<PAGE>
As filed with the Securities and Exchange Commission on 17 April 1996
Registration No. 33-58796
811-7534
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO.6
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
SEPARATE ACCOUNT B OF PARAGON LIFE INSURANCE COMPANY
(Exact Name of Registrant)
PARAGON LIFE INSURANCE COMPANY
100 South Brentwood Boulevard
St. Louis, MO 63105
(Address of Principal Executive Office)
Matthew P. McCauley, Esquire
Paragon Life Insurance Company
700 Market Street
St. Louis, MO 63101
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
x on April 29, 1996 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i)
on ( date ) pursuant to paragraph (a)(1) of
Rule 485.
The Registrant has registered an indefinite number of its shares under the
Securities Act of l933 pursuant to Rule 24f-2 under the Investment Company Act
of l940. The Registrant filed the notice required by such rule for the
Registrant's most recent year on February 27, 1996.
Post-Effective Amendment No. 6 to the registration statement on Form S-6 (the
"Registration Statement") is being filed pursuant to paragraph (b) of Rule 485
under the Securities Act of 1933 (the "Act") to update the Registration
Statement, which describes four variable life insurance policies (the
"Policies") issued by the depositor and the registrant described in the four
prospectuses included in the Registration Statement. The Policies are
substantially identical, except that different subaccounts investing in
different underlying funds are available as allocation options under each of the
four Policies.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
Item No. of
Form N-8B-2 Caption in Prospectus
1. Cover Page
2. Cover Page
3. Not Applicable
4. Distribution of the Policies
5. The Company and the Separate
Account
6. The Separate Account
7. Not Required
8. Not Required
9. Legal Proceedings
10. Summary; Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment
Series/Putnam Capital Manager
Trust/MFS Variable Insurance
Trust; Charges and Deductions;
Policy Benefits; Policy
Rights; Voting Rights; General
Matters Relating to the Policy
11. Summary; Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment
Series/Putnam Capital Manager
Trust/MFS Variable Insurance
Trust
12. Summary; Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment
Series/Putnam Capital Manager
Trust/MFS Variable Insurance
Trust
13. Summary; Charges and Deductions;
Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment
Series/Putnam Capital Manager
Trust/MFS Variable Insurance
Trust
14. Summary; Payment and Allocation
of Premiums
15. Payment and Allocation of
Premiums
-i-
<PAGE>
Item No. of
Form N-8B-2 Caption in Prospectus
16. Payment and Allocation of
Premiums; Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment
Series/Putnam Capital Manager
Trust/MFS Variable
Insurance Trust
17. Summary; Charges and Deductions;
Policy Rights; Scudder Variable
Life Investment Fund/Dean
Witter Variable Investment
Series/Putnam
Capital Manager Trust/MFS
Variable
Insurance Trust
18. Scudder Variable Life Investment
Fund/Dean Witter Variable
Investment Series/Putnam
Capital Manager Trust/MFS
Variable Insurance Trust;
Payment and Allocation of
Premiums
19. General Matters Relating to the
Policy; Voting Rights
20. Not Applicable
21. Policy Rights; General Matters
Relating to the Policy
22. Not Applicable
23. Safekeeping of the Separate
24. General Matters Relating to the
Policy
25. The Company and the Separate
Account
26. Not Applicable
27. The Company and the Separate
Account
28. Management of the Company
29. The Company and the Separate
Account
30. Not Applicable
Account's Assets
-ii-
<PAGE>
Item No. of
Form N-8B-2 Caption in Prospectus
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Company and the Separate
Account
36. Not Required
37. Not Applicable
38. Summary; Distribution of the
Policies
39. Summary; Distribution of the
Policies
40. Not Applicable
41. The Company and the Separate
Account; Distribution of the
Policies
42. Not Applicable
43. Not Applicable
44. Payment and Allocation of
Premiums
45. Not Applicable
46. Policy Rights
47. Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment Series/
Putnam Capital Manager Trust/
MFS Variable Insurance Trust
48. Not Applicable
49. Not Applicable
50. The Separate Account
51. Cover Page; Summary; Charges and
Deductions; Policy Rights;
Policy Benefits; Payment and
Allocation of Premiums
52. Scudder Variable Life
Investment Fund/Dean Witter
Variable Investment Series/
Putnam Capital Manager Trust/
MFS Variable Insurance Trust
53. Federal Tax Matters
54. Not Applicable
55. Not Applicable
56. Not Required
57. Not Required
58. Not Required
59. Not Required
-iii-
<PAGE>
LOGO
^ GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
50407
Prospectus dated May 1, 1996 Com
SCUDDER
LOGO
VARIABLE LIFE
INVESTMENT FUND
<PAGE>
GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes flexible premium variable life insurance policies
offered by Paragon Life Insurance Company (the "Company") which are designed
for use in employer-sponsored insurance programs. In circumstances where a
Group Contract is issued, Individual Policies or Certificates setting forth or
summarizing the rights of the Owners and/or Insureds, will be issued under the
Group Contract. Individual Policies also can be issued in connection with
employer-sponsored insurance programs in circumstances where a Group Contract
is not issued. The terms of the Certificate and the Individual Policy, whether
or not the Individual Policy is issued under a Group Contract, are
substantially the same and are collectively referred to in this Prospectus as
"Policy" or "Policies."
The Policies are designed to provide lifetime insurance protection to age 95
and at the same time provide flexibility to vary premium payments and change
the level of death benefits payable under the Policies. This flexibility allows
an Owner to provide for changing insurance needs under a single insurance
policy. An Owner also has the opportunity to allocate net premiums among
several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount of
the Policy. The insurance under a Policy will remain in force so long as its
Cash Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy.
The Owner may allocate net premiums to one or more of the Divisions of the
Separate Account B (the "Separate Account"). The duration of the Policy and the
amount of the Cash Value will vary to reflect the investment performance of the
Divisions of the Separate Account selected by the Owner, and, depending on the
death benefit option elected, the amount of the death benefit above the minimum
may also vary with that investment performance. Thus, the Owner bears the
entire investment risk under the Policies; there is no minimum guaranteed Cash
Value.
Each Division of the Separate Account will invest solely in Class A Shares of
a corresponding investment portfolio of Scudder Variable Life Investment Fund,
an investment company currently consisting of six separate investment
portfolios, or "Funds": Money Market Portfolio, Bond Portfolio, Capital Growth
Portfolio, Balanced Portfolio, Growth and Income Portfolio and International
Portfolio. The accompanying prospectus for Scudder Variable Life Investment
Fund describes the investment objectives and policies, and the risks of the
Funds.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
Scudder Variable Life Investment Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The date of this prospectus is May 1, 1996.
Com
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................ 3
Summary.................................................................... 4
The Company and the Separate Account....................................... 9
The Company.............................................................. 9
The Separate Account..................................................... 10
Scudder Variable Life Investment Fund.................................... 10
Addition, Deletion, or Substitution of Investments....................... 12
Payment and Allocation of Premiums......................................... 13
Issuance of a Policy..................................................... 13
Premiums................................................................. 14
Allocation of Net Premiums and Cash Value................................ 15
Policy Lapse and Reinstatement........................................... 16
Policy Benefits............................................................ 16
Death Benefit............................................................ 16
Cash Value............................................................... 20
Policy Rights and Privileges............................................... 21
Exercising Rights and Privileges Under the Policies...................... 21
Loans.................................................................... 21
Surrender and Partial Withdrawals........................................ 23
Transfers................................................................ 24
Right to Examine Policy.................................................. 24
Conversion Right to a Fixed Benefit Policy............................... 25
Eligibility Change Conversion............................................ 25
Payment of Benefits at Maturity.......................................... 26
Payment of Policy Benefits............................................... 26
Charges and Deductions..................................................... 27
Sales Charges............................................................ 27
Premium Tax Charge....................................................... 27
Monthly Deduction........................................................ 27
Partial Withdrawal Transaction Charge.................................... 30
Separate Account Charges................................................. 30
General Matters Relating to the Policy..................................... 30
Distribution of the Policies............................................... 33
General Provisions of the Group Contract................................... 34
Federal Tax Matters........................................................ 35
Safekeeping of the Separate Account's Assets............................... 38
Voting Rights.............................................................. 39
State Regulation of the Company............................................ 39
Management of the Company.................................................. 40
Legal Matters.............................................................. 41
Legal Proceedings.......................................................... 41
Experts.................................................................... 41
Additional Information..................................................... 41
Financial Statements....................................................... 41
Appendix A................................................................. A-1
</TABLE>
THE POLICIES ARE NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
2
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Associated Companies--Those companies listed in a Group Contract's
specifications pages that are under common control through stock ownership,
contract or otherwise, with the Contractholder.
Beneficiary--The person(s) named in an application for Individual Insurance
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness.
Certificate--A document issued to Owners of Policies issued under Group
Contracts, setting forth or summarizing the Owner's rights and benefits.
Contractholder--The employer, association, sponsoring organization or trust
that is issued a Group Contract.
Corporate Program--A category of Policies available, usually as an Individual
Policy, in which the sponsoring employer or its designated trust is generally
the Owner of the Policy.
Division--A subaccount of the Separate Account. Each Division invests
exclusively in the Class A shares of a Fund of Scudder Variable Life Investment
Fund.
Employee--A person who is employed and paid for services by an employer on a
regular basis. To qualify as an employee, a person ordinarily must work for an
employer at least 30 hours per week. The Company may waive or modify this
requirement at its discretion. An employee may also include an independent
contractor acting in many respects as an employee with a sponsoring employer.
An employee may include a partner in a partnership if the employer is a
partnership.
Executive Program--A category of Policies issued under Group Contracts or
employer-sponsored insurance programs that have a maximum Face Amount available
for each Policy generally in excess of $500,000.
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Fund--A separate investment portfolio of the Scudder Variable Life Investment
Fund, a mutual fund in which the Separate Account's assets are invested.
Group Contract--A group flexible premium variable life insurance contract
issued to the Contractholder by the Company.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest charged
on loans.
Individual Insurance--Insurance provided under a Group Contract or under an
Individual Policy issued in connection with an employer-sponsored insurance
program on an employee or an employee's spouse.
3
<PAGE>
Insured--The person whose life is insured under a Policy. The term may
include both an employee and an employee's spouse.
Investment Start Date--The date the initial premium is applied to the
Divisions of the Separate Account. This date is the later of the Issue Date or
the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
Issue Date--The effective date of coverage under a Policy. The Issue Date is
the date from which Policy Anniversaries, Policy Years, and Policy Months are
measured.
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 95.
Monthly Anniversary--The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the
last day of that month.
Net Premium--The premium less any premium expense charge and any charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--Either the Certificate or the Individual Policy offered by the
Company and described in this Prospectus. Under Group Contracts, the Policy may
be issued on the employee or on the employee's spouse.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the day
immediately preceding the next Policy Anniversary.
Separate Account--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy.
Spouse--An employee's legal spouse. The term does not include a spouse who is
legally separated from the employee.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the close
of business of the next succeeding Valuation Date.
SUMMARY
The following summary of Prospectus information should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the description of the Policies contained in this
Prospectus assumes that a Policy is in effect and that there is no outstanding
Indebtedness.
4
<PAGE>
The Policy. The Policies (either an Individual Policy or a Certificate)
described in this Prospectus are designed for use in employer-sponsored
insurance programs and are typically issued in two situations. First, Policies
are issued pursuant to Group Contracts entered into between the Company and
Contractholders. (See "General Provisions of the Group Contract," page 34.)
Second, in certain circumstances where Group Contracts are not issued,
Individual Policies are issued in connection with the employer-sponsored
insurance programs. Subject to certain restrictions, the Insured under a Policy
may be either an employee of the Contractholder or sponsoring employer, or the
employee's spouse. Generally, only the employee is eligible to be an Insured
under an Executive Program Policy. Provided there is sufficient Cash Surrender
Value, Individual Insurance under a Group Contract or other employer-sponsored
insurance program will continue should the Group Contract or other program
cease or the employee's employment end. (See "Payment and Allocation of
Premiums--Issuance of a Policy," page 13.)
The Policies are life insurance contracts with death benefits, cash values,
surrender rights, policy loan privileges, and other features traditionally
associated with life insurance. The Contractholder will remit planned premium
payments under the Group Contract on behalf of Owners equal to an amount
authorized by employees to be deducted from their wages. In addition, Owners
may, but are not required to, pay additional premiums. A similar procedure will
apply when an Individual Policy is issued in connection with an employer-
sponsored program where the Group Contract is not issued.
The Policies are "variable" policies because, unlike the fixed benefits under
an ordinary life insurance contract, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment performance of the Divisions of the Separate
Account to which the Owner has allocated net premium payments. However, so long
as a Policy's Cash Surrender Value continues to be sufficient to pay the
monthly deduction, an Owner is guaranteed a minimum death benefit equal to the
Face Amount of his or her Policy or an accelerated death benefit in a reduced
amount determined in accordance with certain riders available under the Policy
(See "General Matters Relating to the Policy--Additional Insurance Benefits,"
page 32.)
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. The Separate Account has Divisions, each of
which invests in Class A shares of a corresponding Fund of Scudder Variable
Life Investment Fund. The six Funds currently available with the Policy are the
Money Market Portfolio, Bond Portfolio, Capital Growth Portfolio, Balanced
Portfolio, Growth and Income Portfolio and International Portfolio. Each Fund
has a different investment objective. (See "The Company and the Separate
Account--Scudder Variable Life Investment Fund," page 10.) An Owner may change
future allocations of net premiums at any time by notifying the Company
directly.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to modify the transfer privilege.
(See "Policy Rights and Privileges--Transfers," page 24.)
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the planned
annual premium set forth in the specifications page of a Policy is necessary to
place a Policy in force. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount and certain other
factors. Under Group Contracts and employer-sponsored programs, the initial
premium and subsequent planned premiums generally are remitted by the
Contractholder or sponsoring employer on behalf of the Owner at intervals
agreed to by the Contractholder or employer. In Corporate Programs, the Owner
or its designee will remit premiums generally on a schedule agreed to by the
Company. However, as is discussed below, planned premiums need not be paid so
long as there is sufficient Cash Surrender Value to keep the Policy in force.
Subject to certain limitations, additional premium payments in any amount and
at any frequency may be made directly by the Owner. (See "Payment and
Allocation of Premiums--Issuance of a Policy--Premiums," pages 13 and 14.)
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 16).
The Policies, therefore, differ in two important respects from conventional
life insurance policies. First, the failure
5
<PAGE>
to make planned premium payments following the initial premium payment will not
itself cause a Policy to lapse. Second, under the circumstances described
above, a Policy can lapse even if planned premiums have been paid. Thus, the
payment of premiums in any amount does not guarantee that the Policy will
remain in force until the Maturity Date. (See "Payment and Allocation of
Premiums--Policy Lapse and Reinstatement," page 16.)
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies or, under certain riders available under
the Policy, to the Owner, prior to the Insured's death under circumstances
described in those riders. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 32.) Two death benefit options are
available. Under the "Level Type" death benefit, the death benefit is the Face
Amount of the Policy or, if greater, the applicable percentage of Cash Value.
Under the "Increasing Type" death benefit, the death benefit is the Face Amount
of the Policy plus the Cash Value or, if greater, the applicable percentage of
Cash Value. So long as a Policy remains in force, the minimum death benefit
under either option will be at least equal to the current Face Amount. The
death benefit proceeds will be increased by the amount of the cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "Policy Benefits--Death
Benefit," page 16.)
The minimum initial Face Amount is generally $25,000 under the Company's
current rules. Executive Program Policies generally have a minimum Face Amount
of $100,000. The maximum Face Amount is generally $500,000. However, in
connection with a particular Group Contract, employer-sponsored insurance
program, Executive Programs or Corporate Programs, the Company may establish a
substantially higher Face Amount for Policies issued under that Contract or
program. The Owner may generally change the Face Amount (subject to the minimum
and maximum amounts applicable to his or her policy) and the death benefit
option, but in certain cases evidence of insurability may be required. (See
"Policy Benefits--Death Benefit," page 16.)
Additional insurance benefits offered under the Policy by rider may include a
children's insurance rider, an acceleration of death benefits rider, an
accelerated death benefit settlement option rider, an accidental death benefit
rider, and a waiver of monthly deductions rider. Some Group Contracts and
employer-sponsored insurance programs may not provide each of the additional
benefits described above. Generally, Executive Program Policies only have the
acceleration of death benefits rider. Generally, Corporate Programs have none
of the additional benefits described above. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32.) The cost of these
additional insurance benefits will be deducted from Cash Value as part of the
monthly deduction. (See "Charges and Deductions--Monthly Deduction," page 27.)
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy or an applicable rider. (See "Policy
Benefits--Death Benefit" page 16, and "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.)
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
premium payments, the investment performance of any selected Divisions of the
Separate Account, any Policy Loans, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value," page
20.) There is no minimum guaranteed Cash Value.
Charges and Deductions. A front-end sales charge of 1% of premiums will be
deducted from each premium paid ("premium expense charge"). An additional
charge will be imposed on Policies that are deemed to be individual Policies
under the Omnibus Budget Reconciliation Act of 1990 ("OBRA"). The additional
charge, which is for federal income taxes measured by premiums, is equal to 1%
of each premium payment, and compensates the Company for a significantly higher
corporate income tax liability resulting from changes made to the Internal
Revenue Code by OBRA. This additional charge is treated as sales load for
purposes of determining compliance with the limitations on sales loads imposed
by the Investment Company Act of 1940 and applicable regulations thereunder.
6
<PAGE>
A charge of 2 percent to cover state premium taxes will be deducted from
premiums paid. (See "Charges and Deductions--Premium Tax Charge," page 27.)
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, a cost of insurance charge, and the cost of any additional insurance
benefits provided by rider. The amount of the administrative charge will be set
forth in the specification pages of the Policy and will be based on the number
of the Insureds covered under a Group Contract or other employer-sponsored
insurance program and the amount of administrative services provided by the
Company. The charge will not exceed $6.00 per month during the first Policy
Year and $3.50 per month during renewal years.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance" page 28.)
Monthly cost of insurance rates will be determined by the Company based upon
its expectations as to future mortality experience. The Company currently
underwrites Policies on either a simplified issue or guaranteed issue basis.
However, the Company does not vary cost of insurance rates based on a
particular Policy's classification as simplified issue or guaranteed issue
within a particular Group Contract or employer-sponsored program. Rather, the
rates are based on the Attained Age and rate class of the Insured, as well as
on the gender mix of the group insured, which is the proportion of men and
women covered under a particular Group Contract or employer-sponsored program.
For a discussion of the factors affecting the rate class of the Insured, see
"Charges and Deductions--Monthly Deduction--Cost of Insurance" page 28.
Cost of insurance rates are guaranteed not to exceed 125 percent of the
maximum rates that could be charged based on the 1980 Commissioners Standard
Ordinary Mortality Table C ("1980 CSO Table"). The 1980 CSO Table assumes a
blending of sixty percent male and forty percent female. Generally, the rates
currently charged do not exceed 100% of the 1980 CSO Table. However, instances
in which the Company's current rates may exceed 100% of the 1980 CSO Table are
generally limited to particular Policies issued to Insureds in small groups
(i.e. generally less than 750 eligible employees) and/or groups that are
predominantly male. The guaranteed rates are higher than the 1980 CSO Table
because, under both guaranteed and simplified underwriting, the Insured is not
required to submit to a medical or paramedical examination although a blood
test may be required. Because the Company gathers less health information about
these individuals, it is exposed to additional insurance risks. Although the
circumstances in which the Company could raise its current mortality charges
are limited, such an increase is permitted under the Policy. To the extent that
the current cost of insurance rates exceed or are raised so that they exceed
100% of the 1980 CSO Table, the monthly cost of insurance charge would, in
effect, be a substandard risk charge for healthy Insureds.
A daily charge of .0024547% (an annual rate of .90%) of the net assets of
each Division of the Separate Account will be imposed for the Company's
assumption of certain mortality and expense risks incurred in connection with
the Policies. (See "Charges and Deductions--Separate Account Charges," page
29.)
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes or to pay any economic burden resulting from the application of the tax
laws that the Company determines to be properly attributable to the Separate
Account or the Policies. (See "Federal Tax Matters," page 35.)
The value of the assets of the Divisions of the Separate Account will reflect
the investment advisory fee and other expenses incurred by Scudder Variable
Life Investment Fund because the Separate Account purchases the Class A shares
of Scudder Variable Life Investment Fund. (See "Charges and Deductions--
Separate Account Charges," page 29.) The advisory fees range from an annual
rate of 0.37% to 0.875% of the average daily assets of each Fund. (See "The
Company and the Separate Account--Scudder Variable Life Investment Fund," page
10.)
7
<PAGE>
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net Premiums
and Cash Value," page 15, and "Policy Rights and Privileges-- Surrender and
Partial Withdrawals--Transfers," pages 22 and 24, and "Charges and Deductions--
Partial Withdrawal Transaction Charge," page 29.)
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b), where (a) is 85
percent of the Cash Value of the Policy on the date the loan request is
received and (b) is any outstanding Indebtedness. Loan interest is due and
payable in arrears on each Policy Anniversary or on a pro rata basis for such
shorter period as the Policy Loan may exist. All outstanding Indebtedness will
be deducted from proceeds payable at the Insured's death, upon maturity, or
upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid in
whole or in part at any time while the Policy is in force. (See "Policy Rights
and Privileges--Loans," page 21.) Loans taken from, or secured by, a Policy may
in certain circumstances be treated as taxable distributions from the Policy.
Moreover, with certain exceptions, a ten percent additional income tax would be
imposed on the portion of any loan that is included in income. (See "Federal
Tax Matters," page 35.)
Surrender and Partial Withdrawals. At any time that a Policy is in effect, an
Owner may elect to surrender the Policy and receive its Cash Surrender Value.
An Owner may also request a partial withdrawal of the Cash Value of the Policy.
When the death benefit under either death benefit option is not based on an
applicable percentage of the Cash Value, a partial withdrawal reduces the death
benefit payable under the Policy by an amount equal to the reduction in the
Policy's Cash Value. (See "Policy Rights and Privileges--Surrender and Partial
Withdrawals," page 22.) Surrenders and partial withdrawals may have federal
income tax consequences. (See "Federal Tax Matters," page 35.)
Right to Examine Policy. The Owner has a limited right to return a Policy for
cancellation within 20 days after the delivery of the Policy to the Owner,
within 45 days after the Owner signs the application, or within 10 days after
the Company mails a notice of this cancellation right to the Owner whichever is
latest. If a Policy is cancelled within this time period, a refund will be paid
which will equal all premiums paid under the Policy or any different amount
required by state law. The Owner also has a right to cancel a requested
increase in Face Amount. Upon cancellation of an increase, the Owner may
request that the Company refund the amount of the additional charges deducted
in connection with the increase, or have the amount of the additional charges
added to the Cash Value. (See "Policy Rights and Privileges--Right to Examine
Policy," page 24.)
Eligibility Change Conversion. In the event that the Insured is no longer
eligible for coverage under the Group Contract, either because the Group
Contract has terminated or because the employee is no longer employed by the
Contractholder, the Individual Insurance provided by the Policy issued in
connection with the Group Contract will continue unless the Policy is cancelled
or surrendered by the Owner or there is insufficient Cash Surrender Value to
prevent the Policy from lapsing.
If a Certificate was issued in connection with the Group Contract, the
Certificate will be amended automatically to continue in force as an Individual
Policy. The new Individual Policy will provide benefits which are identical to
those provided under the Certificate. If an Individual Policy was issued in
connection
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with a Group Contract, the Individual Policy will continue in force following
the termination of the Group Contract. (See "Policy Right and Privileges--
Eligibility Change Conversion," page 25.)
Conversion Right to a Fixed Benefit Policy. During the first 24 Policy Months
following a Policy's Issue Date, the Owner may convert the Policy to a life
insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. The Owner also has
a similar right with respect to increases in the Face Amount. (See "Policy
Rights and Privileges--Conversion Right to a Fixed Benefit Policy," page 24.)
Exercising Rights and Privileges Under the Policies. Owners of Policies
issued under a Group Contract or in connection with an employer-sponsored
insurance program may exercise their rights and privileges under the Policies
(i.e., make transfers, change premium allocations, borrow, etc.) by notifying
the Company in writing at its Home Office. Likewise, the Company will send all
reports and other notices described herein or in the Policy directly to the
Owner. (See "Policy Rights and Privileges--Exercising Rights and Privileges
Under the Policies," page 21.)
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-1 to A-7 in Appendix A show how death benefits and Cash Surrender
Values may vary based on certain hypothetical rate of return assumptions as
well as assumptions pertaining to the level of the administrative charge and
the level of the sales charges. These illustrations also show how these
benefits compare with amounts which would accumulate if premiums were invested
to earn interest (after taxes) at 5% compounded annually. If a Policy is
surrendered in the early Policy Years, the Cash Surrender Value payable will be
low as compared with premiums accumulated with interest, and consequently the
insurance protection provided prior to surrender will be costly.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy Owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits payable
under a Policy should be completely excludable from the gross income of the
Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds.
Under certain circumstances, a Policy may be treated as a "modified endowment
contract." If the Policy is a modified endowment contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Loans will not be treated as distributions.
Neither distributions nor loans from a Policy that is not a modified endowment
contract are subject to the 10% penalty tax. (See "Federal Tax Matters," page
35.)
THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection with
the name change. The Company is principally engaged in writing individual and
group life insurance policies and annuity contracts. As of December 31, 1995,
it had statutory admitted assets in excess
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of $123 million. The Company is admitted to do business in 49 states and the
District of Columbia. The principal offices of the Company are at 100 South
Brentwood, St. Louis, Missouri 63105 ("Home Office").
The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a mutual life insurance company. The Parent
Company has agreed that until March 23, 1999, it will maintain capital and
surplus within the Company sufficient to satisfy the capital requirements of
the states in which the Company is authorized to do business.
In addition, the Parent Company agrees to guarantee that the Company will
have sufficient funds to meet all of its contractual obligations. In the event
a policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. This guarantee, which does not have a
predetermined termination date, can be modified or ended only as to policies
not yet issued. The guarantee agreement is binding on the Parent Company, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
THE SEPARATE ACCOUNT
Separate Account B (the "Separate Account") was established by the Company as
a separate investment account on January 4, 1993 under Missouri law. The
Separate Account receives and invests the net premiums paid under the Policies.
In addition, the Separate Account receives and invests net premiums for other
flexible premium variable life insurance policies issued by the Company that
are invested in other subaccounts of the Separate Account.
The Separate Account is divided into Divisions. Each Division for the Policy
invests exclusively in Class A shares of a single Fund of Scudder Variable Life
Investment Fund. Income and both realized and unrealized gains or losses from
the assets of each Division of the Separate Account are credited to or charged
against that Division without regard to income, gains, or losses from any other
Division of the Separate Account or arising out of any other business the
Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Separate Account invests in Class A shares of Scudder Variable Life
Investment Fund (the "Scudder Variable Fund"), a series-type mutual fund
registered with the SEC as an open-end, diversified management investment
company. Scudder Variable Fund currently has six separate investment portfolios
or "Funds" used by the Policies: Money Market Portfolio, Bond Portfolio,
Capital Growth Portfolio, Balanced Portfolio, Growth and Income Portfolio, and
International Portfolio. The assets of each Fund are held separate from the
assets of the other Funds, and each Fund has investment objectives and policies
which are different from those of the other Funds. Thus, each Fund operates as
a separate investment vehicle, and the income or losses of one Fund generally
have no effect on the investment performance of any other Fund.
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The investment objectives and policies of each Fund are summarized below:
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although there can be no assurance that this will be achieved.
BOND PORTFOLIO
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Under normal
circumstances, the Fund invests at least 65% of its assets in bonds, including
those of the U.S. Government and its agencies, and those of corporations and
other notes and bonds paying high current income. The Fund may also invest in
preferred stocks consistent with it's objectives. It will attempt to moderate
the effect of market price fluctuation relative to that of a long-term bond by
investing in securities with varying maturities and by entering into future
contracts on debt securities and related options for hedging purposes.
CAPITAL GROWTH PORTFOLIO
The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and flexible investment program. The Fund invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk,
as market or economic conditions periodically warrant, the Fund may also invest
up to 25% of its assets in short-term debt instruments.
BALANCED PORTFOLIO
The Balanced Portfolio seeks a balance of growth and income from a
diversified portfolio of equity and fixed income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented investment
approach that is designed to reduce risk.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income. The Fund invests primarily in common stocks,
preferred stocks, and securities convertible into common stocks of companies
which offer the prospect for growth of earnings while paying current dividends.
Over time, continued growth of earnings tends to lead to higher dividends and
enhancement of capital value. The Fund allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.
INTERNATIONAL PORTFOLIO
The International Portfolio seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments. The Fund
invests in companies, wherever organized, which do business primarily outside
the United States. The Fund intends to diversify investments among several
countries and to have represented in its holdings, in substantial portions,
business activities in not less than three different countries. The Fund does
not intend to concentrate investments in any particular industry.
There is no assurance that any of the Funds will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for the Scudder Variable Fund, which must accompany or precede
this Prospectus and which should be read carefully.
Scudder, Stevens & Clark, Inc. ("Scudder") provides investment advisory
services to the Scudder Variable Fund in accordance with the terms set forth in
the current prospectus for the Scudder Variable Fund. For its advisory
services, Scudder receives compensation monthly at the following annual rates:
Money Market Portfolio--0.37%; Bond Portfolio--0.475%; Capital Growth
Portfolio--0.475%; Balanced Portfolio--0.475%; Growth and Income Portfolio--
0.475%; and International Portfolio--0.875%.
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The Scudder Variable Fund is registered with the SEC as an open-end
diversified management company. Registration with the SEC does not involve
supervision of the management or investment practices or policies of the
Scudder Variable Fund by the Commission.
Resolving Material Conflicts. All of the Funds of the Scudder Variable Fund
are also available to registered separate accounts of other insurance companies
offering variable annuity and variable life insurance products. As a result,
there is a possibility that a material conflict may arise between the interests
of Owners of Policies and of owners of policies whose cash values are allocated
to other separate accounts investing in the Funds. In the event a material
conflict arises, the Company will take any necessary steps, including removing
the assets of the Separate Account from one or more of the Funds, to resolve
the matter. See the Scudder Variable Fund prospectus for further details.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Funds of the
Scudder Variable Fund and to substitute shares of another Fund of the Scudder
Variable Fund or of another registered open-end investment company, if the
shares of a Fund are no longer available for investment, or if in the Company's
judgment further investment in any Fund becomes inappropriate in view of the
purposes of the Separate Account. The Company will not substitute any shares
attributable to an Owner's interest in a Division of the Separate Account
without notice to the Owner and prior approval of the SEC, to the extent
required by the 1940 Act or other applicable law. Nothing contained in this
Prospectus shall prevent the Separate Account from purchasing other securities
for other series or classes of policies, or from permitting a conversion
between series or classes of policies on the basis of requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Fund of the Scudder
Variable Fund, or in shares of another investment company, with a specified
investment objective. New Divisions may be established when, in the sole
discretion of the Company, marketing needs or investment conditions warrant,
and any new Division will be made available to existing Owners on a basis to be
determined by the Company. To the extent approved by the SEC, the Company may
also eliminate or combine one or more Divisions, substitute one Division for
another Division, or transfer assets between Divisions if, in its sole
discretion, marketing, tax, or investment conditions warrant.
In the event of a substitution or change, the Company may, if it considers it
necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
If deemed by the Company to be in the best interests of persons having voting
rights under the Policy, and to the extent any necessary SEC approvals or Owner
votes are obtained, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other separate
accounts of the Company. To the extent permitted by applicable law, the Company
may also transfer the assets of the Separate Account associated with the Policy
to another separate account.
The Company cannot guarantee that the shares of the Scudder Variable Fund
will always be available. Scudder Variable Fund sells its shares to the
Separate Account in accordance with the terms of a participation agreement
between Scudder Variable Fund and the Company. Should this agreement terminate
or should shares become unavailable for any other reason, the Separate Account
will not be able to purchase Scudder Variable Fund shares. Should this occur,
the Company will be unable to honor Owner requests to allocate their cash
values or premium payments to the Divisions of the Separate Account investing
in shares of the Scudder Variable Fund. In the event that the Scudder Variable
Fund is no longer available, the Company will, of course, take reasonable steps
to obtain alternative investment options.
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PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
The Company will generally issue a Group Contract to employers whose
employees and/or their spouses may become Owners and/or Insureds thereunder so
long as the employee is within the class of employees eligible to be included
in the Group Contract. The class(es) of employees covered by a particular Group
Contract are set forth in that Group Contract's specifications pages. The Group
Contract will be issued upon receipt of an application for a Group Contract
signed by a duly authorized officer of the employer and acceptance by a duly
authorized officer of the Company at its Home Office. (See "General Provisions
of the Group Contract--Issuance," page 34.) Individuals (i.e., eligible
employees or their spouses) wishing to purchase a Policy, whether under a Group
Contract or an employer-sponsored insurance program, must complete the
appropriate application for Individual Insurance and submit it to an authorized
representative of the Company or to the Company's Home Office. The Company will
issue to each Contractholder either a Certificate or an Individual Policy to
give to each Owner.
Corporate Programs will generally involve Individual Policies. Policies will
be issued on the lives of eligible Insureds, generally employees of a
sponsoring employer, and the Owner will usually be the sponsoring employer or
its designee.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
70 who supply evidence of insurability satisfactory to the Company. The Company
may, at its sole discretion, issue Policies to individuals falling outside
those Issue Ages or decline to issue Policies to individuals within those Issue
Ages.
In order for an employee to be eligible to purchase a Policy, the employee
must be actively at work at the time the application for Individual Insurance
is signed. In addition, the Contractholder may determine specific classes to
which the employee must belong to be eligible to purchase a Policy. Actively at
work means that the employee must work for the Contractholder or sponsoring
employer at the employee's usual place of work or such other places as required
by the Contractholder or sponsoring employer in the course of such work for the
full number of hours and the full rate of pay, as set by the employment
practices of the employer. Ordinarily the time worked per week must not be less
than 30 hours. However, the Company reserves the right to waive or modify the
actively at work requirement at its discretion. In addition, the Contractholder
may require that, to be eligible to purchase a Policy, an employee must be
employed by the employer as of a certain date or for a certain period of time.
This date or time period will be set forth in the Group Contract specifications
pages. Employees of any Associated Companies of the Contractholder will be
considered employees of the Contractholder. The Company may also allow an
individual who is an independent contractor working primarily for the
sponsoring employer to be considered an eligible employee. As an independent
contractor, he may receive an Individual Policy rather than a Certificate
depending upon state law applicable to the contracts. An employee may include a
partner in a partnership if the employer is a partnership.
In other than Executive Programs or Corporate Programs, the first time an
employee is given the opportunity to purchase a Policy, the Company will issue
the Policy and any children's insurance rider applied for by the employee
pursuant to its guaranteed issue procedure. Under this procedure the employee
is required to answer qualifying questions in the application for Individual
Insurance, but is not required to submit to a medical or paramedical
examination. The maximum Face Amount that an employee can generally apply for
under the guaranteed issue procedure ("Guaranteed Issue Amount") is three times
the employee's salary up to a ceiling that is based on the number of eligible
employees under a Group Contract or other employer-sponsored insurance program.
Guaranteed issue may be available with Executive Programs or Corporate Programs
depending upon number of eligible employees or if other existing insurance
coverage is cancelled.
Where the Face Amount exceeds the guaranteed issue limits, where the Policy
has been offered previously to the employee, where the guaranteed issue
requirements set forth in the application for Individual
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Insurance are not met, or in connection with certain programs that may be
offered without guaranteed issue the employee must submit to a simplified
underwriting procedure which requires the employee to respond satisfactorily to
certain health questions in the application. A blood test may be required. This
requirement is generally applicable only to Executive Programs or Corporate
Programs. Similarly, such questions must be answered if, in connection with the
issuance of any children's rider, if the employee is not eligible for
guaranteed issue underwriting, or, even when the employee is eligible, if the
child does not satisfy the guaranteed issue requirements set forth in the
application for Individual Insurance. However, regardless of which underwriting
procedure is used, acceptance of an application is subject to the Company's
underwriting rules, and the Company reserves the right to reject an application
for any reason.
If a Policy is to be issued to a spouse of an employee who is eligible to
purchase a Policy under a Group Contract or an employer-sponsored insurance
program, the appropriate application for Individual Insurance must be supplied.
The spouse will be subject to the simplified underwriting procedure described
above. Guaranteed issue is not available. Spouse coverage is generally not
available under Executive Program Policies or Corporate Program Policies.
The Issue Date is the effective date for all coverage provided in the
original application for Individual Insurance. The Issue Date is used to
determine Policy Anniversaries, Policy Years, and Policy Months. A Policy will
not take effect until the appropriate application for Individual Insurance is
signed, the initial premium has been paid prior to the Insured's death, the
Insured is eligible for it, and the information in the application is
determined to be acceptable to the Company. However, prior to the actual
issuance of a Policy which is being underwritten on a guaranteed issue basis,
interim insurance in the amount of insurance applied for up to the Guaranteed
Issue Amount will start as of the date of the application. Interim insurance
ends on the earliest of the following dates: (a) the date insurance begins on
the Policy applied for; (b) the date a Policy other than the Policy applied for
is offered to the applicant; (c) the date the Company notifies the applicant
that the application for any proposed Insured is declined; (d) 60 days from the
date of application; or (e) termination of employment with the Contractholder
or sponsoring employer.
PREMIUMS
The initial premium is due on the Issue Date, and usually will be remitted by
the Contractholder or employer on behalf of the Owner. The Company requires
that the initial premium for a Policy be at least equal to one-twelfth ( 1/12)
of the planned annual premium for the Policy set forth in the specifications
pages. The planned annual premium is an amount specified for each Policy based
on the requested initial Face Amount, the Issue Age of the Insured and the
charges under the Policy. (See "Charges and Deductions," page 26.) However, the
Owner is not required to pay premiums equal to the planned annual premium.
Premiums remitted by a Contractholder or sponsoring employer or designated
payor shall be applied to a Policy when received by the Company. Should
supporting documentation to enable the determination of the amount of premium
per Policy not be received prior to or coincident with the cash premium, the
premiums shall be promptly returned to the entity remitting such premiums.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. Under Group Contracts
and Individual Policies issued in connection with other employer-sponsored
insurance programs, the planned annual premium usually will be remitted by the
Contractholder or sponsoring employer on behalf of the Owner pursuant to a
planned premium payment schedule which will provide for premium payments in a
level amount at fixed intervals agreed to by the Contractholder or employer and
the Company (usually monthly). The amount of the premiums remitted by the
sponsoring employer or Contractholder will be that amount authorized to be
deducted by the employee. The Owner may skip planned premium payments. Failure
to pay one or more planned premium payments will not cause the Policy to lapse
until such time as the Cash Surrender Value is insufficient to cover the next
Monthly Deduction. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 16.)
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In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters,"
page 35.) Moreover, as mentioned above, an Owner may also skip planned premium
payments. Therefore, unlike conventional insurance policies, a Policy does not
obligate the Owner to pay premiums in accordance with a rigid and inflexible
premium schedule.
Failure of the Contractholder to remit the planned premium payments
authorized by its employees may cause the Group Contract to terminate. (See
"General Provisions of the Group Contract--Termination," page 34.) Nonetheless,
provided that there is sufficient Cash Surrender Value to prevent the Policy
from lapsing, the Individual Insurance provided will automatically continue in
the event of such termination. (See "Policy Rights and Privileges--Eligibility
Change Conversion," page 25.) Individual Insurance will also continue if the
employee's employment with the Contractholder or sponsoring employer
terminates. In either circumstance, an Owner of an Individual Policy (or a
Certificate converted by amendment to an Individual Policy) will establish a
new schedule of planned premiums which will have the same planned annual
premium, but ordinarily the payment intervals will be no more frequent than
quarterly.
Premium Limitations. Every premium payment remitted by or on behalf of an
Owner must be at least $20. In no event may the total of all premiums paid
under a Policy in any Policy Year exceed the current maximum premium
limitations for that year established by Federal tax laws. The maximum premium
limitation for a Policy Year is the most premium that can be paid in that
Policy Year such that the sum of the premiums paid under the Policy will not at
any time exceed the guideline premium limitations referred to in section
7702(c) of the Internal Revenue Code of 1986, or any successor provision. If at
any time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, the Company will accept only that portion
of the premium which will make total premiums equal the maximum. Any part of
the premium in excess of that amount will be returned directly to the Owner
within 60 days of the end of the Policy Year in which payment is received or
applied as otherwise agreed and no further premiums will be accepted until
allowed by the current maximum premium limitations prescribed by Federal tax
law. See "Federal Tax Matters" on page 38 for a further explanation of premium
limitations. Section 7702A creates an additional premium limitation, which, if
exceeded, can change the tax status of a Policy to that of a "modified
endowment contract." The Company has adopted administrative steps designed to
notify an Owner when it is believed that a premium payment will cause a Policy
to become a modified endowment contract. The Owner will be given a limited
amount of time to request that the premium be reversed in order to avoid the
Policy's being classified as a modified endowment contract. (See "Federal Tax
Matters," page 35.)
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge less any charge to compensate the Company for anticipated higher
corporate income taxes resulting from the sale of a Policy less the premium tax
charge. (See "Charges and Deductions--Sales Charges," page 26.)
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums will
be allocated in accordance with the Owner's instructions upon receipt of the
premiums at the Company's Home Office. However, the minimum percentage, other
than zero ("0"), that may be allocated to a Division is 10 percent of the net
premium, and fractional percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers," page 24.)
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The value of amounts allocated to Divisions of the Separate Account will vary
with the investment performance of the chosen Divisions and the Owner bears the
entire investment risk. This will affect the Policy's Cash Value, and may
affect the death benefit as well. Owners should periodically review their
allocations of premiums and values in light of market conditions and overall
financial planning requirements.
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy to
lapse. Lapse will occur only when the Cash Surrender Value is insufficient to
cover the monthly deduction, and a grace period expires without a sufficient
payment being made. (See also "General Provisions of the Group Contract--Grace
Period--Termination," page 34.)
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium requirements,
the amount of the premium required to keep the Policy in force will be the
amount of the current monthly deduction. (See "Charges and Deductions," page
26.) If the Company does not receive the required amount within the grace
period, the Policy will lapse and terminate without Cash Value. If the Insured
dies during the grace period, any overdue monthly deductions will be deducted
from the death benefit otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
any time within five years after the date of lapse and before the Maturity
Date. The right to reinstate a lapsed Policy will not be affected
by the termination of a Group Contract or the termination of an employee's
employment during the reinstatement period. Reinstatement is subject to the
following conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company (including evidence of insurability of any person covered by a
rider to reinstate the rider).
2. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, is large enough to cover: (a) the
monthly deductions due at the time of lapse, and (b) two times the monthly
deduction due at the time of reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death. Payment
of death benefit proceeds will not be affected by termination of the Group
Contract or employer-sponsored insurance program or by termination of an
employee's employment.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 32.)
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<PAGE>
The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more of the settlement
options set forth in the Policy. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.) Death benefit proceeds will be paid to the
surviving Beneficiary or Beneficiaries specified in the application or as
subsequently changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long as
the Policy remains in force. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 16.) The minimum Face Amount currently is
$25,000. The maximum Face Amount is generally $500,000. However, in connection
with a particular Group Contract or employer sponsored insurance program, the
Company may establish a substantially higher Face Amount for Policies issued
under that Contract or program.
Option A. Under Option A, the death benefit is the current Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value on the date of
death. The applicable percentage is 250 percent for an Insured Attained Age 40
or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table below.
Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. Owners who prefer to have favorable investment performance
reflected in higher Cash Value for the same Face Amount, rather than increased
death benefit, generally should select Option A.
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
40 or younger........... 250%
41...................... 243
42...................... 236
43...................... 229
44...................... 222
45...................... 215
46...................... 209
47...................... 203
48...................... 197
49...................... 191
50...................... 185
51...................... 178
52...................... 171
53...................... 164
54...................... 157
55...................... 150
56...................... 146
57...................... 142
58...................... 138
59...................... 134
60...................... 130
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
61...................... 128%
62...................... 126
63...................... 124
64...................... 122
65...................... 120
66...................... 119
67...................... 118
68...................... 117
69...................... 116
70...................... 115
71...................... 113
72...................... 111
73...................... 109
74...................... 107
75 to 90................ 105
91...................... 104
92...................... 103
93...................... 102
94...................... 101
95 or older............. 100
</TABLE>
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company reserves
the right to alter the applicable percentage to the extent necessary to comply
with changes to Section 7702(d) or any successor provision thereto.
17
<PAGE>
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage is
the same as under Option A: 250 percent for an Insured with an Attained Age of
40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the percentage
declines as shown in the Applicable Percentage Table above. Accordingly, under
Option B the amount of the death benefit will always vary as the Cash Value
varies (but will never be less than the Face Amount). Owners who prefer to have
favorable investment performance reflected in higher death benefits for the
same Face Amount generally should select Option B. All other factors equal, for
the same premium dollar, Option B provides lower initial Face Amount resulting
in earlier cash accumulation.
Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option in effect. The Company reserves the right
to limit the number of changes in death benefit options to one each Policy
Year. A request for change must be made directly to the Company in writing. The
effective date of such a change will be the Monthly Anniversary on or following
the date the Company receives the change request.
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request for a change from Option A to Option B. This change may not be made if
it would result in a Face Amount of less than $25,000.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges will
be imposed upon a change from death benefit Option B to Option A. Changing from
Option A to Option B, however, will result in a decrease in the Face Amount. In
addition, if, prior to or accompanying a change in the death benefit option,
there has been an increase in the Face Amount, the cost of insurance charge may
be different for the increased amount. (See "Charges and Deductions--Monthly
Deduction--Cost of Insurance," page 28.)
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income due to not satisfying the
requirements of Federal tax law. (See "Federal Tax Matters," page 35.)
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written request
for a change in the Face Amount must be sent directly to the Company. A change
in Face Amount may affect the cost of insurance rate and the net amount at
risk, both of which affect an Owner's cost of insurance charge. (See "Charges
and Deductions--Monthly Deduction--Cost of Insurance," page 28.) In addition, a
change in Face Amount may have Federal income tax consequences. (See "Federal
Tax Matters," page 35.)
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000 and the Face Amount
remaining in force after any requested decrease may not be less than the
minimum amount Face Amount, generally $25,000. If, following a decrease in Face
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see "Payment and Allocation of Premiums," page
13), the decrease may be limited or Cash Value may be returned to the Owner (at
the Owner's election), to the extent necessary to meet these requirements. A
decrease in the Face Amount will reduce the Face Amount in the following order:
(a) The Face Amount provided by the most recent increase;
18
<PAGE>
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance," page 28).
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. If approved, the increase will become
effective on the Monthly Anniversary on or following receipt of the
satisfactory evidence of insurability. In addition, the Insured must have an
Attained Age of not greater than 80 on the effective date of the increase. The
amount of the increase may not be less than $5,000. The Face Amount may not be
increased more than the maximum Face Amount for that Policy, generally
$500,000. However, in connection with a particular Group Contract or employer-
sponsored insurance program, the Company may establish a substantially higher
Face Amount for Policies issued under that Contract or program. Although an
increase need not necessarily be accompanied by an additional premium (unless
it is required to meet the next monthly deduction), the Cash Surrender Value in
effect immediately after the increase must be sufficient to cover the next
monthly deduction. (See "Charges and Deductions--Monthly Deduction," page 27.)
An increase in the Face Amount may result in certain additional charges. (See
"Charges and Deductions," page 26.)
An increase in Face Amount may be cancelled within the later of 20 days from
the date the Owner received the new Policy specifications page for the
increase, within 10 days of mailing the right to cancellation notice to the
Owner, or within 45 days after the application for an increase was signed. Upon
cancellation, any additional charges, which would not have been assessed
without the increase, will be refunded to the Owner if requested. If a request
for a refund is not made, the charges will be restored to the Policy's Cash
Value and allocated to Divisions of the Separate Account in the same manner as
they were deducted. Premiums paid following an increase in Face Amount and
prior to the time the right to cancel the increase expires will become part of
the Policy's Cash Value and will not be subject to refund. (See "Policy Rights
and Privileges--Right to Examine Policy," page 24.)
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the level
of premium payments, and, to a lesser extent, making partial withdrawals from
the Policy. Although the consequences of each of these methods will depend upon
the individual circumstances, they may be generally summarized as follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit," page 16),
decrease the pure insurance protection and the cost of insurance charges
under the Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if Option A is in
effect) or the Cash Value plus the Face Amount (if Option B is in effect),
increased premium payments will increase the pure insurance protection.
Increased premiums should also increase the amount of funds available to
keep the Policy in force.
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 16.)
19
<PAGE>
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals," page 22.)
However, it only affects the amount of pure insurance protection and cost
of insurance charges if the death benefit before or after the withdrawal is
based on the applicable percentage of Cash Value, because otherwise the
decrease in the death benefit is offset by the amount of Cash Value
withdrawn. The primary use of a partial withdrawal is to withdraw Cash
Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the Policy--Postponement of Payments," page 30.) The Owner may decide the
form in which the proceeds will be paid. During the Insured's lifetime, the
Owner may arrange for the death benefit proceeds to be paid in a single sum or
under one or more of the optional methods of settlement described below. The
death benefit will be increased by the amount of the monthly cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32, and "Charges and
Deductions," page 26.)
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits," page 26.)
An election or change of method of settlement must be in writing. A change in
Beneficiary revokes any previous settlement election. Once payments have begun,
the settlement option may not be changed.
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash Value
in the Separate Account and the Loan Account. The Policy's Cash Value in the
Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, and the charges assessed in
connection with the Policy. An Owner may at any time surrender the Policy and
receive the Policy's Cash Surrender Value. (See "Policy Rights and Privileges--
Surrender and Partial Withdrawals," page 22.) There is no guaranteed minimum
Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the Issue
Date and the Investment Start Date, this amount may be more than the amount of
one monthly deduction. (See "Payment and Allocation of Premiums," page 13.)
Thereafter, on each Valuation Date, the Cash Value in a Division of the
Separate Account will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
20
<PAGE>
(6) Any amounts transferred from the Division during the current Valuation
Period plus transfer charges if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions," page 26.)
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(4) Any amount charged against each Division for taxes or other economic
burden resulting from the application of tax laws, determined by the
Company to be properly attributable to the Divisions of the Separate
Account or the Policy, or any amount set aside during the Valuation
Period as a reserve for taxes attributable to the operation or
maintenance of each Division; minus
(5) A charge not to exceed .0024547% of the net assets for each day in the
Valuation Period. This corresponds to 0.90% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value. Unit value is obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date: minus
(2) A reduction based upon a charge not to exceed .0024547% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.90% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
POLICY RIGHTS AND PRIVILEGES
EXERCISING RIGHTS AND PRIVILEGES UNDER THE POLICIES
Owners of Policies issued under a Group Contract or in connection with an
employer-sponsored insurance program may exercise their rights and privileges
under the Policies (i.e., make transfers, change premium allocations, borrow,
etc.) by directly notifying the Company in writing at its Home Office. The
Company will send all reports and other notices described herein or in the
Policy directly to the Owner.
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for
21
<PAGE>
such loan. The Loan Value is equal to (a) minus (b), where (a) is 85 percent of
the Cash Value of the Policy on the date the Policy Loan is requested and (b)
is the amount of any outstanding Indebtedness. Loan interest is due and payable
in arrears on each Policy Anniversary or on a pro rata basis for such shorter
period as the loan may exist. The minimum amount that may be borrowed is $100.
The loan may be completely or partially repaid at any time while the Insured is
living. Any amount due to an Owner under a Policy Loan ordinarily will be paid
within seven days after the Company receives the loan request at its Home
Office, although payments may be postponed under certain circumstances. (See
"General Matters Relating to the Policy--Postponement of Payments," page 30.)
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. A Loan Subaccount
exists for each Division of the Separate Account. Amounts transferred to the
Loan Account to secure Indebtedness are allocated to the appropriate Loan
Subaccount to reflect its origin. Unless the Owner requests a different
allocation, amounts will be transferred from the Divisions of the Separate
Account in the same proportion that the Policy's Cash Value in each Division
bears to the Policy's total Cash Value, less the Cash Value in the Loan
Account, at the end of the Valuation Period during which the request for a
Policy Loan is received. This will reduce the Policy's Cash Value in the
Separate Account. These transactions will not be considered transfers for
purposes of the limitations on transfers between Divisions as discussed on page
24.
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of Company
management as authorized by the Board of Directors of the Company. The Loan
Account interest credited will be transferred to the Divisions of the Separate
Account: (1) each Policy Anniversary; (2) when a new loan is made; (3) when a
loan is partially or fully repaid; and (4) when an amount is needed to meet a
monthly deduction.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of Policy Loans," below.) The
amount transferred will be deducted from the Divisions of the Separate Account
in the same proportion that the portion of the Cash Value in each Division
bears to the total Cash Value of the Policy minus the Cash Value in the Loan
Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
Federal income tax consequences (See "Federal Tax Matters," page 35.)
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment performance
of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Charges and
Deductions," page 26.) A sufficient payment must be made within the later of
the grace period of 62 days from the Monthly Anniversary immediately before the
date Indebtedness exceeds the Cash Value, or 31 days after notice that the
Policy will terminate without a sufficient payment has been mailed, or the
Policy will lapse and terminate without value. A lapsed Policy, however, may
later be reinstated. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 16.)
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
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<PAGE>
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part at
any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as repayment
of Indebtedness. When a loan repayment is made, an amount securing the
Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount.
SURRENDER AND PARTIAL WITHDRAWALS
At any time during the lifetime of the Insured and while a Policy is in
force, the Owner may surrender, or make a partial withdrawal under, the Policy
by sending a written request to the Company. The amount available upon
surrender is the Cash Surrender Value (described below) at the end of the
Valuation Period during which the surrender request is received at the
Company's Home Office. Amounts payable upon surrender or a partial withdrawal
ordinarily will be paid within seven days of receipt of the written request.
(See "General Matters Relating to the Policy--Postponement of Payments," page
30.) Surrenders and partial withdrawals may have Federal income tax
consequences. (See "Federal Tax Matters," page 35.)
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request, or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The Cash
Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness. Surrender proceeds will be paid in a single sum. If the request
is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to one
partial withdrawal each Policy Month from the Separate Account. The minimum
amount of a partial withdrawal, net of any transaction charges, is at least
$500. The minimum amount that can be withdrawn from a Division is $50, or the
Policy's Cash Value in a Division, if smaller. The maximum amount that may be
withdrawn, including the partial withdrawal transaction charge, is the Loan
Value. The partial withdrawal transaction charge is equal to the lesser of $25
or two percent of the amount withdrawn. The Owner may allocate the amount
withdrawn, subject to the above conditions, among the Divisions of the Separate
Account. If no allocation is specified, then the partial withdrawal will be
allocated among the Divisions of the Separate Account in the same proportion
that the Policy's Cash Value in each Division bears to the total Cash Value of
the Policy, less the Cash Value in the Loan Account, on the date the request
for the partial withdrawal is received.
A partial withdrawal will decrease the Face Amount in two situations. First,
if the death benefit Option A is in effect and the death benefit equals the
Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge. Second, if the death benefit equals a
percentage of Cash Value (whether Option A or Option B is in effect), then a
partial withdrawal will decrease the Face Amount by the amount that the partial
withdrawal plus the partial withdrawal transaction charge exceeds the
difference between the death benefit and the Face Amount. The death benefit
also will be reduced in this circumstance. If Option B is in effect and the
death benefit equals the Face Amount plus the Cash Value, the partial
withdrawal will not reduce the Face Amount, but it will reduce the Cash Value
and, thus, the death benefit by the amount of the partial withdrawal plus the
partial withdrawal transaction charge. The Face Amount will be decreased in the
following order: (1) the Face Amount at issue; and (2) any increases in the
same order in which they were issued.
Generally, the partial withdrawal transaction charge imposed in connection
with a partial withdrawal will be allocated among the Divisions of the Separate
Account in the same proportion as the partial withdrawal is allocated. If,
following a partial withdrawal, insufficient funds remain in a Division to pay
the
23
<PAGE>
partial withdrawal transaction charge allocated to a Division, the unpaid
charges will be allocated equally among the remaining Divisions. In addition,
an Owner may request that the partial withdrawal transaction charge be paid
from the Owner's Cash Value in another Division.
The Face Amount remaining in force after a partial withdrawal may not be less
than $25,000. Any request for a partial withdrawal that would reduce the Face
Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection," page 19.)
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account. Requests for transfers from or among Divisions of the
Separate Account must be made in writing directly to the Company and may be
made once each Policy Month. Transfers must be in amounts of at least $250 or,
if smaller, the Policy's Cash Value in a Division. The Company will effectuate
transfers and determine all values in connection with transfers as of the end
of the Valuation Period during which the transfer request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 20 days after receiving it, within 45
days after the Owner signed the application, or within 10 days of mailing a
notice of the cancellation right to the Owner, whichever is latest. If a Policy
is cancelled within this time period, a refund will be paid. The refund will
equal all premiums paid under the Policy.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
the Company. A refund of premiums paid by check may be delayed until the check
has cleared the Owner's bank. (See "General Matters Relating to the Policy--
Postponement of Payments," page 30.)
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit," page 16) also may be cancelled. The request for cancellation must be
made within the latest of 20 days from the date the Owner received the new
Policy specifications pages for the increase, 10 days of mailing the right to
cancellation notice to the Owner, or 45 days after the Owner signed the
application for the increase.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have been
made absent the increase (see "Charges and Deductions--Monthly Deduction," page
27). If no request is made, the Company will increase the Policy's Cash Value
by the amount of these additional charges. This amount will be allocated among
the Divisions of the Separate Account in the same manner as it was deducted.
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<PAGE>
CONVERSION RIGHT TO A FIXED BENEFIT POLICY
Once during the first 24 Policy Months following the Issue Date of the
Policy, the Owner may, upon written request, convert a Policy still in force to
a life insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. In the event a
Certificate has been amended to operate as an Individual Policy following an
Insured's change in eligibility under a Group Contract, the conversion right
will be measured from the Issue Date of the original Certificate. (See "Policy
Rights and Privileges--Eligibility Change Conversion," page 25). No evidence of
insurability will be required when this right is exercised. However, the
Company will require that the Policy be in force and that the Owner repay any
existing Indebtedness. At the time of the conversion, the new Policy will have,
at the Owner's option, either the same death benefit or the same net amount at
risk as the original Policy. The new Policy will also have the same Issue Date
and Issue Age as the original Policy. The premiums for the new Policy will be
based on the Company's rates in effect for the same Issue Age and rate class as
the original Policy.
In addition, once during the first 24 Policy Months following the effective
date of a requested increase in Face Amount (i.e., an increase that is not the
result of a change in death benefit options), the Owner may, upon written
request, convert the amount of the increase in Face Amount to a life insurance
policy which also provides for fixed benefits. Premiums under this new contract
will be based on the Company's rates in effect for the same Issue Age and rate
class of the Insured as were applied on the effective date of the increase in
the Face Amount. The conditions and principles, described above, which are
applicable to a conversion of the entire Policy, will be equally applicable to
the conversion of an increase in Face Amount to a fixed-benefit policy.
ELIGIBILITY CHANGE CONVERSION
If an Insured's eligibility under a Group Contract or employer-sponsored
insurance program ends due to its termination or due to the termination of the
employee's employment, the Insured's coverage will continue unless the Policy
is no longer in force. Even if the Policy is not in force due to lapse, the
right to reinstate and thus to convert a lapsed Policy will not be affected by
the change in the employee's eligibility during the reinstatement period.
If a Certificate was issued under the Group Contract, the Certificate will be
amended automatically so that it will continue in force as an Individual
Policy. The rights, benefits, and guaranteed charges will not be altered by
this amendment. The amendment will be mailed to the Owner within 31 days after
the Company receives written notice that (a) the employee's employment ended or
(b) after the termination of the Group Contract. If, at the time the conversion
occurs, the Policy is in a grace period (see "Payment and Allocation of
Premiums--Policy Lapse and Reinstatement," page 16), any premium necessary to
prevent the Policy from lapsing must be paid to the Company at its Home Office
before the new Individual Policy will be mailed. A new planned premium schedule
will be established which will have the same planned annual premium utilized
under the Group Contract, but, ordinarily, the planned payment intervals will
be no more frequent than quarterly. The Company may allow payment of planned
premium through periodic (usually monthly) authorized electronic funds
transfer. Of course, unscheduled premium payments can be made at any time. (See
"Payment and Allocation of Premiums--Premiums," page 14.)
If an Individual Policy was issued under the Group Contract or other
employer-sponsored insurance program including a Corporate Program or Executive
Program, the Policy will continue in force following the change in eligibility.
The rights, benefits, and guaranteed charges under the Policy will remain the
same following this change in eligibility.
When an employee's spouse is the Insured under a Policy, the spouse's
insurance coverage also will continue in the event the employee is no longer
eligible. If a Certificate was originally issued to the employee's spouse, the
Certificate will be amended automatically as described above. If an Individual
Policy was
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<PAGE>
originally issued, the Individual Policy will continue as described above. In
addition, if an Associated Company ceases be to under common control with the
Contractholder, the Insureds of the Associated Company (i.e., employees of the
Associated Company and their spouses) may continue their insurance in the
manner described above.
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay the
Cash Surrender Value of the Policy to the Owner on the Maturity Date. An Owner
may elect to have amounts payable on the Maturity Date paid in a single sum or
under a settlement option. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.) Amounts payable on the Maturity Date ordinarily
will be paid within seven days of that date, although payment may be postponed
under certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments," page 30.) A Policy will mature if and when the
Insured reaches Attained Age 95.
PAYMENT OF POLICY BENEFITS
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written agreement with
the Company.
Settlement Options. The settlement options described below apply to the
payment of death benefit proceeds, as well as to benefits payable at maturity.
These are examples of options that may be available. Once a settlement option
is in effect, there will no longer be value in the Separate Account. The
Company may make other settlement options available in the future.
Option A--Life Income. The Company will pay equal monthly payments that will
be made for the payee's lifetime.
Option B--Life Income for Two Lives. The Company will pay monthly
installments jointly and to two named payees if both are living when the
installments become payable. One payee will be designated as primary payee.
Full installments will continue so long as the primary payee is living. If the
primary payee dies after installments begin, full installments or installments
of 1/2 or 2/3 (whichever the Owner elected when applying for this option) will
continue to the other payee during his or her lifetime.
Option C--Income for Specified Number of Years and Life Thereafter. The
Company will pay monthly installments beginning on the effective date of the
option and continuing for 5, 10, 15 or 20 years certain, as may be chosen, and
after that during the payee's lifetime.
Option D--Life Income With Cash Refund. The Company will pay equal monthly
installments as long as the payee lives. If the payee dies before the total
amounts paid equal the proceeds applied, the Company pays the difference in one
sum.
Option E--Installments of a Specified Amount. The Company will pay
installments at dates and in amounts chosen by the payee with the Company's
approval. The Company will continue to make payments until all of the proceeds,
with interest, are paid. The final payment will not exceed the unpaid balance.
Option F--Income for Specified Number of Years. The Company will pay monthly
installments beginning on the effective date of the option and continuing for a
specified number of years, not to exceed 30 years.
Option G--Interest. The Company will hold the proceeds on deposit during the
payee's lifetime or for any other period selected with the Company's approval.
Interest may be accumulated or received in monthly, quarterly, semiannual, or
annual payments, as elected. The proceeds may be withdrawn at any time upon
request. Interest begins to accrue as of the date of death, for death benefit
proceeds; the Maturity Date, for benefits payable upon maturity of a Policy;
and the date a request for surrender is received, for surrender of a Policy.
The Company may, from time to time, offer additional settlement options
and/or more favorable settlement option rates to all Insureds or Beneficiaries
under the Policies.
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<PAGE>
Accelerated Death Benefits. The Company offers certain riders which permit
the Owner to elect to receive an accelerated payment of the Policy's death
benefit in a reduced amount under certain circumstances. (See "General Matters
Relating to the Policy--Additional Insurance Benefits," page 32.)
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policies to compensate the
Company for providing the insurance benefits set forth in the Policies and any
additional benefits added by rider, administering the Policies, incurring
expenses in distributing the Policies, and assuming certain risks in connection
with the Policies.
SALES CHARGES
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by a front-end sales charge ("premium
expense charge") equal to one percent of the premium.
In addition, as a result of OBRA, insurance companies are generally required
to capitalize and amortize certain policy acquisition expenses over a ten year
period rather than currently deducting such expenses. A higher capitalization
expense applies to the deferred acquisition expenses of Policies that are
deemed to be individual contracts under OBRA and will result in a significantly
higher corporate income tax liability for the Company in early Policy Years.
Thus, under Policies that are deemed to be individual contracts under OBRA, the
Company makes an additional charge of 1% of each premium payment to compensate
the Company for the anticipated higher corporate income taxes that result from
the sale of such a Policy. This additional charge is treated as a sales load
for purposes of determining compliance with the limitations on sales loads
imposed by the Investment Company Act of 1940 and applicable regulations
thereunder.
The premium payment less the premium expense charge less any charge to
compensate the Company for anticipated higher corporate income taxes resulting
from the sale of a Policy less the premium tax charge (described below) equals
the net premium.
The sales charges will not change in the event that an Insured is no longer
eligible under a Group Contract or employer-sponsored insurance program, but
continues coverage on an individual basis.
The sales charges may not be sufficient to cover the distribution expenses
incurred by the Company. The Company expects to recover any deficiency from its
general assets, which may include profits from the mortality and expense risk
charge.
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premium taxes, the Company deducts a charge of 2 percent from all
Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate the Company for (a) certain administrative costs; (b)
insurance underwriting and acquisition expenses in connection with issuing a
Policy; (c) the cost of insurance; and (d) the cost of optional benefits added
by rider. The monthly deduction will be deducted on the Investment Start Date
and on each succeeding Monthly Anniversary. It will be allocated among each
Division of the Separate Account in the same proportion that a Policy's Cash
Value in each Division bears to the total Cash Value of the Policy, less the
Cash Value in the Loan Account, on the date the deduction is made. Because
portions of the monthly deduction, such as the cost of insurance, can vary from
month to month, the monthly deduction itself will vary in amount from month to
month.
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<PAGE>
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping, processing
death benefit claims, cash surrenders, partial withdrawals, Policy changes,
reporting and overhead costs, processing applications, and establishing Policy
records. As reimbursement for administrative expenses related to the
maintenance of each Policy and the Separate Account, the Company assesses a
monthly administration charge from each Policy. The amount of this charge is
set forth in the specifications pages of the Policy and depends on the number
of employees eligible to be covered at issue of a Group Contract or an
employer-sponsored insurance program. The following table sets forth the range
of monthly administrative charges under the Policy:
<TABLE>
<CAPTION>
ELIGIBLE EMPLOYEES FIRST YEAR SUBSEQUENT YEARS
------------------ ---------- ----------------
<S> <C> <C>
250-499....................... $5.00......................... $2.50
500-999....................... $4.75......................... $2.25
1000+......................... $4.50......................... $2.00
</TABLE>
For Group Contracts or other employer-sponsored insurance programs with fewer
than 250 eligible employees, those with additional administrative costs, or
those that are offered as Executive Programs or Corporate Programs, the monthly
administrative charge may be higher, but will not exceed $6.00 per month during
the first Policy Year and $3.50 per month in renewal years.
These charges, once established at the time a Policy is issued, are
guaranteed not to increase over the life of the Policy. Nor will the
administrative charge change in the event that the Insured is no longer
eligible for group coverage, but continues coverage on an individual basis. The
Company has designed the administrative charge so as not to make any profit on
the charge. In addition, where the Company believes that lower administrative
costs will be incurred in connection with a particular Group Contract or
employer-sponsored insurance program due to the number of eligible employees or
administrative support provided by the employer, the Company may modify the
above schedule for that Group Contract or other employer-sponsored insurance
program. The amount of the administrative charge applicable to a particular
Policy will be set forth in specifications pages for that Policy.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience. The Company currently issues
the Policies on a guaranteed issue or simplified underwriting basis without
regard to the sex of the Insured. Whether a Policy is issued on a guaranteed
issue or simplified underwriting basis does not affect the cost of insurance
charge determined for that Policy.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and possibly the gender mix (i.e., the
proportion of men and women covered under a particular Group Contract or
employer-sponsored program). The cost of insurance rates generally increase as
the Insured's Attained Age increases. An Insured's rate class is generally
based on the number of eligible employees as well as other factors that may
affect the mortality risks assumed by the Company in connection with a
particular Group Contract or employer-sponsored insurance program. All other
factors being equal, the cost of insurance rates generally decrease by rate
class as the number of eligible employees in the rate class increase. The
Company reserves the right to change criteria on which a rate class will be
based in the future.
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<PAGE>
If gender mix is a factor, the Company will estimate the gender mix of the
pool of Insureds under a Group Contract or employer-sponsored insurance program
upon issuance of the Contract. Each year on the Group Contract or employer-
sponsored insurance program's anniversary, the Company may adjust the rate to
reflect the actual gender mix for the particular group. In the event that the
Insured's eligibility under a Group Contract (or other employer-sponsored
insurance program) ceases, the cost of insurance rate will continue to reflect
the gender mix of the pool of Insureds at the time the Insured's eligibility
ceased. However, at some time in the future, the Company reserves the right to
base the gender mix and rate class on the group consisting of those Insureds
who are no longer under a Group Contract or employer-sponsored program.
The current cost of insurance rates will not be greater than the guaranteed
cost of insurance rates set forth in the Policy. These guaranteed rates are 125
percent of the maximum rates that could be charged based on the 1980
Commissioners Standard Ordinary Mortality Table C ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the maximum rates in the 1980
CSO Table because the Company uses guaranteed or simplified underwriting
procedures whereby the insured is not required to submit to a medical
or paramedical examination. The current cost of insurance rates are generally
lower than 100 percent of the 1980 CSO Table. Any change in the actual cost of
insurance rates, except those changes made to adjust for changes in the gender
mix of the pool of Insureds under a particular Group Contract or employer-
sponsored insurance program, will apply to all persons of the same Attained Age
and rate class whose initial Face Amounts or increases in Face Amount have been
in force for the same length of time. (For purposes of computing guideline
premiums under Section 7702 of the Internal Revenue Code of 1986, as amended,
the Company will use 100 percent of the 1980 CSO Table.)
The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0040741 (which reduces the net
amount at risk, solely for purposes of computing the cost of insurance, by
taking into account assumed monthly earnings at an annual rate of five
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that for
the initial Face Amount, the net amount at risk will be calculated separately
for each rate class. If Option A is in effect, for purposes of determining the
net amounts at risk for each rate class, Cash Value will first be considered a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, the excess Cash Value will then be considered a part of each
increase in order, starting with the first increase. If Option B is in effect,
the net amount at risk for each rate class will be determined by the Face
Amount associated with that rate class. In calculating the cost of insurance
charge, the cost of insurance rate for a Face Amount is applied to the net
amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option A
and Option B when more than one rate class is in effect, a change in the death
benefit option may result in a different net amount at risk for each rate class
than would have occurred had the death benefit option not been changed. Since
the cost of insurance is calculated separately for each rate class, any change
in the net amount at risk resulting from a change in the death benefit option
may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," page 16, and "Policy Rights and Privileges--Surrender
and Partial Withdrawals," page 22.)
Additional Insurance Benefits. The monthly deduction will include charges for
any additional benefits provided by rider. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32.)
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal.
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<PAGE>
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at the rate of .0024547% of the net assets of each
Division of the Separate Account, which equals an annual rate of .90% of those
net assets. This deduction is guaranteed not to increase for the duration of
the Policy. The Company may realize a profit from this charge.
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount of
death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future. Charges for other
taxes, if any, attributable to the Account may also be made. (See "Federal Tax
Matters," page 35.)
Expenses of Scudder Variable Fund. The value of the net assets of the
Separate Account will reflect the investment advisory fee and other expenses
incurred by the Class A Shares of Scudder Variable Fund. (See "The Company and
the Separate Account--Scudder Variable Life Investment Fund," page 10.)
GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) 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; (ii) the SEC by order
permits postponement for the protection of Owners; or (iii) 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 premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE CONTRACT
The Policy, the attached application, any riders, endorsements, any
application for an increase in Face Amount, and any application for
reinstatement constitute the entire contract between the Owner and the Company.
Apart from the rights and benefits described in the Certificate or Individual
Policy and incorporated by reference into the Group Contract, the Owner has no
rights under the Group Contract. All statements made by the Insured in the
application are considered representations and not warranties, except in the
case of fraud. Only statements in the application and any supplemental
applications can be used to contest a claim or the validity of the Policy. Any
change to the Policy must be approved in writing by the President, a Vice
President, or the Secretary of the Company. No agent has the authority to alter
or modify any of the terms, conditions, or agreements of the Policy or to waive
any of its provisions.
CONTROL OF POLICY
The Insured will be considered Owner of the Policy unless another person is
shown as the Owner in the application. Ownership may be changed, however, as
described below. The Owner is entitled to all rights
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<PAGE>
provided by the Policy, prior to its Maturity Date. After the Maturity Date,
the Owner cannot change the payee nor the mode of payment, unless otherwise
provided in the Policy. Any person whose rights of ownership depend upon some
future event will not possess any present rights of ownership. If there is more
than one Owner at a given time, all must exercise the rights of ownership. If
the Owner should die, and the Owner is not the Insured, the Owner's interest
will go to his or her estate unless otherwise provided.
BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If there is more
than one Beneficiary at the death of the Insured, each will receive equal
payments unless otherwise provided by the Owner. If no Beneficiary is living at
the death of the Insured, the proceeds will be payable to the Owner or, if the
Owner is not living, to the Owner's estate.
CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received at
the Company's Home Office. The
Company will not be liable for any payment made or action taken before the
Company received the written request for change. If the Owner is also a
Beneficiary of the Policy at the time of the Insured's death, the Owner may,
within 60 days of the Insured's death, designate another person to receive the
Policy proceeds.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or any
applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment thereunder
will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from the
Issue Date during the lifetime of the Insured. An increase in Face Amount or
addition of a rider after the Issue Date is incontestable after such increase
or addition has been in force for two years from its effective date during the
lifetime of the Insured. Any reinstatement of a Policy is incontestable, except
for nonpayment of premiums, only after it has been in force during the lifetime
of the Insured for two years after the effective date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an
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<PAGE>
acknowledged copy to the Owner. The Company is not responsible for determining
the validity of any assignment. Payment of Policy proceeds is subject to the
rights of any assignee of record. If a claim is based on an assignment, the
Company may require proof of the interest of the claimant. A valid assignment
will take precedence over any claim of a Beneficiary.
SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the laws of the state in
which the Policy was delivered, if less than two years), the amount payable
will be limited to premiums paid, less any partial withdrawals and outstanding
Indebtedness. If the Insured, while sane or insane, dies by suicide within two
years after the effective date of any increase in Face Amount, the death
benefit for that increase will be limited to the amount of the monthly
deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide when
the Policy, or any increase in Face Amount, was applied for.
MISSTATEMENT OF AGE AND CORRECTIONS
If the age of the Insured has been misstated in the application, the amount
of the death benefit will be that which the most recent cost of insurance
charge would have purchased for the correct age.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. However, some Group
Contracts or employer-sponsored insurance programs may not offer each of the
additional benefits described below. Certain riders may not be available in all
states. In addition, should it be determined that the tax status of a Policy as
life insurance is adversely affected by the addition of any of these riders,
the Company will cease offering such riders. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy should be consulted. The
cost of any additional insurance benefits will be deducted as part of the
monthly deduction. (See "Charges and Deductions--Monthly Deduction," page 27.)
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accidental Death Benefit Rider. Provides additional insurance if the
Insured's death results from accidental bodily injury, as defined in the rider.
Under the terms of the rider, the additional benefits provided in the Policy
will be paid upon receipt of proof by the Company that death resulted directly
from accidental injury and independently of all other causes; occurred within
120 days from the date of injury; and occurred before the Policy Anniversary
nearest age 70 of the Insured.
Children's Life Insurance Rider. Provides for term insurance on the Insured's
children, as defined in the rider. To be eligible for insurance under the
rider, the child to be insured must not be confined in a hospital at the time
the application is signed. Under the terms of the rider, the death benefit will
be payable to the named Beneficiary upon the death of any insured child. Upon
receipt of proof of the Insured's death before the rider terminates, the rider
will be continued on a fully paid-up term insurance basis.
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<PAGE>
HIV Acceleration of Death Benefits Rider. Provides for the Owner's election
for the Company to make an accelerated payment, prior to the death of the
Insured upon receipt of satisfactory evidence that the Insured has tested
seropositive for the human immunodeficiency virus ("HIV") after both the Policy
and rider are issued. The Company will pay the Policy's death benefit (less any
Indebtedness and any term insurance added by riders), calculated on the date
that the Company receives satisfactory evidence that the Insured has tested
seropositive for HIV, reduced by a $100 administrative processing fee. The
Company will pay the accelerated benefit to the Owner in a single payment in
full settlement of the Company's obligations under the Policy. The rider may be
added to the Policy only after the Insured satisfactorily meets certain
underwriting requirements which will generally include a negative HIV test
result to a blood or other screening test acceptable to the Company.
The Federal income tax consequences associated with (i) adding the HIV
Acceleration of Death Benefit Rider or (ii) receiving the benefit provided
under the rider are uncertain. Accordingly, we urge you to consult a tax
adviser about such consequences before adding the HIV Acceleration of Death
Benefit Rider to your Policy or requesting a benefit under the rider.
Accelerated Death Benefit Settlement Option Rider. Provides for the
accelerated payment of a portion of death benefit proceeds in a single sum to
the Owner if the Insured is terminally ill or permanently confined to a nursing
home. Under the rider, which is available at no additional cost, the Owner may
make a voluntary election to completely settle the Policy in return for the
Company's accelerated payment of a reduced death benefit. The Owner may make
such an election under the rider if the Insured (1) has a life expectancy of 12
months or less or (2) is permanently confined to a qualified nursing home and
is expected to remain there until death. Any irrevocable beneficiary and
assignees of record must provide written authorization in order for the Owner
to receive the accelerated benefit.
The amount of the death benefit payable under the rider will equal the cash
surrender value under the Policy on the date the Company receives satisfactory
evidence of either (1) or (2), above, (less any Indebtedness and any term
insurance added by other riders) plus the product of the applicable "benefit
factor" multiplied by the difference of (a) minus (b), where (a) equals the
Policy's death benefit proceeds, and (b) equals the Policy's cash surrender
value. The "benefit factor", in the case of terminal illness, is 0.85 and, in
the case of permanent nursing home confinement, is 0.70.
The Federal income tax consequences associated with (i) adding the
Accelerated Death Benefit Settlement Option Rider or (ii) receiving the
benefits provided under such rider are uncertain. Accordingly, we urge you to
consult a tax adviser about such consequences before adding the Accelerated
Death Benefit Settlement Option Rider to your Policy or requesting a benefit
under the rider.
RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the Scudder
Variable Fund and a list of the portfolio securities held in each Fund. Receipt
of premium payments directly from the Owner, transfers, partial withdrawals,
Policy Loans, loan repayments, changes in death benefit options, increases or
decreases in Face Amount, surrenders and reinstatements will be confirmed
promptly following each transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to an Underwriting Agreement with the
Company. Walnut Street is a wholly-owned subsidiary of General American Holding
Company, which is an affiliate of the Company. Walnut Street is registered with
the SEC
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under the Securities Exchange Act of 1934 as a broker-dealer and is a member of
the National Association of Securities Dealers. The Policies will be sold by
broker-dealers who have entered into written sales agreements with Walnut
Street.
Broker-dealers will receive commissions based upon a commission schedule in
the sales agreement with the Company and Walnut Street. Broker-dealers
compensate their registered representative agents. Commissions are payable on
net collected premiums received by the Company. Maximum commissions payable to
a broker-dealer during the first year of a Group Contract or other employer-
sponsored insurance program are (a) 18% of premiums that do not exceed the cost
of insurance assessed during the first Policy Year plus (b) 1% of premiums in
excess of the cost of insurance assessed during that Policy Year. In all
renewal years of a Group Contract or other employer-sponsored insurance program
maximum commissions are (a) 3% of premiums that do not exceed the cost of
insurance assessed during the respective Policy Year plus (b) 1% of premiums in
excess of the cost of insurance assessed during that Policy Year. In lieu of
the part (b) of renewal commissions described above payable on premiums
received in excess of the cost of insurance assessed, renewal commissions may
be up to 0.25% per year of the average cash value of a Policy during a Policy
Year or calendar year. In no event will commissions be payable for more than 20
years.
Walnut Street received $22,568 in commissions on the Policies during the year
ended December 31, 1994, and $9,130 for the year ended December 31, 1995.
GENERAL PROVISIONS OF THE GROUP CONTRACT
ISSUANCE
The Group Contract will be issued upon receipt of a signed application for
Group Insurance signed by a duly authorized officer of the employer and
acceptance by a duly authorized officer of the Company at its Home Office.
PREMIUM PAYMENTS
The Contractholder will remit planned premium payments for Insureds of the
Contractholder or an Associated Company in an amount authorized by the employee
to be deducted from his wages. All planned premiums under a Group Contract must
be remitted in advance to the Company. The planned premium payment interval is
agreed to by the Contractholder and the Company. Prior to each planned payment
interval, the Company will furnish the Contractholder with a statement of the
planned premium payments to be made under the Group Contract or such other
notification as has been agreed to by the Contractholder and the Company.
GRACE PERIOD
If the Contractholder does not remit planned premium payments in a timely
fashion, the Group Contract will be in default. A grace period of 31 days
begins on the date that the planned premiums were scheduled to be remitted. If
the Contractholder does not remit premiums prior to the end of the grace
period, the Group Contract will terminate. However, the Individual Insurance
will continue following the Group Contract's termination, provided such
insurance is not surrendered or cancelled by the Owner. (See "Policy Rights and
Privileges--Eligibility Change Conversion," page 25.)
TERMINATION
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, the Company may end a Group
Contract or any of its provisions on 31 days notice. If the Group Contract
terminates, any Policies in effect will remain in force on an individual basis,
unless such insurance is surrendered or cancelled by the Owner. New Policies
will be issued as described in "Policy Rights and Privileges--Eligibility
Change Conversion," page 25.
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RIGHT TO EXAMINE GROUP CONTRACT
The Contractholder may terminate the Group Contract within 20 days after
receiving it, within 45 days after the application was signed or within 10 days
of mailing a notice of the cancellation right, whichever is latest. To cancel
the Group Contract, the Contractholder should mail or deliver the Group
Contract to the Company.
ENTIRE CONTRACT
The Group Contract, with the attached copy of the Contractholder's
application and other attached papers, if any, is the entire contract between
the Contractholder and the Company. All statements made by the Contractholder,
any Owner or any Insured will be deemed representations and not warranties.
Misstatements will not be used in any contest or to reduce claim under the
Group Contract, unless it is in writing. A copy of the application containing
such misstatement must have been given to the Contractholder or to the Insured
or to his Beneficiary, if any.
INCONTESTABILITY
The Company cannot contest the Group Contract after it has been in force for
two years from the date of issue.
OWNERSHIP OF GROUP CONTRACT
The Contractholder owns the Group Contract. The Group Contract may be changed
or ended by agreement between the Company and the Contractholder without the
consent of, or notice to, any person claiming rights or benefits under the
Group Contract. However, the Contractholder does not have any ownership
interest in the Policies issued under the Group Contract. The rights and
benefits under the Policies inure to the benefit of the Owners, Insureds, and
Beneficiaries as set forth herein and in the Policies.
FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is limited.
The Company nonetheless believes (largely in reliance on IRS Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that the
Policy should meet the Section 7702 definition of a life insurance contract. If
a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy. Therefore, if it is subsequently
determined that a Policy does not satisfy section 7702, the Company will take
whatever steps are appropriate and necessary to attempt to cause such Policy to
comply
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with section 7702, including possibly refunding any premiums paid that exceed
the limitations allowable under section 7702 (together with interest or other
earnings on any such premiums refunded as required by law). For these reasons,
the Company reserves the right to modify the Policy as necessary to attempt to
qualify it as a life insurance contract under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated as
a life insurance contract for Federal tax purposes. Although the Company does
not control the Scudder Variable Fund or its investments, the Scudder Variable
Fund has represented that it intends to comply with the diversification
requirements prescribed by the Treasury in Reg. section 1.817-5. Thus, the
Company believes that each Division of the Separate Account, through the
Scudder Variable Fund, will be in compliance with the requirements prescribed
by the Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
significant guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company does not know what standards will be set forth, if any,
in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being considered the owner of
a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. As a life insurance contract, the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101(a)(1) of the Code.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, a conversion to a fixed policy, an exchange, a Policy loan, an
unscheduled premium payment, a Policy lapse with an outstanding loan, a partial
withdrawal, a surrender, or an assignment of the Policy may have Federal income
tax consequences depending on the circumstances. In addition, Federal estate
and state and local estate, inheritance, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy owner or Beneficiary. A competent tax adviser should be consulted for
further information.
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The Federal income tax consequences associated with (i) adding either the HIV
Acceleration of Death Benefit Rider or the Accelerated Death Benefit Settlement
Option Rider (the "Riders") or (ii) receiving the benefits provided under these
Riders are uncertain. Accordingly, we urge you to consult a tax adviser before
adding either rider to your Policy or requesting a benefit under such Riders.
The Policies may be used in various arrangements, such as nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract". Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
2. POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. In general, a Policy
will be a modified endowment contract if the accumulated premiums paid at any
time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. Further, a Policy that is not otherwise a modified endowment contract
may become a modified endowment contract if it is "materially changed." The
determination whether a Policy will be a modified endowment contract after a
material change generally depends upon the relationship of the death benefit
and the cash value at the time of such change and the additional premiums paid
in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a modified endowment
contract are extremely complex. Therefore, a current or prospective Policy
owner is strongly advised to retain and consult with a competent advisor before
purchasing a Policy, making an unscheduled premium payment on an existing
Policy or making any change in an existing Policy, to determine whether the
Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified endowment
contract. Although the Company cannot provide complete assurance at this time
that a Policy will not inadvertently become a modified endowment contract, it
is continuing its efforts to enhance its administrative systems to
automatically monitor potential modified endowment classifications.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the cash value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from, or secured by,
such a Policy (as well as due but unpaid interest that is added to the loan
amount) are treated as distributions from such a Policy and taxed accordingly.
Third, a 10 percent additional income tax is imposed on the portion of any
distribution from, or loan taken from or secured by, such a Policy that is
included in income except where the distributions or loan is made on or after
the Policy owner attains age 59 1/2, is attributable to the Policy owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Policy owner or the joint
lives (or joint life expectancies) of the Policy owner and the Policy owner's
Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
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distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that
a distribution from a Policy that is not a modified endowment contract could
later become taxable as a distribution from a modified endowment contract.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's death benefit (e.g., partial withdrawal or a
change from Option B to Option A) or any other change that reduces benefits
under the Policy in the first 15-years after the Policy is issued and that
results in a cash distribution to the Policy owner in order for the Policy to
continue complying with the section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a modified endowment contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional income tax.
5. POLICY LOAN INTEREST. If there is any borrowing against a Policy, the
interest paid on the loan may not be tax deductible. A Policyowner should
consult a qualified tax adviser before deducting interest on a policy loan.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Policy owner (except that the amount of any loan from, or secured by, a
Policy that is a modified endowment contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a modified endowment contract to the
extent that such amount is included in the gross income of the Owner.
7. MULTIPLE POLICIES. All modified endowment contracts that are issued by the
Company (or its affiliates) to the same Policy owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be
properly attributable to the Separate Account or to the Policies.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases and redemptions of
Scudder Variable Fund shares by each of the Divisions. Additional protection
for the assets of the Separate Account is afforded by a blanket fidelity bond
issued by Reliance Insurance Company in the amount of $5 million, covering all
officers and employees of the Company who have access to the assets of the
Separate Account.
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VOTING RIGHTS
To the extent required by law, the Company will vote the Class A shares of
the Scudder Variable Fund held in the Separate Account at regular and special
shareholder meetings of the Scudder Variable Fund in accordance with
instructions received from persons having voting interests in the corresponding
Divisions of the Separate Account. If, however, the 1940 Act or any regulation
thereunder should be amended or if the present interpretation thereof should
change, and as a result the Company determines that it is permitted to vote
shares of the Scudder Variable Fund in its own right, it may elect to do so.
The Owners of Policies ordinarily are the persons having a voting interest in
the Divisions of the Separate Account. The number of votes which an Owner has
the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Fund in which the Division invests. Fractional
shares will be counted. The number of votes of the Fund which the Owner has
right to instruct will be determined as of the date coincident with the date
established by that Fund for determining shareholders eligible to vote at the
meeting of the Scudder Variable Fund. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the Scudder Variable Fund.
Because the Funds of the Scudder Variable Fund serve as investment vehicles
for this Policy as well as for other variable life insurance policies sold by
insurers other than the Company and funded through other separate investment
accounts, persons owning the other policies will enjoy similar voting rights.
The Company will vote Fund shares held in the Separate Account for which no
timely voting instructions are received and Fund shares that it owns as a
consequence of accrued charges under the Policies, in proportion to the voting
instructions which are received with respect to all Policies participating in a
Fund. Each person having a voting interest in a Division will receive proxy
material, reports, and other materials relating to the appropriate Fund.
Disregard of Voting Instructions. The Company may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of or one or more of the Funds or to
approve or disapprove an investment advisory contract for a Fund. In addition,
the Company itself may disregard voting instructions in favor of changes
initiated by an Owner in the investment policy or by the investment adviser or
sub-adviser of a Fund of the Scudder Variable Fund if the Company reasonably
disapproves of such changes. A proposed change would be disapproved only if the
proposed change is contrary to state law or prohibited by state regulatory
authorities, or the Company determined that the change would have an adverse
effect on its general assets in that the proposed investment policy for a Fund
may result in overly speculative or unsound investments. In the event the
Company does disregard voting instructions, a summary of that action and the
reasons for such action will be included in the next annual report to Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of the Company and the
Separate Account and certifies their adequacy, and a full examination of the
Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
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MANAGEMENT OF THE COMPANY
NAME PRINCIPAL OCCUPATION(S)
DURING PAST FIVE YEARS*
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since June,
1986, and Vice President, New Ventures, since June
1986, General American Life Insurance Co., St.
Louis, Mo. (GenAm).
Steven D. Anderson Vice President and Chief Financial Officer since
December, 1993. Formerly, Assistant Vice President
and Chief Financial Officer August, 1990-December,
1993.
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actuary
General American Life and Treasurer, GenAm since October, 1994. Executive
Insurance Company Vice President--Group Pensions, GenAm January, 1990-
700 Market Street October, 1994.
St. Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984. Sec-
General American Life retary since February, 1991. Associate General Coun-
Insurance Company sel, GenAm, since August, 1984.
700 Market Street
St. Louis, MO 63101
Craig K. Nordyke@ Vice President and Chief Actuary since August, 1990.
Formerly, Second Vice President and Chief Actuary,
May, 1987-August, 1990.
George E. Phillips Vice President--Operations and System Development
since January, 1995. Formerly, Senior Vice Presi-
dent, Fortis, Inc. July, 1991-August, 1994. Vice
President, Mutual Benefit prior to July, 1991.
DIRECTORS***
Richard A. Liddy President and Chief Executive Officer, GenAm, since
May, 1992. President and Chief Operating Officer,
GenAm, May, 1988-May, 1992.
Leonard M. Rubenstein Executive Vice President--Investments, GenAm, since
February, 1991. Vice President and Treasurer, Secu-
rities, GenAm, November, 1984-February, 1991.
Warren J. Winer Executive Vice President--Group, GenAm, since Sep-
tember, 1995. Formerly, Managing Director, Wm. M.
Mercer, July, 1993-August, 1995; President, W F
Corroon, September, 1990-July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
November, 1991. Vice President--Life Product Manage-
ment, GenAm, May, 1989-November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc., since
May, 1993, Formerly, Executive Vice President--Rein-
surance, GenAm, since January, 1990.
- --------
*All positions listed are with the Company unless otherwise indicated.
**The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
***The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring--Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
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LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws applicable
to the issue and sale of the Policies. All matters of Missouri law pertaining
to the Policies, including the validity of the Policies and the Company's right
to issue the Policies and the Group Contract under Missouri insurance law, and
all legal matters relating to the Parent Company's resolution concerning
policies issued by Paragon have been passed upon by Matthew P. McCauley,
Esquire, General Counsel of Paragon Life Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The financial statements of the Company and the Separate Account included in
this Prospectus and in the registration statement have been included in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, and on the authority of said firm as experts in accounting
and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of the
Company contains an explanatory paragraph which states that the financial
statements are presented in conformity with accounting practices prescribed or
permitted by the State of Missouri Department of Insurance. These practices
differ in some respects from generally accepted accounting principles. The
financial statements do not include any adjustments that might result from the
differences.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Vice President and Chief Actuary of the Company, as stated
in the opinion filed as an exhibit to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, the Company and the Policy offered
hereby. Statements contained in this Prospectus as to the contents of the
Policy and other legal instruments are summaries. For a complete statement of
the terms thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this Prospectus
should be distinguished from the financial statements for the Separate Account
Divisions included in this Prospectus, and 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.
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LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital and surplus of Paragon Life Insurance Company as of
December 31, 1995 and 1994, and related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three-year
period ended December 31, 1995. These statutory financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statutory financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 2, the accompanying financial statements have been
prepared in conformity with accounting practices prescribed or permitted by the
State of Missouri Department of Insurance. These practices differ in some
respects from generally accepted accounting principles. Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations,
and cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
and surplus of Paragon Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flow for each of the years in
the three-year period ended December 31, 1995, on the basis of accounting
described in note 2.
KPMG Peat Marwick LLP
February 16, 1996
F-1
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PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES:
Cash received:
Premiums and considerations....................... $36,612 29,478 20,416
Allowances and reserve adjustments on reinsurance
ceded............................................ 99 125 127
Investment income received, net of related
expenses......................................... 4,252 3,697 2,825
Other income...................................... 347 75 --
------- ------ ------
Total cash received from operating activities... 41,310 33,375 23,368
------- ------ ------
Total benefits, operating charges paid and
transfers:
Life and other benefits paid...................... 9,315 7,627 3,583
Operating charges--commissions, other expenses and
taxes (excluding Federal income tax)............. 7,678 6,319 5,850
Federal income taxes received..................... (93) (121) (697)
Net transfers to separate account................. 14,296 10,247 5,972
------- ------ ------
Total benefits, operating charges paid and
transfers...................................... 31,196 24,072 14,708
------- ------ ------
Net increase in policy loans........................ 1,308 1,438 1,178
------- ------ ------
Net cash provided from operating activities........... 8,806 7,865 7,482
Proceeds from investments sold, matured or repaid--
bonds................................................ 3,082 4,566 8,702
Other cash provided................................... 729 707 363
------- ------ ------
Total cash provided............................. 12,617 13,138 16,547
------- ------ ------
Cost of investments acquired--bonds................... 8,462 11,613 25,447
Other cash applied.................................... 141 50 47
------- ------ ------
Total cash applied.............................. 8,603 11,663 25,494
------- ------ ------
Net increase (decrease) in cash and short term
investments.......................................... 4,014 1,475 (8,947)
Cash and short-term investments:
Beginning of year................................... 3,042 1,567 10,514
------- ------ ------
End of Year......................................... $ 7,056 3,042 1,567
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS,
LIABILITIES, AND CAPITAL AND SURPLUS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
ADMITTED ASSETS
Bonds, at amortized cost (deposited with regulatory authori-
ties, $3,868 and $2,866 in 1995 and 1994)................... $ 56,458 51,077
Policy loans................................................. 7,206 5,418
Cash and short-term investments.............................. 7,056 3,042
Amounts recoverable from reinsurers.......................... 1,183 1,497
Investment income due and accrued............................ 1,041 885
Other assets................................................. 221 161
Separate account assets...................................... 50,194 27,311
-------- ------
Total admitted assets.................................. $123,359 89,391
======== ======
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy reserves--life contracts............................ 57,618 46,661
Policy reserves--without life contingencies................ 399 389
Policy claim liabilities................................... 1,096 709
Amounts due to reinsurers.................................. 833 648
Accrued expenses, commissions, taxes, licenses & fees...... 870 700
Asset valuation reserve.................................... 336 238
Interest maintenance reserve............................... 117 132
Due to parent.............................................. 945 628
Other liabilities.......................................... 858 726
Separate account liabilities............................... 49,509 26,739
-------- ------
Total liabilities...................................... 112,581 77,570
-------- ------
COMMITMENTS AND CONTINGENCIES
Capital and Surplus:
Capital stock--par value of $100 per share; 100,000 shares
authorized; 20,500 shares issued and outstanding.......... 2,050 2,050
Surplus:
Additional paid-in....................................... 17,950 17,950
Unassigned surplus....................................... (9,907) (8,751)
Assigned surplus--separate accounts...................... 685 572
-------- ------
Total capital and surplus.............................. 10,778 11,821
-------- ------
Total liabilities and capital and surplus.............. $123,359 89,391
======== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS, CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Income:
Premiums and considerations......................... $36,612 29,478 20,416
Net investment income............................... 4,905 4,132 3,519
Expense allowances on reinsurance ceded............. 94 130 123
Other income........................................ 461 317 227
------- ------ ------
Total income...................................... 42,072 34,057 24,285
Policy obligations, expenses and net transfers:
Policyholder benefits............................... 10,011 6,243 3,818
Increase in policy reserves--life contracts......... 10,957 11,705 9,481
Increase in policy reserves--without life contingen-
cies............................................... 10 35 354
------- ------ ------
Total policy obligations.......................... 20,978 17,983 13,653
General insurance expenses.......................... 5,996 5,084 4,341
Commissions......................................... 523 491 715
Insurance taxes, licenses and fees.................. 1,329 1,093 697
------- ------ ------
Total expenses.................................... 7,848 6,668 5,753
------- ------ ------
Net transfers to separate account................... 14,283 10,464 5,972
------- ------ ------
Loss before Federal income tax benefit and real-
ized capital gains............................... (1,037) (1,058) (1,093)
Federal income tax benefit............................ (117) (108) (180)
------- ------ ------
Loss before realized capital gains................ (920) (950) (913)
Realized capital gains, net of tax and transfer to
IMR.................................................. -- -- 6
------- ------ ------
Net loss.......................................... (920) (950) (907)
Other changes in capital and surplus:
Increase in asset valuation reserve................. (98) (94) (74)
(Increase) Decrease in non-admitted assets.......... (25) 74 193
------- ------ ------
Total other changes in capital and surplus........ (123) (20) 119
------- ------ ------
Decrease in capital and surplus................... (1,043) (970) (788)
Capital and Surplus:
Beginning of year................................... 11,821 12,791 13,579
------- ------ ------
End of year......................................... $10,778 11,821 12,791
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) AFFILIATION AND GUARANTEE AGREEMENT
Paragon Life Insurance Company (Paragon) is a wholly-owned subsidiary of
General American Life Insurance Company (General American) established for the
purpose of marketing life insurance products through the sponsorship of major
companies and organizations. Paragon is licensed to do business in the District
of Columbia and in all states except New York.
General American has guaranteed that Paragon will have sufficient funds to
meet all of its contractual obligations. In the event a policyholder presents a
legitimate claim for payment on a Paragon insurance policy, General American
will pay such claim directly to the policyholder if Paragon is unable to make
such payment. The guarantee agreement is binding on General American, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than General American's rating.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying statutory financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Missouri
Department of Insurance, which vary in some respects from generally accepted
accounting principles (GAAP). The preparation of statutory financial statements
requires management to make estimates and assumptions which affect the reported
amounts within the statutory financial statements. Actual results could differ
from the estimated amounts. The significant statutory accounting practices and
the related differences from GAAP are as follows:
(a) Premiums on variable universal life and investment contracts under
statutory accounting practices are considered revenue when received;
whereas under GAAP, revenues for universal life and investment products
consist of policy fees that have been assessed against the account balances
for the cost of insurance, policy administration, and surrender charges.
Acquisition expenses, including commissions and other costs related to
acquiring new business, are charged to operations as incurred rather than
being deferred and amortized in relation to gross profits as required by
GAAP.
(b) Bonds are valued as prescribed by the National Association of
Insurance Commissioners (NAIC) and market values are stated at independent
dealer prices. Bonds are carried at amortized cost except for those bonds
required to be carried at values other than amortized cost in accordance
with NAIC guidelines. Accounting for bonds under GAAP would require the
bonds to be carried at amortized cost or market value depending on the
company's intent and ability to hold such investments. The Company
generally intends to hold bonds until maturity. Policy loans are stated at
their net unpaid balance.
(c) Policy reserves are based on statutory mortality and interest
assumptions without consideration for withdrawals. Policy reserves are
computed under the Commissioners Reserve Valuation Method using 5.5%
interest for policies issued from 1986 to 1993, 5.0% interest for policies
issued in 1994 and 4.5% interest for policies issued in 1995. Mortality
assumptions are based upon the 1980 Commissioners Standard Ordinary table.
These reserves differ from reserves based on account values that accrue to
policyholders on universal-life and investment product contracts under
GAAP.
(d) Federal income taxes are charged to operations based on income that
is currently taxable. Deferred income taxes are not provided for the tax
effect of temporary differences between the book and tax basis of assets
and liabilities.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(e) Certain assets designated as non-admitted assets (principally
furniture and equipment and computer software) have been excluded from
assets by a direct charge to surplus.
(f) An asset valuation reserve (AVR), which is a reserve for possible
losses on investments, is recorded as a liability by a direct charge to
surplus in accordance with statutory accounting practices; under GAAP, the
AVR is not maintained.
(g) Certain capital gains and losses on investment sales that resulted
from changes in the level of interest rates are deferred and recorded in an
interest maintenance reserve (IMR), net of related income taxes. The IMR
liability will be amortized into operating income over the approximate
remaining lives of the respective investments sold. Realized gains and
losses from the sale or decrease in valuation basis due to change in credit
quality of invested assets are presented separately from operating income,
net of applicable income taxes. Under GAAP, realized gains and losses from
the sale of investments are recognized currently as a component of pre-tax
income.
(h) Separate account assets and liabilities represent segregated funds
administered and invested by Paragon for the exclusive benefit of variable
life insurance contract holders. Paragon receives administrative fees for
services rendered on behalf of the separate account policyholders. The
amount of the asset balance in excess of liabilities of $685,415 and
$572,334 at December 31, 1995 and 1994, respectively, represents policy
surrender charges which are permitted to be recorded to surplus under
statutory accounting practices. Such amounts are designated as Assigned
Surplus--Separate Accounts in the accompanying balance sheet. Under GAAP,
the amount would be reported as a liability to the separate account
policyholder.
(i) Reinsurance recoverable on unpaid policy claims is netted against the
applicable policyholder liability. Under GAAP, the amount would be reported
as an asset and the policy claim liability would be shown before the
effects of reinsurance.
(3) FEDERAL INCOME TAX
Paragon files a consolidated federal income tax return with General American
which includes the operations of General American and its subsidiaries. In
accordance with a tax allocation agreement between Paragon and General
American, taxes are computed as if Paragon was filing its own income tax
return, and tax expense (benefit) is paid to, or received from, General
American. Paragon recognizes a tax benefit to the extent that its tax losses
are utilized by other members of the General American consolidated tax group.
The current tax law requires life insurance companies to recompute certain
policy reserves for tax purposes and capitalize a percentage of premiums
attributed to acquisition expenses.
Federal income tax expense (benefit) differs from that computed based on the
federal statutory tax rate of 35 percent. The reasons for these differences are
as follows (000's):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit on pretax
loss................................... $(363) (35)% $(370) (35)% $(382) (35)%
Capitalization of acquisition expenses.. 298 29 214 20 168 16
Recomputed policy tax reserves.......... (34) (3) 18 2 31 3
Other................................... (18) (2) 30 3 3 --
----- --- ----- --- ----- ---
</TABLE>
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(4) TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
Paragon purchases certain administrative services from General American.
Charges for services performed are based upon personnel and other costs
involved in providing such service. Charges for services during 1995, 1994 and
1993 were $1,103,028, $651,472 and $597,120, respectively.
Paragon has a risk retention limit of $50,000 on any one life. Amounts over
the risk retention limit are ceded to an affiliate of General American on
either a coinsurance or yearly renewable term basis at rates commensurate with
those which could be obtained from unrelated companies. Premiums ceded in 1995,
1994 and 1993 totaled $9,126,245, $7,135,943 and $5,492,871, respectively, and
represented 99.9% of total premiums ceded in 1995 and 1994 and 95.9% of total
premiums ceded in 1993. Reserve credits taken by Paragon at December 31, 1995
and 1994 were $5,760,070 and $5,604,548, respectively. Amounts due from
reinsurance on paid and unpaid policyholder benefits at December 31, 1995 and
1994 were $3,155,457 and $2,066,748, respectively.
The Company had $3,342,742 and $2,748,885 on deposit with General American at
December 31, 1995 and 1994, respectively. The funds were readily convertible to
cash and earn interest at short-term money market rates.
(5) INVESTMENT SECURITIES
At December 31, 1995, Paragon had $56.5 million invested in bonds; $44.0
million were rated Highest Quality, $12.2 million were High Quality and $.3
million were Low Quality using the NAIC designation definitions.
The amortized cost and market values of investments in bonds at December 31,
1995 and 1994 are as follows (000's):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1995
US treasury securities................. $ 4,608 281 (1) 4,888
US government agency obligations....... 4,920 173 -- 5,093
Corporate securities................... 42,842 2,842 (438) 45,246
Mortgage backed securities............. 4,088 203 -- 4,291
------- ----- ------ ------
$56,458 3,499 (439) 59,518
======= ===== ====== ======
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1994
US treasury securities................. $ 3,606 24 (87) 3,543
US government agency obligations....... 5,123 24 (253) 4,894
Corporate securities................... 38,027 103 (3,029) 35,101
Mortgage backed securities............. 4,321 17 (325) 4,013
------- ----- ------ ------
$51,077 168 (3,694) 47,551
======= ===== ====== ======
</TABLE>
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Contractual maturities may differ from expected maturities because borrowers
may have the right to call or prepay the obligation with or without call or
prepayment penalties. The amortized cost and market value of investments in
bonds, listed by contractual maturity, at December 31, 1995 are as follows
(000's):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C> <C>
Due in one year or less............................. $ 593 585
Due after one year through five years............... 7,388 7,748
Due after five years through ten years.............. 18,521 19,471
Due after five years through ten years.............. 20,948 22,330
------- ------
47,450 50,134
Mortgage-backed securities (including US government
agency obligations)................................ 9,008 9,384
------- ------ ---
$56,458 59,518
======= ======
</TABLE>
Major categories of net investment income for the years ended December 31,
1995, 1994 and 1993 consist of the following (000's):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Bonds............................................. $4,040 $3,685 $3,229
Policy loans...................................... 480 347 221
Short term investments............................ 407 113 103
------ ------ ------
Total investment income........................... 4,927 4,145 3,553
IMR amortization.................................. 17 15 6
Investment expenses............................... (39) (28) (40)
------ ------ ------
Net investment income............................. $4,905 $4,132 $3,519
====== ====== ======
</TABLE>
Proceeds from sales of investments in bonds during 1995, 1994 and 1993 were
$3,082,387, $4,565,799 and $8,701,679, respectively. Gross gains realized on
sales during 1995 were $1,338 of which $870 of total net gains were transferred
to the interest maintenance reserve, net of taxes of $468. Gross gains realized
on sales during 1994 were $44,095 of which $28,662 of total net gains were
transferred to the interest maintenance reserve, net of taxes of $15,433. Gross
gains realized on sales during 1993 and gross losses were $174,988 and $829 of
which $165,069 of net gains were transferred to the Interest Maintenance
Reserve, net of taxes of $57,774. At December 31, 1995, the Company had 16
investment securities totaling $16,924,493, rated either the highest quality or
high quality using the NAIC definitions, that individually exceeded 10% of
statutory capital and surplus.
(6) BENEFIT PLANS AND POSTRETIREMENT BENEFITS
Associates of Paragon participate in a non-contributory multi-employer
defined benefit pension plan jointly sponsored by Paragon and General American.
The benefits are based on years of service and compensation level. No pension
expense was recognized in 1995, 1994 or 1993 due to overfunding of the plan.
In addition, Paragon has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by General American and are based on
salaries of eligible associates. Full vesting occurs after five years of
continuous service. Total expense to the Company for the incentive plan were
$149,747, $37,533 and $101,398 for 1995, 1994 and 1993, respectively.
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Paragon provides for certain health care and life insurance benefits for
retired employees in accordance with Statement of Financial Accounting
Standards Number 106--Employer's Accounting for Postretirement Benefits Other
Than Pensions (SFAS No. 106). SFAS No. 106 requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services.
SFAS No. 106 allows recognition of the cumulative effect of the liability in
the year of the adoption or the amortization of the transition obligation over
a period of up to 20 years. The Company has elected to recognize the initial
post-retirement benefit obligation of approximately $72,684 over a period of 20
years. The unrecognized initial post-retirement benefit obligation was
approximately $61,782 and $65,416 at December 31, 1995 and 1994, respectively.
Net periodic post-retirement benefit cost for the years ended December 31,
1995, 1994 and 1993 were approximately $35,000, $26,000, and $40,000,
respectively. This includes expected costs of benefits for newly eligible or
vested employees, interest costs, gains and losses from differences between
actuarial and actual experience, and amortization of the initial post-
retirement benefit obligation. The accumulated post-retirement benefit
obligation was approximately $118,000, and $86,000 at December 31, 1995 and
1994. The discount rate used in determining the accumulated post-retirement
benefit obligation was 8.25 percent. The health care cost trend rates were ten
percent for the Indemnity Plan, nine percent for the HMO Plan, and ten percent
for the Dental Plan. These rates were graded to six percent over the next 14
years. A one percentage point increase in the assumed health care cost trend
rates would increase the December 31, 1995 accumulated post-retirement
obligation by 11 percent, and the estimated service cost and interest cost
components of the net periodic post-retirement benefit cost for 1995 by 13.8
percent.
(7) LEASE COMMITMENT
In 1991 Paragon entered into a five year operating lease for home office
space. During 1995, Paragon renewed the operating lease for its home office
space for an additional five year period.
Annual lease obligations for years subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................... $ 288,419
1997........................................................... 368,993
1998........................................................... 390,870
1999........................................................... 390,870
2000........................................................... 390,870
2001........................................................... 97,718
----------
$1,927,740
==========
</TABLE>
Total rental expense during 1995, 1994 and 1993 was $256,631, $239,967 and
$194,234, respectively.
(8) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's
domiciliary state of Missouri impose risk-based capital (RBC) requirements on
insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or activity
levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory
intervention is required based on the ratio of a Company's actual total
adjusted capital (sum of capital and surplus and asset valuation reserve) to
control levels determined by the RBC formula. At December 31, 1995, the
Company's actual total adjusted capital was in excess of minimum requirements
which would cause company action under the RBC formula.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(9) DIVIDEND RESTRICTIONS
Dividend payments by Paragon are restricted by state insurance laws as to the
amount that may be paid without prior notice or approval of the Missouri
Department of Insurance. The maximum amount of dividends which can be paid
without prior approval of the insurance commissioner is limited to the maximum
of (1) 10% of statutory surplus or (2) net gain from operations. The maximum
dividend distribution that can be paid by Paragon during 1996 without prior
notice or approval is $804,291. Paragon did not pay dividends in 1995, 1994 or
1993.
F-10
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company and
Policyholders of Separate Account B:
We have audited the accompanying statements of net assets, including the
schedule of investments, of the Money Market, International, Capital Growth,
Balanced, Bond, and Growth and Income Divisions of Paragon Separate Account B
as of December 31, 1995, and related statements of operations and changes in
net assets for the year ended December 31, 1995 and the period March 3, 1994
(Inception) to December 31, 1994. These financial statements are the
responsibility of Paragon Separate Account B's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at December 31, 1995 by
correspondence with the Scudder Variable Life Investment Fund. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Money Market,
International, Capital Growth, Balanced, Bond, and Growth and Income Divisions
of Paragon Separate Account B as of December 31, 1995, and the results of their
operations and changes in their net assets for the year ended December 31, 1995
and the period March 3, 1994 (Inception) to December 31, 1994, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
February 16, 1996
F-11
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY CAPITAL GROWTH &
MARKET INTERNATIONAL GROWTH BALANCED BOND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS:
Investments in Scudder
Investments,
at Market Value (See
Schedule of
Investments)......... $17,317 265,822 478,037 243,566 70,062 12,083
------- ------- ------- ------- ------ ------
Receivable (payable)
from/to Paragon Life
Insurance Company.... (4) 36 (132) 113 7 448
------- ------- ------- ------- ------ ------
Total Net Assets.... 17,313 265,858 477,905 243,679 70,069 12,531
======= ======= ======= ======= ====== ======
TOTAL NET ASSETS REPRE-
SENTED BY:
Group Variable Univer-
sal Life Cash Value
Invested in Separate
Account.............. 17,313 265,858 477,905 243,679 70,069 12,531
------- ------- ------- ------- ------ ------
$17,313 265,858 477,905 243,679 70,069 12,531
======= ======= ======= ======= ====== ======
Total Units Held........ 16,324 22,709 30,799 21,350 8,937 1,534
Net Asset Value Per
Unit................... $ 1.06 11.71 15.52 11.41 7.84 8.17
Cost of Investments..... 16,606 239,690 396,539 205,012 60,735 10,603
======= ======= ======= ======= ====== ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-12
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE PERIOD
FROM MARCH 3, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
CAPITAL GROWTH &
MONEY MARKET INTERNATIONAL GROWTH BALANCED BOND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------- --------------- -------------- -------------- ------------- ------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET REALIZED GAIN (LOSS)
FROM SALES OF INVEST-
MENTS:
Proceeds from Sales.... $7,711 54,912 64,140 126,258 74,163 68,339 41,367 38,170 11,832 90,086 1,961 55,424
Cost of Investments
Sold................... 7,546 54,716 61,059 128,911 68,867 70,498 38,636 38,457 11,059 90,992 1,739 55,407
------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ----- ------
Net Realized Gain
(Loss) from Sales of
Investments........... 165 196 3,081 (2,653) 5,296 (2,159) 2,731 (287) 773 (906) 222 17
Net Unrealized Gain
(Loss) on Investments:
Unrealized Gain (Loss)
Beginning of Year...... 79 -- (364) -- (4,175) -- (122) -- 493 -- 7 --
Unrealized Gain (Loss)
End of Year............ 711 79 26,132 (364) 81,498 (4,175) 38,554 (122) 9,327 493 1,480 7
------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ----- ------
Net Unrealized Gain
(Loss) on Investments.. 632 79 26,496 (364) 85,673 (4,175) 38,676 (122) 8,834 493 1,473 7
Net Gain (Loss) on In-
vestments............. 797 275 29,577 (3,017) 90,969 (6,334) 41,407 (409) 9,607 (413) 1,695 24
EXPENSES:
Mortality and Expense
Charge................. 142 56 2,056 722 3,431 867 1,617 384 519 183 55 1
------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ----- ------
Increase (Decrease) in
Assets Resulting from
Operations.............. $ 655 219 27,521 (3,739) 87,538 (7,201) 39,790 (793) 9,088 (596) 1,640 23
====== ====== ====== ======= ====== ====== ====== ====== ====== ====== ===== ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-13
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE PERIOD
FROM MARCH 3, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
MONEY CAPITAL GROWTH &
MARKET INTERNATIONAL GROWTH BALANCED BOND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------- ---------------- ---------------- --------------- -------------- -------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
------- ------ ------- ------- ------- ------- ------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net Realized Gain
(Loss) on Investments.. $ 165 196 3,081 (2,653) 5,296 (2,159) 2,731 (287) 773 (906) 222 17
Net Unrealized Gain
(Loss) on Investments.. 632 79 26,496 (364) 85,673 (4,175) 38,676 (122) 8,834 493 1,473 7
Mortality and Expense
Charge................. (142) (56) (2,056) (722) (3,431) (867) (1,617) (384) (519) (183) (55) (1)
------- ------ ------- ------- ------- ------- ------- ------ ------ ------ ------ -----
Increase (Decrease) in
Net Assets Resulting
from Operations....... 655 219 27,521 (3,739) 87,538 (7,201) 39,790 (793) 9,088 (596) 1,640 23
Net Deposits into Sep-
arate Account......... 6,407 10,032 102,560 139,516 222,400 175,168 108,054 96,628 27,205 34,372 6,848 4,020
------- ------ ------- ------- ------- ------- ------- ------ ------ ------ ------ -----
Increase in Net As-
sets................. 7,062 10,251 130,081 135,777 309,938 167,967 147,844 95,835 36,293 33,776 8,488 4,043
Net Assets, Beginning
of Year................ 10,251 -- 135,777 -- 167,967 -- 95,835 -- 33,776 -- 4,043 --
------- ------ ------- ------- ------- ------- ------- ------ ------ ------ ------ -----
Net Assets, End of
Year................... $17,313 10,251 265,858 135,777 477,905 167,967 243,679 95,835 70,069 33,776 12,531 4,043
======= ====== ======= ======= ======= ======= ======= ====== ====== ====== ====== =====
</TABLE>
See Accompanying Notes to Financial Statements.
F-14
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) ORGANIZATION
Paragon Life Insurance Company (Paragon) established Paragon Separate Account
B on January 4, 1993. Paragon Separate Account B (the Separate Account)
commenced operations on March 3, 1994 and is registered under the Investment
Company Act of 1940 as a unit investment trust. The Separate Account receives
and invests net premiums for flexible premium group variable life insurance
policies that are issued by Paragon. The Separate Account is divided into
divisions, six of which invests exclusively in shares of a single fund of
Scudder Variable Life Investment Fund, an open-end, diversified management
investment company. These funds are the Money Market Portfolio, International
Portfolio, Capital Growth Portfolio, Balanced Portfolio, Bond Portfolio, and
Growth and Income Portfolio (the Funds). Policyholders have the option of
directing their premium payments into any or all of the Funds.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Separate Account in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
Investments
The Separate Account's investments in the Funds of Scudder are valued daily
based on the net asset values of the respective fund shares held. The average
cost method is used in determining the cost of shares sold on withdrawals by
the Separate Account. Share transactions are recorded consistent with trade
date accounting. Dividends are recorded on the ex-dividend date and are
immediately reinvested.
Federal Income Taxes
The operations of the Separate Account are treated as part of Paragon for
income tax purposes. Under existing Federal income tax law, capital gains from
sales of investments of the Separate Account are not taxable. Therefore, no
Federal income tax has been provided.
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions with respect to amounts reported in the financial statements.
Actual results could differ from those estimates.
(3) POLICY CHARGES
Charges are deducted from the policies and the Separate Account to compensate
Paragon for providing the insurance benefits set forth in the contracts and any
additional benefits added by rider, administering the policies, incurring
expenses in distributing the policies, and assuming certain risks in connection
with the policy.
Premium Expense Charge
Certain policies include a provision that premium payments may be reduced by
a premium expense charge. The premium expense charge is determined by the costs
associated with distributing the policy and, if applicable, is equal to 1% of
the premium paid. The premium expense charge compensates Paragon for
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
providing the insurance benefits set forth in the policies, incurring expenses
of distributing the policies, and assuming certain risks in connection with the
policies. In addition, some polices have a premium tax assessment equal to 2%
or 2.25% to reimburse Paragon for premium taxes incurred. The premium payment
less premium expense and premium tax charges equals the net premium that is
invested in the underlying separate account.
Monthly Expense Charge
Paragon has responsibility for the administration of the policies and the
Separate Account. As reimbursement for expenses related to the acquisition and
maintenance of each policy and the Separate Account, Paragon assesses a monthly
administration charge to each policy. This charge, which varies due to the size
of the group, has a maximum of $6.00 per month during the first 12 policy
months and $3.50 per month thereafter.
Cost of Insurance
The cost of insurance is deducted on each monthly anniversary for the
following policy month. Because the cost of insurance depends upon a number of
variables, the cost varies for each policy month. The cost of insurance is
determined separately for the initial face amount and for any subsequent
increase in face amount. Paragon determines the monthly cost of insurance
charge by multiplying the applicable cost of insurance rate or rates by the net
amount at risk for each policy month.
Optional Rider Benefits Charge
The monthly deduction charge for any additional benefits provided by rider.
Surrender or Contingent Deferred Sales Charge
During the first policy years, certain policies include a provision for a
charge upon surrender or lapse of the policy, a requested decrease in face
amount, or a partial withdrawal that causes the face amount to decrease. The
amount assessed under the policy terms, if any, depends upon the cost
associated with distributing the particular policies. The amount of any charge
depends on a number of factors, including whether the event is a full surrender
or lapse or only a decrease in face amount, the amount of premiums received by
Paragon, and the policy year in which the surrender or other event takes place.
Mortality and Expense Charge
In addition to the above contract charges against the operations of each
division, a daily charge is made for the mortality and expense risks assumed by
Paragon. Paragon deducts a daily charge from the Separate Account at the rate
of .0024547% of the net assets of each division of the Separate Account which
equals an annual rate of .90% of those net assets. The mortality risk assumed
by Paragon is that insureds may die sooner than anticipated and that,
therefore, Paragon will pay an aggregate amount of death benefits greater than
anticipated. The expense risk assumed is that expenses incurred in issuing and
administering the policy will exceed the amounts realized from the
administrative charges assessed against the policy.
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PURCHASES AND SALES OF SCUDDER INVESTMENT SHARES
During the year ended December 31, 1995 and for the period ended March 3,
1994 (Inception) to December 31, 1994 the purchases and proceeds from the sale
of the Scudder Investment Funds were as follows:
<TABLE>
<CAPTION>
MONEY CAPITAL GROWTH &
MARKET INTERNATIONAL GROWTH BALANCED BOND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------------- --------------- --------------- --------------- -------------- ------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
------- ------ ------- ------- ------- ------- ------- ------- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $13,976 64,538 164,644 258,600 293,131 237,403 147,804 128,210 38,518 123,033 8,754 59,419
Sales................... 7,711 54,912 64,140 126,258 74,163 68,339 41,367 38,170 11,832 90,086 1,961 55,424
======= ====== ======= ======= ======= ======= ======= ======= ====== ======= ===== ======
</TABLE>
NOTE 5--ACCUMULATION OF UNIT ACTIVITY
The following is a reconciliation of the accumulation of unit activity for
the year ended December 31, 1995 and for the period ended March 3, 1994
(Inception) to December 31, 1994:
<TABLE>
<CAPTION>
CAPITAL GROWTH &
MARKET INTERNATIONAL GROWTH BALANCED BOND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------- ------------- ------------- ------------- ----------- ----------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------ ------ ------ ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits............... 13,545 17,149 15,567 17,820 22,304 25,409 14,882 18,942 5,517 7,079 1,138 646
Withdrawals............ 7,295 7,075 5,639 5,039 5,299 11,615 4,035 8,439 1,592 2,067 250 --
------ ------ ------ ------ ------ ------ ------ ------ ----- ----- ----- ---
Net Increase in Units. 6,250 10,074 9,928 12,781 17,005 13,794 10,847 10,503 3,925 5,012 888 646
Outstanding Units, Be-
ginning of Year......... 10,074 -- 12,781 -- 13,794 -- 10,503 -- 5,012 -- 646 --
Outstanding Units, End
of Year................. 16,324 10,074 22,709 12,781 30,799 13,794 21,350 10,503 8,937 5,012 1,534 646
====== ====== ====== ====== ====== ====== ====== ====== ===== ===== ===== ===
</TABLE>
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--RECONCILIATION OF GROSS AND NET DEPOSITS INTO THE SEPARATE ACCOUNT
Deposits into the Separate Account purchase shares of Scudder Variable Life
Investment Fund. Net deposits represent the amounts available for investment in
such shares after deduction of premium expense charges, monthly expense
charges, cost of insurance and the cost of optional benefits added by rider.
The following is a summary of net deposits made for the year ended December 31,
1995 and for the period from March 3, 1994 (Inception) to December 31, 1995:
<TABLE>
<CAPTION>
GROWTH &
MARKET INTERNATIONAL CAPITAL GROWTH BALANCED BOND INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------- ---------------- ---------------- ---------------- -------------- ------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
------- ------ ------- ------- ------- ------- ------- ------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross Deposits... $15,728 14,282 187,321 187,545 304,665 239,058 164,138 137,307 43,869 47,026 8,921 3,226
Surrenders and With-
drawals................ (1,878) -- (6,334) (3,620) (5,721) (260) (10,199) (246) (2,002) (106) -- --
Transfers Between Funds
and General Account.... (1,374) 265 (22,137) 348 16,250 (516) 5,283 (215) -- (774) 1,978 892
------- ------ ------- ------- ------- ------- ------- ------- ------ ------ ------ -----
Total Gross Deposits
net of Surrenders,
Withdrawals, and
Transfers............ 12,476 14,547 158,850 184,273 315,194 238,282 159,222 136,846 41,867 46,146 10,899 4,118
Deductions:
Premium Expense
Charges............... 468 438 5,576 5,621 9,068 7,249 4,886 4,051 1,306 1,389 266 98
Monthly Expense
Charges............... 419 547 4,596 5,247 7,658 7,490 4,158 4,849 1,214 1,392 141 --
Cost of Insurance and
Optional Benefits..... 5,182 3,530 46,118 33,889 76,068 48,375 42,124 31,318 12,142 8,993 3,644 --
------- ------ ------- ------- ------- ------- ------- ------- ------ ------ ------ -----
Total Deductions..... 6,069 4,515 56,290 44,757 92,794 63,114 51,168 40,218 14,662 11,774 4,051 98
Net Deposits from Poli-
cyholders.............. $ 6,407 10,032 102,560 139,516 222,400 175,168 108,054 96,628 27,205 34,372 6,848 4,020
======= ====== ======= ======= ======= ======= ======= ======= ====== ====== ====== =====
</TABLE>
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT B
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE COST
--------- -------- --------
<S> <C> <C> <C>
SCUDDER VARIABLE INSURANCE SERIES:
Money Market Division............................ 17,317 $ 17,317 $ 16,606
International Division........................... 22,489 265,822 239,690
Capital Growth Division.......................... 31,700 478,037 396,539
Balanced Division................................ 22,243 243,566 205,012
Bond Division.................................... 9,771 70,062 60,735
Growth & Income Division......................... 1,514 12,083 10,603
</TABLE>
See Accompanying Notes to Financial Statements.
F-19
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value and Death Benefit of a
Policy change with the investment experience of a Division of the Separate
Account. The tables show how the Cash Value and Death Benefit of a Policy
issued to an Insured of a given age and at a given premium would vary over time
if the investment return on the assets held in each Division of the Separate
Account were a uniform, gross, after-tax annual rate of 0%, 6% or 12%. In
addition, the Cash Values and Death Benefits 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 and below those averages for
individual Policy years.
The tables illustrate a Policy issued to an Insured, age 45, in an Executive
Program issued as a Group Contract Policy. This assumes the maximum monthly
administrative charge. If a particular Policy has different sales or
administrative charges or if a particular group is larger or smaller or has a
different gender mix, the Cash Values and Death Benefits would vary from those
shown in the tables.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
and monthly charges for the cost of insurance based on the guaranteed rate
which is 125% of the maximum allowed under the 1980 Commissioners Standard
Ordinary Mortality Table C. The "Cash Value" column under the "Current" heading
shows the accumulated value of the premiums paid reflecting deduction of the
charges described above and monthly charges for the cost of insurance at the
current level for an Executive Program, which is less than or equal to 125% of
the maximum allowed by the 1980 Commissioners Standard Ordinary Mortality Table
C. The illustrations of Death Benefits reflect the above assumptions. The Death
Benefits also vary between tables depending upon whether Level Type (Option A)
or Increasing Type (Option B) Death Benefits are illustrated.
The amounts shown for the Cash Value and Death Benefit reflect the fact that
the investment rate of return is lower than the gross after-tax return on the
assets held in a Division of the Separate Account. The charges include a .90%
charge for mortality and expense risk, an investment advisory fee of .523%,
representing the average of the fees incurred by the Funds in which the
Divisions invest (the actual investment advisory fee is shown on page 11), and
a .162% charge that is an estimate of the Funds' expenses based on the average
of the actual expenses incurred in fiscal year 1995. After deduction for these
amounts, the illustrated gross annual investment rates of return of 0%, 6% and
12% correspond to approximate net annual rates of -1.585%, 4.415%, and 10.415%,
respectively. An expense reimbursement arrangement exists between the Company
and Scudder Variable Fund, as part of the Scudder Variable Fund's participation
agreement with the Company. However, fund assets are of a sufficient size that
no reimbursement is currently necessary. Scudder reimbursed expenses in 1995
for the Growth and Income Portfolio.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against the Separate Account, since the Company is not
currently making any such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return of the
divisions of the Separate Account would have to exceed 0%, 6%, and 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit and Cash Value illustrated. (See "Federal Tax Matters," page 35.)
Additionally, the hypothetical values shown in the tables assume that the
Policy for which values are illustrated is not deemed an individual policy
under OBRA, and therefore the values do not reflect the additional 1% premium
expense charge for the Company's increased federal tax liabilities.
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, that no transfer charges were incurred, and
that no optional riders have been requested.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, group size and gender mix, the Face Amount and
premium requested and the proposed frequency of premium payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1% $6,000.00
PREMIUM TAX: 2% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.585%)
--------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
CASH DEATH CASH DEATH
YR PREM @5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,049 $500,000 $ 4,880 $500,000
2 12,631 5,895 500,000 9,597 500,000
3 19,423 8,496 500,000 14,191 500,000
4 26,556 10,845 500,000 18,595 500,000
5 34,045 12,917 500,000 22,820 500,000
6 41,909 14,694 500,000 26,870 500,000
7 50,165 16,146 500,000 30,750 500,000
8 58,835 17,231 500,000 34,403 500,000
9 67,938 17,912 500,000 37,895 500,000
10 77,496 18,160 500,000 41,170 500,000
11 87,532 17,966 500,000 44,173 500,000
12 98,070 17,295 500,000 46,969 500,000
13 109,135 16,144 500,000 49,510 500,000
14 120,753 14,481 500,000 51,742 500,000
15 132,952 12,252 500,000 53,670 500,000
16 145,761 9,393 500,000 55,301 500,000
17 159,210 5,790 500,000 56,580 500,000
18 173,332 1,306 500,000 57,455 500,000
19 188,160 0 0 57,935 500,000
20 203,729 0 0 57,966 500,000
25 294,060 0 0 48,466 500,000
30 409,349 0 0 9,806 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of Scudder Variable Life Investment
Fund. The cash value and death benefit for a policy would be different from
those shown if the actual rates of return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
years. No representation can be made by the Company, Walnut Street Securities,
Scudder, or any representative thereof, that this hypothetical rate of return
can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the policy
anniversary day and further assume there is no policy indebtedness outstanding.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1% $6,000.00
PREMIUM TAX: 2% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.415%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
CASH DEATH CASH DEATH
YR PREM @5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,148 $500,000 $ 5,039 $500,000
2 12,631 6,278 500,000 10,213 500,000
3 19,423 9,341 500,000 15,567 500,000
4 26,556 12,325 500,000 21,038 500,000
5 34,045 15,200 500,000 26,642 500,000
6 41,909 17,940 500,000 32,388 500,000
7 50,165 20,503 500,000 38,284 500,000
8 58,835 22,839 500,000 44,280 500,000
9 67,938 24,898 500,000 50,446 500,000
10 77,496 26,632 500,000 56,733 500,000
11 87,532 28,015 500,000 63,093 500,000
12 98,070 28,996 500,000 69,594 500,000
13 109,135 29,548 500,000 76,196 500,000
14 120,753 29,617 500,000 82,855 500,000
15 132,952 29,122 500,000 89,581 500,000
16 145,761 27,971 500,000 96,388 500,000
17 159,210 26,013 500,000 103,234 500,000
18 173,332 23,069 500,000 110,079 500,000
19 188,160 18,939 500,000 116,940 500,000
20 203,729 13,410 500,000 123,779 500,000
25 294,060 0 0 155,627 500,000
30 409,349 0 0 174,506 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of Scudder Variable Life Investment
Fund. The cash value and death benefit for a policy would be different from
those shown if the actual rates of return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
years. No representation can be made by the Company, Walnut Street Securities,
Scudder, or any representative thereof, that this hypothetical rate of return
can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the policy
anniversary day and further assume there is no policy indebtedness outstanding.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1% $6,000.00
PREMIUM TAX: 2% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @
10.415%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,246 $500,000 $ 5,195 $500,000
2 12,631 6,669 500,000 10,843 500,000
3 19,423 10,240 500,000 17,029 500,000
4 26,556 13,967 500,000 23,741 500,000
5 34,045 17,840 500,000 31,043 500,000
6 41,909 21,857 500,000 39,003 500,000
7 50,165 26,001 500,000 47,695 500,000
8 58,835 30,246 500,000 57,142 500,000
9 67,938 34,567 500,000 67,492 500,000
10 77,496 38,947 500,000 78,790 500,000
11 87,532 43,388 500,000 91,090 500,000
12 98,070 47,873 500,000 104,571 500,000
13 109,135 52,409 500,000 119,325 500,000
14 120,753 56,985 500,000 135,454 500,000
15 132,952 61,565 500,000 153,135 500,000
16 145,761 66,106 500,000 172,563 500,000
17 159,210 70,517 500,000 193,917 500,000
18 173,332 74,682 500,000 217,408 500,000
19 188,160 78,472 500,000 243,329 500,000
20 203,729 81,753 500,000 271,975 500,000
25 294,060 85,908 500,000 470,344 545,599
30 409,349 39,204 500,000 798,393 854,280
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of Scudder Variable Life Investment
Fund. The cash value and death benefit for a policy would be different from
those shown if the actual rates of return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
years. No representation can be made by the Company, Walnut Street Securities,
Scudder, or any representative thereof, that this hypothetical rate of return
can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the policy
anniversary day and further assume there is no policy indebtedness outstanding.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1% $12,000.00
PREMIUM TAX: 2% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -1.585%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 8,809 $508,809 $ 10,645 $510,645
2 25,261 17,306 517,306 21,027 521,027
3 38,847 25,450 525,450 31,185 531,185
4 53,112 33,234 533,234 41,052 541,052
5 68,090 40,634 540,634 50,638 550,638
6 83,817 47,633 547,633 59,948 559,948
7 100,331 54,201 554,201 68,986 568,986
8 117,670 60,289 560,299 77,691 577,691
9 135,876 65,891 565,891 86,135 586,135
10 154,992 70,951 570,951 94,255 594,255
11 175,064 75,475 575,475 101,992 601,992
12 196,140 79,436 579,436 109,417 609,417
13 218,270 82,837 582,837 116,476 616,476
14 241,506 85,658 585,658 123,110 623,110
15 265,904 87,854 587,854 129,325 629,325
16 291,521 89,376 589,376 135,128 635,128
17 318,420 90,127 590,127 140,460 640,460
18 346,663 89,997 589,997 145,265 645,265
19 376,319 88,875 588,875 149,555 649,555
20 407,458 86,662 586,662 153,275 653,275
25 588,121 57,564 557,564 160,393 660,393
30 818,698 0 0 136,994 636,994
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of Scudder Variable Life Investment
Fund. The cash value and death benefit for a policy would be different from
those shown if the actual rates of return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
years. No representation can be made by the Company, Walnut Street Securities,
Scudder, or any representative thereof, that this hypothetical rate of return
can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the policy
anniversary day and further assume there is no policy indebtedness outstanding.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1% $12,000.00
PREMIUM TAX: 2% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.415%)
------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,096 $509,096 $ 10,993 $510,993
2 25,261 18,417 518,417 22,373 522,373
3 38,847 27,923 527,923 34,194 534,194
4 53,112 37,610 537,610 46,403 546,403
5 68,090 47,457 547,457 59,023 559,023
6 83,817 57,445 557,445 72,072 572,072
7 100,331 67,544 567,544 85,568 585,568
8 117,670 77,710 577,710 99,465 599,465
9 135,876 87,903 587,903 113,847 613,847
10 154,992 98,089 598,089 128,669 628,669
11 175,064 108,254 608,254 143,883 643,883
12 196,140 118,361 618,361 159,573 659,573
13 218,270 128,402 628,402 175,700 675,700
14 241,506 138,342 638,342 192,216 692,216
15 265,904 148,123 648,123 209,137 709,137
16 291,521 157,677 657,677 226,482 726,482
17 318,420 166,883 666,883 244,203 744,203
18 346,663 175,599 675,599 262,249 762,249
19 376,319 183,673 683,673 280,640 780,640
20 407,458 190,963 690,963 299,326 799,326
25 588,121 211,869 711,869 394,148 894,148
30 818,698 186,769 686,769 477,525 977,525
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds and Scudder Variable Life Investment
Fund. The cash value and death benefit for a policy would be different from
those shown if the actual rates of return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
years. No representation can be made by the Company, Walnut Street Securities,
Scudder, or any representative thereof, that this hypothetical rate of return
can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the policy
anniversary day and further assume there is no policy indebtedness outstanding.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1% $12,000.00
PREMIUM TAX: 2% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.415%)
------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,379 $ 509,379 $ 11,334 $ 511,334
2 25,261 19,552 519,552 23,748 523,748
3 38,847 30,551 530,551 37,391 537,391
4 53,112 42,450 542,450 52,318 552,318
5 68,090 55,312 555,312 68,666 568,666
6 83,817 69,211 569,211 86,585 586,585
7 100,331 84,218 584,218 106,238 606,238
8 117,670 100,397 600,397 127,736 627,736
9 135,876 117,827 617,827 151,342 651,342
10 154,992 136,601 636,601 177,205 677,205
11 175,064 156,846 656,846 205,491 705,491
12 196,140 178,677 678,677 236,522 736,522
13 218,270 202,255 702,255 270,522 770,522
14 241,506 227,729 727,729 307,730 807,730
15 265,904 255,241 755,241 348,480 848,480
16 291,521 284,941 784,941 393,143 893,143
17 318,420 316,943 816,943 442,057 942,057
18 346,663 351,357 851,357 495,595 995,595
19 376,319 388,301 888,301 554,247 1,054,247
20 407,458 427,921 927,921 618,476 1,118,476
25 588,121 674,312 1,174,312 1,042,141 1,542,141
30 818,698 1,020,722 1,520,722 1,698,530 2,198,530
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds and Scudder Variable Life Investment
Fund. The cash value and death benefit for a policy would be different from
those shown if the actual rates of return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
years. No representation can be made by the Company, Walnut Street Securities,
Scudder, or any representative thereof, that this hypothetical rate of return
can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the policy
anniversary day and further assume there is no policy indebtedness outstanding.
A-7
<PAGE>
DEAN WITTER VARIABLE
INVESTMENT SERIES
LOGO
^ GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
Prospectus dated May 1, 1996
50450
<PAGE>
GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes flexible premium variable life insurance policies
offered by Paragon Life Insurance Company (the "Company") which are designed
for use in employer-sponsored insurance programs. In circumstances where a
Group Contract is issued, Individual Policies or Certificates setting forth or
summarizing the rights of the Owners and/or Insureds, will be issued under the
Group Contract. Individual Policies also can be issued in connection with
employer-sponsored insurance programs in circumstances where a Group Contract
is not issued. The terms of the Certificate and the Individual Policy, whether
or not the Individual Policy is issued under a Group Contract, are
substantially the same and are collectively referred to in this Prospectus as
"Policy" or "Policies."
The Policies are designed to provide lifetime insurance protection to age 95
and at the same time provide flexibility to vary premium payments and change
the level of death benefits payable under the Policies. This flexibility allows
an Owner to provide for changing insurance needs under a single insurance
policy. An Owner also has the opportunity to allocate net premiums among
several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount of
the Policy. The insurance under a Policy will remain in force so long as its
Cash Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy.
The Owner may allocate net premiums to one or more of the Divisions of the
Separate Account B (the "Separate Account"). The duration of the Policy and the
amount of the Cash Value will vary to reflect the investment performance of the
Divisions of the Separate Account selected by the Owner, and, depending on the
death benefit option elected, the amount of the death benefit above the minimum
may also vary with that investment performance. Thus, the Owner bears the
entire investment risk under the Policies; there is no minimum guaranteed Cash
Value.
Each Division of the Separate Account will invest solely in a corresponding
investment portfolio of Dean Witter Variable Investment Series (the "Fund") an
investment company comprised currently of eleven Portfolios. The Separate
Account will invest in the following Portfolios which correspond to the
Divisions of the Separate Account. The available investment portfolios
("Portfolios") are: Money Market Portfolio, Quality Income Plus Portfolio, High
Yield Portfolio, Utilities Portfolio, Dividend Growth Portfolio, Capital Growth
Portfolio, Global Dividend Growth Portfolio, European Growth Portfolio, Pacific
Growth Portfolio, Equity Portfolio, and Strategist Portfolio. The prospectus
for the Fund describes the investment objectives and policies, and the risks of
the Portfolios.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
Dean Witter Variable Investment Series.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The Date Of This Prospectus Is May 1, 1996.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................ 3
Summary.................................................................... 4
The Company and the Separate Account....................................... 9
The Company.............................................................. 9
The Separate Account..................................................... 10
Dean Witter Variable Investment Series................................... 10
Addition, Deletion, or Substitution of Investments....................... 11
Payment and Allocation of Premiums......................................... 12
Issuance of a Policy..................................................... 12
Premiums................................................................. 14
Allocation of Net Premiums and Cash Value................................ 15
Policy Lapse and Reinstatement........................................... 15
Policy Benefits............................................................ 16
Death Benefit............................................................ 16
Cash Value............................................................... 20
Policy Rights and Privileges............................................... 21
Exercising Rights and Privileges Under the Policies...................... 21
Loans.................................................................... 21
Surrender and Partial Withdrawals........................................ 22
Transfers................................................................ 23
Right to Examine Policy.................................................. 24
Conversion Right to a Fixed Benefit Policy............................... 24
Eligibility Change Conversion............................................ 25
Payment of Benefits at Maturity.......................................... 25
Payment of Policy Benefits............................................... 25
Charges and Deductions..................................................... 26
Premium Expense Charge................................................... 26
Premium Tax Charge....................................................... 27
Monthly Deduction........................................................ 27
Partial Withdrawal Transaction Charge.................................... 29
Separate Account Charges................................................. 29
General Matters Relating to the Policy..................................... 30
Distribution of the Policies............................................... 33
General Provisions of the Group Contract................................... 34
Federal Tax Matters........................................................ 35
Safekeeping of the Separate Account's Assets............................... 38
Voting Rights.............................................................. 38
State Regulation of the Company............................................ 39
Management of the Company.................................................. 40
Legal Matters.............................................................. 41
Legal Proceedings.......................................................... 41
Experts.................................................................... 41
Additional Information..................................................... 41
Financial Statements....................................................... 41
Appendix A................................................................. A-1
</TABLE>
THE POLICIES ARE NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
2
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Associated Companies--Those companies listed in a Group Contract's
specifications pages that are under common control through stock ownership,
contract or otherwise, with the Contractholder.
Beneficiary--The person(s) named in an application for Individual Insurance
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness.
Certificate--A document issued to Owners of Policies issued under Group
Contracts, setting forth or summarizing the Owner's rights and benefits.
Contractholder--The employer, association, sponsoring organization or trust
that is issued a Group Contract.
Division--A subaccount of the Separate Account. Each Division invests
exclusively in the shares of a Portfolio of Dean Witter Variable Investment
Series.
Employee--A person who is employed and paid for services by an employer on a
regular basis. To qualify as an employee, a person ordinarily must work for an
employer at least 30 hours per week. The Company may waive or modify this
requirement at its discretion. An employee may also include an independent
contractor acting in many respects as an employee with a sponsoring employer.
An employee may include a partner in a partnership if the employer is a
partnership.
Executive Program--A category of Policies issued under Group Contracts or
employer-sponsored insurance programs that have a maximum Face Amount available
for each Policy generally in excess of $500,000.
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Group Contract--A group flexible premium variable life insurance contract
issued to the Contractholder by the Company.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest charged
on loans.
Individual Insurance--Insurance provided under a Group Contract or under an
Individual Policy issued in connection with an employer-sponsored insurance
program on an employee or an employee's spouse.
Insured--The person whose life is insured under a Policy. The term may
include both an employee and an employee's spouse.
Investment Start Date--The date the initial premium is applied to the
Divisions of the Separate Account. This date is the later of the Issue Date or
the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
3
<PAGE>
Issue Date--The effective date of coverage under a Policy. The Issue Date is
the date from which Policy Anniversaries, Policy Years, and Policy Months are
measured.
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 95.
Monthly Anniversary--The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the
last day of that month.
Net Premium--The premium less any premium expense charge and any charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--Either the Certificate or the Individual Policy offered by the
Company and described in this Prospectus. Under Group Contracts, the Policy may
be issued on the employee or on the employee's spouse.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the day
immediately preceding the next Policy Anniversary.
Portfolio--A separate investment portfolio of Dean Witter Variable Investment
Series, the mutual fund in which the Separate Account's assets are invested.
Separate Account--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy.
Spouse--An employee's legal spouse. The term does not include a spouse who is
legally separated from the employee.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the close
of business of the next succeeding Valuation Date.
SUMMARY
The following summary of Prospectus information should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the description of the Policies contained in this
Prospectus assumes that a Policy is in effect and that there is no outstanding
Indebtedness.
The Policy. The Policies (either an Individual Policy or a Certificate)
described in this Prospectus are designed for use in employer-sponsored
insurance programs and are typically issued in two situations. First, Policies
are issued pursuant to Group Contracts entered into between the Company and
Contractholders. (See "General Provisions of the Group Contract," page 34.)
Second, in certain circumstances where Group Contracts are not issued,
Individual Policies are issued in connection with the employer-sponsored
insurance programs. Subject to certain restrictions, the Insured under a Policy
may be either an employee of the Contractholder or sponsoring employer, or the
employee's spouse. Generally, only the employee is eligible to be an Insured
under an Executive Program Policy. Provided there is sufficient Cash Surrender
Value,
4
<PAGE>
Individual Insurance under a Group Contract or other employer-sponsored
insurance program will continue should the Group Contract or other program
cease or the employee's employment end. (See "Payment and Allocation of
Premiums--Issuance of a Policy," page 12.)
The Policies are life insurance contracts with death benefits, cash values,
surrender rights, policy loan privileges, and other features traditionally
associated with life insurance. The Contractholder will remit planned premium
payments under the Group Contract on behalf of Owners equal to an amount
authorized by employees to be deducted from their wages. In addition, Owners
may, but are not required to, pay additional premiums. A similar procedure will
apply when an Individual Policy is issued in connection with an employer-
sponsored program where the Group Contract is not issued.
The Policies are "variable" policies because, unlike the fixed benefits under
an ordinary life insurance contract, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment performance of the Divisions of the Separate
Account to which the Owner has allocated net premium payments. However, so long
as a Policy's Cash Surrender Value continues to be sufficient to pay the
monthly deduction, an Owner is guaranteed a minimum death benefit equal to the
Face Amount of his or her Policy or an accelerated death benefit in a reduced
amount determined in accordance with certain riders available under the Policy.
(See "General Matters Relating to the Policy--Additional Insurance Benefits,"
page 32.)
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. The Separate Account has Divisions, each of
which invests in shares of a corresponding Portfolio of the Fund. The eleven
Portfolios currently available with the Policy are the Money Market Portfolio,
Quality Income Plus Portfolio, High Yield Portfolio, Utilities Portfolio,
Dividend Growth Portfolio, Capital Growth Portfolio, Global Dividend Growth
Portfolio, European Growth Portfolio, Pacific Growth Portfolio, Equity
Portfolio, and Strategist Portfolio. Each Portfolio has a different investment
objective. (See "The Separate Account--Dean Witter Variable Investment Series,"
page 10.) An Owner may change future allocations of net premiums at any time by
notifying the Company directly.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to modify the transfer privilege.
(See "Policy Rights and Privileges--Transfers," page 23.)
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the planned
annual premium set forth in the specifications page of a Policy is necessary to
place a Policy in force. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount and certain other
factors. Under Group Contracts and employer-sponsored programs, the initial
premium and subsequent planned premiums generally are remitted by the
Contractholder or sponsoring employer on behalf of the Owner at intervals
agreed to by the Contractholder or employer. However, as is discussed below,
planned premiums need not be paid so long as there is sufficient Cash Surrender
Value to keep the Policy in force. Subject to certain limitations, additional
premium payments in any amount and at any frequency may be made directly by the
Owner. (See "Payment and Allocation of Premiums--Issuance of a Policy--
Premiums," pages 12 and 14.)
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 15).
The Policies, therefore, differ in two important respects from conventional
life insurance policies. First, the failure to make planned premium payments
following the initial premium payment will not itself cause a Policy to lapse.
Second, under the circumstances described above, a Policy can lapse even if
planned premiums have been paid. Thus, the payment of premiums in any amount
does not guarantee that the Policy will remain in force until the Maturity
Date. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 15.)
5
<PAGE>
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies or, under certain riders available under
the Policy, to the Owner, prior to the Insured's death under circumstances
described in those riders. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 32.) Two death benefit options are
available. Under the "Level Type" death benefit, the death benefit is the Face
Amount of the Policy or, if greater, the applicable percentage of Cash Value.
Under the "Increasing Type" death benefit, the death benefit is the Face Amount
of the Policy plus the Cash Value or, if greater, the applicable percentage of
Cash Value. So long as a Policy remains in force, the minimum death benefit
under either option will be at least equal to the current Face Amount. The
death benefit proceeds will be increased by the amount of the cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "Policy Benefits--Death
Benefit," page 16.)
The minimum initial Face Amount is generally $25,000 under the Company's
current rules. Executive Program Policies generally have a minimum Face Amount
of $100,000. The maximum Face Amount is generally $500,000. However, in
connection with a particular Group Contract or employer-sponsored insurance
program the Company may establish a substantially higher Face Amount for
Policies issued under that Contract or program. The Owner may generally change
the Face Amount (subject to the minimum and maximum amounts applicable to his
or her policy) and the death benefit option, but in certain cases evidence of
insurability may be required. (See "Policy Benefits--Death Benefit," page 16.)
Additional insurance benefits offered under the Policy by rider may include a
children's insurance rider, an accelerated death benefit settlement option
rider, an accidental death benefit rider, and a waiver of monthly deductions
rider. Some Group Contracts and employer-sponsored insurance programs may not
provide each of the additional benefits described above. Generally, Executive
Program Policies only have the acceleration of death benefits rider. (See
"General Matters Relating to the Policy--Additional Insurance Benefits," page
32.) The cost of these additional insurance benefits will be deducted from Cash
Value as part of the monthly deduction. (See "Charges and Deductions--Monthly
Deduction," page 27.)
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy or an applicable rider. (See "Policy
Benefits--Death Benefit" page 16, and "Policy Rights and Privileges--Payment of
Policy Benefits," page 25.)
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
premium payments, the investment performance of any selected Divisions of the
Separate Account, any Policy Loans, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value," page
20.) There is no minimum guaranteed Cash Value.
Charges and Deductions. Generally, there are no sales charges under a Policy.
However, a front-end charge will be imposed on Policies that are deemed to be
individual Policies under the Omnibus Budget Reconciliation Act of 1990
("OBRA"). The charge, which is for federal income taxes measured by premiums,
is equal to 1% of each premium payment, and compensates the Company for a
significantly higher corporate income tax liability resulting from changes made
to the Internal Revenue Code by OBRA. This additional charge is treated as
sales load for purposes of determining compliance with the limitations on sales
loads imposed by the Investment Company Act of 1940 and applicable regulations
thereunder.
A charge of 2 1/4 percent to cover state premium taxes will be deducted from
premiums paid. (See "Charges and Deductions--Premium Tax Charge," page 27.)
6
<PAGE>
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, a cost of insurance charge, and the cost of any additional insurance
benefits provided by rider. The amount of the administrative charge will be set
forth in the specification pages of the Policy and will be based on the number
of the Insureds covered under a Group Contract or other employer-sponsored
insurance program and the amount of administrative services provided by the
Company. The charge will not exceed $6.00 per month during the first Policy
Year and $3.50 per month during renewal years.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance" page 28.)
Monthly cost of insurance rates will be determined by the Company based upon
its expectations as to future mortality experience. The Company currently
underwrites Policies on either a simplified issue or guaranteed issue basis.
However, the Company does not vary cost of insurance rates based on a
particular Policy's classification as simplified issue or guaranteed issue.
Rather, the rates are based on the Attained Age and rate class of the Insured,
as well as on the gender mix of the group insured, which is the proportion of
men and women covered under a particular Group Contract or employer-sponsored
program. For a discussion of the factors affecting the rate class of the
Insured. See "Charges and Deductions--Monthly Deduction--Cost of Insurance"
page 28.
Cost of insurance rates are guaranteed not to exceed 125 percent of the
maximum rates that could be charged based on the 1980 Commissioners Standard
Ordinary Mortality Table C ("1980 CSO Table"). The 1980 CSO Table assumes a
blending of sixty percent male and forty percent female. Generally, the rates
currently charged do not exceed 100% of the 1980 CSO Table. However, instances
in which the Company's current rates may exceed 100% of the 1980 CSO Table are
generally limited to particular Policies issued to Insureds in small groups
(i.e. generally less than 750 eligible employees) and/or groups that are
predominantly male. The guaranteed rates are higher than the 1980 CSO Table
because, under both guaranteed and simplified underwriting, the Insured is not
required to submit to a medical or paramedical examination although a blood
test may be required. Because the Company gathers less health information about
these individuals, it is exposed to additional insurance risks. Although the
circumstances in which the Company could raise its current mortality charges
are limited, such an increase is permitted under the Policy. To the extent that
the current cost of insurance rates exceed or are raised so that they exceed
100% of the 1980 CSO Table, the monthly cost of insurance charge would, in
effect, be a substandard risk charge for healthy Insureds.
A daily charge of .0024547% (an annual rate of .90%) of the net assets of
each Division of the Separate Account will be imposed for the Company's
assumption of certain mortality and expense risks incurred in connection with
the Policies. (See "Charges and Deductions--Separate Account Charges," page
29.)
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes. (See "Federal Tax Matters," page 35.)
The value of the assets of the Divisions of the Separate Account will reflect
the investment advisory fee and other expenses incurred by the Fund because the
Separate Account purchases the shares of the Fund. (See "Charges and
Deductions--Separate Account Charges," page 29.) The advisory fees range from
an annual rate of 0.5% to a maximum of 0.75% of the average daily assets of
each Portfolio. See the Fund prospectus for actual fees and expenses.
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net Premiums
and Cash Value," page 15, and "Policy Rights and Privileges--
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Surrender and Partial Withdrawals, Transfers," pages 22 and 23 respectively,
and "Charges and Deductions--Partial Withdrawal Transaction Charge," page 29.)
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b), where (a) is 85
percent of the Cash Value of the Policy on the date the Policy Loan is
requested, and (b) is the amount of outstanding Indebtedness. Loan interest is
due and payable in arrears on each Policy Anniversary or on a pro rata basis
for such shorter period as the Policy Loan may exist. All outstanding
Indebtedness will be deducted from proceeds payable at the Insured's death,
upon maturity, or upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid in
whole or in part at any time while the Policy is in force. (See "Policy Rights
and Privileges--Loans," page 21.) Loans taken from, or secured by, a Policy may
in certain circumstances be treated as taxable distributions from the Policy.
Moreover, with certain exceptions, a ten percent additional income tax would be
imposed on the portion of any loan that is included in income. (See "Federal
Tax Matters," page 35.)
Surrender and Partial Withdrawals. At any time that a Policy is in effect, an
Owner may elect to surrender the Policy and receive its Cash Surrender Value.
An Owner may also request a partial withdrawal of the Cash Value of the Policy.
When the death benefit under either death benefit option is not based on an
applicable percentage of the Cash Value, a partial withdrawal reduces the death
benefit payable under the Policy by an amount equal to the reduction in the
Policy's Cash Value. (See "Policy Rights and Privileges--Surrender and Partial
Withdrawals," page 22.) Surrenders and partial withdrawals may have federal
income tax consequences. (See "Federal Tax Matters," page 35.)
Right to Examine Policy. The Owner has a limited right to return a Policy for
cancellation within 20 days after the delivery of the Policy to the Owner,
within 45 days after the Owner signs the application, or within 10 days after
the Company mails a notice of this cancellation right to the Owner whichever is
latest. If a Policy is cancelled within this time period, a refund will be paid
which will equal all premiums paid under the Policy or any different amount
required by law. The Owner also has a right to cancel a requested increase in
Face Amount. Upon cancellation of an increase, the Owner may request that the
Company refund the amount of the additional charges deducted in connection with
the increase, or have the amount of the additional charges added to the Cash
Value. (See "Policy Rights and Privileges--Right to Examine Policy," page 24.)
Eligibility Change Conversion. In the event that the Insured is no longer
eligible for coverage under the Group Contract, either because the Group
Contract has terminated or because the employee is no longer employed by the
Contractholder, the Individual Insurance provided by the Policy issued in
connection with the Group Contract will continue unless the Policy is cancelled
or surrendered by the Owner or there is insufficient Cash Surrender Value to
prevent the Policy from lapsing.
If a Certificate was issued in connection with the Group Contract, the
Certificate will be amended automatically to continue in force as an Individual
Policy. The new Individual Policy will provide benefits which are identical to
those provided under the Certificate. If an Individual Policy was issued in
connection with a Group Contract, the Individual Policy will continue in force
following the termination of the Group Contract. (See "Policy Right and
Privileges--Eligibility Change Conversion," page 25.)
Conversion Right to a Fixed Benefit Policy. During the first 24 Policy Months
following a Policy's Issue Date, the Owner may convert the Policy to a life
insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. The Owner also has
a similar right with respect to increases in the Face Amount. (See "Policy
Rights and Privileges--Conversion Right to a Fixed Benefit Policy," page 24.)
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Exercising Rights and Privileges Under the Policies. Owners of Policies
issued under a Group Contract or in connection with an employer-sponsored
insurance program may exercise their rights and privileges under the Policies
(i.e., make transfers, change premium allocations, borrow, etc.) by notifying
the Company in writing at its Home Office. Likewise, the Company will send all
reports and other notices described herein or in the Policy directly to the
Owner. (See "Policy Rights and Privileges--Exercising Rights and Privileges
Under the Policies," page 21.)
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-1 to A-7 in Appendix A show how death benefits and Cash Surrender
Values may vary based on certain hypothetical rate of return assumptions as
well as assumptions pertaining to the level of the administrative charge and
the level of the sales charges. These illustrations also show how these
benefits compare with amounts which would accumulate if premiums were invested
to earn interest (after taxes) at 5% compounded annually. If a Policy is
surrendered in the early Policy Years, the Cash Surrender Value payable will be
low as compared with premiums accumulated with interest, and consequently the
insurance protection provided prior to surrender will be costly.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits payable
under a Policy should be completely excludable from the gross income of the
Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds.
Under certain circumstances, a Policy may be treated as a "modified endowment
contract." If the Policy is a modified endowment contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Loans will not be treated as distributions.
Neither distributions, nor loans from a Policy that is not a modified endowment
contract are subject to the 10% penalty tax. (See "Federal Tax Matters," page
35.)
THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection with
the name change. The Company is principally engaged in writing individual and
group life insurance policies and annuity contracts. As of December 31, 1995,
it had statutory admitted assets in excess of $123 million. The Company is
admitted to do business in 49 states and the District of Columbia. The
principal offices of the Company are at 100 South Brentwood, St. Louis,
Missouri 63105 ("Home Office").
The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a mutual life insurance company. The Parent
Company has agreed that until March 23, 1999, it will maintain capital and
surplus within the Company sufficient to satisfy the capital requirements of
the states in which the Company is authorized to do business.
In addition, the Parent Company agrees to ensure that the Company will have
sufficient funds to meet all of its contractual obligations. In the event a
policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. The Parent Company agrees that this
guarantee of the Company's insurance contracts will be and remain enforceable
by the Company's policyholders against the Parent Company directly. This
guarantee, which does not have a predetermined termination date, can be
modified or ended only as to policies not yet issued. The guarantee agreement
is binding on the Parent Company, its successor
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or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
THE SEPARATE ACCOUNT
Separate Account B (the "Separate Account") was established by the Company as
a separate investment account on January 4, 1993 under Missouri law. The
Separate Account receives and invests the net premiums paid under the Policies.
In addition, the Separate Account may receive and invest net premiums for other
flexible premium variable life insurance policies issued by the Company that
are invested in other subaccounts of the Separate Account.
The Separate Account is divided into Divisions. Each Division for the Policy
invests exclusively in shares of a single portfolio of the Fund. Income and
both realized and unrealized gains or losses from the assets of each Division
of the Separate Account are credited to or charged against that Division
without regard to income, gains, or losses from any other Division of the
Separate Account or arising out of any other business the Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
DEAN WITTER VARIABLE INVESTMENT SERIES
The Separate Account invests in shares of Dean Witter Variable Investment
Series (referred to as the "Fund"), a series-type mutual fund registered with
the SEC as open-end, diversified management investment companies. The Fund
currently has eleven separate investment portfolios ("Portfolios"); the
following of which are currently invested in by the Separate Account: Money
Market Portfolio, Quality Income Plus Portfolio, High Yield Portfolio,
Utilities Portfolio, Dividend Growth Portfolio, Capital Growth Portfolio,
Global Dividend Growth Portfolio, European Growth Portfolio, Pacific Growth
Portfolio, Equity Portfolio, and Strategist Portfolio. The assets of each
Portfolio are held separate from the assets of the other Portfolios, and each
Portfolio has investment objectives and policies which are different from those
of the other Portfolios. Thus, each Fund operates as a separate investment
vehicle, and the income or losses of one Portfolio generally have no effect on
the investment performance of any other Portfolio.
The investment objectives and policies of each Portfolio are summarized
below:
The Money Market Portfolio seeks high current income, preservation of
capital, and liquidity by investing in certain money market instruments,
principally U.S. government securities, bank obligations, and high grade
commercial paper.
The Quality Income Plus Portfolio seeks, as its primary objective, to earn a
high level of current income and, as a secondary objective, capital
appreciation, but only when consistent with its primary objective, by investing
primarily in debt securities issued by the U.S. Government, its agencies and
instrumentalities, including zero coupon securities and in fixed-income
securities rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("Standard & Poor's") or non-rated securities of
comparable quality, and by writing covered call and put options against such
securities.
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The High Yield Portfolio seeks, as its primary objective, to earn a high
level of current income by investing in a professionally managed diversified
portfolio consisting principally of fixed-income securities rated Baa or lower
by Moody's or BBB or lower by Standard & Poor's or non-rated securities of
comparable quality, which are commonly known as junk bonds, and, as a secondary
objective, capital appreciation when consistent with its primary objective.
The Utilities Portfolio seeks to provide current income and long-term growth
of income and capital by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry.
The Dividend Growth Portfolio seeks to provide reasonable current income and
long-term growth of income and capital by investing primarily in common stock
of companies with a record of paying dividends and the potential for increasing
dividends.
The Capital Growth Portfolio seeks long-term capital growth by investing
primarily in common stocks.
The Global Dividend Growth Portfolio seeks to provide reasonable current
income and long-term growth of income and capital by investing primarily in
common stock of companies, issued by issuers worldwide, with a record of paying
dividends and the potential for increasing dividends.
The European Growth Portfolio seeks to maximize the capital appreciation of
its investments by investing primarily in securities issued by issuers located
in Europe.
The Pacific Growth Portfolio seeks to maximize the capital appreciation of
its investments by investing primarily in securities issued by issuers located
in Asia, Australia and New Zealand.
The Equity Portfolio seeks, as its primary objective, growth of capital
through investments in common stock of companies believed by the Investment
Manager to have potential for superior growth and, as a secondary objective,
income when consistent with its primary objective.
The Strategist Portfolio seeks a high total investment return through a fully
managed investment policy utilizing equity securities, fixed-income securities
rated Baa or higher by Moody's or BBB or higher by Standard & Poor's (or non-
rated securities of comparable quality), and money market securities, and
covered call and put options.
There is no assurance that any of the Portfolios will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for the Fund, which must accompany or precede this Prospectus
and which should be read carefully.
Dean Witter InterCapital Inc. ("InterCapital") provides investment advisory
services to the Fund in accordance with the terms of the current prospectus for
the Fund. The Portfolios pay investment management fees to InterCapital as part
of their expenses. See the Fund prospectus for details regarding these fees.
Resolving Material Conflicts. All of the Portfolios of the Fund are also
available to registered separate accounts of other insurance companies offering
variable annuity and variable life insurance products. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Policies and of owners of policies whose cash values are allocated to other
separate accounts investing in the Portfolios. In the event a material conflict
arises, the Company will take any necessary steps, including removing the
assets of the Separate Account from one or more of the Portfolios, to resolve
the matter. See the Fund prospectus for further details.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Portfolios of
the Fund and to substitute shares of another Portfolio of the Fund or of
another registered open-end investment company, if the shares of a Portfolio
are no longer available for investment, or if in the Company's judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of
the Separate Account. The Company will not substitute any shares attributable
to an Owner's interest in a Division of the Separate Account without notice to
the Owner and prior approval of the SEC, to the extent required by the
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1940 Act or other applicable law. Nothing contained in this Prospectus shall
prevent the Separate Account from purchasing other securities for other series
or classes of policies, or from permitting a conversion between series or
classes of policies on the basis of requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Portfolio of the Fund, or
in shares of another investment company, with a specified investment objective.
New Divisions may be established when, in the sole discretion of the Company,
marketing needs or investment conditions warrant, and any new Division will be
made available to existing Owners on a basis to be determined by the Company.
To the extent approved by the SEC, the Company may also eliminate or combine
one or more Divisions, substitute one Division for another Division, or
transfer assets between Divisions if, in its sole discretion, marketing, tax,
or investment conditions warrant.
In the event of a substitution or change, the Company may, if it considers it
necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
If deemed by the Company to be in the best interests of persons having voting
rights under the Policy, and to the extent any necessary SEC approvals or Owner
votes are obtained, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other separate
accounts of the Company. To the extent permitted by applicable law, the Company
may also transfer the assets of the Separate Account associated with the Policy
to another separate account.
The Company cannot guarantee that the shares of the Fund will always be
available. The Fund sells shares to the Separate Account in accordance with the
terms of a participation agreement between the Fund and the Company. Should
this agreement terminate or should shares become unavailable for any other
reason, the Separate Account will not be able to purchase the Fund shares.
Should this occur, the Company will be unable to honor Owner requests to
allocate their cash values or premium payments to the Divisions of the Separate
Account investing in shares of the Fund. In the event that the Fund is no
longer available, the Company will, of course, take reasonable steps to obtain
alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
The Company will generally issue a Group Contract to employers whose
employees and/or their spouses may become Owners and/or Insureds thereunder so
long as the employee is within the class of employees eligible to be included
in the Group Contract. The class(es) of employees covered by a particular Group
Contract are set forth in that Group Contract's specifications pages. The Group
Contract will be issued upon receipt of an application for a Group Contract
signed by a duly authorized officer of the employer and acceptance by a duly
authorized officer of the Company at its Home Office. (See "General Provisions
of the Group Contract--Issuance," page 34.) Individuals (i.e., eligible
employees or their spouses) wishing to purchase a Policy, whether under a Group
Contract or an employer-sponsored insurance program, must complete the
appropriate application for Individual Insurance and submit it to an authorized
representative of the Company or to the Company's Home Office. The Company will
issue to each Contractholder either a Certificate or an Individual Policy to
give to each Owner. Individual Policies, rather than Certificates, will be
issued (i) to independent contractors of the employer; (ii) to persons who wish
to continue coverage after a Group Contract has terminated; (iii) to persons
who wish to continue coverage after they no longer are employed by the Group
Contractholder; (iv) if state law restrictions make issuance of a Group
Contract impracticable; or (v) if the employer chooses to use an employer-
sponsored insurance program that does not involve a Group Contract.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
70 who supply evidence of insurability satisfactory to the Company. The Company
may, at its sole discretion, issue Policies to individuals falling outside
those Issue Ages or decline to issue Policies to individuals within those Issue
Ages.
In order for an employee to be eligible to purchase a Policy, the employee
must be actively at work at the time the application for Individual Insurance
is signed. In addition, the Contractholder may determine specific classes to
which the employee must belong to be eligible to purchase a Policy. Actively at
work means that the employee must work for the Contractholder or sponsoring
employer at the employee's usual place of
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work or such other places as required by the Contractholder or sponsoring
employer in the course of such work for the full number of hours and the full
rate of pay, as set by the employment practices of the employer. Ordinarily the
time worked per week must not be less than 30 hours. However, the Company
reserves the right to waive or modify the actively at work requirement at its
discretion. In addition, the Contractholder may require that, to be eligible to
purchase a Policy, an employee must be employed by the employer as of a certain
date or for a certain period of time. This date or time period will be set
forth in the Group Contract specifications pages. Employees of any Associated
Companies of the Contractholder will be considered employees of the
Contractholder. The Company may also allow an individual who is an independent
contractor working primarily for the sponsoring employer to be considered an
eligible employee. As an independent contractor, he may receive an Individual
Policy rather than a Certificate depending upon state law applicable to the
contracts. An employee may include a partner in a partnership if the employer
is a partnership.
The first time an employee is given the opportunity to purchase a Policy, the
Company will issue the Policy and any spouse or children's insurance rider
applied for by the employee pursuant to its guaranteed issue procedure. Under
this procedure the employee is required to answer qualifying questions in the
application for Individual Insurance, but is not required to submit to a
medical or paramedical examination. The maximum Face Amount that an employee
can generally apply for under the guaranteed issue procedure ("Guaranteed Issue
Amount") is three times the employee's salary up to a ceiling that is based on
the number of eligible employees under a Group Contract or other employer-
sponsored insurance program. Guaranteed issue may be available with Executive
Programs depending upon number of eligible employees or if other existing
coverage is cancelled.
Where the Face Amount exceeds the guaranteed issue limits, where the Policy
has been offered previously to the employee, where the guaranteed issue
requirements set forth in the application for Individual Insurance are not met,
or in connection with certain programs that may be offered without guaranteed
issue, the employee must submit to a simplified underwriting procedure which
requires the employee to respond satisfactorily to certain health questions in
the application. A blood test may be required. This requirement is generally
applicable only to Executive Programs. Similarly, such questions must be
answered if, in connection with the issuance of any children's rider, if the
employee is not eligible for guaranteed issue underwriting, or, even when the
employee is eligible, if the child does not satisfy the guaranteed issue
requirements set forth in the application for Individual Insurance. However,
regardless of which underwriting procedure is used, acceptance of an
application is subject to the Company's underwriting rules, and the Company
reserves the right to reject an application for any reason.
If a Policy is to be issued to a spouse of an employee who is eligible to
purchase a Policy under a Group Contract or an employer-sponsored insurance
program, the appropriate application for Individual Insurance must be supplied.
The spouse will be subject to the simplified underwriting procedure described
above. Guaranteed issue is not available. Spouse coverage is generally not
available under Executive Program Policies.
The Issue Date is the effective date for all coverage provided in the
original application for Individual Insurance. The Issue Date is used to
determine Policy Anniversaries, Policy Years, and Policy Months. A Policy will
not take effect until the appropriate application for Individual Insurance is
signed, the initial premium has been paid prior to the Insured's death, the
Insured is eligible for it, and the information in the application is
determined to be acceptable to the Company. However, prior to the actual
issuance of a Policy which is being underwritten on a guaranteed issue basis,
interim insurance in the amount of insurance applied for up to the Guaranteed
Issue Amount will start as of the date of the application. Interim insurance
ends on the earliest of the following dates: (a) the date insurance begins on
the Policy applied for; (b) the date a Policy other than the Policy applied for
is offered to the applicant; (c) the date the Company notifies the applicant
that the application for any proposed Insured is declined; (d) 60 days from the
date of application; or (e) termination of employment with the Contractholder
or sponsoring employer.
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PREMIUMS
The initial premium is due on the Issue Date, and usually will be remitted by
the Contractholder or employer on behalf of the Owner. The Company requires
that the initial premium for a Policy be at least equal to one-twelfth ( 1/12)
of the planned annual premium for the Policy set forth in the specifications
pages. The planned annual premium is an amount specified for each Policy based
on the requested initial Face Amount, the Issue Age of the Insured and the
charges under the Policy. (See "Charges and Deductions," page 26.) However, the
Owner is not required to pay premiums equal to the planned annual premium.
Premiums remitted by a Contractholder or sponsoring employer or designated
payor shall be applied to a Policy when received by the Company. Should
supporting documentation to enable the determination of the amount of premium
per Policy not be received prior to or coincident with the cash premium, the
premiums shall be promptly returned to the entity remitting such premiums.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. Under Group Contracts
and Individual Policies issued in connection with other employer-sponsored
insurance programs, the planned annual premium usually will be remitted by the
Contractholder or sponsoring employer on behalf of the Owner pursuant to a
planned premium payment schedule which will provide for premium payments in a
level amount at fixed intervals agreed to by the Contractholder or employer and
the Company (usually monthly). The amount of the premiums remitted by the
sponsoring employer or Contractholder will be that amount authorized to be
deducted by the employee. The Owner may skip planned premium payments. Failure
to pay one or more planned premium payments will not cause the Policy to lapse
until such time as the Cash Surrender Value is insufficient to cover the next
Monthly Deduction. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 15.)
In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters,"
page 35.) Moreover, as mentioned above, an Owner may also skip planned premium
payments. Therefore, unlike conventional insurance policies, a Policy does not
obligate the Owner to pay premiums in accordance with a rigid and inflexible
premium schedule.
Failure of the Contractholder to remit the planned premium payments
authorized by its employees may cause the Group Contract to terminate. (See
"General Provisions of the Group Contract--Termination," page 34.) Nonetheless,
provided that there is sufficient Cash Surrender Value to prevent the Policy
from lapsing, the Individual Insurance provided will automatically continue in
the event of such termination. (See "Policy Rights and Privileges--Eligibility
Change Conversion," page 25.) Individual Insurance will also continue if the
employee's employment with the Contractholder or sponsoring employer
terminates. In either circumstance, an Owner of an Individual Policy (or a
Certificate converted by amendment to an Individual Policy) will establish a
new schedule of planned premiums which will have the same planned annual
premium, but ordinarily the payment intervals will be no more frequent than
quarterly.
Premium Limitations. Every premium payment remitted by or on behalf of an
Owner must be at least $20. In no event may the total of all premiums paid
under a Policy in any Policy Year exceed the current maximum premium
limitations for that year established by Federal tax laws. The maximum premium
limitation for a Policy Year is the most premium that can be paid in that
Policy Year such that the sum of the premiums paid under the Policy will not at
any time exceed the guideline premium limitations referred to in section
7702(c) of the Internal Revenue Code of 1986, or any successor provision. If at
any time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, the Company will accept only that portion
of the premium which will make total premiums equal the maximum. Any part of
the premium in excess of that amount will be returned directly to the Owner
within 60 days of the end of the Policy Year in which payment is received or
applied as otherwise agreed and no further premiums will be accepted until
allowed by the current maximum premium limitations prescribed by Federal tax
law. See "Federal Tax Matters" on page 35 for a further explanation of premium
limitations. Section
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7702A creates an additional premium limitation, which, if exceeded, can change
the tax status of a Policy to that of a "modified endowment contract." A
modified endowment contract is a life insurance contract, withdrawals from
which are, for tax purposes, treated first as a distribution of any taxable
income under the contract, and then as a distribution of nontaxable investment
in the contract. Additionally, such withdrawals may be subject to a 10% federal
income tax penalty. The Company has adopted administrative steps designed to
notify an Owner when it is believed that a premium payment will cause a Policy
to become a modified endowment contract. The Owner will be given a limited
amount of time to request that the premium be reversed in order to avoid the
Policy's being classified as a modified endowment contract. (See "Federal Tax
Matters," page 35.)
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge less the premium tax charge. (See "Charges and Deductions--Sales
Charges," page 28.)
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums will
be allocated in accordance with the Owner's instructions upon receipt of the
premiums at the Company's Home Office. However, the minimum percentage, other
than zero ("0"), that may be allocated to a Division is 10 percent of the net
premium, and fractional percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers," page 23.)
The value of amounts allocated to Divisions of the Separate Account will vary
with the investment performance of the chosen Divisions and the Owner bears the
entire investment risk. This will affect the Policy's Cash Value, and may
affect the death benefit as well. Owners should periodically review their
allocations of premiums and values in light of market conditions and overall
financial planning requirements.
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy to
lapse. Lapse will occur only when the Cash Surrender Value is insufficient to
cover the monthly deduction, and a grace period expires without a sufficient
payment being made. (See also "General Provisions of the Group Contract--Grace
Period--Termination," page 34.)
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium requirements,
the amount of the premium required to keep the Policy in force will be the
amount of the current monthly deduction. (See "Charges and Deductions," page
26.) If the Company does not receive the required amount within the grace
period, the Policy will lapse and terminate without Cash Value. If the Insured
dies during the grace period, any overdue monthly deductions will be deducted
from the death benefit otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
any time within five years after the date of lapse and before the Maturity
Date. The right to reinstate a lapsed Policy will not be affected by the
termination of a Group Contract or the termination of an employee's employment
during the reinstatement period. Reinstatement is subject to the following
conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company (including evidence of insurability of any person covered by a
rider to reinstate the rider).
15
<PAGE>
2. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, is large enough to cover: (a) the
monthly deductions due at the time of lapse, and (b) two times the monthly
deduction due at the time of reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death. Payment
of death benefit proceeds will not be affected by termination of the Group
Contract or employer-sponsored insurance program or by termination of an
employee's employment.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 32.)
The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more of the settlement
options set forth in the Policy. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 25.) Death benefit proceeds will be paid to the
surviving Beneficiary or Beneficiaries specified in the application or as
subsequently changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long as
the Policy remains in force. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 15.) The minimum Face Amount currently is
$25,000. The maximum Face Amount is generally $500,000. However, in connection
with a particular Group Contract or employer sponsored insurance program, the
Company may establish a substantially higher Face Amount for Policies issued
under that Contract or program.
Option A. Under Option A, the death benefit is the current Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value on the date of
death. The applicable percentage is 250 percent for an Insured Attained Age 40
or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table below.
Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. Owners who prefer to have favorable investment performance
reflected in higher Cash Value for the same Face Amount, rather than increased
death benefit, generally should select Option A.
16
<PAGE>
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
40 or younger........... 250%
41...................... 243
42...................... 236
43...................... 229
44...................... 222
45...................... 215
46...................... 209
47...................... 203
48...................... 197
49...................... 191
50...................... 185
51...................... 178
52...................... 171
53...................... 164
54...................... 157
55...................... 150
56...................... 146
57...................... 142
58...................... 138
59...................... 134
60...................... 130
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
61...................... 128%
62...................... 126
63...................... 124
64...................... 122
65...................... 120
66...................... 119
67...................... 118
68...................... 117
69...................... 116
70...................... 115
71...................... 113
72...................... 111
73...................... 109
74...................... 107
75 to 90................ 105
91...................... 104
92...................... 103
93...................... 102
94...................... 101
95 or older............. 100
</TABLE>
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company reserves
the right to alter the applicable percentage to the extent necessary to comply
with changes to Section 7702(d) or any successor provision thereto.
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage is
the same as under Option A: 250 percent for an Insured with an Attained Age of
40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the percentage
declines as shown in the Applicable Percentage Table above. Accordingly, under
Option B the amount of the death benefit will always vary as the Cash Value
varies (but will never be less than the Face Amount). Owners who prefer to have
favorable investment performance reflected in higher death benefits for the
same Face Amount generally should select Option B. All other factors equal, for
the same premium dollar, Option B provides lower initial Face Amount resulting
in earlier cash accumulation.
Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option in effect. The Company reserves the right
to limit the number of changes in death benefit options to one each Policy
Year. A request for change must be made directly to the Company in writing. The
effective date of such a change will be the Monthly Anniversary on or following
the date the Company receives the change request.
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request for a change from Option A to Option B. This change may not be made if
it would result in a Face Amount of less than $25,000.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
17
<PAGE>
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges will
be imposed upon a change from death benefit Option B to Option A. Changing from
Option A to Option B, however, will result in a decrease in the Face Amount. In
addition, if, prior to or accompanying a change in the death benefit option,
there has been an increase in the Face Amount, the cost of insurance charge may
be different for the increased amount. (See "Charges and Deductions--Monthly
Deduction--Cost of Insurance," page 28.)
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income due to not satisfying the
requirements of Federal tax law. (See "Federal Tax Matters," page 35.)
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written request
for a change in the Face Amount must be sent directly to the Company. A change
in Face Amount may affect the cost of insurance rate and the net amount at
risk, both of which affect an Owner's cost of insurance charge. (See "Charges
and Deductions--Monthly Deduction--Cost of Insurance," page 28.) In addition, a
change in Face Amount may have Federal income tax consequences. (See "Federal
Tax Matters," page 35.)
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000 and the Face Amount
remaining in force after any requested decrease may not be less than the
minimum amount Face Amount, generally $25,000. If, following a decrease in Face
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see "Payment and Allocation of Premiums," page
12), the decrease may be limited or Cash Value may be returned to the Owner (at
the Owner's election), to the extent necessary to meet these requirements. A
decrease in the Face Amount will reduce the Face Amount in the following order:
(a) The Face Amount provided by the most recent increase;
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance," page 28).
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. If approved, the increase will become
effective on the Monthly Anniversary on or following receipt of the
satisfactory evidence of insurability. In addition, the Insured must have an
Attained Age of not greater than 80 on the effective date of the increase. The
amount of the increase may not be less than $5,000. The Face Amount may not be
increased more than the maximum Face Amount for that Policy, generally
$500,000. However, in connection with a particular Group Contract or employer-
sponsored insurance program, the Company may establish a substantially higher
Face Amount for Policies issued under that Contract or program. Although an
increase need not necessarily be accompanied by an additional premium (unless
it is required to meet the next monthly deduction), the Cash Surrender Value in
effect immediately after the increase must be sufficient to cover the next
monthly deduction. (See "Charges and Deductions-- Monthly Deduction," page 27.)
An increase in the Face Amount may result in certain additional charges. (See
"Charges and Deductions," page 26.)
An increase in Face Amount may be cancelled within the later of 20 days from
the date the Owner received the new Policy specifications page for the
increase, within 10 days of mailing the right to cancellation notice to the
Owner, or within 45 days after the application for an increase was signed. Upon
cancellation, any additional charges, which would not have been assessed
without the increase, will be refunded to the
18
<PAGE>
Owner if requested. If a request for a refund is not made, the charges will be
restored to the Policy's Cash Value and allocated to Divisions of the Separate
Account in the same manner as they were deducted. Premiums paid following an
increase in Face Amount and prior to the time the right to cancel the increase
expires will become part of the Policy's Cash Value and will not be subject to
refund. (See "Policy Rights and Privileges--Right to Examine Policy," page 24.)
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the level
of premium payments, and, to a lesser extent, making partial withdrawals from
the Policy. Although the consequences of each of these methods will depend upon
the individual circumstances, they may be generally summarized as follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit," page 16),
decrease the pure insurance protection and the cost of insurance charges
under the Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if Option A is in
effect) or the Cash Value plus the Face Amount (if Option B is in effect),
increased premium payments will increase the pure insurance protection.
Increased premiums should also increase the amount of funds available to
keep the Policy in force.
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 15.)
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals," page 22.)
However, it only affects the amount of pure insurance protection and cost
of insurance charges if the death benefit before or after the withdrawal is
based on the applicable percentage of Cash Value, because otherwise the
decrease in the death benefit is offset by the amount of Cash Value
withdrawn. The primary use of a partial withdrawal is to withdraw Cash
Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the Policy--Postponement of Payments," page 30.) The Owner may decide the
form in which the proceeds will be paid. During the Insured's lifetime, the
Owner may arrange for the death benefit proceeds to be paid in a single sum or
under one or more of the optional methods of settlement described below. The
death benefit will be increased by the amount of the monthly cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32, and "Charges and
Deductions," page 26.)
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits," page 25.)
An election or change of method of settlement must be in writing. A change in
Beneficiary revokes any previous settlement election. Once payments have begun,
the settlement option may not be changed.
19
<PAGE>
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash Value
in the Separate Account and the Loan Account. The Policy's Cash Value in the
Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, and the charges assessed in
connection with the Policy. An Owner may at any time surrender the Policy and
receive the Policy's Cash Surrender Value. (See "Policy Rights and Privileges--
Surrender and Partial Withdrawals," page 22.) There is no guaranteed minimum
Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the Issue
Date and the Investment Start Date, this amount may be more than the amount of
one monthly deduction. (See "Payment and Allocation of Premiums," page 12.)
Thereafter, on each Valuation Date, the Cash Value in a Division of the
Separate Account will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
(6) Any amounts transferred from the Division during the current Valuation
Period plus transfer charges if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) Any contingent deferred sales charges incurred during the current
Valuation Period in connection with a partial withdrawal or decrease in
Face Amount allocated to the Division; minus
(9) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions," page 26.)
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(4) Any amount charged against each Division for taxes or any amount set
aside during the Valuation Period as a reserve for taxes attributable
to the operation or maintenance of each Division; minus
20
<PAGE>
(5) A charge not to exceed .0024547% of the net assets for each day in the
Valuation Period. This corresponds to 0.90% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value Cash Value in each Division. Unit value is
obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date; minus
(2) A reduction based upon a charge not to exceed .0024547% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.90% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
POLICY RIGHTS AND PRIVILEGES
EXERCISING RIGHTS AND PRIVILEGES UNDER THE POLICIES
Owners of Policies issued under a Group Contract or in connection with an
employer-sponsored insurance program may exercise their rights and privileges
under the Policies (i.e., make transfers, change premium allocations, borrow,
etc.) by directly notifying the Company in writing at its Home Office. The
Company will send all reports and other notices described herein or in the
Policy directly to the Owner.
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for such loan. The Loan
Value is equal to (a) minus (b), where (a) is 85 percent of the Cash Value of
the Policy on the date the Policy Loan is requested and (b) is the amount of
any outstanding Indebtedness. Loan interest is due and payable in arrears on
each Policy Anniversary or on a pro rata basis for such shorter period as the
loan may exist. The minimum amount that may be borrowed is $100. The loan may
be completely or partially repaid at any time while the Insured is living. Any
amount due to an Owner under a Policy Loan ordinarily will be paid within seven
days after the Company receives the loan request at its Home Office, although
payments may be postponed under certain circumstances. (See "General Matters
Relating to the Policy--Postponement of Payments," page 30.)
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. A Loan Subaccount
exists for each Division of the Separate Account. Amounts transferred to the
Loan Account to secure Indebtedness are allocated to the appropriate Loan
Subaccount to reflect its origin. Unless the Owner requests a different
allocation, amounts will be transferred from the Divisions of the Separate
Account in the same proportion that the Policy's Cash Value in each Division
bears to the Policy's total Cash Value, less the Cash Value in the Loan
Account, at the end of the Valuation Period during which the request for a
Policy Loan is received. This will reduce the Policy's Cash Value in the
Separate Account. These transactions will not be considered transfers for
purposes of the limitations on transfers between Divisions as discussed on page
23.
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of Company
management as authorized by the Board of Directors of the Company. The Loan
Account interest credited will be transferred to the Divisions of the Separate
Account: (1) each Policy Anniversary; (2) when a new loan is made; (3) when a
loan is partially or fully repaid; and (4) when an amount is needed to meet a
monthly deduction.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of
21
<PAGE>
Policy Loans," below.) The amount transferred will be deducted from the
Divisions of the Separate Account in the same proportion that the portion of
the Cash Value in each Division bears to the total Cash Value of the Policy
minus the Cash Value in the Loan Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
Federal income tax consequences (See "Federal Tax Matters," page 35.)
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment performance
of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Charges and
Deductions," page 26.) A sufficient payment must be made within the later of
the grace period of 62 days from the Monthly Anniversary immediately before the
date Indebtedness exceeds the Cash Value, or 31 days after notice that the
Policy will terminate without a sufficient payment has been mailed, or the
Policy will lapse and terminate without value. A lapsed Policy, however, may
later be reinstated. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 15.)
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part at
any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as repayment
of Indebtedness. When a loan repayment is made, an amount securing the
Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount.
SURRENDER AND PARTIAL WITHDRAWALS
At any time during the lifetime of the Insured and while a Policy is in
force, the Owner may surrender, or make a partial withdrawal under, the Policy
by sending a written request to the Company. The amount available upon
surrender is the Cash Surrender Value (described below) at the end of the
Valuation Period during which the surrender request is received at the
Company's Home Office. Amounts payable upon surrender or a partial withdrawal
ordinarily will be paid within seven days of receipt of the written request.
(See "General Matters Relating to the Policy--Postponement of Payments," page
30.) Surrenders and partial withdrawals may have Federal income tax
consequences. (See "Federal Tax Matters," page 35.)
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request, or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The Cash
Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness. Surrender proceeds will be paid in a single sum. If the request
is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to one
partial withdrawal each Policy Month from the Separate Account. The minimum
amount of a partial withdrawal, net of any transaction charges, is at least
$500. The minimum amount that can be withdrawn from a Division is $50, or
22
<PAGE>
the Policy's Cash Value in a Division, if smaller. The maximum amount that may
be withdrawn, including the partial withdrawal transaction charge, is the Loan
Value. The partial withdrawal transaction charge is equal to the lesser of $25
or two percent of the amount withdrawn. The Owner may allocate the amount
withdrawn, subject to the above conditions, among the Divisions of the Separate
Account. If no allocation is specified, then the partial withdrawal will be
allocated among the Divisions of the Separate Account in the same proportion
that the Policy's Cash Value in each Division bears to the total Cash Value of
the Policy, less the Cash Value in the Loan Account, on the date the request
for the partial withdrawal is received.
A partial withdrawal will decrease the Face Amount in two situations. First,
if the death benefit Option A is in effect and the death benefit equals the
Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge. Second, if the death benefit equals a
percentage of Cash Value (whether Option A or Option B is in effect), then a
partial withdrawal will decrease the Face Amount by the amount that the partial
withdrawal plus the partial withdrawal transaction charge exceeds the
difference between the death benefit and the Face Amount. The death benefit
also will be reduced in this circumstance. If Option B is in effect and the
death benefit equals the Face Amount plus the Cash Value, the partial
withdrawal will not reduce the Face Amount, but it will reduce the Cash Value
and, thus, the death benefit by the amount of the partial withdrawal plus the
partial withdrawal transaction charge. The Face Amount will be decreased in the
following order: (1) the Face Amount at issue; and (2) any increases in the
same order in which they were issued.
Generally, the partial withdrawal transaction charge will be allocated among
the Divisions of the Separate Account in the same proportion as the partial
withdrawal is allocated. If, following a partial withdrawal, insufficient funds
remain in a Division to pay the partial withdrawal transaction charge allocated
to a Division, the unpaid charges will be allocated equally among the remaining
Divisions. In addition, an Owner may request that the partial withdrawal
transaction charge be paid from the Owner's Cash Value in another Division.
The Face Amount remaining in force after a partial withdrawal may not be less
than $25,000. Any request for a partial withdrawal that would reduce the Face
Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection," page 19.)
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account. Requests for transfers from or among Divisions of the
Separate Account must be made in writing directly to the Company and may be
made once each Policy Month. Transfers must be in amounts of at least $250 or,
if smaller, the Policy's Cash Value in a Division. The Company will effectuate
transfers and determine all values in connection with transfers as of the end
of the Valuation Period during which the transfer request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
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<PAGE>
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 20 days after receiving it, within 45
days after the Owner signed the application, or within 10 days of mailing a
notice of the cancellation right to the Owner, whichever is latest. If a Policy
is cancelled within this time period, a refund will be paid. The refund will
equal all premiums paid under the Policy.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
the Company. A refund of premiums paid by check may be delayed until the check
has cleared the Owner's bank. (See "General Matters Relating to the Policy--
Postponement of Payments," page 30.)
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit," page 16) also may be cancelled. The request for cancellation must be
made within the latest of 20 days from the date the Owner received the new
Policy specifications pages for the increase, 10 days of mailing the right to
cancellation notice to the Owner, or 45 days after the Owner signed the
application for the increase.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have been
made absent the increase (see "Charges and Deductions--Monthly Deduction," page
27). If no request is made, the Company will increase the Policy's Cash Value
by the amount of these additional charges. This amount will be allocated among
the Divisions of the Separate Account in the same manner as it was deducted.
CONVERSION RIGHT TO A FIXED BENEFIT POLICY
Once during the first 24 Policy Months following the Issue Date of the
Policy, the Owner may, upon written request, convert a Policy still in force to
a life insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. In the event a
Certificate has been amended to operate as an Individual Policy following an
Insured's change in eligibility under a Group Contract, the conversion right
will be measured from the Issue Date of the original Certificate. (See "Policy
Rights and Privileges--Eligibility Change Conversion," page 25). No evidence of
insurability will be required when this right is exercised. However, the
Company will require that the Policy be in force and that the Owner repay any
existing Indebtedness. At the time of the conversion, the new Policy will have,
at the Owner's option, either the same death benefit or the same net amount at
risk as the original Policy. The new Policy will also have the same Issue Date
and Issue Age as the original Policy. The premiums for the new Policy will be
based on the Company's rates in effect for the same Issue Age and rate class as
the original Policy.
In addition, once during the first 24 Policy Months following the effective
date of a requested increase in Face Amount (i.e., an increase that is not the
result of a change in death benefit options), the Owner may, upon written
request, convert the amount of the increase in Face Amount to a life insurance
policy which also provides for fixed benefits. Premiums under this new contract
will be based on the Company's rates in effect for the same Issue Age and rate
class of the Insured as were applied on the effective date of the increase
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<PAGE>
in the Face Amount. The conditions and principles, described above, which are
applicable to a conversion of the entire Policy, will be equally applicable to
the conversion of an increase in Face Amount to a fixed-benefit policy.
ELIGIBILITY CHANGE CONVERSION
If an Insured's eligibility under a Group Contract or employer-sponsored
insurance program ends due to its termination or due to the termination of the
employee's employment, the Insured's coverage will continue unless the Policy
is no longer in force. Even if the Policy is not in force due to lapse, the
right to reinstate and thus to convert a lapsed Policy will not be affected by
the change in the employee's eligibility during the reinstatement period.
If a Certificate was issued under the Group Contract, the Certificate will be
amended automatically so that it will continue in force as an Individual
Policy. The rights, benefits, and guaranteed charges will not be altered by
this amendment. The amendment will be mailed to the Owner within 31 days after
the Company receives written notice that (a) the employee's employment ended or
(b) after the termination of the Group Contract. If, at the time the conversion
occurs, the Policy is in a grace period (see "Payment and Allocation of
Premiums--Policy Lapse and Reinstatement," page 15), any premium necessary to
prevent the Policy from lapsing must be paid to the Company at its Home Office
before the new Individual Policy will be mailed. A new planned premium schedule
will be established which will have the same planned annual premium utilized
under the Group Contract, but, ordinarily, the planned payment intervals will
be no more frequent than quarterly. The Company may allow payment of planned
premium through periodic (usually monthly) authorized electronic funds
transfer. Of course, unscheduled premium payments can be made at any time. (See
"Payment and Allocation of Premiums--Premiums," page 12.)
If an Individual Policy was issued under the Group Contract or other
employer-sponsored insurance program, the Policy will continue in force
following the change in eligibility. The rights, benefits, and guaranteed
charges under the Policy will remain the same following this change in
eligibility.
When an employee's spouse is the Insured under a Policy, the spouse's
insurance coverage also will continue in the event the employee is no longer
eligible. If a Certificate was originally issued to the employee's spouse, the
Certificate will be amended automatically as described above. If an Individual
Policy was originally issued, the Individual Policy will continue as described
above. In addition, if an Associated Company ceases be to under common control
with the Contractholder, the Insureds of the Associated Company (i.e.,
employees of the Associated Company and their spouses) may continue their
insurance in the
manner described above.
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay the
Cash Surrender Value of the Policy to the Owner on the Maturity Date. An Owner
may elect to have amounts payable on the Maturity Date paid in a single sum or
under a settlement option. (See "Policy Rights and Privileges--Payment of
Policy Benefits," below.) Amounts payable on the Maturity Date ordinarily will
be paid within seven days of that date, although payment may be postponed under
certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments," page 30.) A Policy will mature if and when the
Insured reaches Attained Age 95.
PAYMENT OF POLICY BENEFITS
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written agreement with
the Company.
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<PAGE>
Settlement Options. The settlement options described below apply to the
payment of death benefit proceeds, as well as to benefits payable at maturity.
These are examples of options that may be available. Once a settlement option
is in effect, there will no longer be value in the Separate Account. The
Company may make other settlement options available in the future.
Option A--Life Income. The Company will pay equal monthly payments that will
be made for the payee's lifetime.
Option B--Life Income for Two Lives. The Company will pay monthly
installments jointly and to two named payees if both are living when the
installments become payable. One payee will be designated as primary payee.
Full installments will continue so long as the primary payee is living. If the
primary payee dies after installments begin, full installments or installments
of 1/2 or 2/3 (whichever the Owner elected when applying for this option) will
continue to the other payee during his or her lifetime.
Option C--Income for Specified Number of Years and Life Thereafter. The
Company will pay monthly installments beginning on the effective date of the
option and continuing for 5, 10, 15 or 20 years certain, as may be chosen, and
after that during the payee's lifetime.
Option D--Life Income With Cash Refund. The Company will pay equal monthly
installments as long as the payee lives. If the payee dies before the total
amounts paid equal the proceeds applied, the Company pays the difference in one
sum.
Option E--Installments of a Specified Amount. The Company will pay
installments at dates and in amounts chosen by the payee with the Company's
approval. The Company will continue to make payments until all of the proceeds,
with interest, are paid. The final payment will not exceed the unpaid balance.
Option F--Income for Specified Number of Years. The Company will pay monthly
installments beginning on the effective date of the option and continuing for a
specified number of years, not to exceed 30 years.
Option G--Interest. The Company will hold the proceeds on deposit during the
payee's lifetime or for any other period selected with the Company's approval.
Interest may be accumulated or received in monthly, quarterly, semiannual, or
annual payments, as elected. The proceeds may be withdrawn at any time upon
request. Interest begins to accrue as of the date of death, for death benefit
proceeds; the Maturity Date, for benefits payable upon maturity of a Policy;
and the date a request for surrender is received, for surrender of a Policy.
The Company may, from time to time, offer additional settlement options
and/or more favorable settlement option rates to all Insureds or Beneficiaries
under the Policies.
Accelerated Death Benefits. The Company offers certain riders which permit
the Owner to elect to receive an accelerated payment of the Policy's death
benefit in a reduced amount under certain circumstances. (See "General Matters
Relating to the Policy--Additional Insurance Benefits," page 32.)
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policies to compensate the
Company for providing the insurance benefits set forth in the Policies and any
additional benefits added by rider, administering the Policies, incurring
expenses in distributing the Policies, and assuming certain risks in connection
with the Policies.
PREMIUM EXPENSE CHARGE
Generally, there are no sales charges applicable to the Policies. However,
there may be a front-end charge applied to premium payments ("premium expense
charge") to certain Policies that would be categorized as individual contracts
under OBRA.
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<PAGE>
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by any premium expense charge. The
premium expense charge is equal to a percentage of each premium paid as set
forth on the specifications pages of the Policy. The charge will either be zero
("0") or one percent, depending on whether the Policy is determined to be a
group or individual contract under OBRA. As a result of OBRA, insurance
companies are generally required to capitalize and amortize certain policy
acquisition expenses over a ten year period rather than currently deducting
such expenses. A higher capitalization expense applies to the deferred
acquisition expenses of Policies that are deemed to be individual contracts
under OBRA and will result in a significantly higher corporate income tax
liability for the Company in early Policy Years. Thus, under Policies that are
deemed to be individual contracts under OBRA, the Company makes a premium
expense charge of 1% of each premium payment to compensate the Company for the
anticipated higher corporate income taxes that result from the sale of such a
Policy. This premium expense charge is treated as a sales load for purposes of
determining compliance with the limitations on sales loads imposed by the
Investment Company Act of 1940 and applicable regulations thereunder. The
premium payment less the premium expense charge and the premium tax charge (see
"Charges and Deductions--Premium Tax Charge," below) equals the net premium.
The Company expects to recover distribution expenses from its general assets,
which may include profits from the mortality and expense risk charge.
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premium taxes the Company deducts a charge of 2 1/4 percent from
all Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate the Company for (a) certain administrative costs; (b)
insurance underwriting and acquisition expenses in connection with issuing a
Policy; (c) the cost of insurance; and (d) the cost of optional benefits added
by rider. The monthly deduction will be deducted on the Investment Start Date
and on each succeeding Monthly Anniversary. It will be allocated among each
Division of the Separate Account in the same proportion that a Policy's Cash
Value in each Division bears to the total Cash Value of the Policy, less the
Cash Value in the Loan Account, on the date the deduction is made. Because
portions of the monthly deduction, such as the cost of insurance, can vary from
month to month, the monthly deduction itself will vary in amount from month to
month.
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping, processing
death benefit claims, cash surrenders, partial withdrawals, Policy changes,
reporting and overhead costs, processing applications, and establishing Policy
records. As reimbursement for administrative expenses related to the
maintenance of each Policy and the Separate Account, the Company assesses a
monthly administration charge from each Policy. The amount of this charge is
set forth in the specifications pages of the Policy and depends on the number
of employees eligible to be covered at issue of a Group Contract or an
employer-sponsored insurance program. The following table sets forth the range
of monthly administrative charges under the Policy:
<TABLE>
<CAPTION>
ELIGIBLE EMPLOYEES FIRST YEAR SUBSEQUENT YEARS
------------------ ---------- ----------------
<S> <C> <C>
250-499....................... $5.00......................... $2.50
500-999....................... $4.75......................... $2.25
1000+......................... $4.50......................... $2.00
</TABLE>
For Group Contracts or other employer-sponsored insurance programs with fewer
than 250 eligible employees, those with additional administrative costs, or
those that are offered as Executive Programs, the monthly administrative charge
may be higher, but will not exceed $6.00 per month during the first Policy Year
and $3.50 per month in renewal years.
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<PAGE>
These charges, once established at the time a Policy is issued, are
guaranteed not to increase over the life of the Policy. Nor will the
administrative charge change in the event that the Insured is no longer
eligible for group coverage, but continues coverage on an individual basis. The
Company has designed the administrative charge so as not to make any profit on
the charge. In addition, where the Company believes that lower administrative
costs will be incurred in connection with a particular Group Contract or
employer-sponsored insurance program due to the number of eligible employees or
administrative support provided by the employer, the Company may modify the
above schedule for that Group Contract or other employer-sponsored insurance
program. The amount of the administrative charge applicable to a particular
Policy will be set forth in specifications pages for that Policy.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience. The Company currently issues
the Policies on a guaranteed issue or simplified underwriting basis without
regard to the sex of the Insured. Whether a Policy is issued on a guaranteed
issue or simplified underwriting basis does not affect the cost of insurance
charge determined for that Policy.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and possibly the gender mix (i.e., the
proportion of men and women covered under a particular Group Contract or
employer-sponsored program). The cost of insurance rates generally increase as
the Insured's Attained Age increases. An Insured's rate class is generally
based on the number of eligible employees as well as other factors that may
affect the mortality risks assumed by the Company in connection with a
particular Group Contract or employer-sponsored insurance program. All other
factors being equal, the cost of insurance rates generally decrease by rate
class as the number of eligible employees in the rate class increase. The
Company reserves the right to change criteria on which a rate class will be
based in the future.
If gender is a factor, the Company will estimate the gender mix of the pool
of Insureds under a Group Contract or employer-sponsored insurance program upon
issuance of the Contract. Each year on the Group Contract or employer-sponsored
insurance program's anniversary, the Company may adjust the rate to reflect the
actual gender mix for the particular group. In the event that the Insured's
eligibility under a Group Contract (or other employer-sponsored insurance
program) ceases, the cost of insurance rate will continue to reflect the gender
mix of the pool of Insureds at the time the Insured's eligibility ceased.
However, at some time in the future, the Company reserves the right to base the
gender mix and rate class on the group consisting of those Insureds who are no
longer under a Group Contract or employer-sponsored program.
The current cost of insurance rates will not be greater than the guaranteed
cost of insurance rates set forth in the Policy. These guaranteed rates are 125
percent of the maximum rates that could be charged based on the 1980
Commissioners Standard Ordinary Mortality Table C ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the maximum rates in the 1980
CSO Table because the Company uses guaranteed or simplified underwriting
procedures whereby the insured is not required to submit to a medical
or paramedical examination. The current cost of insurance rates are generally
lower than 100 percent of the 1980 CSO Table. Any change in the actual cost of
insurance rates, except those changes made to adjust for changes in the gender
mix of the pool of Insureds under a particular Group Contract or employer-
sponsored insurance program, will apply to all persons of the same Attained Age
and rate class whose initial Face
28
<PAGE>
Amounts or increases in Face Amount have been in force for the same length of
time. (For purposes of computing guideline premiums under Section 7702 of the
Internal Revenue Code of 1986, as amended, the Company will use 100 percent of
the 1980 CSO Table.)
The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0040741 (which reduces the net
amount at risk, solely for purposes of computing the cost of insurance, by
taking into account assumed monthly earnings at an annual rate of five
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that for
the initial Face Amount, the net amount at risk will be calculated separately
for each rate class. If Option A is in effect, for purposes of determining the
net amounts at risk for each rate class, Cash Value will first be considered a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, the excess Cash Value will then be considered a part of each
increase in order, starting with the first increase. If Option B is in effect,
the net amount at risk for each rate class will be determined by the Face
Amount associated with that rate class. In calculating the cost of insurance
charge, the cost of insurance rate for a Face Amount is applied to the net
amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option A
and Option B when more than one rate class is in effect, a change in the death
benefit option may result in a different net amount at risk for each rate class
than would have occurred had the death benefit option not been changed. Since
the cost of insurance is calculated separately for each rate class, any change
in the net amount at risk resulting from a change in the death benefit option
may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," page 16, and "Policy Rights and Privileges--Surrender
and Partial Withdrawals," page 22.)
Additional Insurance Benefits. The monthly deduction will include charges for
any additional benefits provided by rider. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32.)
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal.
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at the rate of .0024547% of the net assets of each
Division of the Separate Account, which equals an annual rate of .90% of those
net assets. This deduction is guaranteed not to increase for the duration of
the Policy. The Company may realize a profit from this charge.
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount of
death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future.
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<PAGE>
Charges for other taxes, if any, attributable to the Account may also be made.
(See "Federal Tax Matters," page 35.)
Expenses of the Fund. The value of the net assets of the Separate Account
will reflect the investment advisory fee and other expenses incurred by the
Fund. (See "Dean Witter Variable Investment Series," page 10.)
GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) 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; (ii) the SEC by order
permits postponement for the protection of Owners; or (iii) 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 premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE CONTRACT
The Policy, the attached application, any riders, endorsements, any
application for an increase in Face Amount, and any application for
reinstatement constitute the entire contract between the Owner and the Company.
Apart from the rights and benefits described in the Certificate or Individual
Policy and incorporated by reference into the Group Contract, the Owner has no
rights under the Group Contract. All statements made by the Insured in the
application are considered representations and not warranties, except in the
case of fraud. Only statements in the application and any supplemental
applications can be used to contest a claim or the validity of the Policy. Any
change to the Policy must be approved in writing by the President, a Vice
President, or the Secretary of the Company. No agent has the authority to alter
or modify any of the terms, conditions, or agreements of the Policy or to waive
any of its provisions.
CONTROL OF POLICY
The Insured will be considered Owner of the Policy unless another person is
shown as the Owner in the application. Ownership may be changed, however, as
described below. The Owner is entitled to all rights provided by the Policy,
prior to its Maturity Date. After the Maturity Date, the Owner cannot change
the payee nor the mode of payment, unless otherwise provided in the Policy. Any
person whose rights of ownership depend upon some future event will not possess
any present rights of ownership. If there is more than one Owner at a given
time, all must exercise the rights of ownership. If the Owner should die, and
the Owner is not the Insured, the Owner's interest will go to his or her estate
unless otherwise provided.
BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If there is more
than one Beneficiary at the death of the Insured, each will receive equal
payments unless otherwise provided by the Owner. If no Beneficiary is living at
the death of the Insured, the proceeds will be payable to the Owner or, if the
Owner is not living, to the Owner's estate.
30
<PAGE>
CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received at
the Company's Home Office. The
Company will not be liable for any payment made or action taken before the
Company received the written request for change. If the Owner is also a
Beneficiary of the Policy at the time of the Insured's death, the Owner may,
within 60 days of the Insured's death, designate another person to receive the
Policy proceeds.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or any
applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment thereunder
will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from the
Issue Date during the lifetime of the Insured. An increase in Face Amount or
addition of a rider after the Issue Date is incontestable after such increase
or addition has been in force for two years from its effective date during the
lifetime of the Insured. Any reinstatement of a Policy is incontestable, except
for nonpayment of premiums, only after it has been in force during the lifetime
of the Insured for two years after the effective date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an acknowledged copy to
the Owner. The Company is not responsible for determining the validity of any
assignment. Payment of Policy proceeds is subject to the rights of any assignee
of record. If a claim is based on an assignment, the Company may require proof
of the interest of the claimant. A valid assignment will take precedence over
any claim of a Beneficiary.
SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the laws of the state in
which the Policy was delivered, if less than two years), the amount payable
will be limited to premiums paid, less any partial withdrawals and outstanding
Indebtedness. If the Insured, while sane or
31
<PAGE>
insane, dies by suicide within two years after the effective date of any
increase in Face Amount, the death benefit for that increase will be limited to
the amount of the monthly deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide when
the Policy, or any increase in Face Amount, was applied for.
MISSTATEMENT OF AGE AND CORRECTIONS
If the age of the Insured has been misstated in the application, the amount
of the death benefit will be that which the most recent cost of insurance
charge would have purchased for the correct age.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. However, some Group
Contracts or employer-sponsored insurance programs may not offer each of the
additional benefits described below. Certain riders may not be available in all
states. In addition, should it be determined that the tax status of a Policy as
life insurance is adversely affected by the addition of any of these riders,
the Company will cease offering such riders. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy should be consulted. The
cost of any additional insurance benefits will be deducted as part of the
monthly deduction. (See "Charges and Deductions--Monthly Deduction," page 27.)
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accidental Death Benefit Rider. Provides additional insurance if the
Insured's death results from accidental bodily injury, as defined in the rider.
Under the terms of the rider, the additional benefits provided in the Policy
will be paid upon receipt of proof by the Company that death resulted directly
from accidental injury and independently of all other causes; occurred within
120 days from the date of injury; and occurred before the Policy Anniversary
nearest age 70 of the Insured.
Children's Life Insurance Rider. Provides for term insurance on the Insured's
children, as defined in the rider. To be eligible for insurance under the
rider, the child to be insured must not be confined in a hospital at the time
the application is signed. Under the terms of the rider, the death benefit will
be payable to the named Beneficiary upon the death of any insured child. Upon
receipt of proof of the Insured's death before the rider terminates, the rider
will be continued on a fully paid-up term insurance basis.
Accelerated Death Benefit Settlement Option Rider. Provides for the
accelerated payment of a portion of death benefit proceeds in a single sum to
the Owner if the Insured is terminally ill or permanently confined to a nursing
home. Under the rider, which is available at no additional cost, the Owner may
make a voluntary election to completely settle the Policy in return for the
Company's accelerated payment of a reduced death benefit. The Owner may make
such an election under the rider if the Insured (1) has a life expectancy of 12
months or less or (2) is permanently confined to a qualified nursing home and
is expected to remain there until death. Any irrevocable beneficiary and
assignees of record must provide written authorization in order for the Owner
to receive the accelerated benefit.
The amount of the death benefit payable under the rider will equal the cash
surrender value under the Policy on the date the Company receives satisfactory
evidence of either (1) or (2), above, (less any Indebtedness and any term
insurance added by other riders) plus the product of the applicable "benefit
factor" multiplied by the difference of (a) minus (b), where (a) equals the
Policy's death benefit proceeds, and (b)
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equals the Policy's cash surrender value. The "benefit factor", in the case of
terminal illness, is 0.85 and, in the case of permanent nursing home
confinement, is 0.70.
The Federal income tax consequences associated with (i) adding the
Accelerated Death Benefit Settlement Option Rider or (ii) receiving the
benefits provided under such rider are uncertain. Accordingly, we urge you to
consult a tax adviser about such consequences before adding the Accelerated
Death Benefit Settlement Option Rider to your Policy or requesting a benefit
under the rider.
RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the American
Series and a list of the portfolio securities held in each Fund. Receipt of
premium payments directly from the Owner, transfers, partial withdrawals,
Policy Loans, loan repayments, changes in death benefit options, increases or
decreases in Face Amount, surrenders and reinstatements will be confirmed
promptly following each transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to an Underwriting Agreement with the
Company. Walnut Street is a wholly-owned subsidiary of General American Holding
Company, which is an affiliate of the Company. Walnut Street is registered with
the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers. The Policies are
distributed by the Company on behalf of Walnut Street or through broker-dealers
who have entered into written sales agreements with Walnut Street. Broker-
dealers will receive commissions based upon a commission schedule in the sales
agreement with the Company and Walnut Street. Broker-dealers compensate their
registered representative agents. Commissions are payable on collected premiums
(premiums received less refunds if any) received by the Company as well as
Policy Cash Surrender Value. Maximum commissions based on premiums received and
payable to a broker-dealer during the first Policy Year are 15% of the premiums
received that do not exceed the cost of insurance assessed during that year. In
addition, maximum commissions, based on Policy Cash Surrender Value, in all
Policy Years through Policy Year 20 are 0.2% of the average of the beginning
and ending Policy Year Net Cash Surrender Value. In no event will commissions
be payable for more than 20 years.
Walnut Street received zero commissions on the Policies for the year ended
December 31, 1995.
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GENERAL PROVISIONS OF THE GROUP CONTRACT
ISSUANCE
The Group Contract will be issued upon receipt of a signed application for
Group Insurance signed by a duly authorized officer of the employer and
acceptance by a duly authorized officer of the Company at its Home Office.
PREMIUM PAYMENTS
The Contractholder will remit planned premium payments for Insureds of the
Contractholder or an Associated Company in an amount authorized by the employee
to be deducted from his wages. All planned premiums under a Group Contract must
be remitted in advance to the Company. The planned premium payment interval is
agreed to by the Contractholder and the Company. Prior to each planned payment
interval, the Company will furnish the Contractholder with a statement of the
planned premium payments to be made under the Group Contract or such other
notification as has been agreed to by the Contractholder and the Company.
GRACE PERIOD
If the Contractholder does not remit planned premium payments in a timely
fashion, the Group Contract will be in default. A grace period of 31 days
begins on the date that the planned premiums were scheduled to be remitted. If
the Contractholder does not remit premiums prior to the end of the grace
period, the Group Contract will terminate. However, the Individual Insurance
will continue following the Group Contract's termination, provided such
insurance is not surrendered or cancelled by the Owner. (See "Policy Rights and
Privileges--Eligibility Change Conversion," page 25.)
TERMINATION
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, the Company may end a Group
Contract or any of its provisions on 31 days notice. If the Group Contract
terminates, any Policies in effect will remain in force on an individual basis,
unless such insurance is surrendered or cancelled by the Owner. New Policies
will be issued as described in "Policy Rights and Privileges--Eligibility
Change Conversion," page 25.
RIGHT TO EXAMINE GROUP CONTRACT
The Contractholder may terminate the Group Contract within 20 days after
receiving it, within 45 days after the application was signed or within 10 days
of mailing a notice of the cancellation right, whichever is latest. To cancel
the Group Contract, the Contractholder should mail or deliver the Group
Contract to the Company.
ENTIRE CONTRACT
The Group Contract, with the attached copy of the Contractholder's
application and other attached papers, if any, is the entire contract between
the Contractholder and the Company. All statements made by the Contractholder,
any Owner or any Insured will be deemed representations and not warranties.
Misstatements will not be used in any contest or to reduce claim under the
Group Contract, unless it is in writing. A copy of the application containing
such misstatement must have been given to the Contractholder or to the Insured
or to his Beneficiary, if any.
INCONTESTABILITY
The Company cannot contest the Group Contract after it has been in force for
two years from the date of issue.
OWNERSHIP OF GROUP CONTRACT
The Contractholder owns the Group Contract. The Group Contract may be changed
or ended by agreement between the Company and the Contractholder without the
consent of, or notice to, any person claiming rights or benefits under the
Group Contract. However, the Contractholder does not have any ownership
interest in the Policies issued under the Group Contract. The rights and
benefits under the Policies inure to the benefit of the Owners, Insureds, and
Beneficiaries as set forth herein and in the Policies.
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FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is limited.
The Company nonetheless believes (largely in reliance on IRS Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that the
Policy should meet the Section 7702 definition of a life insurance contract. If
a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy. Therefore, if it is subsequently
determined that a Policy does not satisfy section 7702, the Company will take
whatever steps are appropriate and necessary to attempt to cause such Policy to
comply with section 7702, including possibly refunding any premiums paid that
exceed the limitations allowable under section 7702 (together with interest or
other earnings on any such premiums refunded as required by law). For these
reasons, the Company reserves the right to modify the Policy as necessary to
attempt to qualify it as a life insurance contract under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated as
a life insurance contract for Federal tax purposes. Although the Company does
not control the Fund or its investments, the Fund has represented that it
intends to comply with the diversification requirements prescribed by the
Treasury in Reg. section 1.817-5. Thus, the Company believes that each Division
of the Separate Account, through the Fund, will be in compliance with the
requirements prescribed by the Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
significant guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company does not know what standards will be set forth, if
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any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being considered the owner of
a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. As a life insurance contract, the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101(a)(1) of the Code.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, a conversion to a fixed policy, an exchange, a Policy loan, an
unscheduled premium payment, a Policy lapse with an outstanding loan, a partial
withdrawal, a surrender, or an assignment of the Policy may have Federal income
tax consequences depending on the circumstances. In addition, Federal estate
and state and local estate, inheritance, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy owner or Beneficiary. A competent tax adviser should be consulted for
further information.
The Federal income tax consequences associated with (i) adding the
Accelerated Death Benefit Settlement Option Rider (the "Rider") or (ii)
receiving the benefits provided under the Rider are uncertain. Accordingly, we
urge you to consult a tax adviser before adding the Rider to your Policy or
requesting a benefit under such Rider.
The Policies may be used in various arrangements, such as nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract". Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
2. POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. In general, a Policy
will be a modified endowment contract if the accumulated premiums paid at any
time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. Further, a Policy that is not otherwise a modified endowment contract
may become a modified endowment contract if it is "materially changed." The
determination whether a Policy will be a modified endowment contract after a
material change generally depends upon the relationship of the death benefit
and the cash value at the time of such change and the additional premiums paid
in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a modified endowment
contract are extremely complex. Therefore, a current or prospective Policy
owner is
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strongly advised to retain and consult with a competent advisor before
purchasing a Policy, making an unscheduled premium payment on an existing
Policy or making any change in an existing Policy, to determine whether the
Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified endowment
contract. Although the Company cannot provide complete assurance at this time
that a Policy will not inadvertently become a modified endowment contract, it
is continuing its efforts to enhance its administrative systems to
automatically monitor potential modified endowment classifications.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the cash value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from, or secured by,
such a Policy (as well as due but unpaid interest that is added to the loan
amount) are treated as distributions from such a Policy and taxed accordingly.
Third, a 10 percent additional income tax is imposed on the portion of any
distribution from, or loan taken from or secured by, such a Policy that is
included in income except where the distributions or loan is made on or after
the Policy owner attains age 59 1/2, is attributable to the Policy owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Policy owner or the joint
lives (or joint life expectancies) of the Policy owner and the Policy owner's
Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that
a distribution from a Policy that is not a modified endowment contract could
later become taxable as a distribution from a modified endowment contract.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's death benefit (e.g., partial withdrawal or a
change from Option B to Option A) or any other change that reduces benefits
under the Policy in the first 15-years after the Policy is issued and that
results in a cash distribution to the Policy owner in order for the Policy to
continue complying with the section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a modified endowment contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional income tax.
5. POLICY LOAN INTEREST. If there is any borrowing against a Policy, the
interest paid on the loan may not be tax deductible. A Policyowner should
consult a qualified tax adviser before deducting interest on a policy loan.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Policy owner (except that the amount of any loan from, or secured by, a
Policy that is a modified endowment contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a modified endowment contract to the
extent that such amount is included in the gross income of the Owner.
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7. MULTIPLE POLICIES. All modified endowment contracts that are issued by the
Company (or its affiliates) to the same Policy owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be
properly attributable to the Separate Account or to the Policies.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases and redemptions of the
Series' shares by each of the Divisions. Additional protection for the assets
of the Separate Account is afforded by a blanket fidelity bond issued by
Reliance Insurance Company in the amount of $5 million, covering all officers
and employees of the Company who have access to the assets of the Separate
Account.
VOTING RIGHTS
To the extent required by law, the Company will vote the shares of the Fund
held in the Separate Account at regular and special shareholder meetings of the
Fund in accordance with instructions received from persons having voting
interests in the corresponding Divisions of the Separate Account. If, however,
the 1940 Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result the Company determines
that it is permitted to vote shares of the Fund in its own right, it may elect
to do so.
The Owners of Policies ordinarily are the persons having a voting interest in
the Divisions of the Separate Account. The number of votes which an Owner has
the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Portfolio in which the Division invests. Fractional
shares will be counted. The number of votes of the Portfolio which the Owner
has right to instruct will be determined as of the date coincident with the
date established by that Portfolio for determining shareholders eligible to
vote at the meeting of the Fund. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the Fund.
Because the Portfolios of the Fund serve as investment vehicles for this
Policy as well as for other variable life insurance policies sold by insurers
other than the Company and funded through other separate investment accounts,
persons owning the other policies will enjoy similar voting rights. The Company
will vote Portfolio shares held in the Separate Account for which no timely
voting instructions are received and Portfolio shares that it owns as a
consequence of accrued charges under the Policies, in proportion to the voting
instructions which are received with respect to all Policies participating in a
Portfolio. Each person having a voting interest in a Division will receive
proxy material, reports, and other materials relating to the appropriate
Portfolio.
Disregard of Voting Instructions. The Company may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of or one or more of the Portfolios
or to approve or disapprove an investment advisory contract for the Portfolio.
In addition, the Company itself may disregard
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voting instructions in favor of changes initiated by an Owner in the investment
policy or by the investment adviser or sub-adviser of the Portfolio or the Fund
if the Company reasonably disapproves of such changes. A proposed change would
be disapproved only if the proposed change is contrary to state law or
prohibited by state regulatory authorities, or the Company determined that the
change would have an adverse effect on its general assets in that the proposed
investment policy for a Portfolio may result in overly speculative or unsound
investments. In the event the Company does disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of the Company and the
Separate Account and certifies their adequacy, and a full examination of the
Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
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MANAGEMENT OF THE COMPANY
NAME PRINCIPAL OCCUPATION(S)
DURING PAST FIVE YEARS*
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since June,
1986, and Vice President, New Ventures, since June
1986, General American Life Insurance Co., St.
Louis, Mo. (GenAm).
Steven D. Anderson Vice President and Chief Financial Officer since
December, 1993. Formerly, Assistant Vice President
and Chief Financial Officer August, 1990-December,
1993
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actuary
General American Life and Treasurer, GenAm since October, 1994. Executive
Insurance Company 700 Vice President--Group Pensions, GenAm January,
Market Street St. 1990-October, 1994.
Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984.
General American Life Secretary since February, 1991. Associate General
Insurance Company 700 Counsel, GenAm, since August, 1984.
Market Street St.
Louis, MO 63101
Craig K. Nordyke@ Vice President and Chief Actuary since August,
1990. Formerly, Second Vice President and Chief
Actuary, May, 1987-August, 1990.
George E. Phillips Vice President--Operations and System Development
since January, 1995. Formerly, Senior Vice
President, Fortis, Inc. July, 1991-August, 1994.
Vice President, Mutual Benefit prior to July, 1991.
DIRECTORS***
Richard A. Liddy President and Chief Executive Officer GenAm, since
May, 1992. President and Chief Operating Officer,
GenAm, May, 1988-May, 1992.
Leonard M. Rubenstein Executive Vice President--Investments, GenAm, since
February, 1991. Vice President and Treasurer, Secu-
rities, GenAm, November, 1984-February, 1991.
Warren J. Winer Executive Vice President--Group, GenAm, since Sep-
tember, 1995. Formerly, Managing Director, Wm. M.
Mercer, July, 1993-August, 1995; President, W. F.
Corroon, September, 1990-July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
November, 1991. Vice President--Life Product Man-
agement, GenAm, May, 1989-November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc.,
since May, 1993. Formerly, Executive Vice
President--Reinsurance, GenAm, since January, 1990.
- --------
*All positions listed are with the Company unless otherwise indicated.
**The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
***The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring--Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
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LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws applicable
to the issue and sale of the Policies. All matters of Missouri law pertaining
to the Policies, including the validity of the Policies and the Company's right
to issue the Policies and the Group Contract under Missouri insurance law, and
all legal matters relating to the Parent Company's resolution concerning
policies issued by Paragon have been passed upon by Matthew P. McCauley,
Esquire, General Counsel of Paragon Life Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The financial statements of the Company and the Separate Account included in
this Prospectus have been so included in reliance on the reports of KPMG Peat
Marwick LLP, independent certified public accountants, and on the authority of
said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements and
schedules of the Company contains an explanatory paragraph which states that
the financial statements are presented in conformity with accounting practices
prescribed or permitted by the State of Missouri Department of Insurance. These
practices differ in some respects from generally accepted accounting
principles. The financial statements do not include any adjustments that might
result from the differences.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Vice President and Chief Actuary of the Company, as stated
in the opinion filed as an exhibit to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, the Company and the Policy offered
hereby. Statements contained in this Prospectus as to the contents of the
Policy and other legal instruments are summaries. For a complete statement of
the terms thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this Prospectus
should be distinguished from the financial statements for the Separate Account
Divisions included in this Prospectus, and 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.
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LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital and surplus of Paragon Life Insurance Company as of
December 31, 1995 and 1994, and related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three-year
period ended December 31, 1995. These statutory financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statutory financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 2, the accompanying financial statements have been
prepared in conformity with accounting practices prescribed or permitted by the
State of Missouri Department of Insurance. These practices differ in some
respects from generally accepted accounting principles. Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations,
and cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
and surplus of Paragon Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flow for each of the years in
the three-year period ended December 31, 1995, on the basis of accounting
described in note 2.
KPMG Peat Marwick LLP
February 16, 1996
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES:
Cash received:
Premiums and considerations....................... $36,612 29,478 20,416
Allowances and reserve adjustments on reinsurance
ceded............................................ 99 125 127
Investment income received, net of related
expenses......................................... 4,252 3,697 2,825
Other income...................................... 347 75 --
------- ------ ------
Total cash received from operating activities... 41,310 33,375 23,368
------- ------ ------
Total benefits, operating charges paid and
transfers:
Life and other benefits paid...................... 9,315 7,627 3,583
Operating charges--commissions, other expenses and
taxes (excluding Federal income tax)............. 7,678 6,319 5,850
Federal income taxes received..................... (93) (121) (697)
Net transfers to separate account................. 14,296 10,247 5,972
------- ------ ------
Total benefits, operating charges paid and
transfers...................................... 31,196 24,072 14,708
------- ------ ------
Net increase in policy loans........................ 1,308 1,438 1,178
------- ------ ------
Net cash provided from operating activities........... 8,806 7,865 7,482
Proceeds from investments sold, matured or repaid--
bonds................................................ 3,082 4,566 8,702
Other cash provided................................... 729 707 363
------- ------ ------
Total cash provided............................. 12,617 13,138 16,547
------- ------ ------
Cost of investments acquired--bonds................... 8,462 11,613 25,447
Other cash applied.................................... 141 50 47
------- ------ ------
Total cash applied.............................. 8,603 11,663 25,494
------- ------ ------
Net increase (decrease) in cash and short term
investments.......................................... 4,014 1,475 (8,947)
Cash and short-term investments:
Beginning of year................................... 3,042 1,567 10,514
------- ------ ------
End of Year......................................... $ 7,056 3,042 1,567
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS,
LIABILITIES, AND CAPITAL AND SURPLUS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
ADMITTED ASSETS
Bonds, at amortized cost (deposited with regulatory authori-
ties, $3,868 and $2,866 in 1995 and 1994)................... $ 56,458 51,077
Policy loans................................................. 7,206 5,418
Cash and short-term investments.............................. 7,056 3,042
Amounts recoverable from reinsurers.......................... 1,183 1,497
Investment income due and accrued............................ 1,041 885
Other assets................................................. 221 161
Separate account assets...................................... 50,194 27,311
-------- ------
Total admitted assets.................................. $123,359 89,391
======== ======
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy reserves--life contracts............................ 57,618 46,661
Policy reserves--without life contingencies................ 399 389
Policy claim liabilities................................... 1,096 709
Amounts due to reinsurers.................................. 833 648
Accrued expenses, commissions, taxes, licenses & fees...... 870 700
Asset valuation reserve.................................... 336 238
Interest maintenance reserve............................... 117 132
Due to parent.............................................. 945 628
Other liabilities.......................................... 858 726
Separate account liabilities............................... 49,509 26,739
-------- ------
Total liabilities...................................... 112,581 77,570
-------- ------
COMMITMENTS AND CONTINGENCIES
Capital and Surplus:
Capital stock--par value of $100 per share; 100,000 shares
authorized; 20,500 shares issued and outstanding.......... 2,050 2,050
Surplus:
Additional paid-in....................................... 17,950 17,950
Unassigned surplus....................................... (9,907) (8,751)
Assigned surplus--separate accounts...................... 685 572
-------- ------
Total capital and surplus.............................. 10,778 11,821
-------- ------
Total liabilities and capital and surplus.............. $123,359 89,391
======== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS, CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Income:
Premiums and considerations......................... $36,612 29,478 20,416
Net investment income............................... 4,905 4,132 3,519
Expense allowances on reinsurance ceded............. 94 130 123
Other income........................................ 461 317 227
------- ------ ------
Total income...................................... 42,072 34,057 24,285
Policy obligations, expenses and net transfers:
Policyholder benefits............................... 10,011 6,243 3,818
Increase in policy reserves--life contracts......... 10,957 11,705 9,481
Increase in policy reserves--without life contingen-
cies............................................... 10 35 354
------- ------ ------
Total policy obligations.......................... 20,978 17,983 13,653
General insurance expenses.......................... 5,996 5,084 4,341
Commissions......................................... 523 491 715
Insurance taxes, licenses and fees.................. 1,329 1,093 697
------- ------ ------
Total expenses.................................... 7,848 6,668 5,753
------- ------ ------
Net transfers to separate account................... 14,283 10,464 5,972
------- ------ ------
Loss before Federal income tax benefit and real-
ized capital gains............................... (1,037) (1,058) (1,093)
Federal income tax benefit............................ (117) (108) (180)
------- ------ ------
Loss before realized capital gains................ (920) (950) (913)
Realized capital gains, net of tax and transfer to
IMR.................................................. -- -- 6
------- ------ ------
Net loss.......................................... (920) (950) (907)
Other changes in capital and surplus:
Increase in asset valuation reserve................. (98) (94) (74)
(Increase) Decrease in non-admitted assets.......... (25) 74 193
------- ------ ------
Total other changes in capital and surplus........ (123) (20) 119
------- ------ ------
Decrease in capital and surplus................... (1,043) (970) (788)
Capital and Surplus:
Beginning of year................................... 11,821 12,791 13,579
------- ------ ------
End of year......................................... $10,778 11,821 12,791
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) AFFILIATION AND GUARANTEE AGREEMENT
Paragon Life Insurance Company (Paragon) is a wholly-owned subsidiary of
General American Life Insurance Company (General American) established for the
purpose of marketing life insurance products through the sponsorship of major
companies and organizations. Paragon is licensed to do business in the District
of Columbia and in all states except New York.
General American has guaranteed that Paragon will have sufficient funds to
meet all of its contractual obligations. In the event a policyholder presents a
legitimate claim for payment on a Paragon insurance policy, General American
will pay such claim directly to the policyholder if Paragon is unable to make
such payment. The guarantee agreement is binding on General American, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than General American's rating.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying statutory financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Missouri
Department of Insurance, which vary in some respects from generally accepted
accounting principles (GAAP). The preparation of statutory financial statements
requires management to make estimates and assumptions which affect the reported
amounts within the statutory financial statements. Actual results could differ
from the estimated amounts. The significant statutory accounting practices and
the related differences from GAAP are as follows:
(a) Premiums on variable universal life and investment contracts under
statutory accounting practices are considered revenue when received;
whereas under GAAP, revenues for universal life and investment products
consist of policy fees that have been assessed against the account balances
for the cost of insurance, policy administration, and surrender charges.
Acquisition expenses, including commissions and other costs related to
acquiring new business, are charged to operations as incurred rather than
being deferred and amortized in relation to gross profits as required by
GAAP.
(b) Bonds are valued as prescribed by the National Association of
Insurance Commissioners (NAIC) and market values are stated at independent
dealer prices. Bonds are carried at amortized cost except for those bonds
required to be carried at values other than amortized cost in accordance
with NAIC guidelines. Accounting for bonds under GAAP would require the
bonds to be carried at amortized cost or market value depending on the
company's intent and ability to hold such investments. The Company
generally intends to hold bonds until maturity. Policy loans are stated at
their net unpaid balance.
(c) Policy reserves are based on statutory mortality and interest
assumptions without consideration for withdrawals. Policy reserves are
computed under the Commissioners Reserve Valuation Method using 5.5%
interest for policies issued from 1986 to 1993, 5.0% interest for policies
issued in 1994 and 4.5% interest for policies issued in 1995. Mortality
assumptions are based upon the 1980 Commissioners Standard Ordinary table.
These reserves differ from reserves based on account values that accrue to
policyholders on universal-life and investment product contracts under
GAAP.
(d) Federal income taxes are charged to operations based on income that
is currently taxable. Deferred income taxes are not provided for the tax
effect of temporary differences between the book and tax basis of assets
and liabilities.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(e) Certain assets designated as non-admitted assets (principally
furniture and equipment and computer software) have been excluded from
assets by a direct charge to surplus.
(f) An asset valuation reserve (AVR), which is a reserve for possible
losses on investments, is recorded as a liability by a direct charge to
surplus in accordance with statutory accounting practices; under GAAP, the
AVR is not maintained.
(g) Certain capital gains and losses on investment sales that resulted
from changes in the level of interest rates are deferred and recorded in an
interest maintenance reserve (IMR), net of related income taxes. The IMR
liability will be amortized into operating income over the approximate
remaining lives of the respective investments sold. Realized gains and
losses from the sale or decrease in valuation basis due to change in credit
quality of invested assets are presented separately from operating income,
net of applicable income taxes. Under GAAP, realized gains and losses from
the sale of investments are recognized currently as a component of pre-tax
income.
(h) Separate account assets and liabilities represent segregated funds
administered and invested by Paragon for the exclusive benefit of variable
life insurance contract holders. Paragon receives administrative fees for
services rendered on behalf of the separate account policyholders. The
amount of the asset balance in excess of liabilities of $685,415 and
$572,334 at December 31, 1995 and 1994, respectively, represents policy
surrender charges which are permitted to be recorded to surplus under
statutory accounting practices. Such amounts are designated as Assigned
Surplus--Separate Accounts in the accompanying balance sheet. Under GAAP,
the amount would be reported as a liability to the separate account
policyholder.
(i) Reinsurance recoverable on unpaid policy claims is netted against the
applicable policyholder liability. Under GAAP, the amount would be reported
as an asset and the policy claim liability would be shown before the
effects of reinsurance.
(3) FEDERAL INCOME TAX
Paragon files a consolidated federal income tax return with General American
which includes the operations of General American and its subsidiaries. In
accordance with a tax allocation agreement between Paragon and General
American, taxes are computed as if Paragon was filing its own income tax
return, and tax expense (benefit) is paid to, or received from, General
American. Paragon recognizes a tax benefit to the extent that its tax losses
are utilized by other members of the General American consolidated tax group.
The current tax law requires life insurance companies to recompute certain
policy reserves for tax purposes and capitalize a percentage of premiums
attributed to acquisition expenses.
Federal income tax expense (benefit) differs from that computed based on the
federal statutory tax rate of 35 percent. The reasons for these differences are
as follows (000's):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit on pretax
loss................................... $(363) (35)% $(370) (35)% $(382) (35)%
Capitalization of acquisition expenses.. 298 29 214 20 168 16
Recomputed policy tax reserves.......... (34) (3) 18 2 31 3
Other................................... (18) (2) 30 3 3 --
----- --- ----- --- ----- ---
</TABLE>
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(4) TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
Paragon purchases certain administrative services from General American.
Charges for services performed are based upon personnel and other costs
involved in providing such service. Charges for services during 1995, 1994 and
1993 were $1,103,028, $651,472 and $597,120, respectively.
Paragon has a risk retention limit of $50,000 on any one life. Amounts over
the risk retention limit are ceded to an affiliate of General American on
either a coinsurance or yearly renewable term basis at rates commensurate with
those which could be obtained from unrelated companies. Premiums ceded in 1995,
1994 and 1993 totaled $9,126,245, $7,135,943 and $5,492,871, respectively, and
represented 99.9% of total premiums ceded in 1995 and 1994 and 95.9% of total
premiums ceded in 1993. Reserve credits taken by Paragon at December 31, 1995
and 1994 were $5,760,070 and $5,604,548, respectively. Amounts due from
reinsurance on paid and unpaid policyholder benefits at December 31, 1995 and
1994 were $3,155,457 and $2,066,748, respectively.
The Company had $3,342,742 and $2,748,885 on deposit with General American at
December 31, 1995 and 1994, respectively. The funds were readily convertible to
cash and earn interest at short-term money market rates.
(5) INVESTMENT SECURITIES
At December 31, 1995, Paragon had $56.5 million invested in bonds; $44.0
million were rated Highest Quality, $12.2 million were High Quality and $ .3
million were Low Quality using the NAIC designation definitions.
The amortized cost and market values of investments in bonds at December 31,
1995 and 1994 are as follows (000's):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1995
US treasury securities................. $ 4,608 281 (1) 4,888
US government agency obligations....... 4,920 173 -- 5,093
Corporate securities................... 42,842 2,842 (438) 45,246
Mortgage backed securities............. 4,088 203 -- 4,291
------- ----- ------ ------
$56,458 3,499 (439) 59,518
======= ===== ====== ======
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1994
US treasury securities................. $ 3,606 24 (87) 3,543
US government agency obligations....... 5,123 24 (253) 4,894
Corporate securities................... 38,027 103 (3,029) 35,101
Mortgage backed securities............. 4,321 17 (325) 4,013
------- ----- ------ ------
$51,077 168 (3,694) 47,551
======= ===== ====== ======
</TABLE>
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Contractual maturities may differ from expected maturities because borrowers
may have the right to call or prepay the obligation with or without call or
prepayment penalties. The amortized cost and market value of investments in
bonds, listed by contractual maturity, at December 31, 1995 are as follows
(000's):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C> <C>
Due in one year or less............................. $ 593 585
Due after one year through five years............... 7,388 7,748
Due after five years through ten years.............. 18,521 19,471
Due after five years through ten years.............. 20,948 22,330
------- ------
47,450 50,134
Mortgage-backed securities (including US government
agency obligations)................................ 9,008 9,384
------- ------ ---
$56,458 59,518
======= ======
</TABLE>
Major categories of net investment income for the years ended December 31,
1995, 1994 and 1993 consist of the following (000's):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Bonds............................................. $4,040 $3,685 $3,229
Policy loans...................................... 480 347 221
Short term investments............................ 407 113 103
------ ------ ------
Total investment income........................... 4,927 4,145 3,553
IMR amortization.................................. 17 15 6
Investment expenses............................... (39) (28) (40)
------ ------ ------
Net investment income............................. $4,905 $4,132 $3,519
====== ====== ======
</TABLE>
Proceeds from sales of investments in bonds during 1995, 1994 and 1993 were
$3,082,387, $4,565,799 and $8,701,679, respectively. Gross gains realized on
sales during 1995 were $1,338 of which $870 of total net gains were transferred
to the interest maintenance reserve, net of taxes of $468. Gross gains realized
on sales during 1994 were $44,095 of which $28,662 of total net gains were
transferred to the interest maintenance reserve, net of taxes of $15,433. Gross
gains realized on sales during 1993 and gross losses were $174,988 and $829 of
which $165,069 of net gains were transferred to the Interest Maintenance
Reserve, net of taxes of $57,774. At December 31, 1995, the Company had 16
investment securities totaling $16,924,493, rated either the highest quality or
high quality using the NAIC definitions, that individually exceeded 10% of
statutory capital and surplus.
(6) BENEFIT PLANS AND POSTRETIREMENT BENEFITS
Associates of Paragon participate in a non-contributory multi-employer
defined benefit pension plan jointly sponsored by Paragon and General American.
The benefits are based on years of service and compensation level. No pension
expense was recognized in 1995, 1994 or 1993 due to overfunding of the plan.
In addition, Paragon has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by General American and are based on
salaries of eligible associates. Full vesting occurs after five years of
continuous service. Total expense to the Company for the incentive plan were
$149,747, $37,533 and $101,398 for 1995, 1994 and 1993, respectively.
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Paragon provides for certain health care and life insurance benefits for
retired employees in accordance with Statement of Financial Accounting
Standards Number 106--Employer's Accounting for Postretirement Benefits Other
Than Pensions (SFAS No. 106). SFAS No. 106 requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services.
SFAS No. 106 allows recognition of the cumulative effect of the liability in
the year of the adoption or the amortization of the transition obligation over
a period of up to 20 years. The Company has elected to recognize the initial
post-retirement benefit obligation of approximately $72, 684 over a period of
20 years. The unrecognized initial post retirement benefit obligation was
approximately $61,782 and $65,416 at December 31, 1995 and 1994, respectively.
Net periodic post-retirement benefit cost for the years ended December 31,
1995, 1994 and 1993 were approximately $35,000, $26,000, and $40,000,
respectively. This includes expected costs of benefits for newly eligible or
vested employees, interest costs, gains and losses from differences between
actuarial and actual experience, and amortization of the initial post-
retirement benefit obligation. The accumulated post-retirement benefit
obligation was approximately $118,000, and $86,000 at December 31, 1995 and
1994. The discount rate used in determining the accumulated post-retirement
benefit obligation was 8.25 percent. The health care cost trend rates were ten
percent for the Indemnity Plan, nine percent for the HMO Plan, and ten percent
for the Dental Plan. These rates were graded to six percent over the next 14
years. A one percentage point increase in the assumed health care cost trend
rates would increase the December 31, 1995 accumulated post-retirement
obligation by 11 percent, and the estimated service cost and interest cost
components of the net periodic post-retirement benefit cost for 1995 by 13.8
percent.
(7) LEASE COMMITMENT
In 1991 Paragon entered into a five year operating lease for home office
space. During 1995, Paragon renewed the operating lease for its home office
space for an additional five year period.
Annual lease obligations for years subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................... $ 288,419
1997........................................................... 368,993
1998........................................................... 390,870
1999........................................................... 390,870
2000........................................................... 390,870
2001........................................................... 97,718
----------
$1,927,740
==========
</TABLE>
Total rental expense during 1995, 1994 and 1993 was $256,631, $239,967 and
$194,234, respectively.
(8) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's
domiciliary state of Missouri impose risk-based capital (RBC) requirements on
insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or activity
levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory
intervention is required based on the ratio of a Company's actual total
adjusted capital (sum of capital and surplus and asset valuation reserve) to
control levels determined by the RBC formula. At December 31, 1995, the
Company's actual total adjusted capital was in excess of minimum requirements
which would cause company action under the RBC formula.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(9) DIVIDEND RESTRICTIONS
Dividend payments by Paragon are restricted by state insurance laws as to the
amount that may be paid without prior notice or approval of the Missouri
Department of Insurance. The maximum amount of dividends which can be paid
without prior approval of the insurance commissioner is limited to the maximum
of (1) 10% of statutory surplus or (2) net gain from operations. The maximum
dividend distribution that can be paid by Paragon during 1996 without prior
notice or approval is $804,291. Paragon did not pay dividends in 1995, 1994 or
1993.
F-10
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company and
Policyholders of Separate Account B:
We have audited the accompanying statements of net assets, including the
schedule of investments, of the Money Market, High Yield, Equity, Strategist,
Quality Income Plus, Dividend Growth, Utilities, Capital Growth, European,
Pacific Growth, and Global Dividend Growth Divisions of Paragon Separate
Account B as of December 31, 1995, and related statements of operations and
changes in net assets for the period September 1, 1995 (Inception) to December
31, 1995. These financial statements are the responsibility of Paragon
Separate Account B's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at December 31, 1995 by
correspondence with the Dean Witter Variable Investment Series. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Money Market, High Yield,
Equity, Strategist, Quality Income Plus, Dividend Growth, Utilities, Capital
Growth, European, Pacific Growth, and Global Dividend Growth Divisions of
Paragon Separate Account B as of December 31, 1995, and the results of their
operations and changes in their net assets for the period September 1, 1995
(Inception) to DecemberSYMBOL 95 \f "Symbol"31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
February 16, 1996
F-11
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
QUALITY GLOBAL
MONEY HIGH INCOME DIVIDED CAPITAL PACIFIC DIVIDEND
MARKET YEILD EQUITY STRATEGIST PLUS GROWTH UTILITIES GROWTH EUROPEAN GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- ---------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS:
Investments in
Dean Witter In-
vestments, at
Market Value
(See Schedule of
Investments).... $54,214 45,977 139,495 30,694 15,502 465,209 24,794 95,408 106,781 345,162 244,019
------- ------ ------- ------ ------ ------- ------ ------ ------- ------- -------
Receivable from
Paragon Life In-
surance Company. 1,233 2,725 9,507 2,015 620 21,818 1,117 4,530 6,980 22,388 12,256
------- ------ ------- ------ ------ ------- ------ ------ ------- ------- -------
Total Net As-
sets........... 55,447 48,702 149,002 32,709 16,122 487,027 25,911 99,938 113,761 367,550 256,275
======= ====== ======= ====== ====== ======= ====== ====== ======= ======= =======
TOTAL NET ASSETS
REPRESENTED BY:
Group Variable
Universal Life
Cash Value In-
vested in Sepa-
rate Account... 55,447 48,702 149,002 32,709 16,122 487,027 25,911 99,938 113,761 367,550 256,275
------- ------ ------- ------ ------ ------- ------ ------ ------- ------- -------
$55,447 48,702 149,002 32,709 16,122 487,027 25,911 99,938 113,761 367,550 256,275
======= ====== ======= ====== ====== ======= ====== ====== ======= ======= =======
Total Units Held. 54,643 7,513 5,490 2,601 1,446 31,091 1,749 6,584 6,508 38,007 21,903
Net Asset Value
Per Unit........ $ 1.01 6.48 27.14 12.57 11.14 15.66 14.81 15.17 17.48 9.67 11.70
Cost of Invest-
ments........... 53,395 44,784 130,180 29,608 14,629 429,045 22,732 86,329 102,675 339,933 231,292
======= ====== ======= ====== ====== ======= ====== ====== ======= ======= =======
</TABLE>
See Accompanying Notes to Financial Statements.
F-12
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 1, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
QUALITY GLOBAL
MONEY HIGH INCOME DIVIDEND CAPITAL PACIFIC DIVIDEND
MARKET YIELD EQUITY STRATEGIST PLUS GROWTH UTILITIES GROWTH EUROPEAN GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVIDEND DIVISION
-------- -------- -------- ---------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET REALIZED GAIN
(LOSS) FROM SALES
OF INVESTMENTS:
Proceeds from
Sales............ $17,805 4,027 11,006 2,402 1,714 38,908 2,172 6,014 8,663 162,949 23,655
Cost of Invest-
ments Sold....... 17,719 3,988 10,567 2,365 1,695 37,057 2,080 5,696 8,480 164,622 23,538
------- ----- ------ ----- ----- ------ ----- ----- ----- ------- ------
Net Realized
Gain (Loss) from
Sales of
Investments..... 86 39 439 37 19 1,851 92 318 183 (1,673) 117
Net Unrealized
Gain on Invest-
ments:........... 819 1,193 9,315 1,086 873 36,164 2,062 9,079 4,106 5,229 12,727
------- ----- ------ ----- ----- ------ ----- ----- ----- ------- ------
Net Gain (Loss)
on Investments.. 905 1,232 9,754 1,123 892 38,015 2,154 9,397 4,289 3,556 12,844
EXPENSES:
Mortality and
Expense Charge.. (150) (96) (336) (73) (39) (1,145) (62) (235) (253) (820) (615)
------- ----- ------ ----- ----- ------ ----- ----- ----- ------- ------
Increase in As-
sets Resulting
from Operations.. $ 755 1,136 9,418 1,050 853 36,870 2,092 9,162 4,036 2,736 12,229
======= ===== ====== ===== ===== ====== ===== ===== ===== ======= ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-13
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF NET ASSETS
FOR THE PERIOD FROM SEPTEMBER 1, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
QUALITY GLOBAL
MONEY HIGH INCOME DIVIDEND CAPITAL PACIFIC DIVIDEND
MARKET YIELD EQUITY STRATEGIST PLUS GROWTH UTILITIES GROWTH EUROPEAN GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- ---------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net Realized Gain
(Loss) on Invest-
ments............ $ 86 39 439 37 19 1,851 92 318 183 (1,673) 117
Net Unrealized
Gain on Invest-
ments............ 819 1,193 9,315 1,086 873 36,164 2,062 9,079 4,106 5,229 12,727
Mortality and Ex-
pense Charge..... (150) (96) (336) (73) (39) (1,145) (62) (235) (253) (820) (615)
------- ------ ------- ------ ------ ------- ------ ------ ------- ------- -------
Increase in Net
Assets Resulting
from Operations. 755 1,136 9,418 1,050 853 36,870 2,092 9,162 4,036 2,736 12,229
Net Deposits
into Separate
Account......... 54,692 47,566 139,584 31,659 15,269 450,157 23,819 90,776 109,725 364,814 244,046
------- ------ ------- ------ ------ ------- ------ ------ ------- ------- -------
Net Assets, End
of Year.......... $55,447 48,702 149,002 32,709 16,122 487,027 25,911 99,938 113,761 367,550 256,275
======= ====== ======= ====== ====== ======= ====== ====== ======= ======= =======
</TABLE>
See Accompanying Notes to Financial Statements.
F-14
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) ORGANIZATION
Paragon Life Insurance Company (Paragon) established Paragon Separate Account
B on January 4, 1993. Paragon Separate Account B (the Separate Account)
commenced operations on March 3, 1994 and is registered under the Investment
Company Act of 1940 as a unit investment trust. The Separate Account receives
and invests net premiums for flexible premium group variable life insurance
policies that are issued by Paragon. The Separate Account is divided into
divisions, six of which invests exclusively in shares of a single fund of Dean
Witter Variable Investment Series, an open-end, diversified management
investment company. These funds are the Money Market Portfolio, High Yield
Portfolio, Equity Portfolio, Strategic Portfolio, Quality Income Plus
Portfolio, Dividend Growth Portfolio, Utilities Portfolio, Capital Growth
Portfolio, European Portfolio, Pacific Growth Portfolio and Global Dividend
Growth Portfolio (the Funds). Policyholders have the option of directing their
premium payments into any or all of the Funds.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Separate Account in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
Investments
The Separate Account's investments in the Funds of Dean Witter are valued
daily based on the net asset values of the respective fund shares held. The
average cost method is used in determining the cost of shares sold on
withdrawals by the Separate Account. Share transactions are recorded consistent
with trade date accounting. Dividends are recorded on the ex-dividend date and
are immediately reinvested.
Federal Income Taxes
The operations of the Separate Account are treated as part of Paragon for
income tax purposes. Under existing Federal income tax law, capital gains from
sales of investments of the Separate Account are not taxable. Therefore, no
Federal income tax has been provided.
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions with respect to amounts reported in the financial statements.
Actual results could differ from those estimates.
(3) POLICY CHARGES
Charges are deducted from the policies and the Separate Account to compensate
Paragon for providing the insurance benefits set forth in the contracts and any
additional benefits added by rider, administering the policies, incurring
expenses in distributing the policies, and assuming certain risks in connection
with the policy.
Premium Expense Charge
Certain policies include a provision that premium payments may be reduced by
a premium expense charge. The premium expense charge is determined by the costs
associated with distributing the policy and, if applicable, is equal to 1% of
the premium paid. The premium expense charge compensates Paragon for providing
the insurance benefits set forth in the policies, incurring expenses of
distributing the policies, and
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
assuming certain risks in connection with the policies. In addition, some
polices have a premium tax assessment equal to 2% or 2.25% to reimburse Paragon
for premium taxes incurred. The premium payment less premium expense and
premium tax charges equals the net premium that is invested in the underlying
separate account.
Monthly Expense Charge
Paragon has responsibility for the administration of the policies and the
Separate Account. As reimbursement for expenses related to the acquisition and
maintenance of each policy and the Separate Account, Paragon assesses a monthly
administration charge to each policy. This charge, which varies due to the size
of the group, has a maximum of $6.00 per month during the first 12 policy
months and $3.50 per month thereafter.
Cost of Insurance
The cost of insurance is deducted on each monthly anniversary for the
following policy month. Because the cost of insurance depends upon a number of
variables, the cost varies for each policy month. The cost of insurance is
determined separately for the initial face amount and for any subsequent
increase in face amount. Paragon determines the monthly cost of insurance
charge by multiplying the applicable cost of insurance rate or rates by the net
amount at risk for each policy month.
Optional Rider Benefits Charge
The monthly deduction charge for any additional benefits provided by rider.
Surrender or Contingent Deferred Sales Charge
During the first policy years, certain policies include a provision for a
charge upon surrender or lapse of the policy, a requested decrease in face
amount, or a partial withdrawal that causes the face amount to decrease. The
amount assessed under the policy terms, if any, depends upon the cost
associated with distributing the particular policies. The amount of any charge
depends on a number of factors, including whether the event is a full surrender
or lapse or only a decrease in face amount, the amount of premiums received by
Paragon, and the policy year in which the surrender or other event takes place.
Mortality and Expense Charge
In addition to the above contract charges against the operations of each
division, a daily charge is made for the mortality and expense risks assumed by
Paragon. Paragon deducts a daily charge from the Separate Account at the rate
of .0024547% of the net assets of each division of the Separate Account which
equals an annual rate of .90% of those net assets. The mortality risk assumed
by Paragon is that insureds may die sooner than anticipated and that,
therefore, Paragon will pay an aggregate amount of death benefits greater than
anticipated. The expense risk assumed is that expenses incurred in issuing and
administering the policy will exceed the amounts realized from the
administrative charges assessed against the policy.
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PURCHASES AND SALES OF DEAN WITTER INVESTMENT SHARES
During the period from September 1, 1995 (Inception) to December 31, 1995
purchases
and proceeds from the sales of the Dean Witter Investment Funds were as
follows:
<TABLE>
<CAPTION>
QUALITY GLOBAL
MONEY HIGH INCOME DIVIDEND CAPITAL PACIFIC DIVIDEND
MARKET YIELD EQUITY STRATEGIST PLUS GROWTH UTILITIES GROWTH EUROPEAN GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- ---------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $72,348 51,497 150,254 33,988 16,944 487,919 25,929 96,556 118,135 526,943 267,087
Sales........... 17,805 4,027 11,006 2,402 1,714 38,908 2,172 6,014 8,663 162,949 23,655
======= ====== ======= ====== ====== ======= ====== ====== ======= ======= =======
</TABLE>
NOTE 5--ACCUMULATION OF UNIT ACTIVITY
The following is a reconciliation of the accumulation of unit activity for
the year ended December 31, 1995:
<TABLE>
<CAPTION>
QUALITY GLOBAL
MONEY HIGH INCOME DIVIDEND CAPITAL PACIFIC DIVIDEND
MARKET YIELD EQUITY STRATEGIST PLUS GROWTH UTILITIES GROWTH EUROPEAN GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- ---------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in
Units
Deposits........ 72,218 8,127 5,832 2,787 1,600 33,423 1,892 6,956 6,958 55,224 23,897
Withdrawals..... 17,575 614 342 186 154 2,332 143 372 450 17,217 1,994
------ ----- ----- ----- ----- ------ ----- ----- ----- ------ ------
Outstanding
Units, End of
Year............. 54,643 7,513 5,490 2,601 1,446 31,091 1,749 6,584 6,508 38,007 21,903
====== ===== ===== ===== ===== ====== ===== ===== ===== ====== ======
</TABLE>
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--RECONCILIATION OF GROSS AND NET DEPOSITS INTO THE SEPARATE ACCOUNT
Deposits into the Separate Account purchase shares of Dean Witter Variable
Investment Series. Net deposits represent the amounts available for investment
in such shares after deduction of premium expense charges, monthly expense
charges, cost of insurance and the cost of optional benefits added by rider.
The following is a summary of net deposits made for the period from September
1, 1995 (Inception) to December 31, 1995.
<TABLE>
<CAPTION>
QUALITY GLOBAL
MONEY HIGH INCOME DIVIDEND CAPITAL PACIFIC DIVIDEND
MARKET YIELD EQUITY STRATEGIST PLUS GROWTH UTILITIES GROWTH EUROPEAN GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVIDEND DIVISION
--------- -------- -------- ---------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross De-
posits........... $ 249,685 55,614 168,322 36,192 18,156 558,538 30,663 108,827 130,327 428,807 302,605
Surrenders and
Withdrawals...... (4,940) -- -- -- -- (6,595) -- -- -- -- (6,400)
Transfers Between
Funds and General
Account.......... (144,845) (812) 119 670 (509) (17,568) (2,355) (817) (1,776) (1,833) (4,223)
--------- ------ ------- ------ ------ ------- ------ ------- ------- ------- -------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 99,900 54,802 168,441 36,862 17,647 534,375 28,308 108,010 128,551 426,974 291,982
DEDUCTIONS:
Premium Expense
Charges.......... 5,601 1,247 3,776 812 407 12,528 688 2,441 2,923 9,618 6,788
Monthly Expense
Charges.......... 712 135 559 100 45 1,612 282 331 356 1,179 927
Cost of Insurance
and Optional Ben-
efit............. 38,895 5,854 24,522 4,291 1,926 70,078 3,519 14,462 15,547 51,363 40,221
--------- ------ ------- ------ ------ ------- ------ ------- ------- ------- -------
Total Deduc-
tions........... 45,208 7,236 28,857 5,203 2,378 84,218 4,489 17,234 18,826 62,160 47,936
Net Deposits from
Policyholders.... $ 54,692 47,566 139,584 31,659 15,269 450,157 23,819 90,776 109,725 364,814 244,046
========= ====== ======= ====== ====== ======= ====== ======= ======= ======= =======
</TABLE>
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT B
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE COST
--------- ------- -------
<S> <C> <C> <C>
DEAN WITTER VARIABLE INVESTMENT SERIES:
Money Market Division.............................. 54,214 $54,214 $53,395
High Yield Division................................ 7,345 45,977 44,784
Equity Division.................................... 5,142 139,495 130,180
Strategist Division................................ 2,467 30,694 29,608
Quality Income Plus Division....................... 1,416 15,502 14,629
Dividend Growth Division........................... 29,840 465,209 429,045
Utilities Division................................. 1,689 24,794 22,732
Capital Growth Division............................ 6,269 95,408 86,329
European Growth Division........................... 6,091 106,781 102,675
Pacific Growth Division............................ 35,584 345,162 339,933
Global Dividend Growth Division.................... 20,892 244,019 231,292
</TABLE>
See Accompanying Notes to Financial Statements.
F-19
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value and Death Benefit of a
Policy change with the investment experience of a Division of the Separate
Account. The tables show how the Cash Value and Death Benefit of a Policy
issued to an Insured of a given age and at a given premium would vary over time
if the investment return on the assets held in each Division of the Separate
Account were a uniform, gross, after-tax annual rate of 0%, 6% or 12%. In
addition, the Cash Values and Death Benefits 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 and below those averages for
individual Policy years.
The tables illustrate a Policy issued to an Insured, age 45, in an Executive
Program issued as a Group Contract Policy. This assumes the maximum monthly
administrative charge. If a particular Policy has different sales or
administrative charges or if a particular group is larger or smaller or has a
different gender mix, the Cash Values and Death Benefits would vary from those
shown in the tables.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
and monthly charges for the cost of insurance based on the guaranteed rate
which is 125% of the maximum allowed under the 1980 Commissioners Standard
Ordinary Mortality Table C. The "Cash Value" column under the "Current" heading
shows the accumulated value of the premiums paid reflecting deduction of the
charges described above and monthly charges for the cost of insurance at the
current level for an Executive Program, which is less than or equal to 125% of
the maximum allowed by the 1980 Commissioners Standard Ordinary Mortality Table
C. The illustrations of Death Benefits reflect the above assumptions. The Death
Benefits also vary between tables depending upon whether Level Type (Option A)
or Increasing Type (Option B) Death Benefits are illustrated.
The amounts shown for the Cash Value and Death Benefit reflect the fact that
the investment rate of return is lower than the gross after-tax return on the
assets held in a Division of the Separate Account. The charges include a .90%
charge for mortality and expense risk, an investment advisory fee of .649%,
representing the average of the fees incurred by the Portfolios in which the
Divisions invest (the actual investment advisory fee is shown in the Fund
prospectus), and a .096% charge that is an estimate of the Portfolios' expenses
based on the average of the actual expenses incurred in fiscal year 1995. After
deduction for these amounts, the illustrated gross annual investment rates of
return of 0%, 6% and 12% correspond to approximate net annual rates of -1.645%,
4.355%, 10.355%, respectively. No expense reimbursement arrangement exists
between the Company and the Fund.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against the Separate Account, since the Company is not
currently making any such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return of the
divisions of the Separate Account would have to exceed 0%, 6%, and 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit and Cash Value illustrated. (see "Federal Tax Matters," page 35.)
Additionally, the hypothetical values shown in the tables assume that the
Policy for which values are illustrated is not deemed an individual policy
under OBRA, and therefore the values do not reflect the additional 1% premium
expense charge for the Company's increased federal tax liabilities.
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, that no transfer charges were incurred, and
that no optional riders have been requested.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, group size and gender mix, the Face Amount and
premium requested and the proposed frequency of premium payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 0% (Monthly Premium: $500)
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.645%)
--------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,092 $500,000 $ 4,952 $500,000
2 12,631 5,980 500,000 9,738 500,000
3 19,423 8,621 500,000 14,396 500,000
4 26,556 11,007 500,000 18,871 500,000
5 34,045 13,115 500,000 23,164 500,000
6 41,909 14,927 500,000 27,279 500,000
7 50,165 16,412 500,000 31,225 500,000
8 58,835 17,530 500,000 34,947 500,000
9 67,938 18,244 500,000 38,504 500,000
10 77,496 18,524 500,000 41,846 500,000
11 87,532 18,361 500,000 44,925 500,000
12 98,070 17,724 500,000 47,799 500,000
13 109,135 16,606 500,000 50,421 500,000
14 120,753 14,978 500,000 52,742 500,000
15 132,952 12,786 500,000 54,764 500,000
16 145,761 9,966 500,000 56,496 500,000
17 159,210 6,404 500,000 57,887 500,000
18 173,332 1,965 500,000 58,888 500,000
19 188,160 0 0 59,504 500,000
20 203,729 0 0 59,682 500,000
25 294,060 0 0 51,277 500,000
30 409,349 0 0 14,958 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Portfolios of the Fund. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities,
InterCapital, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 0% (Monthly Premium: $500)
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.355%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,193 $500,000 $ 5,114 $500,000
2 12,631 6,368 500,000 10,363 500,000
3 19,423 9,478 500,000 15,792 500,000
4 26,556 12,509 500,000 21,350 500,000
5 34,045 15,432 500,000 27,042 500,000
6 41,909 18,219 500,000 32,875 500,000
7 50,165 20,833 500,000 38,864 500,000
8 58,835 23,219 500,000 44,960 500,000
9 67,938 25,331 500,000 51,226 500,000
10 77,496 27,120 500,000 57,620 500,000
11 87,532 28,561 500,000 64,098 500,000
12 98,070 29,602 500,000 70,724 500,000
13 109,135 30,218 500,000 77,458 500,000
14 120,753 30,355 500,000 84,261 500,000
15 132,952 29,935 500,000 91,140 500,000
16 145,761 28,863 500,000 98,112 500,000
17 159,210 26,993 500,000 105,138 500,000
18 173,332 24,125 500,000 112,182 500,000
19 188,160 20,121 500,000 119,259 500,000
20 203,729 14,713 500,000 126,331 500,000
25 294,060 0 0 159,797 500,000
30 409,349 0 0 181,794 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Portfolios of the Fund. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities,
InterCapital, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 0% (Monthly Premium: $500)
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @
10.355%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,293 $500,000 $ 5,273 $500,000
2 12,631 6,765 500,000 11,002 500,000
3 19,423 10,390 500,000 17,276 500,000
4 26,556 14,174 500,000 24,091 500,000
5 34,045 18,109 500,000 31,504 500,000
6 41,909 22,192 500,000 39,582 500,000
7 50,165 26,409 500,000 48,406 500,000
8 58,835 30,731 500,000 57,997 500,000
9 67,938 35,137 500,000 68,501 500,000
10 77,496 39,610 500,000 79,967 500,000
11 87,532 44,153 500,000 92,457 500,000
12 98,070 48,749 500,000 106,144 500,000
13 109,135 53,408 500,000 121,122 500,000
14 120,753 58,121 500,000 137,500 500,000
15 132,952 62,853 500,000 155,449 500,000
16 145,761 67,563 500,000 175,170 500,000
17 159,210 72,165 500,000 196,844 500,000
18 173,332 76,545 500,000 220,686 500,000
19 188,160 80,578 500,000 246,986 500,000
20 203,729 84,138 500,000 276,040 500,000
25 294,060 90,494 500,000 476,839 553,133
30 409,349 48,941 500,000 807,385 863,902
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Portfolios of the Fund. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities,
InterCapital, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is policy indebtedness outstanding.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 0% (Monthly Premium:
PREMIUM TAX: 2.25% $1,000)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @.00% (NET RATE @ -1.645%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 8,895 $508,895 $ 10,760 $510,760
2 25,261 17,472 517,472 21,249 521,249
3 38,847 25,689 525,689 31,506 531,506
4 53,112 33,540 533,540 41,476 541,476
5 68,090 41,002 541,002 51,158 551,158
6 83,817 48,057 548,057 60,556 560,556
7 100,331 54,677 554,677 69,682 569,682
8 117,670 60,821 560,821 78,474 578,474
9 135,876 66,456 566,456 86,997 586,997
10 154,992 71,554 571,554 95,196 595,196
11 175,064 76,113 576,113 103,019 603,019
12 196,140 80,106 580,106 110,529 610,529
13 218,270 83,536 583,536 117,673 617,673
14 241,506 86,383 586,383 124,398 624,398
15 265,904 88,604 588,604 130,705 630,705
16 291,521 90,149 590,149 136,607 636,607
17 318,420 90,923 590,923 142,045 642,045
18 346,663 90,814 590,814 146,968 646,968
19 376,319 89,713 589,713 151,384 651,384
20 407,458 87,524 587,524 155,237 655,237
25 588,121 58,572 558,572 163,304 663,304
30 818,698 0 0 141,720 641,720
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Portfolios of the Fund. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities,
InterCapital, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 0% (Monthly Premium:
PREMIUM TAX: 2.25% $1,000)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ -
4.355%)
----------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,185 $509,185 $ 11,112 $511,112
2 25,261 18,594 518,594 22,610 522,610
3 38,847 28,186 528,186 34,548 534,548
4 53,112 37,958 537,958 46,883 546,883
5 68,090 47,886 547,886 59,627 559,627
6 83,817 57,954 557,954 72,799 572,799
7 100,331 68,130 568,130 86,421 586,421
8 117,670 78,371 578,371 100,448 600,448
9 135,876 88,637 588,637 114,957 614,957
10 154,992 98,892 598,892 129,910 629,910
11 175,064 109,124 609,124 145,263 645,263
12 196,140 119,294 619,294 161,095 661,095
13 218,270 129,395 629,395 177,367 677,367
14 241,506 139,392 639,392 194,037 694,037
15 265,904 149,227 649,227 211,116 711,116
16 291,521 158,831 658,831 228,627 728,627
17 318,420 168,085 668,085 246,523 746,523
18 346,663 176,844 676,844 264,760 764,760
19 376,319 184,960 684,960 283,352 783,352
20 407,458 192,288 692,288 302,249 802,249
25 588,121 213,362 713,362 398,467 898,467
30 818,698 188,464 688,464 484,336 984,336
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Portfolios of the Fund. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities,
InterCapital, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000. AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 0% (Monthly Premium:
$1,000)
PREMIUM TAX: 2.25%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.355%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,471 $ 509,471 $ 11,457 $ 511,457
2 25,261 19,740 519,740 24,000 524,000
3 38,847 30,839 530,839 37,779 537,779
4 53,112 42,843 542,843 52,858 552,858
5 68,090 55,812 555,812 69,367 569,367
6 83,817 69,822 569,822 87,453 587,453
7 100,331 84,943 584,943 107,286 607,286
8 117,670 101,240 601,240 128,978 628,978
9 135,876 118,790 618,790 152,784 652,784
10 154,992 137,686 637,686 178,861 678,861
11 175,064 158,054 658,054 207,380 707,380
12 196,140 180,010 680,010 238,657 738,657
13 218,270 203,712 703,712 272,916 772,916
14 241,506 229,310 729,310 310,403 810,403
15 265,904 256,943 756,943 351,445 851,445
16 291,521 286,760 786,760 396,418 896,418
17 318,420 318,874 818,874 445,659 945,659
18 346,663 353,392 853,392 499,549 999,549
19 376,319 390,431 890,431 558,569 1,058,569
20 407,458 430,134 930,134 623,183 1,123,183
25 588,121 676,646 1,176,646 1,049,118 1,549,118
30 818,698 1,022,237 1,522,237 1,708,587 2,208,587
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Portfolios of the Fund. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities,
InterCapital, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-7
<PAGE>
PUTNAM CAPITAL MANAGER
TRUST
LOGO
^ GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
Prospectus dated May 1, 1996
50455 Com
<PAGE>
GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes flexible premium variable life insurance policies
offered by Paragon Life Insurance Company (the "Company") which are designed
for use in employer-sponsored insurance programs. In circumstances where a
Group Contract is issued, Individual Policies or Certificates setting forth or
summarizing the rights of the Owners and/or Insureds, will be issued under the
Group Contract. Individual Policies also can be issued in connection with
employer-sponsored insurance programs in circumstances where a Group Contract
is not issued. The terms of the Certificate and the Individual Policy, whether
or not the Individual Policy is issued under a Group Contract, are
substantially the same and are collectively referred to in this Prospectus as
"Policy" or "Policies."
The Policies are designed to provide lifetime insurance protection to age 95
and at the same time provide flexibility to vary premium payments and change
the level of death benefits payable under the Policies. This flexibility allows
an Owner to provide for changing insurance needs under a single insurance
policy. An Owner also has the opportunity to allocate net premiums among
several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount of
the Policy. The insurance under a Policy will remain in force so long as its
Cash Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy.
The Owner may allocate net premiums to one or more of the Divisions of the
Separate Account B (the "Separate Account"). The duration of the Policy and the
amount of the Cash Value will vary to reflect the investment performance of the
Divisions of the Separate Account selected by the Owner, and, depending on the
death benefit option elected, the amount of the death benefit above the minimum
may also vary with that investment performance. Thus, the Owner bears the
entire investment risk under the Policies; there is no minimum guaranteed Cash
Value.
Each Division of the Separate Account will invest solely in a corresponding
investment portfolio of Putnam Capital Manager Trust ("PCM"), an investment
company currently consisting of eleven separate investment portfolios, or
"Funds": PCM Asia Pacific Growth Fund, PCM Diversified Income Fund, PCM Global
Asset Allocation Fund, PCM Global Growth Fund, PCM Growth and Income Fund, PCM
High Yield Fund, PCM Money Market Fund, PCM New Opportunities Fund, PCM U.S.
Government and High Quality Bond Fund, PCM Utilities Growth and Income Fund,
and PCM Voyager Fund. The accompanying prospectus for Putnam Capital Manager
Trust describes the investment objectives and policies, and the risks of the
Funds.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
Putnam Capital Manager Trust.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The Date Of This Prospectus Is May 1, 1996.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................ 3
Summary.................................................................... 4
The Company and the Separate Account....................................... 9
The Company.............................................................. 9
The Separate Account..................................................... 10
Putnam Capital Manager Trust............................................. 10
Addition, Deletion, or Substitution of Investments....................... 12
Payment and Allocation of Premiums......................................... 12
Issuance of a Policy..................................................... 12
Premiums................................................................. 14
Allocation of Net Premiums and Cash Value................................ 15
Policy Lapse and Reinstatement........................................... 15
Policy Benefits............................................................ 16
Death Benefit............................................................ 16
Cash Value............................................................... 20
Policy Rights and Privileges............................................... 21
Exercising Rights and Privileges Under the Policies...................... 21
Loans.................................................................... 21
Surrender and Partial Withdrawals........................................ 22
Transfers................................................................ 24
Right to Examine Policy.................................................. 24
Conversion Right to a Fixed Benefit Policy............................... 24
Eligibility Change Conversion............................................ 25
Payment of Benefits at Maturity.......................................... 25
Payment of Policy Benefits............................................... 26
Charges and Deductions..................................................... 27
Sales Charges............................................................ 27
Premium Tax Charge....................................................... 27
Monthly Deduction........................................................ 27
Partial Withdrawal Transaction Charge.................................... 29
Separate Account Charges................................................. 30
General Matters Relating to the Policy..................................... 30
Distribution of the Policies............................................... 33
General Provisions of the Group Contract................................... 34
Federal Tax Matters........................................................ 36
Safekeeping of the Separate Account's Assets............................... 39
Voting Rights.............................................................. 39
State Regulation of the Company............................................ 40
Management of the Company.................................................. 41
Legal Matters.............................................................. 42
Legal Proceedings.......................................................... 42
Experts.................................................................... 42
Additional Information..................................................... 42
Financial Statements....................................................... 42
Appendix A................................................................. A-1
</TABLE>
THE POLICIES ARE NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
2
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Associated Companies--Those companies listed in a Group Contract's
specifications pages that are under common control through stock ownership,
contract or otherwise, with the Contractholder.
Beneficiary--The person(s) named in an application for Individual Insurance
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness.
Certificate--A document issued to Owners of Policies issued under Group
Contracts, setting forth or summarizing the Owner's rights and benefits.
Contractholder--The employer, association, sponsoring organization or trust
that is issued a Group Contract.
Corporate Program--A category of Policies available as an Individual Policy
in which the sponsoring employer or its designated trust is generally the Owner
of the Policy.
Division--A subaccount of the Separate Account available for allocation under
the Policy. Each Division invests exclusively in the shares of Putnam Capital
Manager Trust.
Employee--A person who is employed and paid for services by an employer on a
regular basis. To qualify as an employee, a person ordinarily must work for an
employer at least 30 hours per week. The Company may waive or modify this
requirement at its discretion. An employee may also include an independent
contractor acting in many respects as an employee with a sponsoring employer.
An employee may include a partner in a partnership if the employer is a
partnership.
Executive Program--A category of Policies issued under Group Contracts or
employer-sponsored insurance programs that have a maximum Face Amount available
for each Policy generally in excess of $500,000.
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Fund--A separate investment portfolio of Putnam Capital Manager Trust, a
mutual fund in which the Separate Account's assets are invested.
Group Contract--A group flexible premium variable life insurance contract
issued to the Contractholder by the Company.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest charged
on loans.
Individual Insurance--Insurance provided under a Group Contract or under an
Individual Policy issued in connection with an employer-sponsored insurance
program on an employee or an employee's spouse.
Insured--The person whose life is insured under a Policy. The term may
include both an employee and an employee's spouse.
3
<PAGE>
Investment Start Date--The date the initial premium is applied to the
Divisions of the Separate Account. This date is the later of the Issue Date or
the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
Issue Date--The effective date of coverage under a Policy. The Issue Date is
the date from which Policy Anniversaries, Policy Years, and Policy Months are
measured.
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 95.
Monthly Anniversary--The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the
last day of that month.
Net Premium--The premium less any premium expense charge and any charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--Either the Certificate or the Individual Policy offered by the
Company and described in this Prospectus. Under Group Contracts, the Policy may
be issued on the employee or on the employee's spouse.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the day
immediately preceding the next Policy Anniversary.
Separate Account--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy.
Spouse--An employee's legal spouse. The term does not include a spouse who is
legally separated from the employee.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the close
of business of the next succeeding Valuation Date.
SUMMARY
The following summary of Prospectus information should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the description of the Policies contained in this
Prospectus assumes that a Policy is in effect and that there is no outstanding
Indebtedness.
4
<PAGE>
The Policy. The Policies (either an Individual Policy or a Certificate)
described in this Prospectus are designed for use in employer-sponsored
insurance programs and are typically issued in two situations. First, Policies
are issued pursuant to Group Contracts entered into between the Company and
Contractholders. (See "General Provisions of the Group Contract," page 34.)
Second, in certain circumstances where Group Contracts are not issued,
Individual Policies are issued in connection with the employer-sponsored
insurance programs. Subject to certain restrictions, the Insured under a Policy
may be either an employee of the Contractholder or sponsoring employer, or the
employee's spouse. Generally, only the employee is eligible to be an Insured
under an Executive Program Policy. Provided there is sufficient Cash Surrender
Value, Individual Insurance under a Group Contract or other employer-sponsored
insurance program will continue should the Group Contract or other program
cease or the employee's employment end. (See "Payment and Allocation of
Premiums--Issuance of a Policy," page 12.)
The Policies are life insurance contracts with death benefits, cash values,
surrender rights, policy loan privileges, and other features traditionally
associated with life insurance. The Contractholder will remit planned premium
payments under the Group Contract on behalf of Owners equal to an amount
authorized by employees to be deducted from their wages. In addition, Owners
may, but are not required to, pay additional premiums. However, in Corporate
Programs, the Owner will generally remit planned and additional premiums. A
similar procedure will apply when an Individual Policy is issued in connection
with an employer-sponsored program where the Group Contract is not issued.
The Policies are "variable" policies because, unlike the fixed benefits under
an ordinary life insurance contract, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment performance of the Divisions of the Separate
Account to which the Owner has allocated net premium payments. However, so long
as a Policy's Cash Surrender Value continues to be sufficient to pay the
monthly deduction, an Owner is guaranteed a minimum death benefit equal to the
Face Amount of his or her Policy or an accelerated death benefit in a reduced
amount determined in accordance with certain riders available under the Policy.
(See "General Matters Relating to the Policy--Additional Insurance Benefits,"
page 32).
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. The Separate Account has Divisions, each of
which invests in shares of a corresponding Fund of PCM. The eleven Funds
currently available are PCM Asia Pacific Growth Fund, PCM Diversified Income
Fund, PCM Global Asset Allocation Fund, PCM Global Growth Fund, PCM Growth and
Income Fund, PCM High Yield Fund, PCM Money Market Fund, PCM New Opportunities
Fund, PCM U.S. Government and High Quality Bond Fund, PCM Utilities Growth and
Income Fund, and PCM Voyager Fund. Each Fund has a different investment
objective. (See "The Separate Account--Putnam Capital Manager Trust," page 10.)
An Owner may change future allocations of net premiums at any time by notifying
the Company directly.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to modify the transfer privilege.
(See "Policy Rights and Privileges--Transfers," page 24.)
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the planned
annual premium set forth in the specifications page of a Policy is necessary to
place a Policy in force. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount and certain other
factors. Under Group Contracts and employer-sponsored programs, the initial
premium and subsequent planned premiums generally are remitted by the
Contractholder or sponsoring employer on behalf of the Owner at intervals
agreed to by the Contractholder or employer. In Corporate Programs, the Owner
or its designee will remit premiums generally on a schedule agreed to by the
Company. However, as is discussed below, planned premiums need not be paid so
long as there is sufficient Cash Surrender Value to keep the Policy in force.
Subject to certain limitations, additional premium payments in any amount and
at any frequency may be made directly by the Owner. (See "Payment and
Allocation of Premiums--Issuance of a Policy--Premiums," pages 12 and 14.)
5
<PAGE>
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 15).
The Policies, therefore, differ in two important respects from conventional
life insurance policies. First, the failure to make planned premium payments
following the initial premium payment will not itself cause a Policy to lapse.
Second, under the circumstances described above, a Policy can lapse even if
planned premiums have been paid. Thus, the payment of premiums in any amount
does not guarantee that the Policy will remain in force until the Maturity
Date. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 15.)
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies or, under certain riders available under
the Policy, to the Owner, prior to the Insured's death under circumstances
described in those riders. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 32.) Two death benefit options are
available. Under the "Level Type" death benefit, the death benefit is the Face
Amount of the Policy or, if greater, the applicable percentage of Cash Value.
Under the "Increasing Type" death benefit, the death benefit is the Face Amount
of the Policy plus the Cash Value or, if greater, the applicable percentage of
Cash Value. So long as a Policy remains in force, the minimum death benefit
under either option will be at least equal to the current Face Amount. The
death benefit proceeds will be increased by the amount of the cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "Policy Benefits--Death
Benefit," page 16.)
The minimum initial Face Amount is generally $25,000 under the Company's
current rules. Executive Program Policies generally have a minimum Face Amount
of $100,000. The maximum Face Amount is generally $500,000. However, in
connection with a particular Group Contract, employer-sponsored insurance
program, Executive Program or Corporate Program the Company may establish a
substantially higher Face Amount for Policies issued under that Contract or
program. The Owner may generally change the Face Amount (subject to the minimum
and maximum amounts applicable to the Policy as issued) and the death benefit
option, but in certain cases evidence of insurability may be required. (See
"Policy Benefits--Death Benefit," page 16.)
Additional insurance benefits offered under the Policy by rider may include a
children's insurance rider, an acceleration of death benefits rider, an
accelerated death benefit settlement option rider, an accidental death benefit
rider, and a waiver of monthly deductions rider. Some Group Contracts and
employer-sponsored insurance programs may not provide each of the additional
benefits described above. Generally, Executive Program Policies only have the
acceleration of death benefits rider. Generally, Corporate Programs have none
of the additional benefits described above. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32.) The cost of these
additional insurance benefits will be deducted from Cash Value as part of the
monthly deduction. (See "Charges and Deductions--Monthly Deduction," page 27.)
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy or an applicable rider. (See "Policy
Benefits--Death Benefit" page 16, and "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.)
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
premium payments, the investment performance of any selected Divisions of the
Separate Account, any Policy Loans, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value," page
20.) There is no minimum guaranteed Cash Value.
Charges and Deductions. A front-end sales charge of 1% of premiums will be
deducted from each premium paid ("premium expense charge"). An additional
charge will be imposed on Policies that are deemed
6
<PAGE>
to be individual Policies under the Omnibus Budget Reconciliation Act of 1990
("OBRA"). The additional charge, which is for federal income taxes measured by
premiums, is equal to 1% of each premium payment, and compensates the Company
for a significantly higher corporate income tax liability resulting from
changes made to the Internal Revenue Code by OBRA. This additional charge is
treated as sales load for purposes of determining compliance with the
limitations on sales loads imposed by the Investment Company Act of 1940 and
applicable regulations thereunder.
A charge of 2 percent to cover state premium taxes will be deducted from
premiums paid. (See "Charges and Deductions--Premium Tax Charge," page 27.)
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, a cost of insurance charge, and the cost of any additional insurance
benefits provided by rider. The amount of the administrative charge will be set
forth in the specification pages of the Policy and will be based on the number
of the Insureds covered under a Group Contract or other employer-sponsored
insurance program and the amount of administrative services provided by the
Company. The charge will not exceed $6.00 per month during the first Policy
Year and $3.50 per month during renewal years.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance" page 28.)
Monthly cost of insurance rates will be determined by the Company based upon
its expectations as to future mortality experience. The Company currently
underwrites Policies on either a simplified issue or guaranteed issue basis.
However, the Company does not vary cost of insurance rates based on a
particular Policy's classification as simplified issue or guaranteed issue.
Rather, the rates are based on the Attained Age and rate class of the Insured,
as well as on the gender mix of the group insured, which is the proportion of
men and women covered under a particular Group Contract or employer-sponsored
program. For a discussion of the factors affecting the rate class of the
Insured. See "Charges and Deductions--Monthly Deduction--Cost of Insurance"
page 28.
Cost of insurance rates are guaranteed not to exceed 125 percent of the
maximum rates that could be charged based on the 1980 Commissioners Standard
Ordinary Mortality Table C ("1980 CSO Table"). The 1980 CSO Table assumes a
blending of sixty percent male and forty percent female. Generally, the rates
currently charged do not exceed 100% of the 1980 CSO Table. However, instances
in which the Company's current rates may exceed 100% of the 1980 CSO Table are
generally limited to particular Policies issued to Insureds in small groups
(i.e. generally less than 750 eligible employees) and/or groups that are
predominantly male. The guaranteed rates are higher than the 1980 CSO Table
because, under both guaranteed and simplified underwriting, the Insured is not
required to submit to a medical or paramedical examination although a blood
test may be required. Because the Company gathers less health information about
these individuals, it is exposed to additional insurance risks. Although the
circumstances in which the Company could raise its current mortality charges
are limited, such an increase is permitted under the Policy. To the extent that
the current cost of insurance rates exceed or are raised so that they exceed
100% of the 1980 CSO Table, the monthly cost of insurance charge would, in
effect, be a substandard risk charge for healthy Insureds.
A daily charge not to exceed .0024547% (an annual rate of .90%) of the net
assets of each Division of the Separate Account will be imposed for the
Company's assumption of certain mortality and expense risks incurred in
connection with the Policies. (See "Charges and Deductions--Separate Account
Charges," page 30.)
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes. (See "Federal Tax Matters," page 36.)
The value of the assets of the Divisions of the Separate Account will reflect
the investment advisory fee and other expenses incurred by PCM because the
Separate Account purchases the shares of PCM. (See
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"Charges and Deductions--Separate Account Charges," page 30.) The advisory fee
rates for the first $500 million of assets of a Fund (the highest fee rates)
range from an annual rate of .45% to a maximum of .80% of the average net
assets of each Fund. See the PCM prospectus for actual fees and expenses.
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net Premiums
and Cash Value," page 15, and "Policy Rights and Privileges--Surrender and
Partial Withdrawals, Transfers," pages 22 and 24 respectively, and "Charges and
Deductions--Partial Withdrawal Transaction Charge," page 29.)
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b), where (a) is 85
percent of the Cash Value of the Policy on the date the Policy Loan is
requested, and (b) is the amount of outstanding Indebtedness. Loan interest is
due and payable in arrears on each Policy Anniversary or on a pro rata basis
for such shorter period as the Policy Loan may exist. All outstanding
Indebtedness will be deducted from proceeds payable at the Insured's death,
upon maturity, or upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid in
whole or in part at any time while the Policy is in force. (See "Policy Rights
and Privileges--Loans," page 21.) Loans taken from, or secured by, a Policy may
in certain circumstances be treated as taxable distributions from the Policy.
Moreover, with certain exceptions, a ten percent additional income tax would be
imposed on the portion of any loan that is included in income. (See "Federal
Tax Matters," page 36.)
Surrender and Partial Withdrawals. At any time that a Policy is in effect, an
Owner may elect to surrender the Policy and receive its Cash Surrender Value.
An Owner may also request a partial withdrawal of the Cash Value of the Policy.
When the death benefit under either death benefit option is not based on an
applicable percentage of the Cash Value, a partial withdrawal reduces the death
benefit payable under the Policy by an amount equal to the reduction in the
Policy's Cash Value. (See "Policy Rights and Privileges--Surrender and Partial
Withdrawals," page 22.) Surrenders and partial withdrawals may have federal
income tax consequences. (See "Federal Tax Matters," page 36.)
Right to Examine Policy. The Owner has a limited right to return a Policy for
cancellation within 20 days after the delivery of the Policy to the Owner,
within 45 days after the Owner signs the application, or within 10 days after
the Company mails a notice of this cancellation right to the Owner whichever is
latest. If a Policy is cancelled within this time period, a refund will be paid
which will equal all premiums paid under the Policy or any different amount
required by law. The Owner also has a right to cancel a requested increase in
Face Amount. Upon cancellation of an increase, the Owner may request that the
Company refund the amount of the additional charges deducted in connection with
the increase, or have the amount of the additional charges added to the Cash
Value. (See "Policy Rights and Privileges--Right to Examine Policy," page 24.)
Eligibility Change Conversion. In the event that the Insured is no longer
eligible for coverage under the Group Contract, either because the Group
Contract has terminated or because the employee is no longer employed by the
Contractholder, the Individual Insurance provided by the Policy issued in
connection with the Group Contract will continue unless the Policy is cancelled
or surrendered by the Owner or there is insufficient Cash Surrender Value to
prevent the Policy from lapsing.
If a Certificate was issued in connection with the Group Contract, the
Certificate will be amended automatically to continue in force as an Individual
Policy. The new Individual Policy will provide benefits
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which are identical to those provided under the Certificate. If an Individual
Policy was issued in connection with a Group Contract, the Individual Policy
will continue in force following the termination of the Group Contract. (See
"Policy Right and Privileges--Eligibility Change Conversion," page 25.)
Conversion Right to a Fixed Benefit Policy. During the first 24 Policy Months
following a Policy's Issue Date, the Owner may convert the Policy to a life
insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. The Owner also has
a similar right with respect to increases in the Face Amount. (See "Policy
Rights and Privileges--Conversion Right to a Fixed Benefit Policy," page 24.)
Exercising Rights and Privileges Under the Policies. Owners of Policies
issued under a Group Contract or in connection with an employer-sponsored
insurance program may exercise their rights and privileges under the Policies
(i.e., make transfers, change premium allocations, borrow, etc.) by notifying
the Company in writing at its Home Office. Likewise, the Company will send all
reports and other notices described herein or in the Policy directly to the
Owner. (See "Policy Rights and Privileges--Exercising Rights and Privileges
Under the Policies," page 21.)
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-1 to A-13 in Appendix A show how death benefits and Cash Surrender
Values may vary based on certain hypothetical rate of return assumptions as
well as assumptions pertaining to the level of the administrative charge and
the level of the sales charges. These illustrations also show how these
benefits compare with amounts which would accumulate if premiums were invested
to earn interest (after taxes) at 5% compounded annually. If a Policy is
surrendered in the early Policy Years, the Cash Surrender Value payable will be
low as compared with premiums accumulated with interest, and consequently the
insurance protection provided prior to surrender will be costly.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy Owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits payable
under a Policy should be completely excludable from the gross income of the
Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds.
Under certain circumstances, a Policy may be treated as a "modified endowment
contract." If the Policy is a modified endowment contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Loans will not be treated as distributions.
Neither distributions, nor loans from a Policy that is not a modified endowment
contract are subject to the 10% penalty tax. (See "Federal Tax Matters," page
36.)
THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection with
the name change. The Company is principally engaged in writing individual and
group life insurance policies and annuity contracts. As of December 31, 1995,
it had statutory admitted assets in excess of $123 million. The Company is
admitted to do business in 49 states and the District of Columbia. The
principal offices of the Company are at 100 South Brentwood, St. Louis,
Missouri 63105 ("Home Office").
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The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a mutual life insurance company. The Parent
Company has agreed that until March 23, 1999, it will maintain capital and
surplus within the Company sufficient to satisfy the capital requirements of
the states in which the Company is authorized to do business.
In addition, the Parent Company agrees to guarantee that the Company will
have sufficient funds to meet all of its contractual obligations. In the event
a policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. This guarantee, which does not have a
predetermined termination date, can be modified or ended only as to policies
not yet issued. The guarantee agreement is binding on the Parent Company, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
THE SEPARATE ACCOUNT
Separate Account B (the "Separate Account") was established by the Company as
a separate investment account on January 4, 1993 under Missouri law. The
Separate Account receives and invests the net premiums paid under the Policies.
In addition, the Separate Account receives and invests net premiums for other
flexible premium variable life insurance policies issued by the Company that
are invested in other subaccounts of the Separate Account.
The Separate Account is divided into Divisions. Each Division for the Policy
invests in shares of a single portfolio of PCM. Income and both realized and
unrealized gains or losses from the assets of each Division of the Separate
Account are credited to or charged against that Division without regard to
income, gains, or losses from any other Division of the Separate Account or
arising out of any other business the Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
PUTNAM CAPITAL MANAGER TRUST
The Separate Account invests in shares of PCM, a series-type mutual fund
registered with the SEC as an open-end, management investment company. PCM
currently has eleven separate investment portfolios or "Funds" which are
available in the Policies: PCM Asia Pacific Growth Fund, PCM Diversified Income
Fund, PCM Global Asset Allocation Fund, PCM Global Growth Fund, PCM Growth and
Income Fund, PCM High Yield Fund, PCM Money Market Fund, PCM New Opportunities
Fund, PCM U.S. Government and High Quality Bond Fund, PCM Utilities Growth and
Income Fund, and PCM Voyager Fund. The assets of each Fund are held separate
from the assets of the other Funds, and each Fund has investment objectives and
policies which are different from those of the other Funds. Thus, each Fund
operates as a separate investment vehicle, and the income or losses of one Fund
generally have no effect on the investment performance of any other Fund.
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The investment objectives and policies of each Fund are summarized below:
PCM Asia Pacific Growth Fund seeks capital appreciation by investing
primarily in securities of companies located in Asia and in the Pacific Basin.
PCM Diversified Income Fund seeks high current income consistent with capital
preservation. The Fund pursues its investment objective by allocating its
investments among the following three sectors of the fixed income securities
markets: a U.S. Government Sector, a High Yield Sector (commonly referred to as
"junk bonds"), and an International Sector. See the special considerations for
investments in high yield securities described in the fund prospectus.
PCM Global Asset Allocation Fund seeks a high level of long-term total return
consistent with preservation of capital. By seeking total return, the Fund
seeks to increase the value of the shareholder's investment through both
capital appreciation and investment income. "Total return" includes interest
and dividend income, net of expenses, and realized and unrealized capital gains
and losses on securities. The Fund invests in a wide variety of equity and
fixed income securities both of U.S. and foreign issuers.
PCM Global Growth Fund seeks capital appreciation. The Fund is designed for
investors seeking above-average capital growth potential through a globally
diversified portfolio of common stocks.
PCM Growth and Income Fund seeks capital growth and current income as its
investment objectives. The Fund invests primarily in common stocks that offer
potential for capital growth, current income or both.
PCM High Yield Fund seeks high current income by investing primarily in high
yielding, lower-rated fixed income securities (commonly referred to as "junk
bonds") constituting a diversified portfolio which Putnam Investment
Management, Inc. ("Putnam Management") believes does not involve undue risk to
income or principal. Capital growth is a secondary objective when consistent
with high current income. The risks of investing in these securities are
described in the PCM prospectus which should be read carefully before
investing.
PCM Money Market Fund seeks as high a rate of current income as Putnam
Management believes is consistent with preservation of capital and maintenance
of liquidity through investments in high quality money market instruments. It
is designed for investors seeking current income with stability of principal.
PCM New Opportunities Fund seeks long-term capital appreciation. The Fund
seeks its investment objective by investing principally in common stocks of
companies in sectors of the economy which Putnam Management believes possess
above-average long-term growth potential.
PCM U.S. Government and High Quality Bond Fund seeks current income
consistent with preservation of capital. The Fund invests primarily in
securities issued or guaranteed as to principal and interest by the U.S.
Government or its agencies or instrumentalities and in other debt obligations
rated at least A by Standard & Poor's or Moody's at the time of investment, or,
if not rated, determined by Putnam Management to be of comparable quality.
PCM Utilities Growth and Income Fund seeks capital growth and current income.
The Fund concentrates its investments in securities issued by companies in the
public utilities industries.
PCM Voyager Fund seeks capital appreciation. It is designed for investors
willing to assume above-average risk in return for above-average capital growth
potential. The Fund invests primarily in common stocks of companies that Putnam
Management believes have potential for capital appreciation which is
significantly greater than that of market averages.
There is no assurance that any of the Funds will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for PCM, which must accompany or precede this Prospectus and
which should be read carefully.
Putnam Management provides investment advisory services to PCM in accordance
with the terms of the current prospectus for PCM. The Funds pay investment
management fees to Putnam Management as part of their expenses. See the PCM
prospectus for details regarding these fees.
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Resolving Material Conflicts. All of the Funds of PCM are also available to
registered separate accounts of other insurance companies offering variable
annuity and variable life insurance products. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Policies and of owners of policies whose cash values are allocated to other
separate accounts investing in the Funds. In the event a material conflict
arises, the Company will take any necessary steps, including removing the
assets of the Separate Account from one or more of the Funds, to resolve the
matter. See the PCM prospectus for further details.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Funds of PCM
and to substitute shares of another Fund of PCM or of another registered open-
end investment company, if the shares of a Fund are no longer available for
investment, or if in the Company's judgment further investment in any Fund
becomes inappropriate in view of the purposes of the Separate Account. The
Company will not substitute any shares attributable to an Owner's interest in a
Division of the Separate Account without notice to the Owner and prior approval
of the SEC, to the extent required by the 1940 Act or other applicable law.
Nothing contained in this Prospectus shall prevent the Separate Account from
purchasing other securities for other series or classes of policies, or from
permitting a conversion between series or classes of policies on the basis of
requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Fund of PCM, or in shares
of another investment company, with a specified investment objective. New
Divisions may be established when, in the sole discretion of the Company,
marketing needs or investment conditions warrant, and any new Division will be
made available to existing Owners on a basis to be determined by the Company.
To the extent approved by the SEC, the Company may also eliminate or combine
one or more Divisions, substitute one Division for another Division, or
transfer assets between Divisions if, in its sole discretion, marketing, tax,
or investment conditions warrant.
In the event of a substitution or change, the Company may, if it considers it
necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
If deemed by the Company to be in the best interests of persons having voting
rights under the Policy, and to the extent any necessary SEC approvals or Owner
votes are obtained, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other separate
accounts of the Company. To the extent permitted by applicable law, the Company
may also transfer the assets of the Separate Account associated with the Policy
to another separate account.
The Company cannot guarantee that the shares of PCM will always be available.
PCM sells shares to the Separate Account in accordance with the terms of a
participation agreement between PCM and the Company. Should this agreement
terminate or should shares become unavailable for any other reason, the
Separate Account will not be able to purchase PCM shares. Should this occur,
the Company will be unable to honor Owner requests to allocate their cash
values or premium payments to the Divisions of the Separate Account investing
in shares of PCM. In the event that PCM is no longer available, the Company
will, of course, take reasonable steps to obtain alternative investment
options.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
The Company will generally issue a Group Contract to employers whose
employees and/or their spouses may become Owners and/or Insureds thereunder so
long as the employee is within the class of employees eligible to be included
in the Group Contract. The class(es) of employees covered by a particular Group
Contract are set forth in that Group Contract's specifications pages. The Group
Contract will be issued upon receipt of an application for a Group Contract
signed by a duly authorized officer of the employer and acceptance by a duly
authorized officer of the Company at its Home Office. (See "General Provisions
of the Group Contract--Issuance," page 34.) Individuals (i.e., eligible
employees or their spouses) wishing to purchase a Policy, whether under a Group
Contract or an employer-sponsored insurance program, must complete the
appropriate application for Individual Insurance and submit it to an authorized
representative of the Company or to the Company's Home Office. The Company will
issue to each Contractholder either a
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Certificate or an Individual Policy to give to each Owner. Individual Policies,
rather than Certificates, will be issued (i) to independent contractors of the
employer; (ii) to persons who wish to continue coverage after a Group Contract
has terminated; (iii) to persons who wish to continue coverage after they no
longer are employed by the Group Contractholder; (iv) if state law restrictions
make issuance of a Group Contract impracticable; or (v) if the employer chooses
to use an employer-sponsored insurance program that does not involve a Group
Contract.
Corporate Programs will generally involve Individual Policies. Policies will
be issued on the lives of eligible Insureds, generally employees of a
sponsoring employer, and the Owner will usually be the sponsoring employer or
its designee.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
70 who supply evidence of insurability satisfactory to the Company. The Company
may, at its sole discretion, issue Policies to individuals falling outside
those Issue Ages or decline to issue Policies to individuals within those Issue
Ages.
In order for an individual employee to be eligible to be an Insured under a
Policy, the employee must be actively at work at the time the application for
Individual Insurance is signed. In addition, there may be specific classes to
which the employee must belong to be eligible to be an Insured under a Policy.
Actively at work means that the employee must work for the Contractholder or
sponsoring employer at the employee's usual place of work or such other places
as required by the Contractholder or sponsoring employer in the course of such
work for the full number of hours and the full rate of pay, as set by the
employment practices of the employer. Ordinarily the time worked per week must
not be less than 30 hours. However, the Company reserves the right to waive or
modify the actively at work requirement at its discretion. In addition, the
Contractholder or sponsoring employer may require that, to be eligible to
purchase a Policy, an employee must be employed by the employer as of a certain
date or for a certain period of time. This date or time period will be set
forth in the Group Contract specifications pages. Employees of any Associated
Companies of the Contractholder will be considered employees of the
Contractholder. The Company may also allow an individual who is an independent
contractor working primarily for the sponsoring employer to be considered an
eligible employee. As an independent contractor, he may receive an Individual
Policy rather than a Certificate depending upon state law applicable to the
contracts. An employee may include a partner in a partnership if the employer
is a partnership.
In other than Executive Programs or Corporate Programs, the first time an
employee is given the opportunity to purchase a Policy, the Company may issue
the Policy and any spouse or children's insurance rider applied for by the
employee pursuant to its guaranteed issue procedure. Under this procedure the
employee is required to answer qualifying questions in the application for
Individual Insurance, but is not required to submit to a medical or paramedical
examination. The maximum Face Amount that an employee can generally apply for
under the guaranteed issue procedure ("Guaranteed Issue Amount") is three times
the employee's salary up to a ceiling that is based on the number of eligible
employees under a Group Contract or other employer-sponsored insurance program.
Guaranteed issue may be available with Executive Programs or Corporate Programs
depending upon number of eligible employees or if other existing coverage is
cancelled.
Where the Face Amount exceeds the guaranteed issue limits, where the Policy
has been offered previously to the employee, where the guaranteed issue
requirements set forth in the application for Individual Insurance are not met,
or in connection with certain programs that may be offered without guaranteed
issue, the employee must submit to a simplified underwriting procedure which
requires the employee to respond satisfactorily to certain health questions in
the application. A blood test may be required. This requirement is generally
applicable only to Executive Programs or Corporate Programs. Similarly, such
questions must be answered if, in connection with the issuance of any
children's rider, if the employee is not eligible for guaranteed issue
underwriting, or, even when the employee is eligible, if the child does not
satisfy the guaranteed issue requirements set forth in the application for
Individual Insurance. However, regardless of which underwriting procedure is
used, acceptance of an application is subject to the Company's underwriting
rules, and the Company reserves the right to reject an application for any
reason.
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If a Policy is to be issued to a spouse of an employee who is eligible to
purchase a Policy under a Group Contract or an employer-sponsored insurance
program, the appropriate application for Individual Insurance must be supplied.
The spouse will be subject to the simplified underwriting procedure described
above. Guaranteed issue is not available. Spouse coverage is generally not
available under Executive Program Policies or Corporate Program Policies.
The Issue Date is the effective date for all coverage provided in the
original application for Individual Insurance. The Issue Date is used to
determine Policy Anniversaries, Policy Years, and Policy Months. A Policy will
not take effect until the appropriate application for Individual Insurance is
signed, the initial premium has been paid prior to the Insured's death, the
Insured is eligible for it, and the information in the application is
determined to be acceptable to the Company. However, prior to the actual
issuance of a Policy which is being underwritten on a guaranteed issue basis,
interim insurance in the amount of insurance applied for up to the Guaranteed
Issue Amount may be available and, if so, will start as of the date of the
application. Interim insurance ends on the earliest of the following dates: (a)
the date insurance begins on the Policy applied for; (b) the date a Policy
other than the Policy applied for is offered to the applicant; (c) the date the
Company notifies the applicant that the application for any proposed Insured is
declined; (d) 60 days from the date of application; or (e) termination of
employment with the Contractholder or sponsoring employer.
PREMIUMS
The initial premium is due on the Issue Date, and usually will be remitted by
the Contractholder or employer on behalf of the Owner. In Corporate Programs,
the Owner or its designated payor will remit premiums. The Company requires
that the initial premium for a Policy be at least equal to one-twelfth ( 1/12)
of the planned annual premium for the Policy set forth in the specifications
pages. The planned annual premium is an amount specified for each Policy based
on the requested initial Face Amount, the Issue Age of the Insured and the
charges under the Policy. (See "Charges and Deductions," page 27.) However, the
Owner is not required to pay premiums equal to the planned annual premium.
Premiums remitted by a Contractholder or sponsoring employer or designated
payor shall be applied to a Policy when received by the Company. Should
supporting documentation to enable the determination of the amount of premium
per Policy not be received prior to or coincident with the cash premium, the
premiums shall be promptly returned to the entity remitting such premiums.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. Under Group Contracts
and Individual Policies issued in connection with other employer-sponsored
insurance programs, the planned annual premium usually will be remitted by the
Contractholder or sponsoring employer on behalf of the Owner pursuant to a
planned premium payment schedule which will provide for premium payments in a
level amount at fixed intervals agreed to by the Contractholder or employer and
the Company (usually monthly). The amount of the premiums remitted by the
sponsoring employer or Contractholder will be that amount authorized to be
deducted by the employee. For Corporate Programs, the Owner or its designated
payor shall remit any scheduled and unscheduled premium payments. The Owner may
skip planned premium payments. Failure to pay one or more planned premium
payments will not cause the Policy to lapse until such time as the Cash
Surrender Value is insufficient to cover the next Monthly Deduction. (See
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 15.)
In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters,"
page 36.) Moreover, as mentioned above, an Owner may also skip planned premium
payments. Therefore, unlike conventional insurance policies, a Policy does not
obligate the Owner to pay premiums in accordance with a rigid and inflexible
premium schedule.
Failure of the Contractholder to remit the planned premium payments
authorized by its employees may cause the Group Contract to terminate. (See
"General Provisions of the Group Contract--Termination,"
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page 34.) Nonetheless, provided that there is sufficient Cash Surrender Value
to prevent the Policy from lapsing, the Individual Insurance provided will
automatically continue in the event of such termination. (See "Policy Rights
and Privileges--Eligibility Change Conversion," page 25.) Individual Insurance
will also continue if the employee's employment with the Contractholder or
sponsoring employer terminates. In either circumstance, an Owner of an
Individual Policy (or a Certificate converted by amendment to an Individual
Policy) will establish a new schedule of planned premiums which will have the
same planned annual premium, but ordinarily the payment intervals will be no
more frequent than quarterly. In Corporate Programs, there will generally be no
changes in planned or scheduled premiums upon the discontinuing employment of
an Insured.
Premium Limitations. Every premium payment remitted by or on behalf of an
Owner must be at least $20. In no event may the total of all premiums paid
under a Policy in any Policy Year exceed the current maximum premium
limitations for that year established by Federal tax laws. The maximum premium
limitation for a Policy Year is the most premium that can be paid in that
Policy Year such that the sum of the premiums paid under the Policy will not at
any time exceed the guideline premium limitations referred to in section
7702(c) of the Internal Revenue Code of 1986, or any successor provision. If at
any time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, the Company will accept only that portion
of the premium which will make total premiums equal the maximum. Any part of
the premium in excess of that amount will be returned directly to the Owner
within 60 days of the end of the Policy Year in which payment is received or
applied as otherwise agreed and no further premiums will be accepted until
allowed by the current maximum premium limitations prescribed by Federal tax
law. See "Federal Tax Matters" on page 35 for a further explanation of premium
limitations. Section 7702A creates an additional premium limitation, which, if
exceeded, can change the tax status of a Policy to that of a "modified
endowment contract." A modified endowment contract is a life insurance
contract, withdrawals from which are, for tax purposes, treated first as a
distribution of any taxable income under the contract, and then as a
distribution of nontaxable investment in the contract. Additionally, such
withdrawals may be subject to a 10% federal income tax penalty. The Company has
adopted administrative steps designed to notify an Owner when it is believed
that a premium payment will cause a Policy to become a modified endowment
contract. The Company has administrative procedures to prevent a modified
endowment contract by monitoring premium limits. The Owner will be given a
limited amount of time to request that the premium be reversed in order to
avoid the Policy's being classified as a modified endowment contract. (See
"Federal Tax Matters," page 36.)
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge less the premium tax charge. (See "Charges and Deductions--Sales
Charges," page 27.)
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums will
be allocated in accordance with the Owner's instructions upon receipt of the
premiums at the Company's Home Office. However, the minimum percentage, other
than zero ("0"), that may be allocated to a Division is 10 percent of the net
premium, and fractional percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers," page 24.)
The value of amounts allocated to Divisions of the Separate Account will vary
with the investment performance of the chosen Divisions and the Owner bears the
entire investment risk. This will affect the
15
<PAGE>
Policy's Cash Value, and may affect the death benefit as well. Owners should
periodically review their allocations of premiums and values in light of market
conditions and overall financial planning requirements.
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy to
lapse. Lapse will occur only when the Cash Surrender Value is insufficient to
cover the monthly deduction, and a grace period expires without a sufficient
payment being made. (See also "General Provisions of the Group Contract--Grace
Period--Termination," page 34.)
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium requirements,
the amount of the premium required to keep the Policy in force will be the
amount of the current monthly deduction. (See "Charges and Deductions," page
27.) If the Company does not receive the required amount within the grace
period, the Policy will lapse and terminate without Cash Value. If the Insured
dies during the grace period, any overdue monthly deductions will be deducted
from the death benefit otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
any time within five years after the date of lapse and before the Maturity
Date. The right to reinstate a lapsed Policy will not be affected by the
termination of a Group Contract or the termination of an employee's employment
during the reinstatement period. Reinstatement is subject to the following
conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company (including evidence of insurability of any person covered by a
rider to reinstate the rider).
2. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, is large enough to cover: (a) the
monthly deductions due at the time of lapse, and (b) two times the monthly
deduction due at the time of reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death. Payment
of death benefit proceeds will not be affected by termination of the Group
Contract or employer-sponsored insurance program or by termination of an
employee's employment.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 32.)
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<PAGE>
The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more of the settlement
options set forth in the Policy. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.) Death benefit proceeds will be paid to the
surviving Beneficiary or Beneficiaries specified in the application or as
subsequently changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long as
the Policy remains in force. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 15.) The minimum Face Amount currently is
$25,000. The maximum Face Amount is generally $500,000. However, in connection
with a particular Group Contract, employer sponsored insurance program,
Executive Program or Corporate Program, the Company may establish a
substantially higher Face Amount for Policies issued under that Contract or
program.
Option A. Under Option A, the death benefit is the current Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value on the date of
death. The applicable percentage is 250 percent for an Insured Attained Age 40
or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table below.
Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. Owners who prefer to have favorable investment performance
reflected in higher Cash Value for the same Face Amount, rather than increased
death benefit, generally should select Option A.
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
40 or younger........... 250%
41...................... 243
42...................... 236
43...................... 229
44...................... 222
45...................... 215
46...................... 209
47...................... 203
48...................... 197
49...................... 191
50...................... 185
51...................... 178
52...................... 171
53...................... 164
54...................... 157
55...................... 150
56...................... 146
57...................... 142
58...................... 138
59...................... 134
60...................... 130
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
61...................... 128%
62...................... 126
63...................... 124
64...................... 122
65...................... 120
66...................... 119
67...................... 118
68...................... 117
69...................... 116
70...................... 115
71...................... 113
72...................... 111
73...................... 109
74...................... 107
75 to 90................ 105
91...................... 104
92...................... 103
93...................... 102
94...................... 101
95 or older............. 100
</TABLE>
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company reserves
the right to alter the applicable percentage to the extent necessary to comply
with changes to Section 7702(d) or any successor provision thereto.
17
<PAGE>
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage is
the same as under Option A: 250 percent for an Insured with an Attained Age of
40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the percentage
declines as shown in the Applicable Percentage Table above. Accordingly, under
Option B the amount of the death benefit will always vary as the Cash Value
varies (but will never be less than the Face Amount). Owners who prefer to have
favorable investment performance reflected in higher death benefits for the
same Face Amount generally should select Option B. All other factors equal, for
the same premium dollar, Option B provides lower initial Face Amount resulting
in earlier cash accumulation.
Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option in effect. The Company reserves the right
to limit the number of changes in death benefit options to one each Policy
Year. A request for change must be made directly to the Company in writing. The
effective date of such a change will be the Monthly Anniversary on or following
the date the Company receives the change request.
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request for a change from Option A to Option B. This change may not be made if
it would result in a Face Amount of less than $25,000.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges will
be imposed upon a change from death benefit Option B to Option A. Changing from
Option A to Option B, however, will result in a decrease in the Face Amount. In
addition, if, prior to or accompanying a change in the death benefit option,
there has been an increase in the Face Amount, the cost of insurance charge may
be different for the increased amount. (See "Charges and Deductions--Monthly
Deduction--Cost of Insurance," page 28.)
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income due to not satisfying the
requirements of Federal tax law. (See "Federal Tax Matters," page 36.)
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written request
for a change in the Face Amount must be sent directly to the Company. A change
in Face Amount may affect the cost of insurance rate and the net amount at
risk, both of which affect an Owner's cost of insurance charge. (See "Charges
and Deductions--Monthly Deduction--Cost of Insurance," page 28.) In addition, a
change in Face Amount may have Federal income tax consequences. (See "Federal
Tax Matters," page 36.)
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000 and the Face Amount
remaining in force after any requested decrease may not be less than the
minimum amount Face Amount, generally $25,000. If, following a decrease in Face
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see "Payment and Allocation
18
<PAGE>
of Premiums," page 12), the decrease may be limited or Cash Value may be
returned to the Owner (at the Owner's election), to the extent necessary to
meet these requirements. A decrease in the Face Amount will reduce the Face
Amount in the following order:
(a) The Face Amount provided by the most recent increase;
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance," page 28).
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. If approved, the increase will become
effective on the Monthly Anniversary on or following receipt of the
satisfactory evidence of insurability. In addition, the Insured must have an
Attained Age of not greater than 80 on the effective date of the increase. The
amount of the increase may not be less than $5,000. The Face Amount may not be
increased more than the maximum Face Amount for that Policy, generally
$500,000. However, in connection with a particular Group Contract or employer-
sponsored insurance program, the Company may establish a substantially higher
Face Amount for Policies issued under that Contract or program. Although an
increase need not necessarily be accompanied by an additional premium (unless
it is required to meet the next monthly deduction), the Cash Surrender Value in
effect immediately after the increase must be sufficient to cover the next
monthly deduction. (See "Charges and Deductions-- Monthly Deduction," page 27.)
An increase in the Face Amount may result in certain additional charges. (See
"Charges and Deductions," page 27.)
An increase in Face Amount may be cancelled within the later of 20 days from
the date the Owner received the new Policy specifications page for the
increase, within 10 days of mailing the right to cancellation notice to the
Owner, or within 45 days after the application for an increase was signed. Upon
cancellation, any additional charges, which would not have been assessed
without the increase, will be refunded to the Owner if requested. If a request
for a refund is not made, the charges will be restored to the Policy's Cash
Value and allocated to Divisions of the Separate Account in the same manner as
they were deducted. Premiums paid following an increase in Face Amount and
prior to the time the right to cancel the increase expires will become part of
the Policy's Cash Value and will not be subject to refund. (See "Policy Rights
and Privileges--Right to Examine Policy," page 24.)
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the level
of premium payments, and, to a lesser extent, making partial withdrawals from
the Policy. Although the consequences of each of these methods will depend upon
the individual circumstances, they may be generally summarized as follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit," page 16),
decrease the pure insurance protection and the cost of insurance charges
under the Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if Option A is in
effect) or the Cash Value plus the Face Amount (if Option B is in effect),
increased premium payments will increase the pure insurance protection.
Increased premiums should also increase the amount of funds available to
keep the Policy in force.
19
<PAGE>
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 15.)
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals," page 22.)
However, it only affects the amount of pure insurance protection and cost
of insurance charges if the death benefit before or after the withdrawal is
based on the applicable percentage of Cash Value, because otherwise the
decrease in the death benefit is offset by the amount of Cash Value
withdrawn. The primary use of a partial withdrawal is to withdraw Cash
Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the Policy--Postponement of Payments," page 33.) The Owner may decide the
form in which the proceeds will be paid. During the Insured's lifetime, the
Owner may arrange for the death benefit proceeds to be paid in a single sum or
under one or more of the optional methods of settlement described below. The
death benefit will be increased by the amount of the monthly cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32, and "Charges and
Deductions," page 27.)
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits," page 26.)
An election or change of method of settlement must be in writing. A change in
Beneficiary revokes any previous settlement election. Once payments have begun,
the settlement option may not be changed.
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash Value
in the Separate Account and the Loan Account. The Policy's Cash Value in the
Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, and the charges assessed in
connection with the Policy. An Owner may at any time surrender the Policy and
receive the Policy's Cash Surrender Value. (See "Policy Rights and Privileges--
Surrender and Partial Withdrawals," page 23.) There is no guaranteed minimum
Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the Issue
Date and the Investment Start Date, this amount may be more than the amount of
one monthly deduction. (See "Payment and Allocation of Premiums," page 12.)
Thereafter, on each Valuation Date, the Cash Value in a Division of the
Separate Account will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
20
<PAGE>
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
(6) Any amounts transferred from the Division during the current Valuation
Period plus transfer charges if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) Any contingent deferred sales charges incurred during the current
Valuation Period in connection with a partial withdrawal or decrease in
Face Amount allocated to the Division; minus
(9) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions," page 27.)
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(4) Any amount charged against each Division for taxes or any amount set
aside during the Valuation Period as a reserve for taxes attributable
to the operation or maintenance of each Division; minus
(5) A charge not to exceed .0024547% of the net assets for each day in the
Valuation Period. This corresponds to 0.90% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value. Unit value is obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date; minus
(2) A reduction based upon a charge not to exceed .0024547% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.90% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
POLICY RIGHTS AND PRIVILEGES
EXERCISING RIGHTS AND PRIVILEGES UNDER THE POLICIES
Owners of Policies issued under a Group Contract or in connection with an
employer-sponsored insurance program may exercise their rights and privileges
under the Policies (i.e., make transfers, change premium allocations, borrow,
etc.) by directly notifying the Company in writing at its Home Office. The
Company will send all reports and other notices described herein or in the
Policy directly to the Owner.
21
<PAGE>
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for such loan. The Loan
Value is equal to (a) minus (b), where (a) is 85 percent of the Cash Value of
the Policy on the date the Policy Loan is requested and (b) is the amount of
any outstanding Indebtedness. Loan interest is due and payable in arrears on
each Policy Anniversary or on a pro rata basis for such shorter period as the
loan may exist. The minimum amount that may be borrowed is $100. The loan may
be completely or partially repaid at any time while the Insured is living. Any
amount due to an Owner under a Policy Loan ordinarily will be paid within seven
days after the Company receives the loan request at its Home Office, although
payments may be postponed under certain circumstances. (See "General Matters
Relating to the Policy--Postponement of Payments," page 30.)
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. A Loan Subaccount
exists for each Division of the Separate Account. Amounts transferred to the
Loan Account to secure Indebtedness are allocated to the appropriate Loan
Subaccount to reflect its origin. Unless the Owner requests a different
allocation, amounts will be transferred from the Divisions of the Separate
Account in the same proportion that the Policy's Cash Value in each Division
bears to the Policy's total Cash Value, less the Cash Value in the Loan
Account, at the end of the Valuation Period during which the request for a
Policy Loan is received. This will reduce the Policy's Cash Value in the
Separate Account. These transactions will not be considered transfers for
purposes of the limitations on transfers between Divisions as discussed on page
24.
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of Company
management as authorized by the Board of Directors of the Company. The Loan
Account interest credited will be transferred to the Divisions of the Separate
Account: (1) each Policy Anniversary; (2) when a new loan is made; (3) when a
loan is partially or fully repaid; and (4) when an amount is needed to meet a
monthly deduction.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of Policy Loans," below.) The
amount transferred will be deducted from the Divisions of the Separate Account
in the same proportion that the portion of the Cash Value in each Division
bears to the total Cash Value of the Policy minus the Cash Value in the Loan
Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
Federal income tax consequences (See "Federal Tax Matters," page 36.)
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment performance
of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Charges and
Deductions," page 27.) A sufficient payment must be made within the later of
the grace period of 62 days from the Monthly Anniversary immediately before the
date Indebtedness exceeds the Cash Value, or 31 days after notice that the
Policy will terminate without a sufficient payment has been mailed, or the
Policy will lapse and terminate without value. A lapsed Policy, however, may
later be reinstated. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 15.)
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<PAGE>
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part at
any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as repayment
of Indebtedness. When a loan repayment is made, an amount securing the
Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount.
SURRENDER AND PARTIAL WITHDRAWALS
At any time during the lifetime of the Insured and while a Policy is in
force, the Owner may surrender, or make a partial withdrawal under, the Policy
by sending a written request to the Company. The amount available upon
surrender is the Cash Surrender Value (described below) at the end of the
Valuation Period during which the surrender request is received at the
Company's Home Office. Amounts payable upon surrender or a partial withdrawal
ordinarily will be paid within seven days of receipt of the written request.
(See "General Matters Relating to the Policy--Postponement of Payments," page
30.) Surrenders and partial withdrawals may have Federal income tax
consequences. (See "Federal Tax Matters," page 36.)
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request, or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The Cash
Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness. Surrender proceeds will be paid in a single sum. If the request
is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to one
partial withdrawal each Policy Month from the Separate Account. The minimum
amount of a partial withdrawal, net of any transaction charges, is at least
$500. The minimum amount that can be withdrawn from a Division is $50, or the
Policy's Cash Value in a Division, if smaller. The maximum amount that may be
withdrawn, including the partial withdrawal transaction charge, is the Loan
Value. The partial withdrawal transaction charge is equal to the lesser of $25
or two percent of the amount withdrawn. The Owner may allocate the amount
withdrawn, subject to the above conditions, among the Divisions of the Separate
Account. If no allocation is specified, then the partial withdrawal will be
allocated among the Divisions of the Separate Account in the same proportion
that the Policy's Cash Value in each Division bears to the total Cash Value of
the Policy, less the Cash Value in the Loan Account, on the date the request
for the partial withdrawal is received.
A partial withdrawal will decrease the Face Amount in two situations. First,
if the death benefit Option A is in effect and the death benefit equals the
Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge. Second, if the death benefit equals a
percentage of Cash Value (whether Option A or Option B is in effect), then a
partial withdrawal will decrease the Face Amount by the amount that the partial
withdrawal plus the partial withdrawal transaction charge exceeds the
difference between the death benefit and the Face Amount. The death benefit
also will be reduced in this circumstance. If Option B is in effect and the
death benefit equals the Face Amount plus the Cash Value, the partial
withdrawal will not reduce the Face Amount, but it will reduce the Cash Value
and, thus, the death benefit by the amount of the partial withdrawal plus the
partial withdrawal transaction charge. The Face Amount will be decreased in the
following order: (1) the Face Amount at issue; and (2) any increases in the
same order in which they were issued.
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<PAGE>
Generally, the partial withdrawal transaction charge will be allocated among
the Divisions of the Separate Account in the same proportion as the partial
withdrawal is allocated. If, following a partial withdrawal, insufficient funds
remain in a Division to pay the partial withdrawal transaction charge allocated
to a Division, the unpaid charges will be allocated equally among the remaining
Divisions. In addition, an Owner may request that the partial withdrawal
transaction charge be paid from the Owner's Cash Value in another Division.
The Face Amount remaining in force after a partial withdrawal may not be less
than $25,000. Any request for a partial withdrawal that would reduce the Face
Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection," page 19.)
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account. Requests for transfers from or among Divisions of the
Separate Account must be made in writing directly to the Company and may be
made once each Policy Month. Transfers must be in amounts of at least $250 or,
if smaller, the Policy's Cash Value in a Division. The Company will effectuate
transfers and determine all values in connection with transfers as of the end
of the Valuation Period during which the transfer request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 20 days after receiving it, within 45
days after the Owner signed the application, or within 10 days of mailing a
notice of the cancellation right to the Owner, whichever is latest. If a Policy
is cancelled within this time period, a refund will be paid. The refund will
equal all premiums paid under the Policy.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
the Company. A refund of premiums paid by check may be delayed until the check
has cleared the Owner's bank. (See "General Matters Relating to the Policy--
Postponement of Payments," page 30.)
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit," page 16) also may be cancelled. The request for cancellation must be
made within the latest of 20 days from the date the Owner received the new
Policy specifications pages for the increase, 10 days of mailing the right to
cancellation notice to the Owner, or 45 days after the Owner signed the
application for the increase.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have
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<PAGE>
been made absent the increase (see "Charges and Deductions--Monthly Deduction,"
page 27). If no request is made, the Company will increase the Policy's Cash
Value by the amount of these additional charges. This amount will be allocated
among the Divisions of the Separate Account in the same manner as it was
deducted.
CONVERSION RIGHT TO A FIXED BENEFIT POLICY
Once during the first 24 Policy Months following the Issue Date of the
Policy, the Owner may, upon written request, convert a Policy still in force to
a life insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. In the event a
Certificate has been amended to operate as an Individual Policy following an
Insured's change in eligibility under a Group Contract, the conversion right
will be measured from the Issue Date of the original Certificate. (See "Policy
Rights and Privileges--Eligibility Change Conversion," below). No evidence of
insurability will be required when this right is exercised. However, the
Company will require that the Policy be in force and that the Owner repay any
existing Indebtedness. At the time of the conversion, the new Policy will have,
at the Owner's option, either the same death benefit or the same net amount at
risk as the original Policy. The new Policy will also have the same Issue Date
and Issue Age as the original Policy. The premiums for the new Policy will be
based on the Company's rates in effect for the same Issue Age and rate class as
the original Policy.
In addition, once during the first 24 Policy Months following the effective
date of a requested increase in Face Amount (i.e., an increase that is not the
result of a change in death benefit options), the Owner may, upon written
request, convert the amount of the increase in Face Amount to a life insurance
policy which also provides for fixed benefits. Premiums under this new contract
will be based on the Company's rates in effect for the same Issue Age and rate
class of the Insured as were applied on the effective date of the increase in
the Face Amount. The conditions and principles, described above, which are
applicable to a conversion of the entire Policy, will be equally applicable to
the conversion of an increase in Face Amount to a fixed-benefit policy.
ELIGIBILITY CHANGE CONVERSION
If an Insured's eligibility under a Group Contract or employer-sponsored
insurance program ends due to its termination or due to the termination of the
employee's employment, the Insured's coverage will continue unless the Policy
is no longer in force. Even if the Policy is not in force due to lapse, the
right to reinstate and thus to convert a lapsed Policy will not be affected by
the change in the employee's eligibility during the reinstatement period.
If a Certificate was issued under the Group Contract, the Certificate will be
amended automatically so that it will continue in force as an Individual
Policy. The rights, benefits, and guaranteed charges will not be altered by
this amendment. The amendment will be mailed to the Owner within 31 days after
the Company receives written notice that (a) the employee's employment ended or
(b) after the termination of the Group Contract. If, at the time the conversion
occurs, the Policy is in a grace period (see "Payment and Allocation of
Premiums--Policy Lapse and Reinstatement," page 15), any premium necessary to
prevent the Policy from lapsing must be paid to the Company at its Home Office
before the new Individual Policy will be mailed. A new planned premium schedule
will be established which will have the same planned annual premium utilized
under the Group Contract, but, ordinarily, the planned payment intervals will
be no more frequent than quarterly. The Company may allow payment of planned
premium through periodic (usually monthly) authorized electronic funds
transfer. Of course, unscheduled premium payments can be made at any time. (See
"Payment and Allocation of Premiums--Premiums," page 14.)
If an Individual Policy was issued under the Group Contract or other
employer-sponsored insurance program including a Corporate Program or Executive
Program, the Policy will continue in force following the change in eligibility.
The rights, benefits, and guaranteed charges under the Policy will remain the
same following this change in eligibility.
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<PAGE>
When an employee's spouse is the Insured under a Policy, the spouse's
insurance coverage also will continue in the event the employee is no longer
eligible. If a Certificate was originally issued to the employee's spouse, the
Certificate will be amended automatically as described above. If an Individual
Policy was originally issued, the Individual Policy will continue as described
above. In addition, if an Associated Company ceases be to under common control
with the Contractholder, the Insureds of the Associated Company (i.e.,
employees of the Associated Company and their spouses) may continue their
insurance in the manner described above.
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay the
Cash Surrender Value of the Policy to the Owner on the Maturity Date. An Owner
may elect to have amounts payable on the Maturity Date paid in a single sum or
under a settlement option. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 26.) Amounts payable on the Maturity Date ordinarily
will be paid within seven days of that date, although payment may be postponed
under certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments," page 30.) A Policy will mature if and when the
Insured reaches Attained Age 95.
PAYMENT OF POLICY BENEFITS
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written agreement with
the Company.
Settlement Options. The settlement options described below apply to the
payment of death benefit proceeds, as well as to benefits payable at maturity.
These are examples of options that may be available. Once a settlement option
is in effect, there will no longer be value in the Separate Account. The
Company may make other settlement options available in the future.
Option A--Life Income. The Company will pay equal monthly payments that will
be made for the payee's lifetime.
Option B--Life Income for Two Lives. The Company will pay monthly
installments jointly and to two named payees if both are living when the
installments become payable. One payee will be designated as primary payee.
Full installments will continue so long as the primary payee is living. If the
primary payee dies after installments begin, full installments or installments
of 1/2 or 2/3 (whichever the Owner elected when applying for this option) will
continue to the other payee during his or her lifetime.
Option C--Income for Specified Number of Years and Life Thereafter. The
Company will pay monthly installments beginning on the effective date of the
option and continuing for 5, 10, 15 or 20 years certain, as may be chosen, and
after that during the payee's lifetime.
Option D--Life Income With Cash Refund. The Company will pay equal monthly
installments as long as the payee lives. If the payee dies before the total
amounts paid equal the proceeds applied, the Company pays the difference in one
sum.
Option E--Installments of a Specified Amount. The Company will pay
installments at dates and in amounts chosen by the payee with the Company's
approval. The Company will continue to make payments until all of the proceeds,
with interest, are paid. The final payment will not exceed the unpaid balance.
Option F--Income for Specified Number of Years. The Company will pay monthly
installments beginning on the effective date of the option and continuing for a
specified number of years, not to exceed 30 years.
Option G--Interest. The Company will hold the proceeds on deposit during the
payee's lifetime or for any other period selected with the Company's approval.
Interest may be accumulated or received in monthly, quarterly, semiannual, or
annual payments, as elected. The proceeds may be withdrawn at any time upon
request. Interest begins to accrue as of the date of death, for death benefit
proceeds; the Maturity Date, for benefits payable upon maturity of a Policy;
and the date a request for surrender is received, for surrender of a Policy.
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<PAGE>
The Company may, from time to time, offer additional settlement options
and/or more favorable settlement option rates to all Insureds or Beneficiaries
under the Policies.
Accelerated Death Benefits. The Company offers certain riders which permit
the Owner to elect to receive an accelerated payment of the Policy's death
benefit in a reduced amount under certain circumstances. (See "General Matters
Relating to the Policy--Additional Insurance Benefits," page 32.)
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policies to compensate the
Company for providing the insurance benefits set forth in the Policies and any
additional benefits added by rider, administering the Policies, incurring
expenses in distributing the Policies, and assuming certain risks in connection
with the Policies.
SALES CHARGES
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by a front-end sales charge ("premium
expense charge") equal to one percent of the premium.
In addition, as a result of OBRA, insurance companies are generally required
to capitalize and amortize certain policy acquisition expenses over a ten year
period rather than currently deducting such expenses. A higher capitalization
expense applies to the deferred acquisition expenses of Policies that are
deemed to be individual contracts under OBRA and will result in a significantly
higher corporate income tax liability for the Company in early Policy Years.
Thus, under Policies that are deemed to be individual contracts under OBRA, the
Company makes an additional charge of 1% of each premium payment to compensate
the Company for the anticipated higher corporate income taxes that result from
the sale of such a Policy. Among other possible employer-sponsored programs,
Corporate Program Policies are deemed to be individual contracts. This
additional charge is treated as a sales load for purposes of determining
compliance with the limitations on sales loads imposed by the Investment
Company Act of 1940 and applicable regulations thereunder.
The premium payment less the premium expense charge less any charge to
compensate the Company for anticipated higher corporate income taxes resulting
from the sale of a Policy less the premium tax charge (described below) equals
the net premium.
The sales charges will not change in the event that an Insured is no longer
eligible under a Group Contract or employer-sponsored insurance program, but
continues coverage on an individual basis.
The sales charges may not be sufficient to cover the distribution expenses
incurred by the Company. The Company expects to recover any deficiency from its
general assets, which may include profits from the mortality and expense risk
charge.
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premiums taxes, the Company deducts a charge of 2 percent from all
Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate the Company for (a) certain administrative costs; (b)
insurance underwriting and acquisition expenses in connection with issuing a
Policy; (c) the cost of insurance; and (d) the cost of optional benefits added
by rider. The monthly deduction will be deducted on the Investment Start Date
and on each succeeding Monthly Anniversary. It will be allocated among each
Division of the Separate Account in the same proportion that a Policy's Cash
Value in each Division bears to the total Cash Value of the Policy, less the
Cash Value in the Loan Account, on the date the deduction is made. Because
portions of the monthly deduction, such as the cost of insurance, can vary from
month to month, the monthly deduction itself will vary in amount from month to
month.
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<PAGE>
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping, processing
death benefit claims, cash surrenders, partial withdrawals, Policy changes,
reporting and overhead costs, processing applications, and establishing Policy
records. As reimbursement for administrative expenses related to the
maintenance of each Policy and the Separate Account, the Company assesses a
monthly administration charge from each Policy. The amount of this charge is
set forth in the specifications pages of the Policy and depends on the number
of employees eligible to be covered at issue of a Group Contract or an
employer-sponsored insurance program. The following table sets forth the
general range of monthly administrative charges under the Policy:
<TABLE>
<CAPTION>
ELIGIBLE EMPLOYEES FIRST YEAR SUBSEQUENT YEARS
------------------ ---------- ----------------
<S> <C> <C>
250-499....................... $5.00......................... $2.50
500-999....................... $4.75......................... $2.25
1000+......................... $4.50......................... $2.00
</TABLE>
For Group Contracts or other employer-sponsored insurance programs with fewer
than 250 eligible employees, those with additional administrative costs, or
those that are offered as Executive Programs or Corporate Programs, the monthly
administrative charge may be higher, but will not exceed $6.00 per month during
the first Policy Year and $3.50 per month in renewal years.
These charges, once established at the time a Policy is issued, are
guaranteed not to increase over the life of the Policy. Nor will the
administrative charge change in the event that the Insured is no longer
eligible for group coverage, but continues coverage on an individual basis. The
Company has designed the administrative charge so as not to make any profit on
the charge. In addition, where the Company believes that lower administrative
costs will be incurred in connection with a particular Group Contract or
employer-sponsored insurance program due to the number of eligible employees or
administrative support provided by the employer, the Company may modify the
above schedule for that Group Contract or other employer-sponsored insurance
program. The amount of the administrative charge applicable to a particular
Policy will be set forth in specifications pages for that Policy.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience. The Company currently issues
the Policies on a guaranteed issue or simplified underwriting basis without
regard to the sex of the Insured. Whether a Policy is issued on a guaranteed
issue or simplified underwriting basis does not affect the cost of insurance
charge determined for that Policy.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and possibly the gender mix (i.e., the
proportion of men and women covered under a particular Group Contract or
employer-sponsored program). The cost of insurance rates generally increase as
the Insured's Attained Age increases. An Insured's rate class is generally
based on the number of eligible employees as well as other factors that may
affect the mortality risks assumed by the Company in connection with a
particular Group Contract or employer-sponsored insurance program. All other
factors being equal, the cost of insurance rates generally decrease by rate
class as the number of eligible employees in the rate class increase. The
Company reserves the right to change criteria on which a rate class will be
based in the future.
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<PAGE>
If gender mix is a factor, the Company will estimate the gender mix of the
pool of Insureds under a Group Contract or employer-sponsored insurance program
upon issuance of the Contract. Each year on the Group Contract or employer-
sponsored insurance program's anniversary, the Company may adjust the rate to
reflect the actual gender mix for the particular group. In the event that the
Insured's eligibility under a Group Contract (or other employer-sponsored
insurance program) ceases, the cost of insurance rate will continue to reflect
the gender mix of the pool of Insureds at the time the Insured's eligibility
ceased. However, at some time in the future, the Company reserves the right to
base the gender mix and rate class on the group consisting of those Insureds
who are no longer under a Group Contract or employer-sponsored program.
The current cost of insurance rates will not be greater than the guaranteed
cost of insurance rates set forth in the Policy. These guaranteed rates are 125
percent of the maximum rates that could be charged based on the 1980
Commissioners Standard Ordinary Mortality Table C ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the maximum rates in the 1980
CSO Table because the Company uses guaranteed or simplified underwriting
procedures whereby the insured is not required to submit to a medical
or paramedical examination. The current cost of insurance rates are generally
lower than 100 percent of the 1980 CSO Table. Any change in the actual cost of
insurance rates, except those changes made to adjust for changes in the gender
mix of the pool of Insureds under a particular Group Contract or employer-
sponsored insurance program, will apply to all persons of the same Attained Age
and rate class whose initial Face Amounts or increases in Face Amount have been
in force for the same length of time. (For purposes of computing guideline
premiums under Section 7702 of the Internal Revenue Code of 1986, as amended,
the Company will use 100 percent of the 1980 CSO Table.)
The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0040741 (which reduces the net
amount at risk, solely for purposes of computing the cost of insurance, by
taking into account assumed monthly earnings at an annual rate of five
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that for
the initial Face Amount, the net amount at risk will be calculated separately
for each rate class. If Option A is in effect, for purposes of determining the
net amounts at risk for each rate class, Cash Value will first be considered a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, the excess Cash Value will then be considered a part of each
increase in order, starting with the first increase. If Option B is in effect,
the net amount at risk for each rate class will be determined by the Face
Amount associated with that rate class. In calculating the cost of insurance
charge, the cost of insurance rate for a Face Amount is applied to the net
amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option A
and Option B when more than one rate class is in effect, a change in the death
benefit option may result in a different net amount at risk for each rate class
than would have occurred had the death benefit option not been changed. Since
the cost of insurance is calculated separately for each rate class, any change
in the net amount at risk resulting from a change in the death benefit option
may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," page 16, and "Policy Rights and Privileges--Surrender
and Partial Withdrawals," page 22.)
Additional Insurance Benefits. The monthly deduction will include charges for
any additional benefits provided by rider. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 32.)
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal.
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<PAGE>
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at a rate not to exceed .0024547% of the net assets
of each Division of the Separate Account, which equals an annual rate of .90%
of those net assets. The Company may realize a profit from this charge.
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount of
death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future. Charges for other
taxes, if any, attributable to the Account may also be made. (See "Federal Tax
Matters," page 36.)
Expenses of PCM. The value of the net assets of the Separate Account will
reflect the investment advisory fee and other expenses incurred by PCM. (See
"Putnam Capital Manager Trust," page 10.)
GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) 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; (ii) the SEC by order
permits postponement for the protection of Owners; or (iii) 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 premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE CONTRACT
The Policy, the attached application, any riders, endorsements, any
application for an increase in Face Amount, and any application for
reinstatement constitute the entire contract between the Owner and the Company.
Apart from the rights and benefits described in the Certificate or Individual
Policy and incorporated by reference into the Group Contract, the Owner has no
rights under the Group Contract. All statements made by the Insured in the
application are considered representations and not warranties, except in the
case of fraud. Only statements in the application and any supplemental
applications can be used to contest a claim or the validity of the Policy. Any
change to the Policy must be approved in writing by the President, a Vice
President, or the Secretary of the Company. No agent has the authority to alter
or modify any of the terms, conditions, or agreements of the Policy or to waive
any of its provisions.
CONTROL OF POLICY
The Owner of the Policy is the entity named as the Owner in the application.
Ownership may be changed, however, as described below. The Owner is entitled to
all rights provided by the Policy, prior to its Maturity Date. After the
Maturity Date, the Owner cannot change the payee nor the mode of payment,
unless otherwise provided in the Policy. Any person whose rights of ownership
depend upon some future event will not possess any present rights of ownership.
If there is more than one Owner at a given time, all must exercise the rights
of ownership. If the Owner should die, and the Owner is not the Insured, the
Owner's interest will go to his or her estate unless otherwise provided.
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<PAGE>
BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If there is more
than one Beneficiary at the death of the Insured, each will receive equal
payments unless otherwise provided by the Owner. If no Beneficiary is living at
the death of the Insured, the proceeds will be payable to the Owner or, if the
Owner is not living, to the Owner's estate.
CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received at
the Company's Home Office. The Company will not be liable for any payment made
or action taken before the Company received the written request for change. If
the Owner is also a Beneficiary of the Policy at the time of the Insured's
death, the Owner may, within 60 days of the Insured's death, designate another
person to receive the Policy proceeds.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or any
applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment thereunder
will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from the
Issue Date during the lifetime of the Insured. An increase in Face Amount or
addition of a rider after the Issue Date is incontestable after such increase
or addition has been in force for two years from its effective date during the
lifetime of the Insured. Any reinstatement of a Policy is incontestable, except
for nonpayment of premiums, only after it has been in force during the lifetime
of the Insured for two years after the effective date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an acknowledged copy to
the Owner. The Company is not responsible for determining the validity of any
assignment. Payment of Policy proceeds is subject to the rights of any assignee
of record. If a claim is based on an assignment, the Company may require proof
of the interest of the claimant. A valid assignment will take precedence over
any claim of a Beneficiary.
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<PAGE>
SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the laws of the state in
which the Policy was delivered, if less than two years), the amount payable
will be limited to premiums paid, less any partial withdrawals and outstanding
Indebtedness. If the Insured, while sane or insane, dies by suicide within two
years after the effective date of any increase in Face Amount, the death
benefit for that increase will be limited to the amount of the monthly
deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide when
the Policy, or any increase in Face Amount, was applied for.
MISSTATEMENT OF AGE AND CORRECTIONS
If the age of the Insured has been misstated in the application, the amount
of the death benefit will be that which the most recent cost of insurance
charge would have purchased for the correct age.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. However, some Group
Contracts, employer-sponsored insurance programs, Executive Programs, or
Corporate Programs may not offer each of the additional benefits described
below. Certain riders may not be available in all states. In addition, should
it be determined that the tax status of a Policy as life insurance is adversely
affected by the addition of any of these riders, the Company will cease
offering such riders. The descriptions below are intended to be general; the
terms of the Policy riders providing the additional benefits may vary from
state to state, and the Policy should be consulted. The cost of any additional
insurance benefits will be deducted as part of the monthly deduction. (See
"Charges and Deductions--Monthly Deduction," page 27.)
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accidental Death Benefit Rider. Provides additional insurance if the
Insured's death results from accidental bodily injury, as defined in the rider.
Under the terms of the rider, the additional benefits provided in the Policy
will be paid upon receipt of proof by the Company that death resulted directly
from accidental injury and independently of all other causes; occurred within
120 days from the date of injury; and occurred before the Policy Anniversary
nearest age 70 of the Insured.
Children's Life Insurance Rider. Provides for term insurance on the Insured's
children, as defined in the rider. To be eligible for insurance under the
rider, the child to be insured must not be confined in a hospital at the time
the application is signed. Under the terms of the rider, the death benefit will
be payable to the named Beneficiary upon the death of any insured child. Upon
receipt of proof of the Insured's death before the rider terminates, the rider
will be continued on a fully paid-up term insurance basis.
HIV Acceleration of Death Benefits Rider. Provides for the Owner's election
for the Company to make an accelerated payment, prior to the death of the
Insured upon receipt of satisfactory evidence that the
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Insured has tested seropositive for the human immunodeficiency virus ("HIV")
after both the Policy and rider are issued. The Company will pay the Policy's
death benefit (less any Indebtedness and any term insurance added by riders),
calculated on the date that the Company receives satisfactory evidence that the
Insured has tested seropositive for HIV, reduced by a $100 administrative
processing fee. The Company will pay the accelerated benefit to the Owner in a
single payment in full settlement of the Company's obligations under the
Policy. The rider may be added to the Policy only after the Insured
satisfactorily meets certain underwriting requirements which will generally
include a negative HIV test result to a blood or other screening test
acceptable to the Company.
The Federal income tax consequences associated with (i) adding the HIV
Acceleration of Death Benefit Rider or (ii) receiving the benefit provided
under the rider are uncertain. Accordingly, we urge you to consult a tax
adviser about such consequences before adding the HIV Acceleration of Death
Benefit Rider to your Policy or requesting a benefit under the rider.
Accelerated Death Benefit Settlement Option Rider. Provides for the
accelerated payment of a portion of death benefit proceeds in a single sum to
the Owner if the Insured is terminally ill or permanently confined to a nursing
home. Under the rider, which is available at no additional cost, the Owner may
make a voluntary election to completely settle the Policy in return for the
Company's accelerated payment of a reduced death benefit. The Owner may make
such an election under the rider if the Insured (1) has a life expectancy of 12
months or less or (2) is permanently confined to a qualified nursing home and
is expected to remain there until death. Any irrevocable beneficiary and
assignees of record must provide written authorization in order for the Owner
to receive the accelerated benefit.
The amount of the death benefit payable under the rider will equal the cash
surrender value under the Policy on the date the Company receives satisfactory
evidence of either (1) or (2), above, (less any Indebtedness and any term
insurance added by other riders) plus the product of the applicable "benefit
factor" multiplied by the difference of (a) minus (b), where (a) equals the
Policy's death benefit proceeds, and (b) equals the Policy's cash surrender
value. The "benefit factor", in the case of terminal illness, is 0.85 and, in
the case of permanent nursing home confinement, is 0.70.
The Federal income tax consequences associated with (i) adding the
Accelerated Death Benefit Settlement Option Rider or (ii) receiving the
benefits provided under such rider are uncertain. Accordingly, we urge you to
consult a tax adviser about such consequences before adding the Accelerated
Death Benefit Settlement Option Rider to your Policy or requesting a benefit
under the rider.
RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the American
Series and a list of the portfolio securities held in each Fund. Receipt of
premium payments directly from the Owner, transfers, partial withdrawals,
Policy Loans, loan repayments, changes in death benefit options, increases or
decreases in Face Amount, surrenders and reinstatements will be confirmed
promptly following each transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to an Underwriting Agreement with the
Company. Walnut Street is a wholly-owned subsidiary of General
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American Holding Company, which is an affiliate of the Company. Walnut Street
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities
Dealers. The Policies will be sold by broker-dealers who have entered into
written sales agreements with Walnut Street.
Broker-dealers will receive commissions based upon a commission schedule in
the sales agreement with the Company and Walnut Street. Broker-dealers
compensate their registered representative agents. Commissions are payable on
net collected premiums received by the Company. Maximum commissions payable to
a broker-dealer during the first year of a Group Contract or other employer-
sponsored insurance program are (a) 18% of premiums that do not exceed the cost
of insurance assessed during the first Policy Year plus (b) 1% of premiums in
excess of the cost of insurance assessed during that Policy Year. In all
renewal years of a Group Contract or other employer-sponsored insurance program
maximum commissions are (a) 3% of premiums that do not exceed the cost of
insurance assessed during the respective Policy Year plus (b) 1% of premiums in
excess of the cost of insurance assessed during that Policy Year. In lieu of
the part (b) of renewal commissions described above payable on premiums
received in excess of the cost of insurance assessed, renewal commissions may
be up to 0.25% per year of the average cash value of a Policy during a Policy
Year or calendar year. In no event will commissions be payable for more than 20
years.
Walnut Street received no commissions for the Policies for the year ended
December 31, 1995.
GENERAL PROVISIONS OF THE GROUP CONTRACT
ISSUANCE
The Group Contract will be issued upon receipt of a signed application for
Group Insurance signed by a duly authorized officer of the employer and
acceptance by a duly authorized officer of the Company at its Home Office.
PREMIUM PAYMENTS
The Contractholder will remit planned premium payments for Insureds of the
Contractholder or an Associated Company in an amount authorized by the employee
to be deducted from his wages. All planned premiums under a Group Contract must
be remitted in advance to the Company. The planned premium payment interval is
agreed to by the Contractholder and the Company. Prior to each planned payment
interval, the Company will furnish the Contractholder with a statement of the
planned premium payments to be made under the Group Contract or such other
notification as has been agreed to by the Contractholder and the Company.
GRACE PERIOD
If the Contractholder does not remit planned premium payments in a timely
fashion, the Group Contract will be in default. A grace period of 31 days
begins on the date that the planned premiums were scheduled to be remitted. If
the Contractholder does not remit premiums prior to the end of the grace
period, the Group Contract will terminate. However, the Individual Insurance
will continue following the Group Contract's termination, provided such
insurance is not surrendered or cancelled by the Owner. (See "Policy Rights and
Privileges--Eligibility Change Conversion," page 25.)
TERMINATION
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, the Company may end a Group
Contract or any of its provisions on 31 days notice. If the Group Contract
terminates, any Policies in effect will remain in force on an individual basis,
unless such insurance is surrendered or cancelled by the Owner. New Policies
will be issued as described in "Policy Rights and Privileges--Eligibility
Change Conversion," page 25.
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<PAGE>
RIGHT TO EXAMINE GROUP CONTRACT
The Contractholder may terminate the Group Contract within 20 days after
receiving it, within 45 days after the application was signed or within 10 days
of mailing a notice of the cancellation right, whichever is latest. To cancel
the Group Contract, the Contractholder should mail or deliver the Group
Contract to the Company.
ENTIRE CONTRACT
The Group Contract, with the attached copy of the Contractholder's
application and other attached papers, if any, is the entire contract between
the Contractholder and the Company. All statements made by the Contractholder,
any Owner or any Insured will be deemed representations and not warranties.
Misstatements will not be used in any contest or to reduce claim under the
Group Contract, unless it is in writing. A copy of the application containing
such misstatement must have been given to the Contractholder or to the Insured
or to his Beneficiary, if any.
INCONTESTABILITY
The Company cannot contest the Group Contract after it has been in force for
two years from the date of issue.
OWNERSHIP OF GROUP CONTRACT
The Contractholder owns the Group Contract. The Group Contract may be changed
or ended by agreement between the Company and the Contractholder without the
consent of, or notice to, any person claiming rights or benefits under the
Group Contract. However, the Contractholder does not have any ownership
interest in the Policies issued under the Group Contract. The rights and
benefits under the Policies inure to the benefit of the Owners, Insureds, and
Beneficiaries as set forth herein and in the Policies.
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FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is limited.
The Company nonetheless believes (largely in reliance on IRS Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that the
Policy should meet the Section 7702 definition of a life insurance contract. If
a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy. Therefore, if it is subsequently
determined that a Policy does not satisfy section 7702, the Company will take
whatever steps are appropriate and necessary to attempt to cause such Policy to
comply with section 7702, including possibly refunding any premiums paid that
exceed the limitations allowable under section 7702 (together with interest or
other earnings on any such premiums refunded as required by law). For these
reasons, the Company reserves the right to modify the Policy as necessary to
attempt to qualify it as a life insurance contract under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated as
a life insurance contract for Federal tax purposes. Although the Company does
not control PCM or its investments, PCM has represented that it intends to
comply with the diversification requirements prescribed by the Treasury in Reg.
section 1.817-5. Thus, the Company believes that each Division of the Separate
Account, through PCM, will be in compliance with the requirements prescribed by
the Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
significant guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company does not know what standards will be set forth, if
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any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being considered the owner of
a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. As a life insurance contract, the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101(a)(1) of the Code.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, a conversion to a fixed policy, an exchange, a Policy loan, an
unscheduled premium payment, a Policy lapse with an outstanding loan, a partial
withdrawal, a surrender, or an assignment of the Policy may have Federal income
tax consequences depending on the circumstances. In addition, Federal estate
and state and local estate, inheritance, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy owner or Beneficiary. A competent tax adviser should be consulted for
further information.
The Federal income tax consequences associated with (i) adding either the HIV
Acceleration of Death Benefit Rider or the Accelerated Death Benefit Settlement
Option Rider (the "Riders") or (ii) receiving the benefits provided under these
Riders are uncertain. Accordingly, we urge you to consult a tax adviser before
adding either Rider to your Policy or requesting a benefit under such Riders.
The Policies may be used in various arrangements, such as nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract". Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
2. POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. In general, a Policy
will be a modified endowment contract if the accumulated premiums paid at any
time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. Further, a Policy that is not otherwise a modified endowment contract
may become a modified endowment contract if it is "materially changed." The
determination whether a Policy will be a modified endowment contract after a
material change generally depends upon the relationship of the death benefit
and the cash value at the time of such change and the additional premiums paid
in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a modified endowment
contract are extremely complex. Therefore, a current or prospective Policy
owner is
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strongly advised to retain and consult with a competent advisor before
purchasing a Policy, making an unscheduled premium payment on an existing
Policy or making any change in an existing Policy, to determine whether the
Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified endowment
contract. Although the Company cannot provide complete assurance at this time
that a Policy will not inadvertently become a modified endowment contract, it
is continuing its efforts to enhance its administrative systems to
automatically monitor potential modified endowment classifications.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the cash value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from, or secured by,
such a Policy (as well as due but unpaid interest that is added to the loan
amount) are treated as distributions from such a Policy and taxed accordingly.
Third, a 10 percent additional income tax is imposed on the portion of any
distribution from, or loan taken from or secured by, such a Policy that is
included in income except where the distributions or loan is made on or after
the Policy owner attains age 59 1/2, is attributable to the Policy owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Policy owner or the joint
lives (or joint life expectancies) of the Policy owner and the Policy owner's
Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that
a distribution from a Policy that is not a modified endowment contract could
later become taxable as a distribution from a modified endowment contract.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's death benefit (e.g., partial withdrawal or a
change from Option B to Option A) or any other change that reduces benefits
under the Policy in the first 15-years after the Policy is issued and that
results in a cash distribution to the Policy owner in order for the Policy to
continue complying with the section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a modified endowment contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional income tax.
5. POLICY LOAN INTEREST. If there is any borrowing against a Policy, the
interest paid on the loan may not be tax deductible. A Policyowner should
consult a qualified tax adviser before deducting interest on a policy loan.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Policy owner (except that the amount of any loan from, or secured by, a
Policy that is a modified endowment contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a modified endowment contract to the
extent that such amount is included in the gross income of the Owner.
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7. MULTIPLE POLICIES. All modified endowment contracts that are issued by the
Company (or its affiliates) to the same Policy owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be
properly attributable to the Separate Account or to the Policies.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases and redemptions of PCM
shares by each of the Divisions. Additional protection for the assets of the
Separate Account is afforded by a blanket fidelity bond issued by Reliance
Insurance Company in the amount of $5 million, covering all officers and
employees of the Company who have access to the assets of the Separate Account.
VOTING RIGHTS
To the extent required by law, the Company will vote the shares of PCM held
in the Separate Account at regular and special shareholder meetings of PCM in
accordance with instructions received from persons having voting interests in
the corresponding Divisions of the Separate Account. If, however, the 1940 Act
or any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result the Company determines that it is
permitted to vote shares of PCM in its own right, it may elect to do so.
The Owners of Policies ordinarily are the persons having a voting interest in
the Divisions of the Separate Account. The number of votes which an Owner has
the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Fund in which the Division invests. Fractional
shares will be counted. The number of votes of the Fund which the Owner has
right to instruct will be determined as of the date coincident with the date
established by that Fund for determining shareholders eligible to vote at the
meeting of PCM. Voting instructions will be solicited by written communications
prior to such meeting in accordance with procedures established by PCM.
Because the Funds of PCM serve as investment vehicles for this Policy as well
as for other variable life insurance policies sold by insurers other than the
Company and funded through other separate investment accounts, persons owning
the other policies will enjoy similar voting rights. The Company will vote Fund
shares held in the Separate Account for which no timely voting instructions are
received and Fund shares that it owns as a consequence of accrued charges under
the Policies, in proportion to the voting instructions which are received with
respect to all Policies participating in a Fund. Each person having a voting
interest in a Division will receive proxy material, reports, and other
materials relating to the appropriate Fund.
Disregard of Voting Instructions. The Company may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of or one or more of the Funds or to
approve or disapprove an investment advisory contract for a Fund. In addition,
the Company itself may disregard voting
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instructions in favor of changes initiated by an Owner in the investment policy
or by the investment adviser or sub-adviser of a Fund of PCM if the Company
reasonably disapproves of such changes. A proposed change would be disapproved
only if the proposed change is contrary to state law or prohibited by state
regulatory authorities, or the Company determined that the change would have an
adverse effect on its general assets in that the proposed investment policy for
a Fund may result in overly speculative or unsound investments. In the event
the Company does disregard voting instructions, a summary of that action and
the reasons for such action will be included in the next annual report to
Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of the Company and the
Separate Account and certifies their adequacy, and a full examination of the
Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
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MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME DURING PAST FIVE YEARS*
---- -----------------------
<C> <S>
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since June, 1986, and
Vice President, New Ventures, since June 1986, General
American Life Insurance Co., St. Louis, MO. (GenAm).
Steven D. Anderson Vice President and Chief Financial Officer since December,
1993. Formerly, Assistant Vice President and Chief Financial
Officer August, 1990-December, 1993.
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actuary and
General American Life Treasurer, GenAm since October, 1994. Executive Vice
Insurance Company President-Group Pensions, GenAm January, 1990-October, 1994.
700 Market Street
St. Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984. Secretary
General American Life since February, 1991. Associate General Counsel, GenAm,
Insurance Company since August, 1984.
700 Market Street
St. Louis, MO 63101
Craig K. Nordyke@ Vice President and Chief Actuary since August, 1990.
Formerly, Second Vice President and Chief Actuary, May,
1987-August, 1990.
George E. Phillips Vice President--Operations and System Development since
January, 1995. Formerly, Senior Vice President, Fortis, Inc.
July, 1991-August, 1994. Vice President, Mutual Benefit
prior to July, 1991.
DIRECTORS***
Richard A. Liddy President and Chief Executive Officer, GenAm, since May,
1992. President and Chief Operating Officer, GenAm, May,
1998-May, 1992.
Leonard M. Rubenstein Executive Vice President--Investments, GenAm, since
February, 1991. Vice President and Treasurer, Securities,
GenAm, November, 1984-February, 1991.
Warren J. Winer Executive Vice President--Group, GenAm, since September,
1995. Formerly, Managing Director, Wm. M. Mercer, July,
1993-August, 1995; President, W F Corroon, September, 1990-
July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since November,
1991. Vice President--Life Product Management, GenAm, May,
1989-November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc., since May,
1993. Formerly, Executive Vice President--Reinsurance,
GenAm, since January, 1990.
</TABLE>
- --------
*All positions listed are with the Company unless otherwise indicated.
**The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
***The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring-Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
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<PAGE>
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws applicable
to the issue and sale of the Policies. All matters of Missouri law pertaining
to the Policies, including the validity of the Policies and the Company's right
to issue the Policies and the Group Contract under Missouri insurance law, and
all legal matters relating to the Parent Company's resolution concerning
policies issued by Paragon have been passed upon by Matthew P. McCauley,
Esquire, General Counsel of Paragon Life Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The financial statements of the Company included in this Prospectus and in
the registration statement have been included in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, and on the
authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of the
Company contains an explanatory paragraph which states that the financial
statements are presented in conformity with accounting practices prescribed or
permitted by the State of Missouri Department of Insurance. These practices
differ in some respects from generally accepted accounting principles. The
financial statements do not include any adjustments that might result from the
differences.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Vice President and Chief Actuary of the Company, as stated
in the opinion filed as an exhibit to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, the Company and the Policy offered
hereby. Statements contained in this Prospectus as to the contents of the
Policy and other legal instruments are summaries. For a complete statement of
the terms thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this Prospectus
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. The Separate
Account Divisions available with the Policy had not yet commenced operations as
of December 31, 1995 and have no assets, liabilities, income or expenses and
are therefore not included in this Prospectus.
42
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital and surplus of Paragon Life Insurance Company as of
December 31, 1995 and 1994, and related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three-year
period ended December 31, 1995. These statutory financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statutory financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 2, the accompanying financial statements have been
prepared in conformity with accounting practices prescribed or permitted by the
State of Missouri Department of Insurance. These practices differ in some
respects from generally accepted accounting principles. Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations,
and cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
and surplus of Paragon Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flow for each of the years in
the three-year period ended December 31, 1995, on the basis of accounting
described in note 2.
KPMG Peat Marwick LLP
February 16, 1996
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND CAPITAL AND SURPLUS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
ADMITTED ASSETS
Bonds, at amortized cost (deposited with regulatory authori-
ties, $3,868 and $2,866 in 1995 and 1994)................... $ 56,458 51,077
Policy loans................................................. 7,206 5,418
Cash and short-term investments.............................. 7,056 3,042
Amounts recoverable from reinsurers.......................... 1,183 1,497
Investment income due and accrued............................ 1,041 885
Other assets................................................. 221 161
Separate account assets...................................... 50,194 27,311
-------- ------
Total admitted assets.................................... $123,359 89,391
======== ======
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy reserves--life contracts............................ 57,618 46,661
Policy reserves--without life contingencies................ 399 389
Policy claim liabilities................................... 1,096 709
Amounts due to reinsurers.................................. 833 648
Accrued expenses, commissions, taxes, licenses & fees...... 870 700
Asset valuation reserve.................................... 336 238
Interest maintenance reserve............................... 117 132
Due to parent.............................................. 945 628
Other liabilities.......................................... 858 726
Separate account liabilities............................... 49,509 26,739
-------- ------
Total liabilities........................................ 112,581 77,570
-------- ------
COMMITMENTS AND CONTINGENCIES
Capital and Surplus:
Capital stock--par value of $100 per share; 100,000 shares
authorized; 20,500 shares issued and outstanding.......... 2,050 2,050
Surplus:
Additional paid-in......................................... 17,950 17,950
Unassigned surplus......................................... (9,907) (8,751)
Assigned surplus--separate accounts........................ 685 572
-------- ------
Total capital and surplus................................ 10,778 11,821
-------- ------
Total liabilities and capital and surplus................ $123,359 89,391
======== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS, CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
INCOME:
Premiums and considerations......................... $36,612 29,478 20,416
Net investment income............................... 4,905 4,132 3,519
Expense allowances on reinsurance ceded............. 94 130 123
Other income........................................ 461 317 227
------- ------ ------
Total income...................................... 42,072 34,057 24,285
POLICY OBLIGATIONS, EXPENSES AND NET TRANSFERS:
Policyholder benefits............................... 10,011 6,243 3,818
Increase in policy reserves--life contracts......... 10,957 11,705 9,481
Increase in policy reserves--without life contingen-
cies............................................... 10 35 354
------- ------ ------
Total policy obligations.......................... 20,978 17,983 13,653
General insurance expenses.......................... 5,996 5,084 4,341
Commissions......................................... 523 491 715
Insurance taxes, licenses and fees.................. 1,329 1,093 697
------- ------ ------
Total expenses.................................... 7,848 6,668 5,753
------- ------ ------
Net transfers to separate account................... 14,283 10,464 5,972
------- ------ ------
Loss before Federal income tax benefit and real-
ized capital gains............................... (1,037) (1,058) (1,093)
Federal income tax benefit............................ (117) (108) (180)
------- ------ ------
Loss before realized capital gains................ (920) (950) (913)
Realized capital gains, net of tax and transfer to
IMR.................................................. -- -- 6
------- ------ ------
Net loss.......................................... (920) (950) (907)
OTHER CHANGES IN CAPITAL AND SURPLUS:
Increase in asset valuation reserve................. (98) (94) (74)
(Increase) Decrease in non-admitted assets.......... (25) 74 193
------- ------ ------
Total other changes in capital and surplus........ (123) (20) 119
------- ------ ------
Decrease in capital and surplus................... (1,043) (970) (788)
CAPITAL AND SURPLUS:
Beginning of year................................... 11,821 12,791 13,579
------- ------ ------
End of year......................................... $10,778 11,821 12,791
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Cash flow provided from operating activities:
Cash received:
Premiums and considerations....................... $36,612 29,478 20,416
Allowances and reserve adjustments on reinsurance
ceded............................................ 99 125 127
Investment income received, net of related ex-
penses........................................... 4,252 3,697 2,825
Other income...................................... 347 75 --
------- ------ ------
Total cash received from operating activities... 41,310 33,375 23,368
------- ------ ------
Total benefits, operating charges paid and trans-
fers:
Life and other benefits paid...................... 9,315 7,627 3,583
Operating charges--commissions, other expenses and
taxes (excluding Federal income tax)............. 7,678 6,319 5,850
Federal income taxes received..................... (93) (121) (697)
Net transfers to separate account................. 14,296 10,247 5,972
------- ------ ------
Total benefits, operating charges paid and
transfers...................................... 31,196 24,072 14,708
------- ------ ------
Net increase in policy loans........................ 1,308 1,438 1,178
------- ------ ------
Net cash provided from operating activities........... 8,806 7,865 7,482
Proceeds from investments sold, matured or repaid--
bonds................................................ 3,082 4,566 8,702
Other cash provided................................... 729 707 363
------- ------ ------
Total cash provided............................. 12,617 13,138 16,547
------- ------ ------
Cost of investments acquired--bonds................... 8,462 11,613 25,447
Other cash applied.................................... 141 50 47
------- ------ ------
Total cash applied.............................. 8,603 11,663 25,494
------- ------ ------
Net increase (decrease) in cash and short term invest-
ments................................................ 4,014 1,475 (8,947)
Cash and short-term investments:
Beginning of year................................... 3,042 1,567 10,514
------- ------ ------
End of Year......................................... $ 7,056 3,042 1,567
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) AFFILIATION AND GUARANTEE AGREEMENT
Paragon Life Insurance Company (Paragon) is a wholly-owned subsidiary of
General American Life Insurance Company (General American) established for the
purpose of marketing life insurance products through the sponsorship of major
companies and organizations. Paragon is licensed to do business in the District
of Columbia and in all states except New York.
General American has guaranteed that Paragon will have sufficient funds to
meet all of its contractual obligations. In the event a policyholder presents a
legitimate claim for payment on a Paragon insurance policy, General American
will pay such claim directly to the policyholder if Paragon is unable to make
such payment. The guarantee agreement is binding on General American, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than General American's rating.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying statutory financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Missouri
Department of Insurance, which vary in some respects from generally accepted
accounting principles (GAAP). The preparation of statutory financial statements
requires management to make estimates and assumptions which affect the reported
amounts within the statutory financial statements. Actual results could differ
from the estimated amounts. The significant statutory accounting practices and
the related differences from GAAP are as follows:
(a) Premiums on variable universal life and investment contracts under
statutory accounting practices are considered revenue when received;
whereas under GAAP, revenues for universal life and investment products
consist of policy fees that have been assessed against the account balances
for the cost of insurance, policy administration, and surrender charges.
Acquisition expenses, including commissions and other costs related to
acquiring new business, are charged to operations as incurred rather than
being deferred and amortized in relation to gross profits as required by
GAAP.
(b) Bonds are valued as prescribed by the National Association of
Insurance Commissioners (NAIC) and market values are stated at independent
dealer prices. Bonds are carried at amortized cost except for those bonds
required to be carried at values other than amortized cost in accordance
with NAIC guidelines. Accounting for bonds under GAAP would require the
bonds to be carried at amortized cost or market value depending on the
company's intent and ability to hold such investments. The Company
generally intends to hold bonds until maturity. Policy loans are stated at
their net unpaid balance.
(c) Policy reserves are based on statutory mortality and interest
assumptions without consideration for withdrawals. Policy reserves are
computed under the Commissioners Reserve Valuation Method using 5.5%
interest for policies issued from 1986 to 1993, 5.0% interest for policies
issued in 1994 and 4.5% interest for policies issued in 1995. Mortality
assumptions are based upon the 1980 Commissioners Standard Ordinary table.
These reserves differ from reserves based on account values that accrue to
policyholders on universal-life and investment product contracts under
GAAP.
(d) Federal income taxes are charged to operations based on income that
is currently taxable. Deferred income taxes are not provided for the tax
effect of temporary differences between the book and tax basis of assets
and liabilities.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(e) Certain assets designated as non-admitted assets (principally
furniture and equipment and computer software) have been excluded from
assets by a direct charge to surplus.
(f) An asset valuation reserve (AVR), which is a reserve for possible
losses on investments, is recorded as a liability by a direct charge to
surplus in accordance with statutory accounting practices; under GAAP, the
AVR is not maintained.
(g) Certain capital gains and losses on investment sales that resulted
from changes in the level of interest rates are deferred and recorded in an
interest maintenance reserve (IMR), net of related income taxes. The IMR
liability will be amortized into operating income over the approximate
remaining lives of the respective investments sold. Realized gains and
losses from the sale or decrease in valuation basis due to change in credit
quality of invested assets are presented separately from operating income,
net of applicable income taxes. Under GAAP, realized gains and losses from
the sale of investments are recognized currently as a component of pre-tax
income.
(h) Separate account assets and liabilities represent segregated funds
administered and invested by Paragon for the exclusive benefit of variable
life insurance contract holders. Paragon receives administrative fees for
services rendered on behalf of the separate account policyholders. The
amount of the asset balance in excess of liabilities of $685,415 and
$572,334 at December 31, 1995 and 1994, respectively, represents policy
surrender charges which are permitted to be recorded to surplus under
statutory accounting practices. Such amounts are designated as Assigned
Surplus--Separate Accounts in the accompanying balance sheet. Under GAAP,
the amount would be reported as a liability to the separate account
policyholder.
(i) Reinsurance recoverable on unpaid policy claims is netted against the
applicable policyholder liability. Under GAAP, the amount would be reported
as an asset and the policy claim liability would be shown before the
effects of reinsurance.
(3) FEDERAL INCOME TAX
Paragon files a consolidated federal income tax return with General American
which includes the operations of General American and its subsidiaries. In
accordance with a tax allocation agreement between Paragon and General
American, taxes are computed as if Paragon was filing its own income tax
return, and tax expense (benefit) is paid to, or received from, General
American. Paragon recognizes a tax benefit to the extent that its tax losses
are utilized by other members of the General American consolidated tax group.
The current tax law requires life insurance companies to recompute certain
policy reserves for tax purposes and capitalize a percentage of premiums
attributed to acquisition expenses.
Federal income tax expense (benefit) differs from that computed based on the
federal statutory tax rate of 35 percent. The reasons for these differences are
as follows (000's):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit on pretax
loss................................... $(363) (35%) $(370) (35%) $(382) (35%)
Capitalization of acquisition expenses.. 298 29 214 20 168 16
Recomputed policy tax reserves.......... (34) (3) 18 2 31 3
Other................................... (18) (2) 30 3 3 --
---------- ---------- ----------
</TABLE>
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(4) TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
Paragon purchases certain administrative services from General American.
Charges for services performed are based upon personnel and other costs
involved in providing such service. Charges for services during 1995, 1994 and
1993 were $1,103,028, $651,472 and $597,120, respectively.
Paragon has a risk retention limit of $50,000 on any one life. Amounts over
the risk retention limit are ceded to an affiliate of General American on
either a coinsurance or yearly renewable term basis at rates commensurate with
those which could be obtained from unrelated companies. Premiums ceded in 1995,
1994 and 1993 totaled $9,126,245, $7,135,943 and $5,492,871, respectively, and
represented 99.9% of total premiums ceded in 1995 and 1994 and 95.9% of total
premiums ceded in 1993. Reserve credits taken by Paragon at December 31, 1995
and 1994 were $5,760,070 and $5,604,548, respectively. Amounts due from
reinsurance on paid and unpaid policyholder benefits at December 31, 1995 and
1994 were $3,155,457 and $2,066,748, respectively.
The Company had $3,342,742 and $2,748,885 on deposit with General American at
December 31, 1995 and 1994, respectively. The funds were readily convertible to
cash and earn interest at short-term money market rates.
(5) INVESTMENT SECURITIES
At December 31, 1995, Paragon had $56.5 million invested in bonds; $44.0
million were rated Highest Quality, $12.2 million were High Quality and $.3
million were Low Quality using the NAIC designation definitions.
The amortized cost and market values of investments in bonds at December 31,
1995 and 1994 are as follows (000's):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1995
US treasury securities................. $ 4,608 281 (1) 4,888
US government agency obligations....... 4,920 173 -- 5,093
Corporate securities................... 42,842 2,842 (438) 45,246
Mortgage backed securities............. 4,088 203 -- 4,291
------- ----- ------ ------
$56,458 3,499 (439) 59,518
======= ===== ====== ======
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1994
US treasury securities................. $ 3,606 24 (87) 3,543
US government agency obligations....... 5,123 24 (253) 4,894
Corporate securities................... 38,027 103 (3,029) 35,101
Mortgage backed securities............. 4,321 17 (325) 4,013
------- ----- ------ ------
$51,077 168 (3,694) 47,551
======= ===== ====== ======
</TABLE>
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Contractual maturities may differ from expected maturities because borrowers
may have the right to call or prepay the obligation with or without call or
prepayment penalties. The amortized cost and market value of investments in
bonds, listed by contractual maturity, at December 31, 1995 are as follows
(000's):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C> <C>
Due in one year or less............................. $ 593 585
Due after one year through five years............... 7,388 7,748
Due after five years through ten years.............. 18,521 19,471
Due after five years through ten years.............. 20,948 22,330
------- ------
47,450 50,134
Mortgage-backed securities (including US government
agency obligations)................................ 9,008 9,384
------- ------ ---
$56,458 59,518
======= ======
</TABLE>
Major categories of net investment income for the years ended December 31,
1995, 1994 and 1993 consist of the following (000's):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Bonds............................................. $4,040 $3,685 $3,229
Policy loans...................................... 480 347 221
Short term investments............................ 407 113 103
------ ------ ------
Total investment income........................... 4,927 4,145 3,553
IMR amortiation................................... 17 15 6
Investment expenses............................... (39) (28) (40)
------ ------ ------
Net investment income............................. $4,905 $4,132 $3,519
====== ====== ======
</TABLE>
Proceeds from sales of investments in bonds during 1995, 1994 and 1993 were
$3,082,387, $4,565,799 and $8,701,679, respectively. Gross gains realized on
sales during 1995 were $1,338 of which $870 of total net gains were transferred
to the interest maintenance reserve, net of taxes of $468. Gross gains realized
on sales during 1994 were $44,095 of which $28,662 of total net gains were
transferred to the interest maintenance reserve, net of taxes of $15,433. Gross
gains realized on sales during 1993 and gross losses were $174,988 and $829 of
which $165,069 of net gains were transferred to the Interest Maintenance
Reserve, net of taxes of $57,774. At December 31, 1995, the Company had 16
investment securities totaling $16,924,493, rated either the highest quality or
high quality using the NAIC definitions, that individually exceeded 10% of
statutory capital and surplus.
(6) BENEFIT PLANS AND POSTRETIREMENT BENEFITS
Associates of Paragon participate in a non-contributory multi-employer
defined benefit pension plan jointly sponsored by Paragon and General American.
The benefits are based on years of service and compensation level. No pension
expense was recognized in 1995, 1994 or 1993 due to overfunding of the plan.
In addition, Paragon has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by General American and are based on
salaries of eligible associates. Full vesting occurs after five years of
continuous service. Total expense to the Company for the incentive plan were
$149,747, $37,533 and $101,398 for 1995, 1994 and 1993, respectively.
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Paragon provides for certain health care and life insurance benefits for
retired employees in accordance with Statement of Financial Accounting
Standards Number 106--Employer's Accounting for Postretirement Benefits Other
Than Pensions (SFAS No. 106). SFAS No. 106 requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services.
SFAS No. 106 allows recognition of the cumulative effect of the liability in
the year of the adoption or the amortization of the transition obligation over
a period of up to 20 years. The Company has elected to recognize the initial
post-retirement benefit obligation of approximately $72,684 over a period of 20
years. The unrecognized initial post-retirement benefit obligation was
approximately $61,782 and $65,416 at December 31, 1995 and 1994, respectively.
Net periodic post-retirement benefit cost for the years ended December 31,
1995, 1994 and 1993 were approximately $35,000, $26,000, and $40,000,
respectively. This includes expected costs of benefits for newly eligible or
vested employees, interest costs, gains and losses from differences between
actuarial and actual experience, and amortization of the initial post-
retirement benefit obligation. The accumulated post-retirement benefit
obligation was approximately $118,000, and $86,000 at December 31, 1995 and
1994. The discount rate used in determining the accumulated post-retirement
benefit obligation was 8.25 percent. The health care cost trend rates were ten
percent for the Indemnity Plan, nine percent for the HMO Plan, and ten percent
for the Dental Plan. These rates were graded to six percent over the next 14
years. A one percentage point increase in the assumed health care cost trend
rates would increase the December 31, 1995 accumulated post-retirement
obligation by 11 percent, and the estimated service cost and interest cost
components of the net periodic post-retirement benefit cost for 1995 by 13.8
percent.
(7) LEASE COMMITMENT
In 1991 Paragon entered into a five year operating lease for home office
space. During 1995, Paragon renewed the operating lease for its home office
space for an additional five year period.
Annual lease obligations for years subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................... $ 288,419
1997........................................................... 368,993
1998........................................................... 390,870
1999........................................................... 390,870
2000........................................................... 390,870
2001........................................................... 97,718
----------
$1,927,740
==========
</TABLE>
Total rental expense during 1995, 1994 and 1993 was $256,631, $239,967 and
$194,234, respectively.
(8) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's
domiciliary state of Missouri impose risk-based capital (RBC) requirements on
insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or activity
levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory
intervention is required based on the ratio of a Company's actual total
adjusted capital (sum of capital and surplus and asset valuation reserve) to
control levels determined by the RBC formula. At December 31, 1995, the
Company's actual total adjusted capital was in excess of minimum requirements
which would cause company action under the RBC formula.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(9) DIVIDEND RESTRICTIONS
Dividend payments by Paragon are restricted by state insurance laws as to the
amount that may be paid without prior notice or approval of the Missouri
Department of Insurance. The maximum amount of dividends which can be paid
without prior approval of the insurance commissioner is limited to the maximum
of (1) 10% of statutory surplus or (2) net gain from operations. The maximum
dividend distribution that can be paid by Paragon during 1996 without prior
notice or approval is $804,291. Paragon did not pay dividends in 1995, 1994 or
1993.
F-10
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value and Death Benefit of a
Policy change with the investment experience of a Division of the Separate
Account. The tables show how the Cash Value and Death Benefit of a Policy
issued to an Insured of a given age and at a given premium would vary over time
if the investment return on the assets held in each Division of the Separate
Account were a uniform, gross, after-tax annual rate of 0%, 6% or 12%. In
addition, the Cash Values and Death Benefits 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 and below those averages for
individual Policy years.
The tables illustrate a Policy issued to an Insured, age 45, in an Executive
Program issued as a Group Contract Policy as well as an Insured, age 50, in a
Corporate Program. This assumes the maximum monthly administrative charge. If a
particular Policy has different sales or administrative charges or if a
particular group is larger or smaller or has a different gender mix, the Cash
Values and Death Benefits would vary from those shown in the tables.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
and monthly charges for the cost of insurance based on the guaranteed rate
which is 125% of the maximum allowed under the 1980 Commissioners Standard
Ordinary Mortality Table C. The "Cash Value" column under the "Current" heading
shows the accumulated value of the premiums paid reflecting deduction of the
charges described above and monthly charges for the cost of insurance at the
current level for an Executive Program, which is less than or equal to 125% of
the maximum allowed by the 1980 Commissioners Standard Ordinary Mortality Table
C. The illustrations of Death Benefits reflect the above assumptions. The Death
Benefits also vary between tables depending upon whether Level Type (Option A)
or Increasing Type (Option B) Death Benefits are illustrated.
The amounts shown for the Cash Value and Death Benefit reflect the fact that
the investment rate of return is lower than the gross after-tax return on the
assets held in a Division of the Separate Account. The charges include a .90%
charge for mortality and expense risk, an investment advisory fee of .584%,
representing the average of the fees incurred in 1995 by the Funds in which the
Divisions invest (the actual investment advisory fee is shown in the PCM
prospectus), and a .151% charge that is an estimate of the Funds' expenses
based on the average of the actual expenses incurred in fiscal year 1995. After
deduction for these amounts, the illustrated gross annual investment rates of
return of 0%, 6% and 12% correspond to approximate net annual rates of -1.635%,
4.365%, and 10.365%, respectively. No expense reimbursement arrangement exists
between the Company and PCM. PCM reimbursed expenses in 1995 for PCM Asia
Pacific Growth Fund.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against the Separate Account, since the Company is not
currently making any such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return of the
divisions of the Separate Account would have to exceed 0%, 6%, and 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit and Cash Value illustrated. (see "Federal Tax Matters," page 36.)
Additionally, the hypothetical values shown in the tables assume that the
Policy for which values are illustrated is not deemed an individual policy
under OBRA, and therefore the values do not reflect the additional 1% premium
expense charge for the Company's increased federal tax liabilities.
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, that no transfer charges were incurred, and
that no optional riders have been requested.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, group size and gender mix, the Face Amount and
premium requested and the proposed frequency of premium payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium: $500)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.635%)
--------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,048 $500,000 $ 4,878 $500,000
2 12,631 5,892 500,000 9,592 500,000
3 19,423 8,489 500,000 14,180 500,000
4 26,556 10,833 500,000 18,575 500,000
5 34,045 12,899 500,000 22,790 500,000
6 41,909 14,670 500,000 26,828 500,000
7 50,165 16,114 500,000 30,694 500,000
8 58,835 17,190 500,000 34,331 500,000
9 67,938 17,863 500,000 37,806 500,000
10 77,496 18,102 500,000 41,062 500,000
11 87,532 17,899 500,000 44,044 500,000
12 98,070 17,220 500,000 46,819 500,000
13 109,135 16,060 500,000 49,337 500,000
14 120,753 14,390 500,000 51,545 500,000
15 132,952 12,154 500,000 53,449 500,000
16 145,761 9,290 500,000 55,054 500,000
17 159,210 5,683 500,000 56,307 500,000
18 173,332 1,196 500,000 57,155 500,000
19 188,160 0 0 57,607 500,000
20 203,729 0 0 57,610 500,000
25 294,060 0 0 47,973 500,000
30 409,349 0 0 9,200 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium: $500)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.365%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,147 $500,000 $ 5,038 $500,000
2 12,631 6,274 500,000 10,208 500,000
3 19,423 9,334 500,000 15,555 500,000
4 26,556 12,312 500,000 21,017 500,000
5 34,045 15,180 500,000 26,608 500,000
6 41,909 17,910 500,000 32,338 500,000
7 50,165 20,463 500,000 38,214 500,000
8 58,835 22,786 500,000 44,187 500,000
9 67,938 24,830 500,000 50,325 500,000
10 77,496 26,547 500,000 56,580 500,000
11 87,532 27,913 500,000 62,903 500,000
12 98,070 28,874 500,000 69,362 500,000
13 109,135 29,403 500,000 75,917 500,000
14 120,753 29,449 500,000 82,522 500,000
15 132,952 28,930 500,000 89,189 500,000
16 145,761 27,753 500,000 95,930 500,000
17 159,210 25,768 500,000 102,703 500,000
18 173,332 22,796 500,000 109,467 500,000
19 188,160 18,637 500,000 116,240 500,000
20 203,729 13,079 500,000 122,982 500,000
25 294,060 0 0 154,171 500,000
30 409,349 0 0 171,956 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium: $500)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @
10.365%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,245 $500,000 $ 5,194 $500,000
2 12,631 6,665 500,000 10,838 500,000
3 19,423 10,232 500,000 17,017 500,000
4 26,556 13,952 500,000 23,717 500,000
5 34,045 17,817 500,000 31,003 500,000
6 41,909 21,821 500,000 38,943 500,000
7 50,165 25,950 500,000 47,608 500,000
8 58,835 30,175 500,000 57,020 500,000
9 67,938 34,473 500,000 67,328 500,000
10 77,496 38,824 500,000 78,573 500,000
11 87,532 43,232 500,000 90,809 500,000
12 98,070 47,676 500,000 104,213 500,000
13 109,135 52,165 500,000 118,873 500,000
14 120,753 56,685 500,000 134,892 500,000
15 132,952 61,201 500,000 152,442 500,000
16 145,761 65,666 500,000 171,714 500,000
17 159,210 69,990 500,000 192,885 500,000
18 173,332 74,053 500,000 216,161 500,000
19 188,160 77,725 500,000 241,829 500,000
20 203,729 80,869 500,000 270,178 500,000
25 294,060 83,931 500,000 466,153 540,738
30 409,349 34,782 500,000 789,859 845,149
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is policy indebtedness outstanding.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @.00% (NET RATE @ -1.635%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $12,323 $ 8,806 $508,806 $ 10,642 $510,642
2 25,261 17,297 517,297 21,016 521,016
3 38,847 25,430 525,430 31,160 531,160
4 53,112 33,199 533,199 41,009 541,009
5 68,090 40,581 540,581 50,573 550,573
6 83,817 47,559 547,559 59,856 559,856
7 100,331 54,102 554,102 68,863 568,863
8 117,670 60,172 560,172 77,533 577,533
9 135,876 65,735 565,735 85,937 585,937
10 154,992 70,763 570,763 94,015 594,015
11 175,064 75,253 575,253 101,706 601,706
12 196,140 79,178 579,178 109,083 609,083
13 218,270 82,543 582,543 116,090 616,090
14 241,506 85,325 585,325 122,670 622,670
15 265,904 87,483 587,483 128,828 628,828
16 291,521 88,966 588,966 134,572 634,572
17 318,420 89,679 589,679 139,844 639,844
18 346,663 89,511 589,511 144,586 644,586
19 376,319 88,351 588,351 148,813 648,813
20 407,458 86,103 586,103 152,469 652,469
25 588,121 56,868 556,868 159,263 659,263
30 818,698 0 0 135,583 635,583
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.365%)
----------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,094 $509,094 $ 10,990 $510,990
2 25,261 18,407 518,407 22,361 522,361
3 38,847 27,902 527,902 34,168 534,168
4 53,112 37,572 537,572 46,356 546,356
5 68,090 47,396 547,396 58,948 558,948
6 83,817 57,355 557,355 71,961 571,961
7 100,331 67,420 567,420 85,414 585,414
8 117,670 77,545 577,545 99,259 599,259
9 135,876 87,690 587,690 113,580 613,580
10 154,992 97,821 597,821 128,331 628,331
11 175,064 107,924 607,924 143,463 643,463
12 196,140 117,961 617,961 159,061 659,061
13 218,270 127,924 627,924 175,083 675,083
14 241,506 137,778 637,778 191,481 691,481
15 265,904 147,464 647,464 208,272 708,272
16 291,521 156,914 656,914 225,473 725,473
17 318,420 166,008 666,008 243,034 743,034
18 346,663 174,601 674,601 260,905 760,905
19 376,319 182,544 682,544 279,105 779,105
20 407,458 189,693 689,693 297,581 797,581
25 588,121 209,753 709,753 391,065 891,065
30 818,698 183,599 683,599 472,542 972,542
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.365%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,376 $ 509,376 $ 11,331 $ 511,331
2 25,261 19,542 519,542 23,736 523,736
3 38,847 30,528 530,528 37,364 537,364
4 53,112 42,408 542,408 52,266 552,266
5 68,090 55,242 555,242 68,580 568,580
6 83,817 69,104 569,104 86,453 586,453
7 100,331 84,063 584,063 106,046 606,046
8 117,670 100,182 600,182 127,469 627,469
9 135,876 117,538 617,538 150,981 650,981
10 154,992 136,221 636,221 176,728 676,728
11 175,064 156,357 656,357 204,874 704,874
12 196,140 178,058 678,058 235,736 735,736
13 218,270 201,481 701,481 269,533 769,533
14 241,506 226,773 726,773 306,501 806,501
15 265,904 254,071 754,071 346,968 846,968
16 291,521 283,521 783,521 391,298 891,298
17 318,420 315,233 815,233 439,822 939,822
18 346,663 349,310 849,310 492,906 992,906
19 376,319 385,866 885,866 551,029 1,051,029
20 407,458 425,040 925,040 614,646 1,114,646
25 588,121 668,029 1,168,029 1,033,532 1,533,532
30 818,698 1,008,012 1,508,012 1,680,560 2,180,560
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-7
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 2% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.635%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 7,525 $500,000 $ 9,976 $500,000
2 25,261 14,701 500,000 19,725 500,000
3 38,847 21,466 500,000 29,165 500,000
4 53,112 27,791 500,000 38,366 500,000
5 68,090 33,658 500,000 47,276 500,000
6 83,817 39,069 500,000 55,849 500,000
7 100,331 44,002 500,000 64,153 500,000
8 117,670 48,463 500,000 72,148 500,000
9 135,876 52,438 500,000 79,788 500,000
10 154,992 55,886 500,000 87,089 500,000
11 175,064 58,763 500,000 94,061 500,000
12 196,140 60,983 500,000 100,665 500,000
13 218,270 62,441 500,000 106,862 500,000
14 241,506 63,028 500,000 112,670 500,000
15 265,904 62,644 500,000 118,053 500,000
16 291,521 61,220 500,000 122,974 500,000
17 318,420 58,675 500,000 127,451 500,000
18 346,663 54,940 500,000 131,257 500,000
19 376,319 49,916 500,000 134,317 500,000
20 407,458 43,411 500,000 136,593 500,000
25 588,121 0 0 132,516 500,000
30 818,698 0 0 87,794 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-8
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 2% (Monthly Premium:
PREMIUM TAX: 2% $1,000)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.365%)
----------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 7,771 $500,000 $ 10,302 $500,000
2 25,261 15,652 500,000 20,990 500,000
3 38,847 23,582 500,000 31,993 500,000
4 53,112 31,535 500,000 43,398 500,000
5 68,090 39,491 500,000 55,168 500,000
6 83,817 47,454 500,000 67,271 500,000
7 100,331 55,407 500,000 79,793 500,000
8 117,670 63,359 500,000 92,714 500,000
9 135,876 71,301 500,000 106,014 500,000
10 154,992 79,203 500,000 119,728 500,000
11 175,064 87,030 500,000 133,896 500,000
12 196,140 94,708 500,000 148,510 500,000
13 218,270 102,146 500,000 163,572 500,000
14 241,506 109,256 500,000 179,136 500,000
15 265,904 115,953 500,000 195,216 500,000
16 291,521 122,189 500,000 211,833 500,000
17 318,420 127,904 500,000 229,062 500,000
18 346,663 133,053 500,000 246,805 500,000
19 376,319 137,570 500,000 265,093 500,000
20 407,458 141,314 500,000 284,008 500,000
25 588,121 138,971 500,000 391,203 500,000
30 818,698 56,798 500,000 535,624 562,405
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-9
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 2% (Monthly Premium:
PREMIUM TAX: 2% $1,000)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.365%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 8,013 $ 500,000 $ 10,622 $ 500,000
2 25,261 16,624 500,000 22,282 500,000
3 38,847 25,834 500,000 34,999 500,000
4 53,112 35,682 500,000 48,961 500,000
5 68,090 46,224 500,000 64,249 500,000
6 83,817 57,550 500,000 80,958 500,000
7 100,331 69,741 500,000 99,318 500,000
8 117,670 82,918 500,000 119,475 500,000
9 135,876 97,201 500,000 141,596 500,000
10 154,992 112,710 500,000 165,928 500,000
11 175,064 129,584 500,000 192,748 500,000
12 196,140 147,957 500,000 222,332 500,000
13 218,270 167,982 500,000 255,001 500,000
14 241,506 189,857 500,000 291,171 500,000
15 265,904 213,843 500,000 331,286 500,000
16 291,521 240,294 500,000 375,868 500,000
17 318,420 269,638 500,000 425,549 506,403
18 346,663 302,406 500,000 480,515 567,008
19 376,319 339,235 500,000 540,919 632,875
20 407,458 380,878 500,000 607,295 704,462
25 588,121 678,636 726,141 1,054,463 1,128,276
30 818,698 1,163,966 1,222,164 1,781,630 1,870,711
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-10
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $26,000
PREMIUM EXPENSE CHARGE: 2% (Monthly Premium:
$2,166.67)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.635%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- -----------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 26,699 $ 20,812 $520,812 $ 23,281 $523,281
2 54,733 40,994 540,994 46,088 546,088
3 84,168 60,480 560,480 68,332 568,332
4 115,076 79,239 579,239 90,088 590,088
5 147,528 97,249 597,249 111,300 611,300
6 181,604 114,509 614,509 131,911 631,911
7 217,383 130,997 630,997 151,996 651,996
8 254,951 146,719 646,719 171,505 671,505
9 294,397 161,659 661,659 190,381 690,381
10 335,816 175,775 675,775 208,636 708,636
11 379,306 189,023 689,023 226,280 726,280
12 424,970 201,310 701,310 243,258 743,258
13 472,917 212,529 712,529 259,515 759,515
14 523,262 222,571 722,571 275,069 775,069
15 576,124 231,344 731,344 289,868 789,868
16 631,629 238,805 738,805 303,858 803,858
17 689,910 244,903 744,903 317,059 817,059
18 751,104 249,613 749,613 329,165 829,165
19 815,358 252,894 752,894 340,069 840,069
20 882,825 254,614 754,614 349,727 849,727
25 1,274,262 231,605 731,605 374,981 874,981
30 1,773,845 134,202 634,202 349,477 849,477
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-11
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $26,000
PREMIUM EXPENSE CHARGE: 2% (Monthly Premium:
$2,166.67)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.365%)
--------------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 26,699 $ 21,491 $ 521,491 $ 24,042 $ 524,042
2 54,733 43,622 543,622 49,035 549,035
3 84,168 66,341 566,341 74,925 574,925
4 115,076 89,630 589,630 101,816 601,816
5 147,528 113,479 613,479 129,686 629,686
6 181,604 137,899 637,899 158,510 658,510
7 217,383 162,880 662,880 188,398 688,398
8 254,951 188,439 688,439 219,335 719,335
9 294,397 214,572 714,572 251,299 751,299
10 335,816 241,249 741,249 284,336 784,336
11 379,306 268,433 768,433 318,492 818,492
12 424,970 296,036 796,036 353,750 853,750
13 472,917 323,950 823,950 390,091 890,091
14 523,262 352,061 852,061 427,568 927,568
15 576,124 380,260 880,260 466,165 966,165
16 631,629 408,487 908,487 505,864 1,005,864
17 689,910 436,669 936,669 546,719 1,046,719
18 751,104 464,756 964,756 588,453 1,088,453
19 815,358 492,677 992,677 630,976 1,130,976
20 882,825 520,269 1,020,269 674,257 1,174,257
25 1,274,262 642,888 1,142,888 897,779 1,397,779
30 1,773,845 707,303 1,207,303 1,118,681 1,618,681
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-12
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $26,000
PREMIUM EXPENSE CHARGE: 2% (Monthly Premium:
PREMIUM TAX: 2% $2,166.67)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.365%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 26,699 $ 22,159 $ 522,159 $ 24,789 $ 524,789
2 54,733 46,308 546,308 52,047 552,047
3 84,168 72,569 572,569 81,928 581,928
4 115,076 101,118 601,118 114,775 614,775
5 147,528 132,156 632,156 150,826 650,826
6 181,604 165,927 665,927 190,343 690,343
7 217,383 202,677 702,677 233,755 733,755
8 254,951 242,711 742,711 281,404 781,404
9 294,397 286,335 786,335 333,660 833,660
10 335,816 333,869 833,869 390,999 890,999
11 379,306 385,653 885,653 453,951 953,951
12 424,970 442,017 942,017 523,028 1,023,028
13 472,917 503,304 1,003,304 598,796 1,098,796
14 523,262 569,895 1,069,895 681,957 1,181,957
15 576,124 642,220 1,142,220 773,208 1,273,208
16 631,629 720,809 1,220,809 873,320 1,373,320
17 689,910 806,237 1,306,237 983,220 1,483,220
18 898,057 899,166 1,399,166 1,103,586 1,603,586
19 815,358 1,000,307 1,500,307 1,235,374 1,735,374
20 882,825 1,110,353 1,610,353 1,379,702 1,879,702
25 1,274,262 1,819,525 2,319,525 2,334,174 2,834,174
30 1,773,845 2,882,364 3,382,364 3,834,405 4,334,405
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of PCM. The cash value, cash surrender
value and death benefit for a policy would be different from those shown if the
actual rates of return averaged the rate shown above over a period of years,
but also fluctuated above or below that average for individual years. No
representation can be made by the Company, Walnut Street Securities, Putnam
Management, or any representative thereof, that this hypothetical rate of
return can be achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-13
<PAGE>
Underlying investments
in:
MFS VARIABLE INSURANCE
TRUST
LOGO
^ GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
Prospectus dated May 1, 1996
50456 Com
<PAGE>
GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes flexible premium variable life insurance policies
offered by Paragon Life Insurance Company (the "Company") which are designed
for use in employer-sponsored insurance programs. In circumstances where a
Group Contract is issued, Individual Policies or Certificates setting forth or
summarizing the rights of the Owners and/or Insureds, will be issued under the
Group Contract. Individual Policies also can be issued in connection with
employer-sponsored insurance programs in circumstances where a Group Contract
is not issued. The terms of the Certificate and the Individual Policy, whether
or not the Individual Policy is issued under a Group Contract, are
substantially the same and are collectively referred to in this Prospectus as
"Policy" or "Policies."
The Policies are designed to provide lifetime insurance protection to age 95
and at the same time provide flexibility to vary premium payments and change
the level of death benefits payable under the Policies. This flexibility allows
an Owner to provide for changing insurance needs under a single insurance
policy. An Owner also has the opportunity to allocate net premiums among
several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount of
the Policy. The insurance under a Policy will remain in force so long as its
Cash Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy.
The Owner may allocate net premiums to one or more of the Divisions of the
Separate Account B (the "Separate Account"). The duration of the Policy and the
amount of the Cash Value will vary to reflect the investment performance of the
Divisions of the Separate Account selected by the Owner, and, depending on the
death benefit option elected, the amount of the death benefit above the minimum
may also vary with that investment performance. Thus, the Owner bears the
entire investment risk under the Policies; there is no minimum guaranteed Cash
Value.
Each Division of the Separate Account will invest solely in a corresponding
investment portfolio of an investment company currently consisting of twelve
separate mutual fund series, or "Funds": MFS Emerging Growth Series, MFS Growth
Series, MFS Research Series, MFS Growth With Income Series, MFS Total Return
Series, MFS Utilities Series, MFS High Income Series, MFS World Governments
Series, MFS Strategic Fixed Income Series, MFS Bond Series, MFS Limited
Maturity Series, and MFS Money Market Series. The accompanying prospectus for
MFS Variable Insurance Trust (the "Trust") describes the investment objectives
and policies, and the risks of the Funds.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
MFS Variable Insurance Trust.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
The Date Of This Prospectus Is May 1, 1996.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................ 3
Summary.................................................................... 4
The Company and the Separate Account....................................... 9
The Company.............................................................. 9
The Separate Account..................................................... 10
MFS Variable Insurance Trust............................................. 10
Addition, Deletion, or Substitution of Investments....................... 12
Payment and Allocation of Premiums......................................... 13
Issuance of a Policy..................................................... 13
Premiums................................................................. 15
Allocation of Net Premiums and Cash Value................................ 16
Policy Lapse and Reinstatement........................................... 16
Policy Benefits............................................................ 17
Death Benefit............................................................ 17
Cash Value............................................................... 21
Policy Rights and Privileges............................................... 22
Exercising Rights and Privileges Under the Policies...................... 22
Loans.................................................................... 22
Surrender and Partial Withdrawals........................................ 23
Transfers................................................................ 24
Right to Examine Policy.................................................. 25
Conversion Right to a Fixed Benefit Policy............................... 25
Eligibility Change Conversion............................................ 26
Payment of Benefits at Maturity.......................................... 26
Payment of Policy Benefits............................................... 27
Charges and Deductions..................................................... 28
Sales Charges............................................................ 28
Premium Tax Charge....................................................... 28
Monthly Deduction........................................................ 28
Partial Withdrawal Transaction Charge.................................... 31
Separate Account Charges................................................. 31
General Matters Relating to the Policy..................................... 31
Distribution of the Policies............................................... 35
General Provisions of the Group Contract................................... 35
Federal Tax Matters........................................................ 37
Safekeeping of the Separate Account's Assets............................... 40
Voting Rights.............................................................. 40
State Regulation of the Company............................................ 41
Management of the Company.................................................. 42
Legal Matters.............................................................. 43
Legal Proceedings.......................................................... 43
Experts.................................................................... 43
Additional Information..................................................... 43
Financial Statements....................................................... 43
Appendix A................................................................. A-1
</TABLE>
THE POLICIES ARE NOT AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
2
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Associated Companies--Those companies listed in a Group Contract's
specifications pages that are under common control through stock ownership,
contract or otherwise, with the Contractholder.
Beneficiary--The person(s) named in an application for Individual Insurance
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness.
Certificate--A document issued to Owners of Policies issued under Group
Contracts, setting forth or summarizing the Owner's rights and benefits.
Contractholder--The employer, association, sponsoring organization or trust
that is issued a Group Contract.
Corporate Program--A category of Policies available as an Individual Policy
in which the sponsoring employer or its designated trust is generally the Owner
of the Policy.
Division--A subaccount of the Separate Account available for allocation under
the Policy. Each Division invests exclusively in the shares of MFS Variable
Insurance Trust.
Employee--A person who is employed and paid for services by an employer on a
regular basis. To qualify as an employee, a person ordinarily must work for an
employer at least 30 hours per week. The Company may waive or modify this
requirement at its discretion. An employee may also include an independent
contractor acting in many respects as an employee with a sponsoring employer.
An employee may include a partner in a partnership if the employer is a
partnership.
Executive Program--A category of Policies issued under Group Contracts or
employer-sponsored insurance programs that have a maximum Face Amount available
for each Policy generally in excess of $500,000.
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Fund--A separate mutual fund series of MFS Variable Insurance Trust, a mutual
fund in which the Separate Account's assets are invested.
Group Contract--A group flexible premium variable life insurance contract
issued to the Contractholder by the Company.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest charged
on loans.
Individual Insurance--Insurance provided under a Group Contract or under an
Individual Policy issued in connection with an employer-sponsored insurance
program on an employee or an employee's spouse.
Insured--The person whose life is insured under a Policy. The term may
include both an employee and an employee's spouse.
3
<PAGE>
Investment Start Date--The date the initial premium is applied to the
Divisions of the Separate Account. This date is the later of the Issue Date or
the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
Issue Date--The effective date of coverage under a Policy. The Issue Date is
the date from which Policy Anniversaries, Policy Years, and Policy Months are
measured.
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 95.
Monthly Anniversary--The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the
last day of that month.
Net Premium--The premium less any premium expense charge and any charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--Either the Certificate or the Individual Policy offered by the
Company and described in this Prospectus. Under Group Contracts, the Policy may
be issued on the employee or on the employee's spouse.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the day
immediately preceding the next Policy Anniversary.
Separate Account--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy.
Spouse--An employee's legal spouse. The term does not include a spouse who is
legally separated from the employee.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the close
of business of the next succeeding Valuation Date.
SUMMARY
The following summary of Prospectus information should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the description of the Policies contained in this
Prospectus assumes that a Policy is in effect and that there is no outstanding
Indebtedness.
4
<PAGE>
The Policy. The Policies (either an Individual Policy or a Certificate)
described in this Prospectus are designed for use in employer-sponsored
insurance programs and are typically issued in two situations. First, Policies
are issued pursuant to Group Contracts entered into between the Company and
Contractholders. (See "General Provisions of the Group Contract," page 35.)
Second, in certain circumstances where Group Contracts are not issued,
Individual Policies are issued in connection with the employer-sponsored
insurance programs. Subject to certain restrictions, the Insured under a Policy
may be either an employee of the Contractholder or sponsoring employer, or the
employee's spouse. Generally, only the employee is eligible to be an Insured
under an Executive Program Policy. Provided there is sufficient Cash Surrender
Value, Individual Insurance under a Group Contract or other employer-sponsored
insurance program will continue should the Group Contract or other program
cease or the employee's employment end. (See "Payment and Allocation of
Premiums--Issuance of a Policy," page 13.)
The Policies are life insurance contracts with death benefits, cash values,
surrender rights, policy loan privileges, and other features traditionally
associated with life insurance. The Contractholder will remit planned premium
payments under the Group Contract on behalf of Owners equal to an amount
authorized by employees to be deducted from their wages. In addition, Owners
may, but are not required to, pay additional premiums. However, in Corporate
Programs, the Owner will generally remit planned and additional premiums. A
similar procedure will apply when an Individual Policy is issued in connection
with an employer-sponsored program where the Group Contract is not issued.
The Policies are "variable" policies because, unlike the fixed benefits under
an ordinary life insurance contract, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment performance of the Divisions of the Separate
Account to which the Owner has allocated net premium payments. However, so long
as a Policy's Cash Surrender Value continues to be sufficient to pay the
monthly deduction, an Owner is guaranteed a minimum death benefit equal to the
Face Amount of his or her Policy or an accelerated death benefit in a reduced
amount determined in accordance with certain riders available under the Policy.
(See "General Matters Relating to the Policy--Additional Insurance Benefits,"
page 33).
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. The Separate Account has Divisions, each of
which invests in shares of a corresponding Fund of the Trust. The twelve Funds
currently available are MFS Emerging Growth Series, MFS Growth Series, MFS
Research Series, MFS Growth With Income Series, MFS Total Return Series, MFS
Utilities Series, MFS High Income Series, MFS World Governments Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series,
and MFS Money Market Series. Each Fund has a different investment objective.
(See "The Separate Account--MFS Variable Insurance Trust," page 10.) An Owner
may change future allocations of net premiums at any time by notifying the
Company directly.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to modify the transfer privilege.
(See "Policy Rights and Privileges--Transfers," page 24.)
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the planned
annual premium set forth in the specifications page of a Policy is necessary to
place a Policy in force. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount and certain other
factors. Under Group Contracts and employer-sponsored programs, the initial
premium and subsequent planned premiums generally are remitted by the
Contractholder or sponsoring employer on behalf of the Owner at intervals
agreed to by the Contractholder or employer. In Corporate Programs, the Owner
or its designee will remit premiums generally on a schedule agreed to by the
Company. However, as is discussed below, planned premiums need not be paid so
long as there is sufficient Cash Surrender Value to keep the Policy in force.
Subject to certain limitations, additional premium payments in any amount and
at any frequency may be made directly by the Owner. (See "Payment and
Allocation of Premiums--Issuance of a Policy--Premiums," pages 13 and 15.)
5
<PAGE>
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 16).
The Policies, therefore, differ in two important respects from conventional
life insurance policies. First, the failure to make planned premium payments
following the initial premium payment will not itself cause a Policy to lapse.
Second, under the circumstances described above, a Policy can lapse even if
planned premiums have been paid. Thus, the payment of premiums in any amount
does not guarantee that the Policy will remain in force until the Maturity
Date. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 16.)
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies or, under certain riders available under
the Policy, to the Owner, prior to the Insured's death under circumstances
described in those riders. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 33.) Two death benefit options are
available. Under the "Level Type" death benefit, the death benefit is the Face
Amount of the Policy or, if greater, the applicable percentage of Cash Value.
Under the "Increasing Type" death benefit, the death benefit is the Face Amount
of the Policy plus the Cash Value or, if greater, the applicable percentage of
Cash Value. So long as a Policy remains in force, the minimum death benefit
under either option will be at least equal to the current Face Amount. The
death benefit proceeds will be increased by the amount of the cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "Policy Benefits--Death
Benefit," page 17.)
The minimum initial Face Amount is generally $25,000 under the Company's
current rules. Executive Program Policies generally have a minimum Face Amount
of $100,000. The maximum Face Amount is generally $500,000. However, in
connection with a particular Group Contract, employer-sponsored insurance
program, Executive Program or Corporate Program the Company may establish a
substantially higher Face Amount for Policies issued under that Contract or
program. The Owner may generally change the Face Amount (subject to the minimum
and maximum amounts applicable to the Policy as issued) and the death benefit
option, but in certain cases evidence of insurability may be required. (See
"Policy Benefits--Death Benefit," page 17.)
Additional insurance benefits offered under the Policy by rider may include a
children's insurance rider, an acceleration of death benefits rider, an
accelerated death benefit settlement option rider, an accidental death benefit
rider, and a waiver of monthly deductions rider. Some Group Contracts and
employer-sponsored insurance programs may not provide each of the additional
benefits described above. Generally, Executive Program Policies only have the
acceleration of death benefits rider. Generally, Corporate Programs have none
of the additional benefits described above. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 33.) The cost of these
additional insurance benefits will be deducted from Cash Value as part of the
monthly deduction. (See "Charges and Deductions--Monthly Deduction," page 28.)
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy or an applicable rider. (See "Policy
Benefits--Death Benefit" page 17, and "Policy Rights and Privileges--Payment of
Policy Benefits," page 27.)
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
premium payments, the investment performance of any selected Divisions of the
Separate Account, any Policy Loans, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value," page
21.) There is no minimum guaranteed Cash Value.
Charges and Deductions. A front-end sales charge of 1% of premiums will be
deducted from each premium paid ("premium expense charge"). An additional
charge will be imposed on Policies that are deemed
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to be individual Policies under the Omnibus Budget Reconciliation Act of 1990
("OBRA"). The additional charge, which is for federal income taxes measured by
premiums, is equal to 1% of each premium payment, and compensates the Company
for a significantly higher corporate income tax liability resulting from
changes made to the Internal Revenue Code by OBRA. This additional charge is
treated as sales load for purposes of determining compliance with the
limitations on sales loads imposed by the Investment Company Act of 1940 and
applicable regulations thereunder.
A charge of 2 percent to cover state premium taxes will be deducted from
premiums paid. (See "Charges and Deductions--Premium Tax Charge," page 28.)
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, a cost of insurance charge, and the cost of any additional insurance
benefits provided by rider. The amount of the administrative charge will be set
forth in the specification pages of the Policy and will be based on the number
of the Insureds covered under a Group Contract or other employer-sponsored
insurance program and the amount of administrative services provided by the
Company. The charge will not exceed $6.00 per month during the first Policy
Year and $3.50 per month during renewal years.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance" page 29.)
Monthly cost of insurance rates will be determined by the Company based upon
its expectations as to future mortality experience. The Company currently
underwrites Policies on either a simplified issue or guaranteed issue basis.
However, the Company does not vary cost of insurance rates based on a
particular Policy's classification as simplified issue or guaranteed issue.
Rather, the rates are based on the Attained Age and rate class of the Insured,
as well as on the gender mix of the group insured, which is the proportion of
men and women covered under a particular Group Contract or employer-sponsored
program. For a discussion of the factors affecting the rate class of the
Insured. See "Charges and Deductions--Monthly Deduction--Cost of Insurance"
page 29.
Cost of insurance rates are guaranteed not to exceed 125 percent of the
maximum rates that could be charged based on the 1980 Commissioners Standard
Ordinary Mortality Table C ("1980 CSO Table"). The 1980 CSO Table assumes a
blending of sixty percent male and forty percent female. Generally, the rates
currently charged do not exceed 100% of the 1980 CSO Table. However, instances
in which the Company's current rates may exceed 100% of the 1980 CSO Table are
generally limited to particular Policies issued to Insureds in small groups
(i.e. generally less than 750 eligible employees) and/or groups that are
predominantly male. The guaranteed rates are higher than the 1980 CSO Table
because, under both guaranteed and simplified underwriting, the Insured is not
required to submit to a medical or paramedical examination although a blood
test may be required. Because the Company gathers less health information about
these individuals, it is exposed to additional insurance risks. Although the
circumstances in which the Company could raise its current mortality charges
are limited, such an increase is permitted under the Policy. To the extent that
the current cost of insurance rates exceed or are raised so that they exceed
100% of the 1980 CSO Table, the monthly cost of insurance charge would, in
effect, be a substandard risk charge for healthy Insureds.
A daily charge not to exceed .0024547% (an annual rate of .90%) of the net
assets of each Division of the Separate Account will be imposed for the
Company's assumption of certain mortality and expense risks incurred in
connection with the Policies. (See "Charges and Deductions--Separate Account
Charges," page 31.)
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes. (See "Federal Tax Matters," page 37.)
The value of the assets of the Divisions of the Separate Account will reflect
the investment advisory fee and other expenses incurred by the Trust because
the Separate Account purchases the shares of the Trust.
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(See "Charges and Deductions--Separate Account Charges," page 31.) The advisory
fees range from an annual rate of .50% to a maximum of .75% of the average
daily assets of each Fund. See the Trust prospectus for actual fees and
expenses.
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net Premiums
and Cash Value," page 16, and "Policy Rights and Privileges--Surrender and
Partial Withdrawals, Transfers," pages 23 and 24 respectively, and "Charges and
Deductions--Partial Withdrawal Transaction Charge," page 31.)
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b), where (a) is 85
percent of the Cash Value of the Policy on the date the Policy Loan is
requested, and (b) is the amount of outstanding Indebtedness. Loan interest is
due and payable in arrears on each Policy Anniversary or on a pro rata basis
for such shorter period as the Policy Loan may exist. All outstanding
Indebtedness will be deducted from proceeds payable at the Insured's death,
upon maturity, or upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid in
whole or in part at any time while the Policy is in force. (See "Policy Rights
and Privileges--Loans," page 22.) Loans taken from, or secured by, a Policy may
in certain circumstances be treated as taxable distributions from the Policy.
Moreover, with certain exceptions, a ten percent additional income tax would be
imposed on the portion of any loan that is included in income. (See "Federal
Tax Matters," page 37.)
Surrender and Partial Withdrawals. At any time that a Policy is in effect, an
Owner may elect to surrender the Policy and receive its Cash Surrender Value.
An Owner may also request a partial withdrawal of the Cash Value of the Policy.
When the death benefit under either death benefit option is not based on an
applicable percentage of the Cash Value, a partial withdrawal reduces the death
benefit payable under the Policy by an amount equal to the reduction in the
Policy's Cash Value. (See "Policy Rights and Privileges--Surrender and Partial
Withdrawals," page 23.) Surrenders and partial withdrawals may have federal
income tax consequences. (See "Federal Tax Matters," page 37.)
Right to Examine Policy. The Owner has a limited right to return a Policy for
cancellation within 20 days after the delivery of the Policy to the Owner,
within 45 days after the Owner signs the application, or within 10 days after
the Company mails a notice of this cancellation right to the Owner whichever is
latest. If a Policy is cancelled within this time period, a refund will be paid
which will equal all premiums paid under the Policy or any different amount
required by law. The Owner also has a right to cancel a requested increase in
Face Amount. Upon cancellation of an increase, the Owner may request that the
Company refund the amount of the additional charges deducted in connection with
the increase, or have the amount of the additional charges added to the Cash
Value. (See "Policy Rights and Privileges--Right to Examine Policy," page 25.)
Eligibility Change Conversion. In the event that the Insured is no longer
eligible for coverage under the Group Contract, either because the Group
Contract has terminated or because the employee is no longer employed by the
Contractholder, the Individual Insurance provided by the Policy issued in
connection with the Group Contract will continue unless the Policy is cancelled
or surrendered by the Owner or there is insufficient Cash Surrender Value to
prevent the Policy from lapsing.
If a Certificate was issued in connection with the Group Contract, the
Certificate will be amended automatically to continue in force as an Individual
Policy. The new Individual Policy will provide benefits
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which are identical to those provided under the Certificate. If an Individual
Policy was issued in connection with a Group Contract, the Individual Policy
will continue in force following the termination of the Group Contract. (See
"Policy Right and Privileges--Eligibility Change Conversion," page 26.)
Conversion Right to a Fixed Benefit Policy. During the first 24 Policy Months
following a Policy's Issue Date, the Owner may convert the Policy to a life
insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. The Owner also has
a similar right with respect to increases in the Face Amount. (See "Policy
Rights and Privileges--Conversion Right to a Fixed Benefit Policy," page 25.)
Exercising Rights and Privileges Under the Policies. Owners of Policies
issued under a Group Contract or in connection with an employer-sponsored
insurance program may exercise their rights and privileges under the Policies
(i.e., make transfers, change premium allocations, borrow, etc.) by notifying
the Company in writing at its Home Office. Likewise, the Company will send all
reports and other notices described herein or in the Policy directly to the
Owner. (See "Policy Rights and Privileges--Exercising Rights and Privileges
Under the Policies," page 22.)
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-1 to A-13 in Appendix A show how death benefits and Cash Surrender
Values may vary based on certain hypothetical rate of return assumptions as
well as assumptions pertaining to the level of the administrative charge and
the level of the sales charges. These illustrations also show how these
benefits compare with amounts which would accumulate if premiums were invested
to earn interest (after taxes) at 5% compounded annually. If a Policy is
surrendered in the early Policy Years, the Cash Surrender Value payable will be
low as compared with premiums accumulated with interest, and consequently the
insurance protection provided prior to surrender will be costly.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy Owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits payable
under a Policy should be completely excludable from the gross income of the
Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds.
Under certain circumstances, a Policy may be treated as a "modified endowment
contract." If the Policy is a modified endowment contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Loans will not be treated as distributions.
Neither distributions, nor loans from a Policy that is not a modified endowment
contract are subject to the 10% penalty tax. (See "Federal Tax Matters," page
37.)
THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection with
the name change. The Company is principally engaged in writing individual and
group life insurance policies and annuity contracts. As of December 31, 1995,
it had statutory admitted assets in excess of $123 million. The Company is
admitted to do business in 49 states and the District of Columbia. The
principal offices of the Company are at 100 South Brentwood, St. Louis,
Missouri 63105 ("Home Office").
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The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a mutual life insurance company. The Parent
Company has agreed that until March 23, 1999, it will maintain capital and
surplus within the Company sufficient to satisfy the capital requirements of
the states in which the Company is authorized to do business.
In addition, the Parent Company agrees to guarantee that the Company will
have sufficient funds to meet all of its contractual obligations. In the event
a policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. This guarantee, which does not have a
predetermined termination date, can be modified or ended only as to policies
not yet issued. The guarantee agreement is binding on the Parent Company, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
THE SEPARATE ACCOUNT
Separate Account B (the "Separate Account") was established by the Company as
a separate investment account on January 4, 1993 under Missouri law. The
Separate Account receives and invests the net premiums paid under the Policies.
In addition, the Separate Account receives and invests net premiums for other
flexible premium variable life insurance policies that are invested in other
subaccounts of the Separate Account.
The Separate Account is divided into Divisions. Each Division for the Policy
invests in shares of a single series of the Trust. Income and both realized and
unrealized gains or losses from the assets of each Division of the Separate
Account are credited to or charged against that Division without regard to
income, gains, or losses from any other Division of the Separate Account or
arising out of any other business the Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
MFS VARIABLE INSURANCE TRUST
The Separate Account invests in shares of the Trust, a series-type mutual
fund registered with the SEC as an open-end, management investment company. The
Trust currently has twelve separate mutual fund series or "Funds" which are
available in the Policies: MFS Emerging Growth Series, MFS Growth Series, MFS
Research Series, MFS Growth With Income Series, MFS Total Return Series, MFS
Utilities Series, MFS High Income Series, MFS World Governments Series, MFS
Strategic Fixed Income Series, MFS Bond Series, MFS Limited Maturity Series,
and MFS Money Market Series. The assets of each Fund are held separate from the
assets of the other Funds, and each Fund has investment objectives and policies
which are different from those of the other Funds. Thus, each Fund operates as
a separate investment vehicle, and the income or losses of one Fund generally
have no effect on the investment performance of any other Fund.
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The investment objectives and policies of each Fund are summarized below:
MFS Emerging Growth Series seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental
to the Series investment objective of long-term growth of capital. The Series'
policy is to invest primarily (i.e., at least 80% of its assets under normal
circumstances) in common stocks of small and medium-sized companies that are
early in their life cycle but which have the potential to become major
enterprises (emerging growth companies).
MFS Growth Series' investment objective is to provide long-term growth of
capital and future income rather than current income. The Growth Series' policy
is to invest, under normal market conditions, at least 65% of its assets in the
common stocks, or securities convertible into common stocks, of companies
believed to possess better than average prospects for long-term growth.
Emphasis is placed on the selection of progressive, well-managed companies.
MFS Research Series' investment objective is to provide long-term growth of
capital and future income. The portfolio securities of the Research Series are
selected by the investment research analysts in the Equity Research Group of
the Adviser. The Series' assets are allocated to economic sectors (e.g., health
care, technology, consumer staples), and then to industry groups within these
sectors (e.g., within the health care sector, the managed care, drug and
medical supply industries). The allocation by sector and industry is determined
by the analysts acting together as a group. Individual analysts are then
responsible for selecting what they view as the best securities for capital
appreciation and future income within their assigned industries. The Research
Series policy is to invest a substantial proportion of its assets in the common
stocks or securities convertible into common stocks of companies believed to
possess better than average prospects for long-term growth. A smaller
proportion of the assets may be invested in bonds, short-term obligations,
preferred stocks or common stocks whose principal characteristic is income
production rather than growth.
MFS Growth With Income Series' investment objectives are to provide
reasonable current income and long-term growth of capital and income. Under
normal market conditions, the Growth With Income Series will invest at least
65% of its assets in common stocks or securities convertible into common stocks
that are believed to have long-term prospects for growth and income.
MFS Total Return Series' primary investment objective is to obtain above-
average income (compared to a portfolio entirely invested in equity securities)
consistent with the prudent employment of capital, and its secondary objective
is to provide a reasonable opportunity for growth of capital and income, since
many securities offering a better than average yield may also possess growth
potential. Generally, at least 40% of the assets of the Series are invested in
equity securities.
MFS Utilities Series' investment objective is to seek capital growth and
current income (income above that available from a portfolio invested entirely
in equity securities). The Utilities Series will seek to achieve its objective
by investing, under normal circumstances, at least 65% (but up to 100% at the
discretion of the Adviser) of its assets in equity and debt securities of both
domestic and foreign companies in the utilities industry.
MFS High Income Series' investment objective is to seek high current income
by investing primarily in a professionally managed diversified portfolio of
fixed income securities, some of which may involve equity features. The Series
may invest some of its assets in high yield securities known as "junk bonds."
The risks of investing in these securities are described in the MFS prospectus
which should be read carefully before investing.
MFS World Governments Series' investment objective is to seek not only
preservation, but also growth of capital, together with moderate current
income. The World Governments Series seeks to achieve its investment objective
through a professionally managed, internationally diversified portfolio
consisting primarily of debt securities and to a lesser extent equity
securities.
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MFS Strategic Fixed Income Series' investment objective is to maximize
current income. The Strategic Fixed Income Series seeks to achieve its
objective by investing approximately one-third of its assets in each of the
following sectors of the fixed income securities markets: (i) U.S. Government
securities; (ii) debt securities issued by foreign governments, their political
subdivisions and other foreign issuers; and (iii) high yielding corporate fixed
income securities, some of which may involve equity features.
MFS Bond Series' primary investment objective is to provide as high a level
of current income as is believed to be consistent with prudent investment risk.
The Series' secondary objective is to protect shareholders' capital.
MFS Limited Maturity Series' primary investment objective is to provide as
high a level of current income as is believed to be consistent with prudent
investment risk. The Series' secondary objective is to protect shareholders'
capital.
MFS Money Market Series' investment objective is to seek as high a level of
current income as is considered consistent with the preservation of capital and
liquidity.
There is no assurance that any of the Funds will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for the Trust, which must accompany or precede this Prospectus
and which should be read carefully.
Massachusetts Financial Services Company ("MFS") provides investment advisory
services to the Trust in accordance with the terms of the current prospectus
for the Trust. The Funds pay investment management fees to MFS as part of their
expenses. See the Trust prospectus for details regarding these fees.
Resolving Material Conflicts. All of the Funds of the Trust are also
available to registered separate accounts of other insurance companies offering
variable annuity and variable life insurance products. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Policies and of owners of policies whose cash values are allocated to other
separate accounts investing in the Funds. In the event a material conflict
arises, the Company will take any necessary steps, including removing the
assets of the Separate Account from one or more of the Funds, to resolve the
matter. See the Trust prospectus for further details.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Funds of the
Trust and to substitute shares of another Fund of the Trust or of another
registered open-end investment company, if the shares of a Fund are no longer
available for investment, or if in the Company's judgment further investment in
any Fund becomes inappropriate in view of the purposes of the Separate Account.
The Company will not substitute any shares attributable to an Owner's interest
in a Division of the Separate Account without notice to the Owner and prior
approval of the SEC, to the extent required by the 1940 Act or other applicable
law. Nothing contained in this Prospectus shall prevent the Separate Account
from purchasing other securities for other series or classes of policies, or
from permitting a conversion between series or classes of policies on the basis
of requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Fund of the Trust, or in
shares of another investment company, with a specified investment objective.
New Divisions may be established when, in the sole discretion of the Company,
marketing needs or investment conditions warrant, and any new Division will be
made available to existing Owners on a basis to be determined by the Company.
To the extent approved by the SEC, the Company may also eliminate or combine
one or more Divisions, substitute one Division for another Division, or
transfer assets between Divisions if, in its sole discretion, marketing, tax,
or investment conditions warrant.
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In the event of a substitution or change, the Company may, if it considers it
necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
If deemed by the Company to be in the best interests of persons having voting
rights under the Policy, and to the extent any necessary SEC approvals or Owner
votes are obtained, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other separate
accounts of the Company. To the extent permitted by applicable law, the Company
may also transfer the assets of the Separate Account associated with the Policy
to another separate account.
The Company cannot guarantee that the shares of the Trust will always be
available. The Trust sells shares to the Separate Account in accordance with
the terms of a participation agreement between the Trust, the Company, and MFS.
Should this agreement terminate or should shares become unavailable for any
other reason, the Separate Account will not be able to purchase Trust shares.
Should this occur, the Company will be unable to honor Owner requests to
allocate their cash values or premium payments to the Divisions of the Separate
Account investing in shares of the Trust. In the event that the Trust is no
longer available, the Company will, of course, take reasonable steps to obtain
alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
The Company will generally issue a Group Contract to employers whose
employees and/or their spouses may become Owners and/or Insureds thereunder so
long as the employee is within the class of employees eligible to be included
in the Group Contract. The class(es) of employees covered by a particular Group
Contract are set forth in that Group Contract's specifications pages. The Group
Contract will be issued upon receipt of an application for a Group Contract
signed by a duly authorized officer of the employer and acceptance by a duly
authorized officer of the Company at its Home Office. (See "General Provisions
of the Group Contract--Issuance," page 35.) Individuals (i.e., eligible
employees or their spouses) wishing to purchase a Policy, whether under a Group
Contract or an employer-sponsored insurance program, must complete the
appropriate application for Individual Insurance and submit it to an authorized
representative of the Company or to the Company's Home Office. The Company will
issue to each Contractholder either a Certificate or an Individual Policy to
give to each Owner. Individual Policies, rather than Certificates, will be
issued (i) to independent contractors of the employer; (ii) to persons who wish
to continue coverage after a Group Contract has terminated; (iii) to persons
who wish to continue coverage after they no longer are employed by the Group
Contractholder; (iv) if state law restrictions make issuance of a Group
Contract impracticable; or (v) if the employer chooses to use an employer-
sponsored insurance program that does not involve a Group Contract.
Corporate Programs will generally involve Individual Policies. Policies will
be issued on the lives of eligible Insureds, generally employees of a
sponsoring employer, and the Owner will usually be the sponsoring employer or
its designee.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
70 who supply evidence of insurability satisfactory to the Company. The Company
may, at its sole discretion, issue Policies to individuals falling outside
those Issue Ages or decline to issue Policies to individuals within those Issue
Ages.
In order for an individual employee to be eligible to be an Insured under a
Policy, the employee must be actively at work at the time the application for
Individual Insurance is signed. In addition, there may be specific classes to
which the employee must belong to be eligible to be an Insured under a Policy.
Actively at work means that the employee must work for the Contractholder or
sponsoring employer at the employee's usual place of work or such other places
as required by the Contractholder or sponsoring employer in the course of such
work for the full number of hours and the full rate of pay, as set by the
employment practices
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of the employer. Ordinarily the time worked per week must not be less than 30
hours. However, the Company reserves the right to waive or modify the actively
at work requirement at its discretion. In addition, the Contractholder or
sponsoring employer may require that, to be eligible to purchase a Policy, an
employee must be employed by the employer as of a certain date or for a certain
period of time. This date or time period will be set forth in the Group
Contract specifications pages. Employees of any Associated Companies of the
Contractholder will be considered employees of the Contractholder. The Company
may also allow an individual who is an independent contractor working primarily
for the sponsoring employer to be considered an eligible employee. As an
independent contractor, he may receive an Individual Policy rather than a
Certificate depending upon state law applicable to the contracts. An employee
may include a partner in a partnership if the employer is a partnership.
In other than Executive Programs or Corporate Programs, the first time an
employee is given the opportunity to purchase a Policy, the Company may issue
the Policy and any spouse or children's insurance rider applied for by the
employee pursuant to its guaranteed issue procedure. Under this procedure the
employee is required to answer qualifying questions in the application for
Individual Insurance, but is not required to submit to a medical or paramedical
examination. The maximum Face Amount that an employee can generally apply for
under the guaranteed issue procedure ("Guaranteed Issue Amount") is three times
the employee's salary up to a ceiling that is based on the number of eligible
employees under a Group Contract or other employer-sponsored insurance program.
Guaranteed issue may be available with Executive Programs or Corporate Programs
depending upon number of eligible employees or if other existing coverage is
cancelled.
Where the Face Amount exceeds the guaranteed issue limits, where the Policy
has been offered previously to the employee, where the guaranteed issue
requirements set forth in the application for Individual Insurance are not met,
or in connection with certain programs that may be offered without guaranteed
issue, the employee must submit to a simplified underwriting procedure which
requires the employee to respond satisfactorily to certain health questions in
the application. A blood test may be required. This requirement is generally
applicable only to Executive Programs or Corporate Programs. Similarly, such
questions must be answered if, in connection with the issuance of any
children's rider, if the employee is not eligible for guaranteed issue
underwriting, or, even when the employee is eligible, if the child does not
satisfy the guaranteed issue requirements set forth in the application for
Individual Insurance. However, regardless of which underwriting procedure is
used, acceptance of an application is subject to the Company's underwriting
rules, and the Company reserves the right to reject an application for any
reason.
If a Policy is to be issued to a spouse of an employee who is eligible to
purchase a Policy under a Group Contract or an employer-sponsored insurance
program, the appropriate application for Individual Insurance must be supplied.
The spouse will be subject to the simplified underwriting procedure described
above. Guaranteed issue is not available. Spouse coverage is generally not
available under Executive Program Policies or Corporate Program Policies.
The Issue Date is the effective date for all coverage provided in the
original application for Individual Insurance. The Issue Date is used to
determine Policy Anniversaries, Policy Years, and Policy Months. A Policy will
not take effect until the appropriate application for Individual Insurance is
signed, the initial premium has been paid prior to the Insured's death, the
Insured is eligible for it, and the information in the application is
determined to be acceptable to the Company. However, prior to the actual
issuance of a Policy which is being underwritten on a guaranteed issue basis,
interim insurance in the amount of insurance applied for up to the Guaranteed
Issue Amount may be available and, if so, will start as of the date of the
application. Interim insurance ends on the earliest of the following dates: (a)
the date insurance begins on the Policy applied for; (b) the date a Policy
other than the Policy applied for is offered to the applicant; (c) the date the
Company notifies the applicant that the application for any proposed Insured is
declined; (d) 60 days from the date of application; or (e) termination of
employment with the Contractholder or sponsoring employer.
14
<PAGE>
PREMIUMS
The initial premium is due on the Issue Date, and usually will be remitted by
the Contractholder or employer on behalf of the Owner. In Corporate Programs,
the Owner or its designated payor will remit premiums. The Company requires
that the initial premium for a Policy be at least equal to one-twelfth ( 1/12)
of the planned annual premium for the Policy set forth in the specifications
pages. The planned annual premium is an amount specified for each Policy based
on the requested initial Face Amount, the Issue Age of the Insured and the
charges under the Policy. (See "Charges and Deductions," page 28.) However, the
Owner is not required to pay premiums equal to the planned annual premium.
Premiums remitted by a Contractholder or sponsoring employer or designated
payor shall be applied to a Policy when received by the Company. Should
supporting documentation to enable the determination of the amount of premium
per Policy not be received prior to or coincident with the cash premium, the
premiums shall be promptly returned to the entity remitting such premiums.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. Under Group Contracts
and Individual Policies issued in connection with other employer-sponsored
insurance programs, the planned annual premium usually will be remitted by the
Contractholder or sponsoring employer on behalf of the Owner pursuant to a
planned premium payment schedule which will provide for premium payments in a
level amount at fixed intervals agreed to by the Contractholder or employer and
the Company (usually monthly). The amount of the premiums remitted by the
sponsoring employer or Contractholder will be that amount authorized to be
deducted by the employee. For Corporate Programs, the Owner or its designated
payor shall remit any scheduled and unscheduled premium payments. The Owner may
skip planned premium payments. Failure to pay one or more planned premium
payments will not cause the Policy to lapse until such time as the Cash
Surrender Value is insufficient to cover the next Monthly Deduction. (See
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement," page 16.)
In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters,"
page 37.) Moreover, as mentioned above, an Owner may also skip planned premium
payments. Therefore, unlike conventional insurance policies, a Policy does not
obligate the Owner to pay premiums in accordance with a rigid and inflexible
premium schedule.
Failure of the Contractholder to remit the planned premium payments
authorized by its employees may cause the Group Contract to terminate. (See
"General Provisions of the Group Contract--Termination," page 35.) Nonetheless,
provided that there is sufficient Cash Surrender Value to prevent the Policy
from lapsing, the Individual Insurance provided will automatically continue in
the event of such termination. (See "Policy Rights and Privileges--Eligibility
Change Conversion," page 26.) Individual Insurance will also continue if the
employee's employment with the Contractholder or sponsoring employer
terminates. In either circumstance, an Owner of an Individual Policy (or a
Certificate converted by amendment to an Individual Policy) will establish a
new schedule of planned premiums which will have the same planned annual
premium, but ordinarily the payment intervals will be no more frequent than
quarterly. In Corporate Programs, there will generally be no changes in planned
or scheduled premiums upon the discontinuing employment of an Insured.
Premium Limitations. Every premium payment remitted by or on behalf of an
Owner must be at least $20. In no event may the total of all premiums paid
under a Policy in any Policy Year exceed the current maximum premium
limitations for that year established by Federal tax laws. The maximum premium
limitation for a Policy Year is the most premium that can be paid in that
Policy Year such that the sum of the premiums paid under the Policy will not at
any time exceed the guideline premium limitations referred to in section
7702(c) of the Internal Revenue Code of 1986, or any successor provision. If at
any time a premium
15
<PAGE>
is paid which would result in total premiums exceeding the current maximum
premium limitation, the Company will accept only that portion of the premium
which will make total premiums equal the maximum. Any part of the premium in
excess of that amount will be returned directly to the Owner within 60 days of
the end of the Policy Year in which payment is received or applied as otherwise
agreed and no further premiums will be accepted until allowed by the current
maximum premium limitations prescribed by Federal tax law. See "Federal Tax
Matters" on page 37 for a further explanation of premium limitations. Section
7702A creates an additional premium limitation, which, if exceeded, can change
the tax status of a Policy to that of a "modified endowment contract." A
modified endowment contract is a life insurance contract, withdrawals from
which are, for tax purposes, treated first as a distribution of any taxable
income under the contract, and then as a distribution of nontaxable investment
in the contract. Additionally, such withdrawals may be subject to a 10% federal
income tax penalty. The Company has adopted administrative steps designed to
notify an Owner when it is believed that a premium payment will cause a Policy
to become a modified endowment contract. The Company has administrative
procedures to prevent a modified endowment contract by monitoring premium
limits. The Owner will be given a limited amount of time to request that the
premium be reversed in order to avoid the Policy's being classified as a
modified endowment contract. (See "Federal Tax Matters," page 37.)
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge less the premium tax charge. (See "Charges and Deductions--Sales
Charges," page 28.)
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums will
be allocated in accordance with the Owner's instructions upon receipt of the
premiums at the Company's Home Office. However, the minimum percentage, other
than zero ("0"), that may be allocated to a Division is 10 percent of the net
premium, and fractional percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers," page 24.)
The value of amounts allocated to Divisions of the Separate Account will vary
with the investment performance of the chosen Divisions and the Owner bears the
entire investment risk. This will affect the Policy's Cash Value, and may
affect the death benefit as well. Owners should periodically review their
allocations of premiums and values in light of market conditions and overall
financial planning requirements.
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy to
lapse. Lapse will occur only when the Cash Surrender Value is insufficient to
cover the monthly deduction, and a grace period expires without a sufficient
payment being made. (See also "General Provisions of the Group Contract--Grace
Period--Termination," page 35.)
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium requirements,
the amount of the premium required to keep the Policy in
16
<PAGE>
force will be the amount of the current monthly deduction. (See "Charges and
Deductions," page 28.) If the Company does not receive the required amount
within the grace period, the Policy will lapse and terminate without Cash
Value. If the Insured dies during the grace period, any overdue monthly
deductions will be deducted from the death benefit otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
any time within five years after the date of lapse and before the Maturity
Date. The right to reinstate a lapsed Policy will not be affected by the
termination of a Group Contract or the termination of an employee's employment
during the reinstatement period. Reinstatement is subject to the following
conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company (including evidence of insurability of any person covered by a
rider to reinstate the rider).
2. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, is large enough to cover: (a) the
monthly deductions due at the time of lapse, and (b) two times the monthly
deduction due at the time of reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death. Payment
of death benefit proceeds will not be affected by termination of the Group
Contract or employer-sponsored insurance program or by termination of an
employee's employment.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "General Matters Relating to the Policy--
Additional Insurance Benefits," page 33.)
The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more of the settlement
options set forth in the Policy. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 27.) Death benefit proceeds will be paid to the
surviving Beneficiary or Beneficiaries specified in the application or as
subsequently changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long as
the Policy remains in force. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 16.) The minimum Face Amount currently is
$25,000. The maximum Face Amount is generally $500,000. However, in connection
with a particular Group Contract, employer sponsored insurance program,
Executive Program or Corporate Program, the Company may establish a
substantially higher Face Amount for Policies issued under that Contract or
program.
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<PAGE>
Option A. Under Option A, the death benefit is the current Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value on the date of
death. The applicable percentage is 250 percent for an Insured Attained Age 40
or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table below.
Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. Owners who prefer to have favorable investment performance
reflected in higher Cash Value for the same Face Amount, rather than increased
death benefit, generally should select Option A.
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
40 or younger........... 250%
41...................... 243
42...................... 236
43...................... 229
44...................... 222
45...................... 215
46...................... 209
47...................... 203
48...................... 197
49...................... 191
50...................... 185
51...................... 178
52...................... 171
53...................... 164
54...................... 157
55...................... 150
56...................... 146
57...................... 142
58...................... 138
59...................... 134
60...................... 130
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
61...................... 128%
62...................... 126
63...................... 124
64...................... 122
65...................... 120
66...................... 119
67...................... 118
68...................... 117
69...................... 116
70...................... 115
71...................... 113
72...................... 111
73...................... 109
74...................... 107
75 to 90................ 105
91...................... 104
92...................... 103
93...................... 102
94...................... 101
95 or older............. 100
</TABLE>
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company reserves
the right to alter the applicable percentage to the extent necessary to comply
with changes to Section 7702(d) or any successor provision thereto.
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage is
the same as under Option A: 250 percent for an Insured with an Attained Age of
40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the percentage
declines as shown in the Applicable Percentage Table above. Accordingly, under
Option B the amount of the death benefit will always vary as the Cash Value
varies (but will never be less than the Face Amount). Owners who prefer to have
favorable investment performance reflected in higher death benefits for the
same Face Amount generally should select Option B. All other factors equal, for
the same premium dollar, Option B provides lower initial Face Amount resulting
in earlier cash accumulation.
Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option in effect. The Company reserves the right
to limit the number of changes in death benefit options to one each Policy
Year. A request for change must be made directly to the Company in writing. The
effective date of such a change will be the Monthly Anniversary on or following
the date the Company receives the change request.
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request
18
<PAGE>
for a change from Option A to Option B. This change may not be made if it would
result in a Face Amount of less than $25,000.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges will
be imposed upon a change from death benefit Option B to Option A. Changing from
Option A to Option B, however, will result in a decrease in the Face Amount. In
addition, if, prior to or accompanying a change in the death benefit option,
there has been an increase in the Face Amount, the cost of insurance charge may
be different for the increased amount. (See "Charges and Deductions--Monthly
Deduction--Cost of Insurance," page 29.)
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income due to not satisfying the
requirements of Federal tax law. (See "Federal Tax Matters," page 37.)
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written request
for a change in the Face Amount must be sent directly to the Company. A change
in Face Amount may affect the cost of insurance rate and the net amount at
risk, both of which affect an Owner's cost of insurance charge. (See "Charges
and Deductions--Monthly Deduction--Cost of Insurance," page 29.) In addition, a
change in Face Amount may have Federal income tax consequences. (See "Federal
Tax Matters," page 37.)
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000 and the Face Amount
remaining in force after any requested decrease may not be less than the
minimum amount Face Amount, generally $25,000. If, following a decrease in Face
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see "Payment and Allocation of Premiums," page
13), the decrease may be limited or Cash Value may be returned to the Owner (at
the Owner's election), to the extent necessary to meet these requirements. A
decrease in the Face Amount will reduce the Face Amount in the following order:
(a) The Face Amount provided by the most recent increase;
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance," page 29).
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. If approved, the increase will become
effective on the Monthly Anniversary on or following receipt of the
satisfactory evidence of insurability. In addition, the Insured must have an
Attained Age of not greater than 80 on the effective date of the increase. The
amount of the increase may not be less than $5,000. The Face Amount may not be
increased more than the maximum Face Amount for that Policy, generally
$500,000. However, in connection with a particular Group Contract or employer-
sponsored insurance program, the Company may establish a substantially higher
Face Amount for Policies issued under that Contract or program. Although an
increase need not necessarily be accompanied by an additional premium (unless
it is required to meet the next monthly deduction), the Cash Surrender Value in
effect immediately after the increase must be sufficient to cover the next
monthly deduction. (See "Charges and Deductions-- Monthly Deduction," page 28.)
An increase in the Face Amount may result in certain additional charges. (See
"Charges and Deductions," page 28.)
19
<PAGE>
An increase in Face Amount may be cancelled within the later of 20 days from
the date the Owner received the new Policy specifications page for the
increase, within 10 days of mailing the right to cancellation notice to the
Owner, or within 45 days after the application for an increase was signed. Upon
cancellation, any additional charges, which would not have been assessed
without the increase, will be refunded to the Owner if requested. If a request
for a refund is not made, the charges will be restored to the Policy's Cash
Value and allocated to Divisions of the Separate Account in the same manner as
they were deducted. Premiums paid following an increase in Face Amount and
prior to the time the right to cancel the increase expires will become part of
the Policy's Cash Value and will not be subject to refund. (See "Policy Rights
and Privileges--Right to Examine Policy," page 25.)
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the level
of premium payments, and, to a lesser extent, making partial withdrawals from
the Policy. Although the consequences of each of these methods will depend upon
the individual circumstances, they may be generally summarized as follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit," page 17),
decrease the pure insurance protection and the cost of insurance charges
under the Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if Option A is in
effect) or the Cash Value plus the Face Amount (if Option B is in effect),
increased premium payments will increase the pure insurance protection.
Increased premiums should also increase the amount of funds available to
keep the Policy in force.
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement," page 16.)
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals," page 23.)
However, it only affects the amount of pure insurance protection and cost
of insurance charges if the death benefit before or after the withdrawal is
based on the applicable percentage of Cash Value, because otherwise the
decrease in the death benefit is offset by the amount of Cash Value
withdrawn. The primary use of a partial withdrawal is to withdraw Cash
Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the Policy--Postponement of Payments," page 31.) The Owner may decide the
form in which the proceeds will be paid. During the Insured's lifetime, the
Owner may arrange for the death benefit proceeds to be paid in a single sum or
under one or more of the optional methods of settlement described below. The
death benefit will be increased by the amount of the monthly cost of insurance
for the portion of the month from the date of death to the end of the month,
and reduced by any outstanding Indebtedness. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 33, and "Charges and
Deductions," page 28.)
20
<PAGE>
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits," page 27.)
An election or change of method of settlement must be in writing. A change in
Beneficiary revokes any previous settlement election. Once payments have begun,
the settlement option may not be changed.
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash Value
in the Separate Account and the Loan Account. The Policy's Cash Value in the
Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, and the charges assessed in
connection with the Policy. An Owner may at any time surrender the Policy and
receive the Policy's Cash Surrender Value. (See "Policy Rights and Privileges--
Surrender and Partial Withdrawals," page 23.) There is no guaranteed minimum
Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the Issue
Date and the Investment Start Date, this amount may be more than the amount of
one monthly deduction. (See "Payment and Allocation of Premiums," page 13.)
Thereafter, on each Valuation Date, the Cash Value in a Division of the
Separate Account will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
(6) Any amounts transferred from the Division during the current Valuation
Period plus transfer charges if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) Any contingent deferred sales charges incurred during the current
Valuation Period in connection with a partial withdrawal or decrease in
Face Amount allocated to the Division; minus
(9) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions," page 28.)
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
21
<PAGE>
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(4) Any amount charged against each Division for taxes or any amount set
aside during the Valuation Period as a reserve for taxes attributable
to the operation or maintenance of each Division; minus
(5) A charge not to exceed .0024547% of the net assets for each day in the
Valuation Period. This corresponds to 0.90% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value. Unit value is obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date; minus
(2) A reduction based upon a charge not to exceed .0024547% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.90% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
POLICY RIGHTS AND PRIVILEGES
EXERCISING RIGHTS AND PRIVILEGES UNDER THE POLICIES
Owners of Policies issued under a Group Contract or in connection with an
employer-sponsored insurance program may exercise their rights and privileges
under the Policies (i.e., make transfers, change premium allocations, borrow,
etc.) by directly notifying the Company in writing at its Home Office. The
Company will send all reports and other notices described herein or in the
Policy directly to the Owner.
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for such loan. The Loan
Value is equal to (a) minus (b), where (a) is 85 percent of the Cash Value of
the Policy on the date the Policy Loan is requested and (b) is the amount of
any outstanding Indebtedness. Loan interest is due and payable in arrears on
each Policy Anniversary or on a pro rata basis for such shorter period as the
loan may exist. The minimum amount that may be borrowed is $100. The loan may
be completely or partially repaid at any time while the Insured is living. Any
amount due to an Owner under a Policy Loan ordinarily will be paid within seven
days after the Company receives the loan request at its Home Office, although
payments may be postponed under certain circumstances. (See "General Matters
Relating to the Policy--Postponement of Payments," page 31.)
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. A Loan Subaccount
exists for each Division of the Separate Account. Amounts transferred to the
Loan Account to secure Indebtedness are allocated to the appropriate Loan
Subaccount to reflect its origin. Unless the Owner requests a different
allocation, amounts will be transferred from the Divisions of the Separate
Account in the same proportion that the Policy's Cash Value in each Division
bears to the Policy's total Cash Value, less the Cash Value in the Loan
Account, at the end of the Valuation Period during which the request for a
Policy Loan is received. This will reduce the Policy's Cash Value in the
Separate Account. These transactions will not be considered transfers for
purposes of the limitations on transfers between Divisions as discussed on page
24.
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of
22
<PAGE>
Company management as authorized by the Board of Directors of the Company. The
Loan Account interest credited will be transferred to the Divisions of the
Separate Account: (1) each Policy Anniversary; (2) when a new loan is made; (3)
when a loan is partially or fully repaid; and (4) when an amount is needed to
meet a monthly deduction.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of Policy Loans," below.) The
amount transferred will be deducted from the Divisions of the Separate Account
in the same proportion that the portion of the Cash Value in each Division
bears to the total Cash Value of the Policy minus the Cash Value in the Loan
Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
Federal income tax consequences (See "Federal Tax Matters," page 37.)
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment performance
of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Charges and
Deductions," page 28.) A sufficient payment must be made within the later of
the grace period of 62 days from the Monthly Anniversary immediately before the
date Indebtedness exceeds the Cash Value, or 31 days after notice that the
Policy will terminate without a sufficient payment has been mailed, or the
Policy will lapse and terminate without value. A lapsed Policy, however, may
later be reinstated. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement," page 16.)
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part at
any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as repayment
of Indebtedness. When a loan repayment is made, an amount securing the
Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount.
SURRENDER AND PARTIAL WITHDRAWALS
At any time during the lifetime of the Insured and while a Policy is in
force, the Owner may surrender, or make a partial withdrawal under, the Policy
by sending a written request to the Company. The amount available upon
surrender is the Cash Surrender Value (described below) at the end of the
Valuation Period during which the surrender request is received at the
Company's Home Office. Amounts payable upon surrender or a partial withdrawal
ordinarily will be paid within seven days of receipt of the written request.
(See "General Matters Relating to the Policy--Postponement of Payments," page
31.) Surrenders and partial withdrawals may have Federal income tax
consequences. (See "Federal Tax Matters," page 37.)
23
<PAGE>
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request, or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The Cash
Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness. Surrender proceeds will be paid in a single sum. If the request
is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to one
partial withdrawal each Policy Month from the Separate Account. The minimum
amount of a partial withdrawal, net of any transaction charges, is at least
$500. The minimum amount that can be withdrawn from a Division is $50, or the
Policy's Cash Value in a Division, if smaller. The maximum amount that may be
withdrawn, including the partial withdrawal transaction charge, is the Loan
Value. The partial withdrawal transaction charge is equal to the lesser of $25
or two percent of the amount withdrawn. The Owner may allocate the amount
withdrawn, subject to the above conditions, among the Divisions of the Separate
Account. If no allocation is specified, then the partial withdrawal will be
allocated among the Divisions of the Separate Account in the same proportion
that the Policy's Cash Value in each Division bears to the total Cash Value of
the Policy, less the Cash Value in the Loan Account, on the date the request
for the partial withdrawal is received.
A partial withdrawal will decrease the Face Amount in two situations. First,
if the death benefit Option A is in effect and the death benefit equals the
Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge. Second, if the death benefit equals a
percentage of Cash Value (whether Option A or Option B is in effect), then a
partial withdrawal will decrease the Face Amount by the amount that the partial
withdrawal plus the partial withdrawal transaction charge exceeds the
difference between the death benefit and the Face Amount. The death benefit
also will be reduced in this circumstance. If Option B is in effect and the
death benefit equals the Face Amount plus the Cash Value, the partial
withdrawal will not reduce the Face Amount, but it will reduce the Cash Value
and, thus, the death benefit by the amount of the partial withdrawal plus the
partial withdrawal transaction charge. The Face Amount will be decreased in the
following order: (1) the Face Amount at issue; and (2) any increases in the
same order in which they were issued.
Generally, the partial withdrawal transaction charge will be allocated among
the Divisions of the Separate Account in the same proportion as the partial
withdrawal is allocated. If, following a partial withdrawal, insufficient funds
remain in a Division to pay the partial withdrawal transaction charge allocated
to a Division, the unpaid charges will be allocated equally among the remaining
Divisions. In addition, an Owner may request that the partial withdrawal
transaction charge be paid from the Owner's Cash Value in another Division.
The Face Amount remaining in force after a partial withdrawal may not be less
than $25,000. Any request for a partial withdrawal that would reduce the Face
Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection," page 20.)
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account. Requests for transfers from or among Divisions of the
Separate Account must be made in writing directly to the Company and may be
made once each Policy Month. Transfers must be in amounts of at least $250 or,
if smaller, the Policy's Cash
24
<PAGE>
Value in a Division. The Company will effectuate transfers and determine all
values in connection with transfers as of the end of the Valuation Period
during which the transfer request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 20 days after receiving it, within 45
days after the Owner signed the application, or within 10 days of mailing a
notice of the cancellation right to the Owner, whichever is latest. If a Policy
is cancelled within this time period, a refund will be paid. The refund will
equal all premiums paid under the Policy.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
the Company. A refund of premiums paid by check may be delayed until the check
has cleared the Owner's bank. (See "General Matters Relating to the Policy--
Postponement of Payments," page 31.)
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit," page 17) also may be cancelled. The request for cancellation must be
made within the latest of 20 days from the date the Owner received the new
Policy specifications pages for the increase, 10 days of mailing the right to
cancellation notice to the Owner, or 45 days after the Owner signed the
application for the increase.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have been
made absent the increase (see "Charges and Deductions--Monthly Deduction," page
28). If no request is made, the Company will increase the Policy's Cash Value
by the amount of these additional charges. This amount will be allocated among
the Divisions of the Separate Account in the same manner as it was deducted.
CONVERSION RIGHT TO A FIXED BENEFIT POLICY
Once during the first 24 Policy Months following the Issue Date of the
Policy, the Owner may, upon written request, convert a Policy still in force to
a life insurance policy that provides for benefits that do not vary with the
investment return of the Divisions of the Separate Account. In the event a
Certificate has been amended to operate as an Individual Policy following an
Insured's change in eligibility under a Group Contract, the conversion right
will be measured from the Issue Date of the original Certificate. (See "Policy
Rights and Privileges--Eligibility Change Conversion," page 26). No evidence of
insurability will be required when this right is exercised. However, the
Company will require that the Policy be in force and that the Owner repay any
existing Indebtedness. At the time of the conversion, the new Policy will have,
at the Owner's option, either the same death benefit or the same net amount at
risk as the original Policy. The new Policy will also have the same Issue Date
and Issue Age as the original Policy. The premiums for the new Policy will be
based on the Company's rates in effect for the same Issue Age and rate class as
the original Policy.
25
<PAGE>
In addition, once during the first 24 Policy Months following the effective
date of a requested increase in Face Amount (i.e., an increase that is not the
result of a change in death benefit options), the Owner may, upon written
request, convert the amount of the increase in Face Amount to a life insurance
policy which also provides for fixed benefits. Premiums under this new contract
will be based on the Company's rates in effect for the same Issue Age and rate
class of the Insured as were applied on the effective date of the increase in
the Face Amount. The conditions and principles, described above, which are
applicable to a conversion of the entire Policy, will be equally applicable to
the conversion of an increase in Face Amount to a fixed-benefit policy.
ELIGIBILITY CHANGE CONVERSION
If an Insured's eligibility under a Group Contract or employer-sponsored
insurance program ends due to its termination or due to the termination of the
employee's employment, the Insured's coverage will continue unless the Policy
is no longer in force. Even if the Policy is not in force due to lapse, the
right to reinstate and thus to convert a lapsed Policy will not be affected by
the change in the employee's eligibility during the reinstatement period.
If a Certificate was issued under the Group Contract, the Certificate will be
amended automatically so that it will continue in force as an Individual
Policy. The rights, benefits, and guaranteed charges will not be altered by
this amendment. The amendment will be mailed to the Owner within 31 days after
the Company receives written notice that (a) the employee's employment ended or
(b) after the termination of the Group Contract. If, at the time the conversion
occurs, the Policy is in a grace period (see "Payment and Allocation of
Premiums--Policy Lapse and Reinstatement," page 16), any premium necessary to
prevent the Policy from lapsing must be paid to the Company at its Home Office
before the new Individual Policy will be mailed. A new planned premium schedule
will be established which will have the same planned annual premium utilized
under the Group Contract, but, ordinarily, the planned payment intervals will
be no more frequent than quarterly. The Company may allow payment of planned
premium through periodic (usually monthly) authorized electronic funds
transfer. Of course, unscheduled premium payments can be made at any time. (See
"Payment and Allocation of Premiums--Premiums," page 15.)
If an Individual Policy was issued under the Group Contract or other
employer-sponsored insurance program including a Corporate Program or Executive
Program, the Policy will continue in force following the change in eligibility.
The rights, benefits, and guaranteed charges under the Policy will remain the
same following this change in eligibility.
When an employee's spouse is the Insured under a Policy, the spouse's
insurance coverage also will continue in the event the employee is no longer
eligible. If a Certificate was originally issued to the employee's spouse, the
Certificate will be amended automatically as described above. If an Individual
Policy was originally issued, the Individual Policy will continue as described
above. In addition, if an Associated Company ceases be to under common control
with the Contractholder, the Insureds of the Associated Company (i.e.,
employees of the Associated Company and their spouses) may continue their
insurance in the manner described above.
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay the
Cash Surrender Value of the Policy to the Owner on the Maturity Date. An Owner
may elect to have amounts payable on the Maturity Date paid in a single sum or
under a settlement option. (See "Policy Rights and Privileges--Payment of
Policy Benefits," page 27.) Amounts payable on the Maturity Date ordinarily
will be paid within seven days of that date, although payment may be postponed
under certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments," page 31.) A Policy will mature if and when the
Insured reaches Attained Age 95.
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<PAGE>
PAYMENT OF POLICY BENEFITS
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written agreement with
the Company.
Settlement Options. The settlement options described below apply to the
payment of death benefit proceeds, as well as to benefits payable at maturity.
These are examples of options that may be available. Once a settlement option
is in effect, there will no longer be value in the Separate Account. The
Company may make other settlement options available in the future.
Option A--Life Income. The Company will pay equal monthly payments that will
be made for the payee's lifetime.
Option B--Life Income for Two Lives. The Company will pay monthly
installments jointly and to two named payees if both are living when the
installments become payable. One payee will be designated as primary payee.
Full installments will continue so long as the primary payee is living. If the
primary payee dies after installments begin, full installments or installments
of 1/2 or 2/3 (whichever the Owner elected when applying for this option) will
continue to the other payee during his or her lifetime.
Option C--Income for Specified Number of Years and Life Thereafter. The
Company will pay monthly installments beginning on the effective date of the
option and continuing for 5, 10, 15 or 20 years certain, as may be chosen, and
after that during the payee's lifetime.
Option D--Life Income With Cash Refund. The Company will pay equal monthly
installments as long as the payee lives. If the payee dies before the total
amounts paid equal the proceeds applied, the Company pays the difference in one
sum.
Option E--Installments of a Specified Amount. The Company will pay
installments at dates and in amounts chosen by the payee with the Company's
approval. The Company will continue to make payments until all of the proceeds,
with interest, are paid. The final payment will not exceed the unpaid balance.
Option F--Income for Specified Number of Years. The Company will pay monthly
installments beginning on the effective date of the option and continuing for a
specified number of years, not to exceed 30 years.
Option G--Interest. The Company will hold the proceeds on deposit during the
payee's lifetime or for any other period selected with the Company's approval.
Interest may be accumulated or received in monthly, quarterly, semiannual, or
annual payments, as elected. The proceeds may be withdrawn at any time upon
request. Interest begins to accrue as of the date of death, for death benefit
proceeds; the Maturity Date, for benefits payable upon maturity of a Policy;
and the date a request for surrender is received, for surrender of a Policy.
The Company may, from time to time, offer additional settlement options
and/or more favorable settlement option rates to all Insureds or Beneficiaries
under the Policies.
Accelerated Death Benefits. The Company offers certain riders which permit
the Owner to elect to receive an accelerated payment of the Policy's death
benefit in a reduced amount under certain circumstances. (See "General Matters
Relating to the Policy--Additional Insurance Benefits," page 33.)
27
<PAGE>
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policies to compensate the
Company for providing the insurance benefits set forth in the Policies and any
additional benefits added by rider, administering the Policies, incurring
expenses in distributing the Policies, and assuming certain risks in connection
with the Policies.
SALES CHARGES
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by a front-end sales charge ("premium
expense charge") equal to one percent of the premium.
In addition, as a result of OBRA, insurance companies are generally required
to capitalize and amortize certain policy acquisition expenses over a ten year
period rather than currently deducting such expenses. A higher capitalization
expense applies to the deferred acquisition expenses of Policies that are
deemed to be individual contracts under OBRA and will result in a significantly
higher corporate income tax liability for the Company in early Policy Years.
Thus, under Policies that are deemed to be individual contracts under OBRA, the
Company makes an additional charge of 1% of each premium payment to compensate
the Company for the anticipated higher corporate income taxes that result from
the sale of such a Policy. Among other possible employer-sponsored programs,
Corporate Program Policies are deemed to be individual contracts. This
additional charge is treated as a sales load for purposes of determining
compliance with the limitations on sales loads imposed by the Investment
Company Act of 1940 and applicable regulations thereunder.
The premium payment less the premium expense charge less any charge to
compensate the Company for anticipated higher corporate income taxes resulting
from the sale of a Policy less the premium tax charge (described below) equals
the net premium.
The sales charges will not change in the event that an Insured is no longer
eligible under a Group Contract or employer-sponsored insurance program, but
continues coverage on an individual basis.
The sales charges may not be sufficient to cover the distribution expenses
incurred by the Company. The Company expects to recover any deficiency from its
general assets, which may include profits from the mortality and expense risk
charge.
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premium taxes the Company deducts a charge of 2 percent from all
Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate the Company for (a) certain administrative costs; (b)
insurance underwriting and acquisition expenses in connection with issuing a
Policy; (c) the cost of insurance; and (d) the cost of optional benefits added
by rider. The monthly deduction will be deducted on the Investment Start Date
and on each succeeding Monthly Anniversary. It will be allocated among each
Division of the Separate Account in the same proportion that a Policy's Cash
Value in each Division bears to the total Cash Value of the Policy, less the
Cash Value in the Loan Account, on the date the deduction is made. Because
portions of the monthly deduction, such as the cost of insurance, can vary from
month to month, the monthly deduction itself will vary in amount from month to
month.
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping,
28
<PAGE>
processing death benefit claims, cash surrenders, partial withdrawals, Policy
changes, reporting and overhead costs, processing applications, and
establishing Policy records. As reimbursement for administrative expenses
related to the maintenance of each Policy and the Separate Account, the Company
assesses a monthly administration charge from each Policy. The amount of this
charge is set forth in the specifications pages of the Policy and depends on
the number of employees eligible to be covered at issue of a Group Contract or
an employer-sponsored insurance program. The following table sets forth the
general range of monthly administrative charges under the Policy:
<TABLE>
<CAPTION>
ELIGIBLE EMPLOYEES FIRST YEAR SUBSEQUENT YEARS
------------------ ---------- ----------------
<S> <C> <C>
250-499....................... $5.00......................... $2.50
500-999....................... $4.75......................... $2.25
1000+......................... $4.50......................... $2.00
</TABLE>
For Group Contracts or other employer-sponsored insurance programs with fewer
than 250 eligible employees, those with additional administrative costs, or
those that are offered as Executive Programs or Corporate Programs, the monthly
administrative charge may be higher, but will not exceed $6.00 per month during
the first Policy Year and $3.50 per month in renewal years.
These charges, once established at the time a Policy is issued, are
guaranteed not to increase over the life of the Policy. Nor will the
administrative charge change in the event that the Insured is no longer
eligible for group coverage, but continues coverage on an individual basis. The
Company has designed the administrative charge so as not to make any profit on
the charge. In addition, where the Company believes that lower administrative
costs will be incurred in connection with a particular Group Contract or
employer-sponsored insurance program due to the number of eligible employees or
administrative support provided by the employer, the Company may modify the
above schedule for that Group Contract or other employer-sponsored insurance
program. The amount of the administrative charge applicable to a particular
Policy will be set forth in specifications pages for that Policy.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience. The Company currently issues
the Policies on a guaranteed issue or simplified underwriting basis without
regard to the sex of the Insured. Whether a Policy is issued on a guaranteed
issue or simplified underwriting basis does not affect the cost of insurance
charge determined for that Policy.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and possibly the gender mix (i.e., the
proportion of men and women covered under a particular Group Contract or
employer-sponsored program). The cost of insurance rates generally increase as
the Insured's Attained Age increases. An Insured's rate class is generally
based on the number of eligible employees as well as other factors that may
affect the mortality risks assumed by the Company in connection with a
particular Group Contract or employer-sponsored insurance program. All other
factors being equal, the cost of insurance rates generally decrease by rate
class as the number of eligible employees in the rate class increase. The
Company reserves the right to change criteria on which a rate class will be
based in the future.
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<PAGE>
If gender mix is a factor, the Company will estimate the gender mix of the
pool of Insureds under a Group Contract or employer-sponsored insurance program
upon issuance of the Contract. Each year on the Group Contract or employer-
sponsored insurance program's anniversary, the Company may adjust the rate to
reflect the actual gender mix for the particular group. In the event that the
Insured's eligibility under a Group Contract (or other employer-sponsored
insurance program) ceases, the cost of insurance rate will continue to reflect
the gender mix of the pool of Insureds at the time the Insured's eligibility
ceased. However, at some time in the future, the Company reserves the right to
base the gender mix and rate class on the group consisting of those Insureds
who are no longer under a Group Contract or employer-sponsored program.
The current cost of insurance rates will not be greater than the guaranteed
cost of insurance rates set forth in the Policy. These guaranteed rates are 125
percent of the maximum rates that could be charged based on the 1980
Commissioners Standard Ordinary Mortality Table C ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the maximum rates in the 1980
CSO Table because the Company uses guaranteed or simplified underwriting
procedures whereby the insured is not required to submit to a medical
or paramedical examination. The current cost of insurance rates are generally
lower than 100 percent of the 1980 CSO Table. Any change in the actual cost of
insurance rates, except those changes made to adjust for changes in the gender
mix of the pool of Insureds under a particular Group Contract or employer-
sponsored insurance program, will apply to all persons of the same Attained Age
and rate class whose initial Face Amounts or increases in Face Amount have been
in force for the same length of time. (For purposes of computing guideline
premiums under Section 7702 of the Internal Revenue Code of 1986, as amended,
the Company will use 100 percent of the 1980 CSO Table.)
The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0040741 (which reduces the net
amount at risk, solely for purposes of computing the cost of insurance, by
taking into account assumed monthly earnings at an annual rate of five
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that for
the initial Face Amount, the net amount at risk will be calculated separately
for each rate class. If Option A is in effect, for purposes of determining the
net amounts at risk for each rate class, Cash Value will first be considered a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, the excess Cash Value will then be considered a part of each
increase in order, starting with the first increase. If Option B is in effect,
the net amount at risk for each rate class will be determined by the Face
Amount associated with that rate class. In calculating the cost of insurance
charge, the cost of insurance rate for a Face Amount is applied to the net
amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option A
and Option B when more than one rate class is in effect, a change in the death
benefit option may result in a different net amount at risk for each rate class
than would have occurred had the death benefit option not been changed. Since
the cost of insurance is calculated separately for each rate class, any change
in the net amount at risk resulting from a change in the death benefit option
may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," page 17, and "Policy Rights and Privileges--Surrender
and Partial Withdrawals," page 23.)
Additional Insurance Benefits. The monthly deduction will include charges for
any additional benefits provided by rider. (See "General Matters Relating to
the Policy--Additional Insurance Benefits," page 33.)
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal.
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<PAGE>
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at a rate not to exceed .0024547% of the net assets
of each Division of the Separate Account, which equals an annual rate of .90%
of those net assets. The Company may realize a profit from this charge.
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount of
death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future. Charges for other
taxes, if any, attributable to the Account may also be made. (See "Federal Tax
Matters," page 37.)
Expenses of the Trust. The value of the net assets of the Separate Account
will reflect the investment advisory fee and other expenses incurred by the
Trust. (See "MFS Variable Insurance Trust," page 10.)
GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) 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; (ii) the SEC by order
permits postponement for the protection of Owners; or (iii) 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 premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE CONTRACT
The Policy, the attached application, any riders, endorsements, any
application for an increase in Face Amount, and any application for
reinstatement constitute the entire contract between the Owner and the Company.
Apart from the rights and benefits described in the Certificate or Individual
Policy and incorporated by reference into the Group Contract, the Owner has no
rights under the Group Contract. All statements made by the Insured in the
application are considered representations and not warranties, except in the
case of fraud. Only statements in the application and any supplemental
applications can be used to contest a claim or the validity of the Policy. Any
change to the Policy must be approved in writing by the President, a Vice
President, or the Secretary of the Company. No agent has the authority to alter
or modify any of the terms, conditions, or agreements of the Policy or to waive
any of its provisions.
CONTROL OF POLICY
The Owner of the Policy is the entity named as the Owner in the application.
Ownership may be changed, however, as described below. The Owner is entitled to
all rights provided by the Policy, prior to its Maturity Date. After the
Maturity Date, the Owner cannot change the payee nor the mode of payment,
unless otherwise provided in the Policy. Any person whose rights of ownership
depend upon some future event will not possess any present rights of ownership.
If there is more than one Owner at a given time, all must exercise the rights
of ownership. If the Owner should die, and the Owner is not the Insured, the
Owner's interest will go to his or her estate unless otherwise provided.
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BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If there is more
than one Beneficiary at the death of the Insured, each will receive equal
payments unless otherwise provided by the Owner. If no Beneficiary is living at
the death of the Insured, the proceeds will be payable to the Owner or, if the
Owner is not living, to the Owner's estate.
CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received at
the Company's Home Office. The Company will not be liable for any payment made
or action taken before the Company received the written request for change. If
the Owner is also a Beneficiary of the Policy at the time of the Insured's
death, the Owner may, within 60 days of the Insured's death, designate another
person to receive the Policy proceeds.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or any
applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment thereunder
will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from the
Issue Date during the lifetime of the Insured. An increase in Face Amount or
addition of a rider after the Issue Date is incontestable after such increase
or addition has been in force for two years from its effective date during the
lifetime of the Insured. Any reinstatement of a Policy is incontestable, except
for nonpayment of premiums, only after it has been in force during the lifetime
of the Insured for two years after the effective date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an acknowledged copy to
the Owner. The Company is not responsible for determining the validity of any
assignment. Payment of Policy proceeds is subject to the rights of any assignee
of record. If a claim is based on an assignment, the Company may require proof
of the interest of the claimant. A valid assignment will take precedence over
any claim of a Beneficiary.
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SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the laws of the state in
which the Policy was delivered, if less than two years), the amount payable
will be limited to premiums paid, less any partial withdrawals and outstanding
Indebtedness. If the Insured, while sane or insane, dies by suicide within two
years after the effective date of any increase in Face Amount, the death
benefit for that increase will be limited to the amount of the monthly
deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide when
the Policy, or any increase in Face Amount, was applied for.
MISSTATEMENT OF AGE AND CORRECTIONS
If the age of the Insured has been misstated in the application, the amount
of the death benefit will be that which the most recent cost of insurance
charge would have purchased for the correct age.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. However, some Group
Contracts, employer-sponsored insurance programs, Executive Programs, or
Corporate Programs may not offer each of the additional benefits described
below. Certain riders may not be available in all states. In addition, should
it be determined that the tax status of a Policy as life insurance is adversely
affected by the addition of any of these riders, the Company will cease
offering such riders. The descriptions below are intended to be general; the
terms of the Policy riders providing the additional benefits may vary from
state to state, and the Policy should be consulted. The cost of any additional
insurance benefits will be deducted as part of the monthly deduction. (See
"Charges and Deductions--Monthly Deduction," page 28.)
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accidental Death Benefit Rider. Provides additional insurance if the
Insured's death results from accidental bodily injury, as defined in the rider.
Under the terms of the rider, the additional benefits provided in the Policy
will be paid upon receipt of proof by the Company that death resulted directly
from accidental injury and independently of all other causes; occurred within
120 days from the date of injury; and occurred before the Policy Anniversary
nearest age 70 of the Insured.
Children's Life Insurance Rider. Provides for term insurance on the Insured's
children, as defined in the rider. To be eligible for insurance under the
rider, the child to be insured must not be confined in a hospital at the time
the application is signed. Under the terms of the rider, the death benefit will
be payable to the named Beneficiary upon the death of any insured child. Upon
receipt of proof of the Insured's death before the rider terminates, the rider
will be continued on a fully paid-up term insurance basis.
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HIV Acceleration of Death Benefits Rider. Provides for the Owner's election
for the Company to make an accelerated payment, prior to the death of the
Insured upon receipt of satisfactory evidence that the Insured has tested
seropositive for the human immunodeficiency virus ("HIV") after both the Policy
and rider are issued. The Company will pay the Policy's death benefit (less any
Indebtedness and any term insurance added by riders), calculated on the date
that the Company receives satisfactory evidence that the Insured has tested
seropositive for HIV, reduced by a $100 administrative processing fee. The
Company will pay the accelerated benefit to the Owner in a single payment in
full settlement of the Company's obligations under the Policy. The rider may be
added to the Policy only after the Insured satisfactorily meets certain
underwriting requirements which will generally include a negative HIV test
result to a blood or other screening test acceptable to the Company.
The Federal income tax consequences associated with (i) adding the HIV
Acceleration of Death Benefit Rider or (ii) receiving the benefit provided
under the rider are uncertain. Accordingly, we urge you to consult a tax
adviser about such consequences before adding the HIV Acceleration of Death
Benefit Rider to your Policy or requesting a benefit under the rider.
Accelerated Death Benefit Settlement Option Rider. Provides for the
accelerated payment of a portion of death benefit proceeds in a single sum to
the Owner if the Insured is terminally ill or permanently confined to a nursing
home. Under the rider, which is available at no additional cost, the Owner may
make a voluntary election to completely settle the Policy in return for the
Company's accelerated payment of a reduced death benefit. The Owner may make
such an election under the rider if the Insured (1) has a life expectancy of 12
months or less or (2) is permanently confined to a qualified nursing home and
is expected to remain there until death. Any irrevocable beneficiary and
assignees of record must provide written authorization in order for the Owner
to receive the accelerated benefit.
The amount of the death benefit payable under the rider will equal the cash
surrender value under the Policy on the date the Company receives satisfactory
evidence of either (1) or (2), above, (less any Indebtedness and any term
insurance added by other riders) plus the product of the applicable "benefit
factor" multiplied by the difference of (a) minus (b), where (a) equals the
Policy's death benefit proceeds, and (b) equals the Policy's cash surrender
value. The "benefit factor", in the case of terminal illness, is 0.85 and, in
the case of permanent nursing home confinement, is 0.70.
The Federal income tax consequences associated with (i) adding the
Accelerated Death Benefit Settlement Option Rider or (ii) receiving the
benefits provided under such rider are uncertain. Accordingly, we urge you to
consult a tax adviser about such consequences before adding the Accelerated
Death Benefit Settlement Option Rider to your Policy or requesting a benefit
under the rider.
RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the American
Series and a list of the portfolio securities held in each Fund. Receipt of
premium payments directly from the Owner, transfers, partial withdrawals,
Policy Loans, loan repayments, changes in death benefit options, increases or
decreases in Face Amount, surrenders and reinstatements will be confirmed
promptly following each transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
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DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to an Underwriting Agreement with the
Company. Walnut Street is a wholly-owned subsidiary of General American Holding
Company, which is an affiliate of the Company. Walnut Street is registered with
the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers. The Policies will be
sold by broker-dealers who have entered into written sales agreements with
Walnut Street.
Broker-dealers will receive commissions based upon a commission schedule in
the sales agreement with the Company and Walnut Street. Broker-dealers
compensate their registered representative agents. Commissions are payable on
net collected premiums received by the Company. Maximum commissions payable to
a broker-dealer during the first year of a Group Contract or other employer-
sponsored insurance program are (a) 18% of premiums that do not exceed the cost
of insurance assessed during the first Policy Year plus (b) 1% of premiums in
excess of the cost of insurance assessed during that Policy Year. In all
renewal years of a Group Contract or other employer-sponsored insurance program
maximum commissions are (a) 3% of premiums that do not exceed the cost of
insurance assessed during the respective Policy Year plus (b) 1% of premiums in
excess of the cost of insurance assessed during that Policy Year. In lieu of
the part (b) of renewal commissions described above payable on premiums
received in excess of the cost of insurance assessed, renewal commissions may
be up to 0.25% per year of the average cash value of a Policy during a Policy
Year or calendar year. In no event will commissions be payable for more than 20
years.
Walnut Street received zero commissions for the Policies for the year ended
December 31, 1995.
GENERAL PROVISIONS OF THE GROUP CONTRACT
ISSUANCE
The Group Contract will be issued upon receipt of a signed application for
Group Insurance signed by a duly authorized officer of the employer and
acceptance by a duly authorized officer of the Company at its Home Office.
PREMIUM PAYMENTS
The Contractholder will remit planned premium payments for Insureds of the
Contractholder or an Associated Company in an amount authorized by the employee
to be deducted from his wages. All planned premiums under a Group Contract must
be remitted in advance to the Company. The planned premium payment interval is
agreed to by the Contractholder and the Company. Prior to each planned payment
interval, the Company will furnish the Contractholder with a statement of the
planned premium payments to be made under the Group Contract or such other
notification as has been agreed to by the Contractholder and the Company.
GRACE PERIOD
If the Contractholder does not remit planned premium payments in a timely
fashion, the Group Contract will be in default. A grace period of 31 days
begins on the date that the planned premiums were scheduled to be remitted. If
the Contractholder does not remit premiums prior to the end of the grace
period, the Group Contract will terminate. However, the Individual Insurance
will continue following the Group Contract's termination, provided such
insurance is not surrendered or cancelled by the Owner. (See "Policy Rights and
Privileges--Eligibility Change Conversion," page 26.)
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TERMINATION
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, the Company may end a Group
Contract or any of its provisions on 31 days notice. If the Group Contract
terminates, any Policies in effect will remain in force on an individual basis,
unless such insurance is surrendered or cancelled by the Owner. New Policies
will be issued as described in "Policy Rights and Privileges--Eligibility
Change Conversion," page 26.
RIGHT TO EXAMINE GROUP CONTRACT
The Contractholder may terminate the Group Contract within 20 days after
receiving it, within 45 days after the application was signed or within 10 days
of mailing a notice of the cancellation right, whichever is latest. To cancel
the Group Contract, the Contractholder should mail or deliver the Group
Contract to the Company.
ENTIRE CONTRACT
The Group Contract, with the attached copy of the Contractholder's
application and other attached papers, if any, is the entire contract between
the Contractholder and the Company. All statements made by the Contractholder,
any Owner or any Insured will be deemed representations and not warranties.
Misstatements will not be used in any contest or to reduce claim under the
Group Contract, unless it is in writing. A copy of the application containing
such misstatement must have been given to the Contractholder or to the Insured
or to his Beneficiary, if any.
INCONTESTABILITY
The Company cannot contest the Group Contract after it has been in force for
two years from the date of issue.
OWNERSHIP OF GROUP CONTRACT
The Contractholder owns the Group Contract. The Group Contract may be changed
or ended by agreement between the Company and the Contractholder without the
consent of, or notice to, any person claiming rights or benefits under the
Group Contract. However, the Contractholder does not have any ownership
interest in the Policies issued under the Group Contract. The rights and
benefits under the Policies inure to the benefit of the Owners, Insureds, and
Beneficiaries as set forth herein and in the Policies.
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FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is limited.
The Company nonetheless believes (largely in reliance on IRS Notice 88-128 and
the proposed regulations under Section 7702, issued on July 5, 1991) that the
Policy should meet the Section 7702 definition of a life insurance contract. If
a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy. Therefore, if it is subsequently
determined that a Policy does not satisfy section 7702, the Company will take
whatever steps are appropriate and necessary to attempt to cause such Policy to
comply with section 7702, including possibly refunding any premiums paid that
exceed the limitations allowable under section 7702 (together with interest or
other earnings on any such premiums refunded as required by law). For these
reasons, the Company reserves the right to modify the Policy as necessary to
attempt to qualify it as a life insurance contract under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated as
a life insurance contract for Federal tax purposes. Although the Company does
not control the Trust or its investments, the Trust has represented that it
intends to comply with the diversification requirements prescribed by the
Treasury in Reg. section 1.817-5. Thus, the Company believes that each Division
of the Separate Account, through the Trust, will be in compliance with the
requirements prescribed by the Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor (i.e., the
Owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
significant guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company does not know what standards will be set forth, if
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any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being considered the owner of
a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. As a life insurance contract, the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101(a)(1) of the Code.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, a conversion to a fixed policy, an exchange, a Policy loan, an
unscheduled premium payment, a Policy lapse with an outstanding loan, a partial
withdrawal, a surrender, or an assignment of the Policy may have Federal income
tax consequences depending on the circumstances. In addition, Federal estate
and state and local estate, inheritance, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy owner or Beneficiary. A competent tax adviser should be consulted for
further information.
The Federal income tax consequences associated with (i) adding either the HIV
Acceleration of Death Benefit Rider or the Accelerated Death Benefit Settlement
Option Rider (the "Riders") or (ii) receiving the benefits provided under these
Riders are uncertain. Accordingly, we urge you to consult a tax adviser before
adding either Rider to your Policy or requesting a benefit under such Riders.
The Policies may be used in various arrangements, such as nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract". Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
2. POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. In general, a Policy
will be a modified endowment contract if the accumulated premiums paid at any
time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. Further, a Policy that is not otherwise a modified endowment contract
may become a modified endowment contract if it is "materially changed." The
determination whether a Policy will be a modified endowment contract after a
material change generally depends upon the relationship of the death benefit
and the cash value at the time of such change and the additional premiums paid
in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a
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modified endowment contract are extremely complex. Therefore, a current or
prospective Policy owner is strongly advised to retain and consult with a
competent advisor before purchasing a Policy, making an unscheduled premium
payment on an existing Policy or making any change in an existing Policy, to
determine whether the Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified endowment
contract. Although the Company cannot provide complete assurance at this time
that a Policy will not inadvertently become a modified endowment contract, it
is continuing its efforts to enhance its administrative systems to
automatically monitor potential modified endowment classifications.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the cash value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from, or secured by,
such a Policy (as well as due but unpaid interest that is added to the loan
amount) are treated as distributions from such a Policy and taxed accordingly.
Third, a 10 percent additional income tax is imposed on the portion of any
distribution from, or loan taken from or secured by, such a Policy that is
included in income except where the distributions or loan is made on or after
the Policy owner attains age 59 1/2, is attributable to the Policy owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Policy owner or the joint
lives (or joint life expectancies) of the Policy owner and the Policy owner's
Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that
a distribution from a Policy that is not a modified endowment contract could
later become taxable as a distribution from a modified endowment contract.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's death benefit (e.g., partial withdrawal or a
change from Option B to Option A) or any other change that reduces benefits
under the Policy in the first 15-years after the Policy is issued and that
results in a cash distribution to the Policy owner in order for the Policy to
continue complying with the section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a modified endowment contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional income tax.
5. POLICY LOAN INTEREST. If there is any borrowing against a Policy, the
interest paid on the loan may not be tax deductible. A Policyowner should
consult a qualified tax adviser before deducting interest on a policy loan.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Policy owner (except that the amount of any loan from, or secured by, a
Policy that is a modified endowment contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a modified endowment contract to the
extent that such amount is included in the gross income of the Owner.
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7. MULTIPLE POLICIES. All modified endowment contracts that are issued by the
Company (or its affiliates) to the same Policy owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be
properly attributable to the Separate Account or to the Policies.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases and redemptions of Trust
shares by each of the Divisions. Additional protection for the assets of the
Separate Account is afforded by a blanket fidelity bond issued by Reliance
Insurance Company in the amount of $5 million, covering all officers and
employees of the Company who have access to the assets of the Separate Account.
VOTING RIGHTS
To the extent required by law, the Company will vote the shares of the Trust
held in the Separate Account at regular and special shareholder meetings of the
Trust in accordance with instructions received from persons having voting
interests in the corresponding Divisions of the Separate Account. If, however,
the 1940 Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result the Company determines
that it is permitted to vote shares of the Trust in its own right, it may elect
to do so.
The Owners of Policies ordinarily are the persons having a voting interest in
the Divisions of the Separate Account. The number of votes which an Owner has
the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Fund in which the Division invests. Fractional
shares will be counted. The number of votes of the Fund which the Owner has
right to instruct will be determined as of the date coincident with the date
established by that Fund for determining shareholders eligible to vote at the
meeting of the Trust. Voting instructions will be solicited by written
communications prior to such meeting in accordance with procedures established
by the Trust.
Because the Funds of the Trust serve as investment vehicles for this Policy
as well as for other variable life insurance policies sold by insurers other
than the Company and funded through other separate investment accounts, persons
owning the other policies will enjoy similar voting rights. The Company will
vote Fund shares held in the Separate Account for which no timely voting
instructions are received and Fund shares that it owns as a consequence of
accrued charges under the Policies, in proportion to the voting instructions
which are received with respect to all Policies participating in a Fund. Each
person having a voting interest in a Division will receive proxy material,
reports, and other materials relating to the appropriate Fund.
Disregard of Voting Instructions. The Company may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
subclassification or investment objective of or one or more of the Funds or to
approve or disapprove an investment advisory contract for a Fund. In addition,
the Company itself may disregard voting
40
<PAGE>
instructions in favor of changes initiated by an Owner in the investment policy
or by the investment adviser or sub-adviser of a Fund of the Trust if the
Company reasonably disapproves of such changes. A proposed change would be
disapproved only if the proposed change is contrary to state law or prohibited
by state regulatory authorities, or the Company determined that the change
would have an adverse effect on its general assets in that the proposed
investment policy for a Fund may result in overly speculative or unsound
investments. In the event the Company does disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of the Company and the
Separate Account and certifies their adequacy, and a full examination of the
Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
41
<PAGE>
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME DURING PAST FIVE YEARS*
---- -----------------------
<C> <S>
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since June, 1986, and
Vice President, New Ventures, since June 1986, General
American Life Insurance Co., St. Louis, MO (GenAm).
Steven D. Anderson Vice President and Chief Financial Officer since December,
1993. Formerly, Assistant Vice President and Chief Financial
Officer August, 1990-December, 1993.
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actuary and
General American Life Treasurer, GenAm since October, 1994. Executive Vice
Insurance Company President-Group Pensions, GenAm January, 1990-October, 1994.
700 Market Street
St. Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984. Secretary
General American Life since February, 1991. Associate General Counsel, GenAm,
Insurance Company since August, 1984.
700 Market Street
St. Louis, MO 63101
Craig K. Nordyke@ Vice President and Chief Actuary since August, 1990.
Formerly, Second Vice President and Chief Actuary, May,
1987-August, 1990.
George E. Phillips Vice President--Operations and System Development since
January, 1995. Formerly, Senior Vice President, Fortis, Inc.
July, 1991-August, 1994. Vice President, Mutual Benefit
prior to July, 1991.
DIRECTORS***
Richard A. Liddy President and Chief Executive Officer, GenAm, since May,
1992. President and Chief Operating Officer, GenAm, May,
1998-May, 1992.
Leonard M. Rubenstein Executive Vice President--Investments, GenAm, since
February, 1991. Vice President and Treasurer, Securities,
GenAm, November, 1984-February, 1991.
Warren J. Winer Executive Vice President--Group, GenAm, since September
1995. Formerly, Managing Director, Wm. M. Mercer, July,
1993-August, 1995; President, W F Corroon, September, 1990-
July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since November,
1991. Vice President--Life Product Management, GenAm, May,
1989-November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc., since May,
1993. Formerly, Executive Vice President--Reinsurance,
GenAm, since January, 1990.
</TABLE>
- --------
*All positions listed are with the Company unless otherwise indicated.
**The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
***The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring-Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
42
<PAGE>
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws applicable
to the issue and sale of the Policies. All matters of Missouri law pertaining
to the Policies, including the validity of the Policies and the Company's right
to issue the Policies and the Group Contract under Missouri insurance law, and
all legal matters relating to the Parent Company's resolution concerning
policies issued by Paragon have been passed upon by Matthew P. McCauley,
Esquire, General Counsel of Paragon Life Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The financial statements of the Company included in this Prospectus and in
the registration statement have been included in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, and on the
authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of the
Company contains an explanatory paragraph which states that the financial
statements are presented in conformity with accounting practices prescribed or
permitted by the State of Missouri Department of Insurance. These practices
differ in some respects from generally accepted accounting principles. The
financial statements do not include any adjustments that might result from the
differences.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Vice President and Chief Actuary of the Company, as stated
in the opinion filed as an exhibit to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This Prospectus does not contain all the information
set forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Separate Account, the Company and the Policy offered
hereby. Statements contained in this Prospectus as to the contents of the
Policy and other legal instruments are summaries. For a complete statement of
the terms thereof reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this Prospectus
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. The Separate
Account Divisions available with the Policy had not commenced operations as of
December 31, 1995 and have no assets, liabilities, income or expenses and are
therefore not included in this Prospectus.
43
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital and surplus of Paragon Life Insurance Company as of
December 31, 1995 and 1994, and related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three-year
period ended December 31, 1995. These statutory financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statutory financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 2, the accompanying financial statements have been
prepared in conformity with accounting practices prescribed or permitted by the
State of Missouri Department of Insurance. These practices differ in some
respects from generally accepted accounting principles. Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations,
and cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
and surplus of Paragon Life Insurance Company as of December 31, 1995 and 1994,
and the results of its operations and its cash flow for each of the years in
the three-year period ended December 31, 1995, on the basis of accounting
described in note 2.
KPMG Peat Marwick LLP
February 16, 1996
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES:
Cash received:
Premiums and considerations....................... $36,612 29,478 20,416
Allowances and reserve adjustments on reinsurance
ceded............................................ 99 125 127
Investment income received, net of related
expenses......................................... 4,252 3,697 2,825
Other income...................................... 347 75 --
------- ------ ------
Total cash received from operating activities... 41,310 33,375 23,368
------- ------ ------
Total benefits, operating charges paid and
transfers:
Life and other benefits paid...................... 9,315 7,627 3,583
Operating charges--commissions, other expenses and
taxes (excluding Federal income tax)............. 7,678 6,319 5,850
Federal income taxes received..................... (93) (121) (697)
Net transfers to separate account................. 14,296 10,247 5,972
------- ------ ------
Total benefits, operating charges paid and
transfers...................................... 31,196 24,072 14,708
------- ------ ------
Net increase in policy loans........................ 1,308 1,438 1,178
------- ------ ------
Net cash provided from operating activities........... 8,806 7,865 7,482
Proceeds from investments sold, matured or repaid--
bonds................................................ 3,082 4,566 8,702
Other cash provided................................... 729 707 363
------- ------ ------
Total cash provided............................. 12,617 13,138 16,547
------- ------ ------
Cost of investments acquired--bonds................... 8,462 11,613 25,447
Other cash applied.................................... 141 50 47
------- ------ ------
Total cash applied.............................. 8,603 11,663 25,494
------- ------ ------
Net increase (decrease) in cash and short term
investments.......................................... 4,014 1,475 (8,947)
Cash and short-term investments:
Beginning of year................................... 3,042 1,567 10,514
------- ------ ------
End of Year......................................... $ 7,056 3,042 1,567
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS,
LIABILITIES, AND CAPITAL AND SURPLUS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
ADMITTED ASSETS
Bonds, at amortized cost (deposited with regulatory authori-
ties, $3,868 and $2,866 in 1995 and 1994)................... $ 56,458 51,077
Policy loans................................................. 7,206 5,418
Cash and short-term investments.............................. 7,056 3,042
Amounts recoverable from reinsurers.......................... 1,183 1,497
Investment income due and accrued............................ 1,041 885
Other assets................................................. 221 161
Separate account assets...................................... 50,194 27,311
-------- ------
Total admitted assets.................................. $123,359 89,391
======== ======
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy reserves--life contracts............................ 57,618 46,661
Policy reserves--without life contingencies................ 399 389
Policy claim liabilities................................... 1,096 709
Amounts due to reinsurers.................................. 833 648
Accrued expenses, commissions, taxes, licenses & fees...... 870 700
Asset valuation reserve.................................... 336 238
Interest maintenance reserve............................... 117 132
Due to parent.............................................. 945 628
Other liabilities.......................................... 858 726
Separate account liabilities............................... 49,509 26,739
-------- ------
Total liabilities...................................... 112,581 77,570
-------- ------
COMMITMENTS AND CONTINGENCIES
Capital and Surplus:
Capital stock--par value of $100 per share; 100,000 shares
authorized; 20,500 shares issued and outstanding.......... 2,050 2,050
Surplus:
Additional paid-in....................................... 17,950 17,950
Unassigned surplus....................................... (9,907) (8,751)
Assigned surplus--separate accounts...................... 685 572
-------- ------
Total capital and surplus.............................. 10,778 11,821
-------- ------
Total liabilities and capital and surplus.............. $123,359 89,391
======== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS, CAPITAL AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Income:
Premiums and considerations......................... $36,612 29,478 20,416
Net investment income............................... 4,905 4,132 3,519
Expense allowances on reinsurance ceded............. 94 130 123
Other income........................................ 461 317 227
------- ------ ------
Total income...................................... 42,072 34,057 24,285
Policy obligations, expenses and net transfers:
Policyholder benefits............................... 10,011 6,243 3,818
Increase in policy reserves--life contracts......... 10,957 11,705 9,481
Increase in policy reserves--without life contingen-
cies............................................... 10 35 354
------- ------ ------
Total policy obligations.......................... 20,978 17,983 13,653
General insurance expenses.......................... 5,996 5,084 4,341
Commissions......................................... 523 491 715
Insurance taxes, licenses and fees.................. 1,329 1,093 697
------- ------ ------
Total expenses.................................... 7,848 6,668 5,753
------- ------ ------
Net transfers to separate account................... 14,283 10,464 5,972
------- ------ ------
Loss before Federal income tax benefit and real-
ized capital gains............................... (1,037) (1,058) (1,093)
Federal income tax benefit............................ (117) (108) (180)
------- ------ ------
Loss before realized capital gains................ (920) (950) (913)
Realized capital gains, net of tax and transfer to
IMR.................................................. -- -- 6
------- ------ ------
Net loss.......................................... (920) (950) (907)
Other changes in capital and surplus:
Increase in asset valuation reserve................. (98) (94) (74)
(Increase) Decrease in non-admitted assets.......... (25) 74 193
------- ------ ------
Total other changes in capital and surplus........ (123) (20) 119
------- ------ ------
Decrease in capital and surplus................... (1,043) (970) (788)
Capital and Surplus:
Beginning of year................................... 11,821 12,791 13,579
------- ------ ------
End of year......................................... $10,778 11,821 12,791
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the statutory financial
statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) AFFILIATION AND GUARANTEE AGREEMENT
Paragon Life Insurance Company (Paragon) is a wholly-owned subsidiary of
General American Life Insurance Company (General American) established for the
purpose of marketing life insurance products through the sponsorship of major
companies and organizations. Paragon is licensed to do business in the District
of Columbia and in all states except New York.
General American has guaranteed that Paragon will have sufficient funds to
meet all of its contractual obligations. In the event a policyholder presents a
legitimate claim for payment on a Paragon insurance policy, General American
will pay such claim directly to the policyholder if Paragon is unable to make
such payment. The guarantee agreement is binding on General American, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than General American's rating.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying statutory financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Missouri
Department of Insurance, which vary in some respects from generally accepted
accounting principles (GAAP). The preparation of statutory financial statements
requires management to make estimates and assumptions which affect the reported
amounts within the statutory financial statements. Actual results could differ
from the estimated amounts. The significant statutory accounting practices and
the related differences from GAAP are as follows:
(a) Premiums on variable universal life and investment contracts under
statutory accounting practices are considered revenue when received;
whereas under GAAP, revenues for universal life and investment products
consist of policy fees that have been assessed against the account balances
for the cost of insurance, policy administration, and surrender charges.
Acquisition expenses, including commissions and other costs related to
acquiring new business, are charged to operations as incurred rather than
being deferred and amortized in relation to gross profits as required by
GAAP.
(b) Bonds are valued as prescribed by the National Association of
Insurance Commissioners (NAIC) and market values are stated at independent
dealer prices. Bonds are carried at amortized cost except for those bonds
required to be carried at values other than amortized cost in accordance
with NAIC guidelines. Accounting for bonds under GAAP would require the
bonds to be carried at amortized cost or market value depending on the
company's intent and ability to hold such investments. The Company
generally intends to hold bonds until maturity. Policy loans are stated at
their net unpaid balance.
(c) Policy reserves are based on statutory mortality and interest
assumptions without consideration for withdrawals. Policy reserves are
computed under the Commissioners Reserve Valuation Method using 5.5%
interest for policies issued from 1986 to 1993, 5.0% interest for policies
issued in 1994 and 4.5% interest for policies issued in 1995. Mortality
assumptions are based upon the 1980 Commissioners Standard Ordinary table.
These reserves differ from reserves based on account values that accrue to
policyholders on universal-life and investment product contracts under
GAAP.
(d) Federal income taxes are charged to operations based on income that
is currently taxable. Deferred income taxes are not provided for the tax
effect of temporary differences between the book and tax basis of assets
and liabilities.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(e) Certain assets designated as non-admitted assets (principally
furniture and equipment and computer software) have been excluded from
assets by a direct charge to surplus.
(f) An asset valuation reserve (AVR), which is a reserve for possible
losses on investments, is recorded as a liability by a direct charge to
surplus in accordance with statutory accounting practices; under GAAP, the
AVR is not maintained.
(g) Certain capital gains and losses on investment sales that resulted
from changes in the level of interest rates are deferred and recorded in an
interest maintenance reserve (IMR), net of related income taxes. The IMR
liability will be amortized into operating income over the approximate
remaining lives of the respective investments sold. Realized gains and
losses from the sale or decrease in valuation basis due to change in credit
quality of invested assets are presented separately from operating income,
net of applicable income taxes. Under GAAP, realized gains and losses from
the sale of investments are recognized currently as a component of pre-tax
income.
(h) Separate account assets and liabilities represent segregated funds
administered and invested by Paragon for the exclusive benefit of variable
life insurance contract holders. Paragon receives administrative fees for
services rendered on behalf of the separate account policyholders. The
amount of the asset balance in excess of liabilities of $685,415 and
$572,334 at December 31, 1995 and 1994, respectively, represents policy
surrender charges which are permitted to be recorded to surplus under
statutory accounting practices. Such amounts are designated as Assigned
Surplus--Separate Accounts in the accompanying balance sheet. Under GAAP,
the amount would be reported as a liability to the separate account
policyholder.
(i) Reinsurance recoverable on unpaid policy claims is netted against the
applicable policyholder liability. Under GAAP, the amount would be reported
as an asset and the policy claim liability would be shown before the
effects of reinsurance.
(3) FEDERAL INCOME TAX
Paragon files a consolidated federal income tax return with General American
which includes the operations of General American and its subsidiaries. In
accordance with a tax allocation agreement between Paragon and General
American, taxes are computed as if Paragon was filing its own income tax
return, and tax expense (benefit) is paid to, or received from, General
American. Paragon recognizes a tax benefit to the extent that its tax losses
are utilized by other members of the General American consolidated tax group.
The current tax law requires life insurance companies to recompute certain
policy reserves for tax purposes and capitalize a percentage of premiums
attributed to acquisition expenses.
Federal income tax expense (benefit) differs from that computed based on the
federal statutory tax rate of 35 percent. The reasons for these differences are
as follows (000's):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit on pretax
loss................................... $(363) (35)% $(370) (35)% $(382) (35)%
Capitalization of acquisition expenses.. 298 29 214 20 168 16
Recomputed policy tax reserves.......... (34) (3) 18 2 31 3
Other................................... (18) (2) 30 3 3 --
----- --- ----- --- ----- ---
</TABLE>
F-6
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(4) TRANSACTIONS WITH PARENT COMPANY AND AFFILIATES
Paragon purchases certain administrative services from General American.
Charges for services performed are based upon personnel and other costs
involved in providing such service. Charges for services during 1995, 1994 and
1993 were $1,103,028, $651,472 and $597,120, respectively.
Paragon has a risk retention limit of $50,000 on any one life. Amounts over
the risk retention limit are ceded to an affiliate of General American on
either a coinsurance or yearly renewable term basis at rates commensurate with
those which could be obtained from unrelated companies. Premiums ceded in 1995,
1994 and 1993 totaled $9,126,245, $7,135,943 and $5,492,871, respectively, and
represented 99.9% of total premiums ceded in 1995 and 1994 and 95.9% of total
premiums ceded in 1993. Reserve credits taken by Paragon at December 31, 1995
and 1994 were $5,760,070 and $5,604,548, respectively. Amounts due from
reinsurance on paid and unpaid policyholder benefits at December 31, 1995 and
1994 were $3,155,457 and $2,066,748, respectively.
The Company had $3,342,742 and $2,748,885 on deposit with General American at
December 31, 1995 and 1994, respectively. The funds were readily convertible to
cash and earn interest at short-term money market rates.
(5) INVESTMENT SECURITIES
At December 31, 1995, Paragon had $56.5 million invested in bonds; $44.0
million were rated Highest Quality, $12.2 million were High Quality and $.3
million were Low Quality using the NAIC designation definitions.
The amortized cost and market values of investments in bonds at December 31,
1995 and 1994 are as follows (000's):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1995
US treasury securities................. $ 4,608 281 (1) 4,888
US government agency obligations....... 4,920 173 -- 5,093
Corporate securities................... 42,842 2,842 (438) 45,246
Mortgage backed securities............. 4,088 203 -- 4,291
------- ----- ------ ------
$56,458 3,499 (439) 59,518
======= ===== ====== ======
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
1994
US treasury securities................. $ 3,606 24 (87) 3,543
US government agency obligations....... 5,123 24 (253) 4,894
Corporate securities................... 38,027 103 (3,029) 35,101
Mortgage backed securities............. 4,321 17 (325) 4,013
------- ----- ------ ------
$51,077 168 (3,694) 47,551
======= ===== ====== ======
</TABLE>
F-7
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Contractual maturities may differ from expected maturities because borrowers
may have the right to call or prepay the obligation with or without call or
prepayment penalties. The amortized cost and market value of investments in
bonds, listed by contractual maturity, at December 31, 1995 are as follows
(000's):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C> <C>
Due in one year or less............................. $ 593 585
Due after one year through five years............... 7,388 7,748
Due after five years through ten years.............. 18,521 19,471
Due after five years through ten years.............. 20,948 22,330
------- ------
47,450 50,134
Mortgage-backed securities (including US government
agency obligations)................................ 9,008 9,384
------- ------ ---
$56,458 59,518
======= ======
</TABLE>
Major categories of net investment income for the years ended December 31,
1995, 1994 and 1993 consist of the following (000's):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Bonds............................................. $4,040 $3,685 $3,229
Policy loans...................................... 480 347 221
Short term investments............................ 407 113 103
------ ------ ------
Total investment income........................... 4,927 4,145 3,553
IMR amortization.................................. 17 15 6
Investment expenses............................... (39) (28) (40)
------ ------ ------
Net investment income............................. $4,905 $4,132 $3,519
====== ====== ======
</TABLE>
Proceeds from sales of investments in bonds during 1995, 1994 and 1993 were
$3,082,387, $4,565,799 and $8,701,679, respectively. Gross gains realized on
sales during 1995 were $1,338 of which $870 of total net gains were transferred
to the interest maintenance reserve, net of taxes of $468. Gross gains realized
on sales during 1994 were $44,095 of which $28,662 of total net gains were
transferred to the interest maintenance reserve, net of taxes of $15,433. Gross
gains realized on sales during 1993 and gross losses were $174,988 and $829 of
which $165,069 of net gains were transferred to the Interest Maintenance
Reserve, net of taxes of $57,774. At December 31, 1995, the Company had 16
investment securities totaling $16,924,493, rated either the highest quality or
high quality using the NAIC definitions, that individually exceeded 10% of
statutory capital and surplus.
(6) BENEFIT PLANS AND POSTRETIREMENT BENEFITS
Associates of Paragon participate in a non-contributory multi-employer
defined benefit pension plan jointly sponsored by Paragon and General American.
The benefits are based on years of service and compensation level. No pension
expense was recognized in 1995, 1994 or 1993 due to overfunding of the plan.
In addition, Paragon has adopted an associate incentive plan applicable to
full-time salaried associates with at least one year of service. Contributions
to the plan are determined annually by General American and are based on
salaries of eligible associates. Full vesting occurs after five years of
continuous service. Total expense to the Company for the incentive plan were
$149,747, $37,533 and $101,398 for 1995, 1994 and 1993, respectively.
F-8
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Paragon provides for certain health care and life insurance benefits for
retired employees in accordance with Statement of Financial Accounting
Standards Number 106--Employer's Accounting for Postretirement Benefits Other
Than Pensions (SFAS No. 106). SFAS No. 106 requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services.
SFAS No. 106 allows recognition of the cumulative effect of the liability in
the year of the adoption or the amortization of the transition obligation over
a period of up to 20 years. The Company has elected to recognize the initial
post-retirement benefit obligation of approximately $72,684 over a period of 20
years. The unrecognized initial post-retirement benefit obligation was
approximately $61,782 and $65,416 at December 31, 1995 and 1994, respectively.
Net periodic post-retirement benefit cost for the years ended December 31,
1995, 1994 and 1993 were approximately $35,000, $26,000, and $40,000,
respectively. This includes expected costs of benefits for newly eligible or
vested employees, interest costs, gains and losses from differences between
actuarial and actual experience, and amortization of the initial post-
retirement benefit obligation. The accumulated post-retirement benefit
obligation was approximately $118,000, and $86,000 at December 31, 1995 and
1994. The discount rate used in determining the accumulated post-retirement
benefit obligation was 8.25 percent. The health care cost trend rates were ten
percent for the Indemnity Plan, nine percent for the HMO Plan, and ten percent
for the Dental Plan. These rates were graded to six percent over the next 14
years. A one percentage point increase in the assumed health care cost trend
rates would increase the December 31, 1995 accumulated post-retirement
obligation by 11 percent, and the estimated service cost and interest cost
components of the net periodic post-retirement benefit cost for 1995 by 13.8
percent.
(7) LEASE COMMITMENT
In 1991 Paragon entered into a five year operating lease for home office
space. During 1995, Paragon renewed the operating lease for its home office
space for an additional five year period.
Annual lease obligations for years subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996........................................................... $ 288,419
1997........................................................... 368,993
1998........................................................... 390,870
1999........................................................... 390,870
2000........................................................... 390,870
2001........................................................... 97,718
----------
$1,927,740
==========
</TABLE>
Total rental expense during 1995, 1994 and 1993 was $256,631, $239,967 and
$194,234, respectively.
(8) RISK-BASED CAPITAL
The insurance departments of various states, including the Company's
domiciliary state of Missouri impose risk-based capital (RBC) requirements on
insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or activity
levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory
intervention is required based on the ratio of a Company's actual total
adjusted capital (sum of capital and surplus and asset valuation reserve) to
control levels determined by the RBC formula. At December 31, 1995, the
Company's actual total adjusted capital was in excess of minimum requirements
which would cause company action under the RBC formula.
F-9
<PAGE>
PARAGON LIFE INSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(9) DIVIDEND RESTRICTIONS
Dividend payments by Paragon are restricted by state insurance laws as to the
amount that may be paid without prior notice or approval of the Missouri
Department of Insurance. The maximum amount of dividends which can be paid
without prior approval of the insurance commissioner is limited to the maximum
of (1) 10% of statutory surplus or (2) net gain from operations. The maximum
dividend distribution that can be paid by Paragon during 1996 without prior
notice or approval is $804,291. Paragon did not pay dividends in 1995, 1994 or
1993.
F-10
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value and Death Benefit of a
Policy change with the investment experience of a Division of the Separate
Account. The tables show how the Cash Value and Death Benefit of a Policy
issued to an Insured of a given age and at a given premium would vary over time
if the investment return on the assets held in each Division of the Separate
Account were a uniform, gross, after-tax annual rate of 0%, 6% or 12%. In
addition, the Cash Values and Death Benefits 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 and below those averages for
individual Policy years.
The tables illustrate a Policy issued to an Insured, age 45, in an Executive
Program issued as a Group Contract Policy as well as an Insured, age 50, in a
Corporate Program. This assumes the maximum monthly administrative charge. If a
particular Policy has different sales or administrative charges or if a
particular group is larger or smaller or has a different gender mix, the Cash
Values and Death Benefits would vary from those shown in the tables.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
and monthly charges for the cost of insurance based on the guaranteed rate
which is 125% of the maximum allowed under the 1980 Commissioners Standard
Ordinary Mortality Table C. The "Cash Value" column under the "Current" heading
shows the accumulated value of the premiums paid reflecting deduction of the
charges described above and monthly charges for the cost of insurance at the
current level for an Executive Program, which is less than or equal to 125% of
the maximum allowed by the 1980 Commissioners Standard Ordinary Mortality Table
C. The illustrations of Death Benefits reflect the above assumptions. The Death
Benefits also vary between tables depending upon whether Level Type (Option A)
or Increasing Type (Option B) Death Benefits are illustrated.
The amounts shown for the Cash Value and Death Benefit reflect the fact that
the investment rate of return is lower than the gross after-tax return on the
assets held in a Division of the Separate Account. The charges include a .90%
charge for mortality and expense risk, an investment advisory fee of .70%,
representing the average of the fees incurred in 1994 by the Funds in which the
Divisions invest (the actual investment advisory fee is shown in the Trust
prospectus), and a .267% charge that is an estimate of the Funds' expenses
based on the average of the actual expenses incurred in fiscal year 1995. After
deduction for these amounts, the illustrated gross annual investment rates of
return of 0%, 6% and 12% correspond to approximate net annual rates of -1.867%,
4.133%, and 10.133%, respectively. No expense reimbursement arrangement exists
between the Company and the Trust. MFS reimbursed expenses in 1995 for all
Series of the Trust.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against the Separate Account, since the Company is not
currently making any such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return of the
divisions of the Separate Account would have to exceed 0%, 6%, and 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit and Cash Value illustrated. (see "Federal Tax Matters," page 36.)
Additionally, the hypothetical values shown in the tables assume that the
Policy for which values are illustrated is not deemed an individual policy
under OBRA, and therefore the values do not reflect the additional 1% premium
expense charge for the Company's increased federal tax liabilities.
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, that no transfer charges were incurred, and
that no optional riders have been requested.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, group size and gender mix, the Face Amount and
premium requested and the proposed frequency of premium payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium: $500)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.867%)
--------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,044 $500,000 $ 4,872 $500,000
2 12,631 5,877 500,000 9,568 500,000
3 19,423 8,458 500,000 14,128 500,000
4 26,556 10,779 500,000 18,486 500,000
5 34,045 12,818 500,000 22,653 500,000
6 41,909 14,556 500,000 26,635 500,000
7 50,165 15,965 500,000 30,436 500,000
8 58,835 17,004 500,000 34,001 500,000
9 67,938 17,637 500,000 37,395 500,000
10 77,496 17,836 500,000 40,564 500,000
11 87,532 17,592 500,000 43,454 500,000
12 98,070 16,874 500,000 46,130 500,000
13 109,135 15,677 500,000 48,544 500,000
14 120,753 13,972 500,000 50,643 500,000
15 132,952 11,706 500,000 52,434 500,000
16 145,761 8,818 500,000 53,923 500,000
17 159,210 5,193 500,000 55,057 500,000
18 173,332 698 500,000 55,784 500,000
19 188,160 0 0 56,114 500,000
20 203,729 0 0 55,993 500,000
25 294,060 0 0 45,746 500,000
30 409,349 0 0 6,487 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium: $500)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.133%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,144 $500,000 $ 5,031 $500,000
2 12,631 6,259 500,000 10,184 500,000
3 19,423 9,300 500,000 15,500 500,000
4 26,556 12,252 500,000 20,918 500,000
5 34,045 15,085 500,000 26,450 500,000
6 41,909 17,773 500,000 32,105 500,000
7 50,165 20,275 500,000 37,891 500,000
8 58,835 22,539 500,000 43,755 500,000
9 67,938 24,516 500,000 49,766 500,000
10 77,496 26,158 500,000 55,873 500,000
11 87,532 27,440 500,000 62,027 500,000
12 98,070 28,311 500,000 68,295 500,000
13 109,135 28,742 500,000 74,634 500,000
14 120,753 28,683 500,000 80,998 500,000
15 132,952 28,053 500,000 87,396 500,000
16 145,761 26,759 500,000 93,837 500,000
17 159,210 24,652 500,000 100,279 500,000
18 173,332 21,555 500,000 106,678 500,000
19 188,160 17,267 500,000 113,049 500,000
20 203,729 11,581 500,000 119,349 500,000
25 294,060 0 0 147,587 500,000
30 409,349 0 0 160,503 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $6,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium: $500)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @
10.413%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,242 $500,000 $ 5,188 $500,000
2 12,631 6,650 500,000 10,813 500,000
3 19,423 10,196 500,000 16,959 500,000
4 26,556 13,886 500,000 23,608 500,000
5 34,045 17,708 500,000 30,822 500,000
6 41,909 21,656 500,000 38,665 500,000
7 50,165 25,714 500,000 47,205 500,000
8 58,835 29,850 500,000 56,459 500,000
9 67,938 34,040 500,000 66,570 500,000
10 77,496 38,261 500,000 77,574 500,000
11 87,532 42,513 500,000 89,516 500,000
12 98,070 46,773 500,000 102,566 500,000
13 109,135 51,046 500,000 116,803 500,000
14 120,753 55,313 500,000 132,317 500,000
15 132,952 59,534 500,000 149,268 500,000
16 145,761 63,658 500,000 167,835 500,000
17 159,210 67,585 500,000 188,174 500,000
18 173,332 71,190 500,000 210,472 500,000
19 188,160 74,330 500,000 234,993 500,000
20 203,729 76,859 500,000 261,999 500,000
25 294,060 75,039 500,000 447,096 518,631
30 409,349 15,102 500,000 751,320 803,913
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is policy indebtedness outstanding.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @.00% (NET RATE @ -1.867%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $12,323 $ 8,795 $508,795 $ 10,629 $510,629
2 25,261 17,254 517,254 20,964 520,964
3 38,847 25,337 525,337 31,048 531,048
4 53,112 33,039 533,039 40,813 540,813
5 68,090 40,337 540,337 50,272 550,272
6 83,817 47,215 547,215 59,430 559,430
7 100,331 53,645 553,645 68,294 568,294
8 117,670 59,589 559,589 76,802 576,802
9 135,876 65,015 565,015 85,028 585,028
10 154,992 69,896 569,896 92,912 592,912
11 175,064 74,231 574,231 100,394 600,394
12 196,140 77,994 577,994 107,547 607,547
13 218,270 81,191 581,191 114,319 614,319
14 241,506 83,802 583,802 120,651 620,651
15 265,904 85,785 585,785 126,552 626,552
16 291,521 87,093 587,093 132,030 632,030
17 318,420 87,632 587,632 137,027 637,027
18 346,663 87,292 587,292 141,489 641,489
19 376,319 85,966 585,966 145,430 645,430
20 407,458 83,558 583,558 148,795 648,795
25 588,121 53,721 553,721 154,139 654,139
30 818,698 0 0 129,224 629,224
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.133%)
----------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,083 $509,083 $ 10,976 $510,976
2 25,261 18,364 518,364 22,309 522,309
3 38,847 27,803 527,803 34,049 534,049
4 53,112 37,395 537,395 46,139 546,139
5 68,090 47,114 547,114 58,602 558,602
6 83,817 56,942 556,942 71,451 571,451
7 100,331 66,847 566,847 84,704 584,704
8 117,670 76,784 576,784 98,309 598,309
9 135,876 86,710 586,710 112,348 612,348
10 154,992 96,589 596,589 126,772 626,772
11 175,064 106,406 606,406 141,531 641,531
12 196,140 116,124 616,124 156,704 656,704
13 218,270 125,731 625,731 172,249 672,249
14 241,506 135,192 635,192 188,113 688,113
15 265,904 144,448 644,448 204,311 704,311
16 291,521 153,427 653,427 220,854 720,854
17 318,420 162,009 662,009 237,692 737,692
18 346,663 170,050 670,050 254,769 754,769
19 376,319 177,400 677,400 272,102 772,102
20 407,458 183,913 683,913 289,633 789,633
25 588,121 200,184 700,184 377,099 877,099
30 818,698 169,376 669,376 450,100 950,100
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 45
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 1% (Monthly Premium:
$1,000)
PREMIUM TAX: 2%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.133%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- ---------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 9,366 $ 509,366 $ 11,318 $ 511,318
2 25,261 19,498 519,498 23,682 523,682
3 38,847 30,424 530,424 37,237 537,237
4 53,112 42,212 542,212 52,026 552,026
5 68,090 54,918 554,918 68,182 568,182
6 83,817 68,609 568,609 85,844 585,844
7 100,331 83,349 583,349 105,162 605,162
8 117,670 99,192 599,192 126,238 626,238
9 135,876 116,208 616,208 149,317 649,317
10 154,992 134,476 634,476 174,533 674,533
11 175,064 154,111 654,111 202,035 702,035
12 196,140 175,216 675,216 232,123 732,123
13 218,270 197,931 697,931 264,997 764,997
14 241,506 222,391 722,391 300,869 800,869
15 265,904 248,714 748,714 340,044 840,044
16 291,521 277,028 777,028 382,857 882,857
17 318,420 307,421 807,421 429,608 929,608
18 346,663 339,972 839,972 480,628 980,628
19 376,319 374,771 874,771 536,355 1,036,355
20 407,458 411,924 911,924 597,198 1,097,198
25 588,121 639,602 1,139,602 994,538 1,494,538
30 818,698 950,879 1,450,879 1,599,651 2,099,651
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-7
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 2.00% (Monthly Premium:
$1,000)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.867%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 7,515 $500,000 $ 9,963 $500,000
2 25,261 14,665 500,000 19,677 500,000
3 38,847 21,387 500,000 29,059 500,000
4 53,112 27,654 500,000 38,181 500,000
5 68,090 33,450 500,000 46,993 500,000
6 83,817 38,775 500,000 55,448 500,000
7 100,331 43,612 500,000 63,616 500,000
8 117,670 47,966 500,000 71,457 500,000
9 135,876 51,823 500,000 78,927 500,000
10 154,992 55,145 500,000 86,041 500,000
11 175,064 57,888 500,000 92,812 500,000
12 196,140 59,966 500,000 99,200 500,000
13 218,270 61,276 500,000 105,167 500,000
14 241,506 61,710 500,000 110,731 500,000
15 265,904 61,169 500,000 115,857 500,000
16 291,521 59,586 500,000 120,509 500,000
17 318,420 56,881 500,000 124,704 500,000
18 346,663 52,987 500,000 128,216 500,000
19 376,319 47,807 500,000 130,967 500,000
20 407,458 41,150 500,000 132,922 500,000
25 588,121 0 0 127,014 500,000
30 818,698 0 0 79,954 500,000
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-8
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 2.00% (Monthly Premium:
PREMIUM TAX: 2.00% $1,000)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.133%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 7,762 500,000 $ 10,289 $500,000
2 25,261 15,615 500,000 20,941 500,000
3 38,847 23,498 500,000 31,881 500,000
4 53,112 31,383 500,000 43,194 500,000
5 68,090 39,249 500,000 54,841 500,000
6 83,817 47,100 500,000 66,789 500,000
7 100,331 54,915 500,000 79,121 500,000
8 117,670 62,704 500,000 91,814 500,000
9 135,876 70,455 500,000 104,844 500,000
10 154,992 78,135 500,000 118,243 500,000
11 175,064 85,707 500,000 132,049 500,000
12 196,140 93,096 500,000 146,249 500,000
13 218,270 100,207 500,000 160,839 500,000
14 241,506 106,948 500,000 175,870 500,000
15 265,904 113,230 500,000 191,350 500,000
16 291,521 119,000 500,000 207,293 500,000
17 318,420 124,195 500,000 223,768 500,000
18 346,663 128,763 500,000 240,663 500,000
19 376,319 132,632 500,000 258,001 500,000
20 407,458 135,650 500,000 275,850 500,000
25 588,121 127,975 500,000 375,286 500,000
30 818,698 34,705 500,000 506,875 532,219
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-9
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: A ANNUAL PREMIUM: $12,000
PREMIUM EXPENSE CHARGE: 2.00% (Monthly Premium:
PREMIUM TAX: 2.00% $1,000)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.133%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 12,323 $ 8,004 $ 500,000 $ 10,610 $ 500,000
2 25,261 16,586 500,000 22,231 500,000
3 38,847 25,744 500,000 34,879 500,000
4 53,112 35,513 500,000 48,736 500,000
5 68,090 45,946 500,000 63,874 500,000
6 83,817 57,125 500,000 80,382 500,000
7 100,331 69,125 500,000 98,481 500,000
8 117,670 82,060 500,000 118,305 500,000
9 135,876 96,041 500,000 140,011 500,000
10 154,992 111,179 500,000 163,830 500,000
11 175,064 127,599 500,000 190,023 500,000
12 196,140 145,420 500,000 218,846 500,000
13 218,270 164,777 500,000 250,598 500,000
14 241,506 185,848 500,000 285,668 500,000
15 265,904 208,866 500,000 324,468 500,000
16 291,521 234,154 500,000 367,483 500,000
17 318,420 262,101 500,000 415,303 500,000
18 346,663 293,191 500,000 468,246 552,530
19 376,319 328,005 500,000 526,318 615,793
20 407,458 367,220 500,000 589,998 684,398
25 588,121 648,641 694,046 1,016,141 1,087,271
30 818,698 1,104,445 1,159,668 1,701,921 1,787,018
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-10
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $26,000
PREMIUM EXPENSE CHARGE: 2.00% (Monthly Premium:
$2,166.67)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ .00% (NET RATE @ -
1.867%)
---------------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- -----------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 26,699 $ 20,785 $520,785 $ 23,252 $523,252
2 54,733 40,893 540,893 45,975 545,975
3 84,168 60,260 560,260 68,085 568,085
4 115,076 78,858 578,858 89,658 589,658
5 147,528 96,667 596,667 110,640 610,640
6 181,604 113,688 613,688 130,977 630,977
7 217,383 129,902 629,902 150,745 650,745
8 254,951 145,318 645,318 169,896 669,896
9 294,397 159,921 659,921 188,377 688,377
10 335,816 173,674 673,674 206,201 706,201
11 379,306 186,532 686,532 223,379 723,379
12 424,970 198,408 698,408 239,859 739,859
13 472,917 209,194 709,194 255,589 755,589
14 523,262 218,788 718,788 270,590 770,590
15 576,124 227,100 727,100 284,809 784,809
16 631,629 234,088 734,088 298,197 798,197
17 689,910 239,706 739,706 310,775 810,775
18 751,104 243,934 743,934 322,240 822,240
19 815,358 246,731 746,731 332,489 832,489
20 882,825 247,971 747,971 341,479 841,479
25 1,274,262 222,760 722,760 363,341 863,341
30 1,773,845 124,016 624,016 334,741 834,741
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-11
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $26,000
PREMIUM EXPENSE CHARGE: 2.00% (Monthly Premium:
$2,166.67)
PREMIUM TAX: 2.00%
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.133%)
--------------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 26,699 $ 21,465 $ 521,465 $ 24,012 $ 524,012
2 54,733 43,520 543,520 48,920 548,920
3 84,168 66,107 566,107 74,662 574,662
4 115,076 89,209 589,209 101,340 601,340
5 147,528 112,808 612,808 128,926 628,926
6 181,604 136,913 636,913 157,390 657,390
7 217,383 161,510 661,510 186,836 686,836
8 254,951 186,612 686,612 217,243 717,243
9 294,397 212,210 712,210 248,585 748,585
10 335,816 238,271 738,271 280,899 780,899
11 379,306 264,752 764,752 314,228 814,228
12 424,970 291,561 791,561 348,544 848,544
13 472,917 318,585 818,585 383,824 883,824
14 523,262 345,704 845,704 420,112 920,112
15 576,124 372,808 872,808 457,385 957,385
16 631,629 399,829 899,829 495,615 995,615
17 689,910 426,692 926,692 534,849 1,034,849
18 751,104 453,341 953,341 574,802 1,074,802
19 815,358 479,702 979,702 615,374 1,115,374
20 882,825 505,604 1,005,604 656,526 1,156,526
25 1,274,262 617,728 1,117,728 866,409 1,366,409
30 1,773,845 668,054 1,168,054 1,067,827 1,567,827
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-12
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $500,000 AGE: 50
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $26,000
PREMIUM EXPENSE CHARGE: 2.00% (Monthly Premium:
PREMIUM TAX: 2.00% $2,166.67)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.133%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5% VALUE BENEFIT VALUE BENEFIT
--- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 26,699 $ 22,134 $ 522,134 $ 24,760 $ 524,760
2 54,733 46,203 546,203 51,929 551,929
3 84,168 72,321 572,321 81,650 581,650
4 115,076 100,653 600,653 114,250 614,250
5 147,528 131,385 631,385 149,953 649,953
6 181,604 164,748 664,748 189,005 689,005
7 217,383 200,971 700,971 231,812 731,812
8 254,951 240,339 740,339 278,695 778,695
9 294,397 283,139 783,139 329,996 829,996
10 335,816 329,663 829,663 386,164 886,164
11 379,306 380,227 880,227 447,693 947,693
12 424,970 435,126 935,126 515,057 1,015,057
13 472,917 494,671 994,671 588,778 1,088,778
14 523,262 559,202 1,059,202 669,510 1,169,510
15 576,124 629,106 1,129,106 757,893 1,257,893
16 631,629 704,860 1,204,860 854,636 1,354,636
17 689,910 786,985 1,286,985 960,592 1,460,592
18 751,104 876,079 1,376,079 1,076,361 1,576,361
19 815,358 972,781 1,472,781 1,202,808 1,702,808
20 882,825 1,077,705 1,577,705 1,340,949 1,840,949
25 1,274,262 1,747,458 2,247,458 2,247,221 2,747,221
30 1,773,845 2,734,652 3,234,652 3,653,225 4,153,225
</TABLE>
- --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the policyowner,
and the investment results for the Funds of the Trust. The cash value, cash
surrender value and death benefit for a policy would be different from those
shown if the actual rates of return averaged the rate shown above over a period
of years, but also fluctuated above or below that average for individual years.
No representation can be made by the Company, Walnut Street Securities, MFS, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume premiums are received monthly on the policy anniversary day and further
assume there is no policy indebtedness outstanding.
A-13
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore, or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article III, Section 13 of the Company's Bylaws provide: "The Corporation
may indemnify any person who is made a party to any civil or criminal suit, or
made a subject of any administrative or investigative proceeding by reason of
the fact that he is or was a director, officer, or agent of the Corporation.
This indemnity may extend to expenses, including attorney's fees, judgments,
fine, and amounts paid in settlement. The indemnity shall not be available to
persons being sued by or upon the information of the Corporation not to person
who are being investigated by the Corporation. The indemnity shall be
discretionary with the Board of Directors and shall not be granted until the
Board of Directors has made a determination that the person who would be
indemnified acted in good faith and in a manner he reasonably believed to be in
the best interest of the Corporation. The Corporation shall have such other and
further powers of indemnification as are not inconsistent with the laws of
Missouri."
Insofar as indemnification for liability arising under the Securities Act
of l933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Charter and Articles of Incorporation of the Company,
the By-Laws of the Company, agreement, statute, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
REPRESENTATIONS PURSUANT TO RULE 6e-3(T)
This filing is made pursuant to Rules 6c-3 and 6e-3(T) under the
Investment Company Act of l940.
Registrant elects to be governed by Rule 6e-3(T) (b) (l3) (i) (A) under
the Investment Company Act of l940 with respect to the Policy described in the
Prospectus.
Registrant makes the following representations:
(1) Section 6e-3(T) (b) (l3) (iii) (F) has been relied upon.
(2) The level of the mortality and expense risk charge is within the range
of industry practice for comparable flexible premium variable life
insurance policies, and is reasonable in relation to the risks assumed
by the Company under the Policies.
(3) Registrant has concluded that there is a reasonable likelihood that
the distribution financing arrangement of the Separate Account will
benefit the Separate Account and Owners and will keep and make
available to the Commission on request a memorandum setting forth the
basis for this representation.
(4) The Separate Account will invest only in management investment
companies which have undertaken to have a board of directors, a
majority of whom are not interested persons of the company, formulate
and approve any plan under Rule 12b-1 to finance distribution
expenses.
The methodology used to support the representation made in paragraph (2)
above is based on an analysis of the mortality and expense risk charges
contained in other flexible premium variable life insurance policies.
Registrant undertakes to keep and make available to the Commission on request
the documents used to support the representation in paragraph (2) above.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The facing sheet.
The Scudder
Commissioned Prospectus, consisting of 65 pages; Dean
Witter Prospectus, consisting of 67 pages; Putnam
Prospectus, consisting of 65 pages; MFS Prospectus,
consisting of 66 pages.
The undertaking to file reports required by Section 15 (d), 1934 Act.
The undertaking pursuant to Rule 484.
Representations pursuant to Rule 6e-3(T).
The signatures.
1. The following exhibits (which correspond in number to the numbers under
paragraph A of the instructions as to exhibits for Form N-8B-2):
(1) Resolution of the Board of Directors of the Company authorizing
establishment of the Separate Account. 1
(2) Not applicable.
(3) (a) Form of Underwriting Agreement. 1
(b) Form of Selling Agreement. 1
(c) Commission Schedule for Scudder Commissioned Policy and Dean
Witter Policy.3
(d) Commission Schedule for Putnam Policy and MFS
Policy. 1
(4) Not applicable.
(5) (a) Form of Group Contract. 1
(b) Proposed Form of Individual Policy and Policy Riders. 3
(c) Proposed Form of Certificate and Certificate Riders. 3
(6) (a) Amended Charter and Articles of Incorporation of the
Company. 1
(b) By-Laws of the Company. 2
(7) Not applicable.
II-3
<PAGE>
(8) (a) Form of Series Participation Agreement with Scudder
Variable Life Investment Fund and Dean Witter
Variable Investment Series3
(b) Form of Participation Agreement with Putnam
Capital Manager Trust 4
(c) Form of Particpation Agreement with MFS Variable
Insurance Trust 5
(9) Not applicable.
(10) (a) Form of Application for Group Contract. 1
(b) Form of Application for Employee Insurance
Guaranteed Issue (Group Contract). 1
(c) Form of Application for Employee Insurance
(Simplified Issue) (Group Contract). 1
(d) Form of Application for Spouse Insurance
(Group Contract). 1
(e) Form of Application for Employee Insurance
Guaranteed Issue (Individual Policy). 1
(f) Form of Application for Employee Insurance
(Simplified Issue) (Individual Policy). 1
(g) Form of Application for Spouse Insurance
(Individual Policy). 1
(h) Form of Application for an Executive
Program. 1
(i) Form of Application Supplement for Scudder
Commissioned Policy and Dean Witter Policy. 3
(j) Form of Application Supplement for Putnam
Policy. 4
(k) Form of Application Supplement for MFS
Policy. 5
2. Memorandum describing the Company's issuance, transfer, and redemption
procedures for the Policies and the Company's procedure for conversion to
a fixed benefit policy. 1
II-4
<PAGE>
3. The following exhibits are numbered to correspond to the
numbers in the instructions as to exhibits for Form S-6.
(1) See above.
(2) See Exhibit 1(5).
(3) Opinion of Matthew P. McCauley, Esquire, General
Counsel of Paragon Life Insurance Company. 1
(4) No financial statements are omitted from the
Prospectus pursuant to Instruction 1(b) or (c) of
Part I.
(5) Not applicable.
4. The opinion and consent of Craig K. Nordyke, F.S.A.,
M.A.A.A., Vice President and Chief Actuary. 6
5. The consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants.6
6. Written consent of Sutherland, Asbill & Brennan. 6
7. Original powers of attorney authorizing Matthew P. McCauley, Carl H.
Anderson, and Craig K. Nordyke, and each of them singly, to sign this
Registration Statement and Amendments thereto on behalf of the Board of
Directors of Paragon Life Insurance Company. 1
8. Power of Attorney for Warren J. Winer. 6
1 Incorporated by reference to the initial Registration
Statement in File No. 33-58796.
2 Incorporated by reference to the Registration Statement in
File No. 33-67970.
3 Incorporated by reference to Post-Effective Amendment No. 2
to the Registration Statement in File No. 33-58796.
4 Incorporated by reference to Post-Effective
Amendment No. 4 to the Registration Statement in File No.
33-58796.
5 Incorporated by reference to Post-Effective Amendment No. 5
to the Registration Statement in File No. 33-58796.
6 Filed herewith.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Paragon Life
Insurance Company and Separate Account B of Paragon Life Insurance Company
certify that they meet all the requirements for effectiveness of this amended
Registration Statement pursuant to Rule 485(b) under the Securities Act of l933
and have duly caused this amended Registration Statement to be signed on their
behalf by the undersigned thereunto duly authorized, and the seal of Paragon
Life Insurance Company to be hereunto affixed and attested, all in the City of
St. Louis, State of Missouri, on the 5th day of April, 1996.
(Seal) Paragon Life Insurance Company
/s/ MATTHEW P. McCAULEY
Attest:_______________________ /s/ CARL H. ANDERSON
Matthew P. McCauley, By:_____________________________
Secretary Carl H. Anderson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ CARL H. ANDERSON
______________________
Carl H. Anderson 4-5-96
President and Director
(Chief Executive Officer)
/s/ STEVEN D. ANDERSON
______________________ 4-5-96
Steven D. Anderson Vice President and Chief
Financial Officer (Principal
Accounting Officer and
Principal Financial Officer)
______________________
Warren J. Winer** Director
______________________
Richard A. Liddy* Director
<PAGE>
Signature Title Date
/s/ MATTHEW P. McCAULEY
_______________________ 4-5-96
Matthew P. McCauley Vice President
General Counsel,
Secretary and Director
/s/ CRAIG K. NORDYKE 4-5-96
_______________________
Craig K. Nordyke Director
_______________________
Leonard M. Rubenstein* Director
_______________________
E. Thomas Hughes, Jr.* Director and Treasurer
_______________________
Bernard H Wolzenski* Director
_______________________
A. Greig Woodring* Director
/s/ CRAIG K. NORDYKE
By: _____________________
Craig K. Nordyke 4-5-96
*Original powers of attorney authorizing Matthew P. McCauley, Carl H. Anderson,
and Craig K. Nordyke, and each of them singly, to sign this Registration
Statement and Amendments thereto on behalf of the Board of Directors of Paragon
Life Insurance Company have been filed with the Securities and Exchange
Commission.
**Original power of attorney authorizing Juanita M. Thomas, Carl H. Anderson,
and Craig K. Nordyke, and each of them singly, to sign this Registration
Statement and Amendments thereto on behalf of Warren J. Winer is being filed
with this Post-Effective Amendment No. 6, File No. 33-58796.
<PAGE>
EXHIBIT INDEX
Exhibit
4. Opinion and consent of Craig K. Nordyke,
F.S.A., M.A.A.A., Vice President and
Chief Actuary
5. Written consent of KPMG Peat Marwick LLP,
Independent Certified Public Accountants.
6. Written consent of Sutherland, Asbill & Brennan.
8. Power of Attorney for Warren J. Winer.
<PAGE>
Exhibit 4
OPINION AND CONSENT OF CRAIG K. NORDYKE, F.S.A., M.A.A.A.,
VICE PRESIDENT AND CHIEF ACTUARY
<PAGE>
RE: 33-58796
Gentlemen:
In my capacity as Vice President and Chief Actuary for Paragon Life Insurance
Company, I have provided actuarial advice concerning: (a) the preparation of a
registration statement for Separate Account B filed on Form S-6 with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Registration Statement") regarding the offer and sale of flexible premium
variable life insurance policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
1. The "sales load", as defined in paragraph (c) (4) of Rule 6e-3(T) under
the Investment Company Act of 1940, will not exceed 9 per centum of the
guideline annual premiums for the lesser of 20 years or the life
expectancy of the insured made under the Policies, in conformance with
paragraphs (b) (13) (i) (A) and (c) (7) of Rule 6e-3(T).
2. The illustrations of cash values, death benefits, and accumulated premiums
in the Appendix to the prospectus contained in the Registration Statement,
are based on the assumptions stated in the illustration, and are
consistent with the provisions of the Policies. The rate structure of the
Policies has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations, appear to be more
favorable to prospective purchasers of Policies aged 45 and 50 in the rate
class illustrated than to prospective purchasers of Policies at other
ages.
3. The information contained in the examples set forth in the section of the
prospectus entitled "Death Benefits", is based on the assumption stated in
the examples, and is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to the Post-
Effective Amendment No. 6 to the Registration Statement and to the use of my
name under the heading "Experts" in the prospectus.
/s/ CRAIG K. NORDYKE
Craig K. Nordyke, FSA, MAAA
Vice President and Chief Actuary
<PAGE>
RE: 33-58796
Prospectus 2 (Dean Witter)
Gentlemen:
In my capacity as Vice President and Chief Actuary for Paragon Life Insurance
Company, I have provided actuarial advice concerning: (a) the preparation of a
registration statement for Separate Account B filed on Form S-6 with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Registration Statement") regarding the offer and sale of flexible premium
variable life insurance policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
1. The "sales load", as defined in paragraph (c) (4) of Rule 6e-3(T) under
the Investment Company Act of 1940, will not exceed 9 per centum of the
guideline annual premiums for the lesser of 20 years or the life
expectancy of the insured made under the Policies, in conformance with
paragraphs (b) (13) (i) (A) and (c) (7) of Rule 63-3(T).
2. The illustration of cash values, cash surrender values, death benefits,
and accumulated premiums in the Appendix to the prospectus contained in
the Registration Statement, are based on the assumptions stated in the
illustration, and are consistent with the provisions of the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear to be more favorable to prospective purchasers of Policies aged 45
or 50 in the rate class illustrated than to prospective purchasers of
Policies at other ages.
3. The information contained in the examples set forth in the section of the
prospectus entitled "Death Benefits", is based on the assumption stated in
the examples, and is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to the Post-
Effective Amendment No. 6 to the Registration Statement and to the use of my
name under the heading "Experts" in the prospectus.
/S/ Craig K. Nordyke
Craig K. Nordyke, FSA, MAAA
Vice President and Chief Actuary
<PAGE>
RE: 33-58796
Prospectus 3 (Putnam)
Gentlemen:
In my capacity as Vice President and Chief Actuary for Paragon Life Insurance
Company, I have provided actuarial advice concerning: (a) the preparation of a
registration statement for Separate Account B filed on Form S-6 with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Registration Statement") regarding the offer and sale of flexible premium
variable life insurance policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
1. The "sales load", as defined in paragraph (c) (4) of Rule 6e-3(T) under
the Investment Company Act of 1940, will not exceed 9 per centum of the
guideline annual premiums for the lesser of 20 years or the life
expectancy of the insured made under the Policies, in conformance with
paragraphs (b) (13) (i) (A) and (c) (7) of Rule 63-3(T).
2. The illustration of cash values, cash surrender values, death benefits,
and accumulated premiums in the Appendix to the prospectus contained in
the Registration Statement, are based on the assumptions stated in the
illustration, and are consistent with the provisions of the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear to be more favorable to prospective purchasers of Policies aged 45
or 50 in the rate class illustrated than to prospective purchasers of
Policies at other ages.
3. The information contained in the examples set forth in the section of the
prospectus entitled "Death Benefits", is based on the assumption stated in
the examples, and is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to the Post-
Effective Amendment No. 6 to the Registration Statement and to the use of my
name under the heading "Experts" in the prospectus.
/S/ CRAIG K. NORDYKE
---------------------------------------
Craig K. Nordyke, FSA, MAAA
Vice President and Chief Actuary
<PAGE>
RE: 33-58796
Prospectus 4 (MFS)
Gentlemen:
In my capacity as Vice President and Chief Actuary for Paragon Life Insurance
Company, I have provided actuarial advice concerning: (a) the preparation of a
registration statement for Separate Account B filed on Form S-6 with the
Securities and Exchange Commission under the Securities Act of 1933 (the
"Registration Statement") regarding the offer and sale of flexible premium
variable life insurance policies (the "Policies"); and (b) the preparation of
policy forms for the Policies described in the Registration Statement.
It is my professional opinion that:
1. The "sales load", as defined in paragraph (c) (4) of Rule 6e-3(T) under
the Investment Company Act of 1940, will not exceed 9 per centum of the
guideline annual premiums for the lesser of 20 years or the life
expectancy of the insured made under the Policies, in conformance with
paragraphs (b) (13) (i) (A) and (c) (7) of Rule 63-3(T).
2. The illustration of cash values, cash surrender values, death benefits,
and accumulated premiums in the Appendix to the prospectus contained in
the Registration Statement, are based on the assumptions stated in the
illustration, and are consistent with the provisions of the Policies. The
rate structure of the Policies has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear to be more favorable to prospective purchasers of Policies aged 45
or 50 in the rate class illustrated than to prospective purchasers of
Policies at other ages.
3. The information contained in the examples set forth in the section of the
prospectus entitled "Death Benefits", is based on the assumption stated in
the examples, and is consistent with the provisions of the Policies.
I hereby consent to the filing of this opinion as an exhibit to the Post-
Effective Amendment No. 6 to the Registration Statement and to the use of my
name under the heading "Experts" in the prospectus.
/S/ Craig K. Nordyke
Craig K. Nordyke, FSA, MAAA
Vice President and Chief Actuary
<PAGE>
Exhibit 5
WRITTEN CONSENT OF KPMG PEAT MARWICK LLP,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Paragon Life Insurance Company
We consent to the use of our reports included herein and to the reference of
our firm under the heading "Experts" in the Registration Statement and
Prospectus for Paragon Separate Account B.
Our report dated February 16, 1996, covering the financial statements of Paragon
Life Insurance Company, contains an explanatory paragraph which states that the
financial statements are presented in conformity with accounting practices
prescribed or permitted by the State of Missouri Department of Insurance. These
practices differ in some respects from generally accepted accounting principles.
The financial statements do no include any adjustments that might result from
the differences.
KPMG Peat Marwick LLP
St. Louis, Missouri
April 17, 1996
<PAGE>
Exhibit 6
WRITTEN CONSENT OF SUTHERLAND, ASBILL & BRENNAN
<PAGE>
April 4, 1996
Board of Directors
Paragon Life Insurance Company
100 South Brentwood Boulevard
St. Louis, Missouri 63105
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption
"Legal Matters" in the Prospectuses filed as part of Post-Effective Amendment
No. 6 to the registration statement on Form S-6 for Separate Account B of
Paragon Life Insurance Company (File No. 33-58796). In giving this consent, we
do not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN
By: /s/ STEPHEN E. ROTH
Stephen E. Roth
<PAGE>
Exhibit 8
POWER OF ATTORNEY FOR WARREN J. WINER
<PAGE>
POWER OF ATTORNEY
As a member of the Board of Directors of Paragon Life Insurance Company, I
hereby constitute Juanita M. Thomas, Carl H. Anderson and Craig K. Nordyke, and
each of them singly, with full power to them and each of them singly to sign for
me, and in my name and in the capacity mentioned below, any and all Registration
Statements, documents, instruments, and exhibits related thereto, and any and
all amendments to Registration Statements filed with the Securities and Exchange
Commission for the purpose of registering securities issued by Separate Account
B of Paragon Life Insurance Company, and I hereby ratify and confirm my
signature as it may be signed by the above-mentioned people to said Registration
Statements and to any and all amendments thereto.
Witness my hand on the date set forth below.
Signature
/s/ WARREN J. WINER
_____________________________ Member, Boardof Directors,
Paragon Life Insurance Company
Warren J. Winer
Name (typed and printed)
Date: 2/20/96
JMT/mef/PA-PLIC
