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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
VARI-EXCEPTIONAL LIFE
PLEASE READ THIS This Prospectus provides important information about
PROSPECTUS CAREFULLY Vari-Exceptional Life, an individual flexible premium
BEFORE INVESTING AND variable life insurance policy issued by Allmerica
KEEP IT FOR FUTURE Financial Life Insurance and Annuity Company to
REFERENCE. applicants who are Age 85 years old and under. The
policies are funded through the VEL II Account, a
separate investment account of this Company referred
to as the Separate Account, and a fixed-interest
account that is referred to as the General Account.
VARIABLE LIFE The Separate Account is subdivided into Sub-Accounts.
POLICIES INVOLVE Each Sub-Account invests exclusively in shares of one
RISKS INCLUDING of the following Funds of Allmerica Investment Trust,
POSSIBLE LOSS OF Variable Insurance Products Fund, Variable Insurance
PRINCIPAL. Products Fund II, T. Rowe Price International Series,
Inc., and Delaware Group Premium Fund, Inc.:
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ALLMERICA INVESTMENT TRUST VARIABLE INSURANCE PRODUCTS FUND
---------------------------------------- ----------------------------------------
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THIS PROSPECTUS MUST Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
BE ACCOMPANIED BY Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
PROSPECTUSES OF THE Select Value Opportunity Fund Fidelity VIP High Income Portfolio
FUNDS. Select Emerging Markets Fund Fidelity VIP Growth Portfolio
Select International Equity Fund Fidelity VIP Money Market Portfolio
Select Growth Fund VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund -----------------------------
Growth Fund Fidelity VIP II Asset Manager Portfolio
Equity Index Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select Growth and Income Fund --------------------------------
Investment Grade Income Fund T. Rowe International Stock Portfolio
Government Bond Fund DELAWARE GROUP PREMIUM FUND, INC.
Money Market Fund ------------------------------
DGPF International Equity Series
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This Prospectus can also be obtained from the
Securities and Exchange Commission's website
THIS LIFE POLICY IS (http://www.sec.gov).
NOT: IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING
- A BANK DEPOSIT OR INSURANCE WITH THE POLICY.
OBLIGATION; THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE
- FEDERALLY INSURED; PROTECTION FOR THE BENEFICIARY. NO CLAIM IS MADE THAT
- ENDORSED BY ANY THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO A
BANK OR SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE
GOVERNMENTAL POLICY, TOGETHER WITH ITS ATTACHED APPLICATION,
AGENCY. CONSTITUTES THE ENTIRE AGREEMENT BETWEEN YOU AND THE
COMPANY.
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.
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CORRESPONDENCE MAY BE MAILED TO DATED MAY 1, 1999
ALLMERICA LIFE 440 LINCOLN STREET
P.O. BOX 8014 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8014 (508) 855-1000
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SPECIAL TERMS
ACCUMULATION UNIT: a measure of your interest in a Sub-Account.
AGE: the Insured's age as of the nearest birthday measured from a Policy
anniversary.
BENEFICIARY: the person(s) designated by the Policyowner to receive the
insurance proceeds upon the death of the Insured.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us," and "the Company" refer to Allmerica Financial Life Insurance and Annuity
Company in this Prospectus.
DATE OF ISSUE: the date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option (Option 1 or
Option 2), less Debt outstanding at the time of the Insured's death, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy, unless the optional Guaranteed Death Benefit
Rider is in effect. If the rider is in effect, the Death Proceeds will be
greater of (a) the Face Amount as of the Final Premium Payment Date or (b) the
Policy Value as of the date due proof of death is received by the Company.
DEBT: all unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: an acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: information, including medical information
satisfactory to the Company, that is used to determine the Insured's Premium
Class.
FACE AMOUNT: the amount of insurance coverage applied for; the Face Amount of
each Policy is set forth in the specification pages of the Policy.
FINAL PREMIUM PAYMENT DATE: the Policy anniversary nearest the Insured's 95th
birthday. The Final Premium Payment Date is the latest date on which a premium
payment may be made. After this date, the Death Proceeds equal the Surrender
Value of the Policy, unless the optional Guaranteed Death Benefit Rider is in
effect.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUIDELINE ANNUAL PREMIUM: the annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Tables (Mortality Table B, Smoker or Non-Smoker, for unisex
Policies), net investment earnings at an annual effective rate of 5%, and fees
and charges as set forth in the Policy and any Policy riders. The Sum Insured
Option 1 Guideline Annual Premium is used when calculating the maximum surrender
charge.
GUIDELINE MINIMUM SUM INSURED: the minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by age; it is calculated by multiplying the Policy Value by a
percentage determined by the Insured's Age.
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INSURANCE AMOUNT AT RISK: the Sum Insured less the Policy Value.
LOAN VALUE: the maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: The Minimum Monthly Factor is a monthly premium amount
calculated by the Company and specified in the Policy. If, in the first 48
Policy months following Date of Issue or the effective date of an increase in
the Face Amount or of a Policy Change which causes a change in the Minimum
Monthly Factor:
- - You make premium payments (less debt, partial withdrawals and partial
withdrawal charges) at least equal to the sum of the Minimum Monthly Factors
for the number of months the Policy, increase in Face Amount or Policy Change
has been in force, and
- - Debt does not exceed Policy Value less surrender charges, then
- - the Policy is guaranteed not to lapse during that period.
EXCEPT FOR THE 48 POLICY MONTH PERIODS, MAKING MONTHLY PAYMENTS AT LEAST EQUAL
TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN
FORCE.
MONTHLY DEDUCTION: charges deducted monthly from the Policy Value of a Policy
prior to the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by riders, and the monthly
administrative charge.
MONTHLY PAYMENT DATE: the date on which the Monthly Deduction is deducted from
the Policy Value.
NET PREMIUM: an amount equal to the premium less a tax expense charge.
POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: the total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Policy.
POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: the risk classification that the Company assigns the Insured
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insured's Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: the Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account the Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account (less Debt) and the
Policy Value in each Sub-Account bear to the total Policy Value on the date of
deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
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SUB-ACCOUNT: a division of the VEL II Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust ("Trust"), a corresponding Portfolio of the Fidelity Variable Insurance
Products Fund ("Fidelity VIP") or the Fidelity Variable Insurance Products Fund
II ("Fidelity VIP II"), the T. Rowe Price International Stock Portfolio of T.
Rowe Price International Series, Inc. ("T. Rowe Price"), or the International
Equity Series of the Delaware Group Premium Fund, Inc. ("DGPF").
SUM INSURED: the amount payable upon the death of the Insured, before the Final
Premium Payment Date, prior to deductions for Debt outstanding at the time of
the Insured's death, partial withdrawals and partial withdrawal charges, if any,
and any due and unpaid Monthly Deductions. The amount of the Sum Insured will
depend on the Sum Insured Option chosen, but always will be at least equal to
the Face Amount.
SURRENDER VALUE: the amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS (FUNDS): the Funds of the Allmerica Investment Trust, the
Portfolios of the Fidelity Variable Insurance Products Fund and Fidelity
Variable Insurance Products Fund II, the Portfolio of T. Rowe Price
International Series, Inc. and the Series of the Delaware Group Premium Fund,
Inc. available under the Policy.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
affected materially.
VEL II ACCOUNT: a Separate Account of the Company to which the Policyowner may
make Net Premium allocations.
WRITTEN REQUEST: a request in writing, by the Policyowner, satisfactory to the
Company.
YOU OR YOUR: the Policyowner, as shown in the application or the latest change
filed with the Company.
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SUMMARY
The following is a summary of the flexible premium variable life insurance
policy sold by Allmerica Financial Life Insurance and Annuity Company. It
highlights key points from the Prospectus which follows. If you are considering
the purchase of this product, you should read the Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product.
Within limits, you may choose the amount of initial premium desired and the
initial Sum Insured. You have the ability to vary the frequency and amount of
premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Policy's Surrender Value, or the Policy may be fully
surrendered at any time, subject to certain limitations. Because of the
substantial nature of the surrender charge, the Policy is not suitable for
short-term investment purposes. A Policyowner contemplating surrender of a
Policy should pay special attention to the limitation of deferred sales charges
on surrenders in the first two years following issuance or Face Amount increase.
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value also will be adjusted for other factors, including the amount
of charges imposed. A Policy will remain in effect so long as the Policy Value
less any surrender charges and less any outstanding debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy Value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments, unless the optional
Guaranteed Death Benefit rider is in effect.
If the Policy is in effect at the death of the Insured, the Company will pay a
death benefit (the "Death Proceeds") to the Beneficiary. Prior to the Final
Premium Payment Date, the Death Proceeds equal the Sum Insured, less any debt,
partial withdrawals, and any due and unpaid charges. You may choose either Sum
Insured Option 1 (the Sum Insured is fixed in amount) or Sum Insured Option 2
(the Sum Insured includes the Policy Value in addition to a fixed insurance
amount). A Policyowner has the right to change the Sum Insured Option, subject
to certain conditions. A Guideline Minimum Sum Insured, equivalent to a
percentage of the Policy Value, will apply if greater than the Sum Insured
otherwise payable under Option 1 or Option 2.
In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code (the "Code"), any policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
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FREE-LOOK PERIOD -- The Policy provides for an initial Free-Look Period. You
may cancel the Policy by mailing or delivering it to the Principal Office or
to an agent of the Company on or before the latest of:
- 45 days after the application for the Policy is signed,
- 10 days after you receive the Policy (or, if required by state law, the
longer period indicated in your Policy), or
- 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.
When you return the Policy, the Company will mail a refund to you within seven
days. The refund of any premium paid by check may be delayed until the check
has cleared your bank.
Where required by state law, the refund will equal the premiums paid. In other
states, the refund will equal the sum of:
(1) the difference between the premium, including fees and charges paid,
and any amount allocated to the Separate Account, plus
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the
General Account. A free-look privilege also applies after a requested increase
in the Face Amount. See THE POLICY -- "Free-Look Period."
CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, subject to certain restrictions, you may convert the Policy to a fixed
flexible premium adjustable life insurance policy by simultaneously
transferring all accumulated value in the Sub-Accounts to the General Account
and instructing the Company to allocate all future premiums to the General
Account. A similar conversion privilege is in effect for 24 Policy months
after the date of an increase in the Face Amount. Where required by state law,
and at your request, the Company will issue a flexible premium adjustable life
insurance policy to you. The new policy will have the same Face Amount, issue
age, Date of Issue, and Premium Class as the original Policy. See THE POLICY
-- "Conversion Privileges."
ABOUT THE POLICY
The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insured,
- Policy Value,
- surrender rights and partial withdrawal rights,
- loan privileges, and
- in some cases, additional insurance benefits available by rider for an
additional charge.
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LIFE INSURANCE
The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is
"variable" because the Policy Value will increase or decrease depending on the
investment experience of the Sub-Accounts of the Separate Account. Under some
circumstances, the Death Benefit may vary with the investment experience of the
Sub-Accounts.
FLEXIBLE PREMIUM
The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. You may vary the
frequency and amount of future premium payments, subject to certain limits,
restrictions and conditions set by Company standards and federal tax laws.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause the Policy to lapse. Because of the variable nature of the Policy, making
planned premium payments does not guarantee that the Policy will remain in
force. Thus, you may, but are not required to, pay additional premiums. However,
if the optional Guaranteed Death Benefit rider is in effect, certain minimum
premium payment tests must be met. This Rider may not be available in all
states. The Policy will remain in force until the Surrender Value is
insufficient to cover the next Monthly Deduction and loan interest accrued, if
any, and a grace period of 62 days has expired without adequate payment being
made by you. During the first 48 Policy months after the Date of Issue or the
effective date of an increase in the Face Amount, the Policy will not lapse if
the total premiums paid less the Debt, partial withdrawals and withdrawal
charges are equal to or exceed the sum of the Minimum Monthly Factors for the
number of months the Policy, increase, or a Policy Change which causes a change
in the Minimum Monthly Factor has been in force. Even during these periods,
however, making payments at least equal to the Minimum Monthly Factor will not
prevent the Policy from lapsing if the Debt equals or exceeds the Policy Value
less surrender charges.
CONDITIONAL INSURANCE AGREEMENT
If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance, subject to the terms of the Conditional Insurance
Agreement. If you do not wish to make any payment at the time of application,
insurance coverage will not be in force until delivery of the Policy and payment
of sufficient premium to place the insurance in force.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the Company's General Account. If your application is approved and
the Policy is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Principal Office. IF A POLICY IS
NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
GUARANTEED DEATH BENEFIT RIDER
This rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account; and
- provides a guaranteed death benefit.
In order to maintain the rider, certain minimum premium payment tests must be
met on each Policy anniversary and within 48 months following the Date of Issue
and/or the date of any increase in Face Amount. In addition, a one-time
administrative charge of $25 will be deducted from Policy Value when the Rider
is elected. Certain transactions, including policy loans, partial withdrawals,
and changes in Sum Insured Options, can result in the termination of the Rider.
If this Rider is terminated, it cannot be reinstated.
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POLICIES ISSUED IN CONNECTION WITH TSA PLANS
The Policies may be issued in connection with Code Section 403(b) tax-sheltered
annuity plans ("TSA Plans") of certain public school systems and organizations
that are tax exempt under Section 501(c)(3) of the Code. A Policy issued in
connection with a TSA Plan will be endorsed to reflect the restrictions imposed
on assignment, premium payments, withdrawals, and surrender under Code Section
403(b). The Policyowner may terminate the endorsement at any time. However, the
termination of the endorsement may cause the Policy to fail to qualify under
Code Section 403(b). See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN
CONNECTION WITH TSA PLANS" and POLICY LOANS -- "POLICIES ISSUED IN CONNECTION
WITH TSA PLANS."
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in the Policy. If, in the first 48 Policy months following Date of
Issue or the effective date of an increase in the Face Amount or of a Policy
Change which causes a change in the Minimum Monthly Factor:
- You make premium payments (less debt, partial withdrawals and partial
withdrawal charges) at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy, increase in Face Amount or
Policy Change has been in force, and
- Debt does not exceed Policy Value less surrender charges, then
- the Policy is guaranteed not to lapse during that period.
EXCEPT FOR THE 48 POLICY MONTH PERIODS, MAKING MONTHLY PAYMENTS AT LEAST EQUAL
TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN
FORCE.
However, if the optional Guaranteed Death Benefit rider is in effect, the
Company (a) guarantees that the Policy will not lapse, regardless of the
investment performance of the Separate Account, and (b) provides a guaranteed
death benefit. See THE POLICY -- "Guaranteed Death Benefit Rider."
ALLOCATION OF INITIAL PREMIUMS
Net premiums may be allocated to one or more Sub-Accounts of the Separate
Account, to the General Account, or to any combination of accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than 20 Sub-Accounts at any one time. The minimum allocation is
1% of Net Premium. All allocations must be in whole numbers and must total 100%.
See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
General Account will earn a fixed rate of interest. Net premiums and minimum
interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PARTIAL WITHDRAWALS
After the first Policy year, you may make partial withdrawals in a minimum
amount of $500 from the Policy Value. Under Option 1, the Face Amount is reduced
by the amount of the partial withdrawal. A partial withdrawal will not be
allowed under Option 1 if it would reduce the Face Amount below $40,000.
A partial withdrawal transaction charge, which is described in CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawal," will be assessed to reimburse the
Company for the cost of processing each partial withdrawal. A withdrawal charge
also may be imposed upon a partial withdrawal. Generally, amounts withdrawn
during each Policy year in excess of 10% of the Policy Value ("excess
withdrawal") are subject to the withdrawal charge. The withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawals" and CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawal."
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LOAN PRIVILEGE
You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions, and interest on Debt to
the end of the Policy year. Thereafter, Loan Value is 90% of an amount equal to
the Policy Value less the surrender charge.
Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon written request. It may be revoked by you at any time. If
this option has been selected, after the tenth policy anniversary, the Policy
Value in the General Account equal to the loan amount will be credited with
interest at an effective annual yield of at least 7.5%. The Company's current
position is to credit a rate of interest equal to the rate being charged for the
preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
Loans from Policies issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code are subject to additional restrictions. See
POLICY LOANS -- "Policies Issued in Connection with TSA Plans."
POLICY LAPSE AND REINSTATEMENT
Except as otherwise provided in the optional Guaranteed Death Benefit Rider, the
failure to make premium payments will not cause a Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any; or
(b) Debt exceeds Policy Value less surrender charges.
A 62-day grace period applies to each situation.
Even if the situation described in (a) above exists, the Policy will not lapse
if you meet the so-called "Minimum Monthly Factor" test. The Minimum Monthly
Factor test is only used to determine whether the Policy will enter the grace
period during the first 48 months or within 48 months following an increase in
the Face Amount. Under the Minimum Monthly Factor test, the Company determines
two amounts:
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- the sum of the payments your have made, minus any Policy loans,
withdrawals and withdrawal charges.
- the amount of the Minimum Monthly Factor (the amount is shown on page 5 of
the Policy) multiplied by the number of months the Policy has been in
force or the number of months which have elapsed since the last increase
in the Face Amount.
The Company then compares the first amount to the second amount. The Policy will
not enter the grace period if the first amount is greater than the second
amount. If the Policy lapses, it may be reinstated within three years of the
date of default (but not later that the Final Premium Payment Date). In order to
reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement. See POLICY TERMINATION AND REINSTATEMENT.
In addition, if the Guaranteed Death Benefit rider is in effect, the Company
guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account. However, the Policy may lapse under certain
circumstance. See THE POLICY -- "Guaranteed Death Benefit Rider."
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account credited to the Policy. The Policy Value reflects the amount and
frequency of Net Premiums paid, charges and deductions imposed under the Policy,
interest credited to accumulations in the General Account, investment
performance of the Sub-Account(s) to which Policy Value has been allocated, and
partial withdrawals. The Policy Value may be relevant to the computation of the
Death Proceeds. You bear the entire investment risk for amounts allocated to the
Separate Account. The Company does not guarantee a minimum Policy Value.
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS
The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Sum Insured, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Policy month in which
the Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the Insured's Age) of the Policy Value. On or after the Final Premium Payment
Date, the Death Proceeds will equal the Surrender Value, unless the optional
Guaranteed Death Benefit Rider is in effect. See THE POLICY -- "Death Proceeds,"
and "Guaranteed Death Benefit Rider."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- DEATH PROCEEDS
PAYMENT OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED
Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Policy. Any change in the Face
Amount will affect the monthly cost of insurance charges and the amount of the
surrender charge. If
12
<PAGE>
the Face Amount is decreased, a pro-rata surrender charge may be imposed. The
Policy Value is reduced by the amount of the charge. See THE POLICY -- "Change
in the Face Amount."
The minimum increase in Face Amount is $10,000 and any increase also may require
additional Evidence of Insurability satisfactory to the Company. The increase is
subject to a "free-look period" and, during the first 24 months after the
increase, to a conversion privilege. See THE POLICY -- "Free-Look Period" and
"Conversion Privileges."
ADDITIONAL INSURANCE BENEFITS
You have the flexibility to add additional insurance benefits by rider. These
include the Waiver of Premium Rider, Accidental Death Benefit Rider, Guaranteed
Insurability Rider, Other Insured Rider, Children's Insurance Rider, Exchange
Option Rider, Living Benefits Rider and Guaranteed Death Benefit Rider. See
APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deductions. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions From the Policy Value."
POLICY FEES AND CHARGES
There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.
DEDUCTIONS FROM EACH PREMIUM
A tax expense charge will be deducted from each premium payment to compensate
the Company for premium taxes imposed by various states and local jurisdictions
and for federal taxes imposed for deferred acquisition costs ("DAC taxes"). The
tax expense charge is currently 3 1/2% but may be increased or decreased to
reflect changing tax rates. See CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
MONTHLY DEDUCTIONS FROM THE POLICY VALUE
On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy
Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE of $5 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyholder inquiries.
As noted above, certain additional insurance rider benefits are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE SEPARATE ACCOUNT
A daily charge currently equivalent to an effective annual rate of 0.80% of the
average daily net asset value of each Sub-Account of the Separate Account is
imposed to compensate the Company for its assumption of
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<PAGE>
certain mortality and expense risks and for administrative costs associated with
the Separate Account. The rate is 0.65% for the mortality and expense risk and
0.15% for the Separate Account administrative charge. The administrative charge
is eliminated after the tenth Policy year. See CHARGES AND DEDUCTIONS --
"Charges Against Assets of the Separate Account."
The Underlying Funds also incur certain expenses which are reflected in the net
asset value of the Sub-Accounts. See INVESTMENT OPTIONS -- "Charges of the
Underlying Investment Companies" below.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn or $25. In addition to the
partial withdrawal transaction charge, a withdrawal charge also may be made
under certain circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial
Withdrawal." The transaction fee applies to all partial withdrawals, including a
Withdrawal without a surrender charge (described below).
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICY -- "Change
In the Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in the
Face Amount."
TRANSFER CHARGE
The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES AND DEDUCTIONS
- -- "Transfer Charges."
SURRENDER CHARGES
At any time that the Policy is in effect, a Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in Face Amount. The duration
of the surrender charge is 15 years for issue Ages 0 through 50, grading down to
10 years for issue Ages 55 and above. The surrender charge is imposed only if,
during its duration, you request a full surrender or a decrease in the Face
Amount.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b), where (a) is a DEFERRED ADMINISTRATIVE CHARGE, and (b)
is a DEFERRED SALES CHARGE.
The DEFERRED ADMINISTRATIVE CHARGE is $8.50 per thousand dollars of the initial
Face Amount or of an increase in the Face Amount. The charge is designed to
reimburse the Company for administrative costs associated with product research
and development, underwriting, Policy administration, decreasing the Face
Amount, and surrendering a Policy. Because the maximum surrender charge reduces
by 0.5% or more per month (depending on issue Age) after the 40th Policy month
from the Date of Issue or the effective date of an increase in the Face Amount,
in certain situations some or all of the deferred administrative charge may not
be assessed upon surrender of the Policy. The deferred sales charge is equal to
49% of premiums received up to a maximum number of Guideline Annual Premiums
that vary by issue Age. This maximum number varies from 1.660714 (for Ages 0
through 55) to 0.948980 (for Age 85). See THE POLICY -- "Policy Surrender" and
CHARGES AND DEDUCTIONS -- "Surrender Charge."
14
<PAGE>
In accordance with state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of the initial
Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above. The deferred sales charge, however, will not exceed
29% of premiums received, up to one Guideline Annual Premium, plus 9% of
premiums received that are in excess of one Guideline Annual Premium, but less
than the maximum number of Guideline Annual Premiums subject to the deferred
sales charge. See THE POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
SURRENDER CHARGES FOR INCREASES IN THE FACE AMOUNT
A separate surrender charge will apply to, and is calculated for, each increase
in the Face Amount. The maximum surrender charge for the increase is equal to
the sum of (a) plus (b), where (a) is the deferred administrative charge, and
(b) is a deferred sales charge. The deferred administrative charge is equal to
$8.50 per thousand dollars of increase. The deferred sales charge is equal to
49% of premiums associated with the increase, up to a maximum number of
Guideline Annual Premiums that varies by issue Age. This maximum number varies
from 1.660714 (for Ages 0 through 55) to 0.948980 (for Age 85).
In accordance with state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This maximum
surrender charge remains level for the first 40 Policy months following the
increase, and reduces by 0.5% or more per month (depending on Age at increase)
thereafter. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. The
actual surrender charge with respect to the increase may be less than the
maximum. See THE POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT
In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full Policy surrender. See THE
POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge"
and APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
OTHER CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. No such charges currently are imposed, and any such
charge is guaranteed not to exceed $25. See CHARGES AND DEDUCTIONS -- "Other
Administrative Charges."
INVESTMENT OPTIONS
The Policy permits Net Premiums to be allocated either to the Company's General
Account or to the Separate Account. The Separate Account currently is comprised
of 20 Sub-Accounts ("Sub-Accounts"). Each Sub-Account invests exclusively in a
corresponding Underlying Fund of the Allmerica Investment Trust ("Trust")
managed by Allmerica Financial Investment Management Services, Inc., ("AFIMS")
Fidelity Variable Insurance Products Fund ("Fidelity VIP") and Fidelity Variable
Insurance Products Fund II ("Fidelity VIP II") managed by Fidelity Management &
Research Company, T. Rowe Price International Series, Inc. ("T. Rowe Price")
managed by Rowe Price-Fleming International, Inc., with respect to the
International Stock
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<PAGE>
Portfolio, or the Delaware Group Premium Fund, Inc. ("DGPF") managed by Delaware
International Advisers Ltd. with respect to the International Equity Series. The
Policy permits you to transfer Policy Value among the available Sub-Accounts and
between the Sub-Accounts and the General Account, subject to certain limitations
described under THE POLICY -- "Transfer Privilege." The Trust, Fidelity VIP,
Fidelity VIP II, T. Rowe Price and DGPF are open-end, diversified series
management investment companies. The following Underlying Funds are available
under the Policy:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
Select Value Opportunity Fund Fidelity VIP Growth Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund
Select Growth Fund VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund Fidelity VIP II Asset Manager Portfolio
Growth Fund
Equity Index Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select Growth and Income Fund T. Rowe Price International Stock Portfolio
Investment Grade Income Fund
Government Bond Fund DELAWARE GROUP PREMIUM FUND, INC.
Money Market Fund DGPF International Equity Series
</TABLE>
Certain Funds may not be available in all states.
Each of the Underlying Funds has its own investment objectives. Certain
Underlying Funds, however, have investment objectives similar to certain other
Underlying Funds. The value of each Sub-Account will vary daily depending upon
the performance of the Underlying Fund in which it invests. Each Sub-Account
reinvests dividends or capital gains distributions received from an Underlying
Fund in additional shares of that Underlying Fund. There can be no assurance
that the investment objectives of the Underlying Funds can be achieved.
CHARGES OF THE UNDERLYING INVESTMENT COMPANIES
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table
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<PAGE>
shows the expenses of the Underlying Funds for 1998. For more information
concerning fees and expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER VOLUNTARY (AFTER APPLICABLE (AFTER WAIVERS/
UNDERLYING FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ---------------------------------------------------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund............................. 0.88% 0.07% 0.95%(1)(2)
Select Capital Appreciation Fund.......................... 0.94% 0.10% 1.04%(1)(2)
Select Value Opportunity Fund............................. 0.90%(1)* 0.08% 0.98%(1)(2)*
Select Emerging Markets Fund(@)........................... 1.00%* 1.19% 2.19%(1)(2)*
Select International Equity Fund.......................... 0.90% 0.12% 1.02%(1)(2)
DGPF International Equity Series.......................... 0.82%(4)* 0.13% 0.95%(4)
Fidelity VIP Overseas Portfolio........................... 0.74% 0.17% 0.91%(3)
T. Rowe Price International Stock Portfolio............... 1.05% 0.00% 1.05%
Select Growth Fund........................................ 0.81%** 0.05% 0.86%(1)(2)**
Select Strategic Growth Fund(@)........................... 0.39%* 0.81% 1.20%(1)(2)*
Growth Fund............................................... 0.44% 0.05% 0.49%(1)(2)
Fidelity VIP Growth Portfolio............................. 0.59% 0.09% 0.68%(3)
Equity Index Fund......................................... 0.29% 0.07% 0.36%(1)
Select Growth and Income Fund............................. 0.68% 0.05% 0.73%(1)(2)
Fidelity VIP Equity-Income Portfolio...................... 0.49% 0.09% 0.58%(3)
Fidelity VIP II Asset Manager Portfolio................... 0.54% 0.10% 0.64%(3)
Fidelity VIP High Income Portfolio........................ 0.58% 0.12% 0.70%
Investment Grade Income Fund.............................. 0.43% 0.09% 0.52%(1)
Government Bond Fund...................................... 0.50% 0.14% 0.64%(1)
Money Market Fund......................................... 0.26% 0.06% 0.32%(1)
</TABLE>
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations on February 20, 1998. Expenses shown are annualized.
* Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Emerging Markets Fund, Select Value Opportunity Fund, and
Select Strategic Growth Fund. Without these adjustments, the Management Fees and
Total Fund Expenses would have been 1.35% and 2.54%, respectively for Select
Emerging Markets Fund, 0.91% and 0.99%, respectively, for Select Value
Opportunity Fund, and 0.85% and 1.66%, respectively, for Select Strategic Growth
Fund.
** Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The Management Fee and Total Fund Expense ratios shown in the table
above have been adjusted to assume that the revised rates took effect January 1,
1998.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("AFIMS") has declared a voluntary expense limitation of 1.35% of average
net assets for Select Aggressive Growth Fund and Select Capital Appreciation
Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select International
Equity Fund, 1.20% for Growth Fund and Select Growth Fund, 1.10% for Select
Growth and Income Fund, 1.00% for Select Income Fund, Investment Grade Income
Fund and Government Bond Fund, and 0.60% for Money Market Fund and Equity Index
Fund. The total operating expenses of these Funds of the Trust were less than
their respective expense limitations throughout 1998.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
17
<PAGE>
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total annual fund operating expense ratios would have been 2.19%
for Select Emerging Markets Fund, 0.92% for Select Aggressive Growth Fund, 1.02%
for Select Capital Appreciation Fund, 0.94% for Select Value Opportunity Fund,
1.01% for Select International Equity Fund, 0.84% for Select Growth Fund, 1.14%
for Select Strategic Growth Fund, 0.46% for Growth Fund, and 0.70% for Select
Growth and Income Fund.
(3) A portion of the brokerage commissions that certain funds paid was used to
reduce Fund expenses. In addition, certain funds, or Fidelity Management &
Research Company on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash balances
were used to reduce custodian expenses. Including these reductions, the total
fund expenses presented in the table would have been 0.57% for Fidelity VIP
Equity-Income Portfolio, 0.66% for Fidelity VIP Growth Portfolio, 0.89% for
Fidelity VIP Overseas Portfolio, and 0.63% for Fidelity VIP II Asset Manager
Portfolio.
(4) Effective May 1, 1999, Delaware International Advisers Ltd., the investment
adviser for the DGPF International Equity Series, has agreed to limit total
annual expenses of the fund to 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 1999. The new limitation will be
in effect through October 31, 1999. For the fiscal year ended December 31, 1998,
the actual ratio of total annual expenses was 0.88%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
TAXATION OF THE POLICIES
The Policy generally is subject to the same federal income tax treatment as a
conventional fixed benefit life insurance Policy. Under current tax law, to the
extent there is no change in benefits and the policy is not a modified endowment
contract, the Policyowner will be taxed on Policy Value withdrawn from the
Policy only to the extent that the amount withdrawn exceeds the total premiums
paid. Withdrawals in excess of premiums paid will be treated as ordinary income.
During the first 15 Policy years, however, an "interest first" rule applies to
any distribution of cash that is required under Section 7702 of the Code because
of a reduction in benefits under the Policy. Death Proceeds under the Policy are
generally excludable from the gross income of the Beneficiary, but in some
circumstances the Death Proceeds or the Policy Value may be subject to federal
estate tax. See FEDERAL TAX CONSIDERATIONS -- "Taxation of the Policy."
A Policy may be considered a "modified endowment contract" if it fails a
"seven-pay " test at any time during the first seven Policy years or within
seven years of a material change in the Policy. The Policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the Policy at any time
during the first seven Policy years or within seven years of a material change
in the Policy, exceed the sum of the net level premiums that would have been
paid had the Policy provided for paid-up future benefits after the payment of
seven level premiums. If the Policy is considered a modified endowment contract,
all distributions (including Policy loans, partial withdrawals, Policy
surrenders or assignments) will be taxed on an "income-first" basis. With
certain exceptions, an additional 10% penalty will be imposed on the portion of
any distribution that is includible in income. For more information, see FEDERAL
TAX CONSEQUENCES -- "Modified Endowment Contracts."
18
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, telephone 508-855-1000. As of December 31, 1998, the
Company had over $14 billion in assets and over $26 billion of life insurance in
force. The Company is subject to the laws of the state of Delaware governing
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America.
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
The Separate Account was authorized by vote of the Board of Directors of the
Company on January 21, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Policy are set aside in the
Separate Account, and are kept separate from the general assets of the Company.
Under Delaware law, assets equal to the reserves and other liabilities of the
Separate Account may not be charged with any liabilities arising out of any
other business of the Company. The Separate Account currently has 20
Sub-Accounts. 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, or the other
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of one of the following investment companies:
- Allmerica Investment Trust
- Variable Insurance Products Fund
- Variable Insurance Products Fund II
- T. Rowe Price International Series, Inc.
- Delaware Group Premium Fund, Inc.
19
<PAGE>
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 generally have no
effect on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public but solely to separate
accounts of life insurance companies, such as the Separate Account.
Each Sub-Account has two subdivisions. One subdivision applies to a Policy
during the first ten Policy years, which are subject to the Separate Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the Separate Account." Thereafter, such a Policy automatically is allocated to
the second subdivision to account for the elimination of the Separate Account
administrative charge.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and Separate Account.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment Policy
of the Trust or its separate investment funds.
The Trust was established by the Company as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by the Company, or other
insurance companies. Thirteen investment portfolios of the Trust ("Funds") are
available under the Policy, each issuing a series of shares: Select Aggressive
Growth Fund, Select Capital Appreciation Fund, Select Value Opportunity Fund,
the Select Emerging Markets Fund, Select International Equity Fund, Select
Growth Fund, Select Strategic Growth Fund, Growth Fund, Equity Index Fund,
Select Growth and Income Fund, Investment Grade Income Fund, Government Bond
Fund and Money Market Fund.
AFIMS serves as investment adviser of the Trust and has entered into
sub-advisory agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Underlying Funds. See INVESTMENT ADVISORY SERVICES
- -- "Investment Advisory Services to the Trust."
VARIABLE INSURANCE PRODUCTS FUND
Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Policy: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity
VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. See
INVESTMENT ADVISORY SERVICES -- "Investment Advisory Services to Fidelity VIP
and Fidelity VIP II Funds."
VARIABLE INSURANCE PRODUCTS FUND II
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR (see
discussion under "Variable Insurance Products Fund"), is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on March 21, 1988 and is registered with the SEC under the 1940 Act. One
of its
20
<PAGE>
investment portfolios is available under the Policy: the Fidelity VIP II Asset
Manager Portfolio. See INVESTMENT ADVISORY SERVICES -- "Investment Advisory
Services to Fidelity VIP and Fidelity VIP II Funds."
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), is an open-end,
diversified, management investment company organized as a Maryland corporation
in 1994 and is registered with the SEC under the 1940 Act. One of its investment
portfolios is available under the Policy: the T. Rowe Price International Stock
Portfolio. See "Investment Advisory Services to T. Rowe Price."
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policy: the International Equity
Series. The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital. Realization of income is not a
significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund of the Trust
seeks long-term growth of capital by investing primarily in a diversified
portfolio of common stocks of small and mid-size companies, whose securities at
the time of purchase are considered by the Sub-Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- The Select Emerging Markets Fund of the Trust
seeks long-term growth of capital by investing in the world's emerging markets.
The Fund may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities.
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SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
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.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
SELECT STRATEGIC GROWTH FUND -- The Select Strategic Growth Fund of the Trust
seeks long-term growth of capital by investing primarily in common stocks of
established companies.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund of the Trust
seeks a combination of long-term growth of capital and current income. The Fund
will invest primarily in dividend-paying common stocks and securities
convertible into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500. The
Portfolio may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities. See the Fidelity VIP prospectus.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
money market instruments.
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FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund 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 within sixty (60)
days of the later of (1) the effective date of such change in the investment
policy, or (2) your receipt of the notice of the right to transfer. You may then
change the percentages of your premium and deduction allocations.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trustees have entered into a Management Agreement with
AFIMS to handle the day-to-day affairs of the Trust. AFIMS, subject to review by
the Trustees, is responsible for the general management of the Funds. AFIMS also
performs certain administrative and management services for the Trust, furnishes
to the Trust all necessary office space, facilities and equipment, and pays the
compensation, if any, of officers and Trustees who are affiliated with AFIMS.
Allmerica Asset Management, Inc., an indirect wholly-owned subsidiary of
Allmerica Financial Corporation, is an affiliate of the Company.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.
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For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Emerging Markets Fund * 1.35%
Select International Equity First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund, the Select Strategic Growth Fund, and
the Government Bond Fund, the investment management fee does not vary according
to the level of assets in the Fund.
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreements, the Sub-Advisers are
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific
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<PAGE>
instructions as may be given by the Trustees. AFIMS is solely responsible for
the payment of all fees for investment management services to the Sub-Advisers.
AFIMS' fee, computed for each Fund, will be paid from the assets of such Fund.
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. AFIMS is solely responsible for the payment of all fees for investment
management services to the Sub-Advisers.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds and
fees paid to the Sub-Advisors by AFIMS, and should be read in conjunction with
this Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS
For managing investments and business affairs, each Portfolio pays a monthly
management fee to FMR. The prospectuses of Fidelity VIP and Fidelity VIP II
contain additional information concerning the Portfolios, including information
about additional expenses paid by the Portfolios, and should be read in
conjunction with this Prospectus.
The fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis, this rate cannot rise above 0.37%,
and drops as total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio throughout the month.
The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made up of
two components:
1. A group fee rate based on the average net assets of all mutual funds advised
by FMR. On an annual basis, this rate cannot rise above 0.52%, and drops as
total assets under management increase.
2. An individual fund fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee
as high as 0.72% of its average net assets. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Fidelity VIP II
Asset Manager Portfolio may have a fee as high as 0.77% of its average net
assets. The Fidelity VIP Overseas Portfolio may have a fee as high as 0.97% of
its average net assets. The actual fee rate may be less depending on the total
assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the International Stock Portfolio is Rowe
Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded in
1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of the largest no-load international mutual
fund asset managers with approximately $32 billion (as of December 31, 1998)
under management in its offices in Baltimore, London, Tokyo, Hong Kong,
Singapore and Buenos Aires. To cover investment management and operating
expenses, the T. Rowe Price International Stock Portfolio pays Price-Fleming a
single, all-inclusive fee of 1.05% of its average daily net assets.
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<PAGE>
INVESTMENT ADVISORY SERVICES TO DGPF
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is based on the average daily net assets of the
Series are 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 net assets in excess of
$2,500 million.
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 are no longer 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 Separate 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 Policy interest in a Sub-Account without notice to
the Policyowner and prior approval of the SEC and state insurance authorities,
to the extent required by 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 a Policyowner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares of a new Underlying Fund
or in shares of another investment company. 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 Policyowners on a basis to be determined by the
Company.
Shares of the Funds of the Trust also are issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price and the Series of DGPF also are issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policyowners or variable annuity contract owners. Although the
Company and the Underlying Investment Companies currently do not foresee any
such disadvantages to either variable life insurance Policyowners or variable
annuity contract owners, the Company and the respective Trustees intend to
monitor events in order to identify any material conflicts and to determine what
action, if any, should be taken. If the Trustees were to conclude that separate
Funds should be established for variable life and variable annuity separate
accounts, the Company will bear the expenses.
If any of these substitutions or changes are made, the Company may endorse the
Policy to reflect the substitution or change, and will notify Policyowners of
all such changes. If the Company deems it to be in the best interest of
Policyowners, and subject to any approvals that may be required under applicable
law, the Separate Account or any Sub-Account(s) 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.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. 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 Policy, the Company reserves the right to do so.
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<PAGE>
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions which have been received by the Company. The Company also will vote
shares held in the Separate Account that it owns and which are not attributable
to the Policy in the same proportion.
The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the Fund shares be voted so
as (1) to cause a change in the sub-classification or investment objective of
one or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, the Company may disregard voting
instructions that are in favor of any change in the investment policies or in
any investment adviser or principal underwriter if the change has been initiated
by Policyowners or the Trustees. Our disapproval of any such change must be
reasonable and, in the case of a change in investment policies or investment
adviser, based on a good faith determination that such change would be contrary
to state law or otherwise is inappropriate in light of the objectives and
purposes of the Funds. In the event we do disregard voting instructions, a
summary of and the reasons for that action will be included in the next periodic
report to Policyowners.
THE POLICY
APPLYING FOR A POLICY
A Policy cannot be issued until the underwriting procedure has been completed.
Upon receipt at its Principal Office of a completed application from a
prospective Policyowner, the Company will follow certain insurance underwriting
procedures designed to determine whether the proposed Insured is insurable. This
process may involve medical examinations, and may require that further
information be provided by the proposed Policyowner before a determination of
insurability can be made. The Company reserves the right to reject an
application which does not meet its underwriting guidelines, but in underwriting
insurance, the Company complies with all applicable federal and state
prohibitions concerning unfair discrimination.
CONDITIONAL INSURANCE AGREEMENT
It is possible to obtain life insurance protection during the underwriting
process through a Conditional Insurance Agreement. If at the time of application
you make a payment equal to at least one "Minimum Monthly Factor" for the Policy
as applied for, the Company will provide conditional insurance, subject to the
terms of the Conditional Insurance Agreement. This coverage generally will
continue for a maximum of 90 days from the date of the application or the
completion of a medical exam, should one be required. In no event will any
insurance proceeds be paid under the Conditional Insurance Agreement if death is
by suicide.
PREMIUMS HELD IN THE GENERAL ACCOUNT PENDING UNDERWRITING APPROVAL
Pending completion of insurance underwriting and Policy issuance procedures, the
initial premium will be held in the General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of receipt of the premium at the Principal
Office. IF A POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
FREE-LOOK PERIOD
The Policy provides for an initial "Free-Look" period. You may cancel the Policy
by mailing or delivering the Policy to the Principal Office or an agent of the
Company on or before the latest of:
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<PAGE>
- 45 days after the application for the Policy is signed, or
- 10 days after you receive the Policy (or longer if required by state law),
or
- 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you.
When you return the Policy, the Company will mail a refund to you within seven
days. The refund of any premium paid by check, however, may be delayed until the
check has cleared your bank.
Where required by state law, the refund will equal the premiums paid. In all
other states, the refund will equal the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Separate Account, plus
(2) the value of the amounts allocated to the Separate Account, plus
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account.
FREE LOOK WITH FACE AMOUNT INCREASES
After an increase in the Face Amount, the Company will mail or personally
deliver a notice of a "Free Look" with respect to the increase. You will have
the right to cancel the increase before the latest of:
- 45 days after the application for the increase is signed, or
- 10 days after you receive the new specifications pages issued for the
increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal rights
to you.
Upon canceling the increase, you will receive a credit to your Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount (assuming the Policy is in force), you may
convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Separate Account to the General Account
and by simultaneously changing your premium allocation instructions to allocate
future premium payments to the General Account. Within 24 months after the
effective date of each increase, you can transfer, without charge, all or part
of the Policy Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, at your request the Company will issue a flexible
premium adjustable life insurance Policy to you. The new Policy will have the
same Face Amount, Issue Age, Dates of Issue, and Premium Class as the original
Policy.
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<PAGE>
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Separate Account
or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY
Unlike conventional insurance policies, the Policy does not obligate you to pay
premiums in accordance with a rigid and inflexible premium schedule. You may
establish a schedule of planned premiums which will be billed by the Company at
regular intervals. Failure to pay planned premiums will not itself cause the
Policy to lapse. However, if the optional Guaranteed Death Benefit rider is in
effect, certain minimum premium payment tests must be met.
You also may make unscheduled premium payments at any time prior to the Final
Premium Payment Date or skip planned premium payments, subject to the maximum
and minimum premium limitations described below.
You also may elect to pay premiums by means of a monthly automatic payment
procedure. Under this procedure, amounts will be deducted each month from your
checking account, generally on the Monthly Payment Date, from your checking
account and applied as a premium under a Policy. The minimum payment permitted
under this procedure is $50.
Premiums are not limited as to frequency and number. No premium payment may be
less than $100, however, without the Company's consent. Moreover, premium
payments must be sufficient to provide a positive Surrender Value at the end of
each Policy month, or the Policy may lapse. See POLICY TERMINATION AND
REINSTATEMENT.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in the Policy. If, in the first 48 Policy months following Date of
Issue or the effective date of an increase in the Face Amount or of a Policy
Change which causes a change in the Minimum Monthly Factor:
- You make premium payments (less debt, partial withdrawals and partial
withdrawal charges) at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy, increase in Face Amount or
Policy Change has been in force, and
- Debt does not exceed Policy Value less surrender charges, then
- the Policy is guaranteed not to lapse during that period.
EXCEPT FOR THE 48 POLICY MONTH PERIODS, MAKING MONTHLY PAYMENTS AT LEAST EQUAL
TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN
FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Policy during a
Policy year. See POLICY TERMINATION AND REINSTATEMENT.
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<PAGE>
INCENTIVE FUNDING DISCOUNT
The Company will lower the cost of insurance charges by 5% during any Policy
year for which you qualify for an incentive funding discount. To qualify, total
premiums paid under the Policy, less any debt, withdrawals and withdrawal
charges, and transfers from other policies issued by the Company, must exceed
90% of the guideline level premiums (as defined in Section 7702 of the Code)
accumulated from the Date of Issue to the date of qualification. The incentive
funding discount is not available in all states.
The amount needed to qualify for the incentive funding discount is determined on
the Date of Issue for the first Policy year and on each Policy anniversary for
each subsequent Policy year. If the Company receives the proceeds from a Policy
issued by an unaffiliated company to be exchanged for the Policy, however, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.
GUARANTEED DEATH BENEFIT RIDER
An optional Guaranteed Death Benefit Rider is available only at issue of the
Policy. If this rider is in effect, the Company:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Separate Account and
- provides a guaranteed death benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in Face Amount, as
described below. In addition, a one-time administrative charge of $25 will be
deducted from Policy Value when the Rider is elected. Certain transactions,
including Policy Loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the rider. If this rider is terminated, it
cannot be reinstated.
GUARANTEED DEATH BENEFIT TESTS
While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:
1. Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any debt,
partial withdrawals and withdrawal charges, must be greater than the Minimum
Monthly Factors (if any) multiplied by the number of months which have
elapsed since the Date of Issue or the effective date of increase; and
2. On each Policy anniversary, (a) must exceed (b), where, since the Date of
Issue:
(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and debt which is classified as a preferred loan; and
(b) is the sum of the minimum guaranteed death benefit premiums, as shown on
the specifications page of the Policy.
GUARANTEED DEATH BENEFIT
If the Guaranteed Death Benefit Rider is in effect on the Final Premium Payment
Date, guaranteed Death Proceeds will be provided as long as the rider is in
force. The Death Proceeds will be the greater of:
- the Face Amount as of the Final Premium Payment Date; or
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<PAGE>
- the Policy Value as of the date due proof of death is received by the
Company.
TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER
The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:
- foreclosure of a Policy Loan; or
- the date on which the sum of your payments does not meet or exceed the
applicable Guaranteed Death Benefit test (above); or any Policy change
that results in a negative guideline level premium; or
- the effective date of a change from Sum Insured Option 2 to Sum Insured
Option I, if such change occurs within 5 Policy years of the Final Premium
Payment Date; or
- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.
It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates. The net amount payable to keep the Policy in force will never exceed
the surrender charge plus three Monthly Deductions.
PAID-UP INSURANCE OPTION
Upon Written Request, a Policyowner may exercise a paid-up insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the Insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount that the Surrender Value of
the Policy can purchase for a net single premium at the Insured's Age and
Underwriting Class on the date this option is elected. The Company will transfer
any Policy Value in the Separate Account to the General Account on the date it
receives the Written Request to elect the option. If the Surrender Value exceeds
the net single premium necessary for the fixed insurance, the Company will pay
the excess to the Policyowner. The net single premium is based on the
Commissioners 1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker
(Table B for unisex Policies) with increases in the tables for non-standard
risks. Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:
- As described above, the paid-up insurance benefit is computed differently
from the net death benefit, and the death benefit options will not apply.
- The Company will transfer the Policy Value in the Separate Account to the
General Account on the date it receives the written request to elect the
option. The Company will not allow transfers of Policy Value from the
General Account back to the Separate Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.
- Riders will continue only with the Company's consent.
After electing paid-up fixed insurance, the Policyowner may make Policy loans or
surrender the Policy for its net cash value. The cash value is equal to the net
single premium for paid-up insurance at the Insured's attained age. The net cash
value is the cash value less any outstanding loans.
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ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the 3 1/2% tax expense charge. In
the application for a Policy, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have Policy
Value in more than 20 Sub-Accounts at any one time. The minimum amount which may
be allocated to a Sub-Account is 1% of Net Premium paid. Allocation percentages
must be in whole numbers (for example, 33 1/3% may not be chosen) and must total
100%.
FUTURE CHANGES ALLOWED
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. If allocation changes by
telephone are elected by the Policyowner, a properly completed authorization
form must be on file before telephone requests will be honored. The Company and
its agents and affiliates 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 telephone transactions may include
requiring callers to identify themselves by name, and to identify the
Policyowner by name, date of birth, and social security number or PIN number.
All transfer instructions by telephone are tape recorded.
INVESTMENT RISK
The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners periodically should review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. However, the Policy Value held in the General Account to secure a
Policy loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Account(s) next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Currently, transfers to and from the General Account are permitted only if:
- there has been at least a 90-day period since the last transfer from the
General Account, and
- the amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Policy.
These rules are subject to change by the Company.
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DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust, respectively, to one or more of the other
Sub-Accounts ("Dollar-Cost Averaging Option"), or
- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS
The transfer privilege is subject to the Company's consent. The Company reserves
the right to impose limitations on transfers including, but not limited to:
- the minimum amount that may be transferred,
- the minimum amount that may remain in a Sub-Account following a transfer
from that Sub-Account,
- the minimum period of time between transfers involving the General
Account, and
- the maximum amount that may be transferred each time from the General
Account.
Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment Policy will not count towards the 12 free transfers.
DEATH PROCEEDS
As long as the Policy remains in force (see POLICY TERMINATION AND
REINSTATEMENT), upon due proof of the Insured's death, the Company will pay the
Death Proceeds of the Policy to the named Beneficiary. The Company normally will
pay the Death Proceeds within seven days of receiving due proof of the Insured's
death, but the Company may delay payments under certain circumstances. See OTHER
POLICY PROVISIONS -- "Postponement of Payments." The Death Proceeds may be
received by the Beneficiary in cash or under one or more of the payment options
set forth in the Policy. See APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.
Prior to the Final Premium Payment Date, the Death Proceeds are equal to:
- the Sum Insured provided under Option 1 or Option 2, whichever is elected
and in effect on the date of death; plus
- any additional insurance on the Insured's life that is provided by rider;
minus
- any outstanding Debt, any partial withdrawals and partial withdrawal
charges, and any Monthly Deductions due and unpaid through the Policy
month in which the Insured dies.
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After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value of the Policy, unless the Guaranteed Death Benefit Rider is in effect. If
the Guaranteed Death Benefit Rider is in effect, the Death Proceed equal the
greater of the Face Amount or Surrender Value. The amount of Death Proceeds
payable will be determined as of the date of the Company's receipt of due proof
of the Insured's death.
SUM INSURED OPTIONS
The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the Option once per Policy year by written request. There is no charge
for a change in Option.
Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED
To remain qualified as "life insurance" for federal tax purposes, federal tax
law requires that policies have a minimum amount of pure life insurance
protection in relation to the size of the Policy Value. The Guideline Minimum
Sum Insured is used to determine compliance with this requirement. So long as
the Policy qualifies as a life insurance contract, the insurance proceeds will
be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM SUM INSURED TABLE
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
- ------------------------------------------------------------- -----------------
<S> <C>
40 and under............................................. 250%
45....................................................... 215%
50....................................................... 185%
55....................................................... 150%
60....................................................... 130%
65....................................................... 120%
70....................................................... 115%
75....................................................... 105%
80....................................................... 105%
85....................................................... 105%
90....................................................... 105%
95 and above............................................. 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
Under both Option 1 and Option 2, the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under the Guideline Minimum Sum Insured exceeds the Face Amount,
in which case the Sum Insured will vary as the Policy Value varies. Under Option
2, the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured (and the Death Proceeds) will
be greater under Option 2 than under Option 1. This is because the Policy Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. Under Option 2, however, the cost of insurance included in the
Monthly Deduction will be greater, and the rate at which Policy Value will
accumulate will be slower (assuming the same specified Face Amount and the same
actual premiums paid). See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Policy Value."
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If you desire to have premium payments and investment performance reflected in
the amount of the Sum Insured, you should choose Option 2. If you desire premium
payments and investment performance reflected to the maximum extent in the
Policy Value, you should select Option 1.
ILLUSTRATIONS
For the purposes of the following illustrations, assume that the Insured is
under the Age of 40 and that there is no outstanding Debt.
ILLUSTRATION OF OPTION 1
Under Option 1, the Face Amount of the Policy generally will equal the Sum
Insured. If at any time, however, the Policy Value multiplied by the applicable
percentage is less than the Face Amount, the Sum Insured will equal the Face
Amount of the Policy.
For example, a Policy with a $50,000 Face Amount will generally have a Sum
Insured equal to $50,000. Because the Sum Insured must be equal to or greater
than 250% of Policy Value, however, if at any time the Policy Value exceeds
$20,000, the Sum Insured will exceed the $50,000 Face Amount. In this example,
each additional dollar of Policy Value above $20,000 will increase the Sum
Insured by $2.50. For example, a Policy with a Policy Value of $35,000 will have
a Guideline Minimum Sum Insured of $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 X
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).
Similarly, so long as Policy Value exceeds $20,000, each dollar taken out of
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $25,000 to $20,000 (because of partial withdrawals,
charges or negative investment performance), the Sum Insured will be reduced
from $62,500 to $50,000.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Sum Insured would not
exceed the $50,000 Face Amount unless the Policy Value exceeded $27,027 (rather
than $20,000), and each dollar then added to or taken from Policy Value would
change the Sum Insured by $1.85.
ILLUSTRATION OF OPTION 2
Under Option 2, the Sum Insured is generally equal to the Face Amount of the
Policy plus the Policy Value. The Sum Insured under Option 2, however, always
will be the greater of:
- the Face Amount plus Policy Value; or
- the Policy Value multiplied by the applicable percentage from the
Guideline Minimum Sum Insured Table.
For example, a Policy with a Face Amount of $50,000 and with Policy Value of
$5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000). Policy Value of
$10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000); Policy Value
of $25,000 will produce a Sum Insured of $75,000 ($50,000 + $25,000).
According to the Guideline Minimum Sum Insured Table, however, the Sum Insured
for the example must be at least 250% of the Policy Value. Therefore, if the
Policy Value is greater than $33,333, 250% of that amount will be the required
Sum Insured, which will be greater than the Face Amount plus Policy Value. In
this example, each additional dollar of Policy Value above $33,333 will increase
the Sum Insured by $2.50. For example, if the Policy Value is $35,000, the
Guideline Minimum Sum Insured will be $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 X
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).
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<PAGE>
Similarly, if the Policy Value exceeds $33,333, each dollar taken out of the
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $45,000 to $40,000 because of partial withdrawals, charges
or negative investment performance, the Sum Insured will be reduced from
$112,500 to $100,000. If at any time, however, Policy Value multiplied by the
applicable percentage is less than the Face Amount plus Policy Value, then the
Sum Insured will be the current Face Amount plus the Policy Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Sum Insured must be at least
1.85 times the Policy Value. The amount of the Sum Insured would be the sum of
the Policy Value plus $50,000 unless the Policy Value exceeded $58,824 (rather
than $33,000). Each dollar added to or subtracted from the Policy would change
the Sum Insured by $1.85.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
CHANGE FROM OPTION 1 TO OPTION 2
If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount of less than $40,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Under Option 2, the Insurance Amount at Risk always will
equal the Face Amount unless the Guideline Minimum Sum Insured is in effect. The
cost of insurance also may be higher or lower than it otherwise would have been
without the change in Sum Insured Option. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from the Policy Value."
CHANGE FROM OPTION 2 TO OPTION 1
If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. The change in
option, however, will affect the determination of the Sum Insured from that
point on, since the Policy Value no longer will be added to the Face Amount in
determining the Sum Insured; the Sum Insured will equal the new Face Amount (or,
if higher, the Guideline Minimum Sum Insured). The cost of insurance may be
higher or lower than it otherwise would have been since any increases or
decreases in Policy Value will reduce or increase, respectively, the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the Separate Account, changing the Sum Insured Option
from Option 2 to Option 1 will reduce the Insurance Amount at Risk and therefore
the cost of insurance charge for all subsequent Monthly Deductions, compared to
what such charge would have been if no such change were made.
A change in Sum Insured Option may result in total premiums paid exceeding the
then-current maximum premium limitation determined by IRS rules. In such event,
the Company will pay the excess to the Policyowner. See THE POLICY -- "Premium
Payments."
CHANGE IN THE FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Policy at any time by submitting a Written Request to the Company.
Any increase or decrease in the specified Face Amount requested by you will
become effective on the Monthly Payment Date on or next following the date of
receipt
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<PAGE>
of the request at the Principal Office or, if Evidence of Insurability is
required, the date of approval of the request.
INCREASES IN THE FACE AMOUNT
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured also is required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than $10,000. You may not increase the Face Amount after the Insured
reaches Age 85. An increase must be accompanied by an additional premium if the
Surrender Value is less than $50 plus an amount equal to the sum of two Minimum
Monthly Factors.
On the effective date of each increase in the Face Amount, a transaction charge
of $40 will be deducted from the Policy Value for administrative costs. The
effective date of the increase will be the first Monthly Payment Date on or
following the date all of the conditions for the increase are met.
An increase in the Face Amount generally will affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge also will
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from the Policy Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase canceled and the charges which would not have been
deducted but for the increase will be credited to the Policy, and (2) during the
first 24 months following the increase, to transfer any or all Policy Value to
the General Account free of charge. See THE POLICY -- "Free-Look Period" and
"Conversion Privileges." A refund of charges which would not have been deducted
but for the increase will be made at your request.
DECREASES IN THE FACE AMOUNT
The minimum amount for a decrease in the Face Amount is $10,000. The Face Amount
in force after any decrease may not be less than $50,000. If, following a
decrease in the Face Amount, the Policy would not comply with the maximum
premium limitation applicable under the IRS Rules, the decrease may be limited
or Policy Value may be returned to the Policyowner (at your election) to the
extent necessary to meet the requirements. A return of Policy Value may result
in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy Value." For
purposes of determining the cost of insurance charge, any decrease in the Face
Amount will reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase;
- the next most recent increases successively; and
- the initial Face Amount.
This order also will be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
For more information, see CHARGES AND DEDUCTIONS -- "Surrender Charge" and
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGE."
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<PAGE>
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of:
- your accumulation in the General Account, plus
- the value of the Accumulation Units in the Sub-Accounts.
The Policy Value is used in determining the Surrender Value (the Policy Value
less any Debt and applicable surrender charges). See THE POLICY -- "Policy
Surrender." There is no guaranteed minimum Policy Value. Because the Policy
Value on any date depends upon a number of variables, it cannot be
predetermined.
The Policy Value and the Surrender Value will reflect the frequency and amount
of Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.
CALCULATION OF POLICY VALUE
The Policy Value is determined first on the Date of Issue and thereafter on each
Valuation Date. On the Date of Issue, the Policy Value will be the Net Premiums
received, plus any interest earned during the underwriting period when premiums
are held in the General Account (before being transferred to the Separate
Account; see THE POLICY -- "Applying for a Policy") less any Monthly Deductions
due. On each Valuation Date after the Date of Issue the Policy Value will be:
- the aggregate of the values in each of the Sub-Accounts on the Valuation
Date, determined for each Sub-Account by multiplying the value of an
Accumulation Unit in that Sub-Account on that date by the number of such
Accumulations Units allocated to the Policy; plus
- the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT
Each Net Premium is allocated to the Sub-Account(s) selected by you. Allocations
to the Sub-Accounts are credited to the Policy in the form of Accumulation
Units. Accumulation Units are credited separately for each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium 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 will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a
Sub-Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
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. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit
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<PAGE>
on 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.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b) and subtracting (c) and (d) from the result,
where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal, on an annual basis,
to 0.65% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 0.90%; and
(d) is the Separate Account administrative charge for each day in the Valuation
Period equal, on an annual basis, to 0.15% of the daily net asset value of
that Sub-Account. The administrative charge may be increased or decreased by
the Company, but may not exceed 0.25%. This charge is applicable only during
the first ten Policy years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- DEATH
PROCEEDS PAYMENT OPTIONS. These choices also are available at the Final Premium
Payment Date and if the Policy is surrendered. The Company may make more payment
options available in the future.
If no election is made, the Company will pay the Death Proceeds in a single sum.
When the Death Proceeds are payable in a single sum, the Beneficiary may, within
one year of the Insured's death, select one or more of the payment options if no
payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Policy by rider.
The cost of any optional insurance benefits will be deducted as part of the
Monthly Deductions. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from the
Policy Value."
POLICY SURRENDER
You may surrender the Policy at any time and receive its Surrender Value. The
Surrender Value is equal to:
- the Policy Value, MINUS
- any Debt and applicable surrender charges.
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<PAGE>
The Surrender Value will be calculated as of the Valuation Date on which a
written request for surrender is received at the Principal Office. A surrender
charge is calculated upon issuance of the Policy and from the effective date of
any increase in the Face Amount. The duration of the surrender charge is 15
years for issue Ages 0 through 50, grading down to 10 years for issue Ages 55
and above. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a single lump sum or under one of the
payment options described in APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.
Normally, the Company will pay the Surrender Value within seven days following
the Company's receipt of the surrender request, but the Company may delay
payment under the circumstances described in OTHER POLICY PROVISIONS --
"Postponement of Payments."
The surrender rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas Optional Retirement Program (Texas
ORP) are restricted; see FEDERAL TAX CONSIDERATIONS -- "Policies Issued in
Connection with TSA Plans."
For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of your Policy, subject to the limits stated below, upon written
request filed at the Principal Office. The written request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions, the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500.
Under Option 1, the Face Amount is reduced by the amount of the withdrawal, and
a withdrawal will not be allowed if it would reduce the Face Amount below
$40,000.
A withdrawal from a Sub-Account will result in the cancellation of the number of
Accumulation Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal." Normally, the Company will pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
The withdrawal rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas Optional Retirement Program (Texas
ORP) are restricted; see FEDERAL TAX CONSIDERATIONS -- "Policies Issued in
Connection with TSA Plans." For important tax consequences which may result from
partial withdrawals, see FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policy. Each of the
charges identified as an administrative charge is intended to reimburse the
Company for actual administrative costs incurred, and is not intended to result
in a profit to the Company.
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The Company may waive or reduce the premium tax charge, administrative charges,
surrender charge, or 5% partial withdrawal charge, and will not pay commissions
on Policies, where the Insured is within the following class of individuals:
All employees of First Allmerica and its affiliates and subsidiaries located
at First Allmerica's home office (or at off-site locations if such employees
are on First Allmerica's home office payroll); all directors of First
Allmerica and its affiliates and subsidiaries; all retired employees of
First Allmerica and its affiliates and subsidiaries eligible under First
Allmerica Companies' Pension Plan or any successor plan; all General Agents,
agents and field staff of First Allmerica; and all spouses, children,
siblings, parents and grandparents of any individuals identified above, who
reside in the same household.
TAX EXPENSE CHARGE
Currently, a deduction of 3 1/2% of premiums for state and local premium taxes
and federal taxes imposed for deferred acquisition costs ("DAC taxes") is made
from each premium payment. The premium payment, less the tax expense charge,
equals the Net Premium. The total charge is a combined state and local premium
tax deduction of 2 1/2% of premiums and a DAC tax deduction of 1% of premiums.
While the premium tax of 2 1/2% is deducted from each premium payment, some
jurisdictions may not impose premium taxes. Premium taxes vary from state to
state, ranging from zero to 4.0%, and the 2 1/2% rate attributable to premiums
for state and local premium taxes approximates the average expenses to the
Company associated with the premium taxes. The 2 1/2% charge may be higher or
lower than the actual premium tax imposed by the applicable jurisdiction. The
Company, however, does not expect to make a profit from this charge.
The 1% rate attributable to premiums for DAC taxes approximates the Company's
expenses in paying federal taxes for deferred acquisition costs associated with
the Policy. The Company reserves the right to increase or decrease the DAC tax
charge to reflect changes in the Company's expenses for premium taxes and DAC
taxes.
MONTHLY DEDUCTION FROM THE POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from the Policy
Value will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider, and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charge is discussed
below. The Monthly Deduction on or following the effective date of a requested
increase in the Face Amount also will include a $40 administrative charge for
the increase. See THE POLICY -- "Change in the Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions or, if no
allocation is specified, the Company will make a Pro-Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. If, however, on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount, for each
subsequent increase in the Face Amount, and for riders. Because the cost of
insurance depends upon a number of variables, it can vary from month to month.
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CALCULATION OF THE CHARGE
If you select Sum Insured Option 2, the monthly cost of insurance charge for the
initial Face Amount generally will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If you select Sum Insured Option 1,
however, the applicable cost of insurance rate will be multiplied by the initial
Face Amount less the Policy Value (minus charges for rider benefits) at the
beginning of the Policy month. Thus, the cost of insurance charge may be greater
for Policyowners who have selected Sum Insured Option 2 than for those who have
selected Sum Insured Option 1 (assuming the same Face Amount in each case and
assuming that the Guideline Minimum Sum Insured is not in effect). In other
words, since the Sum Insured under Option 1 remains constant while the Sum
Insured under Option 2 varies with the Policy Value, any Policy Value increases
will reduce the insurance charge under Option 1 but not under Option 2.
If you select Sum Insured Option 2, the monthly insurance charge for each
increase in Face Amount (other than an increase caused by a change in Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If you select Sum
Insured Option 1, the applicable cost of insurance rate will be multiplied by
the increase in the Face Amount reduced by any Policy Value (minus rider
charges) in excess of the initial Face Amount at the beginning of the Policy
month.
EFFECT OF THE GUIDELINE MINIMUM SUM INSURED
If the Guideline Minimum Sum Insured is in effect under either Option, a monthly
cost of insurance charge also will be calculated for that additional portion of
the Sum Insured which is required to comply with the Guideline rules. This
charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Sum Insured (Policy Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)
OR
- the Face Amount PLUS the Policy Value (if you selected Sum Insured
Option 2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY -- "Change in the Face Amount."
COST OF INSURANCE RATES
Cost of insurance rates are based on male, female or a blended unisex rate
table, Age and Premium Class of the Insured, the effective date of an increase
or date of rider, as applicable, the amount of premiums paid less Debt, any
partial withdrawals and withdrawal charges, risk classification and the
Incentive Funding Discount, if applicable. For those Policies issued on a unisex
basis in certain states or in certain cases, sex-distinct rates do not apply.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in the
Face Amount or rider are determined annually on the anniversary of the effective
date of each increase or rider. The cost of insurance rates generally increase
as the Insured's Age increases. The actual monthly cost of insurance rates will
be based on the Company's expectations as to future mortality experience. They
will not, however, be greater than the guaranteed cost of insurance rates set
forth in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Mortality Table B for
unisex Policies) and the Insured's sex and Age. The Tables used for this purpose
set forth different mortality estimates for males and females and for smokers
and non-smokers. Any change in the cost of insurance rates will apply to all
persons of the same insuring Age, sex and Premium Class whose Policies have been
in force for the same length of time.
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The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into preferred Premium Classes, standard
Premium Classes and substandard Premium Classes. In an otherwise identical
Policy, an Insured in the preferred Premium Class will have a lower cost of
insurance than an Insured in a standard Premium Class who, in turn, will have a
lower cost of insurance than an Insured in a substandard Premium Class with a
higher mortality risk.
Premium Classes also are divided into two categories: smokers and non-smokers.
Non-smoking Insureds will incur lower cost of insurance rates than Insureds who
are classified as smokers but who are otherwise in the same Premium Class. Any
Insured with an Age at issuance under 18 will be classified initially as regular
or substandard. The Insured then will be classified as a smoker at Age 18 unless
the Insured provides satisfactory evidence that the Insured is a non-smoker. The
Company will provide notice to you of the opportunity for the Insured to be
classified as a non-smoker when the Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if the Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES
Prior to the Final Premium Payment Date, a monthly administrative charge of $5
per month will be deducted from the Policy Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Policy, and will compensate the Company for first-year underwriting and other
start-up expenses incurred in connection with the Policy. These expenses include
the cost of processing applications, conducting medical examinations,
determining insurability and the Insured's Premium Class, and establishing
Policy records. The Company does not expect to derive a profit from these
charges.
CHARGES AGAINST ASSETS OF THE SEPARATE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company, and a charge for administrative expenses of the
Separate Account.
MORTALITY AND EXPENSE RISK CHARGE
The Company currently makes a charge on an annual basis of 0.65% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policy. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 0.90% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company therefore will pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policy
will exceed the amounts realized from the administrative charges provided in the
Policy. 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
costs are less than the amounts provided, the difference will be a profit to the
Company. To the extent this charge results in a current profit to the Company,
such profit will be available for use by the Company for, among other things,
the payment of distribution, sales and other expenses. Since mortality and
expense risks involve future contingencies which are not subject to precise
determination in advance, it is not feasible to identify specifically the
portion of the charge which is applicable to each.
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ADMINISTRATIVE CHARGE
During the first ten Policy years, the Company assesses a charge on an annual
basis of 0.15% of the daily net asset value in each Sub-Account. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the Separate Account and the Sub-Accounts. The administrative
functions and expenses assumed by the Company in connection with the Separate
Account and the Sub-Accounts 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, expenses of preparing and typesetting prospectuses, and the cost of
printing prospectuses not allocable to sales expense, filing and other fees. No
Separate Account administrative charge is imposed after the tenth Policy year.
The charge may be increased or decreased by the Board of Directors of the
Company, subject to compliance with applicable state and federal requirements,
but it may not exceed 0.25% on an annual basis.
OTHER CHARGES AND EXPENSES
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price and DGPF contain additional information concerning such fees
and expenses.
Currently, no charges are made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policy provides for a contingent surrender charge. A separate surrender
charge is calculated upon the issuance of the Policy and for each increase in
the Face Amount. A surrender charge may be deducted if you request a full
surrender of the Policy or a decrease in the Face Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
The duration of the surrender charge is 15 years from the Date of Issue or from
the effective date of any increase in the Face Amount for issue Ages 0 through
50, grading down to 10 years for issue Ages 55 and above.
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and
(b) is a deferred sales charge of 49% of premiums received, up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by issue Age from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80).
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months, and reduces by 0.5% or more per month (depending on issue Age)
thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
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This reduction in the maximum surrender charge will reduce the deferred sales
charge and the deferred administrative charge proportionately.
MAXIMUM SURRENDER CHARGE DURING FIRST TWO POLICY YEARS
If you surrender the Policy during the first two Policy years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above, but the deferred sales charge will not exceed 29% of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium, but less than the maximum
number of Guideline Annual Premiums subject to the deferred sales charge. See
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE
A separate surrender charge will apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is
equal to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand
dollars of increase, and (b) is a deferred sales charge of 49% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge that varies by
Age (at the time of increase) from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80).
In accordance with limitations under state insurance regulations, the amount of
the Surrender charge will not exceed a specified amount per $1,000 of increase,
as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is
true for the initial Face Amount, (a) is a deferred administrative charge, and
(b) is a deferred sales charge. The maximum surrender charge for the increase
continues in a level amount for 40 Policy months, and reduces by 0.5% or more
per month (depending on Age) thereafter, as provided in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
REDUCED CHARGE DURING FIRST TWO YEARS FOLLOWING INCREASE
During the first two Policy years following an increase in the Face Amount
before making premium payments associated with the increase in the Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the Face Amount
increase, as described above, but the deferred sales charge imposed will be less
than the maximum described above. Upon such a surrender, the deferred sales
charge will not exceed 29% of premiums associated with the increase, up to one
Guideline Annual Premium (for the increase), plus 9% of premiums associated with
the increase in excess of one Guideline Annual Premium, but less than the
maximum number of Guideline Annual Premiums (for the increase) subject to the
deferred sales charge. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES. The premiums associated with the increase are determined as described
below.
Additional premium payments may not be required to fund a requested increase in
the Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of the existing Policy
Value to the increase, and to allocate subsequent premium payments between the
initial Policy and the increase. For example, suppose the Guideline Annual
Premium is equal to $1,500 before an increase, and is equal to $2,000 as a
result of the increase. The Policy Value on the effective date of the increase
would be allocated 75% ($1,500/$2,000) to the initial Face Amount and 25% to the
increase. All future premiums also would be allocated 75% to the initial Face
Amount and 25% to the increase. Thus, existing Policy Value associated with the
increase will equal the portion of the Policy Value allocated to the increase on
the effective date of the increase, before any deductions are made. Premiums
associated with the increase will equal the portion of the premium payments
actually made on or after the effective date of the increase which are allocated
to the increase.
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See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
POSSIBLE SURRENDER CHARGE ON A FACE AMOUNT DECREASE
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Policy), the surrender charge will be applied in the following order:
- the most recent increase;
- the next most recent increases successively, and
- the initial Face Amount.
Where a decrease causes a partial reduction in an increase or in the initial
Face Amount, a proportionate share of the surrender charge for that increase or
for the initial Face Amount will be deducted.
CHARGES ON PARTIAL WITHDRAWAL
Partial withdrawals of Surrender Value may be made after the first Policy year.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A transaction charge, which is the smaller of 2% of the amount withdrawn or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge. The transaction fee applies to all partial withdrawals,
including a Withdrawal without a surrender charge.
A partial withdrawal charge also may be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company less the
total of any prior withdrawals in that Policy year which were not subject to the
Partial Withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal. This right is not cumulative from Policy year to Policy
year. For example, if only 8% of Policy Value were withdrawn in Policy year two,
the amount you could withdraw in subsequent Policy years would not be increased
by the amount you did not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
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TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICY -- "Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts; or
- to reallocate Policy Value among the Sub-Accounts.
The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.
If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge, and in addition to the 12 free transfers in a Policy year. See THE
POLICY -- "Conversion Privileges," and POLICY LOANS.
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase
and the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge guaranteed not to exceed $25,
for the administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value.
In the first Policy year, the Loan Value is 75% of Policy Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on Debt
to the end of the Policy year. The Loan Value in the second Policy year and
thereafter is 90% of an amount equal to the Policy Value reduced by applicable
surrender charges. There is no minimum limit on the amount of the loan.
The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."
A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy
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loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Accumulation Units equal to the Policy Value so transferred
will be canceled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
The Policy loan rights of Policyowners who are participants under Section 403(b)
plans are restricted; see FEDERAL TAX CONSIDERATIONS -- "Policies Issued in
Connection with TSA Plans."
LOAN INTEREST
LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT
As long as the Policy is in force, the Policy Value in the General Account equal
to the loan amount will be credited with interest at an effective annual yield
of at least 6.00% per year.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon written request. It may be revoked by you at any time. If
this option has been selected, after the tenth Policy anniversary the Policy
Value in the General Account that is equal to the loan amount will be credited
with interest at an effective annual yield of at least 7.5%. The Company's
current position is to credit a rate of interest equal to the rate being charged
for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
Outstanding Policy loans are charged interest. Interest accrues daily and is
payable in arrears at the annual rate of 8%. Interest is due and payable at the
end of each Policy year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount and
will bear interest at the same rate. If the new loan amount exceeds the Policy
Value in the General Account after the due and unpaid interest is added to the
loan amount, the Company will the transfer Policy Value equal to that excess
loan amount from the Policy Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Policy Value
in each Sub-Account bears to the total Policy Value in all Sub-Accounts.
REPAYMENT OF LOANS
Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Separate Account cannot exceed
the Policy Value previously transferred from the Separate Account to secure the
Debt.
If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Policy will terminate with no value. See
POLICY TERMINATION AND REINSTATEMENT.
EFFECT OF POLICY LOANS
Although Policy loans may be repaid at any time prior to the lapse of the
Policy, Policy loans will permanently affect the Policy Value and Surrender
Value, and may permanently affect the Death Proceeds. The effect could be
favorable or unfavorable, depending upon whether the investment performance of
the Sub-Account(s) is less than or greater than the interest credited to the
Policy Value in the General Account attributable to the
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loan. Moreover, outstanding Policy loans and the accrued interest will be
deducted from the proceeds payable upon the death of the Insured or surrender.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
Policies loans are permitted in accordance with the terms of the Policy.
However, if a Policy loan does not comply with the requirements of Code Section
72(p), the Policyowner's TSA plan may become disqualified and Policy values may
be includible in current income. Policy loans must meet the following additional
requirements:
- Loans must be repaid within five (5) years, except when the loan is used
to acquire any dwelling unit which within a reasonable time is to be used
as the Policyowner's principal residence.
- All Policy loans must be amortized on a level basis with loan repayments
being made not less frequently than quarterly.
- The sum of all outstanding loan balances for all loans from all the
Policyowner's TSA plans may not exceed the lesser of:
- $50,000 reduced by the excess (if any) of
- the highest outstanding balance of loans from all of the Policyowner's
TSA plans during the one-year period preceding the date of the loan,
minus
- the outstanding balance of loans from the Policyowner's TSA plans on
the date on which such loan was made
OR
- 50% of the Policyowner's non-forfeitable accrued benefit in all of his/her
TSA plans, but not less than $10,000.
See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA
PLANS."
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POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds still will be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies, and any other overdue
charge, will be deducted from the Death Proceeds.
LIMITED 48-MONTH GUARANTEE
Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months after the Date of Issue or the effective date
of an increase in the Face Amount if you make a minimum amount of premium
payments. The minimum amount paid, minus the Debt, partial withdrawals and
partial withdrawal charges, must be at least equal to the sum of the Minimum
Monthly Factors for the number of months the Policy, increase, or a Policy
Change which causes a change in the Minimum Monthly Factor has been in force. A
Policy Change which may cause a change in the amount of the Minimum Monthly
Factor is a change in the Face Amount or the addition or deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force. However, see THE POLICY -- "Guaranteed Death
Benefit Rider."
REINSTATEMENT
If the Policy has not been surrendered and the Insured is alive, the terminated
Policy may be reinstated any time within three years after the date of default
and before the Final Premium Payment Date. The reinstatement will be effective
on the Monthly Payment Date following the date you submit the following to the
Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insured is insurable according
to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge, is large
enough to cover the minimum amount payable, as described below.
MINIMUM AMOUNT PAYABLE
If reinstatement is requested when fewer than 48 Monthly Deductions have been
made since the Date of Issue or the effective date of an increase in the Face
Amount, you must pay the lesser of the amount shown in A or B. Under A, the
minimum amount payable is the Minimum Monthly Factor for the three-month period
beginning on the date of reinstatement. Under B, the minimum amount payable is
the sum of:
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- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default, PLUS
- Monthly Deductions for the three-month period beginning on the date of
reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue of the Policy or any increase in the Face Amount, you must pay
the amount shown in B above. The Company reserves the right to increase the
Minimum Monthly Factor upon reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the Policy remained in force from the Date of
Issue. The Policy Value less Debt on the date of default will be restored to the
Policy to the extent it does not exceed the surrender charge on the date of
reinstatement. Any Policy Value less the Debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will not be restored.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Policy increased by interest from
the date the payment was received at the Principal Office, PLUS
- an amount equal to the Policy Value less Debt on the date of default to
the extent it does not exceed the surrender charge on the date of
reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is the Insured unless another Policyowner has been named in the
application for the Policy. The Policyowner generally is entitled to exercise
all rights under the Policy while the Insured is alive, subject to the consent
of any irrevocable Beneficiary (the consent of a revocable Beneficiary is not
required). The consent of the Insured is required whenever the Face Amount of
insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Policy, the
Beneficiary has no rights in the Policy before the death of the Insured. While
the Insured is alive, you may change any Beneficiary unless you have declared a
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Policyowner (or the Policyowner's estate) will be the Beneficiary. If more
than one Beneficiary is alive when the Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the Insured will pass
to surviving Beneficiaries proportionally, unless otherwise requested.
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INCONTESTABILITY
The Company will not contest the validity of the Policy after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the Insured's lifetime for two
years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Policy, without
interest, and less any outstanding Debt and any partial withdrawals. If the
Insured commits suicide, while sane or insane, generally within two years from
the effective date of any increase in the Sum Insured, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.
AGE AND SEX
If the Insured's Age or sex as stated in the application for the Policy is not
correct, benefits under the Policy will be adjusted to reflect the correct Age
and sex, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age and sex. In no event will the Sum Insured be
reduced to less than the Guideline Minimum Sum Insured. In the case of a Policy
issued on a unisex basis, this provision as it relates to misstatement of sex
does not apply.
ASSIGNMENT
The Policyowner may assign the Policy as collateral or make an absolute
assignment of the Policy. All rights under the Policy will be transferred to the
extent of the assignee's interest. The consent of the assignee may be required
in order to make changes in premium allocations, to make transfers, or to
exercise other rights under the Policy. The Company is not bound by an
assignment or release thereof, unless it is in writing and is recorded at the
Principal Office. When recorded, the assignment will take effect as of the date
the Written Request was signed. Any rights created by the assignment will be
subject to any payments made or actions taken by the Company before the
assignment is recorded. The Company is not responsible for determining the
validity of any assignment or release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Policy loan and
transfers, may be postponed whenever: (1) the New York Stock Exchange is closed
other than customary weekend and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the SEC or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Policy of any
amounts derived from the premiums paid by check may be delayed until such time
as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the Insured, as
well as payments of Policy loans and transfers from the General Account, for a
period not to exceed six months.
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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and
Director Assistant Secretary (since 1992) of First Allmerica
Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of First
Secretary and Counsel Allmerica; Secretary (since 1988) and Counsel (since
1994) of Allmerica Investments, Inc.; and Secretary
(since 1990) of Allmerica Financial Investment
Management Services, Inc.
Warren E. Barnes
Vice President and Corporate Vice President (since 1996) and Corporate Controller
Controller (since 1998) of First Allmerica
Robert E. Bruce Director and Chief Information Officer (since 1997) and
Director and Chief Information Vice President (since 1995) of First Allmerica; and
Officer Corporate Manager (1979 to 1995) of Digital Equipment
Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and
Director, Vice President and Vice President (since 1991) of First Allmerica; and Vice
Chief Investment Officer President (since 1998) of Allmerica Financial Investment
Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since
Director, Vice President and 1986), General Counsel (since 1981) and Assistant
General Counsel Secretary (since 1991) of First Allmerica; Director
(since 1985) of Allmerica Investments, Inc.; and
Director (since 1990) of Allmerica Financial Investment
Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and
Director President (since 1996) of The Hanover Insurance Company;
and Vice President (1993 to 1996) of The Hanover
Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief Executive
Officer (since 1996) of Citizens Insurance Company of
America
John F. O'Brien Director, President and Chief Executive Officer (since
Director and Chairman of The 1989) of First Allmerica; Director (since 1989) of
Board Allmerica Investments, Inc.; and Director and Chairman
of the Board (since 1990) of Allmerica Financial
Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and
Director, Vice President, Chief Vice President and Treasurer (since 1993) of First
Financial Officer and Treasurer Allmerica; Treasurer (since 1993) of Allmerica
Investments, Inc.; and Treasurer (since 1993) of
Allmerica Financial Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of
Director, President and Chief First Allmerica; Director (since 1990) of Allmerica
Executive Officer Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998) of
Travelers Property & Casualty; Senior Vice President
(1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of
Director and Vice President First Allmerica; Director (since 1991) of Allmerica
Investments, Inc.; and Director (since 1991) of
Allmerica Financial Investment Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of
Director First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., a subsidiary of First Allmerica, acts as the
principal underwriter of the Policy pursuant to a Sales and Administrative
Services Agreement with the Company and the VEL II Account. Allmerica
Investments, Inc. is registered with the SEC as a broker-dealer, and is a member
of the National Association of Securities Dealers, Inc. ("NASD"). The Policy is
sold by agents of the Company who are registered representatives of Allmerica
Investments, Inc., or of certain independent broker-dealers which are members of
the NASD.
The Company pays commissions to registered representatives who sell the Policy
based on a commission schedule. After issue of the Policy or an increase in the
Face Amount, commissions generally will equal 50% of the first-year premiums up
to a basic premium amount established by the Company. Thereafter, commissions
generally will equal 4% of any additional premiums. Certain registered
representatives, including registered representatives enrolled in the Company's
training program for new agents, may receive additional first-year and renewal
commissions and training reimbursements. General Agents of the Company and
certain registered representatives also may be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 10% of first-year
premiums or 14% of renewal premiums.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policyowners or
to the Separate Account. Any surrender charge assessed on a Policy will be
retained by the Company except for amounts it may pay to Allmerica Investments,
Inc. for services it performs and expenses it may incur as principal underwriter
and general distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Funds in return for providing certain services to
Policyowners. Currently, the Company receives service fees with respect to the
Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio, Fideltiy
VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity VIP II
Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net asset
value, respectively, of the shares of such Funds held by the Separate Account.
With respect to the T. Rowe Price International Stock Portfolio, the Company
receives service fees an annual rate of 0.15% per annum of the aggregate net
asset value of shares held by the Separate Account. The Company may in the
future render services for which it will receive compensation from the
investment advisers or other service providers of other Funds.
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<PAGE>
REPORTS
The Company will maintain the records relating to the Separate Account.
Statements of significant transactions such as premium payments, changes in
specified Face Amount, changes in Sum Insured Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement will be sent to you promptly. An annual statement also will be
sent to you within 30 days after a Policy anniversary. The annual statement will
summarize all of the above transactions and deductions of charges during the
Policy year. It also will set forth the status of the Death Proceeds, Policy
Value, Surrender Value, amounts in the Sub-Accounts and General Account, and any
Policy loan(s). In addition, you will be sent periodic reports containing
financial statements and other information for the Separate Account and the
Underlying Funds as required by the 1940 Act.
LEGAL PROCEEDINGS
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
Allmerica Investments, Inc. are not involved in any litigation that is of
material importance in relation to their total assets or that relates to the
Separate Account.
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 from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, D.C., upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, and the financial
statements of VEL II Account of the Company as of December 31, 1998 and for the
periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they currently are interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and
possibly retroactively affect the taxation of the Policy. No representation is
made regarding the likelihood of continuation of current federal income tax laws
or of current interpretations by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws. It should be recognized that
the following summary of federal income tax aspects of amounts received under
the Policy is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. Specifically, the discussion below does not address
certain tax provisions that may be applicable if the Policyowner is a
corporation or the Trustee of an employee benefit plan. A qualified tax adviser
always should be consulted with regard to the application of law to individual
circumstances.
55
<PAGE>
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
and files a consolidated tax return with its parent and affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the Separate Account. Based on this, no charge is made for
federal income taxes which may be attributable to the Separate Account.
Periodically, the Company will review the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company ultimately is determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company also may incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE POLICY
The Company believes that the Policy described in this Prospectus will be
considered a life insurance contract under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Policy Value to the Insurance Amount at
Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value is not
taxable until received by the Policyowner or the Policyowner's designee. But see
"Modified Endowment Contracts".
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Policy for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Policyowners may direct their
investments to particular divisions of a separate account. Regulations in this
regard may be issued in the future. It is possible that if and when regulations
are issued, the Policy may need to be modified to comply with such regulations.
For these reasons, the Policy or the Company's administrative rules may be
modified as necessary to prevent a Policyowner from being considered the owner
of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner or
Beneficiary.
POLICY LOANS
The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Policies"). There is a
risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal and taxed accordingly. At the present time, the IRS has not issued
any guidance on whether loans with the attributes of a preferred loan
56
<PAGE>
should be treated differently than a non-preferred loan. This lack of specific
guidance makes the tax treatment of preferred loans uncertain. In the event
pertinent IRS guidelines are issued in the future, you may revoke your request
for a preferred loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. No tax deduction for interest is allowed on Policy loans
exceeding $50,000 in aggregate, if the Insured is an officer or employee of, or
is financially interested in, any business carried on by the taxpayer.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
The Policies may be issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code.
Under the provisions of Section 403(b) of the Code, payments made for annuity
policies purchased for employees under TSA Plans are excludable from the gross
income of such employees, to the extent that the aggregate purchase payments in
any year do not exceed the maximum contribution permitted under the Code. The
Company has received a Private Letter Ruling with respect to the status of the
Policies as providing "incidental life insurance" when issued in connection with
TSA Plans. In the Private Letter Ruling, the IRS has taken the position that the
purchase of a life insurance Policy by the employer as part of a TSA Plan will
not violate the "incidental benefit" rules of Section 403(b) and the regulations
thereunder. The Private Letter Ruling also stated that the use of current or
accumulated contributions to purchase a life insurance Policy will not result in
current taxation of the premium payments for the life insurance Policy, except
for the current cost of the life insurance protection.
A Policy qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings) may not begin before the employee attains age
59 1/2, separates from service, dies, or becomes disabled. In the case of
hardship, a Policyowner 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 nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax.
Policy loans are generally permitted in accordance with the terms of the Policy.
However, if a Policy loan does not comply with the requirements of Code Section
72(p), the Policyowner's TSA plan may become disqualified and Policy values may
be includible in current income.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("the 1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. The Policy would fail to satisfy the
seven-pay test if the cumulative premiums paid under the Policy at any time
during the first seven Policy years (or within seven years of a material change
in the Policy) exceed the sum of the net level premiums that would have been
paid, had the Policy provided for paid-up future benefits after the payment of
seven level premiums.
If the Policy is considered a modified endowment contract, all distributions
under the Policy will be taxed on an "income-first" basis. Most distributions
received by the Policyowner directly or indirectly (including loans,
withdrawals, surrenders, or the assignment or pledge of any portion of the
Policy Value) will be includible in gross income to the extent that the cash
Surrender Value of the Policy exceeds the Policyowner's investment in the
Policy. Any additional amounts will be treated as a return of capital to the
extent of the Policyowner's basis in the Policy. With certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
57
<PAGE>
insurance company to the same Policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be classified permanently as a
modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities law, any amount in the General Account generally is not subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
GENERAL DESCRIPTION
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 become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUES
The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4%, and might not do so. The excess interest rate, if any, in effect on the
date a premium is received at the Principal Office, however, is guaranteed on
that premium for one year, unless the Policy Value associated with the premium
becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF
INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S ACCUMULATED VALUE
IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM RATE PER YEAR WILL BE
DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE POLICYOWNER ASSUMES THE
RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to the Debt. Such Policy Value, however, will be credited interest at an
effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or the
Policy Value transferred to the General Account, plus interest at an annual rate
of 4%, plus any excess interest which the Company credits, less the sum of all
Policy charges allocable to the General Account and any amounts deducted from
the General Account in connection with loans, partial withdrawals, surrenders or
transfers.
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THE POLICY
This Prospectus describes a flexible premium variable life insurance Policy and
is intended generally to serve as a disclosure document only for the aspects of
the Policy relating to the Separate Account. For complete details regarding the
General Account, see the Policy itself.
SURRENDERS AND PARTIAL WITHDRAWALS
If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in the Face Amount, the surrender charge deducted is a fraction of
the charge that would apply to a full surrender of the Policy. Partial
withdrawals are made on a last-in/first-out basis from the Policy Value
allocated to the General Account.
TRANSFERS
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans also may be made from the Policy Value in the General Account.
DELAY OF PAYMENTS
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days or more, however, the Company will pay interest at least
equal to an effective annual yield of 3 1/2% per year for the period of
deferment. Amounts from the General Account used to pay premiums on policies
with the Company will not be delayed.
YEAR 2000 DISCLOSURE
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
59
<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.
FINANCIAL STATEMENTS
Financial Statements for the Company and the Separate Account are included in
this Prospectus, beginning immediately after the Appendices. The financial
statements of the Company should be considered only as bearing on the ability of
the Company to meet its obligations under the Policy. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account.
60
<PAGE>
APPENDIX B
DEATH PROCEEDS PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that would otherwise be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of:
- The rate per $1,000 of value applied based on the Company's non-guaranteed
current payment option rates for the Policy, or
- The rate in the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Separate Account.
<TABLE>
<C> <S>
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30). Payments
may be made annually, semi- annually, quarterly or monthly.
Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's age on the date
the first payment will be made. One of three variations may be chosen.
Depending upon this choice, payments will end:
(1) upon the death of the payee, with no further payments due (Life Annuity), or
(2) upon the death of the payee, but not before the sum of the payments made
first equals or exceeds the amount applied under this option (Life Annuity
with Installment Refund), or
(3) upon the death of the payee, but not before a selected period (5, 10 or 20
years) has elapsed (Life Annuity with Period Certain).
Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined by the
Company each year, but which will not be less than 3.5%. Payments may be
made annually, semi-annually, quarterly or monthly. Payments will end when
the amount left with the Company has been withdrawn. However, payments will
not continue after the death of the payee. Any unpaid balance plus accrued
interest will be paid in a lump sum.
Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the unpaid
balance is exhausted. Interest will be credited to the unpaid balance. The
rate of interest will be determined by the Company each year, but will not
be less than 3.5%. Payments may be made annually, semi-annually, quarterly
or monthly. The payment level selected must provide for the payment each
year of at least 8% of the amount applied.
Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may be
chosen. After the death of one payee, payments will continue to the
survivor:
(1) in the same amount as the original amount; or
(2) in an amount equal to 2/3 of the original amount; or
(3) in an amount equal to 1/2 of the original amount.
</TABLE>
B-1
<PAGE>
Payments are based on the payees' ages on the date the first payment is due.
Payments will end upon the death of the surviving payee.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
If the amount of monthly income payments under Option B(3) for the attained age
of the payee are the same for different periods certain, the Company will deem
an election to have been made for the longest period certain which could have
been elected for such age and amount.
You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If the payee selects Option C or D when the Policy becomes a
claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the Written Request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the Written Request selecting the option.
A corporation or fiduciary payee may select only Option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
B-2
<PAGE>
APPENDIX C
ILLUSTATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS
The following tables illustrate the way in which the Policy's Sum Insured and
the Policy Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Policy issued to
a male, Age 45, under a standard Premium Class and qualifying for the non-smoker
discount. In each case, one table illustrates the guaranteed cost of insurance
rates and the other table illustrates the current cost of insurance rates as
presently in effect.
The tables assume that no Policy loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Policy year (so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown. The tables are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested each year to earn interest (after taxes) at 5%,
compounded annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of the
Policy's total Policy Value among the Sub-Accounts of the Separate Account, if
the actual rates of return averaged 0%, 6% or 12%, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value, the daily charge against the Separate Account for mortality and
expense risks, and the Separate Account administrative charge (for the first ten
Policy years). In the Current Cost of Insurance Charges tables, the Separate
Account charges are equivalent to an effective annual rate of 0.80% of the
average daily value of the assets in the Separate Account in the first ten
Policy Years, and 0.65% thereafter. In the Guaranteed Cost of Insurance Charges
tables, the Separate Account charges are equivalent to an effective annual rate
of 1.15% of the average daily value of the assets in the Separate Account in the
first ten Policy Years, and 0.90% thereafter.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary, and in 1998, ranged from an
annual rate of 0.32% to an annual rate of 2.19% of average daily net assets. The
fees and expenses associated with your Policy may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
Until further notice, Allmerica Financial Investment Management Services, Inc.
("AFIMS") has declared a voluntary expense limitation of 1.35% of average net
assets for Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.25% for Select Value Opportunity Fund, 1.50% for Select International Equity
C-1
<PAGE>
Fund, 1.20% for Growth Fund and Select Growth Fund, 1.10% for Select Growth and
Income Fund, 1.00% for Investment Grade Income Fund and Government Bond Fund,
and 0.60% for Money Market Fund and Equity Index Fund. The total operating
expenses of these Funds of the Trust were less than their respective expense
limitations throughout 1998.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these Funds. These limitations may be terminated at any time.
Effective May 1, 1999, Delaware International Advisers Ltd., the investment
adviser for the DGPF International Equity Series, has agreed to limit total
annual expenses of the fund to 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 1999. The new limitation will be
in effect through October 31, 1999. For the fiscal year ended December 31, 1998,
the actual ratio of total annual expenses was 0.88%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
NET ANNUAL RATES OF INVESTMENT
In the Current Cost of Insurance Charges tables, taking into account the
mortality and expense risk charge (0.65%), the Separate Account administrative
charge (0.15% in the first ten Policy years), and the assumed charge for
Underlying Fund advisory fees and operating expenses (0.85%), the gross annual
rates of investment return of 0%, 6% and 12% correspond to net annual rates of
- -1.65%, 4.35% and 10.35%, respectively, during the first ten Policy years and
- -1.50%, 4.50% and 10.50%, respectively, thereafter.
In the Guaranteed Cost of Insurance Charges tables, taking into account the
guaranteed mortality and expense risk charge (0.90%), the guaranteed VEL II
Account administrative charge (0.25% in the first ten Policy years), and the
assumed charge for Underlying Fund advisory fees and operating expenses (0.85%),
the gross annual rates of investment return of 0%, 6% and 12% correspond to net
annual rates of -2.00%, 4.00% and 10.00%, respectively, during the first ten
Policy years and -1.75%, 4.25% and 10.25%, respectively, thereafter.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made in order to produce illustrated
death benefits and cash values, the gross annual investment rates of return
would have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax
charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
TO CHOOSE THE SUB-ACCOUNTS WHICH BEST WILL MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE UNDERLYING FUNDS ALONG WITH THIS
PROSPECTUS.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,200 250,000 75 3,418 250,000 293 3,636 250,000
2 9,041 2,566 6,301 250,000 3,203 6,937 250,000 3,866 7,601 250,000
3 13,903 3,688 9,287 250,000 4,948 10,546 250,000 6,315 11,913 250,000
4 19,008 6,786 12,161 250,000 8,876 14,251 250,000 11,237 16,612 250,000
5 24,368 9,883 14,921 250,000 13,014 18,052 250,000 16,698 21,736 250,000
6 29,996 12,849 17,552 250,000 17,236 21,939 250,000 22,614 27,317 250,000
7 35,906 15,701 20,068 250,000 21,562 25,929 250,000 29,052 33,419 250,000
8 42,112 18,435 22,466 250,000 25,994 30,024 250,000 36,067 40,098 250,000
9 48,627 21,052 24,747 250,000 30,536 34,231 250,000 43,725 47,420 250,000
10 55,469 23,537 26,897 250,000 35,182 38,542 250,000 52,087 55,446 250,000
11 62,652 26,397 29,084 250,000 40,458 43,145 250,000 61,773 64,460 250,000
12 70,195 29,131 31,146 250,000 45,868 47,883 250,000 72,373 74,389 250,000
13 78,114 31,721 33,064 250,000 51,404 52,748 250,000 83,984 85,328 250,000
14 86,430 34,156 34,828 250,000 57,067 57,739 250,000 96,723 97,395 250,000
15 95,161 36,422 36,422 250,000 62,852 62,852 250,000 110,720 110,720 250,000
16 104,330 37,861 37,861 250,000 68,112 68,112 250,000 125,477 125,477 250,000
17 113,956 39,125 39,125 250,000 73,515 73,515 250,000 141,838 141,838 250,000
18 124,064 40,195 40,195 250,000 79,058 79,058 250,000 160,007 160,007 250,000
19 134,677 41,027 41,027 250,000 84,722 84,722 250,000 180,212 180,212 250,000
20 145,821 41,647 41,647 250,000 90,544 90,544 250,000 202,749 202,749 250,000
Age 60 95,161 36,422 36,422 250,000 62,852 62,852 250,000 110,720 110,720 250,000
Age 65 145,821 41,647 41,647 250,000 90,544 90,544 250,000 202,749 202,749 250,000
Age 70 210,477 40,696 40,696 250,000 122,197 122,197 250,000 355,914 355,914 412,861
Age 75 292,995 30,366 30,366 250,000 159,685 159,685 250,000 605,316 605,316 647,688
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,102 250,000 0 3,317 250,000 190 3,533 250,000
2 9,041 2,352 6,087 250,000 2,976 6,711 250,000 3,627 7,362 250,000
3 13,903 3,355 8,953 250,000 4,583 10,182 250,000 5,918 11,516 250,000
4 19,008 6,325 11,700 250,000 8,356 13,731 250,000 10,652 16,027 250,000
5 24,368 9,282 14,321 250,000 12,314 17,353 250,000 15,886 20,924 250,000
6 29,996 12,113 16,815 250,000 16,348 21,051 250,000 21,545 26,248 250,000
7 35,906 14,805 19,171 250,000 20,446 24,813 250,000 27,663 32,030 250,000
8 42,112 17,346 21,377 250,000 24,600 28,631 250,000 34,279 38,310 250,000
9 48,627 19,728 23,423 250,000 28,802 32,497 250,000 41,438 45,133 250,000
10 55,469 21,934 25,293 250,000 33,039 36,398 250,000 49,187 52,546 250,000
11 62,652 24,361 27,049 250,000 37,738 40,425 250,000 58,064 60,751 250,000
12 70,195 26,593 28,608 250,000 42,469 44,484 250,000 67,694 69,709 250,000
13 78,114 28,621 29,965 250,000 47,230 48,573 250,000 78,168 79,512 250,000
14 86,430 30,435 31,107 250,000 52,014 52,686 250,000 89,588 90,260 250,000
15 95,161 32,013 32,013 250,000 56,808 56,808 250,000 102,063 102,063 250,000
16 104,330 32,658 32,658 250,000 60,924 60,924 250,000 115,051 115,051 250,000
17 113,956 33,018 33,018 250,000 65,019 65,019 250,000 129,377 129,377 250,000
18 124,064 33,055 33,055 250,000 69,068 69,068 250,000 145,217 145,217 250,000
19 134,677 32,723 32,723 250,000 73,042 73,042 250,000 162,780 162,780 250,000
20 145,821 31,972 31,972 250,000 76,910 76,910 250,000 182,323 182,323 250,000
Age 60 95,161 32,013 32,013 250,000 56,808 56,808 250,000 102,063 102,063 250,000
Age 65 145,821 31,972 31,972 250,000 76,910 76,910 250,000 182,323 182,323 250,000
Age 70 210,477 20,174 20,174 250,000 93,746 93,746 250,000 316,131 316,131 366,712
Age 75 292,995 0 0 250,000 101,672 101,672 250,000 529,651 529,651 566,726
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY ----------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 283 1,178 76,178 359 1,254 76,254 435 1,331 76,331
2 3,014 1,312 2,333 77,333 1,538 2,559 77,559 1,774 2,795 77,795
3 4,634 2,398 3,465 78,465 2,850 3,917 78,917 3,339 4,407 79,407
4 6,336 3,549 4,574 79,574 4,305 5,329 80,329 5,156 6,180 81,180
5 8,123 4,699 5,659 80,659 5,837 6,797 81,797 7,171 8,132 83,132
6 9,999 5,825 6,721 81,721 7,427 8,324 83,324 9,383 10,280 85,280
7 11,969 6,927 7,759 82,759 9,077 9,910 84,910 11,810 12,643 87,643
8 14,037 8,000 8,768 83,768 10,784 11,553 86,553 14,470 15,238 90,238
9 16,209 9,049 9,753 84,753 12,555 13,260 88,260 17,390 18,094 93,094
10 18,490 10,062 10,703 85,703 14,381 15,021 90,021 20,585 21,226 96,226
11 20,884 11,161 11,673 86,673 16,390 16,903 91,903 24,222 24,735 99,735
12 23,398 12,237 12,621 87,621 18,476 18,860 93,860 28,219 28,603 103,603
13 26,038 13,287 13,544 88,544 20,638 20,895 95,895 32,610 32,866 107,866
14 28,810 14,312 14,440 89,440 22,880 23,008 98,008 37,436 37,564 112,564
15 31,720 15,309 15,309 90,309 25,201 25,201 100,201 42,740 42,740 117,740
16 34,777 16,147 16,147 91,147 27,476 27,476 102,476 48,441 48,441 123,441
17 37,985 16,950 16,950 91,950 29,829 29,829 104,829 54,715 54,715 129,715
18 41,355 17,714 17,714 92,714 32,261 32,261 107,261 61,621 61,621 136,621
19 44,892 18,440 18,440 93,440 34,775 34,775 109,775 69,223 69,223 144,223
20 48,607 19,126 19,126 94,126 37,371 37,371 112,371 77,592 77,592 152,592
Age 60 97,665 23,624 23,624 98,624 68,489 68,489 143,489 225,810 225,810 302,586
Age 65 132,771 23,633 23,633 98,633 87,621 87,621 162,621 374,826 374,826 457,288
Age 70 177,576 21,275 21,275 96,275 108,731 108,731 183,731 615,951 615,951 714,503
Age 75 234,759 15,583 15,583 90,583 131,003 131,003 206,003 1,007,907 1,007,907 1,082,907
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 262 1,158 76,158 338 1,233 76,233 414 1,309 76,309
2 3,014 1,269 2,290 77,290 1,492 2,514 77,514 1,725 2,747 77,747
3 4,634 2,330 3,398 78,398 2,776 3,843 78,843 3,258 4,326 79,326
4 6,336 3,455 4,479 79,479 4,197 5,222 80,222 5,034 6,058 81,058
5 8,123 4,574 5,535 80,535 5,690 6,651 81,651 6,999 7,960 82,960
6 9,999 5,667 6,563 81,563 7,234 8,131 83,131 9,149 10,045 85,045
7 11,969 6,733 7,565 82,565 8,832 9,664 84,664 11,500 12,333 87,333
8 14,037 7,770 8,539 83,539 10,482 11,250 86,250 14,072 14,840 89,840
9 16,209 8,780 9,484 84,484 12,186 12,891 87,891 16,884 17,589 92,589
10 18,490 9,760 10,400 85,400 13,946 14,586 89,586 19,961 20,601 95,601
11 20,884 10,803 11,316 86,316 15,865 16,377 91,377 23,446 23,958 98,958
12 23,398 11,818 12,202 87,202 17,846 18,230 93,230 27,260 27,644 102,644
13 26,038 12,803 13,059 88,059 19,892 20,149 95,149 31,438 31,694 106,694
14 28,810 13,758 13,886 88,886 22,004 22,132 97,132 36,014 36,142 111,142
15 31,720 14,682 14,682 89,682 24,184 24,184 99,184 41,030 41,030 116,030
16 34,777 15,446 15,446 90,446 26,304 26,304 101,304 46,398 46,398 121,398
17 37,985 16,177 16,177 91,177 28,493 28,493 103,493 52,296 52,296 127,296
18 41,355 16,873 16,873 91,873 30,752 30,752 105,752 58,775 58,775 133,775
19 44,892 17,533 17,533 92,533 33,084 33,084 108,084 65,893 65,893 140,893
20 48,607 18,156 18,156 93,156 35,488 35,488 110,488 73,713 73,713 148,713
Age 60 97,665 21,524 21,524 96,524 63,150 63,150 138,150 209,388 209,388 284,388
Age 65 132,771 20,153 20,153 95,153 78,566 78,566 153,566 342,324 342,324 417,635
Age 70 177,576 15,057 15,057 90,057 93,126 93,126 168,126 553,120 553,120 641,619
Age 75 234,759 3,935 3,935 78,935 103,642 103,642 178,642 887,453 887,453 962,453
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in the Face Amount. The maximum surrender charge is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$8.50 per $1,000 of initial Face Amount (or Face Amount increase), and (b) is a
deferred sales charge of 49% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs) subject to the deferred sales charge that
varies by issue Age or Age at time of increase, as applicable:
<TABLE>
<CAPTION>
APPLICABLE AGE MAXIMUM GAPS APPLICABLE AGE MAXIMUM GAPS
- -------------- --------------- -------------- ---------------
<S> <C> <C> <C>
0-55 1.660714 68 1.290612
56 1.632245 69 1.262143
57 1.603776 70 1.233673
58 1.575306 71 1.205204
59 1.546837 72 1.176735
60 1.518367 73 1.148265
61 1.489898 74 1.119796
62 1.461429 75 1.091327
63 1.432959 76 1.062857
64 1.404490 77 1.034388
65 1.376020 78 1.005918
66 1.347551 79 0.977449
67 1.319082 80 0.948980
</TABLE>
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in the Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in the Face Amount, the actual
surrender charge may be less than the maximum. See CHARGES AND DEDUCTIONS --
"Surrender Charge."
The maximum surrender charge initially remains level and then grades down
according to the following schedule:
<TABLE>
<CAPTION>
AGES
- ---------
<S> <C>
0-50 The maximum surrender charge remains level for the first 40 Policy months, reduces by 0.5% for the next
80 Policy months, then decreases by 1% per month to zero at the end of 180 Policy months (15 Policy
years).
51 and The maximum surrender charge remains level for 40 Policy months and decreases per month by above the
above percentages below:
age 51 - 0.78% per month for 128 months
age 52 - 0.86% per month for 116 months
age 53 - 0.96% per month for 104 months
age 54 - 1.09% per month for 92 months
age 55 and over - 1.25% per month for 80 months
</TABLE>
D-1
<PAGE>
The factors used in calculating the maximum surrender charges vary with the
issue Age, sex and Premium Class (Smoker) as indicated in the table below:
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female
increase Nonsmoker Smoker Nonsmoker Smoker
- --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
0 8.63 7.68
1 8.63 7.70
2 8.78 7.81
3 8.94 7.93
4 9.10 8.05
5 9.27 8.18
6 9.46 8.32
7 9.65 8.47
8 9.86 8.62
9 10.08 8.78
10 10.31 8.95
11 10.55 9.13
12 10.81 9.32
13 11.07 9.51
14 11.34 9.71
15 11.62 9.92
16 11.89 10.14
17 12.16 10.36
18 10.65 12.44 9.73 10.59
19 10.87 12.73 9.93 10.83
20 11.10 13.02 10.15 11.09
21 11.34 13.33 10.37 11.35
22 11.59 13.66 10.60 11.63
23 11.85 14.01 10.85 11.92
24 12.14 14.38 11.10 12.22
25 12.44 14.77 11.37 12.54
26 12.75 15.19 11.66 12.88
27 13.09 15.64 11.95 13.23
28 13.45 16.11 12.26 13.60
29 13.83 16.62 12.59 13.99
30 14.23 17.15 12.93 14.40
31 14.66 17.72 13.29 14.83
32 15.10 18.32 13.67 15.28
33 15.58 18.96 14.07 15.75
34 16.08 19.63 14.49 16.25
35 16.60 20.35 14.93 16.77
36 17.16 21.10 15.39 17.33
37 17.75 21.89 15.88 17.91
38 18.37 22.73 16.39 18.51
39 19.02 23.55 16.93 19.15
40 19.71 24.28 17.50 19.81
41 20.44 25.04 18.09 20.51
42 21.20 25.85 18.71 21.23
43 22.02 26.71 19.36 21.98
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female
increase Nonsmoker Smoker Nonsmoker Smoker
- --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
44 22.87 27.61 20.04 22.77
45 23.61 28.56 20.76 23.56
46 24.36 29.57 21.52 24.23
47 25.15 30.63 22.33 24.94
48 26.00 31.16 23.14 24.69
49 26.90 32.95 23.83 26.47
50 27.85 34.21 24.57 27.31
51 28.87 35.56 25.35 28.18
52 29.96 36.99 26.17 29.11
53 31.12 38.25 27.05 30.09
54 32.56 38.25 27.95 31.12
55 33.67 38.25 28.97 32.21
56 34.62 38.25 29.65 32.94
57 35.61 38.25 30.36 33.70
58 36.65 38.25 31.11 34.49
59 37.73 38.25 32.74 36.23
60 38.25 38.25 32.74 36.23
61 38.25 38.25 33.63 37.18
62 38.25 38.25 34.57 38.18
63 38.25 38.25 35.56 38.25
64 38.25 38.25 36.60 38.25
65 38.25 38.25 37.68 38.25
66 38.25 38.25 38.25 38.25
67 38.25 38.25 38.25 38.25
68 38.25 38.25 38.25 38.25
69 38.25 38.25 38.25 38.25
70 38.25 38.25 38.25 38.25
71 38.25 38.25 38.25 38.25
72 38.25 38.25 38.25 38.25
73 38.25 38.25 38.25 38.25
74 38.25 38.25 38.25 38.25
75 38.25 38.25 38.25 38.25
76 38.25 38.25 38.25 38.25
77 38.25 38.25 38.25 38.25
78 38.25 38.25 38.25 38.25
79 38.25 38.25 38.25 38.25
80 38.25 38.25 38.25 38.25
</TABLE>
D-3
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 35, non-smoker
purchases a $100,000 Policy. In this example the Guideline Annual Premium
("GAP") equals $1,118.22. His maximum surrender charge is calculated as follows:
(a) Deferred administrative charge $850.00
($8.50/$1,000 of Face Amount)
(b) Deferred sales charge $909.95
(49% X 1.660714 GAPs)
-----------
TOTAL $1,759.95
Maximum surrender charge per table on page 84 (16.60 X 100) $1,660.00
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
(a) Deferred administrative charge $850.00
($8.50/$1,000 of Face Amount)
(b) Deferred sales charge Varies
(not to exceed 29% of Premiums received,
up to one GAP, plus 9% of premiums
received in excess of one GAP, but
less than the maximum number of GAPs
subject to the deferred sales charge)
--------------------
Sum of (a) and (b)
The maximum surrender charge is $1,660. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
EXAMPLE 1:
Assume the Policyowner surrenders the Policy in the tenth Policy month, having
paid total premiums of $900. The actual surrender charge would be $1,111.
EXAMPLE 2:
Assume the Policyowner surrenders the Policy in the 120th Policy month. After
the 40th Policy month, the maximum surrender charge decreases by 0.5% per month
($8.30 per month in this example.) In this example, the maximum surrender charge
would be $996.
D-4
<PAGE>
APPENDIX E
PERFORMANCE INFORMATION
The Policy first was offered to the public in 1993. The Company may advertise
"Total Return" and "Average Annual Total Return" performance information based
on the periods that the Sub-Accounts have been in existence (Tables I(A) and
I(B)) and based on the periods that the Underlying Funds have been in existence
(Tables II(A) and II(B)). The results for any period prior to the Policy being
offered will be calculated as if the Policy had been offered during that period
of time, with all charges assumed to be those applicable to the Sub-Accounts,
the Underlying Funds, and (in Table I(A) and II(A)) under a "representative"
Policy that is surrendered at the end of the applicable period. FOR MORE
INFORMATION ON CHARGES UNDER THE POLICY, SEE CHARGES AND DEDUCTIONS.
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1998. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
Performance information may be compared, in reports and promotional literature,
to:
- 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 results with those of a
group of unmanaged securities widely regarded by investors as
representative of the securities markets in general (unmanaged indices may
assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses); or
- other groups of variable life 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, such as Morningstar, Inc.,
who rank such investment products on overall performance or other
criteria; or
- the Consumer Price Index (a measure for inflation) to assess the real rate
of return from an investment.
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 Services ("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
Portfolios.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar-cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
E-1
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF SUB-
TOTAL 5 ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund -100.00% -1.08% 1.68%
Select Capital Appreciation Fund -100.00% N/A -6.21%
Select Value Opportunity Fund -100.00% -3.44% 0.76%
Select Emerging Markets Fund N/A N/A -100.00%
T. Rowe Price International Stock Portfolio -100.00% N/A -20.70%
Fidelity VIP Overseas Portfolio -100.00% -7.77% -3.98%
Select International Equity Fund -100.00% N/A -7.02%
DGPF International Equity Series -100.00% -6.70% -2.56%
Fidelity VIP Growth Portfolio -81.34% 7.05% 8.55%
Select Growth Fund -84.94% 7.54% 8.31%
Select Strategic Growth Fund N/A N/A -100.00%
Growth Fund -99.24% 3.81% 5.50%
Equity Index Fund -91.25% 8.99% 9.54%
Fidelity VIP Equity-Income Portfolio -100.00% 3.52% 5.23%
Select Growth and Income Fund -100.00% 2.37% 3.33%
Fidelity VIP II Asset Manager Portfolio -100.00% N/A -4.79%
Fidelity VIP High Income Portfolio -100.00% -8.94% -6.31%
Investment Grade Income Fund -100.00% -11.37% -9.74%
Government Bond Fund -100.00% -12.65% -10.79%
Money Market Fund -100.00% -13.70% -11.82%
</TABLE>
The inception dates for the Sub-Accounts are: 7/6/93 for Growth; 7/18/93 for
Money Market, Equity Index, Fidelity VIP Growth, Fidelity VIP Equity-Income,
Fidelity VIP High Income, Select Value Opportunity and DGPF International
Equity; 7/19/93 for Investment Grade Income; 7/20/93 for Select Aggressive
Growth, Select Growth and Fidelity VIP Overseas; 7/22/93 for Government Bond;
7/26/93 for Select Growth and Income; 5/3/94 for Select International Equity;
5/10/94 for Fidelity VIP II Asset Manager; 4/30/95 for Select Capital
Appreciation and 6/21/95 for T. Rowe Price International Stock; and 5/29/98 for
Select Emerging Markets and Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
E-2
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT REFLECT
MONTHLY CHARGES UNDER THE POLICY OR SURRENDER CHARGES. It is assumed that an
annual premium payment of $3,000 (approximately one Guideline Annual Premium)
was made at the beginning of each Policy year and that ALL premiums were
allocated to EACH Sub-Account individually.
<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF SUB-
TOTAL 5 ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund 9.68% 13.91% 14.65%
Select Capital Appreciation Fund 12.97% N/A 19.33%
Select Value Opportunity Fund 4.03% 12.03% 13.88%
Select Emerging Markets Fund N/A N/A -14.83%
T. Rowe Price International Stock Portfolio 14.93% N/A 10.24%
Fidelity VIP Overseas Portfolio 11.85% 8.66% 10.08%
Select International Equity Fund 15.56% N/A 11.23%
DGPF International Equity Series 9.45% 9.49% 11.19%
Fidelity VIP Growth Portfolio 38.38% 20.59% 20.39%
Select Growth Fund 34.36% 21.00% 20.20%
Select Strategic Growth Fund N/A N/A -3.88%
Growth Fund 18.37% 17.89% 17.70%
Equity Index Fund 27.31% 22.22% 21.23%
Fidelity VIP Equity-Income Portfolio 10.74% 17.65% 17.47%
Select Growth and Income Fund 15.50% 16.71% 16.07%
Fidelity VIP II Asset Manager Portolio 14.13% N/A 13.07%
Fidelity VIP High Income Portfolio -5.09% 7.77% 8.23%
Investment Grade Income Fund 7.11% 5.94% 5.60%
Government Bond Fund 6.82% 4.99% 4.83%
Money Market Fund 4.66% 4.22% 4.02%
</TABLE>
The inception dates for the Sub-Accounts are: 7/6/93 for Growth; 7/18/93 for
Money Market, Equity Index, Fidelity VIP Growth, Fidelity VIP Equity-Income,
Fidelity VIP High Income, Select Value Opportunity and DGPF International
Equity; 7/19/93 for Investment Grade Income; 7/20/93 for Select Aggressive
Growth, Select Growth and Fidelity VIP Overseas; 7/22/93 for Government Bond;
7/26/93 for Select Growth and Income; 5/3/94 for Select International Equity;
5/10/94 for Fidelity VIP II Asset Manager; 4/30/95 for Select Capital
Appreciation; 6/21/95 for T. Rowe Price International Stock; and 5/29/98 for
Select Emerging Markets and Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
E-3
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund -100.00% -1.08% 7.48%
Select Capital Appreciation Fund -100.00% N/A -6.17%
Select Value Opportunity Fund -100.00% -3.44% 1.35%
Select Emerging Markets Fund N/A N/A -100.00%
T. Rowe Price International Stock Portfolio -100.00% N/A -9.74%
Fidelity VIP Overseas Portfolio -100.00% -7.77% 3.58%
Select International Equity Fund -100.00% N/A -7.00%
DGPF International Equity Series -100.00% -6.70% -1.18%
Fidelity VIP Growth Portfolio -81.34% 7.05% 13.77%
Select Growth Fund -84.94% 7.54% 8.71%
Select Strategic Growth Fund N/A N/A -100.00%
Growth Fund -99.24% 3.81% 11.16%
Equity Index Fund -91.25% 8.99% 13.64%
Fidelity VIP Equity-Income Portfolio -100.00% 3.52% 9.79%
Select Growth and Income Fund -100.00% 2.37% 4.50%
Fidelity VIP II Asset Manager Portfolio -100.00% -5.07% 6.90%
Fidelity VIP High Income Portfolio -100.00% -8.94% 4.69%
Investment Grade Income Fund -100.00% -11.37% 2.54%
Government Bond Fund -100.00% -12.65% -3.28%
Money Market Fund -100.00% -13.70% -1.53%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/2/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/9/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/6/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for T. Rowe Price International
Stock; and 2/20/98 for Select Emerging Markets and the Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
E-4
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT
REFLECT MONTHLY CHARGES UNDER THE POLICY OR SURRENDER CHARGES. It is assumed
that an annual premium payment of $3,000 (approximately one Guideline Annual
Premium) was made at the beginning of each Policy year and that ALL premiums
were allocated to EACH Sub-Account individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund 9.68% 13.91% 16.93%
Select Capital Appreciation Fund 12.97% N/A 19.30%
Select Value Opportunity Fund 4.03% 12.03% 13.63%
Select Emerging Markets Fund N/A N/A -22.06%
T. Rowe Price International Stock Portfolio 14.93% N/A 8.63%
Fidelity VIP Overseas Portfolio 11.85% 8.66% 8.94%
Select International Equity Fund 15.56% N/A 11.23%
DGPF International Equity Series 9.45% 9.49% 10.05%
Fidelity VIP Growth Portfolio 38.38% 20.59% 18.17%
Select Growth Fund 34.36% 21.00% 17.99%
Select Strategic Growth Fund N/A N/A -3.21%
Growth Fund 18.37% 17.89% 15.76%
Equity Index Fund 27.31% 22.22% 19.46%
Fidelity VIP Equity-Income Portfolio 10.74% 17.65% 14.51%
Select Growth and Income Fund 15.50% 16.71% 14.38%
Fidelity VIP II Asset Manager Portfolio 14.13% 10.75% 12.41%
Fidelity VIP High Income Portfolio -5.09% 7.77% 9.92%
Investment Grade Income Fund 7.11% 5.94% 8.03%
Government Bond Fund 6.82% 4.99% 5.97%
Money Market Fund 4.66% 4.22% 4.52%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/2/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/9/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/6/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for T. Rowe Price International
Stock; and 2/28/98 for Select Emerging Markets and Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
E-5
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 267.4 212.2 176.2
Net investment income...................... 151.3 164.2 171.7
Net realized investment gains (losses)..... 20.0 2.9 (3.6)
Other income............................... 0.6 1.4 0.9
------- ------- -------
Total revenues......................... 439.8 403.5 377.9
------- ------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 153.9 187.8 192.6
Policy acquisition expenses................ 64.6 2.8 49.9
Sales practice litigation.................. 21.0 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Other operating expenses................... 104.1 101.3 86.6
------- ------- -------
Total benefits, losses and expenses.... 343.6 345.8 329.1
------- ------- -------
Income before federal income taxes............. 96.2 57.7 48.8
------- ------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 22.1 13.9 26.9
Deferred................................... 11.8 7.1 (9.8)
------- ------- -------
Total federal income tax expense....... 33.9 21.0 17.1
------- ------- -------
Net income..................................... $ 62.3 $ 36.7 $ 31.7
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)............................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)............................................ 31.8 54.0
Mortgage loans...................................... 230.0 228.2
Real estate......................................... 14.5 12.0
Policy loans........................................ 151.5 140.1
Other long-term investments......................... 9.1 20.3
---------- ----------
Total investments............................... 1,767.3 1,857.1
---------- ----------
Cash and cash equivalents............................. 217.9 31.1
Accrued investment income............................. 33.5 34.2
Deferred policy acquisition costs..................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses,
future policy benefits and unearned premiums........ 308.0 251.1
Other assets.......................................... 46.9 10.7
Separate account assets............................... 11,020.4 7,567.3
---------- ----------
Total assets.................................... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 17.9 18.5
Unearned premiums................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities....................................... 38.1 32.5
---------- ----------
Total policy liabilities and accruals........... 2,343.5 2,150.1
---------- ----------
Expenses and taxes payable............................ 146.2 77.6
Reinsurance premiums payable.......................... 45.7 4.9
Deferred federal income taxes......................... 78.8 75.9
Separate account liabilities.......................... 11,020.4 7,567.3
---------- ----------
Total liabilities............................... 13,634.6 9,875.8
---------- ----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,524 and 2,521 shares issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 407.9 386.9
Accumulated other comprehensive income................ 24.1 38.5
Retained earnings..................................... 275.4 213.1
---------- ----------
Total shareholder's equity...................... 709.9 641.0
---------- ----------
Total liabilities and shareholder's equity...... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 386.9 346.3 324.3
Issuance of common stock................... 21.0 40.6 22.0
-------- -------- --------
Balance at end of period................... 407.9 386.9 346.3
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 38.5 20.5 23.8
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (23.4) 27.0 (5.1)
Benefit (provision) for deferred
federal income taxes................. 9.0 (9.0) 1.8
-------- -------- --------
(14.4) 18.0 (3.3)
-------- -------- --------
Balance at end of period................... 24.1 38.5 20.5
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4 144.7
Net income................................. 62.3 36.7 31.7
-------- -------- --------
Balance at end of period................... 275.4 213.1 176.4
-------- -------- --------
Total shareholder's equity............. $ 709.9 $ 641.0 $ 545.7
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net income.................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities......... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal
income taxes.......................... 9.0 (9.0) 1.8
------- ------- -------
Other comprehensive income.......... (14.4) 18.0 (3.3)
------- ------- -------
Comprehensive income.................... 47.9 $ 54.7 $ 28.4
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (20.0) (2.9) 3.6
Net amortization and depreciation... (7.1) -- 3.5
Sales practice litigation expense... 21.0
Loss from cession of disability
income business................... -- 53.9 --
Deferred federal income taxes....... 11.8 7.1 (9.8)
Payment related to cession of
disability income business........ -- (207.0) --
Change in deferred acquisition
costs............................. (177.8) (181.3) (66.8)
Change in reinsurance premiums
payable........................... 40.8 3.9 (0.2)
Change in accrued investment
income............................ 0.7 3.5 1.2
Change in policy liabilities and
accruals, net..................... 193.1 (72.4) (39.9)
Change in reinsurance receivable.... (56.9) 22.1 (1.5)
Change in expenses and taxes
payable........................... 55.4 0.2 32.3
Separate account activity, net...... (0.5) 1.6 8.0
Other, net.......................... (28.0) (8.7) 2.3
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 94.8 (343.3) (35.6)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 187.0 909.7 809.4
Proceeds from disposals of equity
securities............................ 53.3 2.4 1.5
Proceeds from disposals of other
investments........................... 22.7 23.7 17.4
Proceeds from mortgages matured or
collected............................. 60.1 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (136.0) (579.7) (795.8)
Purchase of equity securities........... (30.6) (3.2) (13.2)
Purchase of other investments........... (22.7) (9.0) (13.9)
Purchase of mortgages................... (58.9) (70.4) (22.3)
Other investing activities, net......... (3.9) -- (2.0)
-------- -------- --------
Net cash provided by investing
activities........................ 71.0 336.4 15.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 21.0 19.2 22.0
-------- -------- --------
Net cash provided by financing
activities........................ 21.0 19.2 22.0
-------- -------- --------
Net change in cash and cash equivalents..... 186.8 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 31.1 18.8 17.3
-------- -------- --------
Cash and cash equivalents, end of period.... $ 217.9 $ 31.1 $ 18.8
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 0.6 $ -- $ 3.4
Income taxes paid....................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted Statement No. 130 for the first quarter of 1998,
which resulted primarily in reporting unrealized gains and losses on investments
in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,284.6 $66.4 $20.6 $1,330.4
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1997
----------------------------------------------
<CAPTION>
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions....... 2.8 0.2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,340.5 $66.6 $ 4.6 $1,402.5
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were $268.5 million
and $284.1 million, respectively. At December 31, 1997, the amortized cost and
market value of assets on deposit were $276.8 million and $291.7 million,
respectively. In addition, fixed maturities, excluding those securities on
deposit in New York, with an amortized cost of $4.2 million were on deposit with
various state and governmental authorities at December 31, 1998 and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
--------- --------
Total....................................................... $ 1,284.6 $1,330.4
--------- --------
--------- --------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ----- ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- -------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
---------- ------ -------
(5.9) (8.5) (14.4)
---------- ------ -------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
---------- ------ -------
---------- ------ -------
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ------ -------
9.4 8.6 18.0
---------- ------ -------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
---------- ------ -------
1996
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
---------- ------ -------
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ------ -------
(7.7) 4.4 (3.3)
---------- ------ -------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
---------- ------ -------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Mortgage loans.............................................. $ 230.0 $ 228.2
Real estate held for sale................................... 14.5 12.0
------- -------
Total mortgage loans and real estate........................ $ 244.5 $ 240.2
------- -------
------- -------
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
Geographic region:
<S> <C> <C>
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 -- $11.5
million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $ 3.3
----- ----- --- -----
----- ----- --- -----
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- --- -----
Total................................................... $11.2 $ 4.8 $6.6 $ 9.4
----- ----- --- -----
----- ----- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- ----- --- -----
Total................................................... $14.6 $ 4.5 $7.9 $11.2
----- ----- --- -----
----- ----- --- -----
</TABLE>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
------ ------ ------
------ ------ ------
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $1.4 million, $1.9 million and $3.6 million in 1998,
1997, and 1996, respectively. Actual interest income on these loans included in
net investment income aggregated $1.8 million, $2.1 million and $2.2 million in
1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
------ ------ ------
------ ------ ------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $ (5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------- ------- -------
Other comprehensive income.................................. $ (14.4) $ 18.0 $ (3.3)
------- ------- -------
------- ------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), requires disclosure of fair value information about
certain financial instruments (insurance contracts, real estate, goodwill and
taxes are excluded) for which it is practicable to estimate such values, whether
or not these instruments are included in the balance sheet. The fair values
presented for certain financial instruments are estimates which, in many cases,
may differ significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments, which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities.......................................... 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities......................................... 31.8 31.8 54.0 54.0
Mortgage loans............................................ 230.0 241.9 228.2 239.8
Policy loans.............................................. 151.5 151.5 140.1 140.1
--------- --------- --------- ---------
$ 1,961.6 $ 1,973.5 $ 1,855.9 $ 1,867.5
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $ 1,069.4 $ 1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life Contingencies......... 16.6 16.6 15.3 15.3
--------- --------- --------- ---------
$ 1,086.0 $ 1,051.2 $ 891.3 $ 865.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
----- ----- -----
----- ----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $ (205.1) $ (175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
-------- --------
Deferred tax liability, net................................. $ 78.8 $ 75.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
------ ------ ------
------ ------ ------
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
------ ------ ------
------ ------ ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
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.
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.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Policyowners of the VEL II Account of Allmerica Financial Life
Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the VEL II Account of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for each of the periods indicated,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of Allmerica Financial Life Insurance and
Annuity Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INVESTMENT
GRADE MONEY EQUITY GOVERNMENT
GROWTH INCOME MARKET INDEX BOND
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $34,408,132 $8,441,941 $8,337,430 $24,981,750 $2,271,251
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- -- --
----------- ---------- ---------- ----------- ----------
Total assets.............................. 34,408,132 8,441,941 8,337,430 24,981,750 2,271,251
LIABILITIES: -- -- -- -- --
----------- ---------- ---------- ----------- ----------
Net assets................................ $34,408,132 $8,441,941 $8,337,430 $24,981,750 $2,271,251
----------- ---------- ---------- ----------- ----------
----------- ---------- ---------- ----------- ----------
Net asset distribution by category:
Variable life policies.................... $34,408,132 $8,441,941 $8,337,430 $24,981,750 $2,271,251
----------- ---------- ---------- ----------- ----------
----------- ---------- ---------- ----------- ----------
Units outstanding, December 31, 1998........ 14,068,201 6,271,985 6,725,101 8,740,247 1,756,658
Net asset value per unit, December 31,
1998....................................... $ 2.445809 $1.345976 $ 1.239748 $ 2.858243 $1.292939
<CAPTION>
SELECT SELECT SELECT
AGGRESSIVE SELECT GROWTH SELECT VALUE INTERNATIONAL
GROWTH GROWTH AND INCOME OPPORTUNITY* EQUITY
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $35,813,463 $25,362,967 $14,549,551 $17,932,001 $17,279,471
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- -- --
----------- ----------- ----------- ------------ -------------
Total assets.............................. 35,813,463 25,362,967 14,549,551 17,932,001 17,279,471
LIABILITIES: -- -- -- -- --
----------- ----------- ----------- ------------ -------------
Net assets................................ $35,813,463 $25,362,967 $14,549,551 $17,932,001 $17,279,471
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
Net asset distribution by category:
Variable life policies.................... $35,813,463 $25,362,967 $14,549,551 $17,932,001 $17,279,471
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
Units outstanding, December 31, 1998........ 17,003,400 9,307,275 6,475,688 8,826,506 10,517,376
Net asset value per unit, December 31,
1998....................................... $ 2.106253 $ 2.725069 $ 2.246796 $ 2.031608 $ 1.642945
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT SELECT SELECT FIDELITY FIDELITY
CAPITAL EMERGING STRATEGIC VIP VIP
APPRECIATION MARKETS GROWTH HIGH INCOME EQUITY-INCOME
------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $12,302,463 $ 143,993 $ 231,113 $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- 15,021,905 52,559,790
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- -- --
------------ --------- --------- ----------- -------------
Total assets.............................. 12,302,463 143,993 231,113 15,021,905 52,559,790
LIABILITIES: -- -- -- -- --
------------ --------- --------- ----------- -------------
Net assets................................ $12,302,463 $ 143,993 $ 231,113 $15,021,905 $52,559,790
------------ --------- --------- ----------- -------------
------------ --------- --------- ----------- -------------
Net asset distribution by category:
Variable life policies.................... $12,302,463 $ 143,993 $ 231,113 $15,021,905 $52,559,790
------------ --------- --------- ----------- -------------
------------ --------- --------- ----------- -------------
Units outstanding, December 31, 1998........ 6,430,014 169,071 240,434 9,758,729 21,717,827
Net asset value per unit, December 31,
1998....................................... $ 1.913287 $0.851672 $0.961233 $ 1.539330 $ 2.420122
<CAPTION>
FIDELITY FIDELITY FIDELITY T. ROWE PRICE DGPF
VIP VIP VIP II INTERNATIONAL INTERNATIONAL
GROWTH OVERSEAS ASSET MANAGER STOCK EQUITY
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. 56,709,495 12,466,363 5,062,413 -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- 5,803,255 --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- -- 9,711,421
----------- ----------- ------------- ------------- -------------
Total assets.............................. 56,709,495 12,466,363 5,062,413 5,803,255 9,711,421
LIABILITIES: -- -- -- -- --
----------- ----------- ------------- ------------- -------------
Net assets................................ $56,709,495 $12,466,363 $5,062,413 $5,803,255 $9,711,421
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
Net asset distribution by category:
Variable life policies.................... $56,709,495 $12,466,363 $5,062,413 $5,803,255 $9,711,421
----------- ----------- ------------- ------------- -------------
----------- ----------- ------------- ------------- -------------
Units outstanding, December 31, 1998........ 20,612,842 7,388,206 2,862,122 4,113,424 5,443,994
Net asset value per unit, December 31,
1998....................................... $ 2.751173 $ 1.687333 $ 1.768762 $ 1.410809 $ 1.783878
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
------------------------------------- -----------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 316,966 $ 283,355 $ 206,184 $ 462,517 $ 407,722 $ 326,845
Mortality and expense risk fees............ (181,137) (116,436) (65,259) (48,259) (38,709) (33,445)
Administrative expense fees................ (50,318) (32,345) (18,128) (13,406) (10,754) (9,291)
----------- ----------- ----------- ----------- ---------- ----------
Net investment income (loss)............. 85,511 134,574 122,797 400,852 358,259 284,109
----------- ----------- ----------- ----------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 296,620 3,803,334 1,122,802 -- -- --
Net realized gain (loss) from sales of
investments.............................. 45,211 13,705 16,012 23,393 4,905 3,288
----------- ----------- ----------- ----------- ---------- ----------
Net realized gain (loss)................... 341,831 3,817,039 1,138,814 23,393 4,905 3,288
Net unrealized gain (loss)................. 4,529,850 (302,672) 475,209 103,962 157,561 (130,047)
----------- ----------- ----------- ----------- ---------- ----------
Net realized and unrealized gain
(loss).................................. 4,871,681 3,514,367 1,614,023 127,355 162,466 (126,759)
----------- ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 4,957,192 3,648,941 1,736,820 528,207 520,725 157,350
----------- ----------- ----------- ----------- ---------- ----------
POLICY TRANSACTIONS:
Net premiums............................... 6,144,647 5,187,881 3,576,337 1,566,601 1,556,516 1,593,863
Terminations............................... (574,649) (288,326) (163,133) (237,541) (144,261) (160,699)
Insurance and other charges................ (1,917,435) (1,328,256) (794,780) (535,639) (479,054) (443,364)
Transfers between sub-accounts (including
fixed account), net...................... 2,235,202 4,358,700 1,465,851 276,613 (85,999) 328,837
Other transfers from (to) the General
Account.................................. (622,114) (313,524) (130,558) (128,482) (109,266) (45,350)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets from
policy transactions...................... 5,265,651 7,616,475 3,953,717 941,552 737,936 1,273,287
----------- ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets...... 10,222,843 11,265,416 5,690,537 1,469,759 1,258,661 1,430,637
NET ASSETS:
Beginning of year.......................... 24,185,289 12,919,873 7,229,336 6,972,182 5,713,521 4,282,884
----------- ----------- ----------- ----------- ---------- ----------
End of year................................ $34,408,132 $24,185,289 $12,919,873 $ 8,441,941 $6,972,182 $5,713,521
----------- ----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
MONEY MARKET EQUITY INDEX
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 400,037 $ 380,873 $ 258,693 $ 226,283 $ 120,956 $ 58,986
Mortality and expense risk fees............ (46,770) (44,692) (33,783) (116,800) (54,835) (21,545)
Administrative expense fees................ (12,992) (12,415) (9,385) (32,446) (15,233) (5,985)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. 340,275 323,766 215,525 77,037 50,888 31,456
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- 598,938 358,920 70,001
Net realized gain (loss) from sales of
investments.............................. -- -- -- 54,509 18,631 13,660
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... -- -- -- 653,447 377,551 83,661
Net unrealized gain (loss)................. -- -- -- 3,875,163 1,740,965 523,125
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. -- -- -- 4,528,610 2,118,516 606,786
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 340,275 323,766 215,525 4,605,647 2,169,404 638,242
----------- ----------- ----------- ----------- ----------- -----------
POLICY TRANSACTIONS:
Net premiums............................... 7,449,133 8,532,423 6,749,544 5,093,396 3,434,564 1,507,147
Terminations............................... (101,754) (394,510) (77,221) (396,309) (133,574) (62,433)
Insurance and other charges................ (1,164,042) (1,155,011) (965,654) (1,453,842) (732,490) (292,375)
Transfers between sub-accounts (including
fixed account), net...................... (5,597,594) (6,855,651) (3,483,404) 4,027,145 4,025,452 877,359
Other transfers from (to) the General
Account.................................. (111,363) (9,977) (17,081) (343,680) (155,884) (53,721)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 474,380 117,274 2,206,184 6,926,710 6,438,068 1,975,977
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 814,655 441,040 2,421,709 11,532,357 8,607,472 2,614,219
NET ASSETS:
Beginning of year.......................... 7,522,775 7,081,735 4,660,026 13,449,393 4,841,921 2,227,702
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $ 8,337,430 $ 7,522,775 $ 7,081,735 $24,981,750 $13,449,393 $ 4,841,921
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 112,072 $ 104,946 $ 86,148 $ -- $ -- $ --
Mortality and expense risk fees............ (12,823) (11,118) (9,827) (195,159) (143,062) (92,527)
Administrative expense fees................ (3,562) (3,088) (2,730) (54,213) (39,742) (25,703)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. 95,687 90,740 73,591 (249,372) (182,804) (118,230)
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- -- 2,145,475 1,196,236
Net realized gain (loss) from sales of
investments.............................. 8,406 (3,012) (2,403) 93,192 85,955 52,019
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 8,406 (3,012) (2,403) 93,192 2,231,430 1,248,255
Net unrealized gain (loss)................. 29,300 21,888 (32,151) 3,191,552 1,740,371 983,776
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 37,706 18,876 (34,554) 3,284,744 3,971,801 2,232,031
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 133,393 109,616 39,037 3,035,372 3,788,997 2,113,801
----------- ----------- ----------- ----------- ----------- -----------
POLICY TRANSACTIONS:
Net premiums............................... 560,398 653,635 755,854 6,749,118 6,131,806 4,891,290
Terminations............................... (44,470) (45,711) (21,159) (751,983) (473,349) (324,067)
Insurance and other charges................ (266,186) (254,593) (284,369) (1,994,008) (1,625,760) (1,136,275)
Transfers between sub-accounts (including
fixed account), net...................... (43,862) (160,083) (196,988) 2,076,931 2,333,233 2,209,863
Other transfers from (to) the General
Account.................................. 13,415 2,879 (13,747) (745,231) (376,424) (187,293)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 219,295 196,127 239,591 5,334,827 5,989,506 5,453,518
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 352,688 305,743 278,628 8,370,199 9,778,503 7,567,319
NET ASSETS:
Beginning of year.......................... 1,918,563 1,612,820 1,334,192 27,443,264 17,664,761 10,097,442
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $ 2,271,251 $ 1,918,563 $ 1,612,820 $35,813,463 $27,443,264 $17,664,761
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 16,199 $ 39,996 $ 17,349 $ 155,337 $ 110,140 $ 65,013
Mortality and expense risk fees............ (119,135) (61,074) (27,144) (76,884) (51,419) (29,966)
Administrative expense fees................ (33,095) (16,966) (7,540) (21,358) (14,284) (8,324)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. (136,031) (38,044) (17,335) 57,095 44,437 26,723
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 192,876 704,995 830,250 44,298 875,928 411,607
Net realized gain (loss) from sales of
investments.............................. 42,231 15,462 35,539 30,051 25,787 30,955
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 235,107 720,457 865,789 74,349 901,715 442,562
Net unrealized gain (loss)................. 5,693,947 1,960,237 (97,967) 1,645,668 593,928 357,212
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 5,929,054 2,680,694 767,822 1,720,017 1,495,643 799,774
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 5,793,023 2,642,650 750,487 1,777,112 1,540,080 826,497
----------- ----------- ----------- ----------- ----------- -----------
POLICY TRANSACTIONS:
Net premiums............................... 4,467,127 3,046,076 1,471,313 2,558,683 2,186,957 1,458,393
Terminations............................... (303,721) (99,899) (133,417) (317,093) (144,681) (115,094)
Insurance and other charges................ (1,234,508) (658,772) (305,176) (827,602) (596,095) (371,473)
Transfers between sub-accounts (including
fixed account), net...................... 3,139,248 3,177,361 1,247,720 1,181,215 1,527,843 829,619
Other transfers from (to) the General
Account.................................. (374,190) (175,653) (40,687) (131,261) (134,431) (73,548)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 5,693,956 5,289,113 2,239,753 2,463,942 2,839,593 1,727,897
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 11,486,979 7,931,763 2,990,240 4,241,054 4,379,673 2,554,394
NET ASSETS:
Beginning of year.......................... 13,875,988 5,944,225 2,953,985 10,308,497 5,928,824 3,374,430
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $25,362,967 $13,875,988 $ 5,944,225 $14,549,551 $10,308,497 $ 5,928,824
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 150,768 $ 76,994 $ 53,312 $ 214,280 $ 276,917 $ 119,061
Mortality and expense risk fees............ (100,876) (66,512) (38,196) (93,727) (60,368) (25,452)
Administrative expense fees................ (28,022) (18,476) (10,611) (26,036) (16,769) (7,070)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. 21,870 (7,994) 4,505 94,517 199,780 86,539
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 57,641 1,853,239 338,499 -- 385,980 14,019
Net realized gain (loss) from sales of
investments.............................. 61,203 31,580 19,554 77,820 21,396 3,792
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 118,844 1,884,819 358,053 77,820 407,376 17,811
Net unrealized gain (loss)................. 480,693 400,302 994,751 1,901,215 (359,194) 719,795
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 599,537 2,285,121 1,352,804 1,979,035 48,182 737,606
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 621,407 2,277,127 1,357,309 2,073,552 247,962 824,145
----------- ----------- ----------- ----------- ----------- -----------
POLICY TRANSACTIONS:
Net premiums............................... 3,340,166 3,004,320 1,861,028 3,866,493 3,615,659 2,183,184
Terminations............................... (303,435) (191,453) (140,220) (325,068) (123,443) (48,303)
Insurance and other charges................ (989,354) (704,362) (422,764) (983,752) (736,991) (367,224)
Transfers between sub-accounts (including
fixed account), net...................... 1,636,991 2,094,611 1,073,542 854,569 2,975,731 1,830,294
Other transfers from (to) the General
Account.................................. (421,924) (233,631) (94,441) (451,272) (208,146) (62,831)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- (132)
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 3,262,444 3,969,485 2,277,145 2,960,970 5,522,810 3,534,988
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 3,883,851 6,246,612 3,634,454 5,034,522 5,770,772 4,359,133
NET ASSETS:
Beginning of year.......................... 14,048,150 7,801,538 4,167,084 12,244,949 6,474,177 2,115,044
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $17,932,001 $14,048,150 $ 7,801,538 $17,279,471 $12,244,949 $ 6,474,177
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT EMERGING SELECT STRATEGIC
SELECT CAPITAL APPRECIATION MARKETS GROWTH
------------------------------------- -------------------- --------------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, 5/11/98** TO 5/11/98** TO
1998 1997 1996 12/31/98 12/31/98
----------- ----------- ----------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ -- $ 255 $ 541
Mortality and expense risk fees............ (63,195) (44,096) (17,100) (114) (247)
Administrative expense fees................ (17,554) (12,249) (4,750) (32) (68)
----------- ----------- ----------- -------- --------
Net investment income (loss)............... (80,749) (56,345) (21,850) 109 226
----------- ----------- ----------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 1,861,691 -- 7,014 -- --
Net realized gain (loss) from sales of
investments.............................. 55,945 29,423 7,676 (872) 95
----------- ----------- ----------- -------- --------
Net realized gain (loss)................... 1,917,636 29,423 14,690 (872) 95
Net unrealized gain (loss)................. (411,083) 1,139,908 64,919 5,052 14,616
----------- ----------- ----------- -------- --------
Net realized and unrealized gain
(loss)................................. 1,506,553 1,169,331 79,609 4,180 14,711
----------- ----------- ----------- -------- --------
Net increase (decrease) in net assets from
operations............................... 1,425,804 1,112,986 57,759 4,289 14,937
----------- ----------- ----------- -------- --------
CONTRACT TRANSACTIONS:
Net premiums............................... 2,626,606 2,762,349 2,286,232 21,518 51,275
Terminations............................... (162,883) (81,117) (33,966) -- --
Insurance and other charges................ (770,431) (661,875) (321,105) (2,546) (4,763)
Transfers between sub-accounts (including
fixed account), net...................... 273,943 1,115,389 2,099,809 121,748 170,984
Other transfers from (to) the General
Account.................................. (197,322) (128,415) (42,163) (1,016) (1,320)
Net increase (decrease) in investment by
Sponsor.................................. -- -- (295) -- --
----------- ----------- ----------- -------- --------
Net increase (decrease) in net assets from
policy transactions...................... 1,769,913 3,006,331 3,988,512 139,704 216,176
----------- ----------- ----------- -------- --------
Net increase (decrease) in net assets...... 3,195,717 4,119,317 4,046,271 143,993 231,113
NET ASSETS:
Beginning of year.......................... 9,106,746 4,987,429 941,158 -- --
----------- ----------- ----------- -------- --------
End of year................................ $12,302,463 $ 9,106,746 $ 4,987,429 $143,993 $231,113
----------- ----------- ----------- -------- --------
----------- ----------- ----------- -------- --------
<CAPTION>
FIDELITY VIP HIGH INCOME
-------------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 907,111 $ 559,997 $ 350,078
Mortality and expense risk fees............ (87,531) (62,697) (39,682)
Administrative expense fees................ (24,315) (17,417) (11,023)
----------- ----------- -----------
Net investment income (loss)............... 795,265 479,883 299,373
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 576,394 69,213 68,494
Net realized gain (loss) from sales of
investments.............................. 4,906 13,499 20,404
----------- ----------- -----------
Net realized gain (loss)................... 581,300 82,712 88,898
Net unrealized gain (loss)................. (2,131,526) 990,433 319,076
----------- ----------- -----------
Net realized and unrealized gain
(loss)................................. (1,550,226) 1,073,145 407,974
----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... (754,961) 1,553,028 707,347
----------- ----------- -----------
CONTRACT TRANSACTIONS:
Net premiums............................... 3,533,562 3,060,740 2,471,469
Terminations............................... (282,163) (250,657) (168,885)
Insurance and other charges................ (1,076,327) (869,264) (620,511)
Transfers between sub-accounts (including
fixed account), net...................... 1,364,912 1,696,889 793,942
Other transfers from (to) the General
Account.................................. (292,218) (178,856) (89,567)
Net increase (decrease) in investment by
Sponsor.................................. -- -- --
----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 3,247,766 3,458,852 2,386,448
----------- ----------- -----------
Net increase (decrease) in net assets...... 2,492,805 5,011,880 3,093,795
NET ASSETS:
Beginning of year.......................... 12,529,100 7,517,220 4,423,425
----------- ----------- -----------
End of year................................ $15,021,905 $12,529,100 $ 7,517,220
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 599,106 $ 471,623 $ 27,058 $ 196,055 $ 179,959 $ 45,598
Mortality and expense risk fees............ (296,865) (215,740) (144,230) (284,492) (202,868) (142,781)
Administrative expense fees................ (82,467) (59,931) (40,066) (79,030) (56,355) (39,664)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............... 219,774 195,952 (157,238) (167,467) (79,264) (136,847)
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 2,132,113 2,371,217 775,651 5,128,386 805,529 1,151,351
Net realized gain (loss) from sales of
investments.............................. 222,848 89,970 43,028 310,089 102,342 38,097
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 2,354,961 2,461,187 818,679 5,438,475 907,871 1,189,448
Net unrealized gain (loss)................. 2,213,351 5,395,541 2,101,563 10,030,880 5,592,661 1,555,911
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 4,568,312 7,856,728 2,920,242 15,469,355 6,500,532 2,745,359
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 4,788,086 8,052,680 2,763,004 15,301,888 6,421,268 2,608,512
----------- ----------- ----------- ----------- ----------- -----------
CONTRACT TRANSACTIONS:
Net premiums............................... 8,923,997 8,345,475 7,421,307 7,907,232 7,970,339 7,554,363
Terminations............................... (1,207,113) (691,960) (502,308) (1,275,659) (729,359) (557,319)
Insurance and other charges................ (3,091,815) (2,509,855) (1,823,775) (2,912,792) (2,417,623) (1,878,817)
Transfers between sub-accounts (including
fixed account), net...................... 1,877,320 2,753,211 2,401,097 756,510 1,015,264 2,605,773
Other transfers from (to) the General
Account.................................. (984,428) (596,239) (357,946) (1,061,964) (498,641) (334,504)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 5,517,961 7,300,632 7,138,375 3,413,327 5,339,980 7,389,496
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 10,306,047 15,353,312 9,901,379 18,715,215 11,761,248 9,998,008
NET ASSETS:
Beginning of year.......................... 42,253,743 26,900,431 16,999,052 37,994,280 26,233,032 16,235,024
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $52,559,790 $42,253,743 $26,900,431 $56,709,495 $37,994,280 $26,233,032
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 206,980 $ 164,581 $ 85,914 $ 118,077 $ 74,088 $ 57,493
Mortality and expense risk fees............ (73,028) (63,163) (57,395) (26,444) (17,355) (12,103)
Administrative expense fees................ (20,287) (17,547) (15,944) (7,346) (4,822) (3,362)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. 113,665 83,871 12,575 84,287 51,911 42,028
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 610,045 653,336 94,506 354,232 185,848 47,406
Net realized gain (loss) from sales of
investments.............................. 99,347 137,675 66,545 23,843 18,276 25,651
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 709,392 791,011 161,051 378,075 204,124 73,057
Net unrealized gain (loss)................. 442,842 100,802 804,672 123,898 230,651 117,171
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 1,152,234 891,813 965,723 501,973 434,775 190,228
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 1,265,899 975,684 978,298 586,260 486,686 232,256
----------- ----------- ----------- ----------- ----------- -----------
POLICY TRANSACTIONS:
Net premiums............................... 2,084,737 2,046,534 2,367,301 1,068,721 834,108 599,994
Terminations............................... (344,007) (274,848) (264,283) (169,904) (59,008) (82,153)
Insurance and other charges................ (681,587) (641,234) (651,790) (320,166) (221,398) (167,378)
Transfers between sub-accounts (including
fixed account), net...................... 14,793 (903,192) (235,930) 357,339 591,311 (25,141)
Other transfers from (to) the General
Account.................................. (262,003) (215,476) (127,337) (112,329) (70,970) (44,969)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 811,933 11,784 1,087,961 823,661 1,074,043 280,353
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 2,077,832 987,468 2,066,259 1,409,921 1,560,729 512,609
NET ASSETS:
Beginning of year.......................... 10,388,531 9,401,063 7,334,804 3,652,492 2,091,763 1,579,154
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $12,466,363 $10,388,531 $ 9,401,063 $ 5,062,413 $ 3,652,492 $ 2,091,763
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK DGPF INTERNATIONAL EQUITY
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 66,418 $ 37,234 $ 17,766 $ 311,056 $ 197,248 $ 105,224
Mortality and expense risk fees............ (31,456) (19,910) (6,461) (56,229) (43,126) (27,458)
Administrative expense fees................ (8,738) (5,530) (1,795) (15,620) (11,980) (7,627)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. 26,224 11,794 9,510 239,207 142,142 70,139
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 23,442 52,748 10,233 -- -- 28,310
Net realized gain (loss) from sales of
investments.............................. 26,897 7,824 6,686 87,082 38,749 27,242
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 50,339 60,572 16,919 87,082 38,749 55,552
Net unrealized gain (loss)................. 593,201 (67,400) 106,328 463,754 102,792 593,576
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 643,540 (6,828) 123,247 550,836 141,541 649,128
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 669,764 4,966 132,757 790,043 283,683 719,267
----------- ----------- ----------- ----------- ----------- -----------
POLICY TRANSACTIONS:
Net premiums............................... 1,202,810 1,202,548 710,635 2,005,452 2,108,363 1,509,158
Terminations............................... (74,518) (46,171) (15,845) (218,580) (125,515) (87,745)
Insurance and other charges................ (328,749) (255,771) (103,524) (576,447) (478,785) (343,477)
Transfers between sub-accounts (including
fixed account), net...................... 281,251 1,327,149 778,696 63,325 1,070,357 387,642
Other transfers from (to) the General
Account.................................. (60,852) (33,783) (14,917) (308,425) (161,983) (58,024)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
policy transactions...................... 1,019,942 2,193,972 1,355,045 965,325 2,412,437 1,407,554
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 1,689,706 2,198,938 1,487,802 1,755,368 2,696,120 2,126,821
NET ASSETS:
Beginning of year.......................... 4,113,549 1,914,611 426,809 7,956,053 5,259,933 3,133,112
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $ 5,803,255 $ 4,113,549 $ 1,914,611 $ 9,711,421 $ 7,956,053 $ 5,259,933
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The VEL II Account (VEL II) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company), established on June
10, 1993, for the purpose of separating from the general assets of the Company
those assets used to fund the variable portion of certain flexible premium
variable life policies issued by the Company. The Company is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company (First
Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Under applicable insurance law, the assets and liabilities of
VEL II are clearly identified and distinguished from the other assets and
liabilities of the Company. VEL II cannot be charged with liabilities arising
out of any other business of the Company.
VEL II is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VEL II currently offers twenty
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Financial Investment Management Services, Inc. (AFIMS) (successor to Allmerica
Investment Management Company, Inc.), a wholly-owned subsidiary of First
Allmerica; or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR); or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.;
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price, and DGPF (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
Effective January 9, 1998, Small-Mid Cap Value Fund was renamed Select Value
Opportunity Fund.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of VEL II. Therefore,
no provision for income taxes has been charged against VEL II.
SA-12
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET
ASSET
VALUE
NUMBER OF AGGREGATE PER
INVESTMENT PORTFOLIO SHARES COST SHARE
- ---------------------------------------- ----------- ------------ --------
<S> <C> <C> <C>
Growth................................ 12,179,870 $ 29,199,504 $2.825
Investment Grade Income............... 7,457,545 8,175,287 1.132
Money Market.......................... 8,337,430 8,337,430 1.000
Equity Index.......................... 7,330,326 18,530,119 3.408
Government Bond....................... 2,126,640 2,239,758 1.068
Select Aggressive Growth.............. 14,558,318 27,878,380 2.460
Select Growth......................... 10,446,033 17,373,838 2.428
Select Growth and Income.............. 8,178,500 11,531,849 1.779
Select Value Opportunity*............. 10,642,137 15,752,462 1.685
Select International Equity........... 11,205,883 14,860,193 1.542
Select Capital Appreciation........... 7,501,502 11,444,715 1.640
Select Emerging Markets............... 183,664 138,941 0.784
Select Strategic Growth............... 237,527 216,497 0.973
Fidelity VIP High Income.............. 1,302,854 15,492,666 11.530
Fidelity VIP Equity-Income............ 2,067,655 39,871,011 25.420
Fidelity VIP Growth................... 1,263,862 36,128,014 44.870
Fidelity VIP Overseas................. 621,764 10,595,673 20.050
Fidelity VIP II Asset Manager......... 278,767 4,428,791 18.160
T. Rowe Price International Stock..... 399,673 5,158,062 14.520
DGPF International Equity............. 589,285 8,286,280 16.480
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value.
Effective March 21, 1996, the Company makes a charge of 0.65% (previously
0.90%) per annum based on the average daily net assets of each Sub-Account at
each valuation date for mortality and expense risks. The total mortality and
expense risk charge may be increased or decreased by the Board of Directors of
the Company once each year, subject to compliance with applicable state and
federal requirements, but the total charge may not exceed 1.275% per annum.
Effective May 21, 1996, the Company also charges each Sub-Account 0.15%
(previously 0.25%) per annum based on the average daily net assets of each
Sub-Account for
SA-13
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
administrative expenses. These charges are deducted in the daily computation of
unit values and are paid to the Company on a daily basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of VEL II, and does not receive any compensation for sales of VEL II policies.
Commissions are paid to registered representatives of Allmerica Investments and
certain independent broker-dealers by the Company. The current series of
policies have a surrender charge and no deduction is made for sales charges at
the time of the sale. For the years ended December 31, 1998, 1997, and 1996, the
Company received $1,743,648, $1,478,536, and $1,697,182, respectively, for
surrender charges applicable to VEL II.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VEL II satisfies the current requirements of
the regulations, and it intends that VEL II will continue to meet such
requirements.
SA-14
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by VEL II
during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
Growth............................................... $ 6,219,178 $ 571,396
Investment Grade Income.............................. 1,995,874 653,470
Money Market......................................... 9,354,909 8,540,254
Equity Index......................................... 7,884,427 281,742
Government Bond...................................... 790,852 475,870
Select Aggressive Growth............................. 5,671,903 586,448
Select Growth........................................ 5,941,142 190,341
Select Growth and Income............................. 2,817,261 251,926
Select Value Opportunity*............................ 3,830,009 488,054
Select International Equity.......................... 3,733,111 677,624
Select Capital Appreciation.......................... 3,906,793 355,938
Select Emerging Markets.............................. 204,329 64,516
Select Strategic Growth.............................. 221,422 5,020
Fidelity VIP High Income............................. 5,020,851 401,426
Fidelity VIP Equity-Income........................... 8,986,660 1,116,812
Fidelity VIP Growth.................................. 9,582,910 1,208,664
Fidelity VIP Overseas................................ 2,214,130 678,487
Fidelity VIP II Asset Manager........................ 1,588,740 326,560
T. Rowe Price International Stock.................... 1,438,968 369,360
DGPF International Equity............................ 1,820,628 616,096
------------ -----------
Totals............................................. $ 83,224,097 $17,860,004
------------ -----------
------------ -----------
</TABLE>
* Name changed. See Note 1.
SA-15
