<PAGE>
As filed with the Securities and Exchange Commission on 28 April 2000
Registration No. 33-75778
811-7534
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO.7
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 LLP
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective (check appropriate space)
[ ] immediately upon filing pursuant to paragraph (b), of Rule 485
[X] 1 May 2000 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date), pursuant to paragraph (a)(1) of rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
Title of securities being registered: Group and Individual Flexible Premium
Variable Life Insurance Policies
<PAGE>
Post-Effective Amendment No. 7 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 two variable life insurance policies (the "Policies")
issued by the depositor and the registrant described in the two 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 two Policies.
<PAGE>
Scudder
[LOGO OF SCUDDER VARIABLE LIFE INVESTMENT FUND]
Variable Life
Investment Fund
[LOGO OF PARAGON LIFE INSURANCE COMPANY]
. GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
Prospectus dated May 1, 2000
50412
Dir
<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," "we," or "us") which
are designed for use in employer-sponsored insurance programs. When a Group
Contract is issued, Certificates showing the rights of the Owners and/or
Insureds will be issued under the Group Contract. Individual Policies will be
issued when a Group Contract is not issued. The terms of the Certificate and
the Individual Policy are very similar 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 provide flexibility to vary premium payments and change the level of death
benefits payable under the Policies. Flexibility allows an Owner to provide
for changing insurance needs under a single insurance policy. An Owner can
allocate net premiums among several investment portfolios ("Funds") with
different investment objectives.
The Policy provides for: (1) a value upon surrendering the Policy; (2) loans;
and (3) a death benefit payable on the Insured's death. As long as the Policy
remains in force, the death benefit payable on the Insured's death will not be
less than the Face Amount of the Policy. The Policy will remain in force so
long as there is enough value to pay certain monthly charges.
The Owner may allocate net premiums to one or more of the Divisions of
Separate Account B (the "Separate Account"). The Policy value will vary to
reflect the investment experience of the Divisions selected by the Owner.
Depending on the death benefit option elected, portions of the death benefit
may also vary. The Owner bears the entire investment risk under the Policies;
there is no minimum guaranteed 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:
FUND FUND
- -------------------------------------------------------------------------------
Money Market Portfolio Global Discovery Portfolio
Bond Portfolio International Portfolio
Capital Growth Portfolio 21st Century Growth Portfolio
Balanced Portfolio Large Company Growth Portfolio
Growth and Income Portfolio
- -------------------------------------------------------------------------------
The date of this Prospectus is May 1, 2000.
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Please read this Prospectus carefully and keep it. A full description of the
Funds is contained in the prospectus for each Fund, which must accompany this
Prospectus.
It may not be a good decision 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.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
The Company, The Separate Account, and The Funds......................... 9
The Company
The Separate Account
The Funds
Addition, Deletion, or Substitution of Investments
Payment and Allocation of Premiums....................................... 13
Issuance of a Policy
Premiums
Allocation of Net Premiums and Cash Value
Policy Lapse and Reinstatement
Policy Benefits.......................................................... 17
Death Benefit
Cash Value
Policy Rights and Privileges............................................. 23
Exercising Rights and Privileges Under the Policies
Loans
Surrender and Partial Withdrawals
Transfers
Right to Examine Policy
Conversion Right to a Fixed Benefit Policy
Eligibility Change Conversion
Payment of Benefits at Maturity
Payment of Policy Benefits
Charges and Deductions................................................... 27
Sales Charges
Premium Tax Charge
Monthly Deduction
Partial Withdrawal Transaction Charge
Separate Account Charges
General Matters Relating to the Policy................................... 30
Distribution of the Policies............................................. 34
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
Definitions.............................................................. 42
Financial Statements..................................................... F-1
Appendix A............................................................... A-1
</TABLE>
The Policies are not available in all states.
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SUMMARY OF THE POLICY
The following summary of Prospectus information should be read with the
detailed information which follows in this Prospectus. Unless we provide
otherwise, 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 issued in three situations.
. First--Policies in the form of Certificates are issued pursuant to Group
Contracts entered into between the Company and Contractholders (see
"General Provisions of the Group Contract");
. Second--Individual Policies can be issued in connection with employer-
sponsored insurance programs where Group Contracts are not issued; and
. Third--Individual Policies can be issued in connection with Corporate
Programs, where Group Contracts are not issued.
The Insured under a Policy is usually an employee of the Contractholder or
sponsoring employer or the employee's spouse. An Executive Program Policy is
issued with a maximum Face Amount in excess of $500,000 under a Group Contract
or an employer-sponsored insurance program. Generally, only an employee
is eligible to be an Insured under an Executive Program Policy. If 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").
On behalf of Owners, the Contractholder will make planned premium payments
under the Group Contract equal to an amount authorized by employees to be
deducted from their wages. In addition, Owners may pay additional premiums. In
Corporate Programs only the Owner will remit planned and additional premiums.
A similar procedure will apply when an Individual Policy is issued in
connection with an employer-sponsored program.
The Policies are "variable" policies because, unlike the fixed benefits under
other types of life insurance contracts, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment experience of the Funds underlying the Divisions
to which the Owner has allocated net premium payments. 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.")
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.")
The Separate Account
The Owner may allocate the net premiums to one or more Divisions. (See "The
Company, The Separate Account and The Funds" for a complete description of the
available Funds.) An Owner may change future allocations of net premiums at
any time by notifying the Company directly.
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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.")
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 start a Policy. 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 will pay premiums generally on a
schedule agreed to by the Company.
However, as 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.")
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is not enough 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.")
Death Benefit
Death benefit proceeds are payable to the Beneficiary when the Insured dies or
to the Owner, prior to the Insured's death under circumstances described in
available riders. (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") Two death benefit options are available, as follows:
. 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; and
. 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. (See "Policy
Benefits--Death Benefit.")
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, we may
establish a higher maximum Face Amount for Executive or Corporate Program
Policies. 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.")
Riders
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
5
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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.") We will deduct the cost of these
additional insurance benefits from Cash Value as part of the monthly
deduction. (See "Charges and Deductions--Monthly Deduction.")
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 premium payments, the investment performance
of any selected Divisions of the Separate Account, transfers, any Policy
Loans, Loan Account interest rate credited, any partial withdrawals, and the
charges imposed in connection with the Policy. (See "Policy Benefits--Cash
Value.") There is no minimum guaranteed Cash Value.
Charges and Deductions
Premium Expense Charges. Generally, there are no sales charges under a Policy.
We deduct an additional charge 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.
Premium Tax Charge. We deduct a charge of 2% to cover state premium taxes from
premiums paid. However, a charge of 2 1/4 percent to cover state premium taxes
may be deducted from premiums paid in connection with Executive Programs and
Corporate Programs. (See "Charges and Deductions--Premium Tax Charge.")
Monthly Deduction. We make a monthly deduction from the Policy's Cash Value in
the Separate Account. The monthly deduction includes the following:
. Administrative Charge. We deduct an administrative charge (see the
specification pages of the Policy) based on 1) the number of Insureds
covered under a Group Contract or other employer-sponsored insurance
program, and 2) 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.
. Cost of Insurance Charge. We deduct a cost of insurance charge calculated
on each Monthly Anniversary. We determine monthly cost of insurance rates
based upon expectations as to future mortality experience. For a
discussion of the factors affecting the rate class of the Insured, see
"Charges and Deductions--Monthly Deduction--Cost of Insurance."
. A charge for any additional insurance benefits provided by a rider.
Separate Account Charges.
. Mortality and Expense Risk Charge. We deduct a daily charge not to exceed
.0024547% (an annual rate of .90%) of the net assets of each Division for
the Company's assumption of certain mortality and expense risks incurred
in connection with the Policies. (See "Charges and Deductions--Separate
Account Charges.")
. Federal Taxes. No charges are currently made for federal or state income
taxes. (See "Federal Tax Matters.")
. Annual Expenses of the Funds (after fee waiver and reimbursement as
applicable). The value of the assets of the Divisions will reflect the
management fee and other expenses incurred by the Funds. The following
table describes the Fund fees and expenses during the time that the Owner
owns the Policy. These fees and expenses are shown as a percentage of net
assets for the year ended December 31, 1999.
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The prospectus for each Fund contains more detail concerning a Fund's fees
and expenses. (See "The Company, The Separate Account, and The Funds.")
<TABLE>
<CAPTION>
Management Fees
(after fee Other Expenses Total
waiver (after reimbursement Annual
Fund as applicable) as applicable) Expenses
<S> <C> <C> <C>
Money Market Portfolio 0.37% 0.06% 0.43%
Bond Portfolio 0.48% 0.09% 0.57%
Capital Growth Portfolio 0.46% 0.03% 0.49%
Balanced Portfolio 0.48% 0.08% 0.56%
Growth and Income Portfolio 0.48% 0.08% 0.56%
International Portfolio 0.85% 0.18% 1.03%
Global discovery Portfolio(/1/) 0.98% 0.65% 1.63%
Large Company Growth Portfolio(2) 0.00% 1.25% 1.25%
21st Century Growth Portfolio(3) 0.00% 1.50% 1.50%
</TABLE>
(/1/)Please note that beginning May 1, 2000, with the new Scudder
Variable Life Investment Fund prospectus, Scudder Kemper Investments had
agreed to maintain the expenses for the Global Discovery Portfolio at 1.25%
of the portfolio's average daily net assets. These expense limits will
remain in effect until at least April 30, 2001.
(/2/)The Adviser continues to maintain the expenses for the Large
Company Growth Portfolio at 1.25% of the portfolio's average daily net
assets through April 30, 2001. Without these reimbursements, the Management
Fee would have been .745% and Other Expenses would have been 2.72% for
total expenses of 3.47%.
(/3/)The Adviser also continues to maintain the management expenses for
the 21st Century Growth Portfolio at 1.50% of the portfolio's average daily
net assets through April 30, 2001. Without these reimbursements, the
Management Fee would have been .875% and Other Expenses would have been
2.02% for total expenses of 2.90%.
The expense information regarding the Funds was provided by those Funds. We
have not independently verified this information. We cannot guarantee that the
reimbursements provided by certain Funds will continue.
Partial Withdrawal Transaction Charge. We deduct a transaction charge equal to
the lesser of $25 or 2% of the amount withdrawn on each partial withdrawal of
amounts from the Separate Account. Currently, there are no transaction charges
imposed for transfers of amounts between Divisions. 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," "Policy Rights and Privileges--Surrender and Partial Withdrawals--
Transfers," and "Charges and Deductions--Partial Withdrawal Transaction
Charge.")
Policy Loans
After the first Policy Anniversary an Owner may borrow against the Cash Value
of a Policy. All outstanding Indebtedness will be deducted from proceeds
payable at the Insured's death, upon maturity, or upon surrender. We transfer
a portion of the Policy's Cash Value in each Division of the Separate Account
to which the loan is allocated 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.") 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 10% additional income tax would be imposed on the
portion of any loan that is included in income. (See "Federal Tax Matters.")
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. A partial withdrawal may
reduce the Face Amount and the death benefit payable under the Policy. (See
"Policy Rights and Privileges--Surrender and Partial Withdrawals.") Surrenders
and partial withdrawals may have federal income tax consequences. (See
"Federal Tax Matters.")
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Conversion Right
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. 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.")
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 Rights and Privileges--Eligibility Change Conversion.")
Illustrations
Illustrations in Appendix A show how death benefits and Cash Values may vary
based on certain hypothetical rate of return assumptions as well as
assumptions pertaining to the level of the charges. These rates are not
guaranteed. They are illustrative only and do not show past or future
performance. If a Policy is surrendered in the early Policy Years, the Cash
Value payable will be low compared to premiums accumulated with interest, and
consequently the insurance protection provided prior to surrender will be
costly.
Policy Tax Compliance
We intend for the Policy to satisfy the definition of a life insurance
contract under Section 7702 of the Internal Revenue Code (the "Code").
Assuming that a Policy qualifies as a life insurance contract under the Code,
a Policy Owner should not be taxed for receiving value from the Policy, until
there is a distribution from the Policy. Also, death benefits payable under a
Policy should be excludable from the gross income of the Beneficiary.
A Policy may be treated as a "modified endowment contract." If the Policy is a
modified endowment contract, it will affect the tax advantages offered under
the Policy. (See "Federal Tax Matters.")
Specialized Uses of the Policy
Because the Policy provides for an accumulation of Cash Value as well as a
death benefit, the Policy can be used for various individual and business
financial planning purposes. Purchasing the Policy in part for such purposes
entails certain risks. For example, if the investment performance of Divisions
to which Cash Value is allocated is poorer than expected or if sufficient
premiums are not paid, the Policy may lapse or may not accumulate sufficient
Cash Value to fund the purpose for which the Policy was purchased. Partial
withdrawals and Policy Loans may significantly affect current and future Cash
Value, Cash Surrender Value, or death benefit proceeds. Depending upon
Division investment performance and the amount of a Policy Loan, the loan may
cause a Policy to lapse. Because the Policy is designed to provide benefits on
a long-term basis, before purchasing a Policy for a specialized purpose a
purchaser should consider whether the long-term nature of the Policy is
consistent with the purpose for which it is being considered. Using a Policy
for a specialized purpose may have tax consequences. (See "Federal Tax
Matters.")
Questions
If you have any questions, you may write or call the Company at 100 South
Brentwood, St. Louis, MO 63105, (314) 862-2211.
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THE COMPANY AND THE SEPARATE ACCOUNT
The Company
Paragon Life Insurance Company is a stock life insurance company incorporated
under the laws of Missouri. We were organized in 1981 as General American
Insurance Company and on December 31, 1987, our name was changed. No change in
operations or ownership took place in connection with the name change. Our
main business is writing individual and group life insurance policies and
annuity contracts. As of December 31, 1999, we had assets of $400 million. We
are admitted to do business in 49 states and the District of Columbia. Our
principal offices of the Company are at 100 South Brentwood, St. Louis,
Missouri 63105 ("Home Office"). Our Internal Revenue Service Employer
Identification Number is 43-1235869.
We are a wholly-owned subsidiary of General American Life Insurance Company
(the "Parent Company"), a Missouri life insurance company. The Parent Company
is wholly owned by GenAmerica Corporation, a Missouri general business
corporation, which is wholly owned by Metropolitan Life Insurance Company, a
New York insurance company.
Guarantee. In addition, the Parent Company agrees to guarantee that we will
have sufficient funds to meet all of our 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 end 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
that this guarantee cover the investment experience or Cash Values of the
Policy.
Ratings. We may from time to time publish in advertisements, sales literature,
and reports to Owners or Contractholders, the ratings and other information
assigned to us by one or more independent rating organizations such as A. M.
Best Company, Standard & Poor's, and Duff & Phelps. The purpose of the ratings
is to reflect our financial strength and/or claims paying ability and should
not be considered as bearing on the investment performance of assets held in
the Separate Account. Each year the A. M. Best Company reviews the financial
status of thousands of insurers, culminating in the assignment of Best's
ratings. These ratings reflect Best's current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health insurance industry. In addition,
the claims paying ability of the Company as measured by Standard & Poor's
Insurance Ratings Services or Duff & Phelps may be referred to in
advertisements or sales literature or in reports to Owners or Contractholders.
These ratings are opinions of an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. These ratings do not reflect the investment performance of the
Separate Account or the degree of risk associated with an investment in the
Separate Account.
Advertisements. We also may include in advertisements and other literature
certain rankings assigned to us by the National Association of Insurance
Commissioners ("NAIC"), and our analyses of statistical information produced
by the NAIC. These rankings and analyses of statistical information may
describe, among other things, our growth, premium income, investment income,
capital gains and losses, policy reserves, policy claims, and life insurance
in force. Our use of such rankings and statistical information is not an
endorsement by the NAIC.
Advertisements and literature prepared by the Company also may include
discussions of taxable and tax-deferred investment programs (including
comparisons based on selected tax brackets), alternative investment vehicles,
and general economic conditions.
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The Separate Account
We established Separate Account B (the "Separate Account") 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 us.
The Separate Account is divided into Divisions. Each Division will invest in
Funds as shown on the cover page of this Prospectus. 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 we 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 we 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 Policy liabilities. From time to
time, these excess assets may be transferred from the Separate Account and
included in the Company's general assets. Before making any such transfers, we
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.
The Funds
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 open-end, diversified management investment
company. The assets of the Fund used by the Policies are held separate from
the assets of the other Funds, and each Fund has investment objectives and
policies which are generally different from those of the other Funds. The
income or losses of one Fund generally have no effect on the investment
performance of any other Fund.
Investment Results. The investment objectives and policies of certain Funds
are similar to the investment objectives and policies of other portfolios that
may be managed by the same investment adviser or manager. The investment
results of the Funds may differ from the results of these other portfolios.
There can be no guarantee, and no representation is made, that the investment
results of any of the Funds will be comparable to the investment results of
any other portfolio, even if the other portfolio has the same investment
adviser or manager.
The following summarizes the investment policies of each Fund:
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 Portfolio seeks to maintain a net asset value of $1.00 per
share.
Unless otherwise indicated, the portfolio's investment objective and policies
may be changed without a vote of shareholders.
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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. Unless otherwise
indicated, the portfolio's investment objective and policies may be changed
without a vote of shareholders.
Capital Growth Portfolio
The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and flexible investment program. Unless otherwise indicated,
the portfolio's investment objective and policies may be changed without a
vote of shareholders.
Balanced Portfolio
The Balanced Portfolio pursues a balance of growth and income from a
diversified portfolio of equity and fixed income securities. The Portfolio
also seeks long-term preservation of capital through a quality-oriented
investment approach that is designed to reduce risk. Unless otherwise
indicated, the portfolio's investment objective and policies may be changed
without a vote of shareholders.
Growth and Income Portfolio
The Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income. Unless otherwise indicated, the portfolio's
investment objective and policies may be changed without a vote of
shareholders.
Global Discovery Portfolio
The Global Discovery Portfolio pursues above-average capital appreciation over
the long term by investing primarily in the equity securities of small
companies located throughout the world. Unless otherwise indicated, the
portfolio's investment objective and policies may be changed without a vote of
shareholders.
International Portfolio
The International Portfolio seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments. Unless
otherwise indicated, the portfolio's investment objective and policies may be
changed without a vote of shareholders.
21st Century Growth Portfolio
Please Note: This fund was previously named Small Company Growth Portfolio.
The 21st Century Growth Portfolio pursues long-term growth of capital by
investing primarily in equity securities issued by emerging growth companies.
Unless otherwise indicated, the portfolio's investment objective and policies
may be changed without a vote of shareholders.
11
<PAGE>
Large Company Growth Portfolio
Large Company Growth Portfolio seeks long-term growth of capital through
investment primarily in the equity securities of seasoned, financially strong
U.S. growth companies. Unless otherwise indicated, the portfolio's investment
objective and policies may be changed without a vote of shareholders.
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 Funds, which must accompany or precede this Prospectus and
which should be read carefully. Please also refer to the "Annual Expenses of
the Funds" information of this Prospectus for a list of the Funds' annual
expenses.
Agreements. We have entered into or may enter into arrangements with certain
Funds pursuant to which we receive a fee based upon an annual percentage of
the average net asset amount invested by us on behalf of the Separate Account
and other separate accounts of the Company. These arrangements vary among the
Funds and are entered into because of administrative services provided by the
Company.
Resolving Material Conflicts. All of the Funds 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.
Addition, Deletion, or Substitution of Investments. We reserve the right,
subject to compliance with applicable law, to make additions to, deletions
from, or substitutions for the shares of the Funds that are held by the
Separate Account or that the Separate Account may purchase. We reserve the
right to (1) eliminate the shares of any of the Funds and (2) substitute
shares of another fund if the shares of a Fund are no longer available for
investment, or further investment in any Fund becomes inappropriate in view of
the purposes of the Separate Account. We will not substitute any shares
without notice to the Owner and prior approval of the SEC, to the extent
required by the 1940 Act or other applicable law, as required.
We also reserve the right to establish additional Divisions of the Separate
Account. We will establish new Divisions when marketing needs or investment
conditions warrant. 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,
we may also:
. Eliminate or combine one or more Divisions;
. Substitute one Division for another Division; or
. Transfer assets between Divisions if marketing, tax, or investment
conditions warrant.
We may make changes in the Policy by appropriate endorsement in the event of a
substitution or change. We will notify all Owners of any such changes.
If we deem it 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.
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<PAGE>
To the extent permitted by applicable law, we may transfer the assets of the
Separate Account associated with the Policy to another separate account.
We cannot guarantee that the shares of the Funds will always be available. The
Funds each sell shares to the Separate Account in accordance with the terms of
a participation agreement between the Fund distributors and us. Should this
agreement terminate or should shares become unavailable for any other reason,
the Separate Account will not be able to purchase the existing Fund shares.
Should this occur, we will be unable to honor Owner requests to allocate Cash
Values or premium payments to the Divisions of the Separate Account investing
in such shares. In the event that a Fund is no longer available, we will take
reasonable steps to obtain alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy
We will generally issue a Group Contract to employers whose employees and/or
their spouses may become Owners (and/or Insureds) under the Group Contract 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 an appropriate officer of the employer and acceptance by us
at our Home Office. (See "General Provisions of the Group Contract--
Issuance.") Individuals (i.e., eligible employees and/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 our authorized representative or us at
our Home Office. We 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
(1) to independent contractors of the employer;
(2) to persons who wish to continue coverage after a Group Contract has
terminated;
(3) to persons who wish to continue coverage after they no longer are
employed by the Group Contractholder;
(4) if state law restrictions make issuance of a Group Contract
impracticable; or
(5) if the employer chooses to use an employer-sponsored insurance program
that does not involve a Group Contract.
Corporate Programs. Corporate Programs will generally involve Individual
Policies. We will issue Policies on the lives of eligible Insureds (generally
employees of a sponsoring employer), and the Owner will usually be the
sponsoring employer or its designee.
Issue Ages. A Policy generally will be issued only to Insureds of Issue Ages
17 through 70 who supply satisfactory evidence of insurability. We may issue
Policies to individuals falling outside the Issue Ages or decline to issue
Policies to individuals within the Issue Ages.
Employee Eligibility. 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, we reserve
the right to waive or modify the "actively at work" requirement at our
discretion.
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<PAGE>
In addition, the Contractholder may require that an employee must be employed
by the employer as of a certain date or for a certain period of time. We will
set forth this date or time period in the Group Contract specifications pages.
Employees of any Associated Companies of the Contractholder will be considered
employees of the Contractholder. We may also allow an individual who is an
independent contractor working primarily for the sponsoring employer to be
considered an eligible employee. An independent contractor 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.
Guaranteed Issue. Other than in Executive Programs or Corporate Programs, we
will issue the Policy and any children's insurance rider applied for by the
employee pursuant to our guaranteed issue procedure. We offer the guaranteed
issue procedure only when an employee is given the opportunity to purdchase a
Policy for the first time. 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. We may offer
guaranteed issue with Executive Programs or Corporate Programs depending upon
the number of eligible employees or if other existing insurance coverage is
cancelled.
Simplified Underwriting. The employee must submit to a simplified underwriting
procedure requiring the employee to respond satisfactorily to certain health
questions in the application:
. 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
A blood test may be required. This requirement is generally applicable only to
Executive Programs or Corporate Programs.
Simplified underwriting must be followed 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.
Acceptance of an application is always subject to our underwriting rules, and
we reserve the right to reject an application for any reason.
Employee's Spouse. If a Policy is to be issued to a spouse, the appropriate
application for Individual Insurance must be supplied. We will subject the
spouse to the simplified underwriting procedure described above. Guaranteed
issue is not available. We generally do not offer spouse coverage under
Executive Program Policies or Corporate Program Policies.
Issue Date. 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;
14
<PAGE>
. the Insured is eligible for it; and
. the information in the application is determined to be acceptable to the
Company.
Interim Insurance. Interim Insurance in the amount of insurance applied for
may be available prior to the issuance of a Policy which is being underwritten
on a guaranteed issue basis up to the Guaranteed Issue Amount. If available,
interim insurance will start as of the date of the application. Interim
insurance ends on the earliest of the following dates:
. the date insurance begins on the Policy applied for;
. the date a Policy other than the Policy applied for is offered to the
applicant;
. the date the Company notifies the applicant that the application for any
proposed Insured is declined;
. 60 days from the date of application; or
. termination of employment with the Contractholder or sponsoring employer.
Premiums
The initial premium is due on the Issue Date, and usually will be paid 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.") The Owner is not
required to pay premiums equal to the planned annual premium.
We will apply premiums paid by a Contractholder or sponsoring employer or
designated payor to a Policy as of the Valuation Date we receive the premiums.
Premiums will be "received" on a Valuation Date when we receive supporting
documentation necessary for us to determine the amount of premium per Policy
and the cash premium.
Planned Premium Payments. After the initial premium, and 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 paid by the Contractholder or sponsoring employer on behalf of
the Owner pursuant to a planned premium payment schedule. A planned premium
payment schedule provides for premium payments in a level amount at fixed
intervals (usually monthly) agreed to by the Contractholder or employer and
us.
The amount of the premiums paid by the sponsoring employer or Contractholder
will be equal to the amount authorized by the employee. The Owner may skip
planned premium payments. Failure to pay one or more planned premium payments
will not always cause the Policy to lapse. The Policy will lapse if the Cash
Surrender Value is insufficient to cover the next Monthly Deduction. (See
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement.")
Unscheduled Premiums. In addition to any planned payments made, an Owner may
make unscheduled premium payments at any time and 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.") 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.
Continuance of Insurance. Failure of the Contractholder to pay the planned
premium payments authorized by its employees may cause the Group Contract to
terminate. (See "General Provisions of the Group Contract--Termination.")
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 Group Contract termination. (See "Policy Rights and Privileges--
Eligibility Change Conversion.") Individual Insurance will also continue if
the
15
<PAGE>
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. The new schedule will have the same planned
annual premium, and the payment intervals will be no more frequent than
quarterly. In Corporate Programs, there will generally be no change in planned
or scheduled premiums upon discontinuing the employment of an Insured.
Premium Limitations. Every premium payment paid must be at least $20. Total
premiums paid under a Policy may not exceed the current maximum premium
limitations established by federal tax laws in any Policy Year. The maximum
premium limitation for a Policy Year is the sum of the premiums paid under the
Policy that will not at any time exceed the guideline premium limitations
referred to in Section 7702(c) of the Internal Revenue Code of 1986. If at any
time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, we will accept only that portion of the
premium which will make total premiums equal the maximum. Any part of the
premium in excess of the maximum premiums will be returned directly to the
Owner within 60 days of the end of the Policy Year in which payment is
received (unless we agree) and no further premiums will be accepted until
allowed by the current maximum premium limitations prescribed by Federal tax
law. See "Federal Tax Matters" 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, from
which withdrawals are treated (for tax purposes) (1) as a distribution of any
taxable income under the contract, and (2) as a distribution of nontaxable
investment in the contract. Also, such withdrawals may be subject to a 10%
federal income tax penalty. We have adopted administrative steps designed to
notify an Owner when we believe that a premium payment will cause a Policy to
become a modified endowment contract. Owner will be given a limited amount of
time to request that the premium be reversed in order to avoid the Policy's
classification as a modified endowment contract. (See "Federal Tax Matters.")
Allocation of Net Premiums and Cash Value
Net Premiums. The net premium equals:
(1) the premium paid; less
(2) the premium expense charge;
(3) any charge to compensate us for anticipated higher corporate income
taxes resulting from the sale of a Policy; and
(4) the premium tax charge. (See "Charges and Deductions--Premium Expense
Charge.")
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the 14 Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums
will be allocated in accordance with the Owner's instructions upon our receipt
of the premiums. However, the minimum percentage, of any allocation 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 us. Any change in allocation
will take effect immediately upon our receipt 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.")
The value of amounts allocated to the Divisions will vary with the investment
performance of the Funds underlying the Divisions. The Owner bears the entire
investment risk. Investment performance 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.
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<PAGE>
Policy Lapse and Reinstatement
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium payment will not itself cause a
Policy to lapse. However, a Policy can lapse even if planned premiums have
been paid. 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.") Thus, the payment of premiums in any
amount does not guarantee that the Policy will remain in force until the
Maturity Date.
The grace period, which is 62 days, begins on the Monthly Anniversary on which
the Cash Surrender Value is not enough to cover the next monthly deduction,
premium expense charge, and premium tax charge. We will notify the Owner at
the beginning of the grace period by mail. 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.") 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 payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
at 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:
. Evidence of the insurability of the Insured satisfactory to us (including
evidence of insurability of any person covered by a rider to reinstate
the rider).
. 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.
. 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. 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 our approval 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, we 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, 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.")
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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.") 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.") 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, we
may establish a substantially higher Face Amount for Policies issued under
that Contract or program.
Option A. Under Option A, the death benefit is:
(1) the current Face Amount of the Policy or, if greater,
(2) the applicable percentage of Cash Value on the date of death.
The applicable percentage is 250% 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. 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...................... 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>
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<PAGE>
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:
(1) the current Face Amount plus the Cash Value of the Policy or, if
greater,
(2) the applicable percentage of the Cash Value on the date of death. The
applicable percentage is the same as under Option A.
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. We reserve the right to limit the number
of changes in death benefit options to one each Policy Year. A request for a
change must be made directly to us in writing. The effective date of such a
change will be the Monthly Anniversary on or following the date we receive 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 us 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.")
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income because the federal tax
law requirements are not satisfied. (See "Federal Tax Matters.")
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 us. 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.") In addition, a change
in Face Amount may have federal income tax consequences. (See "Federal Tax
Matters.")
Face Amount Decreases. Any decrease in the Face Amount will become effective
on the Monthly Anniversary on or following our receipt of the written request.
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
19
<PAGE>
Premiums"), 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 those
requirements. A decrease in the Face Amount will reduce the Face Amount in the
following order:
(1) The Face Amount provided by the most recent increase;
(2) The next most recent increases successively; and
(3) 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").
Face Amount Increases. For an increase in the Face Amount, we require 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 80 or less 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, we may establish a substantially higher Face
Amount for Policies issued under that Contract or program. Although an
increase need not necessarily be accompanied by additional premium, 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.") An increase in the Face Amount may result in certain additional
charges. (See "Charges and Deductions.")
Cancellation of an Increase. 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 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.")
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.
Examples 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"), 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
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<PAGE>
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.")
(e) A partial withdrawal will reduce the death benefit. (See "Policy Rights
and Privileges--Surrender and Partial Withdrawals.") 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 we receive all documentation
required. Payment may, however, be postponed in certain circumstances. (See
"General Matters Relating to the Policy--Postponement of Payments.") 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," and
"Charges and Deductions.")
When no election for an optional method of settlement is in force when the
Insured dies, 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.")
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;
. the frequency and amount of net premiums paid;
. transfers;
. partial withdrawals;
. Policy Loans;
. Loan account interest rate credited; 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.") 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
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<PAGE>
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.") Thereafter, on each
Valuation Date, the Cash Value in a Division 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 (including amounts securing Policy Loans) 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.")
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 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.
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<PAGE>
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 us in writing at our Home Office. We 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 us, 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 we receive
the loan request at our Home Office, although payments may be postponed under
certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments.")
When a Policy Loan is made, Cash Value equal to the amount of the loan and
loan interest due will be transferred to the Loan Account as security for the
loan. 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 (not including 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.
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 5%. The rate is declared by action of our management as
authorized by our Board of Directors. The Loan Account interest credited will
be transferred to the Divisions: (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 8%. Interest charged will be due and payable annually in
arrears on each Policy Anniversary or for the duration of the Policy Loan, if
shorter. 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 "Policy Rights and Privileges--Loans--Effect of Policy
Loans.") The amount transferred will be deducted from the Divisions in the
same proportion that the portion of the Cash Value in each Division bears to
the total Cash Value of the Policy (not including 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.")
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.
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.
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<PAGE>
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.") A sufficient payment must be made within the later of:
(1) the grace period of 62 days from the Monthly Anniversary immediately
before the date Indebtedness exceeds the Cash Value; or
(2) 31 days after notice that the Policy will terminate without a
sufficient payment has been mailed.
If a sufficient payment is not received, the Policy will lapse and terminate
without value. A lapsed Policy may later be reinstated. (See "Payment and
Allocation of Premiums--Policy Lapse and Reinstatement.")
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 us. Amounts paid while a
Policy Loan is outstanding will be treated as premiums unless the Owner
requests in writing that the payments 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 in
the same proportion that Cash Value in the Loan Account bears to the Cash
Value in each Loan Subaccount. A Loan Subaccount exists for each Division.
Amounts transferred to the Loan Account to secure Indebtedness are allocated
to the appropriate Loan Subaccount to reflect their origin.
Surrender and Partial Withdrawals
During the lifetime of the Insured and while a Policy is in force, the Owner
may surrender, or make a partial withdrawal of the Policy by sending a written
request to us. Any restrictions are described below. 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 by us. 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.") Surrenders and partial withdrawals
may have federal income tax consequences. (See "Federal Tax Matters.")
Surrender. To effect a surrender, the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
lost Policy. Upon request, we can provide a lost Policy Certificate. Upon
surrender, we 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 $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 2% of the amount withdrawn. The Owner may allocate the amount withdrawn,
subject to the above conditions, among the Divisions. If no allocation is
specified, then the partial withdrawal will be allocated among the Divisions
in the same proportion that the Policy's Cash Value in each Division bears to
the total Cash Value of the Policy (not including the Cash Value in the Loan
Account), on the date the request for the partial withdrawal is received.
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<PAGE>
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 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 approved.
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.")
Transfers
Under the Company's current rules, a Policy's Cash Value (not including
amounts credited to the Loan Account), may be transferred among the Divisions
available with the Policy. Requests for transfers from or among Divisions must
be made in writing directly to us 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. We will make 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, we will make 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 we currently intend to continue to permit transfers for the
foreseeable future, the Policy provides that we 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 we may determine.
Right to Examine Policy
The Owner may cancel a Policy within 10 days of after receiving it or such
longer period if required by state law. 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
us. 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.")
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As noted above, a request for an increase in Face Amount (see "Policy
Benefits--Death Benefit") 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 we refund the
amount of the additional charges deducted in connection with the increase.
This amount 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.") If no request is made, we will increase the Policy's Cash Value
by the amount of these additional charges. This amount will be allocated among
the Divisions 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. 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.") No evidence of insurability will
be required when this right is exercised. However, we 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 our rates in
effect for the same Issue Age and rate class as the original 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 (a)
after we receive written notice that 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"), any premium necessary to prevent
the Policy from lapsing must be paid us 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. The new
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.")
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.") 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.") 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 our agreement.
Settlement Options. We may offer settlement options that apply to the payment
of death benefit proceeds, as well as to benefits payable at maturity. Once a
settlement option is in effect, there will no longer be value in the Separate
Account.
Accelerated Death Benefits. We offer 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.")
CHARGES AND DEDUCTIONS
We will deduct charges in connection with the Policies to compensate us 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. We may realize a profit on one or more of these charges. We may use
any such profit for any corporate purpose, including, among other things,
payments of sales and distribution expenses.
Premium Expense Charges
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.
Prior to allocation of net premiums among the Divisions, 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 1%, depending on
whether the Policy is determined to be a group or individual contract under
OBRA. Among other possible employer-sponsored programs, Corporate Program
Policies are deemed to be individual contracts. 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 high 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, we charge 1% of each premium
payment for the anticipatee higher corporate income taxes that result from the
sale of such a Policy.
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The net premium payment is calculated as 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; and
. the premium tax charge (described below).
The sales charges will not change if an Insured is no longer eligible under a
Group Contract or employer-sponsored insurance program, but continues coverage
on an individual basis.
Premium Tax Charge
Various states and subdivisions impose a tax on premiums received by insurance
companies. Premium taxes vary from jurisdiction to jurisdiction. Generally, to
cover these premium taxes, premium payments will be reduced by a premium tax
charge of 2% from all Policies. However, we may impose a premium tax charge of
2% for premium taxes on premiums received in connection with Policies issued
under an Executive Program.
Monthly Deduction
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate us 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 in the same proportion that a Policy's Cash Value in each Division
bears to the total Cash Value of the Policy (not including 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. We are responsible 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. We assess 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>
First Subsequent
Eligible Employees Year 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 (1) with
fewer than 250 eligible employees, (2) with additional administrative costs,
or (3) 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 are guaranteed not to increase over the life of the Policy. The
administrative charge will not change in the event that the Insured is no
longer eligible for group coverage, but continues coverage on an individual
basis. In addition, when we believe that lower administrative costs will be
incurred in connection with a particular Group Contract or employer-sponsored
insurance program we 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.
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<PAGE>
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the next 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
increases in Face Amount. We 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.
Cost of Insurance Rates. 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. We will determine the current cost of insurance rates based on
our expectations as to future mortality experience. We currently issue 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 risk we asume 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. We reserve the right
to change criteria on which a rate class will be based in the future.
If gender mix is a factor, we 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, we 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, we reserve 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% 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% of the maximum rates in the 1980 CSO
Table because we use 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% of the 1980
CSO Table. Any change in the actual cost of insurance rates, will apply to all
persons of the same Attained Age and rate class whose Face Amounts have been
in force for the same length of time. Any change in the actual cost of
insurance rates will not include changes made to adjust for changes in the
gener mix of the pool of Insureds under a particular Group Contract or
employer-sponsored insurance program. (For purposes of computing guideline
premiums under Section 7702 of the Internal Revenue Code of 1986, as amended,
the Company will use 100% of the 1980 CSO Table.)
Net Amount at Risk. 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), less (b)
the Cash Value at the beginning of the Policy Month. Dividing the death
benefit by 1.0040741 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 5%.
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, we will calculate the net amount at risk separately for
each rate class. When we determine the net amounts at risk for each rate
class, when Option A is in effect, we will consider the Cash Value first to be
a part of the initial Face Amount. If the Cash Value is greater than the
initial Face Amount,
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we will consider the excess Cash Value a part of each increase in order,
starting with the first increase. If Option B is in effect, we will determine
the net amount at risk for each rate class 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. 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," and "Policy Rights and Privileges--Surrender and
Partial Withdrawals.")
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.")
Partial Withdrawal Transaction Charge
A transaction charge which is the lesser of $25 or 2% of the amount withdrawn
will be assessed on each partial withdrawal, to cover administrative costs
incurred in processing the partial withdrawal.
Separate Account Charges
Mortality and Expense Risk Charge. The Company will deduct a daily charge from
the Separate Account at the rate not to exceed .0024547% of the net assets of
each Division of the Separate Account. This equals an annual rate of .90% of
those net assets. This deduction is guaranteed not to increase for the
duration of the Policy. We may realize a profit from this charge and may use
this profit to finance distribution expenses.
The mortality risk we assume is that an Insured may die sooner than
anticipated and that we 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 incurred by the Separate Account. We may make such a
charge in the future. Charges for other taxes incurred by the Account may also
be made. (See "Federal Tax Matters.")
Expenses of the Funds. The value of the net assets of the Separate Account
will reflect the investment advisory fee and other expenses incurred by the
Funds. (See "Summary of the Policy--Separate Account Charges--Annual Expenses
of the Funds" and "The Company, the Separate Accounts, and The Funds.")
GENERAL MATTERS RELATING TO THE POLICY
Postponement of Payments
Payment of any amount due from the Separate Account because of 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:
(1) the New York Stock Exchange is closed other than customary weekend and
holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the SEC;
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(2) the SEC by order permits postponement for the protection of Owners; or
(3) 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 together make the entire contract between the Owner and us.
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 the Owner of the Policy unless another person is shown as
the Owner in the application. Ownership may be changed 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.
Change of Owner or Beneficiary
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to us 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 by us. We
will not be liable for any payment made or action taken before we receive 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.
Changing the Owner may have adverse tax consequences.
Policy Changes
We reserve 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
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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
We 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 us at our Home
Office; and (c) we send an acknowledged copy to the Owner. We are 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, we 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 at the time
of application for the Policy or any increase in Face Amount.
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 we make in good faith, relying on our records or
evidence supplied with respect to such payment, will fully discharge our duty.
We reserve 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
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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, we 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.")
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 us 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 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. We
will pay the Policy's death benefit (less any Indebtedness and any term
insurance added by riders), calculated on the date that we receive
satisfactory evidence that the Insured has tested seropositive for HIV,
reduced by a $100 administrative processing fee. We will pay the accelerated
benefit to the Owner in a single payment in full settlement of the 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 us.
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
advisor 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 accelerated payment of a reduced death benefit. The Owner may make such an
election under the rider if evidence, including a certification from a
licensed physician, is provided to us that 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 Accelerated Death
Benefit Settlement Option Rider is not available with Corporate Programs.
The amount of the death benefit payable under the rider will equal the Cash
Surrender Value under the Policy on the date we receive 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.
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Pursuant to the Health Insurance Portability and Accountability Act of 1996,
we believe that for federal income tax purposes an accelerated death benefit
payment made under the Accelerated Death Benefit Settlement Option Rider
should be fully excludable from the gross income of the Beneficiary, as long
as the Beneficiary is the Insured under the Policy. However, you should
consult a qualified tax advisor about the consequences of adding this Rider to
a Policy or requesting an accelerated death benefit payment under this Rider.
Records and Reports
We 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 Funds 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 us
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 us. Walnut Street
is a wholly-owned subsidiary of GenAmerica Corporation, a Missouri general
business corporation, which is also a parent company of the Company.
GenAmerica Corporation is wholly owned by Metropolitan Life Insurance Company,
a New York Insurance 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. Walnut Street's Internal Revenue
Service employer identification No. is 43-1333368. It is a Missouri
corporation formed May 4, 1984. Walnut Street's address is 400 South 4th
Street, Suite 1000, St. Louis, MO. 63102. 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. No commissions are paid for
distribution of the Policies. Sales of the Policies may take place in all
states (except New York) and the District of Columbia.
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 give 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 given in advance. The planned premium payment interval is
agreed to by the Contractholder and us. Prior to each planned payment
interval, we 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 us.
Grace Period
If the Contractholder does not give 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 given.
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If the Contractholder does not give 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.")
Termination
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, we 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."
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 us.
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 us. 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
We 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 us 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 tax situations. This discussion is not intended as tax advice.
Counsel or other competent tax advisors should be consulted for more complete
information. This discussion is based upon our understanding of the present
federal income tax laws. No representation is made as to the likelihood of
continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
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Tax Status of the Policy
In order to qualify as a life insurance contract for federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under federal tax law, a Policy must satisfy certain requirements
which are set forth in the Internal Revenue Code. Guidance as to how these
requirements are to be applied is limited. Nevertheless, we believe that the
Policy should satisfy the applicable requirements. If it is subsequently
determined that a Policy does not satisfy the applicable requirements, we may
take appropriate steps to bring the Policy into compliance with such
requirements and we reserve the right to restrict Policy transactions in order
to do so.
In order to qualify as a life insurance contract for federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under federal tax law, a Policy must satisfy certain requirements
which are set forth in the Internal Revenue Code. Guidance as to how these
requirements are to be applied is limited. Nevertheless, we believe that the
Policy should satisfy the applicable requirements. If it is subsequently
determined that a Policy does not satisfy the applicable requirements, we may
take appropriate steps to bring the Policy into compliance with such
requirements and we reserve the right to restrict Policy transactions in order
to do so.
In certain circumstances, owners of variable life insurance contracts have
been considered for federal income tax purposes to be the owners of the assets
of the variable account supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
contract owners have been currently taxed on income and gains attributable to
the variable account assets. There is little guidance in this area, and some
features of the Policies, such as the flexibility of a Owner to allocate
premiums and cash values, have not been explicitly addressed in published
rulings. While we believe that the Policies do not give Owners investment
control over Variable Account assets, we reserve the right to modify the
Policies as necessary to prevent a Owner from being treated as the owner of
the Variable Account assets supporting the Policy.
In addition, the Code requires that the investments of the Variable Account be
"adequately diversified" in order for the Policies to be treated as life
insurance contracts for federal income tax purposes. It is intended that the
Variable Account, through its decisions, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
Tax Treatment of Policy Benefits
In General. We believe that the death benefit under a Policy should be
excludible from the gross income of the beneficiary. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Owner or beneficiary. A tax
advisor should be consulted on these consequences.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy cash value until there is a distribution. When distributions from a
Policy occur, or when loans are taken out from or secured by a Policy, the tax
consequences depend on whether the Policy is classified as a "modified
endowment contract."
Modified Endowment Contracts. Under the Internal Revenue Code, certain life
insurance contracts are classified as "modified endowment contracts," with
less favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policies as to premiums and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
modified endowment contract. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy years. Certain changes in a Policy after it is issued could also cause
it to be classified as a modified endowment contract. A current or prospective
Owner should consult with a competent advisor to determine whether a Policy
transaction will cause the Policy to be classified as a modified endowment
contract.
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Distributions Other Than Death Benefits from Modified Endowment Contracts.
Policies classified as modified endowment contracts are subject to the
following tax rules:
(1) All distributions other than death benefits, including
distributions upon surrender and withdrawals, from a modified endowment
contract will be treated first as distributions of gain taxable as ordinary
income and as tax-free recovery of the Owner's investment in the Policy
only after all gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a modified
endowment contract are treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject
to tax except where the distribution or loan is made when the Owner has
attained age 59 or is disabled, or where the distribution is part of a
series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies) of
the Owner and the Owner's beneficiary or designated beneficiary.
If a Policy becomes a modified endowment contract, distributions that occur
during the contract year will be taxed as distributions from a modified
endowment contract. In addition, distributions from a Policy within two years
before it becomes a modified endowment contract will be taxed in this manner.
This means that a distribution made from a Policy that is not a modified
endowment contract could later become taxable as a distribution from a
modified endowment contract.
Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts Distributions other than death benefits from a Policy that
is not classified as a modified endowment contract are generally treated first
as a recovery of the Owner's investment in the Policy and only after the
recovery of all investment in the Policy as taxable income. However, certain
distributions which must be made in order to enable the Policy to continue to
qualify as a life insurance contract for federal income tax purposes if Policy
benefits are reduced during the first 15 Policy years may be treated in whole
or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a modified endowment contract
are generally not treated as distributions.
Finally, neither distributions from nor loans from or secured by a Policy that
is not a modified endowment contract are subject to the 10 percent additional
income tax.
Investment in the Policy. Your investment in the Policy is generally your
aggregate premiums. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
Policy Loans. In general, interest on a Policy loan will not be deductible. If
a Policy loan is outstanding when a Policy is canceled or lapses, the amount
of the outstanding indebtedness will be added to the amount distributed and
will be taxed accordingly.
Before taking out a Policy loan, you should consult a tax adviser as to the
tax consequences.
Multiple Policies. All modified endowment contracts that are issued by us (or
our affiliates) to the same Owner during any calendar year are treated as one
modified endowment contract for purposes of determining the amount includible
in the Owner's income when a taxable distribution occurs.
Accelerated Death Benefit Settlement Option Rider. We believe that payments
received under the Accelerated Death Benefit Settlement Option Rider should be
fully excludable from the gross income of the beneficiary if the beneficiary
is the insured under the Policy. However, you should consult a qualified tax
adviser about the consequences of adding this rider to a Policy or requesting
payment under this rider.
HIV Acceleration of Death Benefit Rider. The tax consequences association with
the HIV Acceleration of Death Benefit Rider are uncertain and a tax advisor
should be consulted.
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Business Uses of Policy. Businesses can use the Policies in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, tax
exempt and nonexempt welfare benefit plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the
particular facts and circumstances. If you are purchasing the Policy for any
arrangement the value of which depends in part on its tax consequences, you
should consult a qualified tax adviser. In recent years, moreover, Congress
has adopted new rules relating to life insurance owned by businesses. Any
business contemplating the purchase of a new Policy or a change in an existing
Policy should consult a tax adviser.
Other Tax Considerations. The transfer of the Policy or designation of a
beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate, and generation-
skipping transfer taxes. For example, the transfer of the Policy to, or the
designation as a beneficiary of, or the payment of proceeds to, a person who
is assigned to a generation which is two or more generations below the
generation assignment of the owner may have generation skipping transfer tax
consequences under federal tax law. The individual situation of each owner or
beneficiary will determine the extent, if any, to which federal, state, and
local transfer and inheritance taxes may be imposed and how ownership or
receipt of Policy proceeds will be treated for purposes of federal, state and
local estate, inheritance, generation skipping and other taxes.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the
Policy could change by legislation or otherwise. Consult a tax adviser with
respect to legislative developments and their effect on the Policy.
Our Income Taxes
Under current federal income tax law, we are not taxed on the Separate
Account's operations. Thus, currently we do not deduct a charge from the
Separate Account for federal income taxes. We reserve the right to charge the
Separate Account for any future federal income taxes or economic burdens we
may incur.
Under current laws in several states, we may incur state and local taxes (in
addition to premium taxes). These taxes are not now significant and we are not
currently charging for them. If they increase, we may deduct charges for such
taxes.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from our general assets. We
maintain records of all purchases and redemptions of Fund shares by each of
the Divisions. Additional protection for assets of the Separate Account is
afforded by Financial Institution Bonds issued by St. Paul Fire and Marine
Company with a limit of $25 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 held in the
Separate Account at regular and special shareholder meetings of the underlying
Funds 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 underlying Funds in its own right,
it may elect to do so.
38
<PAGE>
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 underlying Funds. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the underlying Funds.
Because the Funds 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. We will vote Fund shares held
in the Separate Account for which no timely voting instructions are received
and Fund shares that we own 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 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 we determine
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 we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Owners.
IMSA
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may include the IMSA logo and information about IMSA
membership in its advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
STATE REGULATION OF THE COMPANY
We are a stock life insurance company organized under the laws of Missouri and
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 our liabilities and reserves and the liabilities and
reserves of the Separate Account and certifies their adequacy. 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, we are 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.
39
<PAGE>
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
Name Principal Occupation(s) During Past Five Years (1)
------------------------- ---------------------------------------------------
<C> <S>
Executive Officers (2)
Carl H. Anderson (4) President and Chief Executive Officer since June
1986. Vice President, New Ventures, since June
1986, General American Life Insurance Co.,
St. Louis, Mo. (GenAm).
Matthew K. Duffy (4) Vice President and Chief Financial Officer since
June 1996. Formerly Director of Accounting,
Prudential Insurance Company of America, March
1987-June 1996.
E. Thomas Hughes, Jr. (4) Treasurer since December 1994. Corporate Actuary
General American Life and Treasurer, GenAm since October 1994.
Insurance Company
700 Market Street
St. Louis, MO 63101
Matthew P. McCauley (4) Vice President and General Counsel since 1984.
General American Life Secretary since August 1981. Vice President and
Insurance Company Associate General Counsel, GenAm, since December
700 Market Street 30, 1995.
St. Louis, MO 63101
Craig K. Nordyke (4) Executive Vice President and Chief Actuary since
November 1996. Vice President and Chief Actuary
August 1990-November 1996.
John R. Tremmel Vice President--Operations and System Development
since January 1999. Formerly Chief Operating
Officer, ISP Alliance, April 1998-December 1998.
Vice President and General Manager of National
Operations Centers, Norell Corporation, January
1995-March 1998. Senior Vice President, Citicorp
Insurance Group, September 1986-December 1995.
Directors (3)
Richard A. Liddy Chairman and Chief Executive Officer, GenAm, since
January 2000. Chairman, President, and Chief
Executive Officer, GenAm, May 1992- January 2000.
Warren J. Winer Executive Vice President--Group, GenAm, since
September 1995. Formerly, Managing Director, Wm.
M. Mercer, July 1993-August 1995.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
October 1991.
A. Greig Woodring President and CEO, Reinsurance Group of America,
Inc., since May 1993, and Executive Vice
President--Reinsurance, GenAm, since January 1990.
</TABLE>
- --------
(1) All positions listed are with the Company unless otherwise indicated.
(2) The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, MO 63105 unless
otherwise noted.
(3) 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, 1370 Timberlake Manor
Parkway, Chesterfield, MO 63017.
(4) Indicates Executive Officers who are also Directors.
40
<PAGE>
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain legal matters relating to aspects of federal securities laws. 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 LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Executive 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
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.
41
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed Policy
Years.
Associated Companies--The 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 Individual Insurance Policy 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 an available underlying 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.
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.
42
<PAGE>
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.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying balance sheets of Paragon Life Insurance
Company as of December 31, 1999 and 1998, and the related statements of
operations and comprehensive income, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paragon Life Insurance Company
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
March 10, 2000
KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG
International, a Swiss association.
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1999 and 1998
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Assets
Fixed maturities, available
for sale................... $ 81,421 83,384
Policy loans................ 16,954 14,135
Cash and cash equivalents... 10,591 7,439
-------- -------
Total cash and invested
assets................. 108,966 104,958
-------- -------
Reinsurance recoverables.... 1,314 1,170
Deposits relating to
reinsured policyholder
account balances........... 7,020 6,688
Accrued investment income... 1,853 1,545
Deferred policy acquisition
costs...................... 24,357 20,602
Fixed assets and leasehold
improvements, net.......... 1,031 4,504
Other assets................ 262 105
Separate account assets..... 255,190 168,222
-------- -------
Total assets............ $399,993 307,794
======== =======
Liabilities and
Stockholder's Equity
Policyholder account
balances................... 101,665 93,334
Policy and contract claims.. 1,691 1,672
Federal income taxes
payable.................... 1,007 281
Other liabilities and
accrued expenses........... 3,734 3,943
Payable to affiliates....... 3,803 2,062
Due to separate account..... 192 183
Deferred tax liability...... 3,070 5,591
Separate account
liabilities................ 255,126 168,222
-------- -------
Total liabilities....... $370,288 275,288
-------- -------
Stockholder's equity:
Common stock, par value
$25; 100,000 shares
authorized;
82,000 shares issued and
outstanding.............. 2,050 2,050
Additional paid-in
capital.................. 17,950 17,950
Accumulated other
comprehensive (loss)
income................... (2,748) 2,809
Retained earnings......... 12,453 9,697
-------- -------
Total stockholder's
equity................. $ 29,705 32,506
-------- -------
Total liabilities and
stockholder's equity... $399,993 307,794
======== =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Operations and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Revenues:
Policy contract charges............................... $24,577 20,437 16,417
Net investment income................................. 7,726 6,983 6,288
Commissions and expense allowances on reinsurance
ceded................................................ 292 124 10
Net realized investment gains......................... 57 53 69
------- ------ ------
Total revenues...................................... 32,652 27,597 22,784
======= ====== ======
Benefits and expenses:
Policy benefits....................................... 4,616 4,774 3,876
Interest credited to policyholder account balances.... 5,524 5,228 4,738
Commissions, net of capitalized costs................. 445 167 227
General and administration expenses, net of
capitalized costs.................................... 11,394 9,042 7,743
Policy administration system expenses................. 4,787 469 --
Amortization of deferred policy acquisition costs..... 1,631 1,150 424
------- ------ ------
Total benefits and expenses......................... 28,397 20,830 17,008
======= ====== ======
Income before federal income tax expense............ 4,255 6,766 5,775
Federal income tax expense.............................. 1,499 2,368 1,885
------- ------ ------
Net income.............................................. $ 2,756 4,398 3,890
Other comprehensive (loss) income....................... (5,557) 851 1,636
------- ------ ------
Comprehensive (loss) income............................. $(2,801) 5,249 5,526
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1999, 1998, and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in comprehensive Retained stockholder's
Stock capital income earnings equity
------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $2,050 17,950 322 1,409 21,731
Net income............ -- -- -- 3,890 3,890
Other comprehensive
income............... -- -- 1,636 -- 1,636
------ ------ ------ ------ ------
Balance at December 31,
1997................... $2,050 17,950 1,958 5,299 27,257
Net income............ -- -- -- 4,398 4,398
Other comprehensive
income............... -- -- 851 -- 851
------ ------ ------ ------ ------
Balance at December 31,
1998................... $2,050 17,950 2,809 9,697 32,506
Net income............ -- -- -- 2,756 2,756
Other comprehensive
loss................. -- -- (5,557) -- (5,557)
------ ------ ------ ------ ------
Balance at December 31,
1999................... $2,050 17,950 (2,748) 12,453 29,705
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 2,756 4,398 3,890
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in:
Reinsurance recoverables..................... (144) 563 (892)
Deposits relating to reinsured policyholder
account balances............................ (332) (272) (342)
Accrued investment income.................... (308) (168) (79)
Federal income tax payable................... 726 118 (648)
Other assets................................. 3,316 (1,821) (1,280)
Policy and contract claims................... 19 587 (23)
Other liabilities and accrued expenses....... (209) 457 782
Payable to affiliates........................ 1,741 442 (669)
Company ownership of separate account........ (64) -- --
Due to separate account...................... 9 122 (34)
Deferred tax expense........................... 469 740 732
Policy acquisition costs deferred.............. (4,185) (3,808) (2,972)
Amortization of deferred policy acquisition
costs......................................... 1,631 1,150 424
Interest credited to policyholder accounts..... 5,524 5,228 4,738
Net gain on sales and calls of fixed
maturities.................................... (57) (53) (69)
-------- ------- -------
Net cash provided by operating activities.......... 10,892 7,683 3,558
-------- ------- -------
Cash flows from investing activities:
Purchase of fixed maturities..................... (12,423) (14,915) (12,557)
Sale or maturity of fixed maturities............. 4,695 8,632 5,255
Increase in policy loans, net.................... (2,819) (2,648) (1,923)
-------- ------- -------
Net cash used in investing activities (10,547) (8,931) (9,225)
-------- ------- -------
Cash flows from financing activities:
Net policyholder account deposits................ 2,807 2,954 2,294
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 3,152 1,706 (3,373)
Cash and cash equivalents at beginning of year..... 7,439 5,733 9,106
-------- ------- -------
Cash and cash equivalents at end of year........... $ 10,591 7,439 5,733
-------- ------- -------
Income taxes paid.................................. $ (346) (1,460) (1,801)
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
Paragon Life Insurance Company (Paragon or the Company) is a wholly owned
subsidiary of General American Life Insurance Company (General American or the
Parent). Paragon markets universal life and variable universal life insurance
products through the sponsorship of major companies and organizations. Paragon
is licensed to do business in the District of Columbia and 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.
The accompanying financial statements are prepared on the basis of generally
accepted accounting principles. The preparation of financial statements
requires the use of estimates by management which affect the amounts reflected
in the financial statements. Actual results could differ from those estimates.
Accounts that the Company deems to be sensitive to changes in estimates include
deferred policy acquisition costs and contract claims.
The significant accounting policies of the Company are as follows:
(a) Recognition of Policy Revenue and Related Expenses
Revenues for universal life products consist of policy charges for the cost
of insurance, administration and surrender charges during the period. Revenues
for variable universal life products also include policy charges for mortality
and expense risks assumed by Paragon. Policy benefits and expenses include
interest credited to policy account balances on universal life products and
death benefit payments made in excess of policy account balances.
Policy acquisition costs, such as commissions and certain costs of policy
issuance and underwriting, are deferred and amortized in relation to the
present value of expected gross profits over the estimated life of the
policies.
(b) Invested Assets
Investment securities are accounted for at fair value. At December 31, 1999
and 1998, fixed maturity securities are classified as available-for-sale and
are carried at fair value with the unrealized gain or loss, net of taxes, being
reflected as accumulated other comprehensive income, a separate component of
stockholder's equity. Policy loans are valued at aggregate unpaid balances.
Realized gains or losses on the sale of securities are determined on the
basis of specific identification and include the impact of any related
amortization of premiums or accretion of discounts which is generally computed
consistent with the interest method.
Amortization of the premium or discount on mortgage-backed securities is
recognized using a level-yield method which considers the estimated timing and
amount of prepayments of underlying mortgage loans. Actual prepayment
experience is periodically reviewed and effective yields are recalculated when
differences arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. When such differences occur,
the net investment in the mortgage-backed security is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the security with a corresponding charge or credit to interest
income.
F-6
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(c) Policyholder Account Balances
Policyholder account balances are equal to the policyholder account value
before deduction of any surrender charges. The policyholder account value
represents an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals. These expense charges are
recognized in income as earned. Certain variable life policies allow
policyholders to exchange accumulated assets from the variable rate separate
accounts to a fixed-interest general account policy. The fixed-interest general
account guaranteed minimum crediting rates of 4% in 1999, 1998 and 1997. The
actual crediting rate ranged from 6.1% to 6.5% in 1999, and was 6.5% in 1998
and 1997.
(d) Federal Income Taxes
The Company establishes deferred taxes under the asset and liability method,
and deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files its federal income tax return on a consolidated basis with
its Parent and other 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.
(e) Reinsurance
Balances resulting from agreements which transfer funds relating to
policyholder account balances have been accounted for as deposits. Other
reinsurance activities are accounted for consistent with terms of the risk
transfer reinsurance contracts. Premiums for reinsurance ceded to other
companies have been reported as a reduction of policy contract charges. Amounts
applicable to reinsurance ceded for future policy benefits and claim
liabilities have been reported as assets for these items, and commissions and
expense allowances received in connection with reinsurance ceded have been
accounted for in income as earned. Reinsurance does not relieve the Company
from its primary responsibility to meet claim obligations.
(f) Deferred Policy Acquisition Costs
The costs of acquiring new business which vary with, and are primarily
related to, the production of new business have been deferred to the extent
that such costs are deemed recoverable from future gross profits. Such costs
include commissions, premium taxes, as well as certain costs of policy issuance
and underwriting. Deferred policy acquisition costs are adjusted for the impact
on estimated gross margins of net unrealized gains and losses on investment
securities. The estimates of expected gross margins are evaluated regularly and
are revised if actual experience or other evidence indicates that revision is
appropriate. Upon revision, total amortization recorded to date is adjusted by
a charge or credit to income.
(g) Separate Account Business
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding variable
life insurance contracts for the exclusive benefit of variable life insurance
contract holders. The Company charges the separate accounts for risks it
assumes in issuing a policy and retains varying amounts of withdrawal charges
to cover expenses in the event of early withdrawals by contract holders. The
assets and liabilities of the separate account are carried at fair value.
F-7
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(h) Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in assumption
could significantly affect the estimates and such estimates should be used with
care. The following assumptions were used to estimate the fair value of each
class of financial instrument for which it was practicable to estimate fair
value:
Fixed maturities--Fixed maturities are valued using quoted market prices,
if available. If quoted market prices are not available, fair value is
estimated using quoted market prices of similar securities.
Policy loans--Policy loans are carried at their unpaid balances which
approximates fair value.
Separate account assets and liabilities--The separate account assets are
carried at fair value as determined by quoted market prices. Accordingly,
the carrying value of separate account liabilities is equal to their fair
value since it represents the contractholders' interest in the separate
account assets.
Cash and cash equivalents--The carrying amount is a reasonable estimate
of fair value.
(i) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents represent
demand deposits and highly liquid short-term investments, which include U.S.
Treasury bills, commercial paper, and repurchase agreements with original or
remaining maturities of 90 days or less when purchased.
(j) Subsequent Event
(i) On January 6, 2000, the Company's ultimate parent, GenAmerica
Corporation, was purchased by Metropolitan Life Insurance Company.
(ii) Subsequent to December 31, 1999 a significant customer notified
Paragon of its intent to terminate its group contract, effective April 30,
2000. This group represents 29% and 8% of Paragon's policies inforce and
separate account assets, as of December 31, 1999.
(2) Investments
The amortized cost and estimated fair value of fixed maturities at December
31, 1999 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
1999
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 8,728 53 (162) 8,619
Corporate securities............ 70,312 276 (4,830) 65,758
Mortgage-backed securities...... 6,911 36 (394) 6,553
Asset-backed securities......... 500 -- (9) 491
-------- --- ------ ------
$ 86,451 365 (5,395) 81,421
======== === ====== ======
</TABLE>
F-8
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
<TABLE>
<CAPTION>
1998
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 6,705 267 -- 6,972
Corporate securities............ 64,607 4,481 (208) 68,880
Mortgage-backed securities...... 6,854 193 (25) 7,022
Asset-backed securities......... 500 10 -- 510
------- ----- ---- ------
$78,666 4,951 (233) 83,384
======= ===== ==== ======
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1999, by contractual maturity, are shown below (000's). Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
cost value
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 471 480
Due after one year through five years................. 22,034 21,893
Due after five years through ten years................ 8,853 8,317
Due after ten years through twenty years.............. 48,182 44,178
Mortgage-backed securities............................ 6,911 6,553
-------- ------
$ 86,451 81,421
======== ======
</TABLE>
Proceeds from sales of fixed maturities during 1999, 1998 and 1997 were
$4,695,414, $4,068,639 and $1,328,585 respectively. Gross gains of $56,686,
$53,180 and $68,876 were realized on those sales in 1999, 1998 and 1997,
respectively.
The sources of net investment income follow (000s):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Fixed Maturities...................................... $ 6,077 5,603 4,941
Short-term investments................................ 486 535 608
Policy loans and other................................ 1,244 924 807
------- ----- -----
$ 7,807 7,062 6,356
Investment expenses................................... (81) (79) (68)
------- ----- -----
Net investment income............................. $ 7,726 6,983 6,288
======= ===== =====
</TABLE>
A summary of the components of the net unrealized appreciation (depreciation)
on invested assets carried at fair value is as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale............ $(5,030) 4,717 3,373
Deferred policy acquisition costs.............. 803 (396) (361)
Deferred income taxes............................ 1,479 (1,512) (1,054)
------- ------ ------
Net unrealized appreciation (depreciation)....... $(2,748) 2,809 1,958
======= ====== ======
</TABLE>
The Company has fixed maturities on deposit with various state insurance
departments with an amortized cost of approximately $4,082,871 and $4,120,850
at December 31, 1999 and 1998 respectively.
F-9
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(3) Reinsurance
The Company reinsures certain risks with other insurance companies above a
maximum retention amount (currently $50,000) to help reduce the loss on any
single policy.
Premiums and related reinsurance amounts for the years ended December 31,
1999, 1998 and 1997 as they relate to transactions with affiliates are
summarized as follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Reinsurance transactions with affiliates:
Premiums for reinsurance ceded.................... $16,869 14,723 13,001
Policy benefits ceded............................. 16,823 17,071 14,070
Commissions and expenses ceded.................... 292 123 195
Reinsurance recoverables.......................... 1,268 1,109 1,661
</TABLE>
Ceded premiums and benefits to nonaffiliates for 1999, 1998 and 1997 were
insignificant.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized is as
follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year.................... $20,602 17,980 15,776
Policy acquisition costs deferred............... 4,185 3,808 2,972
Policy acquisition costs amortized.............. (1,631) (1,150) (424)
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on investments
available for sale............................. 1,201 (36) (344)
------- ------ ------
Balance at end of year.......................... $24,357 20,602 17,980
======= ====== ======
</TABLE>
(5) Administration System Write-off
In 1999 Paragon expensed $4,787,275 relating to the termination of a system
development project for policy administration. The one-time write-off in 1999
of previously capitalized amounts was $3,963,450 and other costs incurred in
1999 relating to the project were $823,825. Other costs incurred and expensed
in 1998 and 1997 were $468,794 and $0, respectively.
(6) Federal Income Taxes
The Company is taxed as a life insurance company. A summary of Federal income
tax expense is as follows (000s):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Current tax expense................................... $ 1,030 1,628 1,153
Deferred tax expense.................................. 469 740 732
------- ----- -----
Federal income tax expense............................ $ 1,499 2,368 1,885
======= ===== =====
</TABLE>
F-10
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
A reconciliation of the Company's "expected" federal income tax expense,
computed by applying the federal U.S. corporate tax rate of 35% to income from
operations before federal income tax, is as follows (000s):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Computed "expected" tax expense...................... $ 1,489 2,368 2,022
Other, net........................................... 10 0 (137)
------- ----- -----
Federal income tax expense........................... $ 1,499 2,368 1,885
======= ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1999, 1998 and
1997 are presented below (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Unearned reinsurance allowances..................... $ 194 218 217
Policy and contract liabilities..................... 583 709 1,031
Tax capitalization of acquisition costs............. 2,559 2,147 1,755
Other, net.......................................... 359 58 76
Unrealized Loss on investments, net................. 1,479 -- --
------- ----- -----
Total deferred tax assets......................... $ 5,174 3,132 3,079
======= ===== =====
Deferred tax liabilities:
Unrealized gain on investments, net................. $ -- 1,512 1,054
Deferred policy acquisition costs................... 8,244 7,211 6,419
------- ----- -----
Total deferred tax liabilities.................... $ 8,244 8,723 7,473
------- ----- -----
Net deferred tax liabilities...................... $ 3,070 5,591 4,394
======= ===== =====
</TABLE>
The Company believes that a valuation allowance with respect to the
realization of the total gross deferred tax asset is not necessary. In
assessing the realization of deferred tax assets, the Company considers whether
it is more likely than not that the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. The Company files a consolidated tax return with its Parent.
Realization of the gross tax asset will not be dependent solely on the
Company's ability to generate its own taxable income. General American has a
proven history of earnings and it appears more likely than not that the
Company's gross deferred tax asset will ultimately be fully realized.
(7) Related-Party Transactions
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 1999, 1998 and
1997 were $2,247,302, $1,513,433 and $1,348,198, respectively. See Note 3 for
reinsurance transactions with affiliates.
(8) Pension Plan
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 1999, 1998 or 1997 due to overfunding of the plan.
F-11
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
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 expenses to the Company for the incentive plan were
$0, $188,316 and $198,972 for 1999, 1998 and 1997, respectively.
As a result of the Metropolitan Life Insurance purchase, Paragon implemented
a new bonus program covering all associates employed from October 1, 1999
through March 31, 2000 with at least 1000 hours of service during 1999. Total
expense to the Company for this program was $422,700 in 1999.
Paragon provides for certain health care and life insurance benefits for
retired employees. The Company accounts for these benefits in accordance with
SFAS No. 106 -- Employer's Accounting for Postretirement Benefits Other Than
Pensions. The amounts involved are not material.
(9) Statutory Financial Information
The Company is subject to financial statement filing requirements of the
State of Missouri Department of Insurance, its state of domicile, as well as
the states in which it transacts business. Such financial statements, generally
referred to as statutory financial statements, are prepared on a basis of
accounting which varies in some respects from generally accepted accounting
principles (GAAP). Statutory accounting principles include: (1) charging of
policy acquisition costs to income as incurred; (2) establishment of policy and
contract liabilities computed using required valuation standards which may vary
in methodology utilized; (3) nonprovision of deferred federal income taxes
resulting from temporary differences between financial reporting and tax bases
of assets and liabilities; (4) recognition of statutory liabilities for asset
impairments and yield stabilization on fixed maturity dispositions prior to
maturity with asset valuation reserves based on statutory determined formulae
and interest stabilization reserves designed to level yields over their
original purchase maturities; (5) valuation of investments in fixed maturities
at amortized cost; (6) net presentation of reinsurance balances; (7)
presentation of indirect cash flows; (8) exclusion of comprehensive income
disclosures; and (9) recognition of deposits and withdrawals on universal life
policies as revenues and expenses.
The stockholder's equity (surplus) and net income of the Company at December
31, 1999, 1998 and 1997, as determined using statutory accounting practices, is
summarized as follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Statutory surplus as reported to regulatory
authorities...................................... $13,545 10,500 10,725
Net income as reported to regulatory authorities.. $ 300 1,596 1,397
</TABLE>
(10) 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 1999 without prior
notice or approval is $300,406. Paragon did not pay dividends in 1999, 1998 or
1997.
(11) 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
F-12
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
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 action by the Company
or regulators is required based on the ratio of a company's actual total
adjusted capital to control levels determined by the RBC formula. At December
31, 1999, the Company's actual total adjusted capital was in excess of minimum
levels which would require action by the Company or regulatory authorities
under the RBC formula.
(12) Commitments and Contingencies
The Company leases certain of its facilities and equipment under
noncancellable leases the majority of which expires March 2001. The future
minimum lease obligations under the terms of the leases are summarized as
follows (000s):
<TABLE>
<S> <C>
Year ended December 31:
2000............................................................ $ 750
2001............................................................ 321
2002............................................................ 130
2003............................................................ 99
-------
$ 1,300
=======
</TABLE>
Rent expense totaled $507,512, $489,999, and $433,864 in 1999, 1998 and 1997,
respectively.
(13) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. The most significant items of comprehensive
income are net income and changes in unrealized gains and losses on securities.
The adoption of SFAS No. 130 does not affect results of operations or financial
position, but affects their presentation and disclosure. The Company has
adopted SFAS No. 130 as of January 1, 1998, and the following summaries present
the components of the Company's comprehensive income, other than net income,
for the periods ending December 31, 1999, 1998 and 1997 (000s):
<TABLE>
<CAPTION>
1999
-------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized holding losses arising during
period.................................. $(8,492) 2,972 (5,520)
Less: reclassification adjustment for
gains realized in net income............ (57) 20 (37)
------- ----- ------
Other comprehensive loss................. (8,549) 2,992 (5,557)
======= ===== ======
</TABLE>
F-13
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
<TABLE>
<CAPTION>
1998
-------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized holding gains arising during
period.................................. $1,361 (476) 885
Less: reclassification adjustment for
gains realized in net income............ (53) 19 (34)
------ ---- ---
Other comprehensive income............... 1,308 (457) 851
====== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized holding gains arising during
period.................................. $2,585 (904) 1,681
Less: reclassification adjustment for
gains realized in net income............ (69) 24 (45)
------ ---- -----
Other comprehensive income............... 2,516 (880) 1,636
====== ==== =====
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company and
Policyholders of Separate Account B's Scudder Divisions:
We have audited the accompanying statements of net assets, including the
schedule of investments, of the Money Market, International, Capital Growth,
Balanced, Bond, Growth & Income and Global Discovery Divisions of Paragon
Separate Account B as of December 31, 1999, and related statements of
operations and changes in net assets for each of the periods in the three year
period then ended. These financial statements are the responsibility of the
management of Paragon Separate Account B. 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, 1999 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, Growth & Income and Global
Discovery Divisions of Paragon Separate Account B as of December 31, 1999, and
the results of their operations and changes in their net assets for each of the
periods in the three year period then ended, in conformity with generally
accepted accounting principles.
March 10, 2000
KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG
International, a Swiss association.
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF NET ASSETS
December 31, 1999
<TABLE>
<CAPTION>
Money Capital Growth & Global
Market International Growth Balanced Bond Income Discovery
Division Division Division Division Division Division Division
-------- ------------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets:
Investments in Scudder
Investments, at
Market Value (See
Schedule of
Investments)......... $107,458 976,038 2,249,701 983,502 209,666 476,350 18,386
Receivable from
(payable to) Paragon
Life Insurance
Company.............. -- 55 83 55 -- 84 --
-------- ------- --------- ------- ------- ------- ------
Total Net Assets.... $107,458 976,093 2,249,784 983,557 209,666 476,434 18,386
======== ======= ========= ======= ======= ======= ======
Net Assets, represent-
ing:
Equity of Contract
Owners............... $107,409 975,679 2,248,803 983,119 209,571 476,222 18,378
Equity of Paragon Life
Insurance Company.... 49 414 981 438 95 212 8
-------- ------- --------- ------- ------- ------- ------
$107,458 976,093 2,249,784 983,557 209,666 476,434 18,386
======== ======= ========= ======= ======= ======= ======
Total Units Held........ 85,564 37,559 55,141 44,991 23,315 33,437 1,387
Net Asset Value Per
Unit................... $ 1.26 25.98 40.78 21.85 8.99 14.24 13.25
Cost of Investments..... $107,458 627,557 1,447,076 775,896 218,557 470,926 12,184
======== ======= ========= ======= ======= ======= ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998, and 1997, except for the Global
Discovery Division
which is for the period from May 15, 1998 (Inception) to December 31, 1998.
<TABLE>
<CAPTION>
Money Market Division International Division Capital Growth Division Balanced Division
---------------------- ------------------------ ----------------------------- ----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------ ------ ------- ------- ------ --------- --------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income... $ 4,524 2,514 1,697 3,862 9,586 6,239 4,505 10,625 67,231 10,818 16,634 12,268
Expenses:
Mortality and
Expense Charge.... 730 364 260 5,713 4,279 3,814 14,587 10,303 8,396 6,948 4,734 3,712
------- ------ ------ ------- ------- ------ --------- --------- ------- ------- ------- ------
Net Investment
Income
(Expense)....... 3,794 2,150 1,437 (1,851) 5,307 2,425 (10,082) 322 58,835 3,870 11,900 8,556
Net Realized Gain
on Investments
Realized Gain
from
Distributions..... -- -- -- 54,461 63,044 3,268 159,059 67,200 2,366 54,670 26,776 20,984
Proceeds from
Sales............. 18,828 11,296 18,673 156,952 112,597 68,547 294,883 264,342 149,231 165,754 83,851 70,741
Cost of
Investments Sold.. 18,828 11,296 18,673 132,987 100,354 56,471 220,294 202,151 104,692 136,484 69,758 56,070
------- ------ ------ ------- ------- ------ --------- --------- ------- ------- ------- ------
Net Realized
Gain on
Investments..... -- -- -- 78,426 75,287 15,344 233,648 129,391 46,905 83,940 40,869 35,655
Net Unrealized Gain
(Loss) on
Investments:
Unrealized Gain
(Loss) Beginning
of Year........... -- -- -- 86,528 78,522 59,971 457,526 316,515 120,746 173,652 97,262 43,162
Unrealized Gain
(Loss) End of
Year.............. -- -- -- 348,481 86,528 78,522 802,625 457,526 316,515 207,606 173,652 97,262
------- ------ ------ ------- ------- ------ --------- --------- ------- ------- ------- ------
Net Unrealized
Gain (Loss) on
Investments....... -- -- -- 261,953 8,006 18,551 345,099 141,011 195,769 33,954 76,390 54,100
------- ------ ------ ------- ------- ------ --------- --------- ------- ------- ------- ------
Net Gain (Loss)
on Investments.. -- -- -- 340,379 83,293 33,895 578,747 270,402 242,674 117,894 117,259 89,755
------- ------ ------ ------- ------- ------ --------- --------- ------- ------- ------- ------
Increase (Decrease)
in Net Assets
Resulting from
Operations......... $ 3,794 2,150 1,437 338,528 88,600 36,320 568,665 270,724 301,509 121,764 129,159 98,311
======= ====== ====== ======= ======= ====== ========= ========= ======= ======= ======= ======
<CAPTION>
Growth & Income Global
Bond Division Division Discovery Division
---------------------- ------------------------ --------------------
1999 1998 1997 1999 1998 1997 1999 1998
------- ------ ------ ------- ------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income... $ 7,739 8,740 5,950 4,300 6,710 3,833 -- --
Expenses:
Mortality and
Expense Charge.... 1,585 1,121 930 3,390 2,254 1,275 58 1
------- ------ ------ ------- ------- ------ --------- ---------
Net Investment
Income
(Expense)....... 6,154 7,619 5,020 910 4,456 2,558 (58) (1)
Net Realized Gain
on Investments
Realized Gain
from
Distributions..... 773 481 1,659 24,411 15,633 3,309 18
Proceeds from
Sales............. 32,355 30,061 27,553 106,367 67,098 26,569 1,402 52
Cost of
Investments Sold.. 33,369 30,206 24,606 102,472 62,590 22,348 1,237 51
------- ------ ------ ------- ------- ------ --------- ---------
Net Realized
Gain on
Investments..... (241) 336 4,606 28,306 20,141 7,530 183 1
Net Unrealized Gain
(Loss) on
Investments:
Unrealized Gain
(Loss) Beginning
of Year........... 535 35 51 20,860 37,619 7,630 59 --
Unrealized Gain
(Loss) End of
Year.............. (8,891) 535 35 5,424 20,860 37,619 6,202 59
------- ------ ------ ------- ------- ------ --------- ---------
Net Unrealized
Gain (Loss) on
Investments....... (9,426) 500 (16) (15,436) (16,759) 29,989 6,143 59
------- ------ ------ ------- ------- ------ --------- ---------
Net Gain (Loss)
on Investments.. (9,667) 836 4,590 12,870 3,382 37,519 6,326 60
------- ------ ------ ------- ------- ------ --------- ---------
Increase (Decrease)
in Net Assets
Resulting from
Operations......... $(3,513) 8,455 9,610 13,780 7,838 40,077 6,268 59
======= ====== ====== ======= ======= ====== ========= =========
</TABLE>
See Accompanying Notes to Financial Statements.
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
For the Years ended December 31, 1999, 1998, and 1997, except for the Global
Discovery Division which
is for the period from May 15, 1998 (inception) to December 31, 1998.
<TABLE>
<CAPTION>
Money Market Division International Division Capital Growth Division
------------------------ ------------------------ -------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- ------- ------- ------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income
(Expense)............. $ 3,794 2,150 1,437 (1,851) 5,307 2,425 (10,082) 322 58,835
Net Realized Gain
(Loss) on Investments. -- -- -- 78,426 75,287 15,344 233,648 129,391 46,905
Net Unrealized Gain
(Loss) on Investments. -- -- -- 261,953 8,006 18,551 345,099 141,011 195,769
-------- ------- ------- ------- ------- ------- --------- --------- ---------
Increase (Decrease)
in Net Assets Re-
sulting from
Operations.......... 3,794 2,150 1,437 338,528 88,600 36,320 568,665 270,724 301,509
Net Deposits into
Separate Account... 26,053 42,677 5,480 31,554 5,924 73,456 115,249 75,940 140,956
-------- ------- ------- ------- ------- ------- --------- --------- ---------
Increase in Net
Assets............ 29,847 44,827 6,917 370,082 94,524 109,776 683,914 346,664 442,465
Net Assets, Beginning
of Year............... 77,611 32,784 25,867 606,011 511,487 401,711 1,565,870 1,219,206 776,741
-------- ------- ------- ------- ------- ------- --------- --------- ---------
Net Assets, End of
Year.................. $107,458 77,611 32,784 976,093 606,011 511,487 2,249,784 1,565,870 1,219,206
======== ======= ======= ======= ======= ======= ========= ========= =========
<CAPTION>
Global
Balanced Division Bond Division Growth & Income Division Discovery
------------------------ ------------------------ ------------------------------- ------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998
-------- ------- ------- ------- ------- ------- --------- --------- --------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income
(Expense)............. $ 3,870 11,900 8,556 6,154 7,619 5,020 910 4,456 2,558 (58) (1)
Net Realized Gain
(Loss) on Investments. 83,940 40,869 35,655 (241) 336 4,606 28,306 20,141 7,530 183 1
Net Unrealized Gain
(Loss) on Investments. 33,954 76,390 54,100 (9,426) 500 (16) (15,436) (16,759) 29,989 6,143 59
-------- ------- ------- ------- ------- ------- --------- --------- --------- ------ ---
Increase (Decrease)
in Net Assets Re-
sulting from
Operations.......... 121,764 129,159 98,311 (3,513) 8,455 9,610 13,780 7,838 40,077 6,268 59
Net Deposits into
Separate Account... 101,725 93,743 69,393 35,257 41,324 14,364 104,619 131,034 97,894 11,545 514
-------- ------- ------- ------- ------- ------- --------- --------- --------- ------ ---
Increase in Net
Assets............ 223,489 222,902 167,704 31,744 49,779 23,974 118,399 138,872 137,971 17,813 573
Net Assets, Beginning
of Year............... 760,068 537,166 369,462 177,922 128,143 104,169 358,035 219,163 81,192 573 --
-------- ------- ------- ------- ------- ------- --------- --------- --------- ------ ---
Net Assets, End of
Year.................. $983,557 760,068 537,166 209,666 177,922 128,143 476,434 358,035 219,163 18,386 573
======== ======= ======= ======= ======= ======= ========= ========= ========= ====== ===
</TABLE>
See Accompanying Notes to Financial Statements.
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements
December 31, 1999
(1) Organization
Paragon Life Insurance Company (Paragon) established Paragon Separate Account
B on January 4, 1991. 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 Division options included
herein commenced operations on March 3, 1994. 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 seven
Divisions, which invest exclusively in shares of a single fund of Scudder
Variable Life Investment Fund (Scudder), an open-end, diversified management
investment company. These funds are the Money Market, International, Capital
Growth, Balanced, Bond, Growth and Income and Global Discovery (the Divisions).
Policyholders have the option of directing their premium payments into any or
all of the Divisions.
(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. All dividends received are immediately reinvested on the ex-
dividend date.
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-19
<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 optional rider benefits charge is a monthly deduction for any additional
benefits provided by policy riders.
Surrender or Contingent Deferred Sales Charge
During the first policy year, 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, a daily charge against the
operations of each division is made for the mortality and expense risks assumed
by Paragon. Paragon deducts a daily charge from the Separate Account at the
rate of .0020471% of the net assets of each division of the Separate Account
which equals an annual rate of .75% 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-20
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
(4) Purchases and Sales of Scudder Investment Series Shares
For the years ended December 31, 1999, 1998, and 1997 except for the Global
Discovery Division which is for the period from May 15, 1998 (Inception) to
December 31, 1998; purchases and proceeds from sales of Scudder Variable Life
Investment Funds were as follows:
<TABLE>
<CAPTION>
Money Market Division International Division Capital Growth Division
--------------------- ----------------------- -----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------ ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $44,371 53,364 23,916 185,087 111,520 138,552 407,432 317,123 282,658
Sales................... $18,828 11,296 18,673 156,952 112,597 68,547 294,883 264,342 149,231
======= ====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Growth & Income Global
Balanced Division Bond Division Division Discovery
------------------------ -------------------- ----------------------- -----------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998
-------- ------- ------- ------ ------ ------ ------- ------- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $274,510 158,435 136,801 66,448 69,750 41,077 208,443 194,789 123,344 12,889 565
Sales................... $165,754 83,851 70,741 32,355 30,061 27,553 106,367 67,098 26,569 1,402 52
======== ======= ======= ====== ====== ====== ======= ======= ======= ====== ===
</TABLE>
(5) Accumulation of Unit Activity
The following is a reconciliation of the accumulation of unit activity for
the years ended December 31, 1999, 1998, and 1997, except for the Global
Discovery Division which is for the period from May 15, 1998 (inception) to
December 31, 1998.
<TABLE>
<CAPTION>
Money Market International Capital Growth
Division Division Division
-------------------- -------------------- --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits............... 35,974 45,369 21,325 10,022 7,107 10,046 12,248 11,935 13,559
Withdrawals............ 14,831 9,370 16,319 8,240 6,829 4,720 8,642 9,447 6,577
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Increase in
Units............... 21,143 35,999 5,006 1,782 278 5,326 3,606 2,488 6,982
Outstanding Units,
Beginning of Year...... 64,421 28,422 23,416 35,777 35,499 30,173 51,535 49,047 42,065
------ ------ ------ ------ ------ ------ ------ ------ ------
Outstanding Units, End
of Year................ 85,564 64,421 28,422 37,559 35,777 35,499 55,141 51,535 49,047
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Global
Growth & Income Discovery
Balanced Division Bond Division Division Division
-------------------- -------------------- -------------------- ----------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits............... 13,201 10,163 10,116 7,282 7,938 5,071 14,411 14,262 11,243 1,460 78
Withdrawals............ 8,020 4,734 4,939 3,425 3,295 3,293 7,439 4,975 2,275 144 7
------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ---
Net Increase in
Units............... 5,181 5,429 5,177 3,857 4,643 1,778 6,972 9,287 8,968 1,316 71
Outstanding Units,
Beginning of Year...... 39,810 34,381 29,204 19,458 14,815 13,037 26,465 17,178 8,210 71 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ---
Outstanding Units, End
of Year................ 44,991 39,810 34,381 23,315 19,458 14,815 33,437 26,465 17,178 1,387 71
====== ====== ====== ====== ====== ====== ====== ====== ====== ===== ===
</TABLE>
F-21
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
(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 amount 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 years ended December
31, 1999, 1998, and 1997, except for the Global Discovery Division which is for
the period from May 15, 1998 (inception) to December 31, 1998.
<TABLE>
<CAPTION>
Money Market Division International Division Capital Growth Division
-------------------------- ------------------------- ---------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- ------- ------- ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross Deposits.. $ 33,424 25,225 18,433 176,515 164,286 172,592 431,496 377,928 334,899
Surrenders and
Withdrawals.......... (4,670) (505) (13,596) (82,647) (84,896) (30,987) (170,285) (150,589) (56,497)
Transfers Between
Funds and General
Account.............. 9,057 25,891 8,319 (8,662) (15,319) (12,712) 1,787 (101) (1,888)
-------- ------- ------- ------- ------- ------- -------- -------- -------
Total Gross Deposits
net of Surrenders,
Withdrawals, and
Transfers........... 37,811 50,611 13,156 85,206 64,071 128,893 262,998 227,238 276,514
Deductions:
Premium Expense
Charges............. 981 740 543 5,186 4,819 5,084 12,684 11,085 9,865
Monthly Expense
Charges............. 779 497 433 3,504 3,685 4,050 9,764 9,690 7,859
Cost of Insurance
and Optional
Benefits............ 9,998 6,697 6,700 44,962 49,643 46,303 125,301 130,523 117,834
-------- ------- ------- ------- ------- ------- -------- -------- -------
Total Deductions... 11,758 7,934 7,676 53,652 58,147 55,437 147,749 151,298 135,558
-------- ------- ------- ------- ------- ------- -------- -------- -------
Net Deposits from
Policyholders........ $ 26,053 42,677 5,480 31,554 5,924 73,456 115,249 75,940 140,956
======== ======= ======= ======= ======= ======= ======== ======== =======
<CAPTION>
Global
Balanced Division Bond Division Growth & Income Division Discovery
-------------------------- ------------------------- --------------------------- ------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998
-------- ------- ------- ------- ------- ------- -------- -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross Deposits.. $279,270 208,733 168,771 73,305 79,806 52,193 233,644 209,544 129,485 13,335 1,239
Surrenders and
Withdrawals.......... (97,872) (28,227) (34,296) (8,447) (4,783) (9,875) (36,802) (17,789) (7,167) -- (11)
Transfers Between
Funds and General
Account.............. 15,106 (14,287) (2,412) (8,709) (12,203) (9,318) (27,875) 1,021 15,123 715 --
-------- ------- ------- ------- ------- ------- -------- -------- ------- ------ -----
Total Gross Deposits
net of Surrenders,
Withdrawals, and
Transfers........... 196,504 166,219 132,063 56,149 62,820 33,000 168,967 192,776 137,441 14,050 1,228
Deductions:
Premium Expense
Charges............. 8,207 6,122 4,971 2,152 2,341 1,537 6,865 6,146 3,814 393 36
Monthly Expense
Charges............. 6,259 4,586 3,961 1,355 1,324 1,225 4,156 3,842 3,039 153 47
Cost of Insurance
and Optional
Benefits............ 80,313 61,768 53,738 17,385 17,831 15,874 53,327 51,754 32,694 1,959 631
-------- ------- ------- ------- ------- ------- -------- -------- ------- ------ -----
Total Deductions... 94,779 72,476 62,670 20,892 21,496 18,636 64,348 61,742 39,547 2,505 714
-------- ------- ------- ------- ------- ------- -------- -------- ------- ------ -----
Net Deposits from
Policyholders........ $101,725 93,743 69,393 35,257 41,324 14,364 104,619 131,034 97,894 11,545 514
======== ======= ======= ======= ======= ======= ======== ======== ======= ====== =====
</TABLE>
F-22
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
(7) Subsequent Event
On January 6, 2000, Paragon Life Insurance Co.'s ultimate parent, GenAmerica
Corporation, was purchased by Metropolitan Life Insurance Company.
F-23
<PAGE>
PARAGON SEPARATE ACCOUNT B
SCHEDULE OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Number
of Market
Shares Value Cost
------- ---------- ----------
<S> <C> <C> <C>
Scudder Variable Insurance Series:
Money Market Division.......................... 107,458 $ 107,458 $ 107,458
International Division......................... 47,988 $ 976,038 $ 627,557
Capital Growth Division........................ 77,232 $2,249,701 $1,447,076
Balanced Division.............................. 61,049 $ 983,502 $ 775,896
Bond Division.................................. 32,306 $ 209,666 $ 218,557
Growth & Income Division....................... 43,463 $ 476,350 $ 470,926
Global Discovery............................... 1,395 $ 18,386 $ 12,184
</TABLE>
See Accompanying Independent Auditor's Report.
F-24
<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 .454%,
representing the average of the fees incurred by the Funds in which the
Divisions invest (the actual investment advisory fee is shown in the Fund
prospectus), and a .435% charge that is an estimate of the Funds' expenses
based on the average of the actual expenses incurred in fiscal year 1999.
These charges take into account expense reimbursement arrangements expected to
be in place for 2000 for some of the Funds. In the absence of the
reimbursement arrangements for some of the Funds, the charges would have
totaled .634% and .657%, respectively. After deduction for these amounts, with
expense reimbursements the illustrated gross annual investment rates of return
of 0%, 6% and 12% correspond to approximate net annual rates of -1.790%,
4.210%, and 10.210%, respectively.
The hypothetical values shown in the tables reflect all fees and charges
under the Policy, including the premium expense charge, the premium tax
charge, and all components of the monthly deduction. They 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.")
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: 0.00% $6,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 0.00% (NET RATE at
1.790%)
--------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,089 $500,000 $ 4,948 $500,000
2 12,630 5,970 500,000 9,722 500,000
3 19,423 8,600 500,000 14,362 500,000
4 26,555 10,972 500,000 18,814 500,000
5 34,045 13,063 500,000 23,077 500,000
6 41,908 14,854 500,000 27,155 500,000
7 50,165 16,317 500,000 31,061 500,000
8 58,834 17,410 500,000 34,736 500,000
9 67,937 18,099 500,000 38,242 500,000
10 77,496 18,353 500,000 41,529 500,000
11 87,532 18,164 500,000 44,548 500,000
12 98,070 17,501 500,000 47,359 500,000
13 109,134 16,359 500,000 49,914 500,000
14 120,752 14,709 500,000 52,166 500,000
15 132,951 12,497 500,000 54,115 500,000
16 145,760 9,661 500,000 55,773 500,000
17 159,209 6,087 500,000 57,086 500,000
18 173,331 1,641 500,000 58,009 500,000
19 188,159 0 0 58,546 500,000
20 203,728 0 0 58,643 500,000
25 294,060 0 0 49,836 500,000
30 409,348 0 0 13,179 500,000
</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 Policy
Owner, and the investment results for the Funds. 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, the investment
management company, 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 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: 0.00% $6,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 6.00% (NET RATE at
4.210%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,190 $500,000 $ 5,109 $500,000
2 12,630 6,358 500,000 10,347 500,000
3 19,423 9,456 500,000 15,757 500,000
4 26,555 12,470 500,000 21,287 500,000
5 34,045 15,371 500,000 26,941 500,000
6 41,908 18,131 500,000 32,726 500,000
7 50,165 20,713 500,000 38,658 500,000
8 58,834 23,062 500,000 44,685 500,000
9 67,937 25,130 500,000 50,870 500,000
10 77,496 26,871 500,000 57,169 500,000
11 87,532 28,259 500,000 63,540 500,000
12 98,070 29,242 500,000 70,043 500,000
13 109,134 29,795 500,000 76,639 500,000
14 120,752 29,865 500,000 83,288 500,000
15 132,951 29,372 500,000 89,994 500,000
16 145,760 28,225 500,000 96,775 500,000
17 159,209 26,275 500,000 103,588 500,000
18 173,331 23,345 500,000 110,398 500,000
19 188,159 19,237 500,000 117,217 500,000
20 203,728 13,743 500,000 124,005 500,000
25 294,060 0 0 155,570 500,000
30 409,348 0 0 174,421 500,000
</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 Policy
Owner, and the investment results for the Funds. 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, the investment
management company, 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 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: 0.00% $6,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 12.00% (NET RATE at
10.210%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,290 $500,000 $ 5,269 $500,000
2 12,630 6,755 500,000 10,986 500,000
3 19,423 10,367 500,000 17,238 500,000
4 26,555 14,131 500,000 24,021 500,000
5 34,045 18,040 500,000 31,389 500,000
6 41,908 22,087 500,000 39,405 500,000
7 50,165 26,258 500,000 48,149 500,000
8 58,834 30,524 500,000 57,639 500,000
9 67,937 34,861 500,000 68,018 500,000
10 77,496 39,250 500,000 79,330 500,000
11 87,532 43,693 500,000 91,633 500,000
12 98,070 48,172 500,000 105,095 500,000
13 109,134 52,693 500,000 119,802 500,000
14 120,752 57,243 500,000 135,857 500,000
15 132,951 61,786 500,000 153,424 500,000
16 145,760 66,277 500,000 172,694 500,000
17 159,209 70,623 500,000 193,836 500,000
18 173,331 74,706 500,000 217,053 500,000
19 188,159 78,396 500,000 242,619 500,000
20 203,728 81,558 500,000 270,813 500,000
25 294,060 84,735 500,000 464,718 539,073
30 409,348 36,085 500,000 782,765 837,558
</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 Policy
Owner, and the investment results for the Funds. 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, the investment
management company, 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 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: 0.00% $12,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 0.00% (NET RATE at--
1.790%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,322 $ 8,887 $508,887 $ 10,751 $510,751
2 25,261 17,445 517,445 21,216 521,216
3 38,846 25,630 525,630 31,434 531,434
4 53,111 33,439 533,439 41,352 541,352
5 68,090 40,847 540,847 50,967 550,967
6 83,817 47,840 547,840 60,287 560,287
7 100,330 54,387 554,387 69,321 569,321
8 117,669 60,452 560,452 78,010 578,010
9 135,875 65,999 565,999 86,420 586,420
10 154,992 71,005 571,005 94,496 594,496
11 175,064 75,465 575,465 102,186 602,186
12 196,140 79,355 579,355 109,554 609,554
13 218,269 82,678 582,678 116,548 616,548
14 241,505 85,417 585,417 123,116 623,116
15 265,903 87,526 587,526 129,259 629,259
16 291,521 88,960 588,960 134,991 634,991
17 318,419 89,622 589,622 140,253 640,253
18 346,663 89,404 589,404 144,997 644,997
19 376,319 88,196 588,196 149,229 649,229
20 407,457 85,904 585,904 152,896 652,896
25 588,120 56,561 556,561 160,027 660,027
30 818,697 0 0 137,628 637,628
</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 Policy
Owner, and the investment results for the Funds. 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, the investment
management company, 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 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: 0.00% $12,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 6.00% (NET RATE at 4.210%)
-----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 12,322 $ 9,178 $ 509,178 $ 11,103 $ 511,103
2 25,261 18,566 518,566 22,576 522,576
3 38,846 28,123 528,123 34,471 534,471
4 53,111 37,845 537,845 46,745 546,745
5 68,090 47,707 547,707 59,408 559,408
6 83,817 57,692 557,692 72,475 572,475
7 100,330 67,768 567,768 85,971 585,971
8 117,669 77,889 577,889 99,846 599,846
9 135,875 88,016 588,016 114,176 614,176
10 154,992 98,111 598,111 128,921 628,921
11 175,064 108,162 608,162 144,037 644,037
12 196,140 118,130 618,130 159,600 659,600
13 218,269 128,005 628,005 175,569 675,569
14 241,505 137,753 637,753 191,899 691,899
15 265,903 147,313 647,313 208,600 708,600
16 291,521 156,618 656,618 225,693 725,693
17 318,419 165,546 665,546 243,128 743,128
18 346,663 173,954 673,954 260,858 760,858
19 376,319 181,691 681,691 278,897 778,897
20 407,457 188,614 688,614 297,190 797,190
25 588,120 207,262 707,262 389,553 889,553
30 818,697 179,367 679,367 469,966 969,966
</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 Policy
Owner, and the investment results for the Funds. 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, the investment
management company, 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 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: 0.00% $12,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 12.00% (NET RATE at 10.210%)
-------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- ---------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1 $ 12,322 $ 9,464 $ 509,464 $ 11,448 $ 511,448
2 25,261 19,711 519,711 23,966 523,966
3 38,846 30,773 530,773 37,698 537,698
4 53,111 42,718 542,718 52,706 552,706
5 68,090 55,607 555,607 69,115 569,115
6 83,817 69,509 569,509 87,067 587,067
7 100,330 84,491 584,491 106,726 606,726
8 117,669 100,613 600,613 128,198 628,198
9 135,875 117,947 617,947 151,730 651,730
10 154,992 136,580 636,580 177,470 677,470
11 175,064 156,632 656,632 205,580 705,580
12 196,140 178,209 678,209 236,366 736,366
13 218,269 201,462 701,462 270,038 770,038
14 241,505 226,532 726,532 306,828 806,828
15 265,903 253,546 753,546 347,049 847,049
16 291,521 282,641 782,641 391,057 891,057
17 318,419 313,916 813,916 439,170 939,170
18 346,663 347,464 847,464 491,745 991,745
19 376,319 383,385 883,385 549,239 1,049,239
20 407,457 421,802 921,802 612,085 1,112,085
25 588,120 658,552 1,158,552 1,024,264 1,524,264
30 818,697 985,792 1,485,792 1,656,905 2,156,905
</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 Policy
Owner, and the investment results for the Funds. 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, the investment
management company, 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 and further assume there is no Policy Indebtedness outstanding.
A-7
<PAGE>
Underlying Funds Through:
Fidelity Variable Insurance Products Fund
Fidelity Variable Insurance Products Fund II
MFS Variable Insurance Trust
Putnam Variable Trust
Scudder Variable Life Investment Fund
T. Rowe Price Equity Series, Inc.
T. Rowe Price Fixed Income Series, Inc.
. GROUP AND INDIVIDUAL
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
Prospectus dated May 1, 2000
50452
Dir
<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," "we," or "us") which
are designed for use in employer-sponsored insurance programs. When a Group
Contract is issued, Certificates showing the rights of the Owners and/or
Insureds will be issued under the Group Contract. Individual Policies will be
issued when a Group Contract is not issued. The terms of the Certificate and
the Individual Policy are very similar 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 provide flexibility to vary premium payments and change the level of death
benefits payable under the Policies. Flexibility allows an Owner to provide for
changing insurance needs under a single insurance policy. An Owner can allocate
net premiums among several investment portfolios ("Funds") with different
investment objectives.
The Policy provides for: (1) a value upon surrendering the Policy; (2) loans;
and (3) a death benefit payable on the Insured's death. As long as the Policy
remains in force, the death benefit payable on the Insured's death will not be
less than the Face Amount of the Policy. The Policy will remain in force so
long as there is enough value to pay certain monthly charges.
The Owner may allocate net premiums to one or more of the Divisions of
Separate Account B (the "Separate Account"). The Policy value will vary to
reflect the investment experience of the Divisions selected by the Owner.
Depending on the death benefit option elected, portions of the death benefit
may also vary. The Owner bears the entire investment risk under the Policies;
there is no minimum guaranteed value.
Each of the 14 Divisions of the Separate Account will invest in one of the
following corresponding Funds:
<TABLE>
<CAPTION>
FUND MANAGER
- -----------------------------------------------------------------------------
<S> <C>
Fidelity Variable Insurance Fidelity Management & Research Company
Products Fund or
Fidelity Variable Insurance
Products Fund II
VIP Growth Portfolio
VIP Equity-Income Portfolio
VIP II Index 500 Portfolio
VIP II Contrafund Portfolio
- -----------------------------------------------------------------------------
MFS Variable Insurance Trust Massachusetts Financial Services Company
MFS Emerging Growth Series
- -----------------------------------------------------------------------------
Putnam Variable Trust Putnam Investment Management, Inc.
Putnam VT High Yield Fund ("Putnam Management")
Putnam VT New Opportunities Fund
Putnam VT Income Fund
Putnam VT Voyager Fund
- -----------------------------------------------------------------------------
Scudder Variable Life Investment Scudder, Kemper Investments
Fund
Money Market Portfolio
International Portfolio
- -----------------------------------------------------------------------------
T. Rowe Price Equity Series, Inc. T. Rowe Price Associates, Inc.
and
T. Rowe Price Fixed Income
Series, Inc.
New America Growth Portfolio
Personal Strategy Balanced
Portfolio
Limited-Term Bond Portfolio
</TABLE>
The date of this Prospectus is May 1, 2000.
<PAGE>
Please read this Prospectus carefully and keep it. A full description of the
Funds is contained in the prospectus for each Fund, which must accompany this
Prospectus.
It may not be a good decision 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.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
The Company, The Separate Account, and The Funds......................... 10
The Company
The Separate Account
The Funds
Addition, Deletion, or Substitution of Investments
Payment and Allocation of Premiums....................................... 15
Issuance of a Policy
Premiums
Allocation of Net Premiums and Cash Value
Policy Lapse and Reinstatement
Policy Benefits.......................................................... 19
Death Benefit
Cash Value
Policy Rights and Privileges............................................. 25
Exercising Rights and Privileges Under the Policies
Loans
Surrender and Partial Withdrawals
Transfers
Right to Examine Policy
Conversion Right to a Fixed Benefit Policy
Eligibility Change Conversion
Payment of Benefits at Maturity
Payment of Policy Benefits
Charges and Deductions................................................... 29
Premium Expense Charges
Premium Tax Charge
Monthly Deduction
Partial Withdrawal Transaction Charge
Separate Account Charges
General Matters Relating to the Policy................................... 33
Distribution of the Policies............................................. 36
General Provisions of the Group Contract................................. 36
Federal Tax Matters...................................................... 38
Safekeeping of the Separate Account's Assets............................. 40
Voting Rights............................................................ 41
State Regulation of the Company.......................................... 41
Management of the Company................................................ 42
Legal Matters............................................................ 43
Legal Proceedings........................................................ 43
Experts.................................................................. 43
Additional Information................................................... 43
Definitions.............................................................. 44
Financial Statements..................................................... F-1
Appendix A............................................................... A-1
</TABLE>
The Policies are not available in all states.
3
<PAGE>
SUMMARY OF THE POLICY
The following summary of Prospectus information should be read with the
detailed information which follows in this Prospectus. Unless we provide
otherwise, 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 issued in three situations.
. First--Policies in the form of Certificates are issued pursuant to Group
Contracts entered into between the Company and Contractholders (see
"General Provisions of the Group Contract");
. Second--Individual Policies can be issued in connection with employer-
sponsored insurance programs where Group Contracts are not issued; and
. Third--Individual Policies can be issued in connection with Corporate
Programs, where Group Contracts are not issued.
The Insured under a Policy is usually an employee of the Contractholder or
sponsoring employer or the employee's spouse. Generally, only an employee is
eligible to be an Insured under an Executive Program Policy. An Executive
Program Policy is issued with a maximum Face Amount in excess of $500,000 under
a Group contract or an employer-sponsored insurance program. If 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").
On behalf of Owners, the Contractholder will make planned premium payments
under the Group Contract equal to an amount authorized by employees to be
deducted from their wages. In addition, Owners may pay additional premiums. In
Corporate Programs only the Owner will remit planned and additional premiums. A
similar procedure will apply when an Individual Policy is issued in connection
with an employer-sponsored program.
The Policies are "variable" policies because, unlike the fixed benefits under
other types of life insurance contracts, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment experience of the Funds underlying the Divisions
to which the Owner has allocated net premium payments. 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.")
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.")
4
<PAGE>
The Separate Account
The Owner may allocate the net premiums to one or more Divisions. See "The
Company The Separate Account and The Funds" for a complete description of the
available Funds. 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.")
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 start
a Policy. 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 will pay premiums generally on a
schedule agreed to by the Company.
However, as 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.")
A Policy will lapse (and terminate without value) when the Cash Surrender Value
is not enough 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.")
Death Benefit
Death benefit proceeds are payable to the Beneficiary when the Insured dies or
to the Owner, prior to the Insured's death under circumstances described in
available riders. (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") Two death benefit options are available, as follows:
. 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; and
. 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. (See "Policy
Benefits--Death Benefit.")
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, we may
establish a higher maximum Face Amount for Executive or Corporate Program
Policies. 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.")
5
<PAGE>
Riders
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.") We will deduct the cost of these
additional insurance benefits from Cash Value as part of the monthly deduction.
(See "Charges and Deductions--Monthly Deduction.")
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 premium payments, the investment performance
of any selected Divisions of the Separate Account, transfers, any Policy Loans,
Loan Account interest rate credited, any partial withdrawals, and the charges
imposed in connection with the Policy. (See "Policy Benefits--Cash Value.")
There is no minimum guaranteed Cash Value.
Charges and Deductions
Premium Expense Charge. Generally, there are no sales charges under a Policy.
However, we deduct an additional charge 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.
Premium Tax Charge. We deduct a charge of 2% to cover state premium taxes from
premiums paid. However, a charge of 2 1/4% to cover state premium taxes may be
deducted from premiums paid in connection with Executive Programs and Corporate
Programs. (See "Charges and Deductions--Premium Tax Charge.")
Monthly Deduction. We make a monthly deduction from the Policy's Cash Value in
the Separate Account. The monthly deduction includes the following:
. Administrative Charge. We deduct an administrative charge (see the
specification pages of the Policy) based on (1) the number of Insureds
covered under a Group Contract or other employer-sponsored insurance
program, and (2) 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.
. Cost of Insurance Charge. We deduct a cost of insurance charge calculated
on each Monthly Anniversary. We determine monthly cost of insurance rates
based upon expectations as to future mortality experience. For a
discussion of the factors affecting the rate class of the Insured, see
"Charges and Deductions--Monthly Deduction--Cost of Insurance."
. A charge for any additional insurance benefits provided by a rider.
Separate Account Charges.
. Mortality and Expense Risk Charge. We deduct a daily charge not to exceed
.0024547% (an annual rate of .90%) of the net assets of each Division for
the Company's assumption of certain mortality and expense risks incurred
in connection with the Policies. (See "Charges and Deductions--Separate
Account Charges.")
. Federal Taxes. No charges are currently made for federal or state income
taxes. (See "Federal Tax Matters.")
6
<PAGE>
. Annual Expenses of the Funds. The value of the assets of the Divisions
will reflect the management fee and other expenses incurred by the Funds.
The following table describes the Fund fees and expenses as a percentage
of net assets (after fee waiver and reimbursement as applicable) for the
year ended December 31, 1999. The prospectus for each Fund contains more
detail concerning a Fund's fees and expenses. (See "The Company The
Separate Account and The Funds.")
<TABLE>
<CAPTION>
Management Fees Other Expenses
(after fee (after Total
waiver as reimbursement as Annual
Fund applicable) applicable) Expenses
<S> <C> <C> <C>
Fidelity Variable Insurance Products
Fund
VIP Growth Portfolio(/1/) .58% .08% .66%
VIP Equity-Income Portfolio(/1/) .48% .09% .57%
Fidelity Variable Insurance Products
Fund II
VIP II Index 500 Portfolio(/2/) .24% .04% .28%
VIP II Contrafund Portfolio(/1/) .58% .09% .67%
MFS Variable Insurance Trust
Emerging Growth Series(/3/) .75% .09% .84%
Putnam Variable Trust
Putnam VT High Yield Fund .65% .07% .72%
Putnam VT New Opportunities Fund .54% .05% .59%
Putnam VT Income Fund .60% .07% .67%
Putnam VT Voyager Fund .53% .04% .57%
Scudder Variable Life Investment
Fund
Money Market Portfolio .37% .06% .43%
International Portfolio .85% .18% 1.03%
T. Rowe Price Equity Series, Inc.
New America Growth Portfolio .85% (/4/) .85%
Personal Strategy Balanced
Portfolio .90% (/4/) .90%
T. Rowe Price Income Series, Inc.
Limited-Term Bond Portfolio .70% (/4/) .70%
(/1/)A portion of the brokerage commissions that certain Funds pay was used
to reduce Fund expenses. In addition, through arrangements with certain
Funds, or FMR on behalf of certain funds, custodian credits realized as a
result of uninvested cash balances were used to reduce a portion of each
applicable Fund's expenses. Including these reductions, the Funds'
management fee, other expenses and total annual expenses were as follows:
VIP Growth Portfolio .58% .07% .65%
VIP Equity-Income Portfolio .48% .08% .56%
VIP II Contrafund Portfolio .58% .07% .65%
(/2/)FMR agreed to reimburse a portion of the Index 500 Portfolio expenses
during the period. Without this reimbursement, the Portfolio's management
fee, other expenses and total expenses would have been:
VIP II Index 500 Portfolio .24% .11% .35%
</TABLE>
(/3/)Each series has an expense offset arrangement which reduces the
series' custodian fee based upon the amount of cash maintained by the
series with its custodian and dividend disbursing agent. Each series may
7
<PAGE>
enter into other such arrangements and directed brokerage arrangements,
which would also have the effect of reducing the series' expenses. "Other
Expenses" do not take into account these expense reductions. Had these
reductions been taken into account, "Total Annual Expenses" would have been
0.83% for the Emerging Growth Series.
(/4/)T. Rowe Price Associates, Inc. does not provide separate Management
Fees and Other Expenses Fees, rather management fees include operating
expenses.
The expense information regarding the Funds was provided by those Funds. We
have not independently verified this information. We cannot guarantee that the
reimbursements provided by certain Funds will continue.
Partial Withdrawal Transaction Charge. We deduct a transaction charge equal to
the lesser of $25 or 2% of the amount withdrawn on each partial withdrawal of
amounts from the Separate Account. Currently, there are no transaction charges
imposed for transfers of amounts between Divisions. 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," "Policy Rights and Privileges--Surrender and Partial Withdrawals--
Transfers," and "Charges and Deductions--Partial Withdrawal Transaction
Charge.")
Policy Loans
After the first Policy Anniversary an Owner may borrow against the Cash Value
of a Policy. All outstanding Indebtedness will be deducted from proceeds
payable at the Insured's death, upon maturity, or upon surrender. We transfer a
portion of the Policy's Cash Value in each Division of the Separate Account to
which the loan is allocated 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.")
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 10% additional income tax would be imposed on the portion of any
loan that is included in income. (See "Federal Tax Matters.")
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. A partial withdrawal may
reduce the Face Amount and 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.") Surrenders and partial
withdrawals may have federal income tax consequences. (See "Federal Tax
Matters.")
Conversion Right
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. 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.")
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.
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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 Rights and
Privileges--Eligibility Change Conversion.")
Illustrations
Illustrations in Appendix A show how death benefits and Cash Values may vary
based on certain hypothetical rate of return assumptions as well as assumptions
pertaining to the level of the charges. These rates are not guaranteed. They
are illustrative only and do not show past or future performance. If a Policy
is surrendered in the early Policy Years, the Cash Value payable will be low
compared to premiums accumulated with interest, and consequently the insurance
protection provided prior to surrender will be costly.
Policy Tax Compliance
We intend for the Policy to satisfy the definition of a life insurance contract
under Section 7702 of the Internal Revenue Code (the "Code"). Assuming that a
Policy qualifies as a life insurance contract under the Code, a Policy Owner
should not be taxed for receiving value from the Policy, until there is a
distribution from the Policy. Also, death benefits payable under a Policy
should be excludable from the gross income of the Beneficiary.
A Policy may be treated as a "modified endowment contract." If the Policy is a
modified endowment contract, it will affect the tax advantages offered under
the Policy. (See "Federal Tax Matters.")
Specialized Uses of the Policy
Because the Policy provides for an accumulation of Cash Value as well as a
death benefit, the Policy can be used for various individual and business
financial planning purposes. Purchasing the Policy in part for such purposes
entails certain risks. For example, if the investment performance of Divisions
to which Cash Value is allocated is poorer than expected or if sufficient
premiums are not paid, the Policy may lapse or may not accumulate sufficient
Cash Value to fund the purpose for which the Policy was purchased. Partial
withdrawals and Policy Loans may significantly affect current and future Cash
Value, Cash Surrender Value, or death benefit proceeds. Depending upon Division
investment performance and the amount of a Policy Loan, the loan may cause a
Policy to lapse. Because the Policy is designed to provide benefits on a long-
term basis, before purchasing a Policy for a specialized purpose a purchaser
should consider whether the long-term nature of the Policy is consistent with
the purpose for which it is being considered. Using a Policy for a specialized
purpose may have tax consequences. (See "Federal Tax Matters.")
Questions
If you have any questions, you may write or call the Company at 100 South
Brentwood, St. Louis, MO 63105, (314) 862-2211.
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THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
The Company
Paragon Life Insurance Company is a stock life insurance company incorporated
under the laws of Missouri. We were organized in 1981 as General American
Insurance Company and on December 31, 1987, our name was changed. No change in
operations or ownership took place in connection with the name change. Our main
business is writing individual and group life insurance policies and annuity
contracts. As of December 31, 1999, it had assets $400 million. We are admitted
to do business in 49 states and the District of Columbia. Our principal offices
are at 100 South Brentwood, St. Louis, Missouri 63105 ("Home Office"). Our
Internal Revenue Service Employer Identification Number is 43-1235869.
We are a wholly-owned subsidiary of General American Life Insurance Company
(the "Parent Company"), a Missouri life insurance company. The Parent Company
is wholly owned by GenAmerica Corporation, a Missouri general business
corporation, which is wholly owned by Metropolitan Life Insurance Company, a
New York insurance company.
Guarantee. The Parent Company agrees to guarantee that we will have sufficient
funds to meet all of our 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 end 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
that this guarantee cover the investment experience or Cash Values of the
Policy.
Ratings. We may from time to time publish in advertisements, sales literature,
and reports to Owners or Contractholders, the ratings and other information
assigned to us by one or more independent rating organizations such as A. M.
Best Company, Standard & Poor's, and Duff & Phelps. The purpose of the ratings
is to reflect our financial strength and/or claims paying ability and should
not be considered as bearing on the investment performance of assets held in
the Separate Account. Each year the A. M. Best Company reviews the financial
status of thousands of insurers, culminating in the assignment of Best's
ratings. These ratings reflect Best's current opinion of the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. In addition, the claims paying
ability of the Company as measured by Standard & Poor's Insurance Ratings
Services or Duff & Phelps may be referred to in advertisements or sales
literature or in reports to Owners or Contractholders. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. These
ratings do not reflect the investment performance of the Separate Account or
the degree of risk associated with an investment in the Separate Account.
Advertisements. We also may include in advertisements and other literature
certain rankings assigned to us by the National Association of Insurance
Commissioners ("NAIC"), and our analyses of statistical information produced by
the NAIC. These rankings and analyses of statistical information may describe,
among other things, our growth, premium income, investment income, capital
gains and losses, policy reserves, policy claims, and life insurance in force.
Our use of such rankings and statistical information is not an endorsement by
the NAIC.
Advertisements and literature prepared by the Company also may include
discussions of taxable and tax-deferred investment programs (including
comparisons based on selected tax brackets), alternative investment vehicles,
and general economic conditions.
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The Separate Account
We established separate Account B (the "Separate Account") 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 us.
The Separate Account is divided into Divisions. Each Division will invest in
Funds as shown on the cover page of this Prospectus. 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 we 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 Policy liabilities. From time to
time, these excess assets may be transferred from the Separate Account and
included in the Company's general assets. Before making any such transfers, we
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.
The Funds
The Separate Account invests in shares of the Funds. The Funds are series-type
mutual funds registered with the SEC as open-end, investment management
companies. The assets of each Fund used by the Policies are held separate from
the assets of the other Funds, and each Fund has investment objectives and
policies which are generally different from those of the other Funds. The
income or losses of one Fund generally have no effect on the investment
performance of any other Fund.
Investment Results. The investment objectives and policies of certain Funds are
similar to the investment objectives and policies of other portfolios that may
be managed by the same investment adviser or manager. The investment results of
the Funds may differ from the results of these other portfolios. There can be
no guarantee, and no representation is made, that the investment results of any
of the Funds will be comparable to the investment results of any other
portfolio, even if the other portfolio has the same investment adviser or
manager.
The following summarizes the investment policies of each Fund under the
corresponding investment management company:
Fidelity Variable Insurance Products Fund
Variable Insurance Products Fund ("VIP") is an open-end diversified management
investment company. Only the Funds described in this section of the Prospectus
are currently available as investment choices of the Policies even though
additional Funds may be described in the prospectus for VIP. Fidelity
Management & Research Company ("FMR") of Boston, Massachusetts is the manager
of the Funds.
. VIP Growth Portfolio
Investment objective: seeks capital appreciation.
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. VIP Equity-Income Portfolio
Investment objective: seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund seeks a yield
which exceeds the composite yield on the securities comprising the S&P
500.
Fidelity Variable Insurance Products Fund II
Variable Insurance Products II Fund ("VIP II") is an open-end diversified
management investment company. Only the Funds described in this section of the
Prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for VIP II. FMR is
the manager of the Funds.
. VIP II Index 500 Portfolio
Investment objective: seeks investment results that correspond to the
total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
. VIP II Contrafund Portfolio
Investment objective: seeks long-term capital appreciation.
MFS Variable Insurance Trust
MFS Variable Insurance Trust ("MFS Trust") is an open-end diversified
management investment company. Only the Funds described in this section of the
Prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the Prospectus for MFS Trust.
Massachusetts Financial Services Company ("MFS") provides investment advisory
services to MFS Trust for fees in accordance with the terms of the current
prospectus for the Fund.
. Emerging Growth Series
Investment objective: seeks long-term growth of capital. The series may
invest up to 25% of its net assets in foreign securities, including
emerging market securities.
Putnam Variable Trust
Putnam Variable Trust is an open-end management investment company, and each of
the funds of Putnam Variable Trust described in this section of the prospectus
is a diversified investment company. Only the Funds described in this section
of the prospectus are currently available as investment choices of the Policies
even though additional Funds may be described in the Prospectus for Putnam
Variable Trust. Putnam Management provides investment advisory services to
Putnam Variable Trust for fees in accordance with the terms described in the
current Fund prospectus.
. Putnam VT High Yield Fund
Seeks high current income. Capital growth is a secondary goal, when
consistent with achieving high current income. The Fund invests in
higher-yielding, lower-rated securities commonly referred to as "junk
bonds." See the special considerations for and risks associated with
investments in these securities described in the Fund prospectus.
. Putnam VT New Opportunities Fund
Seeks long-term capital appreciation.
. Putnam VT Income Fund
Seeks high current income consistent with capital preservation.
. Putnam VT Voyager Fund
Seeks capital appreciation.
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Scudder Variable Life Investment Fund
Scudder Variable Life Investment Fund ("Scudder VLI") is a series-type mutual
fund registered with the SEC as an open-end, diversified management investment
company. Only the Money Market Portfolio and the Class A Shares of the
International Portfolio described herein are currently available as investment
choices of the Policies even though other classes and other Funds may be
described in the Prospectus for Scudder VLI. Scudder Kemper Investments
("Scudder") provides investment advisory services to Scudder VLI whose terms
and fees are set forth in the Scudder VLI prospectus.
. 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 Portfolio seeks to maintain a net asset value
of $1.00 per share. Unless otherwise indicated, the Portfolio's
investment objective and policies may be changed without a vote of
shareholders.
. International Portfolio
The International Portfolio seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
Unless otherwise indicated, the Portfolio's investment objective and
policies may be changed without a vote of shareholders.
T. Rowe Price Equity Series, Inc.
T. Rowe Price Equity Series, Inc. (referred to as "TRP") is an open-end
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for TRP. T. Rowe
Price Associates, Inc. provides investment advisory services to TRP for fees in
accordance with the terms described in the current Fund prospectus.
. New America Growth Portfolio
The Fund seeks to achieve long-term growth of capital by investing
primarily in the common stocks of companies operating in sectors T. Rowe
Price believes will be the fastest growing in the United States. Fast-
growing companies can be found across an array of industries in today's
"new America". The choice of industry sectors would reflect such factors
as the overall revenue growth of the component companies and the sector's
contribution to GDP from year to year.
. Personal Strategy Balanced Portfolio
The Fund objective is to seek the highest total return over time
consistent with an emphasis on both capital appreciation and income. The
fund pursues its objective by investing in a diversified portfolio
typically consisting of approximately 60% stocks, 30% bonds, and 10%
money market securities.
T. Rowe Price Income Series, Inc.
T. Rowe Price Fixed Income Series, Inc. (referred to as "TRP") is an open-end
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for TRP. T. Rowe
Price Associates, Inc. provides investment advisory services to TRP for fees in
accordance with the terms described in the current Fund prospectus.
. Limited-Term Bond Portfolio
The Fund seeks a high level of income consistent with moderate
fluctuations in principal value. The fund invests primarily in a short-
term and intermediate-term bonds. There are no maturity limitations on
individual securities purchased, but the Fund's dollar-weighted average
effective maturity will not exceed five years.
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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 Funds, which must accompany or precede this Prospectus and
which should be read carefully. Please also refer to the "Annual Expenses of
the Funds" information of this Prospectus for a list of the Funds' annual
expenses.
Agreements. We have entered into or may enter into arrangements with certain
Funds pursuant to which we receive a fee based upon an annual percentage of the
average net asset amount invested by us on behalf of the Separate Account and
other separate accounts of the Company. These arrangements vary among the Funds
and are entered into because of administrative services provided by the
Company.
Resolving Material Conflicts. All of the Funds 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.
Addition, Deletion, or Substitution of Investments. We reserve the right,
subject to compliance with applicable law, to make additions to, deletions
from, or substitutions for the shares of the Funds that are held by the
Separate Account or that the Separate Account may purchase. We reserve the
right to (1) eliminate the shares of any of the Funds and (2) substitute shares
of another fund if the shares of a Fund are no longer available for investment,
or further investment in any Fund becomes inappropriate in view of the purposes
of the Separate Account. We will not substitute any shares without notice to
the Owner and prior approval of the SEC, to the extent required by the 1940 Act
or other applicable law, as required.
We also reserve the right to establish additional Divisions of the Separate
Account. We will establish new Divisions when marketing needs or investment
conditions warrant. 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,
we may also:
. Eliminate or combine one or more Divisions;
. Substitute one Division for another Division; or
. Transfer assets between Divisions if marketing, tax, or investment
conditions warrant.
We may make changes in the Policy by appropriate endorsement in the event of a
substitution or change. We will notify all Owners of any such changes.
If we deem it 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, we may transfer the assets of the
Separate Account associated with the Policy to another separate account.
We cannot guarantee that the shares of the Funds will always be available. The
Funds each sell shares to the Separate Account in accordance with the terms of
a participation agreement between the Fund distributors and us. Should this
agreement terminate or should shares become unavailable for any other reason,
the Separate Account will not be able to purchase the existing Fund shares.
Should this occur, we will be unable to honor Owner requests to allocate Cash
Values or premium payments to the Divisions of the Separate Account
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investing in such shares. In the event that a Fund is no longer available, we
will take reasonable steps to obtain alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy
We will generally issue a Group Contract to employers whose employees and/or
their spouses may become Owners (and/or Insureds) under the Group Contract 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 an appropriate officer of the employer and acceptance by us
at our Home Office. (See "General Provisions of the Group Contract--Issuance.")
Individuals (i.e., eligible employees and/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 our authorized representative or us at our Home Office. We 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
(1) to independent contractors of the employer;
(2) to persons who wish to continue coverage after a Group Contract has
terminated;
(3) to persons who wish to continue coverage after they no longer are
employed by the Group Contractholder;
(4) if state law restrictions make issuance of a Group Contract
impracticable; or
(5) if the employer chooses to use an employer-sponsored insurance program
that does not involve a Group Contract.
Corporate Programs. Corporate Programs will generally involve Individual
Policies. We will issue Policies on the lives of eligible Insureds, (generally
employees of a sponsoring employer), and the Owner will usually be the
sponsoring employer or its designee.
Issue Ages. A Policy generally will be issued only to Insureds of Issue Ages 17
through 70 who supply satisfactory evidence of insurability. We may issue
Policies to individuals falling outside the Issue Ages or decline to issue
Policies to individuals within the Issue Ages.
Employee Eligibility. 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, we reserve the right to waive
or modify the "actively at work" requirement at our discretion.
In addition, the Contractholder may require that an employee must be employed
by the employer as of a certain date or for a certain period of time. We will
set forth this date or time period in the Group Contract specifications pages.
Employees of any Associated Companies of the Contractholder will be considered
employees of the Contractholder. We may also allow an individual who is an
independent contractor working primarily for the sponsoring employer to be
considered an eligible employee. An independent contractor 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.
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Guaranteed Issue. Other than in Executive Programs or Corporate Programs, we
will issue the Policy and any children's insurance rider applied for by the
employee pursuant to our guaranteed issue procedure. We offer the guaranteed
issue procedure only when an employee is given the opportunity to purchase a
Policy for the first time. 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. We may offer guaranteed
issue with Executive Programs or Corporate Programs depending upon the number
of eligible employees or if other existing insurance coverage is cancelled.
Simplified Underwriting. The employee must submit to a simplified underwriting
procedure requiring the employee to respond satisfactorily to certain health
questions in the application:
. 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.
A blood test may be required. This requirement is generally applicable only to
Executive Programs or Corporate Programs.
Simplified underwriting must be followed 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.
Acceptance of an application is always subject to our underwriting rules, and
we reserve the right to reject an application for any reason.
Employee's Spouse. If a Policy is to be issued to a spouse, the appropriate
application for Individual Insurance must be supplied. We will subject the
spouse to the simplified underwriting procedure described above. Guaranteed
issue is not available. We generally do not offer spouse coverage under
Executive Program Policies or Corporate Program Policies.
Issue Date. 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.
Interim Insurance. Interim Insurance in the amount of insurance applied for may
be available prior to the issuance of a Policy which is being underwritten on a
guaranteed issue basis up to the Guaranteed Issue Amount. If available, interim
insurance will start as of the date of the application. Interim insurance ends
on the earliest of the following dates:
. the date insurance begins on the Policy applied for;
. the date a Policy other than the Policy applied for is offered to the
applicant;
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. the date the Company notifies the applicant that the application for any
proposed Insured is declined;
. 60 days from the date of application; or
. termination of employment with the Contractholder or sponsoring employer.
Premiums
The initial premium is due on the Issue Date, and usually will be paid 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.") The Owner is not
required to pay premiums equal to the planned annual premium.
We will apply premiums paid by a Contractholder or sponsoring employer or
designated payor to a Policy as of the Valuation Date we receive the premiums.
Premiums will be "received" on a Valuation Date when we receive supporting
documentation necessary for us to determine the amount of premium per Policy
and the cash premium.
Planned Premium Payments. After the initial premium, and 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 paid by the Contractholder or sponsoring employer on behalf of
the Owner pursuant to a planned premium payment schedule. A planned premium
payment schedule provides for premium payments in a level amount at fixed
intervals (usually monthly) agreed to by the Contractholder or employer and us.
The amount of the premiums paid by the sponsoring employer or Contractholder
will be equal to the amount authorized by the employee. The Owner may skip
planned premium payments. Failure to pay one or more planned premium payments
will not always cause the Policy to lapse. The Policy will lapse if the Cash
Surrender Value is insufficient to cover the next Monthly Deduction. (See
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement.")
Unscheduled Premiums. In addition to any planned payments made, an Owner may
make unscheduled premium payments at any time and 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.") 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.
Continuance of Insurance. Failure of the Contractholder to pay the planned
premium payments authorized by its employees may cause the Group Contract to
terminate. (See "General Provisions of the Group Contract--Termination.")
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 Group Contract termination. (See "Policy Rights and Privileges--
Eligibility Change Conversion.") 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. The new schedule will have the same planned
annual premium, and the payment intervals will be no more frequent than
quarterly. In Corporate Programs, there will generally be no change in planned
or scheduled premiums upon discontinuing the employment of an Insured.
Premium Limitations. Every premium payment paid must be at least $20. Total
premiums paid under a Policy may not exceed the current maximum premium
limitations established by federal tax laws in any Policy Year. The maximum
premium limitation for a Policy Year is the sum of the premiums paid under the
Policy that will
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not at any time exceed the guideline premium limitations referred to in Section
7702(c) of the Internal Revenue Code of 1986. If at any time a premium is paid
which would result in total premiums exceeding the current maximum premium
limitation, we will accept only that portion of the premium which will make
total premiums equal the maximum. Any part of the premium in excess of the
maximum premiums will be returned directly to the Owner within 60 days of the
end of the Policy Year in which payment is received (unless we agree) and no
further premiums will be accepted until allowed by the current maximum premium
limitations prescribed by Federal tax law. See "Federal Tax Matters" 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, from which
withdrawals are treated (for tax purposes) (1) as a distribution of any taxable
income under the contract, and (2) as a distribution of nontaxable investment
in the contract. Also, such withdrawals may be subject to a 10% federal income
tax penalty. We have adopted administrative steps designed to notify an Owner
when we believe that a premium payment will cause a Policy to become a modified
endowment contract. Owner will be given a limited amount of time to request
that the premium be reversed in order to avoid the Policy's classification as a
modified endowment contract. (See "Federal Tax Matters.")
Allocation of Net Premiums and Cash Value
Net Premiums. The net premium equals:
(1) the premium paid; less
(2) the premium expense charge;
(3) any charge to compensate us for anticipated higher corporate income
taxes resulting from the sale of a Policy; and
(4) the premium tax charge. (See "Charges and Deductions--Premium Expense
Charges.")
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the 14 Divisions of the
Separate Account. Beginning with the initial premium payment, all premiums will
be allocated in accordance with the Owner's instructions upon our receipt of
the premiums. However, the minimum percentage, of any allocation 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 us. Any change in allocation
will take effect immediately upon our receipt 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.")
The value of amounts allocated to the Divisions will vary with the investment
performance of the Funds underlying the Divisions. The Owner bears the entire
investment risk. Investment performance 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 payment will not itself cause a
Policy to lapse. However, a Policy can lapse even if planned premiums have been
paid. 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.") Thus, the payment of premiums in any amount does not
guarantee that the Policy will remain in force until the Maturity Date.
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The grace period, which is 62 days, begins on the Monthly Anniversary on which
the Cash Surrender Value is not enough to cover the next monthly deduction,
premium expense charge, and premium tax charge. We will notify the Owner at the
beginning of the grace period by mail. 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.") 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 payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
at 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:
. Evidence of the insurability of the Insured satisfactory to us (including
evidence of insurability of any person covered by a rider to reinstate
the rider).
. 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.
. 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. 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 our approval 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, we 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,
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.")
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.") 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
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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.") 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, we may establish a substantially higher Face Amount for
Policies issued under that Contract or program.
Option A. Under Option A, the death benefit is:
(1) the current Face Amount of the Policy or, if greater,
(2) the applicable percentage of Cash Value on the date of death.
The applicable percentage is 250% 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. 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...................... 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:
(1) the current Face Amount plus the Cash Value of the Policy or, if
greater,
(2) the applicable percentage of the Cash Value on the date of death. The
applicable percentage is the same as under Option A.
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<PAGE>
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. We reserve the right to limit the number
of changes in death benefit options to one each Policy Year. A request for a
change must be made directly to us in writing. The effective date of such a
change will be the Monthly Anniversary on or following the date we receive 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 us 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.")
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income because the federal tax
law requirements are not satisfied. (See "Federal Tax Matters.")
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 us. 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.") In addition, a change in
Face Amount may have federal income tax consequences. (See "Federal Tax
Matters.")
Face Amount Decreases. Any decrease in the Face Amount will become effective on
the Monthly Anniversary on or following our receipt of the written request. 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"), 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 those requirements. A
decrease in the Face Amount will reduce the Face Amount in the following order:
(1) The Face Amount provided by the most recent increase;
(2) The next most recent increases successively; and
(3) 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").
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<PAGE>
Face Amount Increases. For an increase in the Face Amount, we require 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 80 or less 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, we may establish a substantially higher Face Amount for Policies
issued under that Contract or program. Although an increase need not
necessarily be accompanied by additional premium, 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.") An
increase in the Face Amount may result in certain additional charges. (See
"Charges and Deductions.")
Cancellation of an Increase. 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 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.")
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.
Examples 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"), 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.")
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<PAGE>
(e) A partial withdrawal will reduce the death benefit. (See "Policy Rights
and Privileges--Surrender and Partial Withdrawals.") 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 we receive all documentation
required. Payment may, however, be postponed in certain circumstances. (See
"General Matters Relating to the Policy--Postponement of Payments.") 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," and "Charges and
Deductions.")
When no election for an optional method of settlement is in force when the
Insured dies, 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.")
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;
. the frequency and amount of net premiums paid;
. transfers;
. partial withdrawals;
. Policy Loans;
. Loan account interest rate credited; 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.") 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.") Thereafter,
on each Valuation Date, the Cash Value in a Division 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
23
<PAGE>
(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 (including amounts securing Policy Loans) 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.")
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 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.
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<PAGE>
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 us in writing at our Home Office. We 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 us, 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% 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 we receive
the loan request at our Home Office, although payments may be postponed under
certain circumstances. (See "General Matters Relating to the Policy--
Postponement of Payments.")
When a Policy Loan is made, Cash Value equal to the amount of the loan and loan
interest due will be transferred to the Loan Account as security for the loan.
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,
(not including 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.
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 5%. The rate is declared by action of our management as authorized by our
Board of Directors. The Loan Account interest credited will be transferred to
the Divisions: (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 8%. Interest charged will be due and payable annually in arrears
on each Policy Anniversary or for the duration of the Policy Loan, if shorter.
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 "Policy Rights and Privileges Loans--Effect of Policy Loans.") The amount
transferred will be deducted from the Divisions in the same proportion that the
portion of the Cash Value in each Division bears to the total Cash Value of the
Policy (not including 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.")
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.
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
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<PAGE>
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.") A sufficient payment must be made within the later of:
(1) the grace period of 62 days from the Monthly Anniversary immediately
before the date Indebtedness exceeds the Cash Value; or
(2) 31 days after notice that the Policy will terminate without a
sufficient payment has been mailed.
If a sufficient payment is not received, the Policy will lapse and terminate
without value. A lapsed Policy may later be reinstated. (See "Payment and
Allocation of Premiums--Policy Lapse and Reinstatement.")
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 us. Amounts paid while a
Policy Loan is outstanding will be treated as premiums unless the Owner
requests in writing that the payments 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 in the
same proportion that Cash Value in the Loan Account bears to the Cash Value in
each Loan Subaccount. A Loan Subaccount exists for each Division. Amounts
transferred to the Loan Account to secure Indebtedness are allocated to the
appropriate Loan Subaccount to reflect their origin.
Surrender and Partial Withdrawals
During the lifetime of the Insured and while a Policy is in force, the Owner
may surrender, or make a partial withdrawal of the Policy by sending a written
request to us. Any restrictions are described below. 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 by us. 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.") Surrenders and partial withdrawals may
have federal income tax consequences. (See "Federal Tax Matters.")
Surrender. To effect a surrender, the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
lost Policy. Upon request, we can provide a lost Policy Certificate. Upon
surrender, we 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 $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 2% of
the amount withdrawn. The Owner may allocate the amount withdrawn, subject to
the above conditions, among the Divisions. If no allocation is specified, then
the partial withdrawal will be allocated among the Divisions in the same
proportion that the Policy's Cash Value in each Division bears to the total
Cash Value of the Policy (not including the Cash Value in the Loan Account) on
the date the request for the partial withdrawal is received.
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<PAGE>
A partial withdrawal will decrease the Face Amount in two situations. First, if
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 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 approved.
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.")
Transfers
Under the Company's current rules, a Policy's Cash Value, (not including
amounts credited to the Loan Account,) may be transferred among the Divisions
available with the Policy. Requests for transfers from or among Divisions must
be made in writing directly to us 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. We will make 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, we will make 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 we currently intend to continue to permit transfers for the
foreseeable future, the Policy provides that we 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 we may determine.
Right to Examine Policy
The Owner may cancel a Policy within 10 days of after receiving it or such
longer period if required by state law. 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
us. 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.")
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As noted above, a request for an increase in Face Amount (see "Policy
Benefits--Death Benefit") 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 we refund the
amount of the additional charges deducted in connection with the increase. This
amount 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.") If no
request is made, we will increase the Policy's Cash Value by the amount of
these additional charges. This amount will be allocated among the Divisions 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. 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.") No evidence of insurability will be required
when this right is exercised. However, we 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 our rates in effect for the
same Issue Age and rate class as the original 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 (a)
after we receive written notice that 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"), any premium necessary to prevent
the Policy from lapsing must be paid us 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. The new
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.")
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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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 to be 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.") 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.") 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 our agreement.
Settlement Options. We may offer settlement options that apply to the payment
of death benefit proceeds, as well as to benefits payable at maturity. Once a
settlement option is in effect, there will no longer be value in the Separate
Account.
Accelerated Death Benefits. We offer 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.")
CHARGES AND DEDUCTIONS
We will be deducting charges in connection with the Policies to compensate us
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. We may realize a profit on one or more of these charges. We
may use any such profit for any corporate purpose, including, among other
things, payments of sales and distribution expenses.
Premium Expense Charges
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.
Prior to allocation of net premiums among the Divisions, 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 1%, depending on whether
the Policy is determined to be a group or individual contract under OBRA. Among
other possible employer-sponsored programs, Corporate Program Policies are
deemed to be individual contracts. 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 high 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,
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under Policies that are deemed to be individual contracts under OBRA, we charge
1% of each premium payment for the anticipated higher corporate income taxes
that result from the sale of such a Policy.
The net premium payment is calculated as the premium payment less:
. the premium expense charge;
. any charge to compensate the Company for anticipated higher corporate
income taxes resulting from the sale of a Policy; and
. the premium tax charge (described below).
The sales charges will not change if an Insured is no longer eligible under a
Group Contract or employer-sponsored insurance program, but continues coverage
on an individual basis.
Premium Tax Charge
Various states and subdivisions impose a tax on premiums received by insurance
companies. Premium taxes vary from jurisdiction to jurisdiction. Generally, to
cover these premium taxes, premium payments will be reduced by a premium tax
charge of 2% from all Policies. However, we may impose a premium tax charge of
2 1/4% for premium taxes on premiums received in connection with Policies
issued under an Executive Program.
Monthly Deduction
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate us 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 in the same proportion that a Policy's Cash Value in each Division
bears to the total Cash Value of the Policy (not including 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. We are responsible 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. We assess 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>
Subsequent
Eligible Employees First Year Years
------------------ ---------- ----------
<S> <C> <C>
250-499................................................ $5.00 $2.50
500-999................................................ $4.75 $2.25
1,000+................................................. $4.50 $2.00
</TABLE>
For Group Contracts or other employer-sponsored insurance programs (1) with
fewer than 250 eligible employees, (2) with additional administrative costs, or
(3) 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 are guaranteed not to increase over the life of the Policy. The
administrative charge will not change in the event that the Insured is no
longer eligible for group coverage, but continues coverage on an individual
basis. In addition, when we believe that lower administrative costs will be
incurred in connection
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<PAGE>
with a particular Group Contract or employer-sponsored insurance program we 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 next 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
increases in Face Amount. We 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.
Cost of Insurance Rates. 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. We will determine the current cost of insurance rates based on our
expectations as to future mortality experience. We currently issue 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 risk we asume 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. We reserve the right
to change criteria on which a rate class will be based in the future.
If gender mix is a factor, we 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, we 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, we reserve 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% 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% of the maximum rates in the 1980 CSO Table because we use
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% of the 1980 CSO Table. Any change
in the actual cost of insurance rates, will apply to all persons of the same
Attained Age and rate class whose Face Amounts have been in force for the same
length of time. Any change in the actual cost of insurance rates will not
include changes made to adjust for changes in the gener mix of the pool of
Insureds under a particular Group Contract or employer-sponsored insurance
program. (For purposes of computing guideline premiums under Section 7702 of
the Internal Revenue Code of 1986, as amended, the Company will use 100% of the
1980 CSO Table.)
Net Amount at Risk. 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), less (b)
the Cash Value at the beginning of the Policy Month. Dividing the death benefit
by 1.0040741 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 5%.
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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, we will calculate the net amount at risk separately for
each rate class. When we determine the net amounts at risk for each rate class,
when Option A is in effect, we will consider the Cash Value first to be a part
of the initial Face Amount. If the Cash Value is greater than the initial Face
Amount, we will consider the excess Cash Value a part of each increase in
order, starting with the first increase. If Option B is in effect, we will
determine the net amount at risk for each rate class 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. 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" and "Policy Rights and Privileges--Surrender and
Partial Withdrawals.")
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.")
Partial Withdrawal Transaction Charge
A transaction charge which is the lesser of $25 or 2% of the amount withdrawn
will be assessed on each partial withdrawal, to cover administrative costs
incurred in processing the partial withdrawal.
Separate Account Charges
Mortality and Expense Risk Charge. The Company will deduct a daily charge from
the Separate Account at the rate not to exceed .0024547% of the net assets of
each Division of the Separate Account. This equals an annual rate of .90% of
those net assets. This deduction is guaranteed not to increase for the duration
of the Policy. We may realize a profit from this charge and may use this profit
to finance distribution expenses.
The mortality risk we assume is that an Insured may die sooner than anticipated
and that we 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 incurred by the Separate Account. We may make such a
charge in the future. Charges for other taxes incurred by the Account may also
be made. (See "Federal Tax Matters.")
Expenses of the Funds. The value of the net assets of the Separate Account will
reflect the investment advisory fee and other expenses incurred by the Funds.
(See "Summary of the Policy--Separate Account Charges--Annual Expenses of the
Funds" and The Company, the Separate Accounts and The Funds--The Funds.")
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GENERAL MATTERS RELATING TO THE POLICY
Postponement of Payments
Payment of any amount due from the Separate Account because of 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:
(1) the New York Stock Exchange is closed other than customary weekend and
holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the SEC;
(2) the SEC by order permits postponement for the protection of Owners; or
(3) 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 together
make the entire contract between the Owner and us. 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 the Owner of the Policy unless another person is shown as
the Owner in the application. Ownership may be changed 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.
Change of Owner or Beneficiary
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to us 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 by us. We
will not be liable for any payment made or action
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<PAGE>
taken before we receive 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. Changing the Owner may have adverse tax consequences.
Policy Changes
We reserve 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
We 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 us at our Home
Office; and (c) we send an acknowledged copy to the Owner. We are 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, we 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 at the time of
application for the Policy or any increase in Face Amount.
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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 we make in good faith, relying on our records or
evidence supplied with respect to such payment, will fully discharge our duty.
We reserve 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, we
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.")
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 us 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 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. We
will pay the Policy's death benefit (less any Indebtedness and any term
insurance added by riders), calculated on the date that we receive satisfactory
evidence that the Insured has tested seropositive for HIV, reduced by a $100
administrative processing fee. We will pay the accelerated benefit to the Owner
in a single payment in full settlement of the 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 us.
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
advisor 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 accelerated
payment of a reduced death benefit. The Owner
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may make such an election under the rider if evidence, including a
certification from a licensed physician, is provided to us that 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
Accelerated Death Benefit Settlement Option Rider is not available with
Corporate Programs.
The amount of the death benefit payable under the rider will equal the Cash
Surrender Value under the Policy on the date we receive 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.
Pursuant to the Health Insurance Portability and Accountability Act of 1996, we
believe that for federal income tax purposes an accelerated death benefit
payment made under the Accelerated Death Benefit Settlement Option Rider should
be fully excludable from the gross income of the Beneficiary, as long as the
Beneficiary is the Insured under the Policy. However, you should consult a
qualified tax advisor about the consequences of adding this Rider to a Policy
or requesting an accelerated death benefit payment under this Rider.
Records and Reports
We 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 Funds 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 us
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 us. Walnut Street is
a wholly-owned subsidiary of GenAmerica Corporation, a Missouri general
business corporation, which is also a parent company of the Company. GenAmerica
Corporation is wholly owned by Metropolitan Life Insurance Company, a New York
insurance 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. Walnut Street's Internal Revenue
Service employer identification No. is 43-1333368. It is a Missouri corporation
formed May 4, 1984. Walnut Street's address is 400 South 4th Street, Suite
1000, St. Louis, MO 63102. 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. No commissions are paid for distribution
of the Policies. Sales of the Policies may take place in all states (except New
York) and the District of Columbia.
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.
36
<PAGE>
Premium Payments
The Contractholder will give 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 given in advance. The planned premium payment interval is agreed to by the
Contractholder and us. Prior to each planned payment interval, we 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 us.
Grace Period
If the Contractholder does not give 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 given. If the
Contractholder does not give 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.")
Termination
Except as described in "Grace Period" above, the Group Contract will be
terminated immediately upon default. In addition, we 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."
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 us.
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 us. 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
We 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 us 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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<PAGE>
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 tax situations. This discussion is not intended as tax advice.
Counsel or other competent tax advisors should be consulted for more complete
information. This discussion is based upon our understanding of the present
federal income tax laws. No representation is made as to the likelihood of
continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
Tax Status of the Policy
In order to qualify as a life insurance contract for federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under federal tax law, a Policy must satisfy certain requirements
which are set forth in the Internal Revenue Code. Guidance as to how these
requirements are to be applied is limited. Nevertheless, we believe that the
Policy should satisfy the applicable requirements. If it is subsequently
determined that a Policy does not satisfy the applicable requirements, we may
take appropriate steps to bring the Policy into compliance with such
requirements and we reserve the right to restrict Policy transactions in order
to do so.
In certain circumstances, owners of variable life insurance contracts have been
considered for federal income tax purposes to be the owners of the assets of
the variable account supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
contract owners have been currently taxed on income and gains attributable to
the variable account assets. There is little guidance in this area, and some
features of the Policies, such as the flexibility of a Owner to allocate
premiums and cash values, have not been explicitly addressed in published
rulings. While we believe that the Policies do not give Owners investment
control over Variable Account assets, we reserve the right to modify the
Policies as necessary to prevent a Owner from being treated as the owner of the
Variable Account assets supporting the Policy.
In addition, the Code requires that the investments of the Variable Account be
"adequately diversified" in order for the Policies to be treated as life
insurance contracts for federal income tax purposes. It is intended that the
Variable Account, through its decisions, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
Tax Treatment of Policy Benefits
In General. We believe that the death benefit under a Policy should be
excludible from the gross income of the beneficiary. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Owner or beneficiary. A tax advisor should
be consulted on these consequences.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy cash value until there is a distribution. When distributions from a
Policy occur, or when loans are taken out from or secured by a Policy, the tax
consequences depend on whether the Policy is classified as a "modified
endowment contract."
Modified Endowment Contracts. Under the Internal Revenue Code, certain life
insurance contracts are classified as "modified endowment contracts," with less
favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policies as to premiums and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
modified endowment contract. The rules are too
38
<PAGE>
complex to be summarized here, but generally depend on the amount of premiums
paid during the first seven Policy years. Certain changes in a Policy after it
is issued could also cause it to be classified as a modified endowment
contract. A current or prospective Owner should consult with a competent
advisor to determine whether a Policy transaction will cause the Policy to be
classified as a modified endowment contract.
Distributions Other Than Death Benefits from Modified Endowment Contracts.
Policies classified as modified endowment contracts are subject to the
following tax rules:
(1) All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a modified endowment contract will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the Owner's investment in the Policy only
after all gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a modified
endowment contract are treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject to
tax except where the distribution or loan is made when the Owner has
attained age 59 1/2 or is disabled, or where the distribution is part
of a series of substantially equal periodic payments for the life (or
life expectancy) of the Owner or the joint lives (or joint life
expectancies) of the Owner and the Owner's beneficiary or designated
beneficiary.
If a Policy becomes a modified endowment contract, distributions that occur
during the contract year will be taxed as distributions from a modified
endowment contract. In addition, distributions from a Policy within two years
before it becomes a modified endowment contract will be taxed in this manner.
This means that a distribution made from a Policy that is not a modified
endowment contract could later become taxable as a distribution from a modified
endowment contract.
Distributions Other Than Death Benefits from Policies that are not Modified
Endowment Contracts. Distributions other than death benefits from a Policy that
is not classified as a modified endowment contract are generally treated first
as a recovery of the Owner's investment in the Policy and only after the
recovery of all investment in the Policy as taxable income. However, certain
distributions which must be made in order to enable the Policy to continue to
qualify as a life insurance contract for federal income tax purposes if Policy
benefits are reduced during the first 15 Policy years may be treated in whole
or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a modified endowment contract are
generally not treated as distributions.
Finally, neither distributions from nor loans from or secured by a Policy that
is not a modified endowment contract are subject to the 10 percent additional
income tax.
Investment in the Policy. Your investment in the Policy is generally your
aggregate premiums. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
Policy Loans. In general, interest on a Policy loan will not be deductible. If
a Policy loan is outstanding when a Policy is canceled or lapses, the amount of
the outstanding indebtedness will be added to the amount distributed and will
be taxed accordingly. Before taking out a Policy loan, you should consult a tax
adviser as to the tax consequences.
Multiple Policies. All modified endowment contracts that are issued by us (or
our affiliates) to the same Owner during any calendar year are treated as one
modified endowment contract for purposes of determining the amount includible
in the Owner's income when a taxable distribution occurs.
39
<PAGE>
Accelerated Death Benefit Settlement Option Rider. We believe that payments
received under the Accelerated Death Benefit Settlement Option Rider should be
fully excludable from the gross income of the beneficiary if the beneficiary is
the insured under the Policy. However, you should consult a qualified tax
adviser about the consequences of adding this rider to a Policy or requesting
payment under this rider.
HIV Acceleration of Death Benefit Rider. The tax consequences association with
the HIV Acceleration of Death Benefit Rider are uncertain and a tax advisor
should be consulted.
Business Uses of Policy. Businesses can use the Policies in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, tax
exempt and nonexempt welfare benefit plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances. If you are purchasing the Policy for any arrangement
the value of which depends in part on its tax consequences, you should consult
a qualified tax adviser. In recent years, moreover, Congress has adopted new
rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax adviser.
Other Tax Considerations. The transfer of the Policy or designation of a
beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate, and generation-skipping
transfer taxes. For example, the transfer of the Policy to, or the designation
as a beneficiary of, or the payment of proceeds to, a person who is assigned to
a generation which is two or more generations below the generation assignment
of the owner may have generation skipping transfer tax consequences under
federal tax law. The individual situation of each owner or beneficiary will
determine the extent, if any, to which federal, state, and local transfer and
inheritance taxes may be imposed and how ownership or receipt of Policy
proceeds will be treated for purposes of federal, state and local estate,
inheritance, generation skipping and other taxes.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the Policy
could change by legislation or otherwise. Consult a tax adviser with respect to
legislative developments and their effect on the Policy.
Our Income Taxes
Under current federal income tax law, we are not taxed on the Separate
Account's operations. Thus, currently we do not deduct a charge from the
Separate Account for federal income taxes. We reserve the right to charge the
Separate Account for any future federal income taxes or economic burdens we may
incur.
Under current laws in several states, we may incur state and local taxes (in
addition to premium taxes). These taxes are not now significant and we are not
currently charging for them. If they increase, we may deduct charges for such
taxes.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from our general assets. We
maintain records of all purchases and redemptions of Fund shares by each of the
Divisions. Additional protection for the assets of the Separate Account is
afforded by Financial Institution Bonds issued by St. Paul Fire and Marine
Company with a limit of $25 million, covering all officers and employees of the
Company who have access to the assets of the Separate Account.
40
<PAGE>
VOTING RIGHTS
To the extent required by law, the Company will vote the shares held in the
Separate Account at regular and special shareholder meetings of the underlying
Funds 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 underlying Funds 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 underlying Funds. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the underlying Funds.
Because the Funds 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. We will vote Fund shares held in the
Separate Account for which no timely voting instructions are received and Fund
shares that we own 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 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 we determine 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 we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Owners.
IMSA
The Company is a member of the Insurance Market place Standards Association
("IMSA"), and as such may include the IMSA logo and information about IMSA
membership in its advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
STATE REGULATION OF THE COMPANY
We are a stock life insurance company organized under the laws of Missouri and
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 our liabilities and reserves and the
liabilities and reserves of the Separate Account and certifies their adequacy.
A full examination of the Company's operations is conducted by the National
Association of Insurance Commissioners at least once every three years.
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<PAGE>
In addition, we are 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.
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
Name Principal Occupation(s) During Past Five Years/1/
--------------------------- --------------------------------------------------
<C> <S>
Executive Officers/2/
Carl H. Anderson/4/ President and Chief Executive Officer since June
1986. Vice President, New Ventures, since June
1986, General American Life Insurance Co., St.
Louis, MO (GenAm).
Matthew K. Duffy/4/ Vice President and Chief Financial Officer since
June 1996. Formerly Director of Accounting,
Prudential Insurance Company of America, March
1987-June 1996.
E. Thomas Hughes, Jr./4/ Treasurer since December 1994. Corporate Actuary
General American Life and Treasurer, GenAm since October 1994.
Insurance Company
700 Market Street
St. Louis, MO 63101
Matthew P. McCauley/4/ Vice President and General Counsel since 1984.
General American Life Secretary since August 1981. Vice President and
Insurance Company Associate General Counsel, GenAm, since December
700 Market Street 30, 1995.
St. Louis, MO 63101
Craig K. Nordyke/4/ Executive Vice President and Chief Actuary since
November 1996. Vice President and Chief Actuary
August 1990-November 1996.
John R. Tremmel Vice President--Operations and System Development
since January 1999. Formerly Chief Operating
Officer, ISP Alliance, April 1998-December 1998.
Vice President and General Manager of National
Operations Centers, Norell Corporation, January
1995-March 1998. Senior Vice President, Citicorp
Insurance Group, September 1986-December 1995.
Directors/3/
Richard A. Liddy Chairman and Chief Executive Officer, GenAm, since
January 2000. Chairman, President, and Chief
Executive Officer, GenAm, May 1992-January 2000.
Warren J. Winer Executive Vice President--Group, GenAm, since
September 1995. Formerly, Managing Director, Wm.
M. Mercer, July 1993-August 1995.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
October 1991.
A. Greig Woodring President and CEO, Reinsurance Group of America,
Inc., since May 1993, and
Executive Vice President--Reinsurance, GenAm,
since January 1990.
</TABLE>
- --------
/1/All positions listed are with the Company unless otherwise indicated.
/2/The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, MO 63105 unless otherwise
noted.
/3/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, 1370 Timberlake Manor Parkway,
Chesterfield, MO 63017.
/4/Indicates Executive Officers who are also Directors.
42
<PAGE>
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain legal matters relating to aspects of federal securities laws. 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 LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Executive 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
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.
43
<PAGE>
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed Policy
Years.
Associated Companies--The 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 Individual Insurance Policy 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 an available underlying 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.
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.
44
<PAGE>
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.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paragon Life Insurance Company:
We have audited the accompanying balance sheets of Paragon Life Insurance
Company as of December 31, 1999 and 1998, and the related statements of
operations and comprehensive income, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paragon Life Insurance Company
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
March 10, 2000
KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG
International, a Swiss association.
F-1
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1999 and 1998
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Assets
Fixed maturities, available
for sale................... $ 81,421 83,384
Policy loans................ 16,954 14,135
Cash and cash equivalents... 10,591 7,439
-------- -------
Total cash and invested
assets................. 108,966 104,958
-------- -------
Reinsurance recoverables.... 1,314 1,170
Deposits relating to
reinsured policyholder
account balances........... 7,020 6,688
Accrued investment income... 1,853 1,545
Deferred policy acquisition
costs...................... 24,357 20,602
Fixed assets and leasehold
improvements, net.......... 1,031 4,504
Other assets................ 262 105
Separate account assets..... 255,190 168,222
-------- -------
Total assets............ $399,993 307,794
======== =======
Liabilities and
Stockholder's Equity
Policyholder account
balances................... 101,665 93,334
Policy and contract claims.. 1,691 1,672
Federal income taxes
payable.................... 1,007 281
Other liabilities and
accrued expenses........... 3,734 3,943
Payable to affiliates....... 3,803 2,062
Due to separate account..... 192 183
Deferred tax liability...... 3,070 5,591
Separate account
liabilities................ 255,126 168,222
-------- -------
Total liabilities....... $370,288 275,288
-------- -------
Stockholder's equity:
Common stock, par value
$25; 100,000 shares
authorized;
82,000 shares issued and
outstanding.............. 2,050 2,050
Additional paid-in
capital.................. 17,950 17,950
Accumulated other
comprehensive (loss)
income................... (2,748) 2,809
Retained earnings......... 12,453 9,697
-------- -------
Total stockholder's
equity................. $ 29,705 32,506
-------- -------
Total liabilities and
stockholder's equity... $399,993 307,794
======== =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Operations and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Revenues:
Policy contract charges............................... $24,577 20,437 16,417
Net investment income................................. 7,726 6,983 6,288
Commissions and expense allowances on reinsurance
ceded................................................ 292 124 10
Net realized investment gains......................... 57 53 69
------- ------ ------
Total revenues...................................... 32,652 27,597 22,784
======= ====== ======
Benefits and expenses:
Policy benefits....................................... 4,616 4,774 3,876
Interest credited to policyholder account balances.... 5,524 5,228 4,738
Commissions, net of capitalized costs................. 445 167 227
General and administration expenses, net of
capitalized costs.................................... 11,394 9,042 7,743
Policy administration system expenses................. 4,787 469 --
Amortization of deferred policy acquisition costs..... 1,631 1,150 424
------- ------ ------
Total benefits and expenses......................... 28,397 20,830 17,008
======= ====== ======
Income before federal income tax expense............ 4,255 6,766 5,775
Federal income tax expense.............................. 1,499 2,368 1,885
------- ------ ------
Net income.............................................. $ 2,756 4,398 3,890
Other comprehensive (loss) income....................... (5,557) 851 1,636
------- ------ ------
Comprehensive (loss) income............................. $(2,801) 5,249 5,526
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1999, 1998, and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in comprehensive Retained stockholder's
Stock capital income earnings equity
------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $2,050 17,950 322 1,409 21,731
Net income............ -- -- -- 3,890 3,890
Other comprehensive
income............... -- -- 1,636 -- 1,636
------ ------ ------ ------ ------
Balance at December 31,
1997................... $2,050 17,950 1,958 5,299 27,257
Net income............ -- -- -- 4,398 4,398
Other comprehensive
income............... -- -- 851 -- 851
------ ------ ------ ------ ------
Balance at December 31,
1998................... $2,050 17,950 2,809 9,697 32,506
Net income............ -- -- -- 2,756 2,756
Other comprehensive
loss................. -- -- (5,557) -- (5,557)
------ ------ ------ ------ ------
Balance at December 31,
1999................... $2,050 17,950 (2,748) 12,453 29,705
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 2,756 4,398 3,890
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in:
Reinsurance recoverables..................... (144) 563 (892)
Deposits relating to reinsured policyholder
account balances............................ (332) (272) (342)
Accrued investment income.................... (308) (168) (79)
Federal income tax payable................... 726 118 (648)
Other assets................................. 3,316 (1,821) (1,280)
Policy and contract claims................... 19 587 (23)
Other liabilities and accrued expenses....... (209) 457 782
Payable to affiliates........................ 1,741 442 (669)
Company ownership of separate account........ (64) -- --
Due to separate account...................... 9 122 (34)
Deferred tax expense........................... 469 740 732
Policy acquisition costs deferred.............. (4,185) (3,808) (2,972)
Amortization of deferred policy acquisition
costs......................................... 1,631 1,150 424
Interest credited to policyholder accounts..... 5,524 5,228 4,738
Net gain on sales and calls of fixed
maturities.................................... (57) (53) (69)
-------- ------- -------
Net cash provided by operating activities.......... 10,892 7,683 3,558
-------- ------- -------
Cash flows from investing activities:
Purchase of fixed maturities..................... (12,423) (14,915) (12,557)
Sale or maturity of fixed maturities............. 4,695 8,632 5,255
Increase in policy loans, net.................... (2,819) (2,648) (1,923)
-------- ------- -------
Net cash used in investing activities (10,547) (8,931) (9,225)
-------- ------- -------
Cash flows from financing activities:
Net policyholder account deposits................ 2,807 2,954 2,294
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 3,152 1,706 (3,373)
Cash and cash equivalents at beginning of year..... 7,439 5,733 9,106
-------- ------- -------
Cash and cash equivalents at end of year........... $ 10,591 7,439 5,733
-------- ------- -------
Income taxes paid.................................. $ (346) (1,460) (1,801)
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PARAGON LIFE INSURANCE COMPANY
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
Paragon Life Insurance Company (Paragon or the Company) is a wholly owned
subsidiary of General American Life Insurance Company (General American or the
Parent). Paragon markets universal life and variable universal life insurance
products through the sponsorship of major companies and organizations. Paragon
is licensed to do business in the District of Columbia and 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.
The accompanying financial statements are prepared on the basis of generally
accepted accounting principles. The preparation of financial statements
requires the use of estimates by management which affect the amounts reflected
in the financial statements. Actual results could differ from those estimates.
Accounts that the Company deems to be sensitive to changes in estimates include
deferred policy acquisition costs and contract claims.
The significant accounting policies of the Company are as follows:
(a) Recognition of Policy Revenue and Related Expenses
Revenues for universal life products consist of policy charges for the cost
of insurance, administration and surrender charges during the period. Revenues
for variable universal life products also include policy charges for mortality
and expense risks assumed by Paragon. Policy benefits and expenses include
interest credited to policy account balances on universal life products and
death benefit payments made in excess of policy account balances.
Policy acquisition costs, such as commissions and certain costs of policy
issuance and underwriting, are deferred and amortized in relation to the
present value of expected gross profits over the estimated life of the
policies.
(b) Invested Assets
Investment securities are accounted for at fair value. At December 31, 1999
and 1998, fixed maturity securities are classified as available-for-sale and
are carried at fair value with the unrealized gain or loss, net of taxes, being
reflected as accumulated other comprehensive income, a separate component of
stockholder's equity. Policy loans are valued at aggregate unpaid balances.
Realized gains or losses on the sale of securities are determined on the
basis of specific identification and include the impact of any related
amortization of premiums or accretion of discounts which is generally computed
consistent with the interest method.
Amortization of the premium or discount on mortgage-backed securities is
recognized using a level-yield method which considers the estimated timing and
amount of prepayments of underlying mortgage loans. Actual prepayment
experience is periodically reviewed and effective yields are recalculated when
differences arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. When such differences occur,
the net investment in the mortgage-backed security is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the security with a corresponding charge or credit to interest
income.
F-6
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(c) Policyholder Account Balances
Policyholder account balances are equal to the policyholder account value
before deduction of any surrender charges. The policyholder account value
represents an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals. These expense charges are
recognized in income as earned. Certain variable life policies allow
policyholders to exchange accumulated assets from the variable rate separate
accounts to a fixed-interest general account policy. The fixed-interest general
account guaranteed minimum crediting rates of 4% in 1999, 1998 and 1997. The
actual crediting rate ranged from 6.1% to 6.5% in 1999, and was 6.5% in 1998
and 1997.
(d) Federal Income Taxes
The Company establishes deferred taxes under the asset and liability method,
and deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files its federal income tax return on a consolidated basis with
its Parent and other 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.
(e) Reinsurance
Balances resulting from agreements which transfer funds relating to
policyholder account balances have been accounted for as deposits. Other
reinsurance activities are accounted for consistent with terms of the risk
transfer reinsurance contracts. Premiums for reinsurance ceded to other
companies have been reported as a reduction of policy contract charges. Amounts
applicable to reinsurance ceded for future policy benefits and claim
liabilities have been reported as assets for these items, and commissions and
expense allowances received in connection with reinsurance ceded have been
accounted for in income as earned. Reinsurance does not relieve the Company
from its primary responsibility to meet claim obligations.
(f) Deferred Policy Acquisition Costs
The costs of acquiring new business which vary with, and are primarily
related to, the production of new business have been deferred to the extent
that such costs are deemed recoverable from future gross profits. Such costs
include commissions, premium taxes, as well as certain costs of policy issuance
and underwriting. Deferred policy acquisition costs are adjusted for the impact
on estimated gross margins of net unrealized gains and losses on investment
securities. The estimates of expected gross margins are evaluated regularly and
are revised if actual experience or other evidence indicates that revision is
appropriate. Upon revision, total amortization recorded to date is adjusted by
a charge or credit to income.
(g) Separate Account Business
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding variable
life insurance contracts for the exclusive benefit of variable life insurance
contract holders. The Company charges the separate accounts for risks it
assumes in issuing a policy and retains varying amounts of withdrawal charges
to cover expenses in the event of early withdrawals by contract holders. The
assets and liabilities of the separate account are carried at fair value.
F-7
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(h) Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in assumption
could significantly affect the estimates and such estimates should be used with
care. The following assumptions were used to estimate the fair value of each
class of financial instrument for which it was practicable to estimate fair
value:
Fixed maturities--Fixed maturities are valued using quoted market prices,
if available. If quoted market prices are not available, fair value is
estimated using quoted market prices of similar securities.
Policy loans--Policy loans are carried at their unpaid balances which
approximates fair value.
Separate account assets and liabilities--The separate account assets are
carried at fair value as determined by quoted market prices. Accordingly,
the carrying value of separate account liabilities is equal to their fair
value since it represents the contractholders' interest in the separate
account assets.
Cash and cash equivalents--The carrying amount is a reasonable estimate
of fair value.
(i) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents represent
demand deposits and highly liquid short-term investments, which include U.S.
Treasury bills, commercial paper, and repurchase agreements with original or
remaining maturities of 90 days or less when purchased.
(j) Subsequent Event
(i) On January 6, 2000, the Company's ultimate parent, GenAmerica
Corporation, was purchased by Metropolitan Life Insurance Company.
(ii) Subsequent to December 31, 1999 a significant customer notified
Paragon of its intent to terminate its group contract, effective April 30,
2000. This group represents 29% and 8% of Paragon's policies inforce and
separate account assets, as of December 31, 1999.
(2) Investments
The amortized cost and estimated fair value of fixed maturities at December
31, 1999 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
1999
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 8,728 53 (162) 8,619
Corporate securities............ 70,312 276 (4,830) 65,758
Mortgage-backed securities...... 6,911 36 (394) 6,553
Asset-backed securities......... 500 -- (9) 491
-------- --- ------ ------
$ 86,451 365 (5,395) 81,421
======== === ====== ======
</TABLE>
F-8
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
<TABLE>
<CAPTION>
1998
-----------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities........ $ 6,705 267 -- 6,972
Corporate securities............ 64,607 4,481 (208) 68,880
Mortgage-backed securities...... 6,854 193 (25) 7,022
Asset-backed securities......... 500 10 -- 510
------- ----- ---- ------
$78,666 4,951 (233) 83,384
======= ===== ==== ======
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1999, by contractual maturity, are shown below (000's). Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
cost value
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 471 480
Due after one year through five years................. 22,034 21,893
Due after five years through ten years................ 8,853 8,317
Due after ten years through twenty years.............. 48,182 44,178
Mortgage-backed securities............................ 6,911 6,553
-------- ------
$ 86,451 81,421
======== ======
</TABLE>
Proceeds from sales of fixed maturities during 1999, 1998 and 1997 were
$4,695,414, $4,068,639 and $1,328,585 respectively. Gross gains of $56,686,
$53,180 and $68,876 were realized on those sales in 1999, 1998 and 1997,
respectively.
The sources of net investment income follow (000s):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Fixed Maturities...................................... $ 6,077 5,603 4,941
Short-term investments................................ 486 535 608
Policy loans and other................................ 1,244 924 807
------- ----- -----
$ 7,807 7,062 6,356
Investment expenses................................... (81) (79) (68)
------- ----- -----
Net investment income............................. $ 7,726 6,983 6,288
======= ===== =====
</TABLE>
A summary of the components of the net unrealized appreciation (depreciation)
on invested assets carried at fair value is as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale............ $(5,030) 4,717 3,373
Deferred policy acquisition costs.............. 803 (396) (361)
Deferred income taxes............................ 1,479 (1,512) (1,054)
------- ------ ------
Net unrealized appreciation (depreciation)....... $(2,748) 2,809 1,958
======= ====== ======
</TABLE>
The Company has fixed maturities on deposit with various state insurance
departments with an amortized cost of approximately $4,082,871 and $4,120,850
at December 31, 1999 and 1998 respectively.
F-9
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
(3) Reinsurance
The Company reinsures certain risks with other insurance companies above a
maximum retention amount (currently $50,000) to help reduce the loss on any
single policy.
Premiums and related reinsurance amounts for the years ended December 31,
1999, 1998 and 1997 as they relate to transactions with affiliates are
summarized as follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Reinsurance transactions with affiliates:
Premiums for reinsurance ceded.................... $16,869 14,723 13,001
Policy benefits ceded............................. 16,823 17,071 14,070
Commissions and expenses ceded.................... 292 123 195
Reinsurance recoverables.......................... 1,268 1,109 1,661
</TABLE>
Ceded premiums and benefits to nonaffiliates for 1999, 1998 and 1997 were
insignificant.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized is as
follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year.................... $20,602 17,980 15,776
Policy acquisition costs deferred............... 4,185 3,808 2,972
Policy acquisition costs amortized.............. (1,631) (1,150) (424)
Deferred policy acquisition costs relating to
change in unrealized (gain) loss on investments
available for sale............................. 1,201 (36) (344)
------- ------ ------
Balance at end of year.......................... $24,357 20,602 17,980
======= ====== ======
</TABLE>
(5) Administration System Write-off
In 1999 Paragon expensed $4,787,275 relating to the termination of a system
development project for policy administration. The one-time write-off in 1999
of previously capitalized amounts was $3,963,450 and other costs incurred in
1999 relating to the project were $823,825. Other costs incurred and expensed
in 1998 and 1997 were $468,794 and $0, respectively.
(6) Federal Income Taxes
The Company is taxed as a life insurance company. A summary of Federal income
tax expense is as follows (000s):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Current tax expense................................... $ 1,030 1,628 1,153
Deferred tax expense.................................. 469 740 732
------- ----- -----
Federal income tax expense............................ $ 1,499 2,368 1,885
======= ===== =====
</TABLE>
F-10
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
A reconciliation of the Company's "expected" federal income tax expense,
computed by applying the federal U.S. corporate tax rate of 35% to income from
operations before federal income tax, is as follows (000s):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Computed "expected" tax expense...................... $ 1,489 2,368 2,022
Other, net........................................... 10 0 (137)
------- ----- -----
Federal income tax expense........................... $ 1,499 2,368 1,885
======= ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1999, 1998 and
1997 are presented below (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Unearned reinsurance allowances..................... $ 194 218 217
Policy and contract liabilities..................... 583 709 1,031
Tax capitalization of acquisition costs............. 2,559 2,147 1,755
Other, net.......................................... 359 58 76
Unrealized Loss on investments, net................. 1,479 -- --
------- ----- -----
Total deferred tax assets......................... $ 5,174 3,132 3,079
======= ===== =====
Deferred tax liabilities:
Unrealized gain on investments, net................. $ -- 1,512 1,054
Deferred policy acquisition costs................... 8,244 7,211 6,419
------- ----- -----
Total deferred tax liabilities.................... $ 8,244 8,723 7,473
------- ----- -----
Net deferred tax liabilities...................... $ 3,070 5,591 4,394
======= ===== =====
</TABLE>
The Company believes that a valuation allowance with respect to the
realization of the total gross deferred tax asset is not necessary. In
assessing the realization of deferred tax assets, the Company considers whether
it is more likely than not that the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. The Company files a consolidated tax return with its Parent.
Realization of the gross tax asset will not be dependent solely on the
Company's ability to generate its own taxable income. General American has a
proven history of earnings and it appears more likely than not that the
Company's gross deferred tax asset will ultimately be fully realized.
(7) Related-Party Transactions
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 1999, 1998 and
1997 were $2,247,302, $1,513,433 and $1,348,198, respectively. See Note 3 for
reinsurance transactions with affiliates.
(8) Pension Plan
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 1999, 1998 or 1997 due to overfunding of the plan.
F-11
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
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 expenses to the Company for the incentive plan were
$0, $188,316 and $198,972 for 1999, 1998 and 1997, respectively.
As a result of the Metropolitan Life Insurance purchase, Paragon implemented
a new bonus program covering all associates employed from October 1, 1999
through March 31, 2000 with at least 1000 hours of service during 1999. Total
expense to the Company for this program was $422,700 in 1999.
Paragon provides for certain health care and life insurance benefits for
retired employees. The Company accounts for these benefits in accordance with
SFAS No. 106 -- Employer's Accounting for Postretirement Benefits Other Than
Pensions. The amounts involved are not material.
(9) Statutory Financial Information
The Company is subject to financial statement filing requirements of the
State of Missouri Department of Insurance, its state of domicile, as well as
the states in which it transacts business. Such financial statements, generally
referred to as statutory financial statements, are prepared on a basis of
accounting which varies in some respects from generally accepted accounting
principles (GAAP). Statutory accounting principles include: (1) charging of
policy acquisition costs to income as incurred; (2) establishment of policy and
contract liabilities computed using required valuation standards which may vary
in methodology utilized; (3) nonprovision of deferred federal income taxes
resulting from temporary differences between financial reporting and tax bases
of assets and liabilities; (4) recognition of statutory liabilities for asset
impairments and yield stabilization on fixed maturity dispositions prior to
maturity with asset valuation reserves based on statutory determined formulae
and interest stabilization reserves designed to level yields over their
original purchase maturities; (5) valuation of investments in fixed maturities
at amortized cost; (6) net presentation of reinsurance balances; (7)
presentation of indirect cash flows; (8) exclusion of comprehensive income
disclosures; and (9) recognition of deposits and withdrawals on universal life
policies as revenues and expenses.
The stockholder's equity (surplus) and net income of the Company at December
31, 1999, 1998 and 1997, as determined using statutory accounting practices, is
summarized as follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Statutory surplus as reported to regulatory
authorities...................................... $13,545 10,500 10,725
Net income as reported to regulatory authorities.. $ 300 1,596 1,397
</TABLE>
(10) 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 1999 without prior
notice or approval is $300,406. Paragon did not pay dividends in 1999, 1998 or
1997.
(11) 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
F-12
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
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 action by the Company
or regulators is required based on the ratio of a company's actual total
adjusted capital to control levels determined by the RBC formula. At December
31, 1999, the Company's actual total adjusted capital was in excess of minimum
levels which would require action by the Company or regulatory authorities
under the RBC formula.
(12) Commitments and Contingencies
The Company leases certain of its facilities and equipment under
noncancellable leases the majority of which expires March 2001. The future
minimum lease obligations under the terms of the leases are summarized as
follows (000s):
<TABLE>
<S> <C>
Year ended December 31:
2000............................................................ $ 750
2001............................................................ 321
2002............................................................ 130
2003............................................................ 99
-------
$ 1,300
=======
</TABLE>
Rent expense totaled $507,512, $489,999, and $433,864 in 1999, 1998 and 1997,
respectively.
(13) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. The most significant items of comprehensive
income are net income and changes in unrealized gains and losses on securities.
The adoption of SFAS No. 130 does not affect results of operations or financial
position, but affects their presentation and disclosure. The Company has
adopted SFAS No. 130 as of January 1, 1998, and the following summaries present
the components of the Company's comprehensive income, other than net income,
for the periods ending December 31, 1999, 1998 and 1997 (000s):
<TABLE>
<CAPTION>
1999
-------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized holding losses arising during
period.................................. $(8,492) 2,972 (5,520)
Less: reclassification adjustment for
gains realized in net income............ (57) 20 (37)
------- ----- ------
Other comprehensive loss................. (8,549) 2,992 (5,557)
======= ===== ======
</TABLE>
F-13
<PAGE>
PARGON LIFE INSURANCE COMPANY
Notes to Financial Statements--(Continued)
<TABLE>
<CAPTION>
1998
-------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized holding gains arising during
period.................................. $1,361 (476) 885
Less: reclassification adjustment for
gains realized in net income............ (53) 19 (34)
------ ---- ---
Other comprehensive income............... 1,308 (457) 851
====== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized holding gains arising during
period.................................. $2,585 (904) 1,681
Less: reclassification adjustment for
gains realized in net income............ (69) 24 (45)
------ ---- -----
Other comprehensive income............... 2,516 (880) 1,636
====== ==== =====
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Paragon Life Insurance Company and Policyholders of
Separate Account B's MultiManager Divisions:
We have audited the accompanying statements of net assets, including the
schedule of investments, of the Scudder Money Market, Scudder International,
Fidelity Equity Income, Fidelity Growth, Fidelity Index 500, Fidelity
Contrafund, Putnam High Yield, Putnam Voyager, Putnam Income, Putnam New
Opportunities, TR Price New America Growth, TR Price Limited-Term Bond, TR
Price Personal Strategy Balanced, and MFS Emerging Growth Divisions of Paragon
Separate Account B as of December 31, 1999 and the related statements of
operations and changes in net assets for each of the periods in the three year
period then ended. These financial statements are the responsibility of the
management of Paragon Separate Account B. 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, 1999 by
correspondence with the Scudder Variable Life Investment Fund, the Fidelity
Variable Insurance Products Fund, the Fidelity Variable Insurance Products Fund
II, the Putnam Variable Trust, the T. Rowe Price Equity Series Inc., the T.
Rowe Price Fixed Income Series, Inc. and the MFS Variable Insurance Trust. 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 Scudder Money Market,
Scudder International, Fidelity Equity Income, Fidelity Growth, Fidelity Index
500, Fidelity Contrafund, Putnam High Yield, Putnam Voyager, Putnam Income,
Putnam New Opportunities, TR Price New America Growth, TR Price Limited-Term
Bond, TR Price Personal Strategy Balanced, and MFS Emerging Growth Divisions of
Paragon Separate Account B as of December 31, 1999, and the results of their
operations and changes in their net assets for each of the periods in the three
year period then ended, in conformity with generally accepted accounting
principles.
March 10, 2000
KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG
International, a Swiss association.
F-15
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF NET ASSETS
December 31, 1999
<TABLE>
<CAPTION>
Scudder Money Scudder Fidelity Fidelity Fidelity Putnam
Market International Equity Income Growth Fidelity Index Contrafund High Yield
Division Division Division Division 500 Division Division Division
------------- ------------- --------------- ------------- --------------- --------------- ----------
1999 1999 1999 1999 1999 1999 1999
------------- ------------- --------------- ------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets:
Investments in
Multiple Fund
Investments, at
Market Value (See
Schedule of
Investments)..... $ 541,708 2,978,926 2,808,576 4,947,495 9,960,873 6,664,237 544,465
Receivable from
(payable to)
Paragon Life
Insurance
Company.......... 272 (50) (1,594) (233) (2,137) 1,805 (276)
----------- --------- --------- --------- --------- --------- -------
Total Net
Assets......... $ 541,980 2,978,876 2,806,982 4,947,262 9,958,736 6,666,042 544,189
=========== ========= ========= ========= ========= ========= =======
Net Assets,
representing:
Equity of Contract
Owners........... $ 541,754 2,977,614 2,805,751 4,945,157 9,954,408 6,663,206 543,947
Equity of Paragon
Life Insurance
Company.......... 226 1,262 1,231 2,105 4,328 2,836 242
----------- --------- --------- --------- --------- --------- -------
$ 541,980 2,978,876 2,806,982 4,947,262 9,958,736 6,666,042 544,189
=========== ========= ========= ========= ========= ========= =======
Total Units Held.... 480,932 117,600 99,470 71,051 57,495 211,032 38,414
Net Asset Value Per
Unit............... $ 1.13 25.32 28.21 69.60 173.13 31.57 14.16
Cost of Investments. $ 541,708 2,141,088 2,664,727 3,784,255 7,871,414 5,194,948 583,953
=========== ========= ========= ========= ========= ========= =======
<CAPTION>
Putnam New T.R. Price T.R. Price T.R. Price
Putnam Income Opportunities New America Limited-Term Personal Strat. MFS Emerging
Division Division Growth Division Bond Division Bal. Division Growth Division
------------- ------------- --------------- ------------- --------------- ---------------
1999 1999 1999 1999 1999 1999
------------- ------------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets:
Investments in
Multiple Fund
Investments, at
Market Value (See
Schedule of
Investments)..... $ 1,376,135 2,980,187 2,371,545 530,432 2,166,163 5,771,340
Receivable from
(payable to)
Paragon Life
Insurance
Company.......... 2 (570) (1,361) (163) (877) (1,139)
----------- --------- --------- --------- --------- ---------
Total Net
Assets......... $ 1,376,137 2,979,617 2,370,184 530,269 2,165,286 5,770,201
=========== ========= ========= ========= ========= =========
Net Assets,
representing:
Equity of Contract
Owners........... $ 1,375,519 2,978,387 2,369,191 530,031 2,164,409 5,767,900
Equity of Paragon
Life Insurance
Company.......... 618 1,230 993 238 877 2,301
----------- --------- --------- --------- --------- ---------
$ 1,376,137 2,979,617 2,370,184 530,269 2,165,286 5,770,201
=========== ========= ========= ========= ========= =========
Total Units Held.... 93,853 68,100 84,624 97,853 112,991 155,321
Net Asset Value Per
Unit............... $ 14.66 43.74 28.00 5.39 19.16 37.14
Cost of Investments. $ 1,411,684 1,687,209 2,048,739 543,883 2,140,001 3,044,843
=========== ========= ========= ========= ========= =========
<CAPTION>
Putnam
Voyager
Division
----------
1999
----------
<S> <C>
Net Assets:
Investments in
Multiple Fund
Investments, at
Market Value (See
Schedule of
Investments)..... 2,378,749
Receivable from
(payable to)
Paragon Life
Insurance
Company.......... (279)
----------
Total Net
Assets......... 2,378,470
==========
Net Assets,
representing:
Equity of Contract
Owners........... 2,377,468
Equity of Paragon
Life Insurance
Company.......... 1,002
----------
2,378,470
==========
Total Units Held.... 30,147
Net Asset Value Per
Unit............... 78.87
Cost of Investments. 1,539,013
==========
<CAPTION>
<S> <C>
Net Assets:
Investments in
Multiple Fund
Investments, at
Market Value (See
Schedule of
Investments).....
Receivable from
(payable to)
Paragon Life
Insurance
Company..........
Total Net
Assets.........
Net Assets,
representing:
Equity of Contract
Owners...........
Equity of Paragon
Life Insurance
Company..........
Total Units Held....
Net Asset Value Per
Unit...............
Cost of Investments.
</TABLE>
See Accompanying Notes to Financial Statements.
F-16
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
Page 1 of 2
For the Years Ended December 31, 1999, 1998 and the period from February 26,
1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
Scudder Money Market Scudder International Fidelity Equity Income
Division Division Division
-------------------------- --------------------------- ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- ------- ------- --------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income... $ 20,414 10,143 3,261 10,925 16,096 1 30,539 14,639 --
Expenses:
Mortality and
Expense Charge.... 3,042 1,460 455 14,321 8,335 2,631 18,098 10,564 2,552
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Investment
Income (Expense).. 17,372 8,683 2,806 (3,396) 7,761 (2,630) 12,441 4,075 (2,552)
Net Realized Gain
on Investments
Realized Gain from
Distributions..... -- -- 154,037 105,862 -- 67,508 52,096 --
Proceeds from
Sales............. 455,692 51,234 289,611 386,233 102,947 173,610 416,382 124,813 38,007
Cost of
Investments Sold.. 455,692 51,234 289,611 372,342 106,571 177,689 390,205 119,169 36,223
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Realized
Gain (Loss) on
Investments..... -- -- -- 167,928 102,238 (4,079) 93,685 57,740 1,784
Net Unrealized Gain
(Loss) on
Investments:
Unrealized
Gain(Loss)
Beginning of Year. -- -- -- 27,148 (25,879) -- 141,690 56,580 --
Unrealized
Gain(Loss) End of
Year.............. -- -- -- 837,838 27,148 (25,879) 143,849 141,690 56,580
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Unrealized
Gain(Loss) on
Investments....... -- -- -- 810,690 53,027 (25,879) 2,159 85,110 56,580
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Gain(Loss)
on Investments.. -- -- -- 978,618 155,265 (29,958) 95,844 142,850 58,364
---------- ------- ------- --------- ------- ------- ------- ------- ------
Increase (Decrease)
in Net Assets
Resulting from
Operations......... $ 17,372 8,683 2,806 975,222 163,026 (32,588) 108,285 146,925 55,812
========== ======= ======= ========= ======= ======= ======= ======= ======
<CAPTION>
Fidelity Index 500 Fidelity Contrafund Putnam High Yield
Division Division Division
-------------------------- --------------------------- ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- ------- ------- --------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income... $ 59,680 27,845 -- 15,792 10,800 -- 42,401 17,896 277
Expenses:
Mortality and
Expense Charge.... 53,104 23,600 6,310 33,475 15,117 4,049 3,311 1,965 775
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Investment
Income (Expense).. 6,576 4,245 (6,310) (17,683) (4,317) (4,049) 39,090 15,931 (498)
Net Realized Gain
on Investments
Realized Gain from
Distributions..... 26,892 64,495 -- 115,805 79,460 -- -- 2,808 32
Proceeds from
Sales............. 598,077 172,866 153,926 537,241 103,003 45,697 63,617 57,532 22,023
Cost of
Investments Sold.. 490,860 152,050 146,855 445,480 94,211 42,658 70,444 53,897 20,837
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Realized
Gain (Loss) on
Investments..... 134,109 85,311 7,071 207,566 88,252 3,039 (6,827) 6,443 1,218
Net Unrealized Gain
(Loss) on
Investments:
Unrealized
Gain(Loss)
Beginning of Year. 867,561 158,189 -- 576,541 83,162 -- (29,078) 14,350 --
Unrealized
Gain(Loss) End of
Year.............. 2,089,459 867,561 158,189 1,469,289 576,541 83,162 (39,488) (29,078) 14,350
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Unrealized
Gain(Loss) on
Investments....... 1,221,898 709,372 158,189 892,748 493,379 83,162 (10,410) (43,428) 14,350
---------- ------- ------- --------- ------- ------- ------- ------- ------
Net Gain(Loss)
on Investments.. 1,356,007 794,683 165,260 1,100,314 581,631 86,201 (17,237) (36,985) 15,568
---------- ------- ------- --------- ------- ------- ------- ------- ------
Increase (Decrease)
in Net Assets
Resulting from
Operations......... $1,362,583 798,928 158,950 1,082,631 577,314 82,152 21,853 (21,054) 15,070
========== ======= ======= ========= ======= ======= ======= ======= ======
<CAPTION>
Fidelity Growth
Division
---------------------------
1999 1998 1997
---------- -------- -------
<S> <C> <C> <C>
Investment Income:
Dividend Income... 71,157 3,814 --
Expenses:
Mortality and
Expense Charge.... 22,207 7,802 1,885
---------- -------- -------
Net Investment
Income (Expense).. 48,950 (3,988) (1,885)
Net Realized Gain
on Investments
Realized Gain from
Distributions..... 134,264 99,760 --
Proceeds from
Sales............. 207,171 74,918 26,952
Cost of
Investments Sold.. 181,132 70,769 25,580
---------- -------- -------
Net Realized
Gain (Loss) on
Investments..... 160,303 103,909 1,372
Net Unrealized Gain
(Loss) on
Investments:
Unrealized
Gain(Loss)
Beginning of Year. 296,448 30,076 --
Unrealized
Gain(Loss) End of
Year.............. 1,163,240 296,448 30,076
---------- -------- -------
Net Unrealized
Gain(Loss) on
Investments....... 866,792 266,372 30,076
---------- -------- -------
Net Gain(Loss)
on Investments.. 1,027,095 370,281 31,448
---------- -------- -------
Increase (Decrease)
in Net Assets
Resulting from
Operations......... 1,076,045 366,293 29,563
========== ======== =======
<CAPTION>
Putnam Voyager
Division
---------------------------
1999 1998 1997
---------- -------- -------
<S> <C> <C> <C>
Investment Income:
Dividend Income... 1,294 1,303 32
Expenses:
Mortality and
Expense Charge.... 10,881 4,710 1,503
---------- -------- -------
Net Investment
Income (Expense).. (9,587) (3,407) (1,471)
Net Realized Gain
on Investments
Realized Gain from
Distributions..... 103,773 31,790 692
Proceeds from
Sales............. 220,253 72,208 39,294
Cost of
Investments Sold.. 182,126 63,834 36,437
---------- -------- -------
Net Realized
Gain (Loss) on
Investments..... 141,900 40,164 3,549
Net Unrealized Gain
(Loss) on
Investments:
Unrealized
Gain(Loss)
Beginning of Year. 159,171 46,424 --
Unrealized
Gain(Loss) End of
Year.............. 839,736 159,171 46,424
---------- -------- -------
Net Unrealized
Gain(Loss) on
Investments....... 680,565 112,748 46,424
---------- -------- -------
Net Gain(Loss)
on Investments.. 822,465 152,912 49,973
---------- -------- -------
Increase (Decrease)
in Net Assets
Resulting from
Operations......... 812,878 149,505 48,502
========== ======== =======
</TABLE>
See Accompanying Notes to Financial Statements.
F-17
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF OPERATIONS
Page 2 of 2
For the Years Ended December 31, 1999, 1998 and the period from February 26,
1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
Putnam Putnam T.R. Price T.R. Price
Income New Opportunities New America Limited-Term Bond
Division Division Growth Division Division
------------------------ -------------------------- ------------------------ --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- ------ ------- --------- ------- ------ ------- ------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income.... $ 48,830 24,286 24 -- -- -- -- -- -- 18,708 3,964 1,148
Expenses:
Mortality and
Expense Charge..... 7,593 3,672 1,336 12,257 5,408 1,771 13,731 8,308 2,619 2,466 521 141
-------- ------ ------- --------- ------- ------ ------- ------- ------ ------- ----- -----
Net Investment
Income (Expense)... 41,237 20,614 (1,312) (12,257) (5,408) (1,771) (13,731) (8,308) (2,619) 16,242 3,443 1,007
Net Realized Gain on
Investments
Realized Gain from
Distributions...... 4,295 632 -- 17,711 8,780 -- 130,662 29,621 1,910 -- 201 --
Proceeds from
Sales.............. 50,661 9,892 13,191 160,862 88,851 21,590 318,715 64,424 25,684 25,275 5,557 3,027
Cost of Investments
Sold............... 51,645 9,414 12,846 127,758 75,941 19,924 266,456 56,227 24,158 25,631 5,494 2,981
-------- ------ ------- --------- ------- ------ ------- ------- ------ ------- ----- -----
Net Realized Gain
(Loss) on
Investments...... 3,311 1,110 345 50,815 21,690 1,666 182,921 37,818 3,436 (356) 264 46
Net Unrealized Gain
(Loss) on
Investments:
Unrealized
Gain(Loss)
Beginning of Year.. 38,849 20,067 -- 220,882 58,379 -- 249,666 74,143 -- 1,054 348 --
Unrealized
Gain(Loss) End of
Year............... (35,549) 38,849 20,067 1,292,978 220,882 58,379 322,806 249,666 74,143 (13,451) 1,054 348
-------- ------ ------- --------- ------- ------ ------- ------- ------ ------- ----- -----
Net Unrealized
Gain(Loss) on
Investments........ (74,398) 18,782 20,067 1,072,096 162,503 58,379 73,140 175,523 74,143 (14,505) 706 348
-------- ------ ------- --------- ------- ------ ------- ------- ------ ------- ----- -----
Net Gain(Loss) on
Investments...... (71,087) 19,892 20,412 1,122,911 184,193 60,045 256,061 213,341 77,579 (14,861) 970 394
-------- ------ ------- --------- ------- ------ ------- ------- ------ ------- ----- -----
Increase (Decrease)
in Net Assets
Resulting from
Operations.......... $(29,850) 40,506 19,100 1,110,654 178,785 58,274 242,330 205,033 74,960 1,381 4,413 1,401
======== ====== ======= ========= ======= ====== ======= ======= ====== ======= ===== =====
<CAPTION>
T.R. Price MFS
Personal Emerging
Strat. Bal. Division Growth Division
------------------------ --------------------------
1999 1998 1997 1999 1998 1997
-------- ------ ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Income.... $ 52,237 22,815 8,442 -- 7,893 --
Expenses:
Mortality and
Expense Charge..... 11,512 5,220 1,615 22,579 9,802 3,269
-------- ------ ------- --------- ------- ------
Net Investment
Income (Expense)... 40,725 17,595 6,827 (22,579) (1,909) (3,269)
Net Realized Gain on
Investments
Realized Gain from
Distributions...... 100,774 32,671 7,070 -- 2,818 --
Proceeds from
Sales.............. 494,695 81,578 128,464 292,638 104,262 85,782
Cost of Investments
Sold............... 483,517 77,738 125,119 222,677 91,161 80,415
-------- ------ ------- --------- ------- ------
Net Realized Gain
(Loss) on
Investments...... 111,952 36,511 10,415 69,961 15,919 5,367
Net Unrealized Gain
(Loss) on
Investments:
Unrealized
Gain(Loss)
Beginning of Year.. 48,761 10,497 -- 467,020 68,906 --
Unrealized
Gain(Loss) End of
Year............... 26,162 48,761 10,497 2,726,497 467,020 68,906
-------- ------ ------- --------- ------- ------
Net Unrealized
Gain(Loss) on
Investments........ (22,599) 38,264 10,497 2,259,477 398,114 68,906
-------- ------ ------- --------- ------- ------
Net Gain(Loss) on
Investments...... 89,353 74,775 20,912 2,329,438 414,033 74,273
-------- ------ ------- --------- ------- ------
Increase (Decrease)
in Net Assets
Resulting from
Operations.......... $130,078 92,370 27,739 2,306,859 412,124 71,004
======== ====== ======= ========= ======= ======
</TABLE>
See Accompanying Notes to Financial Statements.
F-18
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
Page 1 of 2
For the Years Ended December 31, 1999, 1998 and the Period from February 26,
1997 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Fidelity
Scudder Scudder Equity
Money Market International Income
Division Division Division
------------------------------ ------------------------------- -----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- --------- --------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (Expense).. $ 17,372 8,683 2,806 (3,396) 7,761 (2,630) 12,441 4,075 (2,552)
Net Realized Gain
(Loss) on
Investments....... -- -- -- 167,928 102,238 (4,079) 93,685 57,740 1,784
Net Unrealized
Gain (Loss) on
Investments....... -- -- -- 810,690 53,027 (25,879) 2,159 85,110 56,580
---------- --------- --------- --------- --------- --------- --------- --------- -------
Increase
(Decrease) in Net
Assets Resulting
from Operations... 17,372 8,683 2,806 975,222 163,026 (32,588) 108,285 146,925 55,812
Net Deposits into
Separate Account.. 245,044 145,966 122,109 582,890 502,178 788,148 811,876 780,846 903,238
---------- --------- --------- --------- --------- --------- --------- --------- -------
Increase in Net
Assets.......... 262,416 154,649 124,915 1,558,112 665,204 755,560 920,161 927,771 959,050
Net Assets,
Beginning of Year.. 279,564 124,915 -- 1,420,764 755,560 -- 1,886,821 959,050 --
---------- --------- --------- --------- --------- --------- --------- --------- -------
Net Assets, End of
Year............... $ 541,980 279,564 124,915 2,978,876 1,420,764 755,560 2,806,982 1,886,821 959,050
========== ========= ========= ========= ========= ========= ========= ========= =======
<CAPTION>
Fidelity Index 500 Fidelity Contrafund Putnam High Yield
Division Division Division
------------------------------ ------------------------------- -----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- --------- --------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (Expense).. $ 6,576 4,245 (6,310) (17,683) (4,317) (4,049) 39,090 15,931 (498)
Net Realized Gain
(Loss) on
Investments....... 134,109 85,311 7,071 207,566 88,252 3,039 (6,827) 6,443 1,218
Net Unrealized
Gain (Loss) on
Investments....... 1,221,898 709,372 158,189 892,748 493,379 83,162 (10,410) (43,428) 14,350
---------- --------- --------- --------- --------- --------- --------- --------- -------
Increase
(Decrease) in Net
Assets Resulting
from Operations... 1,362,583 798,928 158,950 1,082,631 577,314 82,152 21,853 (21,054) 15,070
Net Deposits into
Separate Account.. 4,030,169 1,595,868 2,012,238 2,585,342 996,842 1,341,761 196,219 125,158 206,943
---------- --------- --------- --------- --------- --------- --------- --------- -------
Increase in Net
Assets.......... 5,392,752 2,394,796 2,171,188 3,667,973 1,574,156 1,423,913 218,072 104,104 222,013
Net Assets,
Beginning of Year.. 4,565,984 2,171,188 -- 2,998,069 1,423,913 -- 326,117 222,013 --
---------- --------- --------- --------- --------- --------- --------- --------- -------
Net Assets, End of
Year............... $9,958,736 4,565,984 2,171,188 6,666,042 2,998,069 1,423,913 544,189 326,117 222,013
========== ========= ========= ========= ========= ========= ========= ========= =======
<CAPTION>
Fidelity Growth
Division
------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Operations:
Net Investment
Income (Expense).. 48,950 (3,988) (1,885)
Net Realized Gain
(Loss) on
Investments....... 160,303 103,909 1,372
Net Unrealized
Gain (Loss) on
Investments....... 866,792 266,372 30,076
---------- ---------- --------
Increase
(Decrease) in Net
Assets Resulting
from Operations... 1,076,045 366,293 29,563
Net Deposits into
Separate Account.. 2,274,602 542,595 658,164
---------- ---------- --------
Increase in Net
Assets.......... 3,350,647 908,888 687,727
Net Assets,
Beginning of Year.. 1,596,615 687,727 --
---------- ---------- --------
Net Assets, End of
Year............... 4,947,262 1,596,615 687,727
========== ========== ========
<CAPTION>
Putnam Voyager
Division
------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Operations:
Net Investment
Income (Expense).. (9,587) (3,407) (1,471)
Net Realized Gain
(Loss) on
Investments....... 141,900 40,164 3,549
Net Unrealized
Gain (Loss) on
Investments....... 680,565 112,748 46,424
---------- ---------- --------
Increase
(Decrease) in Net
Assets Resulting
from Operations... 812,878 149,505 48,502
Net Deposits into
Separate Account.. 649,592 317,314 400,679
---------- ---------- --------
Increase in Net
Assets.......... 1,462,470 466,819 449,181
Net Assets,
Beginning of Year.. 916,000 449,181 --
---------- ---------- --------
Net Assets, End of
Year............... 2,378,470 916,000 449,181
========== ========== ========
</TABLE>
See Accompanying Notes to Financial Statements.
F-19
<PAGE>
PARAGON SEPARATE ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
Page 2 of 2
For the Years Ended December 31, 1999, 1998 and the period from February 26,
1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
Putnam New Opportunities T.R. Price New America
Putnam Income Division Division Growth Division
--------------------------- ----------------------------- -----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- ------- ------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (Expense). $ 41,237 20,614 (1,312) (12,257) (5,408) (1,771) (13,731) (8,308) (2,619)
Net Realized Gain
(Loss) on
Investments...... 3,311 1,110 345 50,815 21,690 1,666 182,921 37,818 3,436
Net Unrealized
Gain (Loss) on
Investments...... (74,398) 18,782 20,067 1,072,096 162,503 58,379 73,140 175,523 74,143
---------- ------- ------- --------- --------- ------- --------- --------- -------
Increase
(Decrease) in Net
Assets Resulting
from Operations.. (29,850) 40,506 19,100 1,110,654 178,785 58,274 242,330 205,033 74,960
Net Deposits into
Separate Account. 797,051 176,598 372,732 791,294 359,780 480,830 582,656 514,647 750,558
---------- ------- ------- --------- --------- ------- --------- --------- -------
Increase in Net
Assets.......... 767,201 217,104 391,832 1,901,948 538,565 539,104 824,986 719,680 825,518
Net Assets,
Beginning of Year. 608,936 391,832 -- 1,077,669 539,104 -- 1,545,198 825,518 --
---------- ------- ------- --------- --------- ------- --------- --------- -------
Net Assets, End of
Year.............. $1,376,137 608,936 391,832 2,979,617 1,077,669 539,104 2,370,184 1,545,198 825,518
========== ======= ======= ========= ========= ======= ========= ========= =======
<CAPTION>
T.R. Price Personal Strat. MFS Emerging Growth
Bal. Division Division
--------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
---------- ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment
Income (Expense). $ 40,725 17,595 6,827 (22,579) (1,909) (3,269)
Net Realized Gain
(Loss) on
Investments...... 111,952 36,511 10,415 69,961 15,919 5,367
Net Unrealized
Gain (Loss) on
Investments...... (22,599) 38,264 10,497 2,259,477 398,114 68,906
---------- ------- ------- --------- --------- -------
Increase
(Decrease) in Net
Assets Resulting
from Operations.. 130,078 92,370 27,739 2,306,859 412,124 71,004
Net Deposits into
Separate Account. 1,062,037 377,161 475,901 1,526,112 582,487 871,615
---------- ------- ------- --------- --------- -------
Increase in Net
Assets.......... 1,192,115 469,531 503,640 3,832,971 994,611 942,619
Net Assets,
Beginning of Year. 973,171 503,640 -- 1,937,230 942,619 --
---------- ------- ------- --------- --------- -------
Net Assets, End of
Year.............. $2,165,286 973,171 503,640 5,770,201 1,937,230 942,619
========== ======= ======= ========= ========= =======
<CAPTION>
T.R. Price Limited-
Term Bond Division
-----------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Operations:
Net Investment
Income (Expense). 16,242 3,443 1,007
Net Realized Gain
(Loss) on
Investments...... (356) 264 46
Net Unrealized
Gain (Loss) on
Investments...... (14,505) 706 348
-------- ------- ------
Increase
(Decrease) in Net
Assets Resulting
from Operations.. 1,381 4,413 1,401
Net Deposits into
Separate Account. 419,557 62,044 41,473
-------- ------- ------
Increase in Net
Assets.......... 420,938 66,457 42,874
Net Assets,
Beginning of Year. 109,331 42,874 --
-------- ------- ------
Net Assets, End of
Year.............. 530,269 109,331 42,874
======== ======= ======
<CAPTION>
<S> <C> <C> <C>
Operations:
Net Investment
Income (Expense).
Net Realized Gain
(Loss) on
Investments......
Net Unrealized
Gain (Loss) on
Investments......
Increase
(Decrease) in Net
Assets Resulting
from Operations..
Net Deposits into
Separate Account.
Increase in Net
Assets..........
Net Assets,
Beginning of Year.
Net Assets, End of
Year..............
</TABLE>
See Accompanying Notes to Financial Statements.
F-20
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements
December 31, 1999
(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 Division options included
herein commenced operations on February 26, 1997. 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
fourteen divisions which invest exclusively in shares of Scudder Variable Life
Investment Fund (Scudder), Fidelity Variable Insurance Products Fund (Fidelity
VIPI), Fidelity Variable Insurance Products Fund II (Fidelity VIPII), Putnam
Variable Trust (Putnam), T. Rowe Price Equity Series, Inc. (TR Price I),
T. Rowe Price Fixed Income Series, Inc. (TR Price II) and MFS Variable
Insurance Trust (MFS), open-end, diversified management investment companies.
These funds are the Scudder Money Market, Scudder International, Fidelity
Equity Income, Fidelity Growth, Fidelity Index 500, Fidelity Contrafund, Putnam
High Yield, Putnam Voyager, Putnam Income, Putnam New Opportunities, TR Price
New America Growth, TR Price Limited-Term Bond, TR Price Personal Strategy
Balanced and MFS Emerging Growth (the Divisions). Policyholders have the option
of directing their premium payments into any or all of the Divisions.
(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, Fidelity VIPI,
Fidelity VIPII, Putnam, TR Price I, TR Price II and MFS 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. All dividends received are immediately reinvested on the ex-
dividend date.
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.
F-21
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
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 assuming certain risks in connection with the
policies. In addition, some policies 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 optional rider benefits charge is a monthly deduction for any additional
benefits provided by policy riders.
Surrender or Contingent Deferred Sales Charge
During the first policy year, 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 a daily charge against the
operations of each division is made for the mortality and expense risks assumed
by Paragon. Paragon deducts a daily charge from the Separate Account at the
rate of .0020471% of the net assets of each division of the Separate Account
which equals an annual rate of .75% 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-22
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
Note 4 -- Purchases and Sales
For the Years Ended December 31, 1999, 1998 and the period from February 26,
1997 (inception) to December 31, 1997, purchases and proceeds from the sales
of the Scudder Variable Insurance Products Fund, Fidelity Variable Insurance
Products Fund, Fidelity Variable Insurance Products Fund II, Putnam Variable
Trust, T.Rowe Price Equity Series, Inc., T.Rowe Price Fixed Income Series,
Inc. and MFS Variable Insurance Trust
<TABLE>
<CAPTION>
Scudder
Scudder Money International Fidelity Equity Fidelity Growth
Market Division Division Income Division Division
------------------------------- ----------------------- ------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- --------- --------- ------- ------- ------- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $ 698,371 194,773 411,282 955,621 596,570 958,562 1,217,400 889,293 938,848 2,462,102 607,056 683,583
Sales........... $ 455,692 51,234 289,611 386,233 102,947 173,610 416,382 124,813 38,007 207,171 74,918 26,952
=========== ========= ========= ======= ======= ======= ========= ======= ======= ========= ======= =======
<CAPTION>
Fidelity Contrafund Putnam High Putnam Voyager Putnam Income
Division Yield Division Division Division
------------------------------- ----------------------- ------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- --------- --------- ------- ------- ------- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $ 3,091,892 1,080,030 1,383,519 257,628 180,347 227,743 860,525 383,609 438,392 841,873 180,773 384,876
Sales........... $ 537,241 103,003 45,697 63,617 57,532 22,023 220,253 72,208 39,294 50,661 9,892 13,191
=========== ========= ========= ======= ======= ======= ========= ======= ======= ========= ======= =======
<CAPTION>
T.R. Price New T.R. Price Personal
America Growth T.R. Price Limited- Strategy Balanced MFS Emerging
Division Term Bond Division Division Growth Division
------------------------------- ----------------------- ------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- --------- --------- ------- ------- ------- --------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases....... $ 896,759 564,498 772,129 444,973 64,606 44,390 1,548,177 454,551 599,637 1,801,453 673,884 952,779
Sales........... $ 318,715 64,424 25,684 25,275 5,557 3,027 494,695 81,578 128,464 292,638 104,262 85,782
=========== ========= ========= ======= ======= ======= ========= ======= ======= ========= ======= -------
<CAPTION>
Fidelity Index 500
Division
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Purchases....... 4,588,369 1,735,116 2,158,781
Sales........... 598,077 172,866 153,926
========= ========= =========
<CAPTION>
Putnam New
Opportunities
Division
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Purchases....... 941,211 442,543 500,587
Sales........... 160,862 88,851 21,590
========= ========= =========
<CAPTION>
<S> <C> <C> <C>
Purchases.......
Sales...........
</TABLE>
<TABLE>
<CAPTION>
Scudder Fidelity Equity Fidelity
Scudder Money International Income Growth Fidelity Index
Market Division Division Division Division 500 Division
----------------------- --------------------- -------------------- -------------------- --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in
Units
Deposits........ 634,186 185,432 406,623 52,999 38,766 65,985 43,661 35,673 41,371 43,315 14,418 19,373 29,736 13,795 20,471
Withdrawals..... 411,882 47,582 285,844 21,472 6,564 12,114 14,773 4,810 1,652 3,554 1,748 753 3,781 1,322 1,404
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Increase in
Units............ 222,304 137,849 120,779 31,527 32,202 53,871 28,888 30,863 39,719 39,761 12,670 18,620 25,955 12,473 19,067
Outstanding
Units,
Beginning of
Year............ 258,628 120,779 -- 86,073 53,871 -- 70,582 39,719 -- 31,290 18,620 -- 31,540 19,067 --
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Outstanding
Units,
End of Year..... 480,932 258,628 120,779 117,600 86,073 53,871 99,470 70,582 39,719 71,051 31,290 18,620 57,495 31,540 19,067
======= ======= ======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The purchases above do not include dividends and realized gains from
distributions that have been reinvested into the respective divisions.
Note 5 -- Accumulation of Unit Activity
The following is a reconciliation of the accumulation of unit activity for
the Years ended December 31, 1999, 1998 and the period from February 26, 1997
(inception) to December 31, 1997:
F-23
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
Note 5--Accumulation of Unit Activity (continued)
The following is a reconciliation of the accumulation of unit activity for
the Year ended December 31, 1998 and the period from February 26, 1997
(Inception) to December 31, 1997:
<TABLE>
<CAPTION>
Putnam New
Fidelity Contrafund Putnam High Yield Putnam Voyager Putnam Income Opportunities
Division Division Division Division Division
---------------------- -------------------- -------------------- -------------------- --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in
Units
Deposits........ 112,850 50,010 74,108 18,391 13,125 16,908 15,394 9,055 12,048 57,047 12,927 28,842 31,975 20,017 26,662
Withdrawals..... 18,908 4,628 2,401 4,597 3,862 1,551 3,728 1,599 1,023 3,431 600 932 5,647 3,804 1,103
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Increase in
Units............ 93,942 45,383 71,707 13,794 9,263 15,357 11,666 7,456 11,025 53,616 12,327 27,910 26,328 16,213 25,559
Outstanding
Units, Beginning
of Year.......... 117,090 71,707 -- 24,620 15,357 -- 18,481 11,025 -- 40,237 27,910 -- 41,772 25,559 --
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Outstanding
Units, End of
Year............. 211,032 117,090 71,707 38,414 24,620 15,357 30,147 18,481 11,025 93,853 40,237 27,910 68,100 41,772 25,559
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following is a reconciliation of the accumulation of unit activity for
the Years ended December 31, 1999, 1998 and the period from February 26, 1997
(inception) to December 31, 1997:
<TABLE>
<CAPTION>
T.R. Price New
America Growth T.R. Price Limited- T.R. Price Personal MFS Emerging Growth
Division Term Bond Division Strat. Bal. Division Division
-------------------- ------------------- --------------------- ---------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ----- ------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Increase in Units
Deposits............... 35,123 25,749 40,110 82,401 12,759 8,977 84,895 27,507 40,523 75,477 38,091 64,495
Withdrawals............ 12,250 2,811 1,297 4,655 1,025 604 26,535 4,947 8,452 11,671 5,702 5,369
------ ------ ------ ------ ------ ----- ------- ------ ------ ------- ------ ------
Net Increase in Units... 22,873 22,938 38,813 77,746 11,734 8,373 58,360 22,560 32,071 63,806 32,389 59,126
Outstanding Units,
Beginning of Year....... 61,751 38,813 -- 20,107 8,373 -- 54,631 32,071 -- 91,515 59,126 --
------ ------ ------ ------ ------ ----- ------- ------ ------ ------- ------ ------
Outstanding Units, End
of Year................. 84,624 61,751 38,813 97,853 20,107 8,373 112,991 54,631 32,071 155,321 91,515 59,126
====== ====== ====== ====== ====== ===== ======= ====== ====== ======= ====== ======
</TABLE>
F-24
<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 various funds. Net
deposits represent the amount 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 years ended December 31, 1999, 1998 and
for the period from February 26, 1997 (inception) to December 31, 1997.
<TABLE>
<CAPTION>
Scudder International Fideliy Equity Income
Scudder Money Market Division Division Division
-------------------------------- ------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross
Deposits........... $ 744,650 454,499 572,646 859,804 722,702 806,785 1,583,555 1,044,412 1,039,412
Surrenders and
Withdrawals........ (67,368) (4,278) (74) (90,393) (20,489) (72) (127,451) (56,750) (14,044)
Transfers Between
Funds and General
Account............ 2,545 17,780 (206,826) (6,036) (59,542) 66,433 (251,955) 63,313 20,328
---------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 679,827 468,001 365,746 763,375 642,671 873,146 1,204,149 1,050,975 1,045,696
Deductions:
Premium Expense
Charges........... 20,523 12,204 16,024 23,697 19,405 22,575 43,644 28,044 29,085
Monthly Expense
Charges........... 20,640 17,632 4,660 7,812 6,891 6,565 17,370 13,776 8,458
Cost of Insurance
and Optional
Benefits.......... 393,620 292,199 222,953 148,976 114,197 55,858 331,259 228,309 104,915
---------- --------- --------- --------- --------- --------- --------- --------- ---------
434,783 322,035 243,637 180,485 140,493 84,998 392,273 270,129 142,458
---------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Deposits from
Policyholders...... $ 245,044 145,966 122,109 582,890 502,178 788,148 811,876 780,846 903,238
========== ========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
Fidelity Index 500 Division Fidelity Contrafund Division Putnam High Yield Division
-------------------------------- ------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross
Deposits........... $5,793,752 2,259,997 2,274,729 3,747,692 1,429,506 1,858,957 353,898 241,285 263,896
Surrenders and
Withdrawals........ (420,055) (84,913) (15,614) (411,457) (55,117) (2,130) (22,356) (7,840) (7,735)
Transfers Between
Funds and General
Account............ 68,815 61,916 76,287 (15,777) (16,713) (283,887) (38,545) (41,786) (1,230)
---------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 5,442,512 2,237,000 2,335,402 3,320,458 1,357,676 1,572,940 292,997 191,659 254,931
Deductions:
Premium Expense
Charges........... 159,679 60,684 63,651 103,288 38,384 52,017 9,754 6,479 7,384
Monthly Expense
Charges........... 62,412 33,032 18,511 31,480 18,350 15,127 4,336 3,416 2,147
Cost of Insurance
and Optional
Benefits.......... 1,190,253 547,416 241,002 600,348 304,100 164,035 82,688 56,606 38,457
---------- --------- --------- --------- --------- --------- --------- --------- ---------
1,412,344 641,132 323,164 735,116 360,834 231,179 96,778 66,501 47,988
---------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Deposits from
Policyholders...... $4,030,168 1,595,868 2,012,238 2,585,342 996,842 1,341,761 196,219 125,158 206,943
========== ========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
Fidelity Growth Division
----------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Total Gross
Deposits........... 2,956,035 828,226 756,226
Surrenders and
Withdrawals........ (132,900) (61,120) (2,270)
Transfers Between
Funds and General
Account............ 129,655 1,791 (56,593)
---------- -------- --------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 2,952,790 768,897 697,363
Deductions:
Premium Expense
Charges........... 81,470 22,239 21,161
Monthly Expense
Charges........... 29,730 11,613 6,154
Cost of Insurance
and Optional
Benefits.......... 566,988 192,450 11,884
---------- -------- --------
678,188 226,302 39,199
---------- -------- --------
Net Deposits from
Policyholders...... 2,274,602 542,595 658,164
========== ======== ========
<CAPTION>
Putnam Voyager Division
----------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Total Gross
Deposits........... 1,105,508 507,398 454,188
Surrenders and
Withdrawals........ (164,260) (26,810) (14,199)
Transfers Between
Funds and General
Account............ (22,810) (8,874) 48,745
---------- -------- --------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 918,438 471,714 488,734
Deductions:
Premium Expense
Charges........... 30,468 13,624 12,709
Monthly Expense
Charges........... 11,878 8,011 3,696
Cost of Insurance
and Optional
Benefits.......... 226,500 132,765 71,650
---------- -------- --------
268,846 154,400 88,055
---------- -------- --------
Net Deposits from
Policyholders...... 649,592 317,314 400,679
========== ======== ========
</TABLE>
F-25
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
Note 6--Reconciliation of Gross and Net Deposits into the Separate Account
(continued)
Deposits into the Separate Account purchase shares of various funds. Net
deposits represent the amount 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 years ended December 31, 1999, 1998 and
for the period from February 26, 1997 (inception) to December 31, 1997.
<TABLE>
<CAPTION>
Putnam New Opportunities T.R. Price New America
Putnam Income Division Division Growth Division
---------------------------- ----------------------------- ---------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- ------- ------- --------- ------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross
Deposits........... $ 981,178 240,997 269,041 1,067,229 588,576 597,955 1,065,174 733,553 809,931
Surrenders and
Withdrawals........ (20,921) (1,926) (1) (59,380) (13,945) (214) (79,000) (27,696) (1,562)
Transfers Between
Funds and General
Account............ 20,905 5,082 150,618 33,779 (54,349) 8,343 (100,173) 20,602 81,731
---------- ------- ------- --------- ------- --------- --------- ------- -------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 981,162 244,153 419,658 1,041,628 520,282 606,084 886,001 726,459 890,100
Deductions:
Premium Expense
Charges........... 27,042 6,471 7,528 29,413 15,804 16,732 29,357 19,697 22,663
Monthly Expense
Charges........... 7,825 3,476 2,189 11,006 8,234 4,866 13,651 10,933 6,591
Cost of Insurance
and Optional
Benefits.......... 149,244 57,608 37,209 209,915 136,464 103,656 260,337 181,182 110,288
---------- ------- ------- --------- ------- --------- --------- ------- -------
184,111 67,555 46,926 250,334 160,502 125,254 303,345 211,812 139,542
---------- ------- ------- --------- ------- --------- --------- ------- -------
Net Deposits from
Policyholders...... $ 797,051 176,598 372,732 791,294 359,780 480,830 582,656 514,647 750,558
========== ======= ======= ========= ======= ========= ========= ======= =======
<CAPTION>
T.R. Price Personal Strat. MFS Emerging Growth
Bal. Division Division
---------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
---------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Gross
Deposits........... $1,651,162 537,081 617,298 2,141,360 906,166 937,102
Surrenders and
Withdrawals........ (201,604) (25,095) (12,595) (137,188) (29,602) (1,608)
Transfers Between
Funds and General
Account............ (51,312) 13,297 (42,168) (25,838) (60,221) 80,406
---------- ------- ------- --------- ------- ---------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 1,398,246 525,283 562,535 1,978,334 816,343 1,015,900
Deductions:
Premium Expense
Charges........... 45,507 14,421 17,273 59,017 24,324 26,222
Monthly Expense
Charges........... 14,483 7,609 5,023 19,591 11,924 7,626
Cost of Insurance
and Optional
Benefits.......... 276,219 126,092 64,338 373,614 197,608 110,437
---------- ------- ------- --------- ------- ---------
336,209 148,122 86,634 452,222 233,856 144,285
---------- ------- ------- --------- ------- ---------
Net Deposits from
Policyholders...... $1,062,037 377,161 475,901 1,526,112 582,487 871,615
========== ======= ======= ========= ======= =========
<CAPTION>
T.R. Price Limited
Term Bond Division
-----------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Total Gross
Deposits........... 471,331 79,889 43,399
Surrenders and
Withdrawals........ (5,509) (145) --
Transfers Between
Funds and General
Account............ 44,830 (854) 4,089
-------- ------- ------
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers....... 510,652 78,890 47,488
Deductions:
Premium Expense
Charges........... 12,990 2,145 1,214
Monthly Expense
Charges........... 3,891 837 353
Cost of Insurance
and Optional
Benefits.......... 74,214 13,864 4,448
-------- ------- ------
91,095 16,846 6,015
-------- ------- ------
Net Deposits from
Policyholders...... 419,557 62,044 41,473
======== ======= ======
<CAPTION>
<S> <C> <C> <C>
Total Gross
Deposits...........
Surrenders and
Withdrawals........
Transfers Between
Funds and General
Account............
Total Gross
Deposits net of
Surrenders,
Withdrawals, and
Transfers.......
Deductions:
Premium Expense
Charges...........
Monthly Expense
Charges...........
Cost of Insurance
and Optional
Benefits..........
Net Deposits from
Policyholders......
</TABLE>
F-26
<PAGE>
PARAGON SEPARATE ACCOUNT B
Notes to Financial Statements--(Continued)
Note 7--Subsequent Event
On January 6, 2000, Paragon Life Insurance Co.'s ultimate parent, GenAmerica
Corporation, was purchased by Metropolitan Life Insurance Company.
F-27
<PAGE>
PARAGON SEPARATE ACCOUNT B
SCHEDULE OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Number
of Market
Shares Value Cost
------- ---------- ----------
<S> <C> <C> <C>
Scudder Variable Life Investment Fund:
Scudder Money Market Division.................. 541,708 $ 541,708 $ 541,708
Scudder International Division................. 146,457 $2,978,926 $2,141,088
Fidelity Variable Insurance Products Fund:
Fidelity Equity Income Division................ 109,241 $2,808,576 $2,664,727
Fidelity Growth Division....................... 90,069 $4,947,495 $3,784,255
Fidelity Variable Insurance Products Fund II:
Fidelity Index 500 Division.................... 59,500 $9,960,873 $7,871,414
Fidelity Contrafund Division................... 228,619 $6,664,237 $5,194,948
Putnam Variable Trust:
Putnam High Yield Division..................... 49,095 $ 544,465 $ 583,953
Putnam Voyager Division........................ 35,906 $2,378,749 $1,539,013
Putnam Income Division......................... 109,915 $1,376,135 $1,411,684
Putnam New Opportunities Division.............. 68,447 $2,980,187 $1,687,209
T.Rowe Price Fixed Income Series, Inc.:
T.R. Price New America Growth Division......... 90,586 $2,371,545 $2,048,739
T.R. Price Limited Term Bond Division.......... 110,737 $ 530,432 $ 543,883
T.R. Price Personal Strategy Balanced.......... 135,385 $2,166,163 $2,140,001
MFS Variable Insurance Trust:
MFS Emerging Growth Division................... 152,118 $5,771,340 $3,044,843
</TABLE>
See Accompanying Independent Auditors' Report.
F-28
<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
maximum .90% charge for mortality and expense risk, an assumed combined
investment advisory fee (representing the average of the fees incurred by the
Funds in which the Divisions invest) and the Funds' expenses (based on the
average of the actual expenses incurred in fiscal year 1999) of .674%. These
charges take into account expense reimbursement arrangements expected to be in
place for 2000 for some of the Funds. In the absence of the reimbursement
arrangements for some of the Funds, the charges would have also totaled an
average of .674%. See the respective Fund prospectus for details. 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 --
1.574%, 4.426%, and 10.426%, respectively.
The hypothetical values shown in the tables reflect all fees and charges
under the Policy, including the premium expense charge, the premium tax
charge, and all components of the monthly deduction. They 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.")
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: 0.00% $6,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 0.00% (NET RATE at -
1.574%)
--------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,093 $500,000 $ 5,077 $500,000
2 12,630 5,984 500,000 10,048 500,000
3 19,423 8,630 500,000 14,889 500,000
4 26,555 11,024 500,000 19,542 500,000
5 34,045 13,140 500,000 24,017 500,000
6 41,908 14,962 500,000 28,369 500,000
7 50,165 16,458 500,000 32,550 500,000
8 58,834 17,587 500,000 36,561 500,000
9 67,937 18,314 500,000 40,409 500,000
10 77,496 18,607 500,000 44,094 500,000
11 87,532 18,457 500,000 47,512 500,000
12 98,070 17,833 500,000 50,777 500,000
13 109,134 16,727 500,000 53,838 500,000
14 120,752 15,110 500,000 56,596 500,000
15 132,951 12,928 500,000 59,103 500,000
16 145,760 10,116 500,000 61,370 500,000
17 159,209 6,561 500,000 63,351 500,000
18 173,331 2,126 500,000 64,992 500,000
19 188,159 0 0 66,351 500,000
20 203,728 0 0 67,329 500,000
25 294,060 0 0 64,647 500,000
30 409,348 0 0 40,035 500,000
</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 Policy
Owner, and the investment results for the Funds. 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, the investment management
companies, 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 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: 0.00% $6,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 6.00% (NET RATE at
4.426%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,194 $500,000 $ 5,243 $500,000
2 12,630 6,373 500,000 10,691 500,000
3 19,423 9,488 500,000 16,328 500,000
4 26,555 12,527 500,000 22,101 500,000
5 34,045 15,461 500,000 28,025 500,000
6 41,908 18,261 500,000 34,161 500,000
7 50,165 20,891 500,000 40,469 500,000
8 58,834 23,296 500,000 46,955 500,000
9 67,937 25,429 500,000 53,637 500,000
10 77,496 27,241 500,000 60,522 500,000
11 87,532 28,709 500,000 67,515 500,000
12 98,070 29,779 500,000 74,735 500,000
13 109,134 30,426 500,000 82,144 500,000
14 120,752 30,598 500,000 89,657 500,000
15 132,951 30,213 500,000 97,331 500,000
16 145,760 29,179 500,000 105,189 500,000
17 159,209 27,349 500,000 113,199 500,000
18 173,331 24,543 500,000 121,327 500,000
19 188,159 20,561 500,000 129,639 500,000
20 203,728 15,196 500,000 138,065 500,000
25 294,060 0 0 181,075 500,000
30 409,348 0 0 221,034 500,000
</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 Policy
Owner, and the investment results for the Funds. 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, the investment management
companies, 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 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: 0.00% $6,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$500.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 12.00% (NET RATE at
10.426%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 6,161 $ 3,293 $500,000 $ 5,406 $500,000
2 12,630 6,769 500,000 11,348 500,000
3 19,423 10,400 500,000 17,857 500,000
4 26,555 14,194 500,000 24,931 500,000
5 34,045 18,143 500,000 32,637 500,000
6 41,908 22,243 500,000 41,100 500,000
7 50,165 26,482 500,000 50,352 500,000
8 58,834 30,832 500,000 60,475 500,000
9 67,937 35,273 500,000 71,576 500,000
10 77,496 39,786 500,000 83,757 500,000
11 87,532 44,378 500,000 97,040 500,000
12 98,070 49,033 500,000 111,658 500,000
13 109,134 53,761 500,000 127,714 500,000
14 120,752 58,554 500,000 145,287 500,000
15 132,951 63,380 500,000 164,605 500,000
16 145,760 68,201 500,000 185,885 500,000
17 159,209 72,930 500,000 209,329 500,000
18 173,331 77,457 500,000 235,169 500,000
19 188,159 81,663 500,000 263,747 500,000
20 203,728 85,422 500,000 295,354 500,000
25 294,060 93,380 500,000 513,588 595,762
30 409,348 55,436 500,000 871,491 932,495
</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 Policy
Owner, and the investment results for the Funds. 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, the investment management
companies, 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 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: 0.00% $12,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 0.00% (NET RATE at --
1.574%%)
---------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 12,322 $ 8,898 $508,898 $ 10,888 $510,888
2 25,261 17,485 517,485 21,571 521,571
3 38,846 25,717 525,717 32,025 532,025
4 53,111 33,590 533,590 42,191 542,191
5 68,090 41,078 541,078 52,079 552,079
6 83,817 48,164 548,164 61,746 561,746
7 100,330 54,819 554,819 71,142 571,142
8 117,669 61,002 561,002 80,267 580,267
9 135,875 66,679 566,679 89,129 589,129
10 154,992 71,824 571,824 97,728 597,728
11 175,064 76,431 576,431 105,948 605,948
12 196,140 80,475 580,475 113,915 613,915
13 218,269 83,959 583,959 121,574 621,574
14 241,505 86,860 586,860 128,810 628,810
15 265,903 89,136 589,136 135,684 635,684
16 291,521 90,737 590,737 142,207 642,207
17 318,419 91,567 591,567 148,326 648,326
18 346,663 91,513 591,513 153,981 653,981
19 376,319 90,466 590,466 159,241 659,241
20 407,457 88,328 588,328 163,991 663,991
25 588,120 59,576 559,576 178,143 678,143
30 818,697 0 0 167,317 667,317
</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 Policy
Owner, and the investment results for the Funds. 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, the investment management
companies, 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 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: 0.00% $12,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 6.00% (NET RATE at 4.426%)
------------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- ------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1 $ 12,322 $ 9,188 $509,188 $ 11,244 $ 511,244
2 25,261 18,607 518,607 22,949 522,949
3 38,846 28,216 528,216 35,112 535,112
4 53,111 38,012 538,012 47,684 547,684
5 68,090 47,973 547,973 60,691 560,691
6 83,817 58,082 558,082 74,206 574,206
7 100,330 68,308 568,308 88,198 588,198
8 117,669 78,608 578,608 102,680 602,680
9 135,875 88,942 588,942 117,681 617,681
10 154,992 99,276 599,276 133,218 633,218
11 175,064 109,597 609,597 149,192 649,192
12 196,140 119,868 619,868 165,746 665,746
13 218,269 130,081 630,081 182,843 682,843
14 241,505 140,202 640,202 200,385 700,385
15 265,903 150,173 650,173 218,448 718,448
16 291,521 159,926 659,926 237,060 737,060
17 318,419 169,342 669,342 256,185 756,185
18 346,663 178,277 678,277 275,778 775,778
19 376,319 186,583 686,583 295,922 795,922
20 407,457 194,114 694,114 316,519 816,519
25 588,120 216,407 716,407 424,621 924,621
30 818,697 193,034 693,034 531,504 1,031,504
</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 Policy
Owner, and the investment results for the Funds. 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, the investment management
companies, 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 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: 0.00% $12,000.00
PREMIUM TAX: 2.25% (Monthly Premium:
$1,000.00)
<TABLE>
<CAPTION>
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN at 12.00% (NET RATE at 10.426%)
--------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR at 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1 $ 12,322 $ 9,474 $ 509,474 $ 11,593 $ 511,593
2 25,261 19,753 519,753 24,358 524,358
3 38,846 30,871 530,871 38,390 538,390
4 53,111 42,903 542,903 53,754 553,754
5 68,090 55,912 555,912 70,593 570,593
6 83,817 69,975 569,975 89,119 589,119
7 100,330 85,164 585,164 109,450 609,450
8 117,669 101,547 601,547 131,769 631,769
9 135,875 119,204 619,204 156,289 656,289
10 154,992 138,230 638,230 183,233 683,233
11 175,064 158,755 658,755 212,729 712,729
12 196,140 180,898 680,898 245,169 745,169
13 218,269 204,822 704,822 280,796 780,796
14 241,505 230,682 730,682 319,817 819,817
15 265,903 258,622 758,622 362,644 862,644
16 291,521 288,798 788,798 409,678 909,678
17 318,419 321,330 821,330 461,297 961,297
18 346,663 356,331 856,331 517,910 1,017,910
19 376,319 393,928 893,928 580,101 1,080,101
20 407,457 434,273 934,273 648,326 1,148,326
25 588,120 685,678 1,185,678 1,101,883 1,601,883
30 818,697 1,040,522 1,540,522 1,815,597 2,315,597
</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 Policy
Owner, and the investment results for the Funds. 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, the investment management
companies, 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 and further assume there is no Policy Indebtedness outstanding.
A-7
<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>
REPRESENTATION CONCERNING FEES AND CHARGES
Paragon Life Insurance Company hereby represents that the fees and charges
deducted under the terms of the Contract are, in the aggregate, reasonable in
relationship to the services rendered, the expenses expected, and the risks
assumed by Paragon.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The facing sheet.
The Scudder Direct Prospectus consisting of 74 pages and the Multiple
Manager Direct Prospectus consisting of 80 pages.
The undertaking to file reports required by Section 15 (d), 1934 Act.
The undertaking pursuant to Rule 484.
Representation concerning fees and charges.
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 4
(2) Not applicable.
(3) (a) Form of Underwriting Agreement. 4
(b) Form of Selling Agreement. 2
(4) Not applicable.
(5) (a) Form of Group Contract.
. Scudder (30020) 4
. Multi-Manager (30037) 4
(b) Form of Individual Policy and Policy Riders.
. Scudder (30018) 4,3
. Multi-Manager (30040) 4,3
(c) Form of Certificate and Certificate Riders.
. Scudder (30018) 4,3
. Multi-Manager (30036) 4,3
(6) (a) Amended Charter and Articles of Incorporation of
the Company 2
(b) By-Laws of the Company 2
(7) Not applicable.
(8) Participation Agreement:
(a) Form of Participation Agreement with Scudder Variable Life
Investment Fund. 2
(b) Form of Participation Agreement with Fidelity Variable
Insurance Products Fund. 2
(c) Form of Participation Agreement with Fidelity Variable Insurance
Products Fund II. 2
(d) Form of Participation Agreement with MFS Variable Insurance
Trust. 2
(e) Form of Participation Agreement with Putnam Capital Manager
Trust. 2
(f) Form of Participation Agreement with T. Rowe Price Investment
Services, Inc. 6
II-3
<PAGE>
(9) Not applicable.
(10) (a) Form of Application for Group Contract (10914). 5
(b) Form of Application for Employee Insurance
Guaranteed Issue (Group Contract 10915). 5
(c) Form of Application for Employee Insurance
(Simplified Issue) (Group Contract 10921, 10920). 5
(d) Form of Application for Spouse Insurance
(Group Contract 10917). 5
(e) Form of Application for Employee Insurance
Guaranteed Issue (Individual Policy 10352, 33100). 5
(f) Form of Application for Employee Insurance
(Simplified Issue) (Individual Policy 10357). 5
(g) Form of Application for Spouse Insurance
(Individual Policy 10354). 5
(h) Form of Application Supplement for Scudder Direct Policy
(33105). 4
(i) Form of Application Supplement for Multi-Manager Direct Policy
(33116). 4
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. 4
3. Opinion of Matthew P. McCauley, Esquire, General Counsel of Paragon Life
Insurance Company. 1
4. Not Applicable
5. Not Applicable
6. Not Applicable
II-4
<PAGE>
7. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive
Vice President and Chief Actuary. 1
8(a). The consent of KPMG LLP, Independent Certified Public Accountants. 1
(b). Written consent of Sutherland Asbill & Brennan LLP. 1
9. 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. 4
* * *
1. Filed Herewith.
2. Incorporated by reference to the Pre-Effective Amendment No. 1 on Form
S-6 found in File No. 333-80393, filed with the Securities and Exchange
Commission on September 1, 1999.
3. Incorporated by reference to the Post Effective Amendment No. 12 on Form
S-6 found on file No. 33-18341, filed with the Securities and Exchange
Commission on April 28, 2000 for Policy and Certificate Riders only.
4. Incorporated by reference to the Post-Effective Amendment No. 12 on Form
S-6 found in File No. 33-58796, filed with the Securities and Exchange
Commission on April 28, 2000.
5. Incorporated by reference to the Post-Effective Amendment No. 12 on Form
S-6 found in File 33-18341, filed with the Securities and Exchange
Commission on April 28, 2000.
6. Incorporated by reference to the Pre-Effective Amendment No. 1 on Form
S-6 found in File No. 333-36515, filed with the Securities and Exchange
Commission on February 26, 1999.
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 28th day of April, 2000.
(Seal) Paragon Life Insurance Company
Attest: /s/Matthew P. McCauley By: /s/Carl H. Anderson
------------------------- ---------------------------
Matthew P. McCauley, Carl H. Anderson, President
Secretary 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 4/28/00
- ------------------------
Carl H. Anderson President and Director
(Chief Executive Officer)
/s/Matthew K. Duffy 4/28/00
- ------------------------
Matthew K. Duffy Vice President and Chief
Financial Officer (Principal
Accounting Officer and
Principal Financial Officer)
and Director
- ------------------------
E. Thomas Hughes, Jr.* Director and Treasurer
- ------------------------
Richard A. Liddy* Director
II-6
<PAGE>
Signature Title Date
Matthew P. McCauley
/s/--------------------- 4/28/00
Matthew P. McCauley Vice President
General Counsel,
Secretary and Director
Craig K. Nordyke
/s/--------------------- 4/28/00
Craig K. Nordyke Executive Vice President,
Chief Actuary, and
Director
- ------------------------
Warren J. Winer* Director
- ------------------------
Bernard H Wolzenski* Director
- ------------------------
A. Greig Woodring* Director
Craig K. Nordyke
By:/s/------------------ 4/28/00
Craig K. Nordyke
*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.
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
1. Opinion of Matthew P. McCauley, Esquire, General Counsel of Paragon
Life Insurance Company.
2. Opinion and Consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive
Vice President and Chief Actuary.
3. Written consent of KPMG LLP, Independent Certified Public Accountants.
4. Written consent of Sutherland Asbill & Brennan LLP
<PAGE>
Exhibit 1
OPINION of MATTHEW P. McCAULEY, ESQUIRE, GENERAL
COUNSEL of PARAGON LIFE INSURANCE COMPANY
<PAGE>
February 22, 1993
Paragon Life Insurance Company
100 South Brentwood Boulevard
St. Louis, MO 63105
Gentlemen:
This opinion is furnished in connection with the offering of certain
group variable life insurance contracts ("Group Contracts") and certain
individual variable life insurance contracts ("Individual Contracts")
(collectively, "Contracts") under Registration Statement No. 33-75778
filed by Paragon Life Insurance Company ("Paragon") and Separate Account
B of Paragon Life Insurance Company (the "Separate Account") under the
Securities Act of 1933, as amended (the "Act").
I am the Vice President and General Counsel of Paragon, and in such
capacity I am familiar with Paragon's Articles of Incorporation and
By-Laws and have reviewed all statements, records, instruments and
documents which I have deemed it necessary to examine for the purpose of
this opinion. I have examined the form of registration statement to be
filed with the Securities and Exchange Commission on Form S-6 in
connection with the registration, under the Act, of the Contracts. I have
supervised the establishment of the Separate Account on January 4, 1993,
by the Board of Directors of Paragon as a Separate Account for assets
designed to support the Contracts. I am familiar with the proceedings
taken and proposed to be taken in connection with the authorization,
issuance and sale of the Contracts. Based upon a review of these
documents and such laws that I consider appropriate, I am of the opinion
that:
1. Paragon is validly organized and in good standing under the
laws of the State of Missouri and a validly existing corporation.
2. The Separate Account is duly created and validly existing as a
Separate Account pursuant to the provisions of Section 309 of
Chapter 376 of the Revised Statutes of Missouri.
3. Both the Group Contracts and the Individual Contracts to be
issued pursuant to the terms of the Registration Statement have
been duly authorized and, when issued and delivered as provided
therein, will constitute legal, validly issued, and binding
obligations of Paragon in accordance with their terms.
4. To the extent so provided in the Contracts, the portion of the
assets to be held in the Separate Account equal to the reserves
and liabilities under the Contracts will not be chargeable with
liabilities arising out of any other business Paragon may
conduct.
<PAGE>
Paragon Life Insurance Company 2 February 22, 1993
5. General American Life Insurance Company's resolution dated May
23, 1991 stating that it will ensure that Paragon will have
sufficient funds to meet all of its contractual obligations and
agreeing that its guarantee of Paragon's insurance policies will
be and remain enforceable by Paragon policyholders against
General American Life Insurance Company directly does not
constitute a guarantee of the investment experience or cash
values of any Contract issued by Paragon.
5. The disclosure in the Registration Statement regarding the
resolution described in Item 5 has been prepared or reviewed by
me, and is fair, correct, and complete in all material respects.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement.
Respectfully submitted,
/s/ Matthew P. McCauley
Matthew P. McCauley
Vice President and General
Counsel
<PAGE>
Exhibit 2
OPINION AND CONSENT OF CRAIG K. NORDYKE, F.S.A,
M.A.A.A., EXECUTIVE VICE PRESIDENT AND CHIEF ACTUARY
<PAGE>
RE: 33-75778
Prospectus #1 Scudder Direct
Gentlemen:
In my capacity as Executive 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 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.
2. 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. 7 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
Executive Vice President and Chief Actuary
<PAGE>
RE: 33-75778
Prospectus #2
Multi Manager Direct
Gentlemen:
In my capacity as Executive 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 illustrations of cash values, death benefits, and accumulated premiums
in the Appendix to the prospectuses 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 in the rate class
illustrated than to prospective purchasers of Policies at other ages.
2. 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. 7 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
Executive Vice President and Chief Actuary
<PAGE>
Exhibit 3
CONSENT OF 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 to our
firm under the heading "Experts" in the Registration Statement and Prospectus of
Separate Account B of Paragon Life Insurance Company.
KPMG LLP
St. Louis, Missouri
April 28, 2000
<PAGE>
Exhibit 4
WRITTEN CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
<PAGE>
April 25, 2000
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 Prospectus filed as part of Post-Effective Amendment No. 7 to
the registration statement on Form S-6 for Separate Account B of Paragon Life
Insurance Company (File No. 33-75778). 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 LLP
By: /s/ Stephen E. Roth
--------------------------
Stephen E. Roth