed
five years from the date of death.
(2) The death benefit may be paid in installments. Payments must begin
within one year from the date of death, and are payable over a period
certain not extended beyond the life expectancy of the beneficiary.
(3) All or a portion of the death benefit may be used to provide a life
annuity for the beneficiary. Benefits must begin within one year from the
date of death and are payable over a period not extended beyond the life
expectancy of the beneficiary. Any annuity benefits will be provided in
accordance with the annuity options of the Policy.
If there is more than one beneficiary, the death benefit will be paid to such
beneficiaries in one sum unless the Company consents to pay an annuity option
chosen by the beneficiaries.
With respect to any death benefit, the Accumulated Value under the Policy shall
be based on the unit values next computed after due proof of death has been
received at the Principal Office. If the beneficiary elects to receive the death
benefit in one sum, the death benefit will be paid within seven business days.
If the beneficiary (other than a spousal beneficiary of an IRA, See "F. The
Spouse of the Owner as Beneficiary," below) has not elected an annuity option
within one year from the date notice of death is received by the Company, the
Company will pay the death benefit in one sum. The death benefit will reflect
any earnings or losses experienced during the period and any withdrawals.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed monthly annuity benefit payments, any unpaid
amounts or installments will be paid to the beneficiary. The Company must pay
the remaining payments at least as rapidly as under the payment option in effect
on the date of the Annuitant's death. If there is more than one beneficiary, the
commuted value of the payments, computed on the basis of the assumed interest
rate incorporated in the annuity option table on which such payments are based,
shall be paid to the beneficiaries in one sum.
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F. THE SPOUSE OF THE OWNER AS BENEFICIARY
If the Owner's spouse is named as beneficiary ("spousal beneficiary") and if the
Owner dies (and predeceases the Annuitant if such Owner is not the Annuitant)
prior to the Annuity Date while the Policy is in force, at the written request
of the spousal beneficiary the death benefit will not be paid and the spousal
beneficiary will become the new Owner (and, if the deceased Owner was also the
Annuitant, the new Annuitant). All other rights and benefits provided in the
Policy will continue, except that any subsequent spouse of such new Owner will
not be entitled to continue the Policy upon such new Owner's death.
G. ASSIGNMENT
The Policy may be assigned by the Owner at any time prior to the Annuity Date
and while the Annuitant is alive. Policies sold in connection with IRA plans and
certain other qualified plans, however, are not assignable. For more information
about these plans, see "FEDERAL TAX CONSIDERATIONS."
The Company will not be deemed to have knowledge of an assignment unless it is
made in writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Policy is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Policy to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Owner in full settlement of all liability
under the Policy. The interest of the Owner and of any beneficiary will be
subject to any assignment.
H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Policy, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the General Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Accounts is made each month. Since the value of an
Annuity Unit in a Sub-Account will reflect the investment performance of the
Sub-Account, the amount of each monthly payment will vary.
The annuity option selected must produce an initial payment of at least $50. If
a combination of fixed and variable payments is selected, the initial payment on
each basis must be at least $50. The Company reserves the right to increase
these minimum amounts. If the annuity option selected does not produce initial
payments which meet these minimums, the Company will pay the Accumulated Value
in one sum. Once the Company begins making annuity payments, the Annuitant
cannot make partial redemptions or surrender the annuity benefit, except in the
case where a commutable period certain option (Option V or a comparable fixed
option) has been chosen. Beneficiaries entitled to receive remaining payments
for a "period certain" may elect to instead receive a lump sum settlement.
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Policy is 75 or under, or (2) within ten years from the date of issue of the
Policy and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Owner may elect to change the Annuity
Date by sending a request to the Principal Office at least one month before the
Annuity Date. The new Annuity Date must be the first day of any month occurring
before the Annuitant's 90th birthday. The new Annuity Date must be within the
life expectancy of the Annuitant. The Company shall determine such life
expectancy at the time a change in Annuity Date is requested. The Code and the
terms of qualified plans
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impose limitations on the age at which annuity benefit payments may commence and
the type of annuity option selected. See "FEDERAL TAX CONSIDERATIONS" for
further information.
If the Owner does not elect otherwise, annuity benefit payments will be made in
accordance with Option I, a variable life annuity with 120 monthly payments
guaranteed. Changes in either the Annuity Date or annuity option can be made up
to one month prior to the Annuity Date.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS
The Company currently provides the variable annuity options described below.
Variable annuity options may be funded through the Decatur Total Return Series,
the Capital Reserves Series and the Delaware Series.
The Company also provides fixed-amount annuity options which are comparable to
the variable annuity options. Regardless of how payments were allocated during
the accumulation period, any one of the variable annuity options or the
fixed-amount options may be selected, or any one of the variable annuity options
may be selected in combination with any one of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
OPTION I -- VARIABLE LIFE ANNUITY WITH 120 MONTHLY PAYMENTS GUARANTEED. A
variable annuity payable monthly during the lifetime of the payee with the
guarantee that if the payee should die before 120 monthly payments have been
paid, the monthly annuity benefit payments will continue to the beneficiary
until a total of 120 monthly payments have been paid.
OPTION II -- VARIABLE LIFE ANNUITY. A variable annuity payable monthly only
during the lifetime of the Annuitant. It would be possible under this option for
the Annuitant to receive only one annuity benefit payment if the Annuitant dies
prior to the due date of the second annuity benefit payment, two annuity benefit
payments if the Annuitant dies before the due date of the third annuity benefit
payment, and so on. Payments will continue, however, during the lifetime of the
Annuitant, no matter how long he or she lives.
OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
monthly during the lifetime of the payee with the guarantee that if (1) exceeds
(2), then monthly variable annuity benefit payments will continue to the
beneficiary until the number of such payments equals the number determined in
(1).
Where:
(1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first monthly payment (which determines the greatest number
of payments payable to the beneficiary), and
(2) is the number of monthly payments paid prior to the death of the payee.
OPTION IV-A -- JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. A monthly variable
annuity payable jointly to two payees during their joint lifetime, and then
continuing during the lifetime of the survivor. The amount of each payment to
the survivor is based on the same number of Annuity Units which applied during
the joint lifetime of the two payees. One of the payees must be either the
person designated as the Annuitant in the Policy or the beneficiary. There is no
minimum number of payments under this option. See Option IV-B, below.
OPTION IV-B -- JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. A monthly
variable annuity payable jointly to two payees during their joint lifetime, and
then continuing thereafter during the lifetime of the survivor. The amount of
each monthly payment to the survivor, however, is based upon two-thirds of the
number of Annuity Units which applied during the joint lifetime of the two
payees. One of the payees must be the person designated as the Annuitant in the
Policy or the beneficiary. There is no minimum number of payments under this
option. See Option IV-A, above.
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OPTION V -- PERIOD CERTAIN VARIABLE ANNUITY. A monthly variable annuity payable
for a stipulated number of years ranging from one to 30 years. This option may
be commutable, that is, the payee reserves the right to receive a lump sum in
place of installments, or it becomes non-commutable. The payee must reserve this
right at the time benefits begin.
It should be noted that Option V does not involve a life contingency. In the
computation of the payments under this option, the charge for annuity rate
guarantees, which includes a factor for mortality risks, is made. Although not
contractually required to do so, the Company currently follows a practice of
permitting persons receiving payments under Option V to elect to convert to a
variable annuity involving a life contingency. The Company may discontinue or
change this practice at any time, but not with respect to Owners who have
elected Option V prior to the date of any change in this practice. See "FEDERAL
TAX CONSIDERATIONS" for a discussion of the possible adverse tax consequences of
selecting Option V.
J. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a policy issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates, or (2) the
guaranteed male rates described in such Policy, regardless of whether the
Annuitant is male or female.
Although the Company believes that the Supreme Court ruling does not affect
Policies funding IRA plans that are not employer-sponsored, the Company will
apply certain aspects of the ruling to annuity benefits under such Policies,
except in those states in which it is prohibited. Such benefits will be based on
(1) the greater of the guaranteed unisex annuity rates described in the
Policies, or (2) the Company's sex-distinct Non-Guaranteed Current Annuity
Option Rates.
K. COMPUTATION OF POLICY VALUES AND ANNUITY BENEFIT PAYMENTS
THE ACCUMULATION UNIT. Each net purchase payment is allocated to the accounts
selected by the Owner. Allocations to the Sub-Accounts are credited to the
Policy in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Policy is equal to the portion of the net purchase
payment allocated to the Sub-Account, divided by the dollar value of the
applicable Accumulation Unit as of the Valuation Date the payment is received at
the Principal Office. The number of Accumulation Units resulting from each
payment will remain fixed unless changed by a subsequent split of Accumulation
Unit value, a transfer, a partial redemption, or surrender. The dollar value of
an Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account and will reflect the
investment performance, expenses and charges of its Underlying Series. The value
of an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See
APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
The Accumulated Value under the Policy is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the General Account, if any.
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ADJUSTED GROSS INVESTMENT RATE. At each Valuation Date an adjusted gross
investment rate for each Sub-Account for the Valuation Period then ended is
determined from the investment performance of that Sub-Account. Such rate is (1)
the investment income of that Sub-Account for the Valuation Period, plus capital
gains and minus capital losses of that Sub-Account for the Valuation Period,
whether realized or unrealized, adjusted for provisions made for taxes, if any,
divided by (2) the amount of that Sub-Account's assets at the beginning of the
Valuation Period. The adjusted gross investment rate may be either positive or
negative.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR. The net investment rate for a
Sub-Account's variable accumulations for any Valuation Period is equal to the
adjusted gross investment rate of the Sub-Account for such Valuation Period
decreased by the equivalent for such period of a charge equal to 1.40% per
annum. This charge cannot be increased.
The net investment factor is 1.000000 plus the applicable net investment rate.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of Accumulation Unit calculation using a hypothetical
example see "ANNUITY BENEFIT PAYMENTS" in the SAI.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a measure of
the value of the Annuitant's monthly annuity benefit payments under a variable
annuity option. The value of an Annuity Unit in each Sub-Account initially was
set at $1.00. The value of an Annuity Unit under a Sub-Account on any Valuation
Date thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the product of (1) the net investment factor of
the Sub-Account for the current Valuation Period, and (2) a factor to adjust
benefits to neutralize the assumed interest rate. The assumed interest rate,
discussed below, is incorporated in the variable annuity options offered in the
Policy.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
monthly annuity benefit payment is based upon the Accumulated Value as of a date
not more than four weeks preceding the date the first annuity benefit payment is
due. Currently, variable annuity benefit payments are made on the first of the
month based on unit values as of the 15th day of the preceding month.
The Policy provides annuity rates which determine the dollar amount of the first
monthly payment under each form of annuity for each $1,000 of applied value
(Accumulated Value applied under a specific annuity option to provide annuity
income payments, minus any applicable premium tax). The annuity rates in the
Policy are based on a modification of the 1983(a) Individual Mortality Table on
rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3.5% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable Annuity Benefit Payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first monthly annuity benefit payment under a life
contingency or a non-commutable period certain option of at least a ten-year
option is determined by multiplying (1) the Accumulated Value applied under that
option (after deduction for premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For any
commutable period certain options and for non-commutable period certain options
the Surrender Value less any premium tax is applied. The dollar amount of the
first monthly variable annuity benefit payment is then divided by the value of
an Annuity Unit
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of the selected Sub-Accounts to determine the number of Annuity Units
represented by the first payment. This number of Annuity Units remains fixed
under all annuity options except the joint and two-thirds survivor annuity
option. In each subsequent month, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity Unit on the applicable Valuation Date.
After the first payment, the dollar amount of each monthly variable annuity
payment will vary with subsequent variations in the value of the Annuity Unit of
the selected Sub-Accounts. The dollar amount of each fixed amount monthly
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
The Company may from time to time offer its Owners both fixed and variable
annuity rates more favorable than those contained in the Policy. Any such rates
will be applied uniformly to all Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
owner, annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Policy.
It should be recognized that the following discussion of federal income tax
aspects of amounts received under variable annuity policies is not exhaustive,
does not purport to cover all situations, and is not intended as tax advice. A
qualified tax adviser always should be consulted with regard to the application
of law to individual circumstances.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Policy, the Variable Account or the Sub-Accounts may have upon
its tax. The Variable Account presently is not subject to tax, but the Company
reserves the right to assess a charge for taxes should the Variable Account at
any time become subject to tax. Any charge for taxes will be assessed on a fair
and equitable basis in order to preserve equity among classes of Owners and with
respect to each separate account as though that separate account were a separate
taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance policies under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity policy are diversified adequately if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on a policy, for any taxable year of
the owner, would be treated as ordinary income received or accrued by the owner.
It is anticipated that the Series of DGPF will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Policy modifications in order to remain in compliance with
the diversification standards, the Company will
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make reasonable efforts to comply, and it reserves the right to make such
changes as it deems appropriate for that purpose.
A. QUALIFIED AND NON-QUALIFIED POLICIES
From a federal tax viewpoint there are two types of variable annuity policies:
"qualified" policies and "non-qualified" policies. A qualified policy is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
policy is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified policy or a
non-qualified policy. For more information on the tax provisions applicable to
qualified contracts, see Section D below.
B. TAXATION OF THE POLICIES IN GENERAL
The Company believes that the Policy described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
policy under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in the
Policy's Accumulated Value is not taxable to the Owner until it is withdrawn
from the Policy. If the Policy is surrendered or amounts are withdrawn prior to
the annuity date, any withdrawal of investment gain in value over the cost basis
of the Policy will be taxed as ordinary income. Under the current provisions of
the Code, amounts received under an annuity policy prior to annuitization
(including payments made upon the death of the annuitant or owner), generally
are first attributable to any investment gains credited to the policy over the
taxpayer's "investment in the policy." Such amounts will be treated as gross
income subject to federal income taxation. "Investment in the Policy" is the
total of all payments to the Policy which were not excluded from the Owner's
gross income less any amounts previously withdrawn which were not included in
income. Section 72(e)(11)(A)(ii) requires that all non-qualified deferred
annuity policies issued by the same insurance company to the same owner during a
single calendar year be treated as one policy in determining taxable
distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are commenced
under the Policy, generally a portion of each payment may be excluded from gross
income. The excludable portion generally is determined by a formula that
establishes the ratio that the cost basis of the Policy bears to the expected
return under the Policy. The portion of the payment in excess of this excludable
amount is taxable as ordinary income. Once all cost basis in the Policy is
recovered, the entire payment is taxable. If the annuitant dies before the cost
basis is recovered, a deduction for the difference is allowed on the annuitant's
final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2. or if the
withdrawal follows the death of the Owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the Owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the Owner elects to have
distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity policy were determined by amortizing the accumulated
value of the policy over the taxpayer's remaining life expectancy (such as under
the Policy's LED option), and the option could be changed or terminated at any
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time, the distributions failed to qualify as part of a "series of substantially
equal payments" within the meaning of Section 72 of the Code. The distributions,
therefore, were subject to the 10% federal penalty tax. This Private Letter
Ruling may be applicable to an Owner who receives distributions under the LED
option prior to age 59 1/2. Subsequent Private Letter Rulings, however, have
treated LED-type withdrawal programs as effectively avoiding the 10% penalty
tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Policy to another
individual as a gift prior to the Annuity Date, the Code provides that the Owner
will incur taxable income at the time of the transfer. An exception is provided
for certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to any investment gain in value over the Owner's cost
basis at the time of the transfer. The transfer also is subject to federal gift
tax provisions. Where the Owner and Annuitant are different persons, the change
of ownership of the Policy to the Annuitant on the Annuity Date, as required
under the Policy, is a gift and will be taxable to the Owner as such; however,
the Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity policies owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity policies
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity policies purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity policy under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity policies. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a policy owned by a state or local government
or a tax-exempt organization will not be treated as an annuity under Section 72.
In addition, plan assets are treated as property of the employer, and are
subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified policies and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified policies. In addition, the Code requires reporting to the IRS of
the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Policies offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Policy made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity policy used to fund such benefits. As such,
the following is simply a general description of various types of qualified
plans that may use the Policy. Before purchasing any annuity policy for use in
funding a qualified plan, more specific information should be obtained.
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A qualified Policy may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to a non-qualified Owner.
Individuals purchasing a qualified Policy should review carefully any such
changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Policies in
connection with such plans should seek competent advice as to the suitability of
the Policy to their specific needs and as to applicable Code limitations and tax
consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Policy will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to revoke the Policy as described in this Prospectus. See "Right to Revoke All
Other Policies."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
the employees IRAs. Employer contributions that may be made to such plans are
larger than the amounts that may be contributed to regular IRAs and may be
deductible to the employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity Policies purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA policies should
seek competent advice as to eligibility, limitations on permissible payments and
other tax consequences associated with the policies.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA policy after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA policy issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
LOANS (QUALIFIED POLICIES ONLY)
Loans will be permitted only for TSAs and Policies issued to a plan qualified
under Section 401(a) and 401(k) of the Code. Loans are made from the Policy's
value on a pro-rata basis from all accounts. The maximum loan amount is the
amount determined under the Company's maximum loan formula for qualified plans.
The
37
<PAGE>
minimum loan amount is $1,000. Loans will be secured by a security interest in
the Policy. Loans are subject to applicable retirement legislation and their
taxation is determined under the federal income tax laws. The amount borrowed
will be transferred to a fixed, minimum guarantee loan assets account in the
Company's General Account, where it will accrue interest at a specified rate
below the then current loan interest rate. Generally, loans must be repaid
within five years and must be made at least quarterly in substantially equal
amounts. When repayments are received, they will be allocated pro-rata in
accordance with the Owner's most recent allocation instructions.
The amount of the death benefit, the amount payable on a full surrender and the
amount applied to provide an annuity on the Annuity Date will be reduced to
reflect any outstanding loan balance (plus accrued interest thereon). Partial
withdrawals may be restricted by the maximum loan limitation.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Series. The Company will also furnish an annual
report to the Owner containing a statement of his or her account, including unit
values and other information required by applicable law, rules and regulations.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Series are no longer available for investment or if, in the Company's
judgment further investment in any Underlying Series should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Series and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy interest in a Sub-Account without notice to
the Owner and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Separate Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by an Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Series or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Series are sold to separate accounts of unaffiliated
insurance companies ("shared funding") which issue variable annuity and variable
life policies ("mixed funding"). It is conceivable that in the future such
shared funding or mixed funding may be disadvantageous for variable life
insurance Owners or variable annuity Owners. Although the Company and the Fund
do not currently foresee any such disadvantages to either variable life
insurance owners or variable annuity owners, the Company and the Trustees of the
Fund intend to monitor events in order to identify any material conflicts and to
determine what action, if any, should be taken in response thereto.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Policy to reflect the substitution or change
and will notify Owners of all such changes. If the Company deems it to be in the
best interest of Owners, and subject to any approvals that may be required under
applicable law, the Separate Account or any Sub-Accounts may be operated as a
management company under the 1940 Act, may be deregistered under the 1940 Act if
registration is no longer required, or may be combined with other Sub-Accounts
or other separate accounts of the Company.
38
<PAGE>
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from Separate Account VA-K or Sub-Account to another of the
Company's separate accounts or sub-accounts having assets of the same class, (2)
to operate the Separate Account or any Sub-Account as a management investment
company under the 1940 Act or in any other form permitted by law, (3) to
deregister the Separate Account under the 1940 Act in accordance with the
requirements of the 1940 Act, and (4) to substitute the shares of any other
registered investment company for the Underlying Series shares held by a
Sub-Account, in the event that Underlying Series shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Series shares is inappropriate in view of the purpose of the Sub-
Account. In no event will the changes described above be made without notice to
Owners in accordance with the 1940 Act. The Company reserves the right, subject
to compliance with applicable law, to change the names of the Separate Account
or of the Sub-Accounts.
VOTING RIGHTS
The Company will vote Underlying Series shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the Underlying Series, together with a form
with which to give voting instructions to the Company. Shares for which no
timely instructions are received will be voted in proportion to the instructions
which are received. The Company also will vote shares in a Sub-Account that it
owns and which are not attributable to the Policies in the same proportion. If
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change and, as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Policies, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Series.
During the accumulation period, the number of Underlying Series shares
attributable to each Owner will be determined by dividing the dollar value of
the Accumulation Units of the Sub-Account credited to the Policy by the net
asset value of one Underlying Series share.
During the annuity period, the number of Underlying Series shares attributable
to each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Series share. Ordinarily, the Annuitant's voting interest in the
Underlying Series will decrease as the reserve for the variable annuity is
depleted.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Policies as presently offered and to make any change to provisions of the
Contracts to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation. Including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the SEC. Certain portions of the Registration
Statement and amendments have been omitted from this Prospectus pursuant to the
rules and regulations of the SEC. The omitted information may be obtained from
the SEC's principal office in Washington, DC, upon payment of the SEC's
prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General Account are not generally subject to regulation under
the provisions of the Securities Act of 1933 or the Investment Company Act of
1940. Disclosures regarding the fixed portion of the annuity Policy and the
General Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the SEC.
ALLOCATIONS TO AND TRANSFERS TO AND FROM THE GENERAL ACCOUNT OF THE COMPANY ARE
NOT PERMITTED IN CERTAIN STATES.
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any Separate Account. Allocations to
the General Account, where available, become part of the assets of the Company
and are used to support insurance and annuity obligations.
A portion or all of net purchase payments may be allocated to accumulate at a
fixed rate of interest in the General Account, where available. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Policies, the minimum interest which may be credited on amounts
allocated to the General Account is 3% compounded annually. Additional "Excess
Interest" may or may not be credited at the sole discretion of the Company.
If the Policy is surrendered, or if an Excess Amount is redeemed, while the
Policy is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to the
surrender or withdrawal have been credited to the Policy less than seven full
Policy years.
If the Policy was issued in Maryland on Form No. A3022-93, the following
surrender charge table applies to monies in the General Account, rather than the
surrender charge table shown in "CHARGES AND DEDUCTION," "A. Contingent Deferred
Sales Charge" (which applies to monies in the Separate Account):
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -----------------------
<S> <C>
0-3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
More Than 9 No Charge
</TABLE>
A-1
<PAGE>
APPENDIX B
INFORMATION APPLICABLE ONLY TO POLICY NO. A3019-92
(AND STATE VARIATIONS)
If the Policy is issued on Form No. A3019-92, or a state variation thereof
("Delaware Medallion I), the Policy is substantially similar to the Policies
described in this Prospectus ("Delaware Medallion II"), except as follows:
1. The minimum interest rate credited to amounts allocated to the General
Account respecting Delaware Medallion II is 3% compounded annually. For Delaware
Medallion I, the minimum interest rate guarantees are 5% for the first five
Policy years, 4% for the next five Policy years, and 3.5% thereafter.
2. The guaranteed death benefit under Delaware Medallion II is reduced
proportionally to reflect partial withdrawals (in the same proportion that the
Accumulated Value was reduced by the withdrawals). Under Delaware Medallion I,
partial withdrawals are subtracted from the guaranteed death benefit.
Additionally, the stepped-up death benefit applies to the most recent fifth year
Policy anniversary for Delaware Medallion II and applies to the most recent
seventh year Policy anniversary for the Delaware Medallion I.
3. Under Delaware Medallion II, the Free Withdrawal Amount is the greater of
(1) cumulative earnings (Accumulated Value as of the most recent Valuation Date
reduced by total gross payments not previously redeemed), (2) 10% of the
Accumulated Value as of the most recent Valuation Date, reduced by the total
amount of any prior partial redemptions made in the same calendar year to which
no contingent deferred sales charge was applied, or (3) the life expectancy
distribution, if applicable. The Free Withdrawal Amount for Delaware Medallion
II is first deducted from cumulative earnings, and any excess will be deemed
withdrawn on a LIFO basis.
Under Delaware Medallion I, the Free Withdrawal Amount is the greater of (1) 10%
of the Accumulated Value as of December 31 of the previous calendar year, or (2)
the life expectancy distribution, if applicable. The Free Withdrawal Amount for
Delaware Medallion I is deducted first from Old Payments, then from the earliest
New Payments and so on until all New Payments have been exhausted pursuant to
the first-in-first-out ("FIFO") method of accounting (LIFO or last-in-first-out
method in New Jersey).
4. If you surrender the Policy or annuitize under a period certain option at
the end of one, three or five years, the expenses you would pay on a $1,000
investment, assuming 5% annual return on assets, are the same in years one and
ten as shown in the expense example (a) under "ANNUAL AND TRANSACTION EXPENSES"
but may be one to two dollars higher in years three and five due to differences
in the Free
B-1
<PAGE>
Withdrawal calculation. The expense numbers for years three and five under
Delaware Medallion I are as follows:
<TABLE>
<CAPTION>
FUND 3 YEARS 5 YEARS
- ---------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Decatur Total Return Series..................................... $ 135 $ 165
Devon Series.................................................... $ 137 $ 170
DelCap Series................................................... $ 139 $ 172
Social Awareness Series......................................... $ 139 $ 172
REIT Series..................................................... $ 139 $ 172
Small Cap Value Series.......................................... $ 139 $ 172
Trend Series.................................................... $ 139 $ 172
International Equity Series..................................... $ 140 $ 174
Emerging Markets Series......................................... $ 157 $ 203
Delaware Series................................................. $ 134 $ 163
Convertible Securities Series................................... $ 139 $ 172
Delchester Series............................................... $ 135 $ 165
Capital Reserves Series......................................... $ 136 $ 167
Strategic Income Series......................................... $ 137 $ 170
Cash Reserve Series............................................. $ 133 $ 162
Global Bond Series.............................................. $ 139 $ 172
</TABLE>
The numbers in example (b) are the same for both Delaware Medallion I and II.
B-2
