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ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
DELAWARE MEDALLION III
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1999 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
(the contract owner) and Allmerica Financial Life Insurance and Annuity Company
(for contracts issued in the District of Columbia, Puerto Rico, the Virgin
Islands and any state except Hawaii and New York) or First Allmerica Financial
Life Insurance Company (for contracts issued in Hawaii and New York). 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 17 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 deferred annuities, the contract has an ACCUMULATION PHASE and, if you
annuitize, 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 pre-tax 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) periodic payments for your lifetime; (2) periodic payments for your
lifetime, but for not less than 10 years; (3) periodic payments for your
lifetime with the guarantee that if payments to you are less than the
accumulated value at annuitization, a refund of the remaining value will be
paid; (4) periodic payments for your lifetime and your survivor's lifetime; (5)
periodic payments guaranteed for your lifetime and your survivor's lifetime with
the payment to the survivor being reduced to 2/3; and (6) periodic payments for
a specified period of 1 to 30 years. Other annuity options may be offered by the
Company.
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.
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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.
4. INVESTMENT OPTIONS
You may allocate money to the Sub-Accounts investing in the following investment
series:
<TABLE>
<S> <C>
Growth & Income Series Emerging Markets Series
Devon Series Delaware Balanced Series
DelCap Series Convertible Securities Series
Aggressive Growth Series Delchester Series
Social Awareness Series Capital Reserves Series
REIT Series Strategic Income Series
Small Cap Value Series Cash Reserve Series
Trend Series Global Bond Series
International Equity 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 on
the date the fee is assessed or if the contract is issued to and maintained by
the Trustees of a 401(k) plan. We also deduct insurance charges at a total
annual rate of 1.40% of the average 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. In addition, if you elect the optional Minimum
Guaranteed Annuity Payout Rider, we will deduct a monthly charge against the
accumulated value of your contract at an annual rate of 0.25% for a rider with a
ten-year waiting period and at an annual rate of 0.15% for a rider with a
fifteen-year waiting period.
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 annual $30
contract fee (which is represented as 0.03%), the 1.40% insurance charges and
the investment charges for each investment series. Optional rider charges are
not included. 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,
surrender charges are assessed in addition to the Total Annual Charges. For year
10, the example shows the aggregate of all the annual charges assessed for 10
years, without a surrender charge. The premium tax is assumed to be 0%
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in both examples. The following chart does not reflect the optional Minimum
Guaranteed Annuity Payout Rider charge which, if elected, would increase the
Total Annual Insurance Charges.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL
EXPENSE AT
THE END OF
TOTAL ANNUAL TOTAL ANNUAL TOTAL ------------------------
INSURANCE INVESTMENT ANNUAL (1) (2)
INVESTMENT SERIES CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- --------------------------------------------------------- --------------- --------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Growth & Income Series................................... 1.43% 0.71% 2.14% $ 83 $ 244
Devon Series............................................. 1.43% 0.71% 2.14% $ 83 $ 244
DelCap Series............................................ 1.43% 0.85% 2.28% $ 84 $ 258
Aggressive Growth 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% 0.95% 2.38% $ 85 $ 268
Emerging Markets Series.................................. 1.43% 1.50% 2.93% $ 90 $ 322
Delaware Balanced Series................................. 1.43% 0.75% 2.18% $ 83 $ 248
Convertible Securities Series............................ 1.43% 0.82% 2.25% $ 84 $ 255
Delchester Series........................................ 1.43% 0.75% 2.18% $ 83 $ 248
Capital Reserves Series.................................. 1.43% 0.69% 2.12% $ 82 $ 242
Strategic Income Series.................................. 1.43% 0.80% 2.23% $ 83 $ 253
Cash Reserve Series...................................... 1.43% 0.54% 1.97% $ 81 $ 226
Global Bond Series....................................... 1.43% 0.85% 2.28% $ 84 $ 258
</TABLE>
* The Aggressive Growth Series had not commenced operations as of December 31,
1998. Expenses shown are based on estimated and annualized amounts. Actual
expenses may be greater or less than shown. The REIT Series commenced operations
on May 1, 1998. Expenses shown are based on annualized amounts.
The charges reflect any expense reimbursement or fee waiver. For more detailed
information, see the Fee Table in the Prospectus.
6. TAXES
Under current tax rules, you do 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 may 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 years 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 nonnatural person.)
The surrender charges are also waived if after the contract is issued and before
you attain age 65, you become disabled. Under New York contracts, the disability
must also exist for a continuous period of at least four months. Also, except in
New York and New Jersey where not permitted by state law, you may receive your
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money without a surrender charge, if, after the contract is issued, you are
diagnosed with a fatal illness or are confined in a medical care facility for
the later of one year, or 90 days from issue.
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 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 Sub-Accounts investing in the underlying series you choose.
The first chart below illustrates past returns on a calendar year basis for each
of the 17 Delaware Group Premium Fund, Inc. Sub-Accounts of Allmerica Financial
Life Insurance and Annuity Company's Separate Account VA-K based on the
inception dates of each of the Sub-Accounts. The second chart illustrates the
same information for the 17 Sub-Accounts of First Allmerica Financial Life
Insurance Company's Separate Account VA-K. Each Company offers the same Sub-
Accounts, however, the Allmerica Financial Life Insurance and Annuity Company's
Separate Account VA-K has had Sub-Accounts investing in these series for a
longer period of time than the First Allmerica Financial Life Insurance
Company's Separate Account VA-K. The performance figures reflect the contract
fee, the insurance charges, and the investment charges and other expenses of the
underlying series. They do not reflect the surrender charges which, if applied,
would reduce such performance. In addition, they do not reflect the optional
Minimum Guaranteed Annuity Payout Rider charge which, if elected, would reduce
such performance. Please note that past performance is not a guarantee of future
results.
SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION) OF ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
INVESTMENT SERIES 1998 1997 1996 1995 1994 1993
- -------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Growth & Income Series.......... 9.15% 29.19% 19.00% 34.24% -1.61% 13.83%
Devon Series.................... 22.25% N/A N/A N/A N/A N/A
DelCap Series................... 16.78 % 13.28 % 12.83 % 27.74 % -4.90 % 10.01 %
Aggressive Growth Series........ N/A N/A N/A N/A N/A N/A
Social Awareness Series......... 13.81 % N/A N/A N/A N/A N/A
REIT Series..................... N/A N/A N/A N/A N/A N/A
Small Cap Value Series.......... -6.43 % 31.06 % 20.81 % 22.12 % -0.64 % N/A
Trend Series.................... 14.15 % 19.66 % 9.41 % 37.29 % -1.90 % N/A
International Equity Series..... 8.41 % 5.10 % 18.32 % 12.29 % 1.20 % 14.35 %
Emerging Markets Series......... -33.45 % N/A N/A N/A N/A N/A
Delaware Balanced Series........ 16.64 % 24.64 % 14.25 % 24.82 % -1.55 % 6.66 %
Convertible Securities Series... -2.55 % N/A N/A N/A N/A N/A
Delchester Series............... -3.48 % 12.04 % 11.17 % 13.89 % -4.23 % 14.71 %
Capital Reserves Series......... 5.21 % 6.09 % 2.55 % 12.57 % -4.05 % 6.32 %
Strategic Income Series......... 1.18 % N/A N/A N/A N/A N/A
Cash Reserve Series............. 3.58 % 3.62 % 3.43 % 4.09 % 2.21 % 1.04 %
Global Bond Series.............. 6.31 % -0.54 % N/A N/A N/A N/A
</TABLE>
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SEPARATE ACCOUNT VA-K (DELAWARE MEDALLION) OF FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR
--------------------------------------------------
INVESTMENT SERIES 1998 1997 1996 1995
- -------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series...................... 9.20% 29.19% 18.99% 34.23%
Devon Series................................ 22.21% N/A N/A N/A
DelCap Series............................... 16.89 % 13.28 % 12.82 % 27.73 %
Aggressive Growth Series.................... N/A N/A N/A N/A
Social Awareness Series..................... 13.80 % N/A N/A N/A
REIT Series................................. N/A N/A N/A N/A
Small Cap Value Series...................... -6.38 % 31.06 % 20.80 % 22.11 %
Trend Series................................ 14.14 % 19.66 % 9.40 % 37.28 %
International Equity Series................. 8.47 % 5.10 % 18.31 % 12.28 %
Emerging Markets Series..................... -33.42 % N/A N/A N/A
Delaware Balanced Series.................... 16.69 % 24.64 % 14.24 % 24.81 %
Convertible Securities Series............... -2.57 % N/A N/A N/A
Delchester Series........................... -3.59 % 12.04 % 11.16 % 13.88 %
Capital Reserves Series..................... 5.21 % 6.09 % 2.54 % 12.56 %
Strategic Income Series..................... 1.09 % N/A N/A N/A
Cash Reserve Series......................... 3.55 % 3.62 % 3.42 % 4.08 %
Global Bond Series.......................... 6.33 % -0.54 % 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 the annual rate of 5%, decreased proportionately to
reflect any prior withdrawals (in Hawaii and New York, the 5% compounding is not
available; therefore, (b) equals gross payments decreased proportionately to
reflect 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 daily at the annual rate of 5%
(except in Hawaii and New York). 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 daily at the
annual rate of 5% (except in Hawaii and New York) 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."
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.
There is no charge for this service.
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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.
There is no charge for this service.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER (not available in all
jurisdictions): This optional rider is available for a separate monthly charge
and guarantees you a minimum amount of fixed annuity lifetime income during the
annuity payout phase, subject to certain conditions. On each contract
anniversary a minimum guaranteed annuity payout benefit base is determined. This
minimum guaranteed annuity payout benefit base (less any applicable premium
taxes) is the value that will be annuitized should you exercise the rider. In
order to exercise the rider, a fixed annuitization option involving a life
contingency must be selected. Annuitization under this rider will occur at the
guaranteed annuity purchase rates listed under the Annuity Option Tables in your
contract. The minimum guaranteed annuity payout benefit base is equal to the
greatest of:
(a) the accumulated value increased by any positive market value adjustment,
if applicable; or
(b) the accumulated value on the effective date of the rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the
rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive market value adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
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
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FUNDED THROUGH SUB-ACCOUNTS OF SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus provides important information about
the Delaware Medallion III variable annuity contracts
issued by Allmerica Financial Life Insurance and
PLEASE READ THIS Annuity Company. The contract is a flexible payment
PROSPECTUS CAREFULLY tax-deferred combination variable and fixed annuity
BEFORE INVESTING AND offered on both a group and individual basis.
KEEP IT FOR FUTURE The Variable Account, known as Separate Account VA-K
REFERENCE. is subdivided into Sub- Accounts. Each Sub-Account
offered under this contract invests exclusively in
shares of one of the following series of Delaware
Group Premium Fund, Inc.:
<TABLE>
<C> <S> <C> <C>
ANNUITIES INVOLVE Growth & Income Series Small Cap Value Series Delchester Series
RISKS INCLUDING Devon Series Trend Series Capital Reserves Series
POSSIBLE LOSS OF DelCap Series International Equity Series Strategic Income Series
PRINCIPAL. Aggressive Growth Series Emerging Markets Series Cash Reserve Series
Social Awareness Series Delaware Balanced Series Global Bond Series
REIT Series Convertible Securities Series
</TABLE>
The Fixed Account is part of the Company's General
Account and pays an interest rate guaranteed for
one year from the time a payment is received. The
Guarantee Period Accounts offer fixed rates of
interest for specified periods ranging from 2 to
10 years. A Market Value Adjustment is applied to
payments removed from a Guarantee Period Account
before the end of the specified period. The Market
THIS ANNUITY IS Value Adjustment may be positive or negative.
NOT: Payments allocated to a Guarantee Period Account
- A BANK DEPOSIT OR GPA are held in the Company's Separate Account.
OBLIGATION; A Statement of Additional Information dated May 1,
- FEDERALLY INSURED; 1999 containing more information about this
- ENDORSED BY ANY annuity is on file with the Securities and
BANK OR Exchange Commission and is incorporated by
GOVERNMENTAL reference into this Prospectus. A copy may be
AGENCY. obtained free of charge by completing the attached
request card or by calling Annuity Client Services
at 1-800-533-2124. The Table of Contents of the
Statement of Additional Information is listed on
page 3 of this Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 4
SUMMARY OF FEES AND EXPENSES.......................................................... 6
SUMMARY OF CONTRACT FEATURES.......................................................... 11
PERFORMANCE INFORMATION............................................................... 17
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND DELAWARE GROUP PREMIUM FUND,
INC.................................................................................. 18
INVESTMENT OBJECTIVES AND POLICIES.................................................... 20
INVESTMENT ADVISORY SERVICES TO DGPF.................................................. 21
DESCRIPTION OF THE CONTRACT........................................................... 22
A. Payments........................................................................ 22
B. Right to Cancel Individual Retirement Annuity................................... 23
C. Right to Cancel All Other Contracts............................................. 23
D. Transfer Privilege.............................................................. 23
Automatic Transfers and Automatic Account Rebalancing Options................. 24
E. Surrender....................................................................... 24
F. Withdrawals..................................................................... 25
Systematic Withdrawals........................................................ 25
Life Expectancy Distributions................................................. 26
G. Death Benefit................................................................... 26
Death of the Annuitant Prior to the Annuity Date.............................. 26
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date..... 27
Payment of the Death Benefit Prior to the Annuity Date........................ 27
Death of the Annuitant On or After the Annuity Date........................... 27
H. The Spouse of the Owner as Beneficiary.......................................... 28
I. Assignment...................................................................... 28
J. Electing the Form of Annuity and the Annuity Date............................... 28
K. Description of Variable Annuity Payout Options.................................. 29
L. Annuity Benefit Payments........................................................ 30
Determination of the First Variable Annuity Benefit Payment................... 30
The Annuity Unit.............................................................. 30
Determination of the Number of Annuity Units.................................. 31
Dollar Amount of Subsequent Variable Annuity Benefit Payments................. 31
M. Optional Minimum Guaranteed Annuity Payout Rider................................. 31
N. NORRIS Decision................................................................. 33
O. Computation of Values........................................................... 33
The Accumulation Unit......................................................... 33
Net Investment Factor......................................................... 34
CHARGES AND DEDUCTIONS................................................................ 34
A. Variable Account Deductions..................................................... 34
Mortality and Expense Risk Charge............................................. 34
Administrative Expense Charge................................................. 35
Other Charges................................................................. 35
B. Contract Fee.................................................................... 35
C. Optional Minimum Guaranteed Annuity Payout Rider Charge......................... 35
D. Premium Taxes................................................................... 36
E. Surrender Charge................................................................ 36
Charge for Surrender and Withdrawal........................................... 36
Reduction or Elimination of Surrender Charge and Additional Amounts
Credited...................................................................... 37
Withdrawal Without Surrender Charge........................................... 38
Surrenders.................................................................... 39
Charge at the Time Annuity Benefit Payments Begin............................. 39
</TABLE>
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<TABLE>
<S> <C>
F. Transfer Charge................................................................. 39
GUARANTEE PERIOD ACCOUNTS............................................................. 39
FEDERAL TAX CONSIDERATIONS............................................................ 41
A. Qualified and Non-Qualified Contracts........................................... 42
B. Taxation of the Contracts in General............................................ 43
Withdrawals Prior to Annuitization............................................ 43
Annuity Payouts After Annuitization........................................... 43
Penalty on Distribution....................................................... 43
Assignments or Transfers...................................................... 44
Nonnatural Owners............................................................. 44
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 44
C. Tax Withholding................................................................. 44
D. Provisions Applicable to Qualified Employer Plans............................... 44
Corporate and Self-Employed Pension and Profit Sharing Plans.................. 44
Individual Retirement Annuities............................................... 45
Tax-Sheltered Annuities....................................................... 45
Texas Optional Retirement Program............................................. 45
STATEMENTS AND REPORTS................................................................ 45
LOANS (QUALIFIED CONTRACTS ONLY)...................................................... 46
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 46
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 47
VOTING RIGHTS......................................................................... 47
DISTRIBUTION.......................................................................... 47
LEGAL MATTERS......................................................................... 48
YEAR 2000 COMPLIANCE.................................................................. 48
FURTHER INFORMATION................................................................... 49
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................................ A-1
APPENDIX B -- PERFOMANCE TABLES (ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY)............................................................................. B-1
APPENDIX C -- PEFORMANCE TABLES (FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY).... C-1
APPENDIX D -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT....................... D-1
APPENDIX E -- THE DEATH BENEFIT....................................................... E-1
APPENDIX F -- CONDENSED FINANCIAL INFORMATION......................................... F-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 total value of all Accumulation Units in the Sub-Accounts
plus 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 unit of measure used to calculate the value of 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. This date may
not be later than the first day of the month before the Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: An investment option under the Contract that guarantees principal
and a fixed interest rate, and which is part of the Company's General Account.
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.
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 (OR YOU): 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 investing 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, surrender charge, and Market Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the Growth & Income Series, Devon Series, DelCap
Series, Aggressive Growth Series, Social Awareness Series, REIT Series, Small
Cap Value Series, Trend Series, International
4
<PAGE>
Equity Series, Emerging Markets Series, Delaware Balanced 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 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 unit 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.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Delaware
Medallion III Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts, and (3) annual 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 "D.
Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
DATE OF
(1) CONTRACT CHARGES: PAYMENT CHARGE
------------ -----------
<S> <C> <C>
SURRENDER CHARGE:* 0 - 1 7.0%
This charge may be assessed upon surrender, 2 6.0%
withdrawal or annuitization under any 3 5.0%
commutable period certain option or a 4 4.0%
noncommutable period certain option of less 5 3.0%
than ten years. The charge is a percentage of 6 2.0%
payments applied to the amount surrendered (in 7 1.0%
excess of any amount that is free of surrender More than 7 0.0%
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.
ANNUAL 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.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly
basis at the end of each month.)
On an annual basis as a percentage of
Accumulated Value, the charge is:
Optional Minimum Guaranteed Annuity Payout 0.25%
Rider with ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout 0.15%
Rider with a fifteen-year waiting period:
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as a percentage of average
daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----------
Total Asset Charges: 1.40%
</TABLE>
6
<PAGE>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts when (1) Contracts are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "REDUCTION OR ELIMINATION OF SURRENDER CHARGE
AND ADDITIONAL AMOUNTS CREDITED."
(3) ANNUAL FUND EXPENSES: The following table shows the expenses of the
Underlying Series as a percentage of average net assets for the year ended
December 31, 1998 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1999). For more information concerning fees and
expenses, see the prospectus of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT
FEE TOTAL FUND
(AFTER ANY OTHER EXPENSES (AFTER EXPENSES (AFTER ANY
FUND VOLUNTARY WAIVERS) ANY REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- ----------------------------------------------- -------------------- ----------------------- --------------------------
<S> <C> <C> <C>
Growth & Income Series......................... 0.60% 0.11% 0.71%(2)
Devon Series................................... 0.65% 0.06% 0.71%(2)
DelCap Series.................................. 0.74% 0.11% 0.85%(1)(2)
Aggressive Growth Series(@).................... 0.68% 0.17% 0.85%(1)(2)
Social Awareness Series........................ 0.71% 0.14% 0.85%(1)(2)
REIT Series(@)................................. 0.58% 0.27% 0.85%(1)(2)
Small Cap Value Series......................... 0.75% 0.10% 0.85%(2)
Trend Series................................... 0.75% 0.10% 0.85%(2)
International Equity Series.................... 0.82% 0.13% 0.95%(1)(2)
Emerging Markets Series........................ 1.08% 0.42% 1.50%(1)(2)
Delaware Balanced Series....................... 0.65% 0.10% 0.75%(2)
Convertible Securities Series.................. 0.75% 0.07% 0.82%(2)
Delchester Series.............................. 0.65% 0.10% 0.75%(2)
Capital Reserves Series........................ 0.50% 0.19% 0.69%(2)
Strategic Income Series........................ 0.64% 0.16% 0.80%(1)(2)
Cash Reserve Series............................ 0.45% 0.09% 0.54%(2)
Global Bond Series............................. 0.68% 0.17% 0.85%(1)(2)
</TABLE>
(@) The Aggressive Growth Series had not commenced operations as of December 31,
1998. Expenses shown are based on estimated and annualized amounts. Actual
expenses may be greater or less than shown. The REIT Series commenced operations
on May 1, 1998. Expenses shown are based on annualized amounts.
(1) For the fiscal year ended December 31, 1998, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.86% for DelCap Series, 0.89% for Social
Awareness Series, 1.02% for REIT Series, 1.67% for Emerging Markets Series,
0.81% for Strategic Income Series, 0.92% for Global Bond Series, 0.88% for
International Equity Series and are anticipated to be 0.92% for Aggressive
Growth Series.
(2) The investment adviser for the Growth & Income Series (formerly known as
"Decatur Total Return Series"), Devon Series, DelCap Series, Aggressive Growth
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Balanced Series (formerly known as "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, 1999
through October 31, 1999, 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; 0.85% for
DelCap Series, Aggressive Growth Series, Social Awareness Series, REIT Series,
Small Cap Value Series, Trend Series, Convertible Securities
7
<PAGE>
Series and Global Bond Series and 0.80% for all other Series. The fee ratios
shown above have been restated, if necessary, to reflect the new voluntary
limitations which took effect on May 1, 1999. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds. Pursuant to a vote of the
Fund's shareholders on March 17, 1999, a new management fee structure based on
average daily net assets was approved. The above ratios have been restated to
reflect the new management fee structure which took effect on May 1, 1999.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay 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. Pursuant to the rules of the Securities and
Exchange Commission ("SEC"), the Contract fee has been reflected in the examples
by a method intended to show the "average" impact of the Contract fee on an
investment in the Variable Account. The total Contract fees collected under the
Contracts by the Company are divided by the total average net assets
attributable to the Contracts. 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. 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.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF LESSER THAN THOSE SHOWN.
(1)(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 a 5%
annual return on assets and no Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 83 $ 112 $ 143 $ 244
Devon Series................................................................. $ 83 $ 112 $ 143 $ 244
DelCap Series................................................................ $ 84 $ 116 $ 150 $ 258
Aggressive Growth 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.................................................. $ 85 $ 119 $ 154 $ 268
Emerging Markets Series...................................................... $ 90 $ 135 $ 181 $ 322
Delaware Balanced Series..................................................... $ 83 $ 113 $ 145 $ 248
Convertible Securities Series................................................ $ 84 $ 115 $ 148 $ 255
Delchester Series............................................................ $ 83 $ 113 $ 145 $ 248
Capital Reserves Series...................................................... $ 82 $ 112 $ 142 $ 242
Strategic Income Series...................................................... $ 83 $ 115 $ 147 $ 253
Cash Reserve Series.......................................................... $ 81 $ 107 $ 134 $ 226
Global Bond Series........................................................... $ 84 $ 116 $ 150 $ 258
</TABLE>
8
<PAGE>
(1)(b) 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 a 5%
annual return on assets and election of a Minimum Guaranteed Annuity Payout
Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 85 $ 120 $ 155 $ 269
Devon Series................................................................. $ 85 $ 120 $ 155 $ 269
DelCap Series................................................................ $ 86 $ 124 $ 162 $ 283
Aggressive Growth Series..................................................... $ 86 $ 124 $ 162 $ 283
Social Awareness Series...................................................... $ 86 $ 124 $ 162 $ 283
REIT Series.................................................................. $ 86 $ 124 $ 162 $ 283
Small Cap Value Series....................................................... $ 86 $ 124 $ 162 $ 283
Trend Series................................................................. $ 86 $ 124 $ 162 $ 283
International Equity Series.................................................. $ 87 $ 126 $ 167 $ 293
Emerging Markets Series...................................................... $ 92 $ 142 $ 193 $ 345
Delaware Balanced Series..................................................... $ 85 $ 121 $ 157 $ 273
Convertible Securities Series................................................ $ 86 $ 123 $ 160 $ 280
Delchester Series............................................................ $ 85 $ 121 $ 157 $ 273
Capital Reserves Series...................................................... $ 85 $ 119 $ 154 $ 267
Strategic Income Series...................................................... $ 86 $ 122 $ 159 $ 278
Cash Reserve Series.......................................................... $ 83 $ 115 $ 147 $ 252
Global Bond Series........................................................... $ 86 $ 124 $ 162 $ 283
</TABLE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable 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 and no
Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 21 $ 66 $ 113 $ 244
Devon Series................................................................. $ 21 $ 66 $ 113 $ 244
DelCap Series................................................................ $ 23 $ 70 $ 120 $ 258
Aggressive Growth 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.................................................. $ 24 $ 73 $ 125 $ 268
Emerging Markets Series...................................................... $ 29 $ 90 $ 153 $ 322
Delaware Balanced Series..................................................... $ 22 $ 67 $ 115 $ 248
Convertible Securities Series................................................ $ 23 $ 69 $ 119 $ 255
Delchester Series............................................................ $ 22 $ 67 $ 115 $ 248
Capital Reserves Series...................................................... $ 21 $ 65 $ 112 $ 242
Strategic Income Series...................................................... $ 22 $ 69 $ 118 $ 253
Cash Reserve Series.......................................................... $ 20 $ 61 $ 105 $ 226
Global Bond Series........................................................... $ 23 $ 70 $ 120 $ 258
</TABLE>
9
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable 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 and
election of a Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting
period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 24 $ 74 $ 126 $ 269
Devon Series................................................................. $ 24 $ 74 $ 126 $ 269
DelCap Series................................................................ $ 25 $ 78 $ 133 $ 283
Aggressive Growth Series..................................................... $ 25 $ 78 $ 133 $ 283
Social Awareness Series...................................................... $ 25 $ 78 $ 133 $ 283
REIT Series.................................................................. $ 25 $ 78 $ 133 $ 283
Small Cap Value Series....................................................... $ 25 $ 78 $ 133 $ 283
Trend Series................................................................. $ 25 $ 78 $ 133 $ 283
International Equity Series.................................................. $ 26 $ 81 $ 138 $ 293
Emerging Markets Series...................................................... $ 32 $ 97 $ 165 $ 345
Delaware Balanced Series..................................................... $ 24 $ 75 $ 128 $ 273
Convertible Securities Series................................................ $ 25 $ 77 $ 131 $ 280
Delchester Series............................................................ $ 24 $ 75 $ 128 $ 273
Capital Reserves Series...................................................... $ 24 $ 73 $ 125 $ 267
Strategic Income Series...................................................... $ 25 $ 76 $ 130 $ 278
Cash Reserve Series.......................................................... $ 22 $ 68 $ 117 $ 252
Global Bond Series........................................................... $ 25 $ 78 $ 133 $ 283
</TABLE>
* The Contract fee is not deducted after annuitization. A surrender charge may
be assessed at the time of annuitization if you elect a noncommutable period
certain option of less than ten years or any commutable period certain option.
No charge is assessed if you elect a life contingency option, or a noncommutable
period certain option of ten years or more.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
10
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE DELAWARE MEDALLION III VARIABLE ANNUITY?
The Delaware Medallion III variable annuity contract ("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 payments that you can receive 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, you may
allocate your initial payment and any additional payments you choose to make
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 you
withdraw money. In addition, during the accumulation phase, the beneficiaries
receive certain protections in the event of the Annuitant's death. See
discussion below: "WHAT HAPPENS UPON 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 any remaining 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.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See "M.
Optional Minimum Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE
CONTRACT." If elected, the Rider guarantees the Annuitant a minimum
11
<PAGE>
amount of fixed annuity lifetime income during the annuity payout phase, subject
to certain conditions. On each Contract anniversary a Minimum Guaranteed Annuity
Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout Benefit
Base (less any applicable premium taxes) is the value that will be annuitized
should you exercise the Rider. In order to exercise the Rider, a fixed
annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in your Contract. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). 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?
You may allocate payments among the Sub-Accounts, the Guarantee Period Accounts,
and the Fixed Account.
12
<PAGE>
YOU HAVE A CHOICE OF 17 SUB-ACCOUNTS INVESTING IN THE FOLLOWING SERIES OF DGPF:
<TABLE>
<S> <C>
Growth & Income Series Emerging Markets Series
Devon Series Delaware Balanced Series
DelCap Series Convertible Securities
Series
Aggressive Growth Series Delchester Series
Social Awareness Series Capital Reserves Series
REIT Series Strategic Income Series
Small Cap Value Series Cash Reserve Series
Trend Series Global Bond Series
International Equity 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 SERIES MAY NOT BE AVAILABLE IN CERTAIN 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, except in California where assets are held in the
Company's General 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.
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 Growth & Income Series, Devon Series, DelCap Series, Aggressive
Growth Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, Delaware Balanced 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 ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Funds, the Guarantee Period Accounts, and the Fixed Account.
You will incur no current taxes on transfers while your
13
<PAGE>
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% federal 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 payments that have not been invested in the Contract for more
than seven years may be subject to a surrender charge. (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, you may withdraw all or a portion of your money without a surrender
charge if, after the Contract is issued and before age 65, you become disabled.
Also, except in New York and New Jersey where not permitted by state law, you
may withdraw money without a surrender charge if, after the contract is issued,
you are admitted to a medical care facility or diagnosed with a fatal illness.
For details and restrictions, see "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited."
WHAT HAPPENS UPON 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
greatest of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments, with interest compounding daily at the annual rate of 5%,
starting on the date each payment is applied, and continuing throughout your
investments' entire accumulation phase, (5% compounding not available in
Hawaii and New York) 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.
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 daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals gross payments.) 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 daily at the annual rate of 5% (gross payments in
Hawaii and New York) 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.
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(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, the Company will deduct a $30 Contract fee 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 surrender
charge. If applicable, this charge will be between 1% and 7% of payments
withdrawn, based on when the payments were originally made.
A deduction for state and local premium taxes, if any, may be made as described
under "D. Premium Taxes."
The Company will deduct, on a daily basis, an annual 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.
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider for an additional charge. If you elect the Rider, a
separate monthly charge is deducted from the Contract's Accumulated Value at the
end of each month within which the Rider has been in effect. The charge is
assessed by multiplying the Accumulated Value on the last day of each month and
on the date the Rider is terminated by 1/12th of the following annual percentage
rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period..... 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period................................................................... 0.15%
</TABLE>
For a description of this Rider, see "C. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "M. Optional Minimum
Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE CONTRACT."
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 Cancel Individual Retirement Annuity,"
and "C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER THE CONTRACT?
You can make several changes 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.
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- - You may change your allocation of payments.
- - You may make transfers of accumulated value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by state law).
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PERFORMANCE INFORMATION
The Delaware Medallion III Contract was first offered to the public by Allmerica
Financial Life Insurance and Annuity Company in 1996 and by First Allmerica
Financial Life Insurance Company in 1997. The Company, however, may advertise
"total return" and "average annual total return" performance information based
on (1) the periods that the Sub-Accounts have been in existence and (2) the
periods that the Underlying Funds have been in existence. Performance results in
Tables 1A and 2A are calculated with all charges assumed to be those applicable
to the Contract, the Sub-Accounts and the Underlying Funds, and also assume that
the Contract is surrendered at the end of the applicable period. Performance
results in Tables 1B and 2B do not include the Contract fee and assume that the
Contract 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 surrender charge which
would be assessed if the investment were completely withdrawn at the end of the
specified period. The calculation is not adjusted to reflect the deduction of a
Minimum Guaranteed Annuity Payout Rider Charge. 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
Contract fee and assumes that the Contract is not surrendered at the end of the
periods shown.
The performance shown in Tables 2A and 2B of Appendix B and C is calculated in
exactly the same manner as those in Tables 1A and 1B of Appendix B and C
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.
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<PAGE>
Performance Tables for Contracts issued by Allmerica Financial Life Insurance
and Annuity Company can be found in Appendix B. Performance Tables for Contracts
issued by First Allmerica Financial Life Insurance Company can be found in
Appendix C. 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, Inc., 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. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
Contract features.
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.
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial 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, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirect wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica"), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998,
18
<PAGE>
First Allmerica and its subsidiaries had over $27 billion in combined assets and
over $48 billion of life insurance in force. Effective October 16, 1995, First
Allmerica converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. First Allmerica is a wholly owned subsidiary of AFC. First
Allmerica's principal office ("Principal Office") is located at 440 Lincoln
Street, Worcester, MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members 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 ACCOUNTS. Each Company maintains a separate investment account
referred to as Separate Account VA-K (the "Variable Account"). The Variable
Accounts of Separate Account VA-K were authorized by votes of the Board of
Directors of the Companies on November 1, 1990.
Each Variable Account meets the definition of a "separate account" under federal
securities laws, and is registered with the SEC as a unit investment trust under
the 1940 Act. This registration does not involve the supervision or management
of investment practices or policies of the Variable Accounts by the SEC.
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 17 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. Obligations under the
Contracts are obligations of the Company. Under Delaware and Massachusetts law,
the assets of the Variable Account may not be charged with any liabilities
arising out of any other business of the Company.
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.
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 serve as an investment vehicle for various separate
accounts supporting variable insurance contracts. DGPF currently has 17
investment portfolios, each issuing a series of shares: Growth & Income Series,
Devon Series, DelCap Series, Aggressive Growth Series, Social Awareness Series,
REIT Series, Small Cap Value Series, Trend Series, International Equity Series,
Emerging Markets Series, Delaware Balanced 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 Growth & Income Series, Devon Series, DelCap
Series, Aggressive Growth Series, Social Awareness Series, REIT Series, Small
Cap Value Series, Trend Series, Delaware Balanced Series, Convertible Securities
Series, Delchester Series, Capital Reserves Series, Strategic Income Series, and
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<PAGE>
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.
GROWTH & INCOME 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
Decatur Total Return Series.
DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes 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.
AGGRESSIVE GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation. It
seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective 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.
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.
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. It
seeks to achieve its objective 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
20
<PAGE>
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 BALANCED 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 Delaware 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.
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. It seeks
to achieve its objective 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 -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
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.
INVESTMENT ADVISORY SERVICES TO DGPF
Investment advisers are paid an annual fee based on the average daily net assets
of their respective Underlying Series for management services. The Cash Reserve
Series management fee rate is as follows: 0.45% on the first $500 million, 0.40%
on the next $500 million, 0.35% on the next $1,500 million and 0.30% on assets
in excess of $2,500 million; the Capital Reserves Series management fee rate is
as follows: 0.50% on the first $500 million, 0.475% on the next $500 million,
0.45% on the next $1,500 million and 0.425% on assets in excess of $2,500
million; the Growth & Income Series, Delchester Series, Delaware Balanced
Series, Devon Series and Strategic Income Series management fee rate is as
follows: 0.65% on the first $500 million, 0.60% on the next $500 million, 0.55%
on the next $1,500 million and 0.50% on assets in excess of $2,500 million;
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<PAGE>
the DelCap Series, Aggressive Growth Series, Small Cap Value Series, Trend
Series, Social Awareness Series, REIT Series, Convertible Securities Series and
Global Bond Series management fee rate is as follows: 0.75% on the first $500
million, 0.70% on the next $500 million, 0.65% on the next $1,500 million and
0.60% on assets in excess of $2,500 million; the International Equity Series
management fee rate is as follows: 0.85% on the first $500 million, 0.80% on the
next $500 million, 0.75% on the next $1,500 million and 0.70% on assets in
excess of $2,500 million; and the Emerging Markets Series management fee rate is
as follows: 1.25% on the first $500 million, 1.20% on the next $500 million,
1.15% on the next $1,500 million and 1.10% on assets in excess of $2,500
million.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. 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.
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 is 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 completed 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 it pending
completion of the outstanding underwriting requirements. Subsequent payments
will be credited as of the Valuation Date received at the Principal Office on
the basis of accumulation unit value next determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. 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 may 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 or PIN number. All transfer instructions by telephone are tape
recorded.
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B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel 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 cancellation 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"
provision on the cover 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 CANCEL ALL OTHER CONTRACTS
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment 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 or issued in a state that requires a full
refund of the initial payment(s), the IRA cancellation right described above
will be used. At the time the Contract is issued, the "Right to Examine"
provision on the cover of the Contract will specifically indicate what the
refund will be and the time period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, the Owner may transfer amounts among
accounts upon written or telephone request to the Company. As of the date of
this Prospectus, transfers may be made to and among all of the available
Sub-Accounts. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts which may be used
during the life of the Contract. 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. Transfers from a
Guarantee Period Account prior to the expiration of the Guarantee Period will be
subject to a Market Value Adjustment.
The first twelve transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
in a Contract year, but reserves the right to assess a charge, guaranteed never
to exceed $25, to reimburse it for the expense of processing these additional
transfers.
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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.
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 use 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 used for
automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Contract year under that
request count as one transfer for purposes of the 12 transfers guaranteed to be
free of a transfer charge in each Contract year. Currently, Dollar Cost
Averaging and Automatic Account Rebalancing may not be in effect simultaneously.
Either option may be elected at no additional charge 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, less any tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The Surrender Value will be calculated 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.
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After the Annuity Date, only Contracts annuitized under a commutable period
certain option may be surrendered. The amount payable is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No surrender 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.
The Company reserves the right 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 submit a signed, written request for withdrawal, satisfactory to
the Company, to the 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 surrender 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 a minimum of $100. Except in New York, where no specific
balance is required, 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, withdrawals are permitted only if the Contract is
annuitized under a commutable period certain option. Annuity Units equivalent in
value to the amount withdrawn will be cancelled.
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,
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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.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals may 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 also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) 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. Under the Company's LED option, 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. Where the Owner is a trust or
other nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contracts in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
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 death 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 the
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annual rate of 5% starting on the date each payment is applied, decreased
proportionately to reflect withdrawals (except in Hawaii and New York where (b)
equals gross payments 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 daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals gross payments). 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 daily at the annual rate of 5% (gross payments in
Hawaii and New York) 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. See APPENDIX E, "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.
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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. The spouse will then 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 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 one 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 Owner selects the Annuity Date. To the extent permitted by state law, 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. In no event will the maximum annuitization age
exceed 90. 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 option, 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
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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. Beneficiaries
entitled to receive remaining payments under either a commutable or
noncommutable period certain option may elect instead to receive a lump sum
settlement.
If the Owner does not elect an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
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 Growth & Income
Series, the Delaware Balanced 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. This variable annuity is payable during the payee's life. It would be
possible under this option for the payee's to receive only one annuity benefit
payment if the payee dies prior to the due date of the second annuity benefit
payment, two annuity benefit payments if the payee dies before the due date of
the third annuity benefit payment, and so on. Payments will continue, however,
during the lifetime of the payee, 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 at
annuitization 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
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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 and may be
commutable or noncommutable. A commutable option provides the payee with the
right to request a lump sum payment of any remaining balance after annuity
payments have commenced. Under a noncommutable period certain option, the
Annuitant may not request a lump sum payment.
The period certain option does not involve a life contingency. In the computing
payments under this option, the Company deducts a charge for annuity rate
guarantees, which includes a factor for mortality risks. Although not
contractually required to do so, the Company currently follows a practice of
permitting persons receiving 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
elections 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
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners 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.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- - For life annuity options and noncommutable period certain options of ten years
or more (six or more years under New York Contracts), the dollar amount 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 (less than six years under New York Contracts), the dollar
amount is determined by multiplying (1) the Surrender Value less premium
taxes, if any, 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 a death benefit annuity, the annuity value will be the amount of the death
benefit.
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. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the 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 net
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investment factor of the Sub-Account for the current Valuation Period and
divided by the assumed interest rate for the current Valuation Period The
assumed interest rate, discussed below, is incorporated in the variable annuity
options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) 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.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an Annuity Unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed annuity lifetime income during
the annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in the Contract. The Minimum Guaranteed Annuity Payout Benefit
Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
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For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Contract
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Contract issue or within thirty days after a Contract
anniversary date, the effective date of the Rider will be the following
Contract anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 78th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Contract anniversary following the expiration of a ten
or fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "K. Description of Variable Annuity Payout
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Contract anniversary after the effective date of the Rider,
unless such termination occurs on or within thirty days after any Contract
anniversary and in conjunction with the repurchase of a Minimum Guaranteed
Annuity Payout Rider with a waiting period of equal or greater length at its
then current price, if available.
- - After the seventh Contract anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Contract anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The Spouse
of the Owner as Beneficiary."
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Contract during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for
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<PAGE>
purposes of illustration only and are not intended as a representation of past
or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under the Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
GUARANTEED
CONTRACT MINIMUM GUARANTEED
ANNIVERSARY BENEFIT MINIMUM ANNUAL
AT EXERCISE BASE INCOME(1)
- ------------------- ----------- ----------------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K.
Description of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
NOTE: Adding the Minimum Guaranteed Annuity Payout Rider after the issue date
and/or repurchasing the benefit will impact the Program to Protect Principal and
Provide Growth Potential offered under the GPA Accounts since the Minimum
Guaranteed Annuity Payout Rider charges are deducted on a pro-rata basis from
all accounts including the GPA Accounts. See "GUARANTEE PERIOD ACCOUNTS."
N. 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.
O. 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
33
<PAGE>
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. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT" and
"GUARANTEE PERIOD ACCOUNTS."
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.
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 assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. 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 payout 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
34
<PAGE>
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.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased. 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 0.80% for mortality risk and 0.45% 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 below 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. 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 if the Accumulated Value on any of these
dates 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 and Additional Amounts Credited" provision below.
C. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Contract at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts, the Fixed Account and the Guarantee Period Accounts (based on the
relative value that the Accumulation Units of the Sub-Accounts, the dollar
amounts in
35
<PAGE>
the Fixed Account and the dollar amounts in the Guarantee Period Accounts bear
to the total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<CAPTION>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
<S> <C>
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
</TABLE>
For a description of the Rider, see "M. Optional Minimum Guaranteed Annuity
Payout Rider" under "DESCRIPTION OF THE CONTRACT," above.
D. 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 in total 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.
E. SURRENDER CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender 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 surrender 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 invested in the Contract for more than seven
years; 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, 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 without the imposition of a surrender charge. If a
withdrawal is attributable all or in part to New Payments, a surrender 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 surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments, to which the withdrawal is
attributed have remained credited under the Contract.
36
<PAGE>
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 oldest New Payment and then from the next
oldest 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 surrender charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- --------------- -------------------------
<S> <C>
0 - 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 surrender charge exceed a maximum limit of 7% of
total gross New Payments. Such total charge equals the aggregate of all
applicable surrender charges for surrender, withdrawals and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by state law, the Company will waive the surrender
charge in the event that the Owner (or the Annuitant, if the Owner is not an
individual) becomes physically disabled after the issue date of the Contract and
before attaining age 65. Under New York Contracts, the disability also must
exist for a continuous period of at least four months. 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. In addition, except in New York and New Jersey
where not permitted by state law, the Company will waive the surrender charge in
the event that an Owner (or the Annuitant, if the Owner is not an individual)
is: (1) admitted to a medical car facility and remains confined there until the
later of one year after the issue date or 90 consecutive days or (2) first
diagnosed by a licensed physician as having a fatal illness after the issue date
of the Contract.
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 surrender charges have been waived under any of the situations discussed
above, no additional payments under the Contract will be accepted unless
required by state law.
In addition, from time to time the Company may allow a reduction in or
elimination of the surrender charges, 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
37
<PAGE>
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, surrender 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 surrender 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 surrender
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 surrender 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
surrender charge was applied; and
Where (3) is: The amount calculated under the Company's life expectancy
distribution Option (see "Life Expectancy Distributions"
above) 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).
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 surrender
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.
38
<PAGE>
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 surrender 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 surrender 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 surrender 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 the Owner chooses a
period certain option or a non-commutable period certain option for less than
ten years (less than six years under New York Contracts), a surrender 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 surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable period
certain option for ten years or more (six years or more under New York
Contracts). 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 surrender 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.
F. 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 to reimburse it for
the expense of processing transfers.
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.
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, except
in California where it is accounted for in the Company's General 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%.
39
<PAGE>
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 Sub-Account investing in 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. Under Contracts issued in New York, the Company will transfer monies
out of the Guarantee Period Account without application of a Market Value
Adjustment if the Owner's request is received within ten days of the renewal
date.
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 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.
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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 D, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT."
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,
(including withdrawals made as part of a pro-rata deduction for charges under a
Minimum Guaranteed Annuity Payout Rider purchased or repurchased after issue) in
order to ensure that on the last day of the Guarantee Period, the value in the
Guarantee Period Account 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 surrender charge applies to
the withdrawal, it will be calculated as set forth under "D. Surrender Charge"
after application of the Market Value Adjustment.
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.
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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 prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified 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. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract,
and therefore the income on the 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 Portfolios of the Fund in this Contract 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.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account. This
announcement also states that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular sub-accounts without being treated as owners of the underlying
assets." As of the date of this Prospectus, no such guidance has been issued.
The Company therefore additionally reserves the right to modify the Contract as
necessary in order to attempt to prevent a contract owner from being considered
the owner of a pro rata share of the assets of the segregated asset account
underlying the variable annuity contracts.
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.
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B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owners" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. 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 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 any LED-type 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.
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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.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural 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
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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.
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 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 cancel the Contract as described in this Prospectus. See "B.
Right to Cancel 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.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to the Owner
each time a transaction is made affecting the Contract Value. (Certain
transactions made under recurring payment plans such as Dollar Cost Averaging
may in the future be confirmed quarterly rather than by immediate
confirmations.) The Owner should review the information in all statements
carefully. All errors or corrections must be reported to the Company immediately
to assure proper crediting to the Contract. The Company will assume that all
transactions are accurately reported on confirmation
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statements and quarterly/annual statements unless the Owner notifies the
Principal Office in writing within 30 days after receipt of the statement.
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 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.
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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 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 6.5% 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.
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The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account which may include amounts derived from mortality and risk
charges. 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 surrender charge 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
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial
48
<PAGE>
completion of the Year 2000 project, through December 31, 1998. The total
remaining cost of the project is estimated between $20-30 million.
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.
49
<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 surrender 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. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information, contact your financial representative or call 1-800-366-1492.
A-1
<PAGE>
APPENDIX B
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT TOTAL RETURN SINCE
INCEPTION FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE ENDED 12/31/98 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 4/27/92 2.66% 16.59% 15.29%
Devon Series............................................. 5/1/97 15.25% N/A 26.55%
DelCap Series............................................ 4/9/92 9.83% 11.96% 11.55%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 7.04 % N/A 21.69 %
REIT Series.............................................. 5/7/98 N/A N/A -15.28 %
Small Cap Value Series................................... 1/2/94 -12.00 % N/A 11.95 %
Trend Series............................................. 12/30/93 7.36 % 14.52 % 14.77 %
International Equity Series.............................. 10/29/92 1.96 % 8.20 % 9.12 %
Emerging Markets Series.................................. 5/1/97 -37.40 % N/A -29.70 %
Delaware Balanced Series................................. 4/30/92 9.70 % 14.79 % 13.35 %
Convertible Securities Series............................ 5/1/97 -8.35 % N/A 4.10 %
Delchester Series........................................ 4/27/92 -9.22 % 4.88 % 6.92 %
Capital Reserves Series.................................. 4/30/92 -1.05 % 3.75 % 4.81 %
Strategic Income Series.................................. 5/1/97 -4.84 % N/A 0.60 %
Cash Reserve Series...................................... 4/22/92 -2.58 % 2.81 % 2.67 %
Global Bond Series....................................... 5/1/96 -0.02 % N/A 4.37 %
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SUB-ACCOUNT TOTAL RETURN SINCE
INCEPTION FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE ENDED 12/31/98 5 YEARS SUB-ACCOUNT
- --------------------------------------------------------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 4/27/92 9.80% 17.42% 15.85%
Devon Series............................................. 5/1/97 22.33% N/A 29.68%
DelCap Series............................................ 4/9/92 17.17% 12.74% 12.01%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 13.85 % N/A 24.86 %
REIT Series.............................................. 5/7/98 N/A N/A -9.91 %
Small Cap Value Series................................... 1/2/94 -6.11 % N/A 12.56 %
Trend Series............................................. 12/30/93 14.43 % 15.10 % 15.27 %
International Equity Series.............................. 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series.................................. 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series................................. 4/30/92 16.98 % 15.43 % 13.72 %
Convertible Securities Series............................ 5/1/97 -2.54 % N/A 7.42 %
Delchester Series........................................ 4/27/92 -3.19 % 5.65 % 7.28 %
Capital Reserves Series.................................. 4/30/92 5.29 % 4.36 % 5.02 %
Strategic Income Series.................................. 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series...................................... 4/22/92 3.63 % 3.40 % 2.85 %
Global Bond Series....................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
UNDERLYING FUND FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE ENDED 12/31/98 5 YEARS UNDERLYING FUND
- --------------------------------------------------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series............................. 7/28/88 2.66% 16.59% 11.22%
Devon Series....................................... 5/1/97 15.25% N/A 26.55%
DelCap Series...................................... 7/12/91 9.83% 11.96% 10.79%
Aggressive Growth Series........................... N/A N/A N/A N/A
Social Awareness Series............................ 5/1/97 7.04 % N/A 21.69 %
REIT Series........................................ 5/1/98 N/A N/A -15.21 %
Small Cap Value Series............................. 12/27/93 -12.00 % 11.95 % 12.00 %
Trend Series....................................... 12/27/93 7.36 % 14.52 % 14.75 %
International Equity Series........................ 10/29/92 1.96 % 8.20 % 9.12 %
Emerging Markets Series............................ 5/1/97 -37.40 % N/A -29.70 %
Delaware Balanced Series........................... 7/28/88 9.70 % 14.79 % 12.95 %
Convertible Securities Series...................... 5/1/97 -8.35 % N/A 4.10 %
Delchester Series.................................. 7/28/88 -9.22 % 4.88 % 7.71 %
Capital Reserves Series............................ 7/28/88 -1.05 % 3.75 % 5.38 %
Strategic Income Series............................ 5/1/97 -4.84 % N/A 0.60 %
Cash Reserve Series................................ 7/28/88 -2.58 % 2.81 % 3.65 %
Global Bond Series................................. 5/1/96 -0.02 % N/A 4.37 %
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
UNDERLYING FUND FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE ENDED 12/31/98 5 YEARS UNDERLYING FUND
- --------------------------------------------------- --------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series............................. 7/28/88 9.80% 17.42% 11.72%
Devon Series....................................... 5/1/97 22.33% N/A 29.68%
DelCap Series...................................... 7/12/91 17.17% 12.74% 11.19%
Aggressive Growth Series........................... N/A N/A N/A N/A
Social Awareness Series............................ 5/1/97 13.85 % N/A 24.86 %
REIT Series........................................ 5/1/98 N/A N/A -9.84 %
Small Cap Value Series............................. 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series....................................... 12/27/93 14.43 % 15.10 % 15.24 %
International Equity Series........................ 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series............................ 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series........................... 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series...................... 5/1/97 -2.54 % N/A 7.42 %
Delchester Series.................................. 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series............................ 7/28/88 5.29 % 4.36 % 5.46 %
Strategic Income Series............................ 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series................................ 7/28/88 3.63 % 3.40 % 3.70 %
Global Bond Series................................. 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-2
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ------------------------------------------------------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series...................................... 5/1/94 2.70% N/A 18.54%
Devon Series................................................ 5/1/97 15.21% N/A 26.48 %
DelCap Series............................................... 4/20/94 9.94 % N/A 14.32 %
Aggressive Growth Series.................................... N/A N/A N/A N/A
Social Awareness Series..................................... 5/1/97 7.03 % N/A 21.66 %
REIT Series................................................. N/A N/A N/A N/A
Small Cap Value Series...................................... 5/11/94 -11.95 % N/A 13.14 %
Trend Series................................................ 5/11/94 7.35 % N/A 16.72 %
International Equity Series................................. 4/20/94 2.02 % N/A 8.50 %
Emerging Markets Series..................................... 5/1/97 -37.39 % N/A -35.91 %
Delaware Balanced Series.................................... 4/20/94 9.75 % N/A 16.04 %
Convertible Securities Series............................... 5/1/97 -8.36 % N/A 4.06 %
Delchester Series........................................... 5/23/94 -9.33 % N/A 5.76 %
Capital Reserves Series..................................... 6/23/94 -1.05 % N/A 4.95 %
Strategic Income Series..................................... 5/1/97 -4.93 % N/A 0.50 %
Cash Reserve Series......................................... 4/7/94 -2.61 % N/A 2.94 %
Global Bond Series.......................................... 5/1/96 0.00 % N/A 4.39 %
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ------------------------------------------------------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series...................................... 5/1/94 9.81% N/A 19.33%
Devon Series................................................ 5/1/97 22.34% N/A 29.66 %
DelCap Series............................................... 4/20/94 17.17 % N/A 15.01 %
Aggressive Growth Series.................................... N/A N/A N/A N/A
Social Awareness Series..................................... 5/1/97 13.86 % N/A 24.86 %
REIT Series................................................. N/A N/A N/A N/A
Small Cap Value Series...................................... 5/11/94 -6.11 % N/A 13.77 %
Trend Series................................................ 5/11/94 14.45 % N/A 17.39 %
International Equity Series................................. 4/20/94 8.80 % N/A 9.43 %
Emerging Markets Series..................................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series.................................... 4/20/94 16.98 % N/A 16.67 %
Convertible Securities Series............................... 5/1/97 -2.54 % N/A 7.41 %
Delchester Series........................................... 5/23/94 -3.19 % N/A 6.66 %
Capital Reserves Series..................................... 6/23/94 5.29 % N/A 5.57 %
Strategic Income Series..................................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series......................................... 4/7/94 3.62 % N/A 3.54 %
Global Bond Series.......................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
C-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS UNDERLYING FUND
- ------------------------------------------------------ --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series................................ 7/28/88 2.70% 16.65% 11.68%
Devon Series.......................................... 5/1/97 15.21% N/A 26.48%
DelCap Series......................................... 7/12/91 9.94% 12.06% 10.88%
Aggressive Growth Series.............................. N/A N/A N/A N/A
Social Awareness Series............................... 5/1/97 7.03 % N/A 21.66 %
REIT Series........................................... 5/1/98 N/A N/A -15.21 %
Small Cap Value Series................................ 12/27/93 -11.95 % 11.96 % 12.49 %
Trend Series.......................................... 12/27/93 7.35 % 14.47 % 14.97 %
International Equity Series........................... 10/29/92 2.02 % 8.33 % 9.21 %
Emerging Markets Series............................... 5/1/97 -37.39 % N/A -35.91 %
Delaware Balanced Series.............................. 7/28/88 9.75 % 14.38 % 12.83 %
Convertible Securities Series......................... 5/1/97 -8.36 % N/A 4.06 %
Delchester Series..................................... 7/28/88 -9.33 % 4.80 % 7.75 %
Capital Reserves Series............................... 7/28/88 -1.05 % 3.78 % 5.47 %
Strategic Income Series............................... 5/1/97 -4.93 % N/A 0.50 %
Cash Reserve Series................................... 7/28/88 -2.61 % 2.86 % 3.69 %
Global Bond Series.................................... 5/1/96 0.00 % N/A 4.39 %
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS UNDERLYING FUND
- ------------------------------------------------------ --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series................................ 7/28/88 9.81% 17.42% 11.72%
Devon Series.......................................... 5/1/97 22.34% N/A 29.66%
DelCap Series......................................... 7/12/91 17.17% 12.76% 11.20%
Aggressive Growth Series.............................. N/A N/A N/A N/A
Social Awareness Series............................... 5/1/97 13.86 % N/A 24.86 %
REIT Series........................................... 5/1/98 N/A N/A -9.84 %
Small Cap Value Series................................ 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series.......................................... 12/27/93 14.45 % 15.13 % 15.24 %
International Equity Series........................... 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series............................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series.............................. 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series......................... 5/1/97 -2.54 % N/A 7.41 %
Delchester Series..................................... 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series............................... 7/28/88 5.29 % 4.35 % 5.52 %
Strategic Income Series............................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series................................... 7/28/88 3.62 % 3.42 % 3.71 %
Global Bond Series.................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
C-2
<PAGE>
APPENDIX D
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.
D-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>
D-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>
D-3
<PAGE>
APPENDIX E
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 (A) BENEFIT (B) BENEFIT (C) 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>
E-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.
E-2
<PAGE>
APPENDIX F
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period................... 2.433 1.883 1.582 1.178 1.197 1.051 1.000
End of Period......................... 2.672 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of
Period (in thousands).................... 146,009 113,507 65,991 48,305 38,591 25,086 4,208
DEVON SERIES
Unit Value:
Beginning of Period................... 1.261 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.543 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 42,690 11,585 N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period................... 1.831 1.616 1.432 1.121 1.178 1.070 1.000
End of Period......................... 2.145 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of
Period (in thousands).................... 58,454 57,025 44,667 35,204 29,100 20,802 4,534
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period................... 1.272 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.448 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 17,819 4,515 N/A N/A N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.901 N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 1,235 N/A N/A N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period................... 1.923 1.467 1.214 0.994 1.000 1.000 N/A
End of Period......................... 1.806 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End of
Period (in thousands).................... 55,136 43,269 15,725 9,467 6,040 6 N/A
TREND SERIES
Unit Value:
Beginning of Period................... 1.779 1.486 1.358 0.989 1.007 1.000 N/A
End of Period......................... 2.036 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End of
Period (in thousands).................... 36,571 33,256 21,711 13,410 6,197 50 N/A
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................... 1.619 1.540 1.301 1.159 1.144 1.000 1.000
End of Period......................... 1.762 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of
Period (in thousands).................... 51,715 48,813 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period................... 0.880 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.586 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 6,662 4,545 N/A N/A N/A N/A N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period................... 2.015 1.616 1.414 1.133 1.150 1.078 1.000
End of Period......................... 2.357 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of
Period (in thousands).................... 81,359 58,759 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period................... 1.156 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.127 1.156 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 4,793 1,291 N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period................... 1.652 1.474 1.326 1.164 1.214 1.058 1.000
End of Period......................... 1.599 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of
Period (in thousands).................... 70,679 56,733 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period................... 1.317 1.241 1.209 1.075 1.120 1.053 1.000
End of Period......................... 1.386 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of
Period (in thousands).................... 28,066 20,234 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period................... 1.052 N/A N/A N/A N/A N/A N/A
End of Period......................... 1.065 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 17,524 5,381 N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period................... 1.165 1.124 1.087 1.044 1.021 1.010 1.000
End of Period......................... 1.207 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of
Period (in thousands).................... 32,501 24,014 21,519 11,568 13,998 5,483 1,387
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GLOBAL BOND SERIES
Unit Value:
Beginning of Period................... 1.102 1.107 1.000 1.000 N/A N/A N/A
End of Period......................... 1.172 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands).................... 4,991 3,950 886 N/A N/A N/A N/A
</TABLE>
F-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period............................................... 2.078 1.608 1.351 1.006 1.000
End of Period..................................................... 2.282 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period (in thousands)........... 3,440 1,311 1,044 670 455
DEVON SERIES
Unit Value:
Beginning of Period............................................... 1.261 N/A N/A N/A N/A
End of Period..................................................... 1.543 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 1,558 106 N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period............................................... 1.646 1.453 1.287 1.008 1.000
End of Period..................................................... 1.929 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period (in thousands)........... 637 355 493 300 149
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period............................................... 1.272 N/A N/A N/A N/A
End of Period..................................................... 1.448 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 394 101 N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period............................................... N/A N/A N/A N/A N/A
End of Period..................................................... 1.000 N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 0 N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period............................................... 1.938 1.478 1.223 1.002 1.000
End of Period..................................................... 1.820 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period (in thousands)........... 731 235 204 146 82
TREND SERIES
Unit Value:
Beginning of Period............................................... 1.839 1.536 1.404 1.022 1.000
End of Period..................................................... 2.104 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period (in thousands)........... 1,099 1,579 285 1,486 790
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period............................................... 1.403 1.335 1.128 1.004 1.000
End of Period..................................................... 1.527 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period (in thousands)........... 652 554 2,244 358 193
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period............................................... 0.754 N/A N/A N/A N/A
End of Period..................................................... 0.502 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 184 1 N/A N/A N/A
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period............................................... 1.764 1.415 1.238 0.991 1.000
End of Period..................................................... 2.063 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period (in thousands)........... 1,070 420 405 304 173
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period............................................... 1.156 N/A N/A N/A N/A
End of Period..................................................... 1.127 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 375 84 N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period............................................... 1.391 1.240 1.116 0.980 1.000
End of Period..................................................... 1.346 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period (in thousands)........... 3,962 1,388 1,003 670 287
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period............................................... 1.214 1.144 1.115 0.991 1.000
End of Period..................................................... 1.278 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period (in thousands)........... 1,069 287 208 195 181
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period............................................... 1.052 N/A N/A N/A N/A
End of Period..................................................... 1.065 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)........... 1,799 276 N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period............................................... 1.138 1.096 1.059 1.018 1.000
End of Period..................................................... 1.179 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period (in thousands)........... 1,603 401 125 126 302
GLOBAL BOND SERIES
Unit Value:
Beginning of Period............................................... 1.102 1.107 1.000 1.000 N/A
End of Period..................................................... 1.171 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period (in thousands)........... 31 7 N/A N/A N/A
</TABLE>
No information is shown above for the Sub-Accounts that commenced operations
after December 31, 1998.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FUNDED THROUGH SUB-ACCOUNTS OF SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus provides important information about
the Delaware Medallion II variable annuity policies
issued by Allmerica Financial Life Insurance and
PLEASE READ THIS Annuity Company and Delaware Medallion I variable
PROSPECTUS CAREFULLY annuity policies issued by Allmerica Financial Life
BEFORE INVESTING AND Insurance and Annuity Company and First Allmerica
KEEP IT FOR FUTURE Financial Life Insurance Company. The policy is a
REFERENCE. flexible payment tax-deferred combination variable
and fixed annuity offered on both a group and
individual basis. Neither of these policies is
currently being sold in any jurisdiction.
Information specific to Delaware Medallion I is set
forth in Appendix B. Owners of these policies should
review this Appendix first.
The Variable Account, known as Separate Account VA-K
is subdivided into Sub-Accounts. Each Sub-Account
offered under this policy invests exclusively in
shares of one of the following series of Delaware
Group Premium Fund, Inc.:
<TABLE>
<C> <S> <C> <C>
ANNUITIES INVOLVE Growth & Income Series Trend Series Delchester Series
RISKS INCLUDING Devon Series International Equity Series Capital Reserves Series
POSSIBLE LOSS OF DelCap Series Emerging Markets Series Strategic Income Series
PRINCIPAL. Aggressive Growth Series Delaware Balanced Series Cash Reserve Series
Social Awareness Series Convertible Securities Global Bond Series
REIT Series Series
Small Cap Value Series
</TABLE>
The Fixed Account is part of the Company's General
Account.
A Statement of Additional Information dated May 1,
1999 containing more information about this
annuity is on file with the Securities and
Exchange Commission and is incorporated by
THIS ANNUITY IS reference into this Prospectus. A copy may be
NOT: obtained free of charge by completing the attached
- A BANK DEPOSIT OR request card or by calling Annuity Client Services
OBLIGATION; at 1-800-533-2124. The Table of Contents of the
- FEDERALLY INSURED; Statement of Additional Information is listed on
- ENDORSED BY ANY page 3 of this Prospectus.
BANK OR This Prospectus and the Statement of Additional
GOVERNMENTAL Information can also be obtained from the
AGENCY. Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 4
SUMMARY OF FEES AND EXPENSES.......................................................... 6
SUMMARY OF POLICY FEATURES............................................................ 11
PERFORMANCE INFORMATION............................................................... 14
WHAT IS AN ANNUITY?................................................................... 20
RIGHT TO CANCEL OR SURRENDER.......................................................... 20
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND DELAWARE GROUP PREMIUM FUND,
INC.................................................................................. 20
INVESTMENT OBJECTIVES AND POLICIES.................................................... 22
INVESTMENT ADVISORY SERVICES TO THE FUND.............................................. 23
CHARGES AND DEDUCTIONS................................................................ 24
A. Surrender Charge................................................................ 24
B. Premium Taxes................................................................... 27
C. Policy Fee...................................................................... 27
D. Annual Charges Against Separate Account Assets.................................. 27
E. Optional Minimum Guaranteed Annuity Payout Rider Charge......................... 28
THE VARIABLE ANNUITY POLICIES......................................................... 29
A. Purchase Payments............................................................... 29
B. Transfer Privilege.............................................................. 30
C. Surrender....................................................................... 31
D. Partial Redemption.............................................................. 31
E. Death Benefit................................................................... 32
F. The Spouse of the Owner as Beneficiary.......................................... 33
G. Assignment...................................................................... 33
H. Electing the Form of Annuity and the Annuity Date............................... 34
I. Description of Variable Annuity Options......................................... 34
J. Optional Minimum Guaranteed Annuity Payout Rider................................ 35
K. NORRIS Decision................................................................. 37
L. Computation of Policy Values and Annuity Benefit Payments....................... 38
Determination of the First Variable Annuity Benefit Payment................... 38
The Annuity Unit.............................................................. 38
Determination of the Number of Annuity Units.................................. 38
Dollar Amount of Subsequent Variable Annuity Benefit Payments................. 38
FEDERAL TAX CONSIDERATIONS............................................................ 39
A. Qualified and Non-Qualified Policies............................................ 40
B. Taxation of the Policies in General............................................. 40
Withdrawals Prior to Annuitization............................................ 40
Annuity Payouts After Annuitization........................................... 41
Penalty on Distribution....................................................... 41
Assignments or Transfers...................................................... 41
Nonnatural Owners............................................................. 41
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations................................................................. 41
C. Tax Withholding................................................................. 42
D. Provisions Applicable to Qualified Employer Plans............................... 42
Corporate and Self-Employed Pension and Profit Sharing Plans.................. 42
Individual Retirement Annuities............................................... 42
Tax-Sheltered Annuities....................................................... 43
Texas Optional Retirement Program............................................. 43
LOANS (QUALIFIED POLICIES ONLY)....................................................... 43
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
STATEMENTS AND REPORTS................................................................ 43
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 43
VOTING RIGHTS......................................................................... 44
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................. 45
LEGAL MATTERS......................................................................... 45
YEAR 2000 COMPLIANCE.................................................................. 45
FURTHER INFORMATION................................................................... 46
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT.............................. A-1
APPENDIX B -- INFORMATION APPLICABLE ONLY TO OWNERS OF DELAWARE MEDALLION I ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (Policy Form A3019-92) FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY (Policy Form A3019-94GRC).......................... B-1
APPENDIX C -- CONDENSED FINANCIAL INFORMATION......................................... C-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 total value of all Accumulation Units in the Sub-Accounts
plus the value of all accumulations in the General Account credited to the
Policy on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of 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. This date may
not be later than the first day of the month before the Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity payments under the Policy.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for all
Delaware Medallion II policies (Form No. 3022-93) and for all Delaware Medallion
I policies (Form No. 3019-92) except for Delaware Medallion I policies issued in
New York on Form No. 301994 GRC on and after April 1, 1994. With regard to New
York policies issued on and after April 1, 1994, any reference to "Company"
refers exclusively to First Allmerica Financial Life Insurance Company.
FIXED ANNUITY PAYOUT: an annuity payout providing for payments which remain
fixed in amount throughout the annuity payment period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
OWNER (OR YOU): 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 and 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 investing 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
surrender charge applicable upon surrender.
UNDERLYING SERIES: the Growth & Income Series, Devon Series, DelCap Series,
Aggressive Growth Series, Social Awareness Series, REIT Series, Small Cap Value
Series, Trend Series, International Equity Series, Emerging Markets Series,
Delaware Balanced 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
4
<PAGE>
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 unit 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.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Delaware
Medallion I and II Policies. The purpose of the following tables is to assist
you in understanding these fees and expenses. The tables show (1) charges under
the Policy, (2) annual expenses of the Sub-Accounts, and (3) annual 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 "B.
Premium Taxes."
<TABLE>
<CAPTION>
YEARS FROM
1. POLICY CHARGES: DATE OF PAYMENT CHARGE
---------------- -----------
<S> <C> <C>
SURRENDER CHARGE:* 0-3 7.0%
This charge may be assessed upon surrender, 4 6.0%
withdrawal or annuitization under any 5 5.0%
commutable period certain option or a 6 4.0%
noncommutable period certain option of less 7 3.0%
than ten years. The charge is a percentage of More than 7 0%
payments applied to 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 Policy 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.
ANNUAL POLICY 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 Policies issued to and
maintained by the trustee of a 401(k) plan.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly
basis at the end of each month.)
On an annual basis as a percentage of
Accumulated Value, the charge is:
Optional Minimum Guaranteed Annuity Payout 0.25%
Rider with a ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout 0.15%
Rider with a fifteen-year waiting period:
2. ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as percentage of average
daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----------
Total Asset Charges: 1.40%
</TABLE>
6
<PAGE>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Policies when (1) Policies are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "REDUCTION OR ELIMINATION OF SURRENDER CHARGE
AND ADDITIONAL AMOUNTS CREDITED."
3.__ANNUAL FUND EXPENSES: The following table shows the expenses of the
Underlying Series as a percentage of average net assets for the year ended
December 31, 1998 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1999). For more information concerning fees and
expenses, see the prospectus of the Underlying Series.
<TABLE>
<CAPTION>
MANAGEMENT TOTAL FUND
FEE (AFTER ANY OTHER EXPENSES EXPENSES (AFTER
VOLUNTARY (AFTER ANY ANY WAIVERS/
FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ----------------------------------------------------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Growth & Income Series........................................... 0.60% 0.11% 0.71%(2)
Devon Series..................................................... 0.65% 0.06% 0.71%(2)
DelCap Series.................................................... 0.74% 0.11% 0.85%(1)(2)
Aggressive Growth Series(@)...................................... 0.68% 0.17% 0.85%(1)(2)
Social Awareness Series.......................................... 0.71% 0.14% 0.85%(1)(2)
REIT Series(@)................................................... 0.58% 0.27% 0.85%(1)(2)
Small Cap Value Series........................................... 0.75% 0.10% 0.85%(2)
Trend Series..................................................... 0.75% 0.10% 0.85%(2)
International Equity Series...................................... 0.82% 0.13% 0.95%(1)(2)
Emerging Markets Series.......................................... 1.08% 0.42% 1.50%(1)(2)
Delaware Balanced Series......................................... 0.65% 0.10% 0.75%(2)
Convertible Securities Series.................................... 0.75% 0.07% 0.82%(2)
Delchester Series................................................ 0.65% 0.10% 0.75%(2)
Capital Reserves Series.......................................... 0.50% 0.19% 0.69%(2)
Strategic Income Series.......................................... 0.64% 0.16% 0.80%(1)(2)
Cash Reserve Series.............................................. 0.45% 0.09% 0.54%(2)
Global Bond Series............................................... 0.68% 0.17% 0.85%(1)(2)
</TABLE>
(@) The Aggressive Growth Series had not commenced operations as of December 31,
1998. Expenses shown are based on estimated and annualized amounts. Actual
expenses may be greater or less than shown. The REIT Series commenced operations
on May 1, 1998. Expenses shown are based on annualized amounts.
(1) For the fiscal year ended December 31, 1998, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.86% for DelCap Series, 0.89% for Social
Awareness Series, 1.02% for REIT Series, 1.67% for Emerging Markets Series,
0.81% for Strategic Income Series, 0.92% for Global Bond Series, 0.88% for
International Equity Series and are anticipated to be 0.92% for Aggressive
Growth Series.
(2) The investment adviser for the Growth & Income Series (formerly known as
"Decatur Total Return Series"), Devon Series, DelCap Series, Aggressive Growth
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Balanced Series (formerly known as "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, 1999
through October 31, 1999, 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; 0.85% for
DelCap Series, Aggressive Growth 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,
7
<PAGE>
if necessary, to reflect the new voluntary limitations which took effect on May
1, 1999. The declaration of a voluntary expense limitation does not bind the
investment advisers to declare future expense limitations with respect to these
Funds. Pursuant to a vote of the Fund's shareholders on March 17, 1999, a new
management fee structure based on average daily net assets was approved. The
above ratios have been restated to reflect the new management fee structure
which took effect on May 1, 1999.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay 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. As required by the rules of the Securities and
Exchange Commission ("SEC"), 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
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 Policies issued
and maintained as part of a 401(k) plan. Because the expenses of the Underlying
Series differ, separate examples are used to illustrate the expenses incurred by
an Owner on an investment in the various Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF LESSER THAN THOSE SHOWN.
(1)(a) If, at the end of the applicable time period, you surrender your Policy
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 a 5%
annual return on assets and no Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 86 $ 135 $ 163 $ 244
Devon Series................................................................. $ 86 $ 135 $ 163 $ 244
DelCap Series................................................................ $ 88 $ 139 $ 170 $ 258
Aggressive Growth 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 $ 141 $ 175 $ 268
Emerging Markets Series...................................................... $ 94 $ 157 $ 203 $ 322
Delaware Balanced Series..................................................... $ 87 $ 136 $ 165 $ 248
Convertible Securities Series................................................ $ 87 $ 138 $ 169 $ 255
Delchester Series............................................................ $ 87 $ 136 $ 165 $ 248
Capital Reserves Series...................................................... $ 86 $ 134 $ 162 $ 242
Strategic Income Series...................................................... $ 87 $ 137 $ 168 $ 253
Cash Reserve Series.......................................................... $ 85 $ 130 $ 155 $ 226
Global Bond Series........................................................... $ 88 $ 139 $ 170 $ 258
</TABLE>
8
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
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 a 5%
annual return on assets and election of a Minimum Guaranteed Annuity Payout
Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 89 $ 142 $ 176 $ 269
Devon Series................................................................. $ 89 $ 142 $ 176 $ 269
DelCap Series................................................................ $ 90 $ 146 $ 183 $ 283
Aggressive Growth Series..................................................... $ 90 $ 146 $ 183 $ 283
Social Awareness Series...................................................... $ 90 $ 146 $ 183 $ 283
REIT Series.................................................................. $ 90 $ 146 $ 183 $ 283
Small Cap Value Series....................................................... $ 90 $ 146 $ 183 $ 283
Trend Series................................................................. $ 90 $ 146 $ 183 $ 283
International Equity Series.................................................. $ 91 $ 148 $ 188 $ 293
Emerging Markets Series...................................................... $ 96 $ 164 $ 214 $ 345
Delaware Balanced Series..................................................... $ 89 $ 143 $ 178 $ 273
Convertible Securities Series................................................ $ 90 $ 145 $ 181 $ 280
Delchester Series............................................................ $ 89 $ 143 $ 178 $ 273
Capital Reserves Series...................................................... $ 88 $ 141 $ 175 $ 267
Strategic Income Series...................................................... $ 89 $ 144 $ 180 $ 278
Cash Reserve Series.......................................................... $ 87 $ 137 $ 167 $ 252
Global Bond Series........................................................... $ 90 $ 146 $ 183 $ 283
</TABLE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Policy, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and no
Rider:**
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 21 $ 66 $ 113 $ 244
Devon Series................................................................. $ 21 $ 66 $ 113 $ 244
DelCap Series................................................................ $ 23 $ 70 $ 120 $ 258
Aggressive Growth 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.................................................. $ 24 $ 73 $ 125 $ 268
Emerging Markets Series...................................................... $ 29 $ 90 $ 153 $ 322
Delaware Balanced Series..................................................... $ 22 $ 67 $ 115 $ 248
Convertible Securities Series................................................ $ 23 $ 69 $ 119 $ 255
Delchester Series............................................................ $ 22 $ 67 $ 115 $ 248
Capital Reserves Series...................................................... $ 21 $ 65 $ 112 $ 242
Strategic Income Series...................................................... $ 22 $ 69 $ 118 $ 253
Cash Reserve Series.......................................................... $ 20 $ 61 $ 105 $ 226
Global Bond Series........................................................... $ 23 $ 70 $ 120 $ 258
</TABLE>
9
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Policy, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and
election of a Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting
period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth & Income Series....................................................... $ 24 $ 74 $ 126 $ 269
Devon Series................................................................. $ 24 $ 74 $ 126 $ 269
DelCap Series................................................................ $ 25 $ 78 $ 133 $ 283
Aggressive Growth Series..................................................... $ 25 $ 78 $ 133 $ 283
Social Awareness Series...................................................... $ 25 $ 78 $ 133 $ 283
REIT Series.................................................................. $ 25 $ 78 $ 133 $ 283
Small Cap Value Series....................................................... $ 25 $ 78 $ 133 $ 283
Trend Series................................................................. $ 25 $ 78 $ 133 $ 283
International Equity Series.................................................. $ 26 $ 81 $ 138 $ 293
Emerging Markets Series...................................................... $ 32 $ 97 $ 165 $ 345
Delaware Balanced Series..................................................... $ 24 $ 75 $ 128 $ 273
Convertible Securities Series................................................ $ 25 $ 77 $ 131 $ 280
Delchester Series............................................................ $ 24 $ 75 $ 128 $ 273
Capital Reserves Series...................................................... $ 24 $ 73 $ 125 $ 267
Strategic Income Series...................................................... $ 25 $ 76 $ 130 $ 278
Cash Reserve Series.......................................................... $ 22 $ 68 $ 117 $ 252
Global Bond Series........................................................... $ 25 $ 78 $ 133 $ 283
</TABLE>
* The Policy fee is not deducted after annuitization. No surrender charge is
assessed at the time of annuitization if you elect a life contingency option or
a noncommutable period certain option of ten years or more.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Policy.
10
<PAGE>
SUMMARY OF POLICY FEATURES
INVESTMENT OPTIONS. Purchase payments may be allocated among the variable
Sub-Accounts, 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 a sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. (the "Fund"). The Fund is an open-end, management investment company,
consisting of 17 different series: the Growth & Income Series (formerly Decatur
Total Return Series), Devon Series, DelCap Series, Aggressive Growth Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Balanced Series
(formerly 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.
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. 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, amounts may 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 PAYMENTS. The Owner may select variable annuity payments based on
certain Sub-Accounts, fixed-amount annuity payments, or a combination of
fixed-amount and variable annuity payments. Fixed-amount annuity payments are
guaranteed by the Company.
In addition, an optional Minimum Guaranteed Annuity Payout Rider is available
during the accumulation phase in most jurisdictions for a separate monthly
charge. See "J. Optional Minimum Guaranteed Annuity Payout Rider" under "THE
VARIABLE ANNUITY POLICIES." If elected, the Rider guarantees the Annuitant a
minimum amount of fixed annuity lifetime income during the annuity payout phase,
subject to certain conditions. On each Policy anniversary a Minimum Guaranteed
Annuity Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout
Benefit Base (less any applicable premium taxes) is the value that will be
annuitized should the Rider be exercised. In order to exercise the Rider, a
fixed annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur
11
<PAGE>
at the guaranteed annuity purchase rates listed under the Annuity Option Tables
in the Policy. The Minimum Guaranteed Annuity Payout Benefit Base is equal to
the greatest of:
(a) the Accumulated Value, if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after positive adjustments have been made
for subsequent payments and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
See "THE VARIABLE ANNUITY POLICIES" for information about annuity payment
options, selecting the Annuity Date, and how annuity benefit payments are
calculated.
CANCELLATION RIGHTS. An individual purchasing a Policy ("IRA") may cancel it
within ten days of receipt. In certain states an Owner may have special
cancellation rights. For more information about cancellation rights, see "RIGHT
TO CANCEL OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. 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 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. SURRENDER CHARGES
No sales charge is deducted from purchase payments at the time the payments are
made. However, a surrender charge may be assessed on withdrawals of payments
that have not been invested for seven full years.
B. ANNUAL POLICY FEE
The Company will deduct a Policy fee equal to $30 from the Accumulated Value on
the Policy anniversary, and upon full surrender of the Policy if the Accumulated
Value on those dates is $50,000 or less. The Policy fee currently is waived for
policies issued to a trustee of a 401(k) plan.
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%.
12
<PAGE>
D. SEPARATE ACCOUNT ASSET CHARGES
The Company will deduct on a daily basis, an annual charge equal to 1.25% of the
average daily net assets of each Sub-Account. The charge is retained for the
mortality and expense risks the Company assumes. In addition, to cover
administrative expenses, the Company deducts on a daily basis, an annual charge
of 0.15% of the average daily net assets in the Sub-Accounts.
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 ranged in 1998 from an annual rate of 0.64% to an annual
rate of 1.50% of average daily net assets.
G. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Owner may elect the following optional Rider.
A separate monthly charge is made for the Rider which is deducted from the
Accumulated Value at the end of each month within which the Rider has been in
effect. The applicable charge is assessed by multiplying the Accumulated Value
on the last day of each month and on the date the Rider is terminated by 1/12th
of the following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period..... 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period................................................................... 0.15%
</TABLE>
For a description of this Rider, see "E. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "J. Optional Minimum
Guaranteed Annuity Payout Rider" under "THE VARIABLE ANNUITY POLICIES."
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 surrender charge, or to
redeem a portion of the Policy's value subject to certain limits and any
applicable surrender 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. Surrender Charge" under
"CHARGES AND DEDUCTIONS," and "FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant or Owner dies 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 an Owner, who is not also the
Annuitant, the death benefit is equal to the Accumulated Value of the Policy.
(For differences under Delaware Medallion I, see APPENDIX B, #5.)
SALES OF POLICIES. The Policies were 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."
13
<PAGE>
PERFORMANCE INFORMATION
Allmerica Financial Life Insurance and Annuity Company first offered Delaware
Medallion II to the public in 1993 and Delaware Medallion I in 1992. The
Company, however, may advertise "total return" and "average annual total return"
performance information based on (1) the periods that the Sub-Accounts have been
in existence and (2) the periods that the Underlying Series have been in
existence. Performance results in Tables 1A and 2A are calculated with all
charges assumed to be those applicable to the Policy, the Sub-Accounts and the
Underlying Series. Performance results also assume that the Policy is
surrendered at the end of the applicable period. Performance results in Tables
1B and 2B, do not include the Policy fee and assume that the Policy 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 Sub-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 Policy fee, the charges of the Underlying Series and the surrender charge
which would be assessed if the investment were completely withdrawn at the end
of the specified period. The calculation is not adjusted to reflect the
deduction of a Minimum Guaranteed Annuity Payout Rider Charge. 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 Policy fee and assumes that the Policy is not surrendered at the end
of the periods shown.
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
Policy.
For more detailed information about these performance calculations, including
actual formulas, see the SAI. For performance of the Delaware Medallion I policy
issued by First Allmerica Financial Life Insurance Company, see Appendix B.
14
<PAGE>
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, Inc., 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. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain policy
features.
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.
15
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY --
DELAWARE MEDALLION I & II
TABLE 1A
TOTAL ANNUAL RETURNS OF SUB-ACCOUNTS
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------------------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series..................................... 4/27/92 2.28% 16.37% 15.16%
Devon Series............................................... 5/1/97 15.25% N/A 26.03%
DelCap Series.............................................. 4/9/92 9.77% 11.70% 11.39%
Aggressive Growth Series................................... N/A N/A N/A N/A
Social Awareness Series.................................... 5/1/97 6.81 % N/A 21.17 %
REIT Series................................................ 5/7/98 N/A N/A -15.59 %
Small Cap Value Series..................................... 1/2/94 -12.33 % N/A 11.70 %
Trend Series............................................... 12/30/93 7.16 % 14.28 % 14.54 %
International Equity Series................................ 10/29/92 1.58 % 7.91 % 8.91 %
Emerging Markets Series.................................... 5/1/97 -37.64 % N/A -30.23 %
Delaware Balanced Series................................... 4/30/92 9.64 % 14.56 % 13.20 %
Convertible Securities Series.............................. 5/1/97 -8.69 % N/A 3.36 %
Delchester Series.......................................... 4/27/92 -9.56 % 4.55 % 6.72 %
Capital Reserves Series.................................... 4/30/92 -1.42 % 3.40 % 4.58 %
Strategic Income Series.................................... 5/1/97 -5.19 % N/A -0.16 %
Cash Reserve Series........................................ 4/22/92 -2.94 % 2.45 % 2.41 %
Global Bond Series......................................... 5/1/96 -0.39 % N/A 3.66 %
</TABLE>
16
<PAGE>
TABLE 1B
SUPPLEMENTAL TOTAL ANNUAL RETURNS OF SUB-ACCOUNTS
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------------------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series..................................... 4/27/92 9.80% 17.42% 15.85%
Devon Series............................................... 5/1/97 22.33% N/A 29.68%
DelCap Series.............................................. 4/9/92 17.17% 12.74% 12.01%
Aggressive Growth Series................................... N/A N/A N/A N/A
Social Awareness Series.................................... 5/1/97 13.85 % N/A 24.86 %
REIT Series................................................ 5/7/98 N/A N/A -9.91 %
Small Cap Value Series..................................... 1/2/94 -6.11 % N/A 12.56 %
Trend Series............................................... 12/30/93 14.43 % 15.10 % 15.27 %
International Equity Series................................ 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series.................................... 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series................................... 4/30/92 16.98 % 15.43 % 13.72 %
Convertible Securities Series.............................. 5/1/97 -2.54 % N/A 7.42 %
Delchester Series.......................................... 4/27/92 -3.19 % 5.65 % 7.28 %
Capital Reserves Series.................................... 4/30/92 5.29 % 4.36 % 5.02 %
Strategic Income Series.................................... 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series........................................ 4/22/92 3.63 % 3.40 % 2.85 %
Global Bond Series......................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
17
<PAGE>
TABLE 2A
TOTAL ANNUAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
UNDERLYING FUND ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS FUND
- --------------------------------------------------------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 7/28/88 2.28% 16.37% 11.22%
Devon Series............................................. 5/1/97 15.25% N/A 26.03%
DelCap Series............................................ 7/12/91 9.77% 11.70% 10.79%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 6.81 % N/A 21.17 %
REIT Series.............................................. 5/1/98 N/A N/A -15.21 %
Small Cap Value Series................................... 12/27/93 -12.33 % 11.69 % 11.75 %
Trend Series............................................. 12/27/93 7.16 % 14.28 % 14.51 %
International Equity Series.............................. 10/29/92 1.58 % 7.91 % 8.91 %
Emerging Markets Series.................................. 5/1/97 -37.64 % N/A -30.23 %
Delaware Balanced Series................................. 7/28/88 9.64 % 14.56 % 12.95 %
Convertible Securities Series............................ 5/1/97 -8.69 % N/A 3.36 %
Delchester Series........................................ 7/28/88 -9.56 % 4.55 % 7.71 %
Capital Reserves Series.................................. 7/28/88 -1.42 % 3.40 % 5.38 %
Strategic Income Series.................................. 5/1/97 -5.19 % N/A -0.16 %
Cash Reserve Series...................................... 7/28/88 -2.94 % 2.45 % 3.65 %
Global Bond Series....................................... 5/1/96 -0.39 % N/A 3.66 %
</TABLE>
18
<PAGE>
TABLE 2B
SUPPLEMENTAL TOTAL ANNUAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
UNDERLYING FUND ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS FUND
- --------------------------------------------------------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series................................... 7/28/88 9.80% 17.42% 11.72%
Devon Series............................................. 5/1/97 22.33% N/A 29.68%
DelCap Series............................................ 7/12/91 17.17% 12.74% 11.19%
Aggressive Growth Series................................. N/A N/A N/A N/A
Social Awareness Series.................................. 5/1/97 13.85 % N/A 24.86 %
REIT Series.............................................. 5/1/98 N/A N/A -9.84 %
Small Cap Value Series................................... 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series............................................. 12/27/93 14.43 % 15.10 % 15.24 %
International Equity Series.............................. 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series.................................. 5/1/97 -33.42 % N/A -27.42 %
Delaware Balanced Series................................. 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series............................ 5/1/97 -2.54 % N/A 7.42 %
Delchester Series........................................ 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series.................................. 7/28/88 5.29 % 4.36 % 5.46 %
Strategic Income Series.................................. 5/1/97 1.21 % N/A 3.84 %
Cash Reserve Series...................................... 7/28/88 3.63 % 3.40 % 3.70 %
Global Bond Series....................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
19
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income in
the form of periodic annuity payments for the lifetime of the purchaser or an
individual chosen by the purchaser. The retirement income payments are called
"annuity payments," and the individual receiving the payments is called the
"annuitant." Annuity 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 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 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 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 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 CANCEL OR SURRENDER
The Owner may cancel 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
cancellation 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 cancel
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.
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
20
<PAGE>
subject to the insurance laws and regulations of other states and jurisdictions
in which it is licensed to operate. As of December 31, 1998, the Company had
over $14 billion in assets and over $26 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 among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries (including the Company) had over $27 billion in combined assets and
over $48 billion in life insurance in force.
The Company is a charter 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
17 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. Obligations under the Policies are obligations 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 Board of Directors of the Company authorized the Separate Account on
November 1, 1990. The Separate Account meets the definition of a "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 or management of 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, 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. The Fund was established to serve as an investment medium for separate
accounts supporting variable insurance policies. The Fund currently has 17
investment portfolios ("Underlying Series"), each issuing a series of shares:
Growth & Income Series, Devon Series, DelCap Series, Aggressive Growth Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Balanced 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.
21
<PAGE>
The investment adviser for the Growth & Income Series, Devon Series, DelCap
Series, Aggressive Growth Series, Social Awareness Series, Small Cap Value
Series, REIT Series, Trend Series, Delaware Balanced 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. The SAI of the Fund is available upon request.
GROWTH & INCOME 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
Decatur Total Return Series.
DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes 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.
AGGRESSIVE GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation. It
seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in small 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.
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.
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. It
seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The
22
<PAGE>
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 BALANCED 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 Delaware 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.
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. It seeks
to achieve its objective 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 -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
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 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.
INVESTMENT ADVISORY SERVICES TO THE FUND
Investment advisers are paid an annual fee based on the average daily net assets
of their respective Underlying Series for management services. The Cash Reserve
Series management fee rate is as follows: 0.45% on the first $500 million, 0.40%
on the next $500 million, 0.35% on the next $1,500 million and 0.30% on assets
in excess of $2,500 million; the Capital Reserves Series management fee rate is
as follows: 0.50% on the first $500 million, 0.475% on the next $500 million,
0.45% on the next $1,500 million and 0.425% on assets in excess of $2,500
million; the Growth & Income Series, Delchester Series, Delaware Balanced
Series, Devon Series and Strategic Income Series management fee rate is as
follows: 0.65% on the first $500 million, 0.60%
23
<PAGE>
on the next $500 million, 0.55% on the next $1,500 million and 0.50% on assets
in excess of $2,500 million; the DelCap Series, Aggressive Growth Series, Small
Cap Value Series, Trend Series, Social Awareness Series, REIT Series,
Convertible Securities Series and Global Bond Series management fee rate is as
follows: 0.75% on the first $500 million, 0.70% on the next $500 million, 0.65%
on the next $1,500 million and 0.60% on assets in excess of $2,500 million; the
International Equity Series management fee rate is as follows: 0.85% on the
first $500 million, 0.80% on the next $500 million, 0.75% on the next $1,500
million and 0.70% on assets in excess of $2,500 million; and the Emerging
Markets Series management fee rate is as follows: 1.25% on the first $500
million, 1.20% on the next $500 million, 1.15% on the next $1,500 million and
1.10% on assets in excess of $2,500 million.
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. SURRENDER CHARGE
No charge for sales expense is deducted from purchase payments at the time the
payments are made. A surrender 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 surrender 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 invested in the Policy for more than seven years;
and (3) the amount available under the Free Withdrawal provision. See "Free
Withdrawal Amounts" below. For purposes of determining the amount of any
surrender charge, surrenders will be deemed to be taken first from Free
Withdrawal Amounts and then Old Payments, and finally from New Payments. Free
Withdrawal Amounts and Old Payments may be withdrawn from the Policy at any time
without the imposition of a surrender charge. If a withdrawal is attributable
all or in part to New Payments, a surrender charge may apply.
Subject to state law, no surrender 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. Any
elimination of or reduction in the amount or duration of the surrender charge
will not discriminate unfairly among purchasers. The Company will not make any
changes to the charge where prohibited by law.
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 surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments 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 then
deducted first from Old Payments. Thereafter, for the purpose of calculating
surrender charges for New Payments, all amounts withdrawn are assumed to be
deducted first from the oldest New Payment and then from the next oldest 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.)
24
<PAGE>
The Surrender Charge is 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%
More than 7 0%
</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 surrender charge
exceed a maximum limit of 8% of total gross New Payments. Such total charge
equals the aggregate of all applicable surrender charges for surrender, partial
redemptions, and annuitization.
In Maryland, a different surrender 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
surrender 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 surrender 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 surrender charge, if any,
until the entire Free Withdrawal Amount has been redeemed.
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<PAGE>
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Policy according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. If an Owner elects
the Company's LED option, in each calendar year a fraction of the Accumulated
Value is withdrawn without a surrender charge based on the Owner's then life
expectancy (or the joint life expectancy of the Owner and a beneficiary.) 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. Under the Company's LED option, 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. Where the Owner is a trust or other nonnatural
person, the Owner may elect the LED option based on the Annuitant's life
expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Policy and be subject to a 10% federal tax
penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Policies in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the amount of the Company's LED amount, a surrender charge may
apply to the amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
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 surrender 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 surrender 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 surrender 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 surrender 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 the Owner chooses a
period certain option (Option V or the comparable fixed annuity option), a
surrender 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.
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<PAGE>
No surrender 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 6.5% 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.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated surrender 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 which may
include amounts derived from mortality and expense risk charges. There is no
additional charge to Owners or to the Separate Account. Any surrender 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
The Company deducts a $30 Policy fee on the Policy anniversary date and upon
full surrender of the Policy if the Accumulated Value on any of these dates 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.
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 assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. 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
27
<PAGE>
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.
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.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's average daily net assets. This charge may not be
increased. 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 to
reimburse it for the expense of processing transfers. 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.
E. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Policy at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts and the Fixed Interest Account (based on the relative
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<PAGE>
value that the Accumulation Units of the Sub-Accounts and the dollar amounts in
the Fixed Interest Account bear to the Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<CAPTION>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
<S> <C>
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
</TABLE>
For a description of the Rider, see "J. Optional Minimum Guaranteed Annuity
Payout Rider" under "THE VARIABLE ANNUITY POLICIES," below.
THE VARIABLE ANNUITY POLICIES
The Policies are designed for use in connection with several types of retirement
plans, as well as for individual use. 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 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 payment is 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 not completed within five business
days of the Company's receipt of the initial payment, or does not specify how
payments are to be allocated among the Accounts, the initial purchase payment
will be returned immediately unless the Owner specifically consents to the
holding of it pending completion of the outstanding underwriting requirements.
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 on the basis of accumulation unit value next
determined after receipt.
Payments may be made to the Policy at any time prior to the Annuity Date,
subject to certain minimums. 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. 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
29
<PAGE>
unauthorized or fraudulent instructions. The procedures the Company follows for
transactions initiated by telephone may 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 or PIN 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. As of the date of this
Prospectus, transfers may be made to and among all of the available Sub-
Accounts. However, should additional funds be added to the Policy, the Company
reserves the right to limit the number of Sub-Accounts which may be used during
the life of the Policy. 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 these additional 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-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
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<PAGE>
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
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Policy year under that
request count as one transfer towards the 12 transfers which are guaranteed to
be free of a transfer charge in each Policy year. Currently, automatic transfers
and automatic rebalancing may not be in effect simultaneously. Either option may
be elected at no additional charge when the Policy is purchased or at a later
date.
C. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Policy and
receive its Surrender Value. The Owner must return the Policy and a signed,
written request for surrender, satisfactory to the Company to the Principal
Office. The Surrender Value will be calculated 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 surrender 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 annuitized under a commutable period
certain option (as in Annuity Option V) may be surrendered. The amount payable
is the commuted value of any unpaid installments, computed on the basis of the
assumed interest rate incorporated in such annuity benefit payments. No
surrender 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.
The Company reserves the right 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 surrender charge, as described under "CHARGES AND DEDUCTIONS."
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<PAGE>
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) before 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 below 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 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.
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<PAGE>
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 under 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 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.
F. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as sole beneficiary ("spousal beneficiary"), may by
written request continue the Policy in force rather than receive the death
benefit. 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.
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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 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 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 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 Owner selects the Annuity Date. To the extent permitted by state law, 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. In no event will the maximum
annuitization age exceed 90. 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.
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.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Policy.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS
The Company currently provides the variable annuity options described below.
Variable annuity options may be funded through the Growth & Income Series, the
Capital Reserves Series and the Delaware Balanced 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
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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 periodically 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 during the
lifetime of the payee only. It would be possible under this option for the payee
to receive only one annuity benefit payment if the payee dies prior to the due
date of the second annuity payment, two annuity benefit payments if the payee
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the payee, no matter how
long he or she lives.
OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2), then monthly variable annuity 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 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 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 in the
Policy or the beneficiary. There is no minimum number of payments under this
option. See Option IV-A, above.
OPTION V -- PERIOD CERTAIN VARIABLE ANNUITY. A 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, if specifically requested 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 Company deducts a charge for
annuity rate guarantees, which includes a factor for mortality risks. 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. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed
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annuity lifetime income during the annuity payout phase, subject to the
conditions described below. On each Policy anniversary a Minimum Guaranteed
Annuity Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout
Benefit Base (less any applicable premium taxes) is the value that will be
annuitized if the Rider is exercised. In order to exercise the Rider, a fixed
annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Policy. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value, if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after positive adjustments have been made
for subsequent payments and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Policy
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Policy issue or within thirty days after a Policy
anniversary date, the effective date of the Rider will be the following Policy
anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 78th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Policy anniversary following the expiration of a ten or
fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "I. Description of Variable Annuity
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Policy.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Policy anniversary after the effective date of the Rider unless
such termination occurs on or within thirty days after any Policy anniversary
or in conjunction with the repurchase of a Minimum Guaranteed Annuity Payout
Rider with a waiting period of equal or greater length at its then current
price, if available.
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- - After the seventh Policy anniversary from the effective date of the Rider the
Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Policy anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Policy or the date that a death
benefit is payable if the Policy is not continued under "F. The Spouse of the
Owner as Beneficiary" (See THE VARIABLE ANNUITY POLICIES").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Policy during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With 120 Monthly Payments Guaranteed. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under one Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
GUARANTEED
POLICY MINIMUM GUARANTEED
ANNIVERSARY BENEFIT MINIMUM ANNUAL
AT EXERCISE BASE INCOME(1)
- ---------------- ----------- ----------------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With 120 Monthly Payments Guaranteed are available. See "I.
Description of Variable Annuity Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
Minimum Guaranteed Annuity Payout Benefit Base.
K. 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.
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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.
L. COMPUTATION OF POLICY VALUES AND ANNUITY BENEFIT PAYMENTS
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "K. NORRIS Decision" above) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Policy provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may 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.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- For life annuity options and noncommutable period certain options of ten
years or more (six or more years under New York Policies), the dollar
amount 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 (less than six years under New York Policies), the
dollar amount is determined by multiplying (1) the Surrender Value less
premium taxes, if any, 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 a death benefit annuity, the annuity value will be the amount of the
death benefit.
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. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the 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 net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Policy.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) 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.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected
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Sub-Account(s). The dollar amount of each subsequent variable annuity benefit
payment is determined by multiplying the fixed number of Annuity Units (derived
from the dollar amount of the first payment, as described above) with respect to
a Sub-Account by the value of an Annuity Unit of that Sub-Account on the
applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "J.
Optional Minimum Guaranteed Annuity Payout Rider" above.
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 contracts under Section 817(h) of
the Code. The regulations prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified 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
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<PAGE>
90% by any four investments. Under this section of the Code, if the investments
are not adequately diversified, the Contract will not be treated as an annuity
contract and therefore, the income on a policy, for any taxable year of an
owner, would be treated as ordinary income received or accrued by the owner. It
is anticipated that the Series of Delaware Group Premium Fund, Inc., in this
Contract 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 make reasonable efforts to comply, and it reserves the right to make such
changes as it deems appropriate for that purpose.
In addition, traditionally in order for a variable annuity policy to qualify for
tax deferral, the Company, and not the variable policy owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity policy owners may now be considered the owners of these assets
for federal income tax purposes. Specifically, the IRS has stated in published
rulings that a variable annuity policy owner may be considered the owner of
segregated account assets if the policy owner possesses incidents of ownership
in those assets, such as the ability to exercise investment control over the
assets. The Treasury Department has also announced, in connection with the
issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
states that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
sub-accounts without being treated as owners of the underlying assets." As of
the date of this Prospectus, no such guidance has been issued. The Company
therefore additionally reserves the right to modify the Policy as necessary in
order to attempt to prevent a contract owner from being considered the owner of
a pro rata share of the assets of the segregated asset account underlying the
variable annuity policies.
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. Please note, however, if the Owner chooses
an Annuity Date beyond the Annuitant's 85th birthday, it is possible that the
Policy may not be considered an annuity for tax purposes and therefore, the
Owner may be taxed on the annual increase in Accumulated Value. The Owner should
consult tax and financial advisers for more information. 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.
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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
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 any
LED-type 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.
NONNATURAL OWNERS. As a general rule, deferred annuity policies owned by
"nonnatural 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,
41
<PAGE>
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.
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 CANCEL OR
SURRENDER."
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.
42
<PAGE>
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 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.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Series. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Policy, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting Policy Value. (Certain transactions made
under recurring payment plans such as Dollar Cost Averaging may in the future be
confirmed quarterly rather than by immediate confirmations.) The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Policy. The Company will assume that all transactions are accurately reported on
confirmation statements and quarterly/ annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement.
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
43
<PAGE>
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.
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from Separate Account VA-K or any 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.
44
<PAGE>
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
Policies 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
or to which the assets of the Separate Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Separate
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year
45
<PAGE>
2000 issue for the products it has sold. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
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.
46
<PAGE>
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 surrender 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 (Delaware Medallion
II), the following surrender charge table applies to monies in the General
Account, rather than the surrender charge table shown in "CHARGES AND
DEDUCTION," "A. Surrender 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 OWNERS OF
DELAWARE MEDALLION I
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(POLICY FORM A3019-92)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (POLICY FORM A3019-94GRC)
Delaware Medallion I policies issued on Form No. A3019-92 were issued solely by
Allmerica Financial Life Insurance and Annuity Company (Allmerica Financial)
until March 31, 1994. On and after April 1, 1994, all Delaware Medallion I
policies sold in New York were issued on Form No. A3019-94GRC by First Allmerica
Financial Life Insurance Company ("First Allmerica"). Delaware Medallion I
policies are no longer available for sale in any jurisdiction.
The Delaware Medallion I policies are substantially similar to the Policies
described in the body of this Prospectus except for the addition/substitution of
the following:
1. (For Owners of A3019-94GRC the following is added to "THE DESCRIPTION OF THE
COMPANY"). The issuer of the policy is First Allmerica rather than Allmerica
Financial. First Allmerica, organized under the laws of Massachusetts in 1844,
is among the five oldest life insurance companies in America. As of December 31,
1998, First Allmerica and its subsidiaries had over $27 billion in combined
assets and over $48 billion of life insurance in force. Effective October 16,
1995, First Allmerica converted from a mutual life insurance company known as
State Mutual Life Assurance Company of America to a stock life insurance company
and adopted its present name. First Allmerica is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"). First Allmerica's principal office
("Principal Office") is located at 440 Lincoln Street, Worcester MA 01653,
Telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
First Allmerica is a charter 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.
2. (Substitute the following provision under "Free Withdrawal Amounts") Under
all Delaware Medallion I policies, 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 Company's life expectancy distribution, if applicable. The Free
Withdrawal Amount is deducted from Old Payments first, 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-last-out
method in New Jersey.)
3. Add "and New York" after the word "Texas" in the second and fourth line of
the third paragraph under "B. Transfer Privilege."
4. Add the following sentence as the second sentence in the second paragraph
under "Life Expectancy Distributions": For policies issued in New York, the LED
option will terminate automatically on the maximum Annuity Date permitted under
the policy, at which time an Annuity Option must be selected.
5. The guaranteed death benefit under Delaware Medallion II policies is reduced
proportionately to reflect a withdrawal (in the same proportion that the
Accumulated Value was reduced by the withdrawal). Under all Delaware Medallion I
policies, the guaranteed death benefit is simply reduced by subsequent
withdrawals by
B-1
<PAGE>
subtracting the amount of the withdrawal from the guaranteed death benefit.
Additionally, the stepped-up death benefit applies to the most recent fifth year
policy anniversary under Delaware Medallion II and applies to the most recent
seventh year policy anniversary under Delaware Medallion I. As such, the
description of the death benefit is revised as follows:
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 less the amount of all prior
partial withdrawals; or (3) the death benefit that would have been
payable on the most recent seventh year Policy anniversary.
6. For Owners of First Allmerica Delaware Medallion I Form A3019-94GRC the
minimum interest rate credited to amounts allocated to the General Account is 3%
compounded annually. For Owners of Allmerica Financial Delaware Medallion I Form
A3019-92 the minimum interest rate credited to amounts allocated to the General
Account is 5% for the first five policy years, and 3.5% thereafter.
7. If you surrender the Policy or annuitize under a period certain option at the
end of one, three, five or ten 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 (1)(a) and if you surrender the Policy or
annuitize under a period certain option at the end of one, three, five or ten
years, the expenses you would pay on a $1,000 investment, assuming 5% annual
return on assets and election of a Minimum Guaranteed Annuity Payout Rider are
the same in years one and ten as shown in the expense example (1)(b) under
"SUMMARY OF FEES AND EXPENSES" but Delaware I may be one to two dollars higher
in years three and five under examples (1)(a) and (1)(b) than Delaware Medallion
II due to differences in the Free Withdrawal calculation. The expense numbers
for years three and five under Delaware Medallion I are as follows:
(1)(a)
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
----------- -----------
<S> <C> <C>
Growth and Income Series........................................................................ $ 129 $ 158
Devon Series.................................................................................... $ 129 $ 158
DelCap Series................................................................................... $ 133 $ 165
Aggressive Growth Series........................................................................ $ 133 $ 165
Social Awareness Series......................................................................... $ 133 $ 165
REIT Series..................................................................................... $ 133 $ 165
Small Cap Value Series.......................................................................... $ 133 $ 165
Trend Series.................................................................................... $ 133 $ 165
International Equity Series..................................................................... $ 136 $ 170
Emerging Markets Series......................................................................... $ 152 $ 197
Delaware Balanced Series........................................................................ $ 130 $ 160
Convertible Securities Series................................................................... $ 132 $ 163
Delchester Series............................................................................... $ 130 $ 160
Capital Reserves Series......................................................................... $ 128 $ 157
Strategic Income Series......................................................................... $ 131 $ 162
Cash Reserve Series............................................................................. $ 123 $ 149
Global Bond Series.............................................................................. $ 133 $ 165
</TABLE>
B-2
<PAGE>
(1)(b)
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
----------- -----------
<S> <C> <C>
Growth and Income Series........................................................................ $ 136 $ 170
Devon Series.................................................................................... $ 136 $ 170
DelCap Series................................................................................... $ 140 $ 177
Aggressive Growth Series........................................................................ $ 140 $ 177
Social Awareness Series......................................................................... $ 140 $ 177
REIT Series..................................................................................... $ 140 $ 177
Small Cap Value Series.......................................................................... $ 140 $ 177
Trend Series.................................................................................... $ 140 $ 177
International Equity Series..................................................................... $ 143 $ 182
Emerging Markets Series......................................................................... $ 160 $ 210
Delaware Balanced Series........................................................................ $ 137 $ 172
Convertible Securities Series................................................................... $ 140 $ 176
Delchester Series............................................................................... $ 137 $ 172
Capital Reserves Series......................................................................... $ 136 $ 169
Strategic Income Series......................................................................... $ 139 $ 175
Cash Reserve Series............................................................................. $ 131 $ 162
Global Bond Series.............................................................................. $ 140 $ 177
</TABLE>
Expense examples (2)(a) and (2)(b) on pages 9 and 10 are the same for both
Delaware Medallion I and Delaware Medallion II.
B-3
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY --
DELAWARE MEDALLION I
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
SUB-ACCOUNT FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN INCEPTION ENDED INCEPTION OF
UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ------------------------------------------------------------- ------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series....................................... 5/1/94 2.32% N/A 18.31%
Devon Series................................................. 5/1/97 15.21% N/A 25.97%
DelCap Series................................................ 4/20/94 9.90% N/A 14.06%
Aggressive Growth Series..................................... N/A N/A N/A N/A
Social Awareness Series...................................... 5/1/97 6.80 % N/A 21.14 %
REIT Series.................................................. N/A N/A N/A N/A
Small Cap Value Series....................................... 5/11/94 -12.28 % N/A 12.87 %
Trend Series................................................. 5/11/94 7.14 % N/A 16.48 %
International Equity Series.................................. 4/20/94 1.64 % N/A 8.19 %
Emerging Markets Series...................................... 5/1/97 -37.62 % N/A -36.40 %
Delaware Balanced Series..................................... 4/20/94 9.69 % N/A 15.80 %
Convertible Securities Series................................ 5/1/97 -8.71 % N/A 3.33 %
Delchester Series............................................ 5/23/94 -9.67 % N/A 5.41 %
Capital Reserves Series...................................... 6/23/94 -1.42 % N/A 4.57 %
Strategic Income Series...................................... 5/1/97 -5.29 % N/A -0.27 %
Cash Reserve Series.......................................... 4/7/94 -2.97 % N/A 2.56 %
Global Bond Series........................................... 5/1/96 -0.37 % N/A 3.68 %
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
SUB-ACCOUNT ENDED INCEPTION OF
NAME OF UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------------------------- --------------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series..................................... 5/1/94 9.81% N/A 19.33%
Devon Series............................................... 5/1/97 22.34% N/A 29.66%
DelCap Series.............................................. 4/20/94 17.17% N/A 15.01%
Aggressive Growth Series................................... N/A N/A N/A N/A
Social Awareness Series.................................... 5/1/97 13.86 % N/A 24.86 %
REIT Series................................................ N/A N/A N/A N/A
Small Cap Value Series..................................... 5/11/94 -6.11 % N/A 13.77 %
Trend Series............................................... 5/11/94 14.45 % N/A 17.39 %
International Equity Series................................ 4/20/94 8.80 % N/A 9.43 %
Emerging Markets Series.................................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series................................... 4/20/94 16.98 % N/A 16.67 %
Convertible Securities Series.............................. 5/1/97 -2.54 % N/A 7.41 %
Delchester Series.......................................... 5/23/94 -3.19 % N/A 6.66 %
Capital Reserves Series.................................... 6/23/94 5.29 % N/A 5.57 %
Strategic Income Series.................................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series........................................ 4/7/94 3.62 % N/A 3.54 %
Global Bond Series......................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-4
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS ENDING
DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN SINCE
FOR YEAR INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND ENDED UNDERLYING
UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS FUND
- ---------------------------------------------------------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Growth & Income Series.................................... 7/28/88 2.32% 16.37% 11.22%
Devon Series.............................................. 5/1/97 15.21% N/A 25.97%
DelCap Series............................................. 7/12/91 9.90% 11.81% 10.88%
Aggressive Growth Series.................................. N/A N/A N/A N/A
Social Awareness Series................................... 5/1/97 6.80 % N/A 21.14 %
REIT Series............................................... 5/1/98 N/A N/A -15.21 %
Small Cap Value Series.................................... 12/27/93 -12.28 % 11.69 % 11.75 %
Trend Series.............................................. 12/27/93 7.14 % 14.28 % 14.51 %
International Equity Series............................... 10/29/92 1.64 % 7.91 % 8.91 %
Emerging Markets Series................................... 5/1/97 -37.62 % N/A -36.40 %
Delaware Balanced Series.................................. 7/28/88 9.69 % 14.56 % 12.95 %
Convertible Securities Series............................. 5/1/97 -8.71 % N/A 3.33 %
Delchester Series......................................... 7/28/88 -9.67 % 4.55 % 7.71 %
Capital Reserves Series................................... 7/28/88 -1.42 % 3.40 % 5.38 %
Strategic Income Series................................... 5/1/97 -5.29 % N/A -0.27 %
Cash Reserve Series....................................... 7/28/88 -2.97 % 2.50 % 3.69 %
Global Bond Series........................................ 5/1/96 -0.37 % N/A 3.68 %
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR
PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR SINCE
UNDERLYING FUND ENDED INCEPTION OF
NAME OF UNDERLYING FUND INCEPTION DATE 12/31/98 5 YEARS UNDERLYING FUND
- ------------------------------------------------------ --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Growth & Income Series................................ 7/28/88 9.81% 17.42% 11.72%
Devon Series.......................................... 5/1/97 22.34% N/A 29.66%
DelCap Series......................................... 7/12/91 17.17% 12.76% 11.20%
Aggressive Growth Series.............................. N/A N/A N/A N/A
Social Awareness Series............................... 5/1/97 13.86 % N/A 24.86 %
REIT Series........................................... 5/1/98 N/A N/A -9.84 %
Small Cap Value Series................................ 12/27/93 -6.11 % 12.55 % 12.52 %
Trend Series.......................................... 12/27/93 14.45 % 15.13 % 15.24 %
International Equity Series........................... 10/29/92 8.80 % 9.01 % 9.61 %
Emerging Markets Series............................... 5/1/97 -33.41 % N/A -33.85 %
Delaware Balanced Series.............................. 7/28/88 16.98 % 15.43 % 13.19 %
Convertible Securities Series......................... 5/1/97 -2.54 % N/A 7.41 %
Delchester Series..................................... 7/28/88 -3.19 % 5.65 % 7.95 %
Capital Reserves Series............................... 7/28/88 5.29 % 4.35 % 5.52 %
Strategic Income Series............................... 5/1/97 1.21 % N/A 3.85 %
Cash Reserve Series................................... 7/28/88 3.62 % 3.42 % 3.71 %
Global Bond Series.................................... 5/1/96 6.33 % N/A 6.11 %
</TABLE>
B-5
<PAGE>
APPENDIX C
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period.................... 2.433 1.883 1.582 1.178 1.197 1.051 1.000
End of Period.......................... 2.672 2.433 1.883 1.582 1.178 1.197 1.051
Number of Units Outstanding at End of
Period (in thousands)..................... 146,009 113,507 65,991 48,305 38,591 25,086 4,208
DEVON SERIES
Unit Value:
Beginning of Period.................... 1.261 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.543 1.261 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 42,690 11,585 N/A N/A N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period.................... 1.831 1.616 1.432 1.121 1.178 1.070 1.000
End of Period.......................... 2.145 1.831 1.616 1.432 1.121 1.178 1.070
Number of Units Outstanding at End of
Period (in thousands)..................... 58,454 57,025 44,667 35,204 29,100 20,802 4,534
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period.................... 1.272 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.448 1.272 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 17,819 4,515 N/A N/A N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period.................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period.......................... 0.901 N/A N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 1,235 N/A N/A N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period.................... 1.923 1.467 1.214 0.994 1.000 1.000 N/A
End of Period.......................... 1.806 1.923 1.467 1.214 0.994 1.000 N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 55,136 43,269 15,725 9,467 6,040 6 N/A
TREND SERIES
Unit Value:
Beginning of Period.................... 1.779 1.486 1.358 0.989 1.007 1.000 N/A
End of Period.......................... 2.036 1.779 1.486 1.358 0.989 1.007 N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 36,571 33,256 21,711 13,410 6,197 50 N/A
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period.................... 1.619 1.540 1.301 1.159 1.144 1.000 1.000
End of Period.......................... 1.762 1.619 1.540 1.301 1.159 1.144 1.000
Number of Units Outstanding at End of
Period (in thousands)..................... 51,715 48,813 30,888 21,612 18,761 6,139 182
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period.................... 0.880 N/A N/A N/A N/A N/A N/A
End of Period.......................... 0.586 0.880 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 6,662 4,545 N/A N/A N/A N/A N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period.................... 2.015 1.616 1.414 1.133 1.150 1.078 1.000
End of Period.......................... 2.357 2.015 1.616 1.414 1.133 1.150 1.078
Number of Units Outstanding at End of
Period (in thousands)..................... 81,359 58,759 40,855 37,203 33,332 22,046 3,145
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period.................... 1.156 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.127 1.156 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 4,793 1,291 N/A N/A N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period.................... 1.652 1.474 1.326 1.164 1.214 1.058 1.000
End of Period.......................... 1.599 1.652 1.474 1.326 1.164 1.214 1.058
Number of Units Outstanding at End of
Period (in thousands)..................... 70,679 56,733 44,760 37,818 31,735 22,281 4,571
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period.................... 1.317 1.241 1.209 1.075 1.120 1.053 1.000
End of Period.......................... 1.386 1.317 1.241 1.209 1.075 1.120 1.053
Number of Units Outstanding at End of
Period (in thousands)..................... 28,066 20,234 20,226 19,818 20,476 16,752 3,828
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period.................... 1.052 N/A N/A N/A N/A N/A N/A
End of Period.......................... 1.065 1.052 N/A N/A N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 17,524 5,381 N/A N/A N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period.................... 1.165 1.124 1.087 1.044 1.021 1.010 1.000
End of Period.......................... 1.207 1.165 1.124 1.087 1.044 1.021 1.010
Number of Units Outstanding at End of
Period (in thousands)..................... 32,501 24,014 21,519 11,568 13,998 5,483 1,387
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
GLOBAL BOND SERIES
Unit Value:
Beginning of Period.................... 1.102 1.107 1.000 1.000 N/A N/A N/A
End of Period.......................... 1.172 1.102 1.107 1.000 N/A N/A N/A
Number of Units Outstanding at End of
Period (in thousands)..................... 4,991 3,950 886 0 N/A N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
GROWTH & INCOME SERIES
Unit Value:
Beginning of Period................................................ 2.078 1.608 1.351 1.006 1.000
End of Period...................................................... 2.282 2.078 1.608 1.351 1.006
Number of Units Outstanding at End of Period (in thousands)............ 3,440 1,311 1,044 670 455
DEVON SERIES
Unit Value:
Beginning of Period................................................ 1.261 N/A N/A N/A N/A
End of Period...................................................... 1.543 1.261 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 1,558 106 N/A N/A N/A
DELCAP SERIES
Unit Value:
Beginning of Period................................................ 1.646 1.453 1.287 1.008 1.000
End of Period...................................................... 1.929 1.646 1.453 1.287 1.008
Number of Units Outstanding at End of Period (in thousands)............ 637 355 493 300 149
SOCIAL AWARENESS SERIES
Unit Value:
Beginning of Period................................................ 1.272 N/A N/A N/A N/A
End of Period...................................................... 1.448 1.272 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 394 101 N/A N/A N/A
REIT SERIES
Unit Value:
Beginning of Period................................................ N/A N/A N/A N/A N/A
End of Period...................................................... 1.000 N/A N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 0 N/A N/A N/A N/A
SMALL CAP VALUE SERIES
Unit Value:
Beginning of Period................................................ 1.938 1.478 1.223 1.002 1.000
End of Period...................................................... 1.820 1.938 1.478 1.223 1.002
Number of Units Outstanding at End of Period (in thousands)............ 731 235 204 146 82
TREND SERIES
Unit Value:
Beginning of Period................................................ 1.839 1.536 1.404 1.022 1.000
End of Period...................................................... 2.104 1.839 1.536 1.404 1.022
Number of Units Outstanding at End of Period (in thousands)............ 1,099 1,579 285 1,486 790
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................................................ 1.403 1.335 1.128 1.004 1.000
End of Period...................................................... 1.527 1.403 1.335 1.128 1.004
Number of Units Outstanding at End of Period (in thousands)............ 652 554 2,244 358 193
EMERGING MARKETS SERIES
Unit Value:
Beginning of Period................................................ 0.754 N/A N/A N/A N/A
End of Period...................................................... 0.502 0.754 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 184 1 N/A N/A N/A
DELAWARE BALANCED SERIES
Unit Value:
Beginning of Period................................................ 1.764 1.415 1.238 0.991 1.000
End of Period...................................................... 2.063 1.764 1.415 1.238 0.991
Number of Units Outstanding at End of Period (in thousands)............ 1,070 420 405 304 173
CONVERTIBLE SECURITIES SERIES
Unit Value:
Beginning of Period................................................ 1.156 N/A N/A N/A N/A
End of Period...................................................... 1.127 1.156 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 375 84 N/A N/A N/A
DELCHESTER SERIES
Unit Value:
Beginning of Period................................................ 1.391 1.240 1.116 0.980 1.000
End of Period...................................................... 1.346 1.391 1.240 0.116 0.098
Number of Units Outstanding at End of Period (in thousands)............ 3,962 1,388 1,003 670 287
CAPITAL RESERVES SERIES
Unit Value:
Beginning of Period................................................ 1.214 1.144 1.115 0.991 1.000
End of Period...................................................... 1.278 1.214 1.144 1.115 0.991
Number of Units Outstanding at End of Period (in thousands)............ 1,069 287 208 195 181
STRATEGIC INCOME SERIES
Unit Value:
Beginning of Period................................................ 1.052 N/A N/A N/A N/A
End of Period...................................................... 1.065 1.052 N/A N/A N/A
Number of Units Outstanding at End of Period (in thousands)............ 1,799 276 N/A N/A N/A
CASH RESERVE SERIES
Unit Value:
Beginning of Period................................................ 1.138 1.096 1.059 1.018 1.000
End of Period...................................................... 1.179 1.138 1.096 1.059 1.018
Number of Units Outstanding at End of Period (in thousands)............ 1,603 401 125 126 302
GLOBAL BOND SERIES
Unit Value:
Beginning of Period................................................ 1.102 1.107 1.000 1.000 N/A
End of Period...................................................... 1.171 1.102 1.107 1.000 N/A
Number of Units Outstanding at End of Period (in thousands)............ 31 7 N/A N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
9. First Allmerica Financial Life Insurance Company first offered the Delaware
Medallion I policy to the public in 1994.
C-4
