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Registration Number 33-70948
811-8120
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Post-Effective Amendment No. 5
INHEIRITAGE ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Esq.
440 Lincoln Street
Worcester MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a) (1)
___ on (date) pursuant to paragraph (a) (1)
___ on (date) pursuant to paragraph (a) (2) of Rule 485
FLEXIBLE PREMIUM VARIABLE LIFE
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is being
registered under the Securities Act of 1933. The Rule 24f-2 Notice for the
issuer's fiscal year ended December 31, 1996 was filed on February 27, 1997.
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RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
Item No. Of
Form N-8B-2 Caption in Prospectus
- ------------ ---------------------
1............................ Cover Page
2............................ Cover Page
3............................ Not Applicable
4............................ Distribution
5............................ The Company, The Inheiritage Account
6............................ The Inheiritage Account
7............................ Not Applicable
8............................ Not Applicable
9............................ Legal Proceedings
10 .......................... Prospectus A: Summary; Description of the Company,
the Inheiritage Account, Allmerica Investment
Trust, Variable Insurance Products Fund, Variable
Insurance Products Fund II, T. Rowe Price
International Series, Inc., and Delaware Group
Premium Fund, Inc.; The Policy; Policy Termination
and Reinstatement; Other Policy Provisions
Prospectus B: Summary; Description of the
Company, The Inheiritage Account, Allmerica
Investment Trust, Variable Insurance Products
Fund, and T. Rowe Price International Series,
Inc.; The Policy; Policy Termination and
Reinstatement; Other Policy Provisions
11 .......................... Prospectus A: Summary;Description of the
Company, the Inheiritage Account, Allmerica
Investment Trust, Variable Insurance Products
Fund, Variable Insurance Products Fund II,
T. Rowe Price International Series, Inc., And
Delaware Group Premium Fund, Inc.; Investment
Objectives and Policies
Prospectus B: Summary; Allmerica Investment
Trust; Variable Insurance Products Fund; and
T. Rowe Price International Series,Inc.;
Investment Objectives and Policies
12 .......................... Prospectus A: Summary; Allmerica Investment
Trust, Variable Insurance Products Fund,
Variable Insurance Products Fund II, T. Rowe
Price International Series, Inc., and Delaware
Group Premium Fund, Inc.
Prospectus B: Summary; Allmerica Investment
Trust; Variable Insurance Products Fund; and
T. Rowe Price International Series,
13 .......................... Prospectus A: Summary; Allmerica Investment
Trust, Variable Insurance Products
Fund, Variable Insurance Products Fund II,
T. Rowe Price International Series,
Inc., and Delaware Group Premium Fund, Inc.
Investment Advisory Services to Allmerica
Investment Trust, Investment Advisory Services
to Variable Insurance Products Fund and
Variable Insurance Products Fund II, Investment
Advisory Services to T. Rowe Price
International Series, Inc.; Investment Advisory
Services to Delaware Group Premium Fund, Inc.;
Charges and Deductions
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Item No. Of
Form N-8B-2 Caption in Prospectus
- ------------ ---------------------
Prospectus B: Summary; Allmerica Investment
Trust; Variable Insurance Products Fund;
T. Rowe Price International Series, Inc.;
Investment Advisory Services to the Trust;
Investment Advisory Services to Variable
Insurance Products Fund; Investment Advisory
Services to T. Rowe Price International Series,
Inc.; Charges and Deductions
14 .......................... Summary; Application for a Policy
15 .......................... Summary; Application for a Policy;
Premium Payments; Allocation of Net
Premiums
16 .......................... Prospectus A: The Inheiritage Account:
Allmerica Investment Trust, Variable Insurance
Products Fund and Variable Insurance Products
Fund II, T. Rowe Price International Series,
Inc., and Delaware Group Premium Fund, Inc.;
International Series, Inc.; Premium Payments;
Allocation of Net Premiums
Prospectus B: The Inheiritage Account;
Allmerica Investment Trust; Variable Insurance
Products Fund; and T. Rowe Price International
Series, Inc.; Premium Payments; Allocation of
Net Premiums
17 .......................... Summary; Surrender; Partial Withdrawal; Charges
and Deductions; Policy Termination and
Reinstatement
18 .......................... Prospectus A: The Inheiritage Account:
Allmerica Investment Trust, Variable Insurance
Products Fund and Variable Insurance Products
Fund II, T. Rowe Price International Series,
Inc., and Delaware Group Premium Fund, Inc.;
International Series, Inc.; Premium Payments
Prospectus B: The Inheiritage Account;
Allmerica Investment Trust; Variable Insurance
Products Fund; and T. Rowe Price International
Series, Inc.; Premium Payments
19 .......................... Reports; Voting Rights
20 .......................... Not Applicable
21 .......................... Summary; Policy Loans; Other Policy Provisions
22 .......................... Other Policy Provisions
23 .......................... Not Required
24 .......................... Other Policy Provisions
25 .......................... The Company
26 .......................... Not Applicable
27 .......................... The Company
28 .......................... Directors and Principal Officers of the Company
29 .......................... The Company
30 .......................... Not Applicable
31 .......................... Not Applicable
32 .......................... Not Applicable
33 .......................... Not Applicable
34 .......................... Not Applicable
35 .......................... Distribution
36 .......................... Not Applicable
37 .......................... Not Applicable
38 .......................... Summary; Distribution
39 .......................... Summary; Distribution
40 .......................... Not Applicable
41 .......................... The Company, Distribution
42 .......................... Not Applicable
43 .......................... Not Applicable
44 .......................... Premium Payments; Policy Value and Cash
Surrender Value
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Item No. Of
Form N-8B-2 Caption in Prospectus
- ------------ ---------------------
45 .......................... Not Applicable
46 .......................... Policy Value and Cash Surrender Value;
Federal Tax Considerations
47 .......................... The Company
48 .......................... Not Applicable
49 .......................... Not Applicable
50 .......................... The Inheiritage Account
51 .......................... Cover Page; Summary; Charges and Deductions;
The Policy; Policy Termination and
Reinstatement; Other Policy Provisions
52 .......................... Addition, Deletion or Substitution of
Investments
53 .......................... Federal Tax Considerations
54 .......................... Not Applicable
55 .......................... Not Applicable
56 .......................... Not Applicable
57 .......................... Not Applicable
58 .......................... Not Applicable
59 .......................... Not Applicable
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AFLIAC INHEIRITAGE
PROSPECTUS A
The Inheiritage Account is a separate investment account of Allmerica Financial
Life Insurance and Annuity Company ("Company"). The Company issues individual
joint survivorship flexible premium variable life insurance policies ("Policy"
or "Policies") described in the Prospectus. Life insurance coverage is provided
for two Insureds, with death proceeds payable at the death of the last surviving
Insured. Applicants must be Age 80 or under with respect to the younger Insured
and Age 85 or under with respect to the older Insured.
The Policy permits you to allocate net premiums among up to seven of 18
sub-accounts ("Sub-Accounts") of the Inheiritage Account, a separate account of
the Company, and a fixed-interest account ("General Account") of the Company
(collectively, "Accounts"). Each Sub-Account invests its assets in a
corresponding investment portfolio of Allmerica Investment Trust ("Trust"),
Variable Insurance Products Fund ("Fidelity VIP"), Variable Insurance Products
Fund II ("Fidelity VIP II"), T. Rowe Price International Series, Inc. ("T. Rowe
Price") or Delaware Group Premium Fund, Inc. ("DGPF"). The following Underlying
Funds are available under the Policy:
ALLMERICA INVESTMENT TRUST
---------------------------------
Select International Equity Fund
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Small-Mid Cap Value Fund
Select Growth Fund
Growth Fund
Equity Index Fund
Select Growth and Income Fund
Investment Grade Income Fund
Government Bond Fund
Money Market Fund
FIDELITY VIP
---------------
Overseas Portfolio
Equity-Income Portfolio
Growth Portfolio
High Income Portfolio
FIDELITY VIP II
-----------------
Asset Manager Portfolio
T. ROWE PRICE
-----------------
International Stock Portfolio
DGPF
---------
International Equity Series
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE
INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC., AND
DELAWARE GROUP PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO
INVESTS IN HIGHER-YIELDING, HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE
"INVESTMENT OBJECTIVES AND POLICIES"). INVESTORS SHOULD RETAIN A COPY
OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE POLICIES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY.
INVESTMENTS IN THE CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE
FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1997
440 LINCOLN STREET WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
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(Continued from cover page)
Policyowners may, within limits, choose the amount of initial payment and vary
the frequency and amount of future payments. The Policy allows partial
withdrawals and full surrender of the Policy's Surrender Value, within limits.
The Policies are not suitable for short-term investment because of the
substantial nature of the surrender charge. If you think about surrendering the
Policy, consider the lower deferred sales charges that apply during the first
two years from the date of issue or an increase in Face Amount.
In certain circumstances, a Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code of 1986 ("Code"), any policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value will also be adjusted for other factors, including the amount
of charges imposed. The Policy will remain in effect so long as the Policy Value
less any surrender charges and less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy Value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments.
If the Policy is in effect at the death of the last surviving Insured, the
Company will pay a death benefit (the "Death Proceeds") to the Beneficiary.
Prior to the Final Premium Payment Date, the Death Proceeds equal the Sum
Insured, less any Debt, partial withdrawals, and any due and unpaid charges. You
may choose either Sum Insured Option 1 (the Sum Insured is fixed in amount) or
Sum Insured Option 2 (the Sum Insured includes the Policy Value in addition to a
fixed insurance amount). A Policyowner has the right to change the Sum Insured
option, subject to certain conditions. A Guideline Minimum Sum Insured,
equivalent to a percentage of the Policy Value, will apply if greater than the
Sum Insured otherwise payable under Option 1 or Option 2.
No claim is made that the Policy is in any way similar or comparable to a
systematic investment plan of a mutual fund.
------------------------
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
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TABLE OF CONTENTS
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SPECIAL TERMS 5
SUMMARY 8
PERFORMANCE INFORMATION 16
DESCRIPTION OF THE COMPANY, THE INHEIRITAGE ACCOUNT, ALLMERICA INVESTMENT TRUST,
VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE
INTERNATIONAL SERIES, INC., AND DELAWARE GROUP PREMIUM FUND, INC. 19
Investment Objectives and Policies 21
Investment Advisory Services 23
Addition, Deletion or Substitution of Investments 26
Voting Rights 26
THE POLICY 27
Applying for a Policy 27
Free-Look Period 28
Conversion Privileges 28
Premium Payments 29
Incentive Funding Discount 29
Paid-up Insurance Option 30
Allocation of Net Premiums 30
Transfer Privilege 31
Death Proceeds 32
Sum Insured Options 32
Change in Sum Insured Option 35
Change in Face Amount 35
Policy Value and Surrender Value 36
Death Proceeds Payment Options 38
Optional Insurance Benefits 38
Policy Surrender 38
Partial Withdrawals 38
CHARGES AND DEDUCTIONS 39
Tax Expense Charge 39
Premium Expense Charge 39
Monthly Deduction from Policy Value 39
Charges Against Assets of the Inheiritage Account 41
Surrender Charge 42
Charges on Partial Withdrawals 43
Transfer Charges 44
Charge for Increase in Face Amount 44
Other Administrative Charges 44
POLICY LOANS 44
POLICY TERMINATION AND REINSTATEMENT 46
OTHER POLICY PROVISIONS 47
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY 49
DISTRIBUTION 49
SERVICES 50
REPORTS 50
LEGAL PROCEEDINGS 50
FURTHER INFORMATION 50
INDEPENDENT ACCOUNTANTS 51
FEDERAL TAX CONSIDERATIONS 51
</TABLE>
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<TABLE>
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The Company and the Inheiritage Account 51
Taxation of the Policies 51
Modified Endowment Contracts 53
Estate and Generation-Skipping Taxes 53
MORE INFORMATION ABOUT THE GENERAL ACCOUNT 53
FINANCIAL STATEMENTS F-1
APPENDIX A -- OPTIONAL BENEFITS A-1
APPENDIX B -- PAYMENT OPTIONS A-2
APPENDIX C -- ILLUSTRATIONS A-4
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES A-10
</TABLE>
4
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SPECIAL TERMS
ACCUMULATION UNIT: A measure of your interest in a Sub-Account.
AGE: An Insured's age as of the nearest birthday measured from a Policy
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Policy to receive the
insurance proceeds upon the death of the last surviving Insured.
COMPANY: Allmerica Financial Life Insurance and Annuity Company.
DATE OF ISSUE: The date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option (Option 1 or
Option 2), less Debt outstanding at death of the last surviving Insured, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy.
DEBT: All unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, including medical information
satisfactory to the Company, that is used to determine the Insureds' Premium
Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Policy is set forth in the specification pages of the Policy.
FINAL PREMIUM PAYMENT DATE: The Policy anniversary nearest the younger
Insured's 95th birthday. The Final Premium Payment Date is the latest date on
which a premium payment may be made. After this date, the Death Proceeds equal
the Surrender Value of the Policy.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
separate account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Tables (Mortality Table D, Smoker or Non-Smoker, for unisex
Policies), net investment earnings at an annual effective rate of 5%, and fees
and charges as set forth in the Policy and any Policy riders. The Sum Insured
Option 1 Guideline Annual Premium is used when calculating the maximum surrender
charge.
GUIDELINE MINIMUM SUM INSURED: The minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by Age. It is calculated by multiplying the Policy Value by a
percentage determined by the younger Insured's Age.
INHEIRITAGE ACCOUNT: A Separate Account of the Company to which you may make
Net Premium allocations.
INSURANCE AMOUNT AT RISK: The Sum Insured less the Policy Value.
INSUREDS: The two persons covered under the Policy.
LOAN VALUE: The maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: A monthly premium amount calculated by the Company and
specified in the Policy. If you pay this amount, the Company guarantees that the
Policy will not lapse prior to the 49th Monthly
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Deduction after the Date of Issue or the effective date of an increase in the
Face Amount. However, making payments at least equal to the Minimum Monthly
Factors will not prevent the Policy from lapsing if (a) Debt exceeds Policy
Value less surrender charges or (b) partial withdrawals and partial withdrawal
charges have reduced premium payments below an amount equal to the Minimum
Monthly Factor multiplied by the number of months since the Date of Issue or the
effective date of an increase.
MONTHLY DEDUCTION: Charges deducted monthly from the Policy Value of a Policy
prior to the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by riders, and the monthly
administrative charge.
MONTHLY PAYMENT DATE: The date on which the Monthly Deduction is deducted from
Policy Value.
NET PREMIUM: An amount equal to the premium less a tax expense charge and
premium expense charge.
PAID-UP INSURANCE: Joint survivorship insurance coverage for the lifetime of
the Insureds, with no further premiums due.
POLICY CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: The total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts and (b) the accumulation in the General Account
credited to that Policy.
POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: The risk classification that the Company assigns the Insureds
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insureds' Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Policy Value
will be allocated. If you do not, the Company will allocate the deduction or
Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A Separate Account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
Separate Account is determined separately from the other assets of the Company.
The assets of a Separate Account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A division of the Inheiritage Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Variable Insurance Products Fund, the
Variable Insurance Products Fund II, the T. Rowe Price International Stock
Portfolio of T. Rowe Price International Series, Inc., or the Series of Delaware
Group Premium Fund.
SUM INSURED: The amount payable upon the death of the last surviving Insured,
before the Final Premium Payment Date, prior to deductions for Debt outstanding
at the death of the last surviving Insured, partial withdrawals and partial
withdrawal charges, if any, and any due and unpaid Monthly Deductions. The
amount of the Sum Insured will depend on the Sum Insured Option chosen, but will
always be at least equal to the Face Amount.
SURRENDER VALUE: The amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
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UNDERLYING FUNDS (FUNDS): the Funds of Allmerica Investment Trust, the
Portfolios of the Variable Insurance Products Fund, the Variable Insurance
Products Fund II, T. Rowe Price International Series, and the Series of Delaware
Group Premium Fund, Inc. available under the Policy.
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
WRITTEN REQUEST: A request by the Policyowner in writing, satisfactory to the
Company.
YOU OR YOUR: The Policyowner, as shown in the application or the latest change
filed with the Company.
7
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SUMMARY
The following is a summary of the individual joint survivorship flexible premium
variable life insurance policy sold by Allmerica Financial Life Insurance and
Annuity Company ("Company"). It highlights key points from the Prospectus which
follows. If you are considering the purchase of this product, you should read
the Prospectus carefully before making a decision. It offers a more complete
presentation of the topics presented here, and will help you better understand
the product. However, the Policy together with its attached application
constitutes the entire agreement between the Company and You.
FREE-LOOK PERIOD -- The Policy provides for an initial free-look period. You may
cancel the Policy by mailing or delivering it to the Principal Office or to an
agent of the Company on or before the latest of:
- 45 days after the application for the Policy is signed,
- 10 days after you receive the Policy (or, if required by state law,
the longer period indicated in your Policy), or
- 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.
Upon returning the Policy, you will receive a refund equal to the sum of:
(1) the difference between the premium, including fees and charges paid, and
any amount allocated to the Inheiritage Account, PLUS
(2) the value of the amounts allocated to the Inheiritage Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Inheiritage
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, however, the Company will refund the
entire amount of premiums paid. A free-look privilege also applies after a
requested increase in the Face Amount. See THE POLICY -- "Free-Look Period."
CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, subject to certain restrictions, you may convert the Policy to a
non-variable flexible premium adjustable life insurance policy by simultaneously
transferring all accumulated value in the Sub-Accounts to the General Account
and instructing the Company to allocate all future premiums to the General
Account. A similar conversion privilege is in effect for 24 Policy months after
the date of an increase in the Face Amount. Where required by state law, and at
your request, the Company will issue a flexible premium adjustable life
insurance policy to you. The new policy will have the same Face Amount, issue
age, Date of Issue, and Premium Class as the original Policy. See THE POLICY --
"Conversion Privileges."
ABOUT THE POLICY
The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insureds,
- Policy Value,
- surrender rights and partial withdrawal rights,
- loan privileges, and
- in some cases, additional insurance benefits available by rider for
an additional charge.
LIFE INSURANCE -- The Policy is a life insurance contract with death benefits,
Policy Value, and other features traditionally associated with life insurance.
The Policy is a "joint survivorship" Policy because Death Proceeds are payable,
not on the death of the first Insured to die, but on the death of the last
surviving Insured. The Policy is "variable" because the Policy Value will
increase or decrease depending on the investment experience of the
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Sub-Accounts of the Inheiritage Account. Under some circumstances, the death
benefit may vary with the investment experience of the Sub-Accounts.
FLEXIBLE PREMIUM -- The Policy is a "flexible premium" policy because, unlike
traditional insurance policies, there is no fixed schedule for premium payments.
You may vary the frequency and amount of future premium payments, subject to
certain limits, restrictions and conditions set by Company standards and federal
tax laws. Although you may establish a schedule of premium payments ("planned
premium payments"), failure to make the planned premium payments will not
necessarily cause the Policy to lapse. Because of the variable nature of the
Policy, making planned premium payments does not guarantee that the Policy will
remain in force. Thus, you may, but are not required to, pay additional
premiums.
The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in the Face Amount, the Policy will not lapse if the total premiums
paid less the Debt, partial withdrawals and withdrawal charges are equal to or
exceed the sum of the Minimum Monthly Factor for the number of months the
Policy, increase in Face Amount, or a Policy Change which causes a change in the
Minimum Monthly Factor has been in force. Even during these periods, however,
making payments at least equal to the Minimum Monthly Factor will not prevent
the Policy from lapsing if the Debt equals or exceeds the Policy Value less
surrender charges.
CONDITIONAL INSURANCE -- If at the time of application you make a payment equal
to at least one Minimum Monthly Factor for the Policy as applied for, the
Company will provide conditional insurance, equal to the amount of insurance
applied for but not to exceed $500,000. If the application is approved, the
Policy will be issued as of the date the terms of the conditional insurance are
met. If you do not wish to make any payment at the time of application,
insurance coverage will not be in force until delivery of the Policy and payment
of sufficient premium to place the insurance in force.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the Company's General Account. If your application is approved and
the Policy is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Principal Office. IF A POLICY IS
NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
MINIMUM MONTHLY FACTOR -- The Minimum Monthly Factor is a monthly premium amount
calculated by the Company and specified in your Policy. If you pay this amount,
the Company guarantees that the Policy will not lapse prior to the 49th Monthly
Deduction after the Date of Issue or the effective date of an increase in the
Face Amount. At all other times, however, payments of such premiums do not
guarantee that the Policy will remain in force. See THE POLICY -- "Premium
Payments." Moreover, even during the 48-month period, if Debt exceeds the Policy
Value less surrender charges, then making payments at least equal to the Minimum
Monthly Factor will not prevent the Policy from lapsing.
ALLOCATION OF INITIAL PREMIUMS -- Upon completion of issuance procedures,
delivery of the Policy, and receipt of any additional premiums, if you have paid
less than $10,000 of initial Net Premiums, such Net Premiums will be allocated
to the Sub-Accounts according to your instructions. If initial Net Premiums
equal or exceed $10,000, or if the Policy provides for planned premium payments
during the first year equal to or exceeding $10,000 annually, $5,000
semi-annually, $2,500 quarterly or $1,000 monthly, the entire Net Premium plus
any interest earned will be allocated to the Sub-Accounts upon return to the
Company of a Delivery Receipt. See THE POLICY -- "Applying for a Policy."
Net Premiums may be allocated to one or more Sub-Accounts of the Inheiritage
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than seven Sub-Accounts at any one time. The minimum allocation
is 1% of Net Premium. All allocations must be in whole numbers and must total
100%. See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
Company's General Account will earn a
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<PAGE>
fixed rate of interest. Net premiums and minimum interest are guaranteed by the
Company. For more information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
PARTIAL WITHDRAWALS -- After the first Policy year, you may make partial
withdrawals in a minimum amount of $500 from the Policy Value. Under Option 1,
the Face Amount is reduced by the amount of the partial withdrawal. A partial
withdrawal will not be allowed under Option 1 if it would reduce the Face Amount
below $100,000.
A transaction charge, which is described in CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawals," will be assessed to reimburse the Company for the cost
of processing each partial withdrawal. A partial withdrawal charge also may be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawals" and CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawals."
LOAN PRIVILEGE -- You may borrow against the Policy Value. The total amount you
may borrow is the Loan Value. Loan Value in the first Policy year is 75% of an
amount equal to the Policy Value less surrender charge, Monthly Deductions, and
interest on Debt to the end of the Policy year. Thereafter, Loan Value is 90% of
an amount equal to the Policy Value less the surrender charge.
Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.
PREFERRED LOAN OPTION -- A preferred loan option is available under the Policy.
The preferred loan option will be available upon Written Request. It may be
revoked by you at any time. If this option has been selected, after the tenth
Policy anniversary the Policy Value in the General Account equal to the loan
amount will be credited with interest at an effective annual yield of at least
7.5%. The Company's current practice is to credit a rate of interest equal to
the rate being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
POLICY LAPSE AND REINSTATEMENT -- The failure to make premium payments will not
cause a Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any; or
(b) Debt exceeds Policy Value less surrender charges.
A 62-day grace period applies to each situation.
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<PAGE>
Even if the situation described in (a) above exists, the Policy will not lapse
if you meet the so-called "Minimum Monthly Factor" test. The Minimum Monthly
Factor test is only used to determine whether the Policy will enter the grace
period during the first 48 months or within 48 months following an increase in
the Face Amount. Under the Minimum Monthly Factor test, the Company determines
two amounts:
- the sum of the payments your have made, MINUS any Policy loans,
withdrawals and withdrawal charges, and
- the amount of the Minimum Monthly Factor (the amount is shown on
page 5 of the Policy) MULTIPLIED by the number of months the Policy
has been in force or the number of months which have elapsed since
the last increase in the Face Amount.
The Company then compares the first amount to the second amount. The Policy will
not enter the grace period if the first amount is greater than the second
amount. If the Policy lapses, it may be reinstated within three years of the
date of default (but not later that the Final Premium Payment Date). In order to
reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement. See POLICY TERMINATION AND REINSTATEMENT.
POLICY VALUE AND SURRENDER VALUE -- The Policy Value is the total amount
available for investment under the Policy at any time. It is the sum of the
value of all Accumulation Units in the Sub-Accounts of the Inheiritage Account
and all accumulations in the General Account of the Company credited to the
Policy. The Policy Value reflects the amount and frequency of Net Premiums paid,
charges and deductions imposed under the Policy, interest credited to
accumulations in the General Account, investment performance of the
Sub-Account(s) to which Policy Value has been allocated, and partial
withdrawals. The Policy Value may be relevant to the computation of the Death
Proceeds. You bear the entire investment risk for amounts allocated to the
Inheiritage Account. The Company does not guarantee a minimum Policy Value.
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS -- The Policy provides for the payment of certain Death Proceeds
to the named Beneficiary upon the death of the last surviving Insured. There are
no Death Proceeds payable on death of the first Insured to die. Prior to the
Final Premium Payment Date, the Death Proceeds will be equal to the Sum Insured,
reduced by any outstanding Debt, partial withdrawals, partial withdrawal
charges, and any Monthly Deductions due and not yet deducted through the Policy
month in which the last surviving Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the younger Insured's Age) of the Policy Value. On or after the Final Premium
Payment Date, the Death Proceeds will equal the Surrender Value. See THE POLICY
- -- "Death Proceeds."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED -- Subject to certain limitations, you may
adjust the Sum Insured, and thus the Death Proceeds, at any time prior to the
Final Premium Payment Date, by increasing or decreasing the Face Amount of the
Policy. Any change in the Face Amount will affect the monthly cost of insurance
charges and the amount of the surrender charge. If the Face Amount is decreased,
a pro-rata surrender charge may be imposed. The Policy Value is reduced by the
amount of the charge. See THE POLICY -- "Change in Face Amount."
The minimum increase in Face Amount is $100,000 and any increase also may
require additional Evidence of Insurability satisfactory to the Company. The
increase is subject to a "free-look period" and, during the first 24
11
<PAGE>
months after the increase, to a conversion privilege. See THE POLICY --
"Free-Look Period" and "Conversion Privileges."
ADDITIONAL INSURANCE BENEFITS -- You have the flexibility to add additional
insurance benefits by rider. These include the Split Option Rider, Other Insured
Rider and Four-Year Term Rider. See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
PAID-UP INSURANCE OPTION -- The Policyowner who elects this option will have,
without further premiums due, joint survivorship insurance coverage for the
lifetime of the Insureds, with the Death Proceeds payable on the death of the
last surviving Insured. The Policyowner who has elected the Paid-Up Insurance
option may not pay additional premiums, select Sum Insured Option 2, increase or
decrease the Face Amount or make partial withdrawals. Policy Value in the
Inheiritage Account will be transferred to the General Account on the date the
Company receives Written Request to exercise the option and transfers of Policy
Value back to the Inheiritage Account will not be permitted. Riders will
continue only with the consent of the Company. Surrender value and loan value
are calculated differently. See THE POLICY -- "Paid-Up Insurance Option."
POLICY FEES AND CHARGES
There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.
TAX EXPENSE CHARGE -- A charge will be deducted from each premium payment for
state and local premium taxes paid by the Company for the Policy and to
compensate the Company for federal taxes imposed for deferred acquisition costs
("DAC") taxes. The total charge is the actual state and local premium taxes paid
by the Company, varying according to jurisdiction, and a DAC tax deduction of 1%
of premiums. See CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
PREMIUM EXPENSE CHARGE -- A charge of 1% of premiums will be deducted from each
premium payment to partially compensate the Company for sales expenses related
to the Policies. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM POLICY VALUE -- On the Date of Issue and each Monthly
Payment Date, certain charges ("Monthly Deductions") will be deducted from the
Policy Value. The Monthly Deduction consists of a charge for cost of insurance,
a charge for administrative expenses, and a charge for the cost of any
additional benefits provided by rider. You may instruct the Company to deduct
the Monthly Deduction from one specific Sub-Account. If you do not, the Company
will make a Pro-Rata Allocation of the charge. No Monthly Deductions are made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE of $6 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyowner inquiries.
As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE INHEIRITAGE ACCOUNT -- A daily charge currently equivalent
to an effective annual rate of 1.15% of the average daily net asset value of
each Sub-Account of the Inheiritage Account is imposed to
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<PAGE>
compensate the Company for its assumption of certain mortality and expense risks
and for administrative costs associated with the Inheiritage Amount. The rate is
0.90% for the mortality and expense risk and 0.25% for the Inheiritage Account
administrative charge. The administrative charge is eliminated after the 15(th)
Policy year. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of the
Inheiritage Account."
CHARGES OF THE UNDERLYING FUNDS -- In addition to the charges described above,
certain fees and expenses are deducted from the assets of the Underlying Funds.
The levels of fees and expenses vary among the Underlying Funds. The following
table shows the expenses of the Underlying Funds for 1996. For more information
concerning fees and expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
OTHER FUND
MANAGEMENT EXPENSES (AFTER ANY TOTAL FUND
UNDERLYING FUND FEE APPLICABLE REIMBURSEMENTS) EXPENSES
- ------------------------------------------------ --------------- --------------------------------- -------------
<S> <C> <C> <C>
Select International Equity Fund................ 1.00% 0.23%* 1.23%***
DGPF International Equity Series................ 0.64% 0.16%** 0.80%
Fidelity VIP Overseas Portfolio................. 0.76% 0.17% 0.93%****
T. Rowe Price International Stock Portfolio..... 1.05% 0.00% 1.05%
Select Aggressive Growth Fund................... 1.00% 0.08%* 1.08%
Select Capital Appreciation Fund................ 1.00% 0.13%* 1.13%
Small-Mid Cap Value Fund........................ 0.85% 0.12%* 0.97%
Select Growth Fund.............................. 0.85% 0.08%* 0.93%***
Growth Fund..................................... 0.44% 0.07%* 0.51%
Fidelity VIP Growth Portfolio................... 0.61% 0.08% 0.69%****
Equity Index Fund............................... 0.32% 0.14%* 0.46%
Select Growth and Income Fund................... 0.75% 0.08% 0.83%***
Fidelity VIP Equity-Income Portfolio............ 0.51% 0.07% 0.58%****
Fidelity VIP II Asset Manager Portfolio......... 0.64% 0.10% 0.74%****
Fidelity VIP High Income Portfolio.............. 0.59% 0.12% 0.71%
Investment Grade Income Fund.................... 0.40% 0.14%* 0.52%
Government Bond Fund............................ 0.50% 0.16%* 0.66%
Money Market Fund............................... 0.28% 0.06%* 0.34%
</TABLE>
* Under the Management Agreement with Allmerica Investment Trust, Allmerica
Investment Management Company, Inc. ("Manager") has declared a voluntary expense
limitation of 1.50% of average net assets for the Select International Equity
Fund, 1.35% for the Select Aggressive Growth Fund and Select Capital
Appreciation Fund, 1.25% for the Small-Mid Cap Value Fund, 1.20% for the Growth
Fund and Select Growth Fund, 1.10% for the Select Growth and Income Fund, 1.00%
for the Investment Grade Income Fund and Government Bond Fund, and 0.60% for the
Money Market Fund and Equity Index Fund. The total operating expenses of the
funds of the Trust were less than their respective expense limitations
throughout 1996. The declaration of a voluntary expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these funds.
** Delaware International Advisers Ltd., the investment adviser for the
International Equity Series, has agreed to waive its management fee and
reimburse the International Equity Series to limit certain expenses to 8/10 of
1% of the corresponding net assets. This waiver has been in effect from the
commencement of the public offering for the Series and has been extended through
June 30, 1997. Without the expense limitation, in 1996 the total annual expenses
of the International Equity Series would have been 1.04%.
*** These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses would have been 1.20% for the Select
International Equity Fund, 0.92% for the Select Growth Fund, and 0.80% for the
Select Growth and Income Fund.
**** A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
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<PAGE>
Including these reductions, the total operating expenses presented in the table
would have been 0.56% for Fidelity VIP Equity-Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.92% for Fidelity VIP Overseas Portfolio and
0.73% for Fidelity VIP II Asset Manager Portfolio.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS -- A transaction charge is assessed at
the time of each partial withdrawal to reimburse the Company for the cost of
processing the withdrawal. The transaction charge is the smaller of 2% of the
amount withdrawn or $25. In addition to the transaction charge, a partial
withdrawal charge also may be made under certain circumstances. See CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawals."
CHARGE FOR INCREASE IN THE FACE AMOUNT -- For each increase in the Face Amount,
a charge of $40 will be deducted from the Policy Value. This charge is designed
to reimburse the Company for underwriting and administrative costs associated
with the increase. See THE POLICY -- "Change in Face Amount" and CHARGES AND
DEDUCTIONS -- "Charge for Increase in Face Amount."
TRANSFER CHARGE -- The first 12 transfers of Policy Value in a Policy year will
be free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES
AND DEDUCTIONS -- "Transfer Charges."
SURRENDER CHARGES
At any time that the Policy is in effect, a Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in Face Amount. The duration
of the surrender charge is 15 years. The surrender charge is imposed only if,
during its duration, you request a full surrender or a decrease in the Face
Amount.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT -- The maximum surrender charge
calculated upon issuance of the Policy is equal to the sum of (a) plus (b) where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of 48% of premiums
received up to a maximum number of Guideline Annual Premiums subject to the
deferred sales charge that varies by average issue Age from 1.95 (for average
issue Ages 5 through 75) to 1.31 (for average issue Age 82). In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of initial Face
Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
The maximum surrender charge remains level for the first 40 Policy months and
reduces by 0.5% or more per month thereafter, as described in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. If you surrender the Policy during the
first two Policy years following the Date of Issue, before making premium
payments associated with the initial Face Amount which are at least equal to one
Guideline Annual Premium, the deferred administrative charge will be $8.50 per
thousand dollars of initial Face Amount, but the deferred sales charge will not
exceed 25% of premiums received. See THE POLICY -- "Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR INCREASES IN FACE AMOUNT -- A separate surrender charge
will apply to and is calculated for each increase in Face Amount. The maximum
surrender charge for the increase is equal to the sum of (a) plus (b) where (a)
is equal to $8.50 per thousand dollars of increase, and (b) is a deferred sales
charge of 48% of premiums associated with the increase, up to a maximum number
of Guideline Annual Premiums (for the increase) subject to the deferred sales
charge that varies by average Age (at the time of increase) from 1.95 (for
average Ages 5 through 75) to 1.31 (for average Age 82). In accordance with
limitations under state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
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<PAGE>
As is true for the initial Face Amount, (a) is a deferred administrative charge
and (b) is a deferred sales charge. This maximum surrender charge remains level
for the first 40 Policy months following the increase and reduces by 0.5% or
more per month thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. If you surrender the Policy during the first two Policy years
following an increase in Face Amount before making premium payments associated
with the increase in Face Amount which are at least equal to one Guideline
Annual Premium, the deferred administrative charge will be $8.50 per thousand
dollars of Face Amount increase, but the deferred sales charge will not exceed
25% of premiums associated with the increase.
SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT -- In the event of a decrease
in the Face Amount, the surrender charge imposed is proportional to the charge
that would apply to a full Policy surrender. See THE POLICY -- "Surrender" and
CHARGES AND DEDUCTIONS -- "Surrender Charge."
TAX TREATMENT
A Policy is generally subject to the same federal income tax treatment as a
conventional fixed benefit life insurance policy. Under current tax law, to the
extent there is no change in benefits, you will be taxed on Policy Value
withdrawn from the Policy only to the extent that the amount withdrawn exceeds
the total premiums paid. Withdrawals in excess of premiums paid will be treated
as ordinary income. During the first 15 Policy years, however, an "interest
first" rule applies to any distribution of cash that is required under Section
7702 of the Code because of a reduction of benefits under the Policy. Death
Proceeds under the Policy are excludable from the gross income of the
Beneficiary, but in some circumstances the Death Proceeds or the Policy Value
may be subject to federal estate tax. See FEDERAL TAX CONSIDERATIONS --
"Taxation of the Policies."
A Policy offered by this Prospectus may be considered a "modified endowment
contract" if it fails a "seven-pay test." A Policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the Policy at any time
during the first seven policy years exceeds the sum of the net level premiums
that would have been paid, had the Policy provided for paid-up future benefits
after the payment of seven level premiums. If the Policy is considered a
modified endowment contract, all distributions (including Policy loans, partial
withdrawals, surrenders or assignments) will be taxed on an "income-first"
basis. In addition, with certain exceptions, an additional 10% penalty will be
imposed on the portion of any distribution that is includible in income. For
more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
15
<PAGE>
PERFORMANCE INFORMATION
The Policies were first offered to the public in 1994. However, the Company may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Underlying Funds have been in
existence. The results for any period prior to the Policies being offered will
be calculated as if the Policies had been offered during that period of time,
with all charges assumed to be those applicable to the Sub-Accounts, the
Underlying Funds, and (in TABLE I) under a "representative" Policy that is
surrendered at the end of the applicable period.
Performance information may be compared, in reports and promotional literature,
to: (i) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other
unmanaged indices so that investors may compare results with those of a group of
unmanaged securities widely regarded by investors as representative of the
securities markets in general; (ii) other groups of variable life separate
accounts or other investment products tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds and other
investment products by overall performance, investment objectives, and assets,
or tracked by other services, companies, publications, or persons, such as
Morningstar, Inc., who rank such investment products on overall performance or
other criteria; or (iii) the Consumer Price Index (a measure for inflation) to
assess the real rate of return from an investment. Unmanaged indices may assume
the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1996. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
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<PAGE>
TABLE I: SUB-ACCOUNT PERFORMANCE
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insureds
are male, Age 45, standard (nonsmoker) Premium Class, and female, Age 43,
standard (nonsmoker) Premium Class, that the Face Amount of the Policy is
$500,000, that an annual premium payment of $5,500 (approximately one Guideline
Annual Premium) was made at the beginning of each Policy year, that ALL premiums
were allocated to EACH Sub-Account individually, and that there was a full
surrender of the Policy at the end of the applicable period.
AVERAGE ANNUAL RETURN AS OF 12/31/96
<TABLE>
<CAPTION>
10 Years
One-Year or Life Years
Total 5 of Fund Since
Underlying Fund Return Years (if less) Inception*
<S> <C> <C> <C> <C>
Select International Equity Fund -84.84% N/A -17.57% 2.67
DGPF International Equity Series -86.24% N/A -2.25% 4.17
Fidelity VIP Overseas Portfolio -92.62% -1.61% 4.29% 9.92
T. Rowe Price International Stock Portfolio -91.38% N/A -23.59% 2.58
Select Aggressive Growth Fund -87.62% N/A 7.48% 4.36
Select Capital Appreciation Fund -96.76% N/A -32.21% 1.67
Small-Mid Cap Value Fund -78.27% N/A -3.91% 3.67
Select Growth Fund -84.37% N/A -0.97% 4.36
Growth Fund -86.09% 2.71% 11.59% 10.00
Fidelity VIP Growth Portfolio -91.23% 5.45% 11.96% 10.00
Equity Index Fund -84.11% 4.82% 11.52% 6.26
Select Growth and Income Fund -85.08% N/A 0.40% 4.36
Fidelity VIP Equity-Income Portfolio -91.62% 8.68% 10.50% 10.00
Fidelity VIP II Asset Manager Portfolio -91.32% 0.90% 6.41% 7.32
Fidelity VIP High Income Portfolio -91.86% 5.21% 7.76% 10.00
Investment Grade Income Fund -100.00% -3.85% 4.79% 10.00
Government Bond Fund -100.00% -5.58% -3.20% 5.35
Money Market Fund -99.99% -7.40% 2.18% 10.00
</TABLE>
* If less than 10 years. The inception dates for the Underlying Funds are:
4/29/85 for Growth, Investment Grade and Money Market; 9/28/90 for Equity
Index; 8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth,
Select Growth, and Select Growth and Income; 4/30/93 for Small-Mid Cap Value;
5/01/94 for Select International Equity; 4/28/95 for the Select Capital
Appreciation Fund; 10/09/86 for Fidelity VIP Equity-Income and Fidelity VIP
Growth; 9/19/85 for Fidelity VIP High Income; 1/28/87 for Fidelity VIP
Overseas; 9/06/89 for Fidelity VIP II Asset Manager; 10/29/92 for DGPF
International Equity; and 3/31/94 for the T. Rowe Price International Stock.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
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<PAGE>
TABLE II: SUB-ACCOUNT PERFORMANCE
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICIES OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $5,500
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.
AVERAGE ANNUAL RETURN AS OF 12/31/96
<TABLE>
<CAPTION>
10 Years
One-Year or Life Years
Total 5 of Fund Since
Underlying Fund Return Years (if less) Inception*
<S> <C> <C> <C> <C>
Select International Equity Fund 20.55% N/A 12.37% 2.67
DGPF International Equity Series 18.65% N/A 11.15% 4.17
Fidelity VIP Overseas Portfolio 11.92% 7.89% 6.64% 9.92
T. Rowe Price International Stock Portfolio 13.23% N/A 8.67% 2.58
Select Aggressive Growth Fund 17.19% N/A 18.39% 4.36
Select Capital Appreciation Fund 7.55% N/A 26.86% 1.67
Small-Mid Cap Value Fund 27.06% N/A 13.54% 3.67
Select Growth Fund 20.62% N/A 11.35% 4.36
Growth Fund 18.81% 11.50% 13.47% 10.00
Fidelity VIP Growth Portfolio 13.39% 13.83% 13.82% 10.00
Equity Index Fund 20.90% 13.29% 16.40% 6.26
Select Growth and Income Fund 19.87% N/A 12.47% 4.36
Fidelity VIP Equity-Income Portfolio 12.97% 16.62% 12.43% 10.00
Fidelity VIP II Asset Manager Portfolio 13.29% 9.98% 10.40% 7.32
Fidelity VIP High Income Portfolio 12.72% 13.63% 9.84% 10.00
Investment Grade Income Fund 2.36% 6.05% 7.06% 10.00
Government Bond Fund 2.32% 4.64% 5.68% 5.35
Money Market Fund 4.14% 3.18% 4.65% 10.00
</TABLE>
* If less than 10 years. The inception dates for the Underlying Funds are:
4/29/85 for Growth, Investment Grade and Money Market; 9/28/90 for Equity
Index; 8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth,
Select Growth, and Select Growth and Income; 4/30/93 for Small-Mid Cap Value;
5/01/94 for Select International Equity; 4/28/95 for the Select Capital
Appreciation Fund; 10/09/86 for Fidelity VIP Equity-Income and Fidelity VIP
Growth; 9/19/85 for Fidelity VIP High Income; 1/28/87 for Fidelity VIP
Overseas; 9/06/89 for Fidelity VIP II Asset Manager; 10/29/92 for DGPF
International Equity; and 3/31/94 for the T. Rowe Price International Stock.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
18
<PAGE>
DESCRIPTION OF THE COMPANY, THE INHEIRITAGE ACCOUNT, ALLMERICA INVESTMENT TRUST,
VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE
PRICE INTERNATIONAL SERIES, INC., AND
DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000. The Company is subject to the laws
of the state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America.
THE INHEIRITAGE ACCOUNT
The Inheiritage Account was authorized by vote of the Board of Directors of the
Company on September 15, 1993. The Inheiritage Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Inheiritage Account or the Company by the SEC.
The assets used to fund the variable portion of the Policies are set aside in
the Inheiritage Account and are kept separate from the general assets of the
Company. Under Delaware law, assets equal to the reserves and other liabilities
of the Inheiritage Account may not be charged with any liabilities arising out
of any other business of the Company. Eighteen Sub-accounts of the Inheiritage
Account are currently offered under the Policy. Each Sub-Account is administered
and accounted for as part of the general business of the Company, but the
income, capital gains, or capital losses of each Sub-Account are allocated to
such Sub-Account, without regard to other income, capital gains, or capital
losses of the Company or the other Sub-Accounts. Each Sub-Account invests
exclusively in a corresponding Underlying Fund of one of the following
investment companies:
- Allmerica Investment Trust
- Variable Insurance Products Fund
- Variable Insurance Products Fund II
- T. Rowe Price International Series, Inc.
- Delaware Group Premium Fund, Inc.
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle and the income or losses of one Underlying Fund generally have no effect
on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public but solely to separate
accounts of life insurance companies, such as the Inheiritage Account.
Each Sub-Account has two sub-divisions. One sub-division applies to Policies
during their first 15 Policy years, which are subject to a Inheiritage Account
administrative charge. See CHARGES AND DEDUCTIONS --
19
<PAGE>
"Charges Against Assets of the Inheiritage Account." Thereafter, such Policies
are automatically allocated to the second sub-division to account for the
elimination of the Inheiritage Account administrative charge.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and Inheiritage Account.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds.
The Trust was established by the Company as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by the Company, or other
affiliated insurance companies. Eleven investment portfolios of the Trust
("Funds") are available under the Policy, each issuing a series of shares: the
Growth Fund, Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Growth Fund, Select Growth and
Income Fund, and Small-Mid Cap Value Fund.
Allmerica Investment Management Company, Inc. ("Allmerica Investment") serves as
investment adviser of the Trust and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Underlying Funds. See INVESTMENT ADVISORY SERVICES, -- "Investment Advisory
Services to the Trust."
VARIABLE INSURANCE PRODUCTS FUND
Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Policy: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity
VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. The
Portfolios of Fidelity VIP, as part of their operating expenses, pay an
investment management fee to FMR. See "Investment Advisory Services to Fidelity
VIP and Fidelity VIP II."
VARIABLE INSURANCE PRODUCTS FUND II
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR (see
discussion under "Variable Insurance Products Fund"), is an open-end,
diversified management investment company organized as a Massachusetts business
trust on March 21, 1988 and is registered with the SEC under the 1940 Act. One
of its investment portfolios is available under the Policy: the Fidelity VIP II
Asset Manager Portfolio. The Portfolios of Fidelity VIP II, as part of their
operating expenses, pay an investment management fee to FMR. See "Investment
Advisory Services to Fidelity VIP and Fidelity VIP II."
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (See "Investment Advisory
Services to T. Rowe Price"), is an open-end, diversified, management investment
company organized as a Maryland corporation in 1994 and is registered with the
SEC
20
<PAGE>
under the 1940 Act. One of its investment portfolios is available under the
Policy: the T. Rowe Price International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policy: the International Equity
Series. The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital in a manner consistent with the
preservation of capital. Realization of income is not a significant investment
consideration and any income realized on the Fund's investments will be
incidental to its primary objective. The Fund invests primarily in common stock
of industries and companies which are believed to be experiencing favorable
demand for their products and services, and which operate in a favorable
competitive environment and regulatory climate.
SMALL-MID CAP VALUE FUND -- The Small-Mid Cap Value Fund of the Trust seeks
long-term growth by investing principally in a diversified portfolio of common
stocks of small and mid-size companies whose securities at the time of purchase
are considered by the Sub-Adviser to be undervalued.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
21
<PAGE>
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the S&P 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund seeks a
combination of long-term growth of capital and current income. The Fund will
invest primarily in dividend-paying common stocks and securities convertible
into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500. The
Portfolio may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities. See "Risks of Lower-Rated Debt
Securities" in the Fidelity VIP prospectus.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
fixed-income instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating. See "Risks of
Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
Policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Policy Value in that Sub-
22
<PAGE>
Account, the Company will transfer it without charge on written request within
sixty (60) days of the later of (1) the effective date of such change in the
investment policy, or (2) your receipt of the notice of the right to transfer.
You may then change the percentages of your premium and deduction allocations.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trustees have entered into a Management Agreement with
Allmerica Investment to handle the day-to-day affairs of the Trust. Allmerica
Investment, subject to review by the Trustees, is responsible for the general
management of the Funds. Allmerica Investment also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with Allmerica Investment.
Allmerica Asset Management, Inc., an indirect wholly-owned subsidiary of
Allmerica Financial Corporation, is an affiliate of the Company.
Other than the expenses specifically assumed by Allmerica Investment under the
Management Agreement, all expenses incurred in the operation of the Trust are
borne by it, including fees and expenses associated with the registration and
qualification of the Trust's shares under the Securities Act of 1933 ("1933
Act"), other fees payable to the SEC, independent public accountant, legal and
custodian fees, association membership dues, taxes, interest, insurance
premiums, brokerage commissions, fees and expenses of the Trustees who are not
affiliated with Allmerica Investment, expenses for proxies, prospectuses,
reports to shareholders, and other expenses.
For providing its services under the Management Agreement, Allmerica Investment
will receive a fee, computed daily at an annual rate based on the average daily
net asset value of each Fund as follows:
<TABLE>
<S> <C> <C>
Select International Equity Fund * 1.00%
Select Aggressive Growth Fund * 1.00%
Select Capital Appreciation Fund * 1.00%
Small-Mid Cap Value Fund First $100 million 1.00%
$100 - 250 million 0.85%
$250- $500 million 0.80%
$500 - $750 million 0.75%
Over $750 million 0.70%
Select Growth Fund * 0.85%
Growth Fund First $50 million 0.60%
$50 - 250 million 0.50%
Over $250 million 0.35%
Equity Index Fund First $50 million 0.35%
$50 - 250 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund 0.75%
Investment Grade Income Fund First $50 million 0.50%
$50 - 250 million 0.35%
Over $250 million 0.25%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
$50 - 250 million 0.25%
Over $250 million 0.20%
</TABLE>
23
<PAGE>
*For the Government Bond Fund, Select International Equity Fund, Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth Fund,
and Select Growth and Income Fund, each rate applicable to Allmerica Investment
does not vary according to the level of assets in the Fund.
The Manager is solely responsible for the payment of all fees to Sub-Advisers
for their investment management services. Sub-Adviser fees, described in the
Trust's prospectus, in no way increase the costs that the funds, Inheiritage
Account and Policyowners bear.
Allmerica Investment's fee, computed for each Fund, will be paid from the assets
of such Fund. Pursuant to the Management Agreement with the Trust, Allmerica
Investment has entered into agreements ("Sub-Adviser Agreements") with other
investment advisers ("Sub-Advisers") under which each Sub-Adviser manages the
investments of one or more of the Funds. Under the Sub-Adviser Agreements, the
Sub-Advisers are authorized to engage in portfolio transactions on behalf of the
applicable Fund, subject to such general or specific instructions as may be
given by the Trustees. The terms of a Sub-Adviser Agreement cannot be materially
changed without the approval of a majority in interest of the shareholders of
the affected Fund. Allmerica Investment is solely responsible for the payment of
all fees for investment management services to the Sub-Advisers.
The Sub-Advisers and the fees they receive from Allmerica Investment (computed
daily at an annual rate based on the average daily net asset value of each
Fund), are as follows:
<TABLE>
<CAPTION>
Sub-Adviser Fund Net Asset Value Rate
- ----------------------------------- -------------------------------- ------------------- ------
<S> <C> <C> <C>
Bank of Ireland Asset Management Select International Equity Fund First $50 million 0.45%
(U.S.) Limited Next $50 million 0.40%
Over $100 million 0.30%
Nicholas-Applegate Capital Select Aggressive Growth Fund ** 0.60%
Management, L.P.
Janus Capital Corporation Select Capital Appreciation Fund First $100 million 0.60%
Over $100 million 0.55%
CRM Advisors, LLC Small-Mid Cap Value Fund First $100 million 0.60%
$100 - 250 million 0.50%
$250- $500 million 0.40%
$500 - $750 million 0.375%
Over $750 million 0.35%
Putnam Investment Management, Inc. Select Growth Fund First $50 million 0.50%
$50 - 150 million 0.45%
$150 - 250 million 0.35%
$250 - 350 million 0.30%
Over $350 million 0.25%
Miller, Anderson & Sherrerd, LLP Growth Fund * *
Allmerica Asset Management, Inc. Equity Index Fund ** 0.10%
John A. Levin & Co., Inc. Select Growth and Income Fund First $100 million 0.40%
Next $200 million 0.25%
Over $300 million 0.30%
Allmerica Asset Management, Inc. Investment Grade Income Fund ** 0.20%
Allmerica Asset Management, Inc. Government Bond Fund ** 0.20%
Allmerica Asset Management, Inc. Money Market Fund ** 0.10%
</TABLE>
24
<PAGE>
* Allmerica Investment will pay a fee to Miller, Anderson & Sherrerd LLP based
on the aggregate assets of the Growth Fund and certain other accounts of First
Allmerica and its affiliates (collectively, the "Affiliated Accounts") which are
managed by Miller, Anderson & Sherrerd LLP, under the following schedule:
<TABLE>
<CAPTION>
Aggregate Average Net
Assets Rate
- -------------------------- ---------
<S> <C>
First $50 million 0.500%
$50 - 100 million 0.375%
$100 - 500 million 0.250%
$500 - 850 million 0.200%
Over $850 million 0.150%
</TABLE>
** For the Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, and Select Aggressive Growth Fund, each rate applicable to
the Sub-Advisers does not vary according to the level of assets in the Fund.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II -- For managing
investments and business affairs, each Portfolio pays a monthly fee to FMR. The
prospectuses of Fidelity VIP and Fidelity VIP II contain additional information
concerning the Portfolios, including information about additional expenses paid
by the Portfolios, and should be read in conjunction with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee
as high as 0.72% of its average net assets. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Fidelity VIP II
Asset Manager Portfolio may have a fee as high as 0.77% of its average net
assets. The Overseas Portfolio may have a fee as high as 0.97% of its average
net assets. The actual fee rate may be less depending on the total assets in the
funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE -- The Investment Adviser for the
T. Rowe Price International Stock Portfolio is Rowe Price-Fleming International,
Inc. ("Price-Fleming"). Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $25 billion under management in its offices in Baltimore, London,
Tokyo and Hong Kong. To cover investment management and operating
25
<PAGE>
expenses, the T. Rowe Price International Stock Portfolio pays Price-Fleming a
single, all-inclusive fee of 1.05% of its average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF -- The Series of DGPF pays an investment
adviser an annual fee for managing the portfolios and making the investment
decisions for the Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). The
annual fee paid by the International Equity Series to Delaware International is
equal to 0.75% of the average daily net assets of the Series.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Inheiritage Account or the affected Sub-Account,
the Company may redeem the shares of that Underlying Fund and substitute shares
of another registered open-end management company. The Company will not
substitute any shares attributable to a Policy interest in a Sub-Account without
notice to you and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law. The Inheiritage
Account may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by a Policy owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Inheiritage Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company. Subject to
applicable law and any required SEC approval, the Company may, in its sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts if
marketing needs, tax considerations or investment conditions warrant. Any new
Sub-Accounts may be made available to existing Policyowners on a basis to be
determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP, Fidelity VIP II, T. Rowe
Price and the DGPF Series are also issued to other unaffiliated insurance
companies ("shared funding"). It is conceivable that in the future such mixed
funding or shared funding may be disadvantageous for variable life Policyowners
or variable annuity Policyowners. Although the Company and the Underlying Funds
do not currently foresee any such disadvantages, the Company and the respective
Trustees intend to monitor events in order to identify any material conflicts
and to determine what action, if any, should be taken. If the Trustees were to
conclude that separate funds should be established for variable life and
variable annuity separate accounts, the Company will bear the expenses.
If any of these substitutions or changes is made, the Company may by endorsement
change the Policy to reflect the substitution or change and will notify
Policyowners of all such changes. If the Company deems it to be in the best
interest of Policyowners, and subject to any approvals that may be required
under applicable law, the Inheiritage Account or any Sub-Account(s) may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration is no longer required, or may be combined with
other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended or if the present interpretation of the 1940 Act or such rules
should change, and as a result the Company determines that it is permitted to
vote shares in its own right, whether or not such shares are attributable to the
Policies, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund together with an appropriate form with which to
give voting instructions to the Company. Shares held in each
26
<PAGE>
Sub-Account for which no timely instructions are received will be voted in
proportion to the instructions received from all persons with an interest in
such Sub-Account who furnish instructions to the Company. The Company will also
vote shares that it owns and which are not attributable to Policies in the same
proportion.
The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (a) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds or (b) to approve or disapprove
an investment advisory contract for the Underlying Funds. In addition, the
Company may disregard voting instructions in favor of any change in the
investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of that action and the reasons for that
action will be included in the next periodic report to Policyowners.
THE POLICY
APPLYING FOR A POLICY
A Policy cannot be issued until the underwriting procedure has been completed.
Upon receipt at its Principal Office of a completed application from a
prospective Policyowner, the Company will follow certain insurance underwriting
procedures designed to determine whether the proposed Insured is insurable. This
process may involve medical examinations, and may require that further
information be provided by the proposed Policyowner before a determination of
insurability can be made. The Company reserves the right to reject an
application which does not meet its underwriting guidelines, but in underwriting
insurance, the Company complies with all applicable federal and state
prohibitions concerning unfair discrimination.
CONDITIONAL INSURANCE AGREEMENT -- It is possible to obtain life insurance
protection during the underwriting process through a Conditional Insurance
Agreement. If at the time of application you make a payment equal to at least
one "Minimum Monthly Factor" for the Policy as applied for, the Company will
provide fixed conditional insurance in the amount of insurance applied for up to
a maximum of $500,000, pending underwriting approval. This coverage generally
will continue for a maximum of 90 days from the date of the application or the
completion of a medical exam, should one be required. In no event will any
insurance proceeds be paid under the Conditional Insurance Agreement if death is
by suicide.
If the application is approved, the Policy will be issued as of the date the
terms of the Conditional Insurance Agreement were met. If no Conditional
Insurance Agreement is in effect because the prospective Policyowner does not
wish to make any payment until the Policy is issued or has paid an initial
premium that is not sufficient to place the Policy in force, upon delivery of
the Policy the Company will require payment of sufficient premium to place the
insurance in force.
PREMIUMS HELD IN THE GENERAL ACCOUNT PENDING UNDERWRITING APPROVAL -- Pending
completion of insurance underwriting and Policy issuance procedures, the initial
premium will be held in the Company's General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of receipt of the premium at the Principal
Office. IF A POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
If the Policy is issued to the trustee of an employee benefit plan, the amounts
held in the Company's General Account will be allocated to the Sub-Accounts
according to the Policyowner's instructions when the Delivery Receipt is
returned to the Principal Office. For all other Policyowners, the date we
transfer the initial net
27
<PAGE>
premium from the General Account to the selected Sub-Accounts depends on the
premium amount. If the initial net premiums are less than $10,000, the amounts
held in the General Account will be allocated to the selected Sub-Accounts not
later than three days after underwriting approval of the Policy. If the initial
net premiums equal or exceed $10,000, or if the Policy provides for planned
premium payments during the first year equal to or exceeding $10,000 annually,
$5,000 semi-annually, $2,500 quarterly or $1,000 monthly, the entire Net
Premium, plus any interest earned, will remain in the General Account until
return of the Policy's Delivery Receipt to the Principal Office. The entire
amount held in the General Account for allocation to the Inheiritage Account
then will be allocated to the Sub-Accounts according to your instructions.
FREE-LOOK PERIOD
The Policy provides for an initial "free-look" period. You may cancel the Policy
by mailing or delivering the Policy to the Principal Office or an agent of the
Company on or before the latest of :
- 45 days after the application for the Policy are signed, or
- 10 days after you receive the Policy (or longer if required by
state law), or
- 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you.
When you return the Policy, the Company will mail within seven days a refund
equal to the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Inheiritage Account, PLUS
(2) the value of the amounts allocated to the Inheiritage Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Inheiritage
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, the refund will equal the premiums paid.
The refund of any premium paid by check, however, may be delayed until the check
has cleared your bank.
FREE LOOK WITH FACE AMOUNT INCREASES -- After an increase in the Face Amount,
the Company will mail or personally deliver a notice of a "free look" with
respect to the increase. You will have the right to cancel the increase before
the latest of:
- 45 days after the application for the increase is signed, or
- 10 days after you receive the new specification pages issued for
the increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal
rights to you.
Upon canceling the increase, you will receive a credit to your Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount (assuming the Policy is in force), you may
convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Inheiritage Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Policy Value in the Inheiritage Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
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<PAGE>
Where required by state law, at your request the Company will issue a flexible
premium adjustable life insurance policy to you. The new policy will have the
same Face Amount, Issue Ages, Date of Issue, and Premium Class as the original
Policy.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Inheiritage
Account or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY -- Unlike conventional insurance policies, the Policy does
not obligate you to pay premiums in accordance with a rigid and inflexible
premium schedule. You may establish a schedule of planned premiums which will be
billed by the Company at regular intervals. Failure to pay planned premiums,
however, will not itself cause the Policy to lapse.
You also may make unscheduled premium payments at any time prior to the Final
Premium Payment Date or skip planned premium payments, subject to the maximum
and minimum premium limitations described below.
You also may elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted each month,
generally on the Monthly Payment Date, from your checking account and applied as
a premium under a Policy. The minimum payment permitted under a MAP procedure is
$50.
Premiums are not limited as to frequency and number. No premium payment may be
less than $100, however, without the Company's consent. Moreover, premium
payments must be sufficient to provide a positive Surrender Value at the end of
each Policy month, or the Policy may lapse. See POLICY TERMINATION AND
REINSTATEMENT.
MINIMUM MONTHLY FACTOR -- If, in the first 48 Policy months following issue or
an increase in the Face Amount, you make premium payments, less partial
withdrawals and partial withdrawal charges, at least equal to the sum of the
Minimum Monthly Factor for the number of months the Policy, increase in Face
Amount, or Policy Change which causes a change in the Minimum Monthly Factor has
been in force and Debt does not exceed Policy Value less surrender charges, the
Policy is guaranteed not to lapse during that period. EXCEPT FOR THE 48 POLICY
MONTHS AFTER THE DATE OF ISSUE, OR THE EFFECTIVE DATE OF AN INCREASE IN THE FACE
AMOUNT, MAKING MONTHLY PAYMENTS AT LEAST EQUAL TO THE MINIMUM MONTHLY FACTOR
DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Policy during a
Policy year. See POLICY TERMINATION AND REINSTATEMENT.
INCENTIVE FUNDING DISCOUNT
We will lower the cost of insurance charges by 5% during any Policy year for
which you qualify for an incentive funding discount. To qualify, total premiums
paid under the Policy, less any Debt, withdrawals and withdrawal charges, and
transfers from other policies issued by the Company, must exceed 90% of the
guideline level premiums (as defined in Section 7702 of the Code) accumulated
from the Date of Issue to the date of qualification. The incentive funding
discount is not available in all states.
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<PAGE>
The amount needed to qualify for the incentive funding discount is determined on
the Date of Issue for the first Policy year and on each Policy anniversary for
each subsequent Policy year. If the Company receives the proceeds from a Policy
issued by an unaffiliated company to be exchanged for the Policy, however, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.
PAID-UP INSURANCE OPTION
Upon Written Request, a Policyowner may exercise a paid-up insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount, up to the Face Amount of the
Policy, that the Surrender Value of the Policy can purchase for a net single
premium at the Insureds' Ages and Premium Class on the date this option is
elected. The Company will transfer any Policy Value in the Inheiritage Account
to the General Account on the date it receives the written request to elect the
option. If the Surrender Value exceeds the net single premium necessary for the
fixed insurance, the Company will pay the excess to the Policyowner. The net
single premium is based on the Commissioners 1980 Standard Ordinary Mortality
Tables, Smoker or Non-Smoker, male, female (or Table B for unisex policies) with
increases in the tables for non-standard risks. Interest will not be less than
4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:
- As described above, the paid-up insurance benefit is computed
differently from the Net Death Benefit, and the death benefit
options will not apply.
- The Company will transfer the Policy Value in the Inheiritage
Account to the General Account on the date it receives the Written
Request to elect the option. The Company will not allow transfers
of Policy Value from the General Account back to the Inheiritage
Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or
make partial withdrawals.
- Riders will continue only with the Company's consent.
After electing paid-up fixed insurance, the Policyowner may surrender the Policy
for its net cash value. The cash value is equal to the net single premium for
paid-up insurance at the Insureds' Ages. The net cash value is the cash value
less any outstanding loans.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the tax expense charge and the
premium expense charge. In the application for a Policy, you indicate the
initial allocation of Net Premiums among the General Account and the
Sub-Accounts of the Inheiritage Account. You may allocate premiums to one or
more Sub-Accounts, but may not have Policy Value in more than seven Sub-Accounts
at any one time. The minimum amount which may be allocated to a Sub-Account is
1% of Net Premium paid. Allocation percentages must be in whole numbers (for
example, 33 1/3% may not be chosen) and must total 100%.
FUTURE CHANGES ALLOWED -- You may change the allocation of future Net Premiums
at any time pursuant to written or telephone request. An allocation change will
be effective as of the date of receipt of the notice at the Principal Office.
Currently, no charge is imposed for changing premium allocation instructions.
The Company reserves the right to impose such a charge in the future, but
guarantees that the charge will not exceed $25.
If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably
30
<PAGE>
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions.
The procedures the Company follows for telephone transactions include requiring
callers to identify themselves by name, and to identify the Policyowner by name,
date of birth and social security number. All transfer instructions by telephone
are tape recorded.
INVESTMENT RISK -- The Policy Value in the Sub-Accounts will vary with their
investment experience; you bear this investment risk. The investment performance
may affect the Death Proceeds as well. Policyowners periodically should review
their allocations of premiums and Policy Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. However, the Policy Value held in the General Account to secure a
Policy loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Account(s) next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Currently, transfers involving the General Account are permitted only if:
- there has been at least a 90-day period since the last transfer
from the General Account, and
- the amount transferred from the General Account in each transfer
does not exceed the lesser of $100,000 or 25% of the Accumulated
Value under the Policy.
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION -- You may have
automatic transfers of at least $100 a month made on a periodic basis:
- from the Sub-Accounts which invest in the Money Market Fund and
Government Bond Fund of the Trust, respectively, to one or more of
the other Sub-Accounts ("Dollar-Cost Averaging Option"), or
- to reallocate Policy Value among the Sub-Accounts ("Automatic
Rebalancing Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS -- The transfer privilege is
subject to the Company's consent. The Company reserves the right to impose
limitations on transfers including, but not limited to:
- the minimum amount that may be transferred,
- the minimum amount that may remain in a Sub-Account following a
transfer from that Sub-Account,
- the minimum period of time between transfers involving the General
Account, and
- the maximum amount that may be transferred each time from the
General Account.
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<PAGE>
Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.
DEATH PROCEEDS
The Policy provides for the payment of the Death Proceeds to the named
Beneficiary on the death of the last surviving Insured. There are no Death
Proceeds payable on the death of the first Insured to die. Within 90 days of the
death of the first Insured to die, or as soon thereafter as is reasonably
possible, the Policyowner must mail due proof of such death to the Principal
Office. As long as the Policy remains in force (see POLICY TERMINATION AND
REINSTATEMENT), the Company will pay the Death Proceeds of the Policy to the
named Beneficiary, upon due proof of the death of the last surviving Insured.
The Company will normally pay the Death Proceeds within seven days of receiving
due proof of the death of the last surviving Insured, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments." The Death Proceeds may be received by the
Beneficiary in cash or under one or more of the payment options set forth in the
Policy. See APPENDIX B -- PAYMENT OPTIONS.
Prior to the Final Premium Payment Date, the Death Proceeds are:
- the Sum Insured provided under Option 1 or Option 2, whichever is
elected and in effect on the date of death of the last surviving
Insured; plus
- any additional insurance on the Insureds' lives that is provided by
rider; minus
- any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid
through the Policy month in which the last surviving Insured dies.
After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value of the Policy. The amount of Death Proceeds payable will be determined as
of the date of the Company's receipt of due proof of death of the last surviving
Insured.
SUM INSURED OPTIONS
The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the applications. You may
change the option once per Policy year by Written Request. There is no charge
for a change in option.
Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED -- The Guideline Minimum Sum Insured is equal to a
percentage of the Policy Value as set forth in the first Table below (for all
Policies issued in Pennsylvania and for certain other Policies* described below,
Table 2 applies). The Guideline Minimum Sum Insured is determined in accordance
with Code regulations to ensure that the Policy qualifies as a life insurance
contract and that the insurance proceeds will be excluded from the gross income
of the Beneficiary.
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GUIDELINE MINIMUM SUM INSURED TABLE
(Age of Younger Insured on Death of Last Surviving Insured)
<TABLE>
<CAPTION>
Age Percentage
- --------- -------------
<S> <C>
under 60 300%
60 300%
61 293%
62 286%
63 279%
64 272%
65 265%
66 258%
67 251%
68 244%
69 237%
70 230%
71 223%
72 217%
73 211%
74 205%
75 198%
76 192%
77 186%
<CAPTION>
Age Percentage
- --------- -------------
<S> <C>
78 180%
79 173%
80 167%
81 163%
82 159%
83 155%
84 151%
85 147%
86 143%
87 139%
88 135%
89 130%
90 125%
91 120%
92 115%
93 110%
94 105%
95 100%
Over 95 100%
</TABLE>
For all Policies issued in Pennsylvania and for certain other Policies*
described below, GUIDELINE MINIMUM SUM INSURED -- TABLE 2 applies, as follows:
GUIDELINE MINIMUM SUM INSURED -- TABLE 2
(Age of Younger Insured on Death of Last Surviving Insured)
<TABLE>
<CAPTION>
Age Percentage
- ---------- -------------
<S> <C>
thru 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%
<CAPTION>
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 thru 90 105%
91 104%
92 103%
93 102%
94 101%
95 100%
</TABLE>
* For a period of 90 days after a state insurance department has approved the
use of GUIDELINE MINIMUM SUM INSURED -- TABLE 2, the Company will permit
Policyowners in that state to endorse the Policy to elect GUIDELINE MINIMUM SUM
INSURED TABLE 2. After a state insurance department has approved its use, all
new Policies issued in that state will utilize GUIDELINE MINIMUM SUM INSURED --
TABLE 2.
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<PAGE>
Under both Option 1 and Option 2 the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under Guideline Minimum Sum Insured exceeds the Face Amount, in
which case the Sum Insured will vary as the Policy Value varies. Under Option 2,
the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured and the Death Proceeds will
be greater under Option 2 than under Option 1, since the Policy Value is added
to the specified Face Amount and included in the Death Proceeds only under
Option 2. However, the cost of insurance included in the Monthly Deduction will
be greater, and thus the rate at which Policy Value will accumulate will be
slower, under Option 2 than under Option 1 (assuming the same specified Face
Amount and the same actual premiums paid). See CHARGES AND DEDUCTIONS --
"Monthly Deduction from Policy Value."
If the Policyowner desires to have premium payments and investment performance
reflected in the amount of the Sum Insured, the Policyowner should choose Option
2. If the Policyowner desires premium payments and investment performance
reflected to the maximum extent in the Policy Value, you should select Option 1.
ILLUSTRATIONS -- For purposes of this illustration, assume that the younger
Insured is under the Age of 40, and that there is no outstanding Debt.
ILLUSTRATION OF OPTION 1 -- Under Option 1, a Policy with a $300,000 Face Amount
will generally have a Sum Insured equal to $300,000. However, because the Sum
Insured must be equal to or greater than 300% of Policy Value, if at any time
the Policy Value exceeds $100,000, the Sum Insured will exceed the $300,000 Face
Amount. In this example, each additional dollar of Policy Value above $100,000
will increase the Sum Insured by $3.00. For example, a Policy with a Policy
Value of $125,000 will have a Guideline Minimum Sum Insured of $375,000
($125,000 X 3.00); Policy Value of $150,000 will produce a Guideline Minimum Sum
Insured of $450,000 ($150,000 X 3.00); and Policy Value of $200,000 will produce
a Guideline Minimum Sum Insured of $600,000 ($200,000 X 3.00).
Similarly, so long as Policy Value exceeds $100,000, each dollar taken out of
Policy Value will reduce the Sum Insured by $3.00. If, for example, the Policy
Value is reduced from $125,000 to $100,000 because of partial withdrawals,
charges or negative investment performance, the Sum Insured will be reduced from
$375,000 to $300,000. If at any time, however, the Policy Value multiplied by
the applicable percentage is less than the Face Amount, the Sum Insured will
equal the Face Amount of the Policy.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the younger Insured's Age in the above example were, for example, 70 (rather
than between 0 and 40), the applicable percentage would be 230%. The Sum Insured
would not exceed the $300,000 Face Amount unless the Policy Value exceeded
$130,436 (rather than $100,000), and each dollar then added to or taken from
Policy Value would change the Sum Insured by $2.30.
ILLUSTRATION OF OPTION 2 -- For purposes of this illustration, assume that the
younger Insured is under the Age of 40 and that there is no outstanding Debt.
Under Option 2, a Policy with a Face Amount of $300,000 will generally produce a
Sum Insured of $300,000 plus Policy Value. For example, a Policy with Policy
Value of $50,000 will produce a Sum Insured of $350,000 ($300,000 + $50,000);
Policy Value of $80,000 will produce a Sum Insured of $380,000 ($300,000 +
$80,000); Policy Value of $100,000 will produce a Sum Insured of $400,000
($300,000 + $100,000). However, the Sum Insured must be at least 300% of the
Policy Value. Therefore, if the Policy Value is greater than $150,000, 300% of
that amount will be the Sum Insured, which will be greater than the Face Amount
plus Policy Value. In this example, each additional dollar of Policy Value above
$150,000 will increase the Sum Insured by $3.00. For example, if the Policy
Value is $200,000, the Guideline Minimum Sum Insured will be $600,000 ($200,000
X 3.00); Policy Value of $250,000 will produce a Guideline Minimum Sum Insured
of $750,000 ($250,000 X 3.00); and Policy Value of $300,000 will produce a
Guideline Minimum Sum Insured of $900,000 ($300,000 X 3.00).
Similarly, if Policy Value exceeds $150,000, each dollar taken out of Policy
Value will reduce the Sum Insured by $3.00. If, for example, the Policy Value is
reduced from $200,000 to $150,000 because of partial
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<PAGE>
withdrawals, charges or negative investment performance, the Sum Insured will be
reduced from $600,000 to $450,000. If at any time, however, Policy Value
multiplied by the applicable percentage is less than the Face Amount plus Policy
Value, then the Sum Insured will be the current Face Amount plus Policy Value.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the Insured's Age in the above example were 70, the applicable percentage
would be 230%, so that the Sum Insured must be at least 2.30 times the Policy
Value. The amount of the Sum Insured would be the sum of the Policy Value plus
$300,000 unless the Policy Value exceeded $230,769 (rather than $150,000). Each
dollar added to or subtracted from the Policy would change the Sum Insured by
$2.30.
The Sum Insured under Option 2 will always be the greater of the Face Amount
plus Policy Value or the Policy Value multiplied by the applicable percentage.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
CHANGE FROM OPTION 1 TO OPTION 2 -- If the Sum Insured Option is changed from
Option 1 to Option 2, the Face Amount will be decreased to equal the Sum Insured
less the Policy Value on the effective date of the change. This change may not
be made if it would result in a Face Amount less than $100,000. A change from
Option 1 to Option 2 will not alter the amount of the Sum Insured at the time of
the change, but will affect the determination of the Sum Insured from that point
on. Because the Policy Value will be added to the new specified Face Amount, the
Sum Insured will vary with the Policy Value. Thus, under Option 2, the Insurance
Amount at Risk will always equal the Face Amount unless the Guideline Minimum
Sum Insured is in effect. The cost of insurance may also be higher or lower than
it otherwise would have been without the change in Sum Insured Option. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value."
CHANGE FROM OPTION 2 TO OPTION 1 -- If the Sum Insured Option is changed from
Option 2 to Option 1, the Face Amount will be increased to equal the Sum Insured
which would have been payable under Option 2 on the effective date of the change
(i.e. the Face Amount immediately prior to the change plus the Policy Value on
the date of the change). The amount of the Sum Insured will not be altered at
the time of the change. However, the change in option will affect the
determination of the Sum Insured from that point on, since the Policy Value will
no longer be added to the Face Amount in determining the Sum Insured; the Sum
Insured will equal the new Face Amount (or, if higher, the Guideline Minimum Sum
Insured). The cost of insurance may be higher or lower than it otherwise would
have been since any increases or decreases in Policy Value will, respectively,
reduce or increase the Insurance Amount at Risk under Option 1. Assuming a
positive net investment return with respect to any amounts in the Inheiritage
Account, changing the Sum Insured Option from Option 2 to Option 1 will reduce
the Insurance Amount at Risk and therefore the cost of insurance charge for all
subsequent Monthly Deductions, compared to what such charge would have been if
no such change were made.
A change in Sum Insured Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by IRS rules. In such event,
the Company will pay the excess to you. See THE POLICY -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Policy at any time by submitting a Written Request to the Company.
Any increase or decrease in the specified Face Amount requested by you will
become effective on the Monthly Payment Date on or next following the date of
receipt of the request at the Principal Office or, if Evidence of Insurability
is required, the date of approval of the request.
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INCREASES IN FACE AMOUNT -- Along with the Written Request for an increase, you
must submit satisfactory Evidence of Insurability. The consent of the Insureds
is also required whenever the Face Amount is increased. A request for an
increase in Face Amount may not be less than $100,000. You may not increase the
Face Amount after the younger Insured reaches Age 80 or the older Insured
reaches Age 85. An increase must be accompanied by an additional premium if the
Surrender Value is less than $50 plus an amount equal to the sum of two Minimum
Monthly Factors.
On the effective date of each increase in Face Amount, a transaction charge of
$40 will be deducted from Policy Value for administrative costs. The effective
date of the increase will be the first Monthly Payment Date on or following the
date all of the conditions for the increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge will also
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly Deduction
from Policy Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a free-look
period, to have the increase canceled and the charges which would not have been
deducted but for the increase will be credited to the Policy and (2) during the
first 24 months following the increase, to transfer any or all Policy Value to
the General Account free of charge. See THE POLICY -- "Free-Look Period" and
"Conversion Privileges." A refund of charges which would not have been deducted
but for the increase will be made at your request.
DECREASES IN THE FACE AMOUNT -- The minimum amount for a decrease in Face Amount
is $100,000. The Face Amount in force after any decrease may not be less than
$100,000. If, following a decrease in Face Amount, the Policy would not comply
with the maximum premium limitation applicable under the IRS rules, the decrease
may be limited or Policy Value may be returned to you (at your election) to the
extent necessary to meet the requirements. A return of Policy Value may result
in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value." For purposes of
determining the cost of insurance charge, any decrease in the Face Amount will
reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase;
- the next most recent increases successively; and
- the initial Face Amount.
This order will also be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
See CHARGES AND DEDUCTIONS -- "Surrender Charge."
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of:
- your accumulation in the General Account, PLUS
- the value of the Accumulation Units in the Sub-Accounts.
The Policy Value is used in determining the Surrender Value (the Policy Value
less any Debt and applicable surrender charges). There is no guaranteed minimum
Policy Value. Because the Policy Value on any date depends upon a number of
variables, it cannot be predetermined.
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The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.
CALCULATION OF POLICY VALUE -- The Policy Value is determined first on the Date
of Issue and thereafter on each Valuation Date. On the Date of Issue, the Policy
Value will be the Net Premiums received, plus any interest earned during the
period when premiums are held in the General Account (before being transferred
to the Inheiritage Account; see THE POLICY -- "Applying for a Policy") less any
Monthly Deductions due. On each Valuation Date after the Date of Issue the
Policy Value will be:
- the aggregate of the values in each of the Sub-Accounts on the
Valuation Date, determined for each Sub-Account by multiplying the
value of an Accumulation Unit in that Sub-Account on that date by
the number of such Accumulations Units allocated to the Policy;
PLUS
- the value in the General Account (including any amounts transferred
to the General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT -- Each Net Premium is allocated to the Sub-Account(s)
selected by you. Allocations to the Sub-Accounts are credited to the Policy in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Principal Office. The number of Accumulation
Units will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a Sub-
Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
The dollar value of an Accumulation Unit of each Sub-Account varies from
Valuation Date to Valuation Date based on the investment experience of that
Sub-Account. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit on a given Valuation Date
is determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a Sub-Account of the Inheiritage Account during the Valuation
Period just ended. The net investment factor for each Sub-Account is equal to
1.0000 plus the number arrived at by dividing (a) by (b) and subtracting (c) and
(d) from the result, where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal on an annual basis to
.90% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 1.275%; and
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(d) is the Inheiritage Account administrative charge for each day in the
Valuation Period equal on an annual basis to 0.25% of the daily net asset
value of that Sub-Account. This charge is applicable only during the first
15 Policy years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insureds' lifetimes, you may arrange for the Death Proceeds to be
paid in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- PAYMENT
OPTIONS. These choices are also available at the Final Premium Payment Date and
if the Policy is surrendered. The Company may make more payment options
available in the future. If no election is made, the Company will pay the Death
Proceeds in a single sum. When the Death Proceeds are payable in a single sum,
the Beneficiary may, within one year of the death of the last surviving Insured,
select one or more of the payment options if no payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Policy by rider.
The cost of any optional insurance benefits will be deducted as part of the
Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy
Value."
POLICY SURRENDER
You may at any time surrender the Policy and receive its Surrender Value. The
Surrender Value is the Policy Value less any Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Policy are received at the
Principal Office. A surrender charge will be deducted when a Policy is
surrendered if less than 15 full Policy years have elapsed from the Date of
Issue of the Policy or from the effective date of any increase in Face Amount.
See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a single lump sum or under one of the
payment options described in APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
For important tax consequences which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of the Policy, subject to the limits stated below, upon Written
Request filed at the Principal Office. The Written Request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500. Under Option 1, the Face Amount is reduced by the amount of the
partial withdrawal, and a partial withdrawal will not be allowed if it would
reduce the Face Amount below $100,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Accumulation Units equivalent in value to the amount withdrawn. The
amount withdrawn equals the amount requested by you plus the transaction charge
and any applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawals." The Company will normally pay
the amount of the partial
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withdrawal within seven days following the Company's receipt of the partial
withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
For important tax consequences which may result from partial withdrawals, see
FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policies.
Certain of the charges and deductions described below may be reduced for
Policies issued to employees of First Allmerica and its affiliates located at
First Allmerica's home office (or at off-site locations if such employees are on
First Allmerica's home office payroll), employees and registered representatives
of any broker-dealer that has entered into a sales agreement with the Company or
Allmerica Investments, Inc. to sell the Policies, and any spouses or children of
the above persons. The Cost of Insurance Charges may be reduced, and no
surrender charges, partial withdrawal charges or front-end sales loads will be
imposed (and no commissions will be paid), where the Policyowner as of the date
of application is within these categories.
TAX EXPENSE CHARGE
A charge will be deducted from each premium payment for the actual state and
local premium taxes paid by the Company and a charge of 1% of premiums to
compensate the Company for federal taxes imposed for deferred acquisition costs
("DAC") taxes. The premium tax deduction will change if there is a change in tax
rates or if the applicable jurisdiction changes (the Company should be notified
of any change in address as soon as possible). The Company reserves the right to
increase or decrease the 1% DAC tax deduction to reflect changes in the
Company's expenses for DAC taxes.
PREMIUM EXPENSE CHARGE
A charge of 1% of premiums will be deducted from each premium payment to
partially compensate the Company for the cost of selling the Policies. The
premium expense charge is a factor the Company must use when calculating the
maximum sales load it can charge under SEC rules during the first two Policy
years.
MONTHLY DEDUCTION FROM POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from Policy Value
will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charges are
discussed below. The Monthly Deduction on or following the effective date of a
requested increase in the Face Amount will also include a $40 administrative
charge for the increase. See THE POLICY -- "Change in Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions or, if no
allocation is specified, the Company will make a Pro-Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. However, if on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
COST OF INSURANCE -- This charge is designed to compensate the Company for the
anticipated cost of providing Death Proceeds to Beneficiaries of those last
surviving Insureds who die prior to the Final Premium Payment Date. The cost of
insurance is determined on a monthly basis, and is determined separately for the
initial Face
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Amount and for each subsequent increase in Face Amount. Because the cost of
insurance depends upon a number of variables, it can vary from month to month.
CALCULATION OF THE CHARGE -- If you select Sum Insured Option 2, the monthly
cost of insurance charge for the initial Face Amount will equal the applicable
cost of insurance rate multiplied by the initial Face Amount. If you select Sum
Insured Option 1, however, the applicable cost of insurance rate will be
multiplied by the initial Face Amount less the Policy Value (minus charges for
rider benefits) at the beginning of the Policy month. Thus, the cost of
insurance charge may be greater for Policyowners who have selected Sum Insured
Option 2 than for those who have selected Sum Insured Option 1, assuming the
same Face Amount in each case and assuming that the Guideline Minimum Sum
Insured is not in effect. In other words, since the Sum Insured under Option 1
remains constant while the Sum Insured under Option 2 varies with the Policy
Value, any Policy Value increases will reduce the insurance charge under Option
1 but not under Option 2.
If you select Sum Insured Option 2, the monthly insurance charge for each
increase in Face Amount (other than an increase caused by a change in the Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in Face Amount. If you select Sum Insured
Option 1, the applicable cost of insurance rate will be multiplied by the
increase in the Face Amount reduced by any Policy Value (minus rider charges) in
excess of the initial Face Amount at the beginning of the policy month.
EFFECT OF THE GUIDELINE MINIMUM SUM INSURED -- If the Guideline Minimum Sum
Insured is in effect under either Option, a monthly cost of insurance charge
also will be calculated for that additional portion of the Sum Insured which is
required to comply with the Guideline rules. This charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial
Face Amount times the Guideline Minimum Sum Insured (Policy Value
times the applicable percentage), MINUS
- the greater of the Face Amount or the Policy Value (if you
selected Sum Insured Option 1)
OR
- the Face Amount PLUS the Policy Value (if you selected Sum
Insured Option 2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY -- "Change in Face Amount."
COST OF INSURANCE RATES -- Cost of insurance rates are based on a blended unisex
rate table, Age and Premium Class of the Insureds at the Date of Issue, the
effective date of an increase or date of rider, as applicable, the amount of
premiums paid less Debt, any partial withdrawals and withdrawal charges, and
risk classification. Sex-distinct rates do not apply, except in those states
that do not permit unisex rates.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in Face
Amount or rider are determined annually on the anniversary of the effective date
of each increase or rider. The cost of insurance rates generally increase as the
Insureds' Ages increase. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Table D, Smoker or Non-Smoker, and the Insureds'
Ages. The Tables used for this purpose set forth different mortality estimates
for smokers and non-smokers. Any change in the cost of insurance rates will
apply to all persons of the same insuring Age and Premium Class whose Policies
have been in force for the same length of time.
The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into standard Premium Classes and substandard
Premium Classes. In an otherwise identical Policy, an Insured in the Standard
Premium Class will have a lower cost of insurance than an Insured in a
substandard Premium Class with a higher mortality risk. The Premium Classes are
also divided into two categories: smokers and nonsmokers. Nonsmoking Insureds
will incur lower cost of insurance rates than Insureds who are classified as
smokers but who are otherwise in the same Premium Class. Any Insured with an Age
at issuance under 18 will be classified initially as regular or substandard. The
Insured then will be classified as a smoker at Age 18 unless
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the Insured provides satisfactory evidence that the Insured is a nonsmoker. The
Company will provide notice to you of the opportunity for an Insured to be
classified as a nonsmoker when the Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in Face Amount. For each increase in Face
Amount you request, at a time when an Insured is in a less favorable Premium
Class than previously, a correspondingly higher cost of insurance rate will
apply only to that portion of the Insurance Amount at Risk for the increase. For
the initial Face Amount and any prior increases, the Company will use the
Premium Class previously applicable. On the other hand, if an Insured's Premium
Class improves on an increase, the lower cost of insurance rate generally will
apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES -- Prior to the Final Premium Payment Date, a
monthly administrative charge of $6 per month will be deducted from Policy
Value. This charge will be used to compensate the Company for expenses incurred
in the administration of the Policy and will compensate the Company for first-
year underwriting and other start-up expenses incurred in connection with the
Policy. These expenses include the cost of processing applications, conducting
medical examinations, determining insurability and the Insureds' Premium Class,
and establishing Policy records. The Company does not expect to derive a profit
from these charges.
CHARGES AGAINST ASSETS OF THE INHEIRITAGE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company and a charge for administrative expenses of the
Inheiritage Account.
MORTALITY AND EXPENSE RISK CHARGE -- The Company currently makes a charge on an
annual basis of 0.90% of the daily net asset value in each Sub-Account. This
charge is for the mortality risk and expense risk which the Company assumes in
relation to the variable portion of the Policies. The total charges may be
increased or decreased by the Board of Directors of the Company once each year,
subject to compliance with applicable state and federal requirements, but it may
not exceed 1.275% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will therefore pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policies
will exceed the amounts realized from the administrative charges provided in the
Policies. If the charge for mortality and expense risks is not sufficient to
cover actual mortality experience and expenses, the Company will absorb the
losses. If costs are less than the amounts provided, the difference will be a
profit to the Company. To the extent this charge results in a current profit to
the Company, such profit will be available for use by the Company for, among
other things, the payment of distribution, sales and other expenses. Since
mortality and expense risks involve future contingencies which are not subject
to precise determination in advance, it is not feasible to identify specifically
the portion of the charge which is applicable to each.
INHEIRITAGE ACCOUNT ADMINISTRATIVE CHARGE -- During the first 15 Policy years,
the Company assesses a charge on an annual basis of 0.25% of the daily net asset
value in each Sub-Account. The charge is assessed to help defray administrative
expenses actually incurred in the administration of the Inheiritage Account and
the Sub-Accounts and is not expected to be a source of profit. The
administrative functions and expenses assumed by the Company in connection with
the Inheiritage Account and the Sub-Accounts include, but are not limited to,
clerical, accounting, actuarial and legal services, rent, postage, telephone,
office equipment and supplies, expenses of preparing and printing registration
statements, expenses of preparing and typesetting prospectuses and the cost of
printing prospectuses not allocable to sales expense, filing and other fees. No
Inheiritage Account administrative charge is imposed after the 15(th) Policy
year.
OTHER CHARGES AND EXPENSES -- Because the Sub-Accounts purchase shares of the
Underlying Funds, the value of the Accumulation Units of the Sub-Accounts will
reflect the investment advisory fee and other expenses incurred by the
Underlying Funds. The prospectuses and statements of additional information of
the
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Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, and DGPF contain additional
information concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policy provides for a contingent surrender charge. A surrender charge may be
deducted if you request a full surrender of the Policy or a decrease in Face
Amount. The duration of the surrender charge is 15 years from Date of Issue or
from the effective date of any increase in the Face Amount. A separate surrender
charge, described in more detail below, is calculated upon the issuance of the
Policy and for each increase in the Face Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agent's
commissions, advertising and the printing of the prospectus and sales
literature.
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and
(b) is a deferred sales charge of 48% of premiums received up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by average issue Age from 1.95 (for average issue Ages 5 through
75) to 1.31 (for average issue Age 82).
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months and reduces by 0.5% or more per month thereafter, as described
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This reduction in the
maximum surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 25% of
premiums received. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE -- A separate surrender
charge will apply to and is calculated for each increase in Face Amount. The
surrender charge for the increase is in addition to that for the initial Face
Amount. The maximum surrender charge for the increase is equal to the sum of (a)
plus (b), where (a) is equal to $8.50 per thousand dollars of increase, and (b)
is a deferred sales charge of 48% of premiums associated with the increase, up
to a maximum number of Guideline Annual Premiums (for the increase) subject to
the deferred sales charge that varies by average Age (at the time of increase)
from 1.95 (for average Ages 5 through 75) to 1.31 (for average Age 82). In
accordance with limitations under state insurance regulations, the amount of the
surrender charge will not exceed a specified amount per $1,000 of increase, as
indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is true
for the initial Face Amount, (a) is a deferred administrative charge and (b) is
a deferred sales charge. The maximum surrender charge for the increase continues
in a level amount for 40 Policy months and reduces by 0.5% or more per month
thereafter, as provided in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
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If you surrender the Policy during the first two Policy years following an
increase in Face Amount before making premium payments associated with the
increase in Face Amount which are at least equal to one Guideline Annual
Premium, the deferred administrative charge will be $8.50 per thousand dollars
of Face Amount increase, as described above, but the deferred sales charge will
not exceed 25% of premiums associated with the increase. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below.
ALLOCATION OF POLICY VALUE AND PREMIUMS UPON AN INCREASE IN FACE AMOUNT --
Additional premium payments may not be required to fund a requested increase in
Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of existing Policy Value
to the increase and to allocate subsequent premium payments between the initial
Face Amount and the increase.
For example, suppose the Guideline Annual Premium is equal to $1,500 before an
increase and is equal to $2,000 as a result of the increase. The Policy Value on
the effective date of the increase would be allocated 75% ($1,500/$2,000) to the
initial Face Amount and 25% to the increase. All future premiums would also be
allocated 75% to the initial Face Amount and 25% to the increase. Thus, existing
Policy Value associated with the increase will equal the portion of Policy Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
POSSIBLE SURRENDER CHARGE ON A DECREASE IN THE FACE AMOUNT -- A surrender charge
may be deducted on a decrease in the Face Amount. In the event of a decrease,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Policy. The fraction will be determined by dividing the
amount of the decrease by the current Face Amount and multiplying the result by
the surrender charge. If more than one surrender charge is in effect (i.e.,
pursuant to one or more increases in the Face Amount of a Policy), the surrender
charge will be applied in the following order: (1) the most recent increase; (2)
the next most recent increases successively, and (3) the initial Face Amount.
Where a decrease causes a partial reduction in an increase or in the initial
Face Amount, a proportionate share of the surrender charge for that increase or
for the initial Face Amount will be deducted.
CHARGES ON PARTIAL WITHDRAWALS
After the first Policy year, partial withdrawals of Surrender Value may be made.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $100,000.
A transaction charge, which is the smaller of 2% of the amount withdrawn or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company less the
total of any prior withdrawals in that Policy year which were not subject to the
partial withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal.
This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative
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<PAGE>
charge component. The partial withdrawal charge deducted will decrease existing
surrender charges in the following order:
- first, the surrender charge for the most recent increase in the
Face Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICY -- "Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and
Government Bond Fund of the Trust to one or more of the other
Sub-Accounts; or
- to reallocate Policy Value among the Sub-Accounts.
The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.
If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge, and in addition to the 12 free transfers in a Policy year. See THE
POLICY -- "Conversion Privileges," and POLICY LOANS.
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase
and the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
incurred for changing the Net Premium allocation instructions, for changing the
allocation of any Monthly Deductions among the various Sub-Accounts, or for a
projection of values. No such charges are currently imposed and any such charge
is guaranteed not to exceed $25.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value. In the first Policy year, the Loan Value is 75% of
Policy Value reduced by applicable surrender charges, as well as Monthly
Deductions and interest on Debt to the end of the Policy year. The Loan Value in
the second Policy year and thereafter is 90% of an amount equal to the Policy
Value reduced by applicable surrender charges. There is no minimum limit on the
amount of the loan.
The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."
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A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy Value so transferred will
be canceled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT -- As long as the Policy is in
force, the Policy Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 6.00% per year.
PREFERRED LOAN OPTION -- A preferred loan option is available under the Policy.
The preferred loan option will be available upon Written Request. It may be
revoked by you at any time. If this option has been selected, after the tenth
Policy anniversary the Policy Value in the General Account that is equal to the
loan amount will be credited with interest at an effective annual yield of at
least 7.5%. Our current practice is to credit a rate of interest equal to the
rate being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED -- Outstanding Policy loans are charged interest. Interest
accrues daily and is payable in arrears at the annual rate of 8%. Interest is
due and payable at the end of each Policy year or on a pro-rata basis for such
shorter period as the loan may exist. Interest not paid when due will be added
to the loan amount and will bear interest at the same rate. If the new loan
amount exceeds the Policy Value in the General Account after the due and unpaid
interest is added to the loan amount, the Company will transfer Policy Value
equal to that excess loan amount from the Policy Value in each Sub-Account to
the General Account as security for the excess loan amount. The Company will
allocate the amount transferred among the Sub-Accounts in the same proportion
that the Policy Value in each Sub-Account bears to the total Policy Value in all
Sub-Accounts.
REPAYMENT OF LOANS
Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Inheiritage Account cannot exceed
the Policy Value previously transferred from the Inheiritage Account to secure
the Debt.
If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Policy will terminate with no value. See
POLICY TERMINATION AND REINSTATEMENT.
EFFECT OF POLICY LOANS
Although Policy loans may be repaid at any time prior to the lapse of the
Policy, Policy loans will permanently affect the Policy Value and Surrender
Value, and may permanently affect the Death Proceeds. The effect could be
favorable or unfavorable, depending upon whether the investment performance of
the Sub-Account(s) is less than or greater than the interest credited to the
Policy Value in the General Account attributable to the loan. Moreover,
outstanding Policy loans and the accrued interest will be deducted from the
proceeds payable upon the death of the last surviving Insured or surrender.
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POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the last surviving Insured dies during the grace
period, the Death Proceeds still will be payable, but any Monthly Deductions due
and unpaid through the Policy month in which the last surviving Insured dies,
and any other overdue charge, will be deducted from the Death Proceeds.
LIMITED 48-MONTH GUARANTEE -- Except for the situation described in (b) above,
the Policy is guaranteed not to lapse during the first 48 months after the Date
of Issue or the effective date of an increase in the Face Amount if you make a
minimum amount of premium payments. The minimum amount paid, minus the Debt,
partial withdrawals and partial withdrawal charges, must be at least equal to
the sum of the Minimum Monthly Factor for the number of months the Policy,
increase in Face Amount, or a Policy Change which causes a change in the Minimum
Monthly Factor has been in force. A Policy change which causes a change in the
Minimum Monthly Factor is a change in the Face Amount or the addition or
deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force.
REINSTATEMENT -- If the Policy has not been surrendered and either or both the
Insureds is alive, the terminated Policy may be reinstated any time within three
years after the date of default and before the Final Premium Payment Date. The
reinstatement will be effective on the Monthly Payment Date following the date
you submit the following to the Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insureds is insurable
according to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge and
premium expense charge, is large enough to cover the minimum amount
payable, as described below.
MINIMUM AMOUNT PAYABLE -- If reinstatement is requested when fewer than 48
Monthly Deductions have been made since the Date of Issue or the effective date
of an increase in the Face Amount, you must pay the lesser of the amount shown
in (a) or (b), above. Under (a), the minimum amount payable is the Minimum
Monthly Factor for the three-month period beginning on the date of
reinstatement. Under (b), the minimum amount payable is the sum of
- the amount by which the surrender charge as of the date of
reinstatement exceeds the Policy Value on the date of default, PLUS
- Monthly Deductions for the three-month period beginning on the date
of reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue of the Policy or any increase in the Face Amount, you must pay
the amount shown in (b) above. The Company reserves the right to increase the
Minimum Monthly Factor upon reinstatement.
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SURRENDER CHARGE -- The surrender charge on the date of reinstatement is the
surrender charge which would have been in effect had the Policy remained in
force from the Date of Issue. The Policy Value less Debt on the date of default
will be restored to the Policy to the extent it does not exceed the surrender
charge on the date of reinstatement. Any Policy Value less the Debt as of the
date of default which exceeds the surrender charge on the date of reinstatement
will not be restored.
POLICY VALUE ON REINSTATEMENT -- The Policy Value on the date of reinstatement
is:
- the Net Premium paid to reinstate the Policy increased by interest
from the date the payment was received at the Principal Office,
PLUS
- an amount equal to the Policy Value less Debt on the date of
default to the extent it does not exceed the surrender charge on
the date of reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations, and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is named in the applications for the Policy. The Policyowner is
generally entitled to exercise all rights under a Policy while the Insureds are
alive, subject to the consent of any irrevocable Beneficiary (the consent of a
revocable Beneficiary is not required). The consent of the Insureds is required
whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the death of the last surviving Insured. Unless otherwise stated in
the Policy, the Beneficiary has no rights in the Policy before the death of the
last surviving Insured. While the Insureds are alive, you may change any
Beneficiary unless you have declared a Beneficiary to be irrevocable. If no
Beneficiary is alive when the last surviving Insured dies, the Policyowner (or
the Policyowner's estate) will be the Beneficiary. If more than one Beneficiary
is alive when the last surviving Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the last surviving
Insured dies will pass to surviving Beneficiaries proportionally.
INCONTESTABILITY
The Company will not contest the validity of a Policy after it has been in force
during the lifetimes of both Insureds for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the lifetimes of both Insureds
for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if either Insured commits suicide, while
sane or insane, within two years from the Date of Issue. Instead, the Company
will pay the Beneficiary an amount equal to all premiums paid for the Policy,
without interest, less any outstanding Debt and less any partial withdrawals. If
either Insured commits suicide, while sane or insane, generally within two years
from the effective date of any increase in the Sum Insured, the Company's
liability with respect to such increase will be limited to a refund of the cost
thereof. The Beneficiary will receive the administrative charges and insurance
charges paid for such increase.
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NOTICE OF FIRST INSURED TO DIE
Within 90 days of the death of the first Insured to die, or as soon thereafter
as is reasonably possible, you must mail to the Principal Office due proof of
such death.
AGE
If the Age of either Insured as stated in the application for a Policy is not
correct, benefits under a Policy will be adjusted to reflect the correct Age, if
death of the last surviving Insured occurs prior to the Final Premium Payment
Date. The adjusted benefit will be that which the most recent cost of insurance
charge would have purchased for the correct Age. In no event will the Sum
Insured be reduced to less than the Guideline Minimum Sum Insured.
ASSIGNMENT
The Policyowner may assign a Policy as collateral or make an absolute assignment
of the Policy. All rights under the Policy will be transferred to the extent of
the assignee's interest. The consent of the assignee may be required in order to
make changes in premium allocations, to make transfers, or to exercise other
rights under the Policy. The Company is not bound by an assignment or release
thereof, unless it is in writing and is recorded at the Principal Office. When
recorded, the assignment will take effect as of the date the Written Request was
signed. Any rights created by the assignment will be subject to any payments
made or actions taken by the Company before the assignment is recorded. The
Company is not responsible for determining the validity of any assignment or
release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Inheiritage Account upon surrender, partial
withdrawals, or death of the last surviving Insured, as well as payments of a
Policy loan and transfers may be postponed whenever: (a) the New York Stock
Exchange is closed for other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the SEC or
(b) 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 Inheiritage Account's net assets. Payments under
the Policy of any amounts derived from the premiums paid by check may be delayed
until such time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the last
surviving Insured, as well as payments of Policy loans and transfers from the
General Account, for a period not to exceed six months.
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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
- --------------------------------------- ---------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice
Director President, First Allmerica
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Allmerica since 1996; Vice President, First
Chief Investment Officer Allmerica
John F. Kelly Director of First Allmerica since 1996; Senior Vice
Director President, General Counsel and Assistant
Secretary, First Allmerica
J. Barry May Director of First Allmerica since 1996; Director
Director and President, The Hanover Insurance Company since
1996; Vice President, The Hanover Insurance
Company, 1993 to 1996
James R. McAuliffe Director of First Allmerica since 1996; President
Director and CEO, Citizens Insurance Company of America
since 1994; Vice President 1982 to 1994 and Chief
Investment Officer, First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board, President and
Director and Chairman of the Board Chief Executive Officer, First Allmerica since
1989
Edward J. Parry III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and
Chief Financial Officer and Treasurer Treasurer, First Allmerica since 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director, President and President, First Allmerica; Director, Allmerica
Chief Executive Officer Investments, Inc.; Director and President,
Allmerica Investment Management Company, Inc.
Larry C. Renfro Director of First Allmerica since 1996; Vice
Director President, First Allmerica
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica; Chief Financial
Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director President, First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Policies pursuant to a Sales and Administrative
Services Agreement with the Company and the Inheiritage Account. Allmerica
Investments, Inc. is registered with the SEC as a broker-dealer and is a member
of the National Association of Securities Dealers, Inc. The Policies are sold by
agents of the Company who are registered representatives of Allmerica
Investments, Inc., or of broker-dealers which have entered into selling
agreements with Allmerica Investments, Inc.
The Company pays to registered representatives who sell the Policy Commissions
based on a commission schedule. After issue of the Policy or an increase in Face
Amount, commissions generally will equal 50 percent of the first year premiums
up to a basic premium amount established by the Company. Thereafter, commissions
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will generally equal 3.5 percent of any additional premiums. Certain registered
representatives, including registered representatives enrolled in the Company's
training program for new agents, may receive additional first year and renewal
commissions and training reimbursements. General Agents of the Company and
certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 10 percent of first
year or 14 percent of renewal premiums.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to you or to the
Inheiritage Account. Any surrender charge assessed on a Policy will be retained
by the Company except for amounts it may pay to Allmerica Investments, Inc. for
services it performs and expenses it may incur as principal underwriter and
general distributor services.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity
VIP II Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net
asset value, respectively, of the shares of such Underlying Funds held by the
Inheiritage Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Inheiritage
Account. The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
REPORTS
The Company will maintain the records relating to the Inheiritage Account. You
will be promptly sent statements of significant transactions such as premium
payments, changes in specified Face Amount, changes in Sum Insured Option,
transfers among Sub-Accounts and the General Account, partial withdrawals,
increases in loan amount by you, loan repayments, lapse, termination for any
reason, and reinstatement. An annual statement will also be sent to you within
30 days after a Policy anniversary. The annual statement will summarize all of
the above transactions and deductions of charges during the Policy year. It will
also set forth the status of the Death Proceeds, Policy Value, Surrender Value,
amounts in the Sub-Accounts and General Account, and any Policy loan(s).
In addition, you will be sent periodic reports containing financial statements
and other information for the Inheiritage Account and the Underlying Investment
Companies as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Inheiritage Account is a
party, or to which the assets of the Inheiritage 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 Inheiritage Account.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the SEC. Certain portions of the Registration
Statement and amendments have been omitted from this Prospectus pursuant to the
rules and regulations of the SEC. Statements contained in this Prospectus
concerning the Policy and other legal documents are summaries. The complete
documents and omitted information may be obtained from the SEC's principal
office in Washington, D.C., upon payment of the SEC's prescribed fees.
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INDEPENDENT ACCOUNTANTS
The financial statements of Allmerica Financial Life Insurance and Annuity
Company prepared in accordance with generally accepted accounting principles as
of and for the year ended December 31, 1996, the statutory basis financial
statements of Allmerica Financial Life Insurance and Annuity Company for 1995
and each of the three years ended December 31, 1995 and the financial statements
for the Inheiritage Account of the Company as of December 31, 1996 and for the
periods indicated included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Allmerica Financial Life Insurance and Annuity
Company included herein should be considered only as bearing on the ability of
Allmerica Financial Life Insurance and Annuity Company to meet its obligations
under the Policies.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to the Policyowner or the Beneficiary depends upon a variety of factors.
The following discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted. From time to
time legislation is proposed which, if passed, could significantly, adversely
and possibly retroactively affect the taxation of the Policies. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policies is not exhaustive, does not purport to
cover all situations and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the trustee of an employee benefit plan.
A qualified tax adviser should always be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE INHEIRITAGE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
and files a consolidated tax return with its parent and affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the Inheiritage Account. Based on these expectations, no
charge is made for federal income taxes which may be attributable to the
Inheiritage Account.
The Company will review periodically the question of a charge to the Inheiritage
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the
Inheiritage Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Inheiritage Account.
TAXATION OF THE POLICIES
The Company believes that the Policies described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance contracts and places
limitations on the relationship of the Policy Value to the Insurance Amount at
risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value of the
Policy is not taxable until received by the Policyowner or the Policyowner's
designee. But see "Modified Endowment Contracts." Although the Company believes
that the Policies are in compliance with
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<PAGE>
Section 7702 of the Code, the manner in which Section 7702 should be applied to
certain features of a joint survivorship life insurance contract is not directly
addressed by Section 7702. In the absence of final regulations or other guidance
issued under Section 7702, there is necessarily some uncertainty whether a
Policy will meet the Section 7702 definition of a life insurance contract. This
is true particularly if the Policyowner pays the full amount of premiums
permitted under the Policy. A Policyowner contemplating the payment of such
premiums should do so only after consulting a tax adviser. If a Policy were
determined not to be a life insurance contract under Section 7702, it would not
have most of the tax advantages normally provided by a life insurance contract.
The Code requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance policy for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Policyowners may direct their
investments to particular divisions of a separate account. Regulations in this
regard may be issued in the future. It is possible that if and when regulations
are issued, the Policies may need to be modified to comply with such
regulations. For these reasons, the Policies or the Company's administrative
rules may be modified as necessary to prevent a Policyowner from being
considered the owner of the assets of the Inheiritage Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding, or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner, or
Beneficiary.
SPLIT OPTION RIDER -- The Split Option Rider permits a Policy to be split into
two other life insurance policies, one covering each Insured singly. A Policy
split may have adverse tax consequences. It is not clear whether a Policy split
will be treated as a nontaxable exchange under Section 1035 of the Code. Unless
a Policy split is so treated, it could result in recognition of taxable income
on the gain in the Policy. In addition, it is not clear whether, in all
circumstances, the individual policies that result from a Policy split would be
treated as life insurance policies under Section 7702 of the Code or would be
classified as modified endowment contracts. The Policyowner should consult a
competent tax adviser regarding the possible adverse tax consequences of a
Policy split.
POLICY LOANS -- The Company believes that non-preferred loans received under the
Policy will be treated as an indebtedness of the Policyowner for federal income
tax purposes. Under current law, these loans will not constitute income for the
Policyowner while the Policy is in force (but see "Modified Endowment
Contracts"). There is a risk, however, that a preferred loan may be
characterized by the IRS as a withdrawal and taxed accordingly. At the present
time, the IRS has not issued any guidance on whether loans with the attributes
of a preferred loan should be treated differently than a non-preferred loan.
This lack of specific guidance makes the tax treatment of preferred loans
uncertain. In the event IRS guidelines are issued in the future, you may revoke
your request for a preferred loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. Generally, no tax deduction for interest is allowed on Policy
loans, if the Insured is an officer or employee of, or is financially interested
in, any business carried on by the taxpayer. There is an exception to this rule
which permits a deduction for interest on loans up to $50,000 related to any
policies covering the greater of (1) five individuals or (2) the lesser of (a)
5% of the total number of officers and employees of the corporation or (b) 20
individuals.
52
<PAGE>
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including a Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. A policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the policy at any time
during the first seven policy years exceeds the sum of the net level premiums
that would have been paid, had the policy provided for paid-up future benefits
after the payment of seven level premiums.
If a Policy is considered a modified endowment contract, all distributions under
the Policy will be taxed on an "income first" basis. Most distributions received
by a Policyowner directly or indirectly (including loans, withdrawals, partial
surrenders, or the assignment or pledge of any portion of the value of the
policy) will be includible in gross income to the extent that the cash surrender
value of the policy exceeds the policyowner's investment in the contract. Any
additional amounts will be treated as a return of capital to the extent of the
policyowner's basis in the policy. In addition, with certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be permanently classified as a
modified endowment contract.
ESTATE AND GENERATION SKIPPING TAXES
When the last surviving Insured dies, the Death Proceeds will generally be
includible in the Policyowner's estate for purposes of federal estate tax if the
last surviving Insured owned the Policy. If the Policyowner was not the last
surviving Insured, the fair market value of the Policy would be included in the
Policy owner's estate upon the Policyowner's death. Nothing would be includible
in the last surviving Insured's estate if he or she neither retained incidents
of ownership at death nor had given up ownership within three years before
death.
Federal estate tax is integrated with federal gift tax under a unified rate
schedule. In general, estates less than $600,000 will not incur a federal estate
tax liability. In addition, an unlimited marital deduction may be available for
federal estate and gift tax purposes. The unlimited marital deduction permits
the deferral of taxes until the death of the surviving spouse, when the death
proceeds would be available to pay taxes due and other expenses incurred.
As a general rule, if an insured is the policyowner and death proceeds are
payable to a person two or more generations younger than the policyowner, a
generation-skipping tax may be payable on the death proceeds at rates similar to
the maximum estate tax rate in effect at the time. If the policyowner (whether
or not he or she is an insured) transfers ownership of the policy to someone two
or more generations younger, the transfer may be subject to the
generation-skipping tax, the taxable amount being the value of the policy. (Such
a transfer is unlikely but not impossible.) If the death proceeds are not
includible in the insured's estate (because the Insured retained no incidents of
ownership and did not relinquish ownership within three years before death), the
payment of the death proceeds to the beneficiary is not subject to the
generation-skipping tax regardless of the beneficiary's generation. The
generation-skipping tax provisions generally apply to transfers which would be
subject to the gift and estate tax rules. Individuals are generally allowed an
aggregate generation skipping tax exemption of $1 million. Because these rules
are complex, the policyowner should consult with a tax adviser for specific
information where benefits are passing to younger generations.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities laws, any amount in the General Account is not generally subject to
regulation under the provisions of the Securities Act of 1933 or the 1940 Act.
Accordingly,
53
<PAGE>
the disclosures in this Section have not been reviewed by the Securities and
Exchange Commission. Disclosures regarding the fixed portion of the Policy and
the General Account may, however, be subject to certain generally applicable
provisions of the federal securities laws concerning the accuracy and
completeness of statements made in prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Policyowner's Policy Value
in the General Account will not be less than an annual rate of 4% ("Guaranteed
Minimum Rate").
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. However, the excess interest rate, if any,
in effect on the date a premium is received at the Principal Office is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. YOU
ASSUME THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM
RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to Debt. However, such Policy Value will be credited interest at an
effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or Policy
Value transferred to the General Account, plus interest at an annual rate of 4%
per year, plus any excess interest which the Company credits, less the sum of
all Policy charges allocable to the General Account and any amounts deducted
from the General Account in connection with loans, partial withdrawals,
surrenders or transfers.
THE POLICY
This Prospectus describes an individual joint survivorship flexible premium
variable life insurance policy and is generally intended to serve as a
disclosure document only for the aspects of the Policy relating to the
Inheiritage Account. For complete details regarding the General Account, see the
Policy itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS
If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in Face Amount, the surrender charge deducted is a fraction of the
charge that would apply to a full surrender of the Policy. Partial withdrawals
are made on a last-in/first-out basis from Policy Value allocated to the General
Account.
54
<PAGE>
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans may also be made from the Policy Value in the General Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3.5% per year for the period of deferment.
Amounts from the General Account used to pay premiums on policies with the
Company will not be delayed.
FINANCIAL STATEMENTS
Financial statements for the Company and for the Inheiritage Account are
included in this prospectus beginning immediately after this section. The
financial statements of the Company should be considered only as bearing on the
ability of the Company to meet its obligations under the Policy. They should not
be considered as bearing on the investment performance of the assets held in the
Inheiritage Account.
55
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding...... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities........... (5.1)
(Provision) benefit for deferred
federal income taxes.................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits)........................... (9.8)
Change in deferred policy
acquisition costs.................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (0.2)
Change in accrued investment
income............................... 1.2
Change in policy liabilities and
accruals, net........................ (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable.............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities.................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities.......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities.................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum
level of 5% of general account assets by FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
B. VALUATION OF INVESTMENTS
The Company classifies all debt and equity securities as available-for-sale.
Realized gains and losses on sales of fixed maturities and equity securities
are determined on the specific-identification basis using amortized cost for
fixed maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage loans
is valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt, investments
such as fixed maturities, mortgage loans and equity securities, and investment
and loan commitments. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The Company evaluates
and monitors each financial instrument individually and, when appropriate,
obtains collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other
costs, which vary with, and are primarily related to, the production of
revenues. Acquisition costs related to universal life and group variable
universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected life
of the contracts using a revised interest rate applied to the remaining benefit
period. Acquisition costs related to annuity and other life insurance businesses
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. Assets consist
principally of bonds, common stocks, mutual funds, and short-term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contractholders and, therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from 2
1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Individual health benefit liabilities for active lives are estimated using
the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned
on a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values.
I. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life tax losses that can be applied to offset life company taxable
income.
The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife return
of AFC is calculated on a separate return basis. Any current tax liability is
paid to AFC. Tax benefits resulting from taxable operating losses or credits of
AFC's subsidiaries are not reimbursed to the subsidiary until such losses or
credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
as defined by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). These differences result primarily from loss
reserves, policy acquisition expenses, and unrealized appreciation/depreciation
on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In March, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.
2. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.
There were no contractual fixed maturity investment commitments at December
31, 1996.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
obligations with or without call or prepayment penalties, or the Company may
have the right to put or sell the obligations back to the issuers. Mortgage
backed securities are included in the category representing their ultimate
maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the
gross realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------
<S> <C> <C> <C>
1996
Fixed maturities............................................ $496.6 $4.3 $8.3
------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
------- ----- ------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1996
Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities............................................... (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $2.2 million.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>
Reserves for mortgage loans were $9.5 million at December 31, 1996.
During 1996, non-cash investing activities included real estate acquired
through foreclosure of mortgage loans, which had a fair value of $0.9 million.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $16.0 million.
These commitments generally expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:
South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>
At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 --
$52.3 million; 2001 -- $7.7 million; and $28.4 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1996, the Company refinanced $7.8 million of mortgage
loans based on terms which differed from those granted to new borrowers.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The carrying value of impaired loans was $21.5 million with related reserves
of $7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.
The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.
D. OTHER
At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
3. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------
<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>
At December 31, 1996, mortgage loans on non-accrual status were $5.0
million, including restructured loans of $2.6 million. The effect of
non-accruals, compared with amounts that would have been recognized in
accordance with the original terms of the investments, was to reduce net income
by $0.1 million in 1996. There were no fixed maturities on non-accrual status at
December 31, 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income
producing for the twelve months ended December 31, 1996.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.
4. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------
FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................. 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>
5. DEBT
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred tax (assets) liabilities are comprised of the following at
December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>
Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>
11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $178.6 million at December 31, 1996. Accident and health claim liabilities
have been re-estimated for all prior years and were increased by $3.2 million in
1996.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may result in
an increase in mandatory assessments by state guaranty funds, or voluntary
payments by solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. The Company is not able to reasonably estimate the
potential effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
reserves are based on different assumptions, life insurance reserves are based
on different assumptions and income tax expense reflects only taxes paid or
currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coninsurance arrangement to Metroplitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive agreements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million to net income in the first quarter of 1997 related to the
reinsurance of this business.
F-17
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants.................................................... F-20
Statement of Assets, Liabilities, Surplus and Other Funds............................ F-22
Statement of Operations and Changes in Capital and Surplus........................... F-23
Statement of Cash Flows.............................................................. F-24
Notes to Statutory Financial Statements.............................................. F-25
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, MA
February 5, 1996
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................ 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations....................... 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments.............................. 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve.................................. (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded........................ 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................ (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)........................... (6,771) (19,603) (4828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
-Bonds considered to be "available-for-sale" or "trading" are not
carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
-The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve is
designed to include deferred realized gains and losses (net of
applicable federal income taxes) due to interest rate changes and
is also recorded as a liability, however, the deferred net
realized investment gains and losses are amortized into future
income generally over the original period to maturity of the
assets sold. These liabilities are not required under generally
accepted accounting principles;
-Total premiums, deposits and benefits on certain investment-type
contracts are reflected in the statement of operations, instead
of using the deposit method of accounting;
-Policy acquisition costs, such as commissions, premium taxes and
other items, are not deferred and amortized in relation to the
revenue/gross profit streams from the related contracts;
-Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for adverse
deviation;
-Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
-Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial statements
and those included in the tax returns;
F-24
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
-Certain adjustments related to prior years are recorded as direct
charges or credits to surplus;
-Certain assets, designated as "non-admitted" assets (principally
agents' balances), are not recorded as assets, but are charged to
surplus; and,
-Costs related to other postretirement benefits are recognized
only for employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS -- Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS -- In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS -- Separate account assets and liabilities represent
segregated funds administered and invested by the Company for the benefit of
certain variable annuity and variable life contract holders. Assets consist
principally of bonds, common stocks, mutual funds, and short term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contract holders and therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in capital and surplus.
F-25
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES -- Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected trends in frequency and severity. Withdrawal
characteristics of annuity and other fund reserves vary by contract. At December
31, 1995 and 1994, approximately 84% and 77%, respectively, of the contracts
(included in both the general account and separate accounts of the Company) were
not subject to discretionary withdrawal or were subject to withdrawal at book
value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
FEDERAL INCOME TAXES -- AFC, its life insurance subsidiaries, First Allmerica
and Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES -- Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
F-26
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS -- The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds.................................. $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds.................. 13,607 2,290 23 15,874
Foreign government bonds.................................. 12,121 772 249 12,644
Corporate securities...................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities................................ 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total..................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds.................................. $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds.................. 1,110 54 -- 1,164
Foreign government bonds.................................. 31,863 83 3,735 28,211
Corporate securities...................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities................................ 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total..................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE -- Mortgage loans and real estate investments,
are diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by the
related properties and are generally no more than 75% of the property value
F-27
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
at the time the original loan is made. At December 31, 1995 and 1994, mortgage
loan and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME -- The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
F-28
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES -- Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS -- The carrying amounts reported in the
statement of assets, liabilities, surplus and other funds approximate fair
value.
BONDS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS -- Fair values are estimated by discounting the future
contractual cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The fair value of below
investment grade mortgage loans is limited to the lesser of the present value of
the cash flows or book value.
F-29
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS -- The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) -- Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies....................... 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
F-30
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively.
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company. Pursuant
to Delaware's statute, the maximum amount of dividends and other distributions
that an insurer may pay in any twelve month period, without the prior approval
of the Delaware Commissioner of Insurance, is limited to the greater of (i) 10%
of its statutory policyholder surplus as of the preceding December 31 or (ii)
the individual company's statutory net gain from operations for the preceding
calendar year (if such insurer is a life company) or its net income (not
including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
F-31
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial
Life Insurance and Annuity Company and Policyowners
of Inheiritage Account of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts (1, 2,
3, 4, 5, 6, 7, 8, 9, 11, 12, 102, 103, 104, 105, 106, 150, and 207) constituting
the Inheiritage Account of Allmerica Financial Life Insurance and Annuity
Company at December 31, 1996, and the results of each of their operations and
the changes in each of their net assets for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Allmerica Financial Life Insurance and Annuity Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at December 31, 1996 by correspondence with
the Funds, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
March 26, 1997
F-33
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENT
GRADE MONEY EQUITY GOVERNMENT
GROWTH INCOME MARKET INDEX BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4 5
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment Trust......... $1,352,200 $ 591,174 $1,085,844 $ 590,879 $ 171,290
Investments in shares of Fidelity Variable Insurance
Products Funds............................................ -- -- -- -- --
Investment in shares of T. Rowe Price International Series,
Inc....................................................... -- -- -- -- --
Investment in shares of Delaware Group Premium Fund, Inc.... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total assets............................................ 1,352,200 591,174 1,085,844 590,879 171,290
LIABILITIES: -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net assets.............................................. $1,352,200 $ 591,174 $1,085,844 $ 590,879 $ 171,290
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net asset distribution by category:
Variable life policies.................................... $1,352,200 $ 591,174 $1,085,844 $ 590,879 $ 171,290
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Units outstanding, December 31, 1996........................ 836,197 497,531 977,434 370,668 149,524
Net asset value per unit, December 31, 1996................. $ 1.617083 $1.188216 $ 1.110913 $1.594093 $1.145571
<CAPTION>
SELECT SELECT
AGGRESSIVE SELECT GROWTH AND SMALL CAP
GROWTH GROWTH INCOME VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
6 7 8 9
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment Trust......... $1,631,287 $ 491,280 $1,021,420 $ 878,415
Investments in shares of Fidelity Variable Insurance
Products Funds............................................ -- -- -- --
Investment in shares of T. Rowe Price International Series,
Inc....................................................... -- -- -- --
Investment in shares of Delaware Group Premium Fund, Inc.... -- -- -- --
----------- ----------- ----------- -----------
Total assets............................................ 1,631,287 491,280 1,021,420 878,415
LIABILITIES: -- -- -- --
----------- ----------- ----------- -----------
Net assets.............................................. $1,631,287 $ 491,280 $1,021,420 $ 878,415
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net asset distribution by category:
Variable life policies.................................... $1,631,287 $ 491,280 $1,021,420 $ 878,415
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Units outstanding, December 31, 1996........................ 1,095,338 326,786 649,056 610,018
Net asset value per unit, December 31, 1996................. $ 1.489300 $1.503368 $ 1.573700 $1.439983
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT SELECT VIPF
INTERNATIONAL CAPITAL VIPF EQUITY- VIPF
EQUITY APPRECIATION HIGH INCOME INCOME GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 102 103 104
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment Trust......... $1,181,803 $ 968,966 -- -- --
Investments in shares of Fidelity Variable Insurance
Products Funds............................................ -- -- $ 835,339 $2,708,857 $2,366,851
Investment in shares of T. Rowe Price International Series,
Inc....................................................... -- -- -- -- --
Investment in shares of Delaware Group Premium Fund, Inc.... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total assets............................................ 1,181,803 968,966 835,339 2,708,857 2,366,851
LIABILITIES: -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net assets.............................................. $1,181,803 $ 968,966 $ 835,339 $2,708,857 $2,366,851
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net asset distribution by category:
Variable life policies.................................... $1,181,803 $ 968,966 $ 835,339 $2,708,857 $2,366,851
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Units outstanding, December 31, 1996........................ 865,291 650,428 627,695 1,703,598 1,470,373
Net asset value per unit, December 31, 1996................. $ 1.365787 $1.489735 $1.330804 $ 1.590080 $ 1.609695
<CAPTION>
T. ROWE
VIPF II PRICE DGPF
VIPF ASSET INTERNATIONAL INTERNATIONAL
OVERSEAS MANAGER STOCK EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
105 106 150 207
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment Trust......... -- -- -- --
Investments in shares of Fidelity Variable Insurance
Products Funds............................................ $ 555,065 $ 536,104 -- --
Investment in shares of T. Rowe Price International Series,
Inc....................................................... -- -- $ 350,318 --
Investment in shares of Delaware Group Premium Fund, Inc.... -- -- -- $ 314,535
----------- ----------- ----------- -----------
Total assets............................................ 555,065 536,104 350,318 314,535
LIABILITIES: -- -- -- --
----------- ----------- ----------- -----------
Net assets.............................................. $ 555,065 $ 536,104 $ 350,318 $ 314,535
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net asset distribution by category:
Variable life policies.................................... $ 555,065 $ 536,104 $ 350,318 $ 314,535
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Units outstanding, December 31, 1996........................ 477,387 414,318 290,715 239,977
Net asset value per unit, December 31, 1996................. $1.162715 $1.293944 $1.205023 $1.310686
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants....................................................... 1
Statement of Assets, Liabilities, Surplus and Other Funds............................... 3
Statement of Operations and Changes in Capital and Surplus.............................. 4
Statement of Cash Flows................................................................. 5
Notes to Statutory Financial Statements................................................. 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
[LOGO]
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares.................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................. 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations........................ 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses.............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments............................... 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve................................... (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded......................... 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................. (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)............................ (6,771) (19,603) (4,828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are
not carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
- The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve
is designed to include deferred realized gains and losses (net
of applicable federal income taxes) due to interest rate
changes and is also recorded as a liability, however, the
deferred net realized investment gains and losses are amortized
into future income generally over the original period to
maturity of the assets sold. These liabilities are not required
under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain
investment-type contracts are reflected in the statement of
operations, instead of using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes
and other items, are not deferred and amortized in relation to
the revenue/gross profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for
adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial
statements and those included in the tax returns;
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
- Certain adjustments related to prior years are recorded as
direct charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets
(principally agents' balances), are not recorded as assets, but
are charged to surplus; and,
- Costs related to other postretirement benefits are recognized
only for employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS -- Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS -- In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS -- Separate account assets and liabilities represent
segregated funds administered and invested by the Company for the benefit of
certain variable annuity and variable life contract holders. Assets consist
principally of bonds, common stocks, mutual funds, and short term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
contract holders and therefore, are not included in the Company's net income.
Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in capital
and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES -- Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected trends in frequency and severity. Withdrawal
characteristics of annuity and other fund reserves vary by contract. At December
31, 1995 and 1994, approximately 84% and 77%, respectively, of the contracts
(included in both the general account and separate accounts of the Company) were
not subject to discretionary withdrawal or were subject to withdrawal at book
value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
FEDERAL INCOME TAXES -- AFC, its life insurance subsidiaries, First Allmerica
and Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES -- Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS -- The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds................ 13,607 2,290 23 15,874
Foreign government bonds................................ 12,121 772 249 12,644
Corporate securities.................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities.............................. 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds................ 1,110 54 -- 1,164
Foreign government bonds................................ 31,863 83 3,735 28,211
Corporate securities.................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities.............................. 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
MORTGAGE LOANS AND REAL ESTATE -- Mortgage loans and real estate investments,
are diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by the
related properties and are generally no more than 75% of the property value at
the time the original loan is made. At December 31, 1995 and 1994, mortgage loan
and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME -- The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES -- Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS -- The carrying amounts reported in the
statement of assets, liabilities, surplus and other funds approximate fair
value.
BONDS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS -- Fair values are estimated by discounting the future
contractual cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The fair value of below
investment grade mortgage loans is limited to the lesser of the present value of
the cash flows or book value.
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS -- The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) -- Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies........................ 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4
million, $13.1 million and $8.6 million, respectively, which include taxes
applicable to realized capital gains of $.4 million, $1.0 million and $3.3
million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities
as new information becomes available and further events occur which may impact
the resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders
by insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its statutory policyholder surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or
13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New
York. In connection with the withdrawal First Allmerica, which is licensed in
New York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements.
14
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER 31, FOR THE PERIOD ENDED DECEMBER 31, FOR THE PERIOD
1996 1995 5/12/94* TO 12/31/94 1996 1995 4/28/94* TO 12/31/94
-------- ------- -------------------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $136,012 $48,237 $ 7,437 $29,860 $14,621 $ 1,762
-------- ------- ------- ------- ------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 8,082 2,845 277 3,961 1,689 73
Administrative fees....................... 2,279 790 77 1,117 469 20
-------- ------- ------- ------- ------- -------
Total expenses.......................... 10,361 3,635 354 5,078 2,158 93
-------- ------- ------- ------- ------- -------
Net investment income (loss).............. 125,651 44,602 7,083 24,782 12,463 1,669
-------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 6,206 871 1 118 170 (51)
Net unrealized gain (loss)................ 24,343 35,675 (7,689) (11,188) 13,405 (1,514)
-------- ------- ------- ------- ------- -------
Net realized and unrealized gain (loss) on
investments............................. 30,549 36,546 (7,688) (11,070) 13,575 (1,565)
-------- ------- ------- ------- ------- -------
Net increase (decrease) in net assets from
operations.............................. $156,200 $81,148 $ (605) $13,712 $26,038 $ 104
-------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- -------
<CAPTION>
MONEY MARKET
SUB-ACCOUNT 3
FOR THE YEAR
ENDED DECEMBER 31, FOR THE PERIOD
1996 1995 5/27/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $32,250 $32,514 $7,247
------- ------- ------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 5,620 5,092 1,400
Administrative fees....................... 1,585 1,415 389
------- ------- ------
Total expenses.......................... 7,205 6,507 1,789
------- ------- ------
Net investment income (loss).............. 25,045 26,007 5,458
------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. -- -- --
Net unrealized gain (loss)................ -- -- --
------- ------- ------
Net realized and unrealized gain (loss) on
investments............................. -- -- --
------- ------- ------
Net increase (decrease) in net assets from
operations.............................. $25,045 $26,007 $5,458
------- ------- ------
------- ------- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT 4 SUB-ACCOUNT 5
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER 31, FOR THE PERIOD ENDED DECEMBER 31, FOR THE PERIOD
1996 1995 8/15/94* TO 12/31/94 1996 1995 7/1/94* TO 12/31/94
------- ------- -------------------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $16,321 $ 6,792 $ 541 $ 9,371 $ 4,876 $ 2,198
------- ------- ------ ------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 3,711 801 39 1,395 779 200
Administrative fees....................... 1,047 223 11 394 216 56
------- ------- ------ ------- ------- --------
Total expenses.......................... 4,758 1,024 50 1,789 995 256
------- ------- ------ ------- ------- --------
Net investment income (loss).............. 11,563 5,768 491 7,582 3,881 1,942
------- ------- ------ ------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 13,582 650 (7) 416 2,220 47
Net unrealized gain (loss)................ 53,897 17,486 (544) (2,658) 3,911 (1,709)
------- ------- ------ ------- ------- --------
Net realized and unrealized gain (loss) on
investments............................. 67,479 18,136 (551) (2,242) 6,131 (1,662)
------- ------- ------ ------- ------- --------
Net increase (decrease) in net assets from
operations.............................. $79,042 $23,904 $ (60) $ 5,340 $10,012 $ 280
------- ------- ------ ------- ------- --------
------- ------- ------ ------- ------- --------
<CAPTION>
SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 6
FOR THE YEAR
ENDED DECEMBER 31, FOR THE PERIOD
1996 1995 4/22/94* TO 12/31/94
-------- -------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $110,059 $ -- --$
-------- -------- -----
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 10,984 4,636 370
Administrative fees....................... 3,098 1,288 103
-------- -------- -----
Total expenses.......................... 14,082 5,924 473
-------- -------- -----
Net investment income (loss).............. 95,977 (5,924) (473)
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 14,437 2,278 268
Net unrealized gain (loss)................ 65,265 135,550 (54)
-------- -------- -----
Net realized and unrealized gain (loss) on
investments............................. 79,702 137,828 214
-------- -------- -----
Net increase (decrease) in net assets from
operations.............................. $175,679 $131,904 $(259)
-------- -------- -----
-------- -------- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 5/20/94* TO 12/31/94 1996 1995 4/28/94* TO 12/31/94
------- ------- -------------------- -------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................................... $70,775 $ 25 $ 119 $ 81,334 $24,678 $ 3,878
------- ------- -------- -------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees................. 2,634 1,047 65 6,466 2,675 358
Administrative fees............................. 743 291 18 1,824 743 100
------- ------- -------- -------- ------- --------
Total expenses................................ 3,377 1,338 83 8,290 3,418 458
------- ------- -------- -------- ------- --------
Net investment income (loss).................... 67,398 (1,313) 36 73,044 21,260 3,420
------- ------- -------- -------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)........................ 8,490 1,936 (31) 5,532 1,275 290
Net unrealized gain (loss)...................... (25,800) 18,467 (914) 50,803 53,136 (5,437)
------- ------- -------- -------- ------- --------
Net realized and unrealized gain (loss) on
investments................................... (17,310) 20,403 (945) 56,335 54,411 (5,147)
------- ------- -------- -------- ------- --------
Net increase (decrease) in net assets from
operations.................................... $50,088 $19,090 $ (909) $129,379 $75,671 $ (1,727)
------- ------- -------- -------- ------- --------
------- ------- -------- -------- ------- --------
<CAPTION>
SMALL CAP VALUE
SUB-ACCOUNT 9
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 6/2/94* TO 12/31/94
-------- ------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................................... $ 44,323 $16,135 $ 743
-------- ------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees................. 5,802 2,801 356
Administrative fees............................. 1,636 778 99
-------- ------- -------
Total expenses................................ 7,438 3,579 455
-------- ------- -------
Net investment income (loss).................... 36,885 12,556 288
-------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)........................ 10,246 1,180 78
Net unrealized gain (loss)...................... 107,671 34,744 (3,761)
-------- ------- -------
Net realized and unrealized gain (loss) on
investments................................... 117,917 35,924 (3,683)
-------- ------- -------
Net increase (decrease) in net assets from
operations.................................... $154,802 $48,480 $(3,395)
-------- ------- -------
-------- ------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY SELECT CAPITAL APPRECIATION
SUB-ACCOUNT 11 SUB-ACCOUNT 12
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
1996 1995 5/3/94* TO 12/31/94 12/31/96 4/28/95* TO 12/31/95
-------- ------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 24,530 $ 4,810 $ 176 $1,660 $ 2,887
-------- ------- ------- ------ -------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 6,466 1,757 150 4,971 370
Administrative fees....................... 1,824 488 42 1,402 103
-------- ------- ------- ------ -------
Total expenses.......................... 8,290 2,245 192 6,373 473
-------- ------- ------- ------ -------
Net investment income (loss).............. 16,240 2,565 (16) (4,713) 2,414
-------- ------- ------- ------ -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 6,398 1,625 (39) 1,850 219
Net unrealized gain (loss)................ 128,190 29,470 (3,111) 6,909 12,788
-------- ------- ------- ------ -------
Net realized and unrealized gain (loss) on
investments............................. 134,588 31,095 (3,150) 8,759 13,007
-------- ------- ------- ------ -------
Net increase (decrease) in net assets from
operations.............................. $150,828 $33,660 $(3,166) $4,046 $15,421
-------- ------- ------- ------ -------
-------- ------- ------- ------ -------
<CAPTION>
VIPF HIGH INCOME
SUB-ACCOUNT 102
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 5/13/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $29,150 $ 4,862 $ --
------- ------- -----
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 4,702 1,284 114
Administrative fees....................... 1,326 357 32
------- ------- -----
Total expenses.......................... 6,028 1,641 146
------- ------- -----
Net investment income (loss).............. 23,122 3,221 (146)
------- ------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 1,765 1,048 (6)
Net unrealized gain (loss)................ 35,447 16,928 (155)
------- ------- -----
Net realized and unrealized gain (loss) on
investments............................. 37,212 17,976 (161)
------- ------- -----
Net increase (decrease) in net assets from
operations.............................. $60,334 $21,197 $(307)
------- ------- -----
------- ------- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 4/28/94* TO 12/31/94 1996 1995 5/12/94* TO 12/31/94
-------- -------- -------------------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 65,464 $ 37,820 $ 2,581 $ 84,694 $ 1,827 $--
-------- -------- ------- -------- -------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 18,682 6,818 707 16,095 6,109 837
Administrative fees....................... 5,269 1,894 196 4,540 1,697 232
-------- -------- ------- -------- -------- -------
Total expenses.......................... 23,951 8,712 903 20,635 7,806 1,069
-------- -------- ------- -------- -------- -------
Net investment income (loss).............. 41,513 29,108 1,678 64,059 (5,979) (1,069)
-------- -------- ------- -------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 20,770 5,061 478 9,689 4,162 1,050
Net unrealized gain (loss)................ 197,470 178,135 (3,903) 129,705 157,014 8,355
-------- -------- ------- -------- -------- -------
Net realized and unrealized gain (loss) on
investments............................. 218,240 183,196 (3,425) 139,394 161,176 9,405
-------- -------- ------- -------- -------- -------
Net increase (decrease) in net assets from
operations.............................. $259,753 $212,304 $(1,747) $203,453 $155,197 $ 8,336
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/21/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $14,705 $ 2,604 $--
------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 5,779 4,128 727
Administrative fees....................... 1,630 1,146 202
------- ------- --------
Total expenses.......................... 7,409 5,274 929
------- ------- --------
Net investment income (loss).............. 7,296 (2,670) (929)
------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 26,178 1,200 (15)
Net unrealized gain (loss)................ 36,231 43,023 (9,330)
------- ------- --------
Net realized and unrealized gain (loss) on
investments............................. 62,409 44,223 (9,345)
------- ------- --------
Net increase (decrease) in net assets from
operations.............................. $69,705 $41,553 $(10,274)
------- ------- --------
------- ------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF II ASSET MANAGER T. ROWE INTERNATIONAL STOCK
SUB-ACCOUNT 106 SUB-ACCOUNT 150
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
1996 1995 6/14/94* TO 12/31/94 12/31/96 6/30/95* TO 12/31/95
------- ------- -------------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $35,481 $ 7,071 $ 22 $ 5,000 $--
------- ------- ------- ------- ------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 5,090 3,680 569 1,506 114
Administrative fees................... 1,435 1,022 158 425 32
------- ------- ------- ------- ------
Total expenses...................... 6,525 4,702 727 1,931 146
------- ------- ------- ------- ------
Net investment income (loss).......... 28,956 2,369 (705) 3,069 (146)
------- ------- ------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 19,047 2,905 (44) 786 25
Net unrealized gain (loss)............ 23,161 56,562 (8,236) 17,465 1,602
------- ------- ------- ------- ------
Net realized and unrealized gain
(loss) on investments............... 42,208 59,467 (8,280) 18,251 1,627
------- ------- ------- ------- ------
Net increase (decrease) in net assets
from operations..................... $71,164 $61,836 $(8,985) $21,320 $ 1,481
------- ------- ------- ------- ------
------- ------- ------- ------- ------
<CAPTION>
DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 5/12/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $ 6,505 $ 1,760 $--
------- ------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 1,812 904 186
Administrative fees................... 511 252 52
------- ------- -------
Total expenses...................... 2,323 1,156 238
------- ------- -------
Net investment income (loss).......... 4,182 604 (238)
------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 3,693 414 --
Net unrealized gain (loss)............ 28,077 11,496 (1,212)
------- ------- -------
Net realized and unrealized gain
(loss) on investments............... 31,770 11,910 (1,212)
------- ------- -------
Net increase (decrease) in net assets
from operations..................... $35,952 $12,514 $ (1,450)
------- ------- -------
------- ------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
YEAR ENDED YEAR ENDED PERIOD FROM
DECEMBER 31, PERIOD FROM DECEMBER 31, 4/28/94* TO
1996 1995 5/12/94* TO 12/31/94 1996 1995 12/31/94
---------- -------- -------------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 125,651 $ 44,602 $ 7,083 $ 24,782 $ 12,463 $ 1,669
Net realized gain (loss) on
investments........................... 6,206 871 1 118 170 (51)
Net unrealized gain (loss) on
investments........................... 24,343 35,675 (7,689) (11,188) 13,405 (1,514)
---------- -------- -------- -------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 156,200 81,148 (605) 13,712 26,038 104
---------- -------- -------- -------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 347,739 133,682 34,411 172,317 129,213 19,120
Terminations............................ (11,851) (725) -- -- (186) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 306,635 197,720 107,846 73,887 101,623 55,346
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- -- -- -- --
---------- -------- -------- -------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 642,523 330,677 142,257 246,204 230,650 74,466
---------- -------- -------- -------- -------- -----------
Net increase (decrease) in net assets... 798,723 411,825 141,652 259,916 256,688 74,570
NET ASSETS:
Beginning of year......................... 553,477 141,652 -- 331,258 74,570 --
---------- -------- -------- -------- -------- -----------
End of year............................... $1,352,200 $553,477 $141,652 $591,174 $331,258 $74,570
---------- -------- -------- -------- -------- -----------
---------- -------- -------- -------- -------- -----------
<CAPTION>
MONEY MARKET
SUB-ACCOUNT 3
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/27/94* TO
1996 1995 12/31/94
---------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 25,045 $ 26,007 $ 5,458
Net realized gain (loss) on
investments........................... -- -- --
Net unrealized gain (loss) on
investments........................... -- -- --
---------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 25,045 26,007 5,458
---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 1,964,968 744,319 311,479
Terminations............................ (894) -- --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (1,311,350) (859,523) 180,335
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- --
---------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 652,724 (115,204) 491,814
---------- -------- -----------
Net increase (decrease) in net assets... 677,769 (89,197) 497,272
NET ASSETS:
Beginning of year......................... 408,075 497,272 --
---------- -------- -----------
End of year............................... $1,085,844 $408,075 $497,272
---------- -------- -----------
---------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY-INDEX GOVERNMENT BOND
SUB-ACCOUNT 4 SUB-ACCOUNT 5
YEAR ENDED YEAR ENDED PERIOD FROM
DECEMBER 31, PERIOD FROM DECEMBER 31, 7/1/94* TO
1996 1995 8/15/94* TO 12/31/94 1996 1995 12/31/94
-------- -------- -------------------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 11,563 $ 5,768 $ 491 $ 7,582 $ 3,881 $ 1,942
Net realized gain (loss) on
investments........................... 13,582 650 (7) 416 2,220 47
Net unrealized gain (loss) on
investments........................... 53,897 17,486 (544) (2,658) 3,911 (1,709)
-------- -------- ------- -------- ------- -----------
Net increase (decrease) in net assets
from operations....................... 79,042 23,904 (60) 5,340 10,012 280
-------- -------- ------- -------- ------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 130,549 62,224 7,031 82,419 54,632 10,629
Terminations............................ -- -- -- -- -- --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 177,134 91,621 19,434 7,432 (98,107) 98,653
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- -- -- -- --
-------- -------- ------- -------- ------- -----------
Net increase (decrease) in net assets
from capital transactions............. 307,683 153,845 26,465 89,851 (43,475) 109,282
-------- -------- ------- -------- ------- -----------
Net increase (decrease) in net assets... 386,725 177,749 26,405 95,191 (33,463) 109,562
NET ASSETS:
Beginning of year......................... 204,154 26,405 -- 76,099 109,562 --
-------- -------- ------- -------- ------- -----------
End of year............................... $590,879 $204,154 $26,405 $171,290 $76,099 $109,562
-------- -------- ------- -------- ------- -----------
-------- -------- ------- -------- ------- -----------
<CAPTION>
SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 6
YEAR ENDED PERIOD FROM
DECEMBER 31, 4/22/94* TO
1996 1995 12/31/94
---------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 95,977 $ (5,924) $ (473)
Net realized gain (loss) on
investments........................... 14,437 2,278 268
Net unrealized gain (loss) on
investments........................... 65,265 135,550 (54)
---------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 175,679 131,904 (259)
---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 375,474 214,367 81,071
Terminations............................ (15,451) (127) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 294,620 223,558 150,451
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- --
---------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 654,643 437,798 231,522
---------- -------- -----------
Net increase (decrease) in net assets... 830,322 569,702 231,263
NET ASSETS:
Beginning of year......................... 800,965 231,263 --
---------- -------- -----------
End of year............................... $1,631,287 $800,965 $231,263
---------- -------- -----------
---------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
DECEMBER 31, 5/20/94* TO DECEMBER 31, 4/28/94* TO
1996 1995 12/31/94 1996 1995 12/31/94
-------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 67,398 $ (1,313) $ 36 $ 73,044 $ 21,260 $ 3,420
Net realized gain (loss) on
investments........................... 8,490 1,936 (31) 5,532 1,275 290
Net unrealized gain (loss) on
investments........................... (25,800) 18,467 (914) 50,803 53,136 (5,437)
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 50,088 19,090 (909) 129,379 75,671 (1,727)
-------- -------- ----------- ---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 122,752 56,664 13,108 216,938 106,450 34,562
Terminations............................ (1,127) -- -- (110) (539) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 149,609 54,862 27,143 161,338 202,145 97,313
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- -- -- -- --
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 271,234 111,526 40,251 378,166 308,056 131,875
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net assets... 321,322 130,616 39,342 507,545 383,727 130,148
NET ASSETS:
Beginning of year......................... 169,958 39,342 -- 513,875 130,148 --
-------- -------- ----------- ---------- -------- -----------
End of year............................... $491,280 $169,958 $39,342 $1,021,420 $513,875 $130,148
-------- -------- ----------- ---------- -------- -----------
-------- -------- ----------- ---------- -------- -----------
<CAPTION>
SMALL CAP VALUE
SUB-ACCOUNT 9
YEAR ENDED PERIOD FROM
DECEMBER 31, 6/2/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 36,885 $ 12,556 $ 288
Net realized gain (loss) on
investments........................... 10,246 1,180 78
Net unrealized gain (loss) on
investments........................... 107,671 34,744 (3,761)
-------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 154,802 48,480 (3,395)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 150,169 121,457 64,114
Terminations............................ (1,360) -- --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 91,341 144,338 108,469
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- --
-------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 240,150 265,795 172,583
-------- -------- -----------
Net increase (decrease) in net assets... 394,952 314,275 169,188
NET ASSETS:
Beginning of year......................... 483,463 169,188 --
-------- -------- -----------
End of year............................... $878,415 $483,463 $169,188
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT CAPITAL
SELECT INTERNATIONAL EQUITY APPRECIATION
SUB-ACCOUNT 11 SUB-ACCOUNT 12
YEAR ENDED PERIOD FROM
DECEMBER 31, PERIOD FROM YEAR ENDED 4/28/95* TO
1996 1995 5/3/94* TO 12/31/94 12/31/96 12/31/95
---------- -------- ------------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 16,240 $ 2,565 $ (16) $ (4,713) $ 2,414
Net realized gain (loss) on
investments........................... 6,398 1,625 (39) 1,850 219
Net unrealized gain (loss) on
investments........................... 128,190 29,470 (3,111) 6,909 12,788
---------- -------- ------- ---------- ------------
Net increase (decrease) in net assets
from operations....................... 150,828 33,660 (3,166) 4,046 15,421
---------- -------- ------- ---------- ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 330,608 86,660 30,883 315,826 40,487
Terminations............................ (10,864) -- -- (789) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 346,431 163,641 53,154 497,943 96,126
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. (132) -- 100 (294) 200
---------- -------- ------- ---------- ------------
Net increase (decrease) in net assets
from capital transactions............. 666,043 250,301 84,137 812,686 136,813
---------- -------- ------- ---------- ------------
Net increase (decrease) in net assets... 816,871 283,961 80,971 816,732 152,234
NET ASSETS:
Beginning of year......................... 364,932 80,971 -- 152,234 --
---------- -------- ------- ---------- ------------
End of year............................... $1,181,803 $364,932 $80,971 $968,966 $152,234
---------- -------- ------- ---------- ------------
---------- -------- ------- ---------- ------------
<CAPTION>
VIPF HIGH INCOME
SUB-ACCOUNT 102
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/13/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 23,122 $ 3,221 $ (146)
Net realized gain (loss) on
investments........................... 1,765 1,048 (6)
Net unrealized gain (loss) on
investments........................... 35,447 16,928 (155)
-------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 60,334 21,197 (307)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 227,688 111,201 29,339
Terminations............................ (3,177) (94) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 260,158 96,059 32,941
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- --
-------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 484,669 207,166 62,280
-------- -------- -----------
Net increase (decrease) in net assets... 545,003 228,363 61,973
NET ASSETS:
Beginning of year......................... 290,336 61,973 --
-------- -------- -----------
End of year............................... $835,339 $290,336 $61,973
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
DECEMBER 31, 4/28/94* TO DECEMBER 31, 5/12/94* TO
1996 1995 12/31/94 1996 1995 12/31/94
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 41,513 $ 29,108 $ 1,678 $ 64,059 $ (5,979) $ (1,069)
Net realized gain (loss) on
investments........................... 20,770 5,061 478 9,689 4,162 1,050
Net unrealized gain (loss) on
investments........................... 197,470 178,135 (3,903) 129,705 157,014 8,355
---------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease) in net assets
from operations....................... 259,753 212,304 (1,747) 203,453 155,197 8,336
---------- ---------- ----------- ---------- ---------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 718,282 382,477 95,195 617,121 330,994 79,238
Terminations............................ (19,458) (227) -- (14,686) (711) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 444,910 380,024 237,344 476,794 305,484 205,631
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease) in net assets
from capital transactions............. 1,143,734 762,274 332,539 1,079,229 635,767 284,869
---------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease) in net assets... 1,403,487 974,578 330,792 1,282,682 790,964 293,205
NET ASSETS:
Beginning of year......................... 1,305,370 330,792 -- 1,084,169 293,205 --
---------- ---------- ----------- ---------- ---------- -----------
End of year............................... $2,708,857 $1,305,370 $330,792 $2,366,851 $1,084,169 $293,205
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
YEAR ENDED PERIOD FROM
DECEMBER 31, 4/21/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 7,296 $ (2,670) $ (929)
Net realized gain (loss) on
investments........................... 26,178 1,200 (15)
Net unrealized gain (loss) on
investments........................... 36,231 43,023 (9,330)
-------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 69,705 41,553 (10,274)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 142,056 152,554 92,813
Terminations............................ (3,164) (129) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (228,656) 72,800 225,807
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- --
-------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. (89,764) 225,225 318,620
-------- -------- -----------
Net increase (decrease) in net assets... (20,059) 266,778 308,346
NET ASSETS:
Beginning of year......................... 575,124 308,346 --
-------- -------- -----------
End of year............................... $555,065 $575,124 $308,346
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE INTERNATIONAL
VIPF II ASSET MANAGER STOCK
SUB-ACCOUNT 106 SUB-ACCOUNT 150
YEAR ENDED PERIOD FROM PERIOD FROM
DECEMBER 31, 6/14/94* TO YEAR ENDED 6/30/95* TO
1996 1995 12/31/94 12/31/96 12/31/95
-------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 28,956 $ 2,369 $ (705) $ 3,069 $ (146)
Net realized gain (loss) on
investments........................... 19,047 2,905 (44) 786 25
Net unrealized gain (loss) on
investments........................... 23,161 56,562 (8,236) 17,465 1,602
-------- -------- ----------- ---------- -----------
Net increase (decrease) in net assets
from operations....................... 71,164 61,836 (8,985) 21,320 1,481
-------- -------- ----------- ---------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 117,653 161,011 85,685 83,905 13,744
Terminations............................ -- -- -- (405) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (180,625) (13,418) 241,812 192,511 37,762
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. (129) -- 100 -- --
-------- -------- ----------- ---------- -----------
Net increase (decrease) in net assets
from capital transactions............. (63,101) 147,593 327,597 276,011 51,506
-------- -------- ----------- ---------- -----------
Net increase (decrease) in net assets... 8,063 209,429 318,612 297,331 52,987
NET ASSETS:
Beginning of year......................... 528,041 318,612 -- 52,987 --
-------- -------- ----------- ---------- -----------
End of year............................... $536,104 $528,041 $318,612 $350,318 $52,987
-------- -------- ----------- ---------- -----------
-------- -------- ----------- ---------- -----------
<CAPTION>
DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/12/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............ $ 4,182 $ 604 $ (238)
Net realized gain (loss) on
investments........................... 3,693 414 --
Net unrealized gain (loss) on
investments........................... 28,077 11,496 (1,212)
-------- -------- -----------
Net increase (decrease) in net assets
from operations....................... 35,952 12,514 (1,450)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 81,837 40,691 18,949
Terminations............................ (193) (481) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 43,641 40,455 42,620
Net increase (decrease) in net assets
from investment by Allmerica Financial
Life Insurance and Annuity Company
(Sponsor)............................. -- -- --
-------- -------- -----------
Net increase (decrease) in net assets
from capital transactions............. 125,285 80,665 61,569
-------- -------- -----------
Net increase (decrease) in net assets... 161,237 93,179 60,119
NET ASSETS:
Beginning of year......................... 153,298 60,119 --
-------- -------- -----------
End of year............................... $314,535 $153,298 $60,119
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION
The Inheiritage Account (Inheiritage) is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company (the Company),
established on April 21, 1994 for the purpose of separating from the general
assets of the Company those assets used to fund the variable portion of certain
flexible premium variable life policies issued by the Company. The Company is a
wholly-owned subsidiary of First Allmerica Financial Life Insurance Company
(First Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Inheiritage are clearly identified and distinguished from the
other assets and liabilities of the Company. Inheiritage cannot be charged with
liabilities arising out of any other business of the Company.
Inheiritage is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Inheiritage currently offers
nineteen Sub-Accounts (See Note 3). Each Sub-Account invests exclusively in a
corresponding investment portfolio of the Allmerica Investment Trust (the Trust)
managed by Allmerica Investment Management Company, Inc., a wholly-owned
subsidiary of First Allmerica or of the Variable Insurance Products Fund (VIPF),
or the Variable Insurance Products Fund II (VIPF II) managed by Fidelity
Management & Research Company (FMR), or of T. Rowe Price International Series,
Inc. (T. Rowe) managed by Rowe Price-Fleming International, Inc. or of the
Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware International
Advisers, Ltd. The Trust, VIPF, VIPF II, T. Rowe, and DGPF (the Funds) are
open-end, diversified management investment companies registered under the 1940
Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, VIPF, VIPF II, T. Rowe, or
DGPF. Net realized gains and losses on securities sold are determined using the
average cost method. Dividends and capital gain distributions are recorded on
the ex-dividend date and are reinvested in additional shares of the respective
investment portfolio of the Trust, VIPF, VIPF II, T. Rowe, or DGPF at net asset
value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return with First Allmerica. The Company anticipates no tax liability
resulting from the operations of Inheiritage. Therefore, no provision for income
taxes has been charged against Inheiritage.
F-48
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, VIPF, VIPF II, T. Rowe, and DGPF at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
SUB-ACCOUNT INVESTMENT PORTFOLIO SHARES COST PER SHARE
- --------------- -------------------------------------------------------------- ---------- ------------ -----------
<C> <S> <C> <C> <C>
Allmerica Investment Trust:
1 Growth........................................................ 579,597 $ 1,299,871 $ 2.333
2 Investment Grade Income....................................... 545,364 590,472 1.084
3 Money Market.................................................. 1,085,844 1,085,844 1.000
4 Equity Index.................................................. 272,923 520,040 2.165
5 Government Bond............................................... 165,338 171,746 1.036
6 Select Aggressive Growth...................................... 800,828 1,430,526 2.037
7 Select Growth................................................. 343,552 499,527 1.430
8 Select Growth and Income...................................... 726,990 922,918 1.405
9 Small Cap Value............................................... 581,347 739,761 1.511
10* Select Income................................................. -- -- --
11 Select International Equity................................... 871,536 1,027,255 1.356
12 Select Capital Appreciation................................... 652,502 949,268 1.485
Fidelity Variable Insurance Products Fund:
102 High Income................................................... 66,720 783,118 12.520
103 Equity-Income................................................. 128,809 2,337,154 21.030
104 Growth........................................................ 76,007 2,071,778 31.140
105 Overseas...................................................... 29,462 485,142 18.840
Fidelity Variable Insurance Products Fund II:
106 Asset Manager................................................. 31,666 464,616 16.930
T. Rowe Price International Series, Inc.:
150 International Stock........................................... 27,715 331,251 12.640
Delaware Group Premium Fund, Inc.:
207 International Equity.......................................... 20,816 276,174 15.110
</TABLE>
- ------------------------
* Sub-Account was established during 1996 and there was no selection of this
investment option by any policyowner.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge of $6. The policyowner
may instruct the Company to deduct this monthly charge from a specific
Sub-Account, but if not so specified, it will be deducted on a pro-rata basis of
allocation which is the same proportion that the policy value in the General
Account of the Company and in each Sub-Account bear to the total policy value.
For the years
F-49
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
ended December 31, 1996, 1995, and 1994, these monthly deductions from
sub-account policy values amounted to $238,545, $137,108 and $26,519,
respectively. These amounts are included on the statements of changes in net
assets with other transfers to the General Account.
The Company makes a charge of .90% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The mortality and expense risks annual charge may be increased or
decreased by the Board of Directors of the Company once each year, subject to
compliance with applicable state and federal requirements, but the total charge
may not exceed 1.275% per annum. During the first 15 policy years, the Company
also charges each Sub-Account .25% per annum based on the average daily net
assets of each Sub-Account for administrative expenses. These charges are
deducted in the daily computation of unit values but paid to the Company on a
monthly basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Inheiritage, and does not receive any compensation for sales of Inheiritage
policies. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of policies have a surrender
charge, no deduction is made for sales charges at the time of the sale. For the
years ended December 31, 1996, and 1995, the Company received $21,515 and
$1,739, respectively, for surrender charges applicable to Inheiritage. There
were no surrender charges for the year ended December 31, 1994.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable life insurance contract, other than a contract issued in connection
with certain types of employee benefit plans, will not be treated as a variable
life insurance contract for federal income tax purposes for any period for which
the investments of the segregated asset account on which the contract is based
are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy either
a statutory safe harbor test or diversification requirements set forth in
regulations issued by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Inheiritage satisfies the current
requirements of the regulations, and it intends that Inheiritage will continue
to meet such requirements.
F-50
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, VIPF, VIPF II, T.
Rowe, and DGPF shares by Inheiritage during the year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
- --------------- ----------------------------------------------------------------------- ------------- ------------
<C> <S> <C> <C>
Allmerica Investment Trust:
1 Growth................................................................. $ 853,873 $ 82,480
2 Investment Grade Income................................................ 343,195 71,615
3 Money Market........................................................... 2,642,121 1,959,033
4 Equity Index........................................................... 417,027 97,967
5 Government Bond........................................................ 261,798 164,454
6 Select Aggressive Growth............................................... 832,803 82,968
7 Select Growth.......................................................... 404,049 63,711
8 Select Growth and Income............................................... 497,166 46,446
9 Small Cap Value........................................................ 342,256 65,694
11 Select International Equity............................................ 753,171 71,226
12 Select Capital Appreciation............................................ 853,443 44,708
Fidelity Variable Insurance Products Fund:
102 High Income............................................................ 569,378 59,471
103 Equity-Income.......................................................... 1,358,783 168,664
104 Growth................................................................. 1,236,825 93,801
105 Overseas............................................................... 199,264 285,905
Fidelity Variable Insurance Products Fund II:
106 Asset Manager.......................................................... 164,980 199,142
T. Rowe Price International Series, Inc.:
150 International Stock.................................................... 303,087 23,143
Delaware Group Premium Fund, Inc.:
207 International Equity................................................... 182,668 49,755
------------- ------------
Totals................................................................. $ 12,215,887 $ 3,630,183
------------- ------------
------------- ------------
</TABLE>
F-51
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, your agent should
be contacted.
The following supplemental benefits are available for issue under the Policies
for an additional charge.
SPLIT OPTION RIDER
This rider, available only at Date of Issue, permits you to split the Policy
into two life insurance policies, one covering each Insured singly, subject
to Company guidelines.
OTHER INSURED RIDER
This rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and minor children of
either primary Insured. The rider includes a feature that allows you to
convert the other-insured coverage to any permanent life insurance policy
acceptable to the Company.
FOUR-YEAR TERM RIDER
This rider provides a term insurance benefit during the first four Policy
years, payable upon the death of the last surviving Insured during the
coverage period.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that would otherwise be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of: (a) the rate per $1,000 of value applied based on the Company's
non-guaranteed current payment option rates for the Policies; or (b) the rate in
the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Inheiritage Account.
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30).
Payments may be made annually, semi-annually, quarterly or monthly.
Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's Age on
the date the first payment will be made. One of three variations may
be chosen. Depending upon this choice, payments will end:
(a) upon the death of the payee, with no further payments due (Life
Annuity);
(b) upon the death of the payee, but not before the sum of the payments
made first equals or exceeds the amount applied under this option
(Life Annuity with Installment Refund); or
(c) upon the death of the payee, but not before a selected period (5, 10
or 20 years) has elapsed (Life Annuity with Period Certain).
Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined
by the Company each year but which will not be less than 3.5%.
Payments may be made annually, semi-annually, quarterly or monthly.
Payments will end when the amount left with the Company has been
withdrawn. However, payments will not continue after the death of the
payee. Any unpaid balance plus accrued interest will be paid in a lump
sum.
Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the
unpaid balance is exhausted. Interest will be credited to the unpaid
balance. The rate of interest will be determined by the Company each
year but will not be less than 3.5%. Payments may be made annually,
semi-annually, quarterly or monthly. The payment level selected must
provide for the payment each year of at least 8% of the amount
applied.
Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may
be chosen. After the death of one payee, payments will continue to the
survivor:
(a) in the same amount as the original amount;
(b) in an amount equal to 2/3 of the original amount; or
(c) in an amount equal to 1/2 of the original amount.
Payments are based on the payees' ages on the date the first payment is
due. Payments will end upon the death of the surviving payee.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
the Policyowner's and/or the Beneficiary's provision, any
A-2
<PAGE>
option selection may be changed before the Death Proceeds become payable. If the
Policyowner makes no selection, the Beneficiary may select an option when the
Death Proceeds become payable.
If the amount of monthly income payments under Option B, choice (c) for the
attained Age of the payee are the same for different periods certain, the
Company will deem an election to have been made for the longest period certain
which could have been elected for such Age and amount.
The Policyowner may give the Beneficiary the right to change from Option C or D
to any other option at any time. If the payee selects Option C or D when this
policy becomes a claim, the right may be reserved to change to any other option.
The payee who elects to change options must be a payee under the option
selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the written request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the written request selecting the option.
A corporation or fiduciary payee may select only Option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date
this Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
A-3
<PAGE>
APPENDIX C
ILLUSTRATIONS
SURRENDER VALUE, POLICY VALUES AND DEATH BENEFITS
The following tables illustrate the way in which a Policy's Sum Insured and
Policy Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued on the lives of both Insureds, each Age
55, under a standard Premium Class and qualifying for the non-smoker discount.
The tables also illustrate the guaranteed cost of insurance rates and the
current cost of insurance rates.
The tables illustrate the Policy Values that would result based upon the
assumptions that no Policy loans have been made, that you have not requested an
increase or decrease in the initial Face Amount, that no partial withdrawals
have been made, and that no transfers above 12 have been made in any Policy year
(so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the
Inheiritage Account for the entire period shown and are based on hypothetical
gross investment rates of return for the Underlying Fund (i.e., investment
income and capital gains and losses, realized or unrealized) equivalent to
constant gross (after tax) annual rates of 0%, 6%, and 12%. The second column of
the tables shows the amount which would accumulate if an amount equal to the
Guideline Annual Premium were invested to earn interest (after taxes) at 5%
compounded annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of a
Policy's total Policy Value among the Sub-Accounts of the Inheiritage Account,
if the actual rates of return averaged 0%, 6% or 12, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value, and the daily charge against the Inheiritage Account for mortality
and expense risks and the Inheiritage Account administrative charge for the
first 15 Policy years, equivalent to an effective annual rate of 1.15% of the
average daily value of the assets in the Inheiritage Account attributable to the
Policies, and 0.90% thereafter.
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary, and in 1996 ranged from an annual
rate of 0.34% to an annual rate of 1.23% of average daily net assets. The fees
and expenses associated with your Policy may be more or less than 0.85% in the
aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
Under its Management Agreement with the Trust, Allmerica Investments has
declared a voluntary expense limitation of 1.50% of average net average assets
for the Select International Equity Fund, 1.20% for the Growth Fund, 1.00% for
the Investment Grade Income Fund, 0.60% for the Money Market Fund, 0.60% for the
Equity Index Fund, 1.00% for the Government Bond Fund, 1.35% for the Select
Capital Appreciation Fund and the Select Aggressive Growth Fund, 1.20% for the
Select Growth Fund, 1.10% for the Select Growth and Income Fund, and 1.25% for
the Small-Mid Cap Value Fund. In 1996 the expenses of the Funds of the Trust did
not exceed the expense limitations.
Delaware International has voluntarily agreed to waive its management fees and
reimburse the International Equity Series to limit certain expenses to 8/10 of
1% of the average daily net assets. Without the expense limitation, in 1996 the
total annual expenes of the International Equity Series would have been 1.04%.
A-4
<PAGE>
NET ANNUAL RATES OF INVESTMENT
Taking into account the mortality and expense risk charge and the Inheiritage
Account administrative charge and the assumed 0.85% charge for Underlying Fund
advisory fees and operating expenses, the gross annual rates of investment
return of 0%, 6% and 12% correspond to net annual rates of -2.00%, 4.00%,
10.00%, respectively, during the first 15 Policy years and -1.75%, 4.25% and
10.25%, respectively, thereafter.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Inheiritage Account since no charges are currently
made. However, if in the future such charges are made, in order to produce
illustrated death benefits and cash values, the gross annual investment rate of
return would have to exceed 0%, 6% or 12% by a sufficient amount to cover the
tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSUREDS' AGES, AND UNDERWRITING CLASSIFICATIONS, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
A-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 1
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,240 1,000,000 0 9,809 1,000,000 0 10,378 1,000,000
2 21,525 5,470 18,186 1,000,000 7,182 19,898 1,000,000 8,963 21,678 1,000,000
3 33,101 7,819 26,819 1,000,000 11,252 30,252 1,000,000 14,967 33,967 1,000,000
4 45,256 16,879 35,119 1,000,000 22,617 40,857 1,000,000 29,077 47,317 1,000,000
5 58,019 25,962 43,062 1,000,000 34,591 51,691 1,000,000 44,704 61,804 1,000,000
6 71,420 34,656 50,616 1,000,000 46,766 62,726 1,000,000 61,546 77,506 1,000,000
7 85,491 42,919 57,739 1,000,000 59,101 73,921 1,000,000 79,680 94,500 1,000,000
8 100,266 50,697 64,377 1,000,000 71,542 85,222 1,000,000 99,179 112,859 1,000,000
9 115,779 57,914 70,454 1,000,000 84,013 96,553 1,000,000 120,106 132,646 1,000,000
10 132,068 64,479 75,879 1,000,000 96,419 107,819 1,000,000 142,524 153,924 1,000,000
11 149,171 71,437 80,557 1,000,000 109,798 118,918 1,000,000 167,642 176,762 1,000,000
12 167,130 77,535 84,375 1,000,000 122,890 129,730 1,000,000 194,392 201,232 1,000,000
13 185,986 82,661 87,221 1,000,000 135,571 140,131 1,000,000 222,871 227,431 1,000,000
14 205,786 86,690 88,970 1,000,000 147,705 149,985 1,000,000 253,186 255,466 1,000,000
15 226,575 89,469 89,469 1,000,000 159,123 159,123 1,000,000 285,458 285,458 1,000,000
16 248,404 88,738 88,738 1,000,000 167,729 167,729 1,000,000 318,247 318,247 1,000,000
17 271,324 86,156 86,156 1,000,000 175,045 175,045 1,000,000 353,300 353,300 1,000,000
18 295,390 81,519 81,519 1,000,000 180,840 180,840 1,000,000 390,879 390,879 1,000,000
19 320,660 74,232 74,232 1,000,000 184,525 184,525 1,000,000 431,068 431,068 1,000,000
20 347,193 63,695 63,695 1,000,000 185,488 185,488 1,000,000 474,082 474,082 1,000,000
Age 60 58,019 25,962 43,062 1,000,000 34,591 51,691 1,000,000 44,704 61,804 1,000,000
Age 65 132,068 64,479 75,879 1,000,000 96,419 107,819 1,000,000 142,524 153,924 1,000,000
Age 70 226,575 89,469 89,469 1,000,000 159,123 159,123 1,000,000 285,458 285,458 1,000,000
Age 75 347,193 63,695 63,695 1,000,000 185,488 185,488 1,000,000 474,082 474,082 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
CURRENT COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 1
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,244 1,000,000 0 9,813 1,000,000 0 10,383 1,000,000
2 21,525 5,494 18,210 1,000,000 7,207 19,923 1,000,000 8,989 21,704 1,000,000
3 33,101 7,891 26,891 1,000,000 11,328 30,328 1,000,000 15,047 34,047 1,000,000
4 45,256 17,043 35,283 1,000,000 22,792 41,032 1,000,000 29,264 47,504 1,000,000
5 58,019 26,283 43,383 1,000,000 34,938 52,038 1,000,000 45,078 62,178 1,000,000
6 71,420 35,229 51,189 1,000,000 47,390 63,350 1,000,000 62,226 78,186 1,000,000
7 85,491 43,875 58,695 1,000,000 60,151 74,971 1,000,000 80,834 95,654 1,000,000
8 100,266 52,213 65,893 1,000,000 73,222 86,902 1,000,000 101,037 114,717 1,000,000
9 115,779 60,231 72,771 1,000,000 86,597 99,137 1,000,000 122,985 135,525 1,000,000
10 132,068 67,919 79,319 1,000,000 100,277 111,677 1,000,000 146,843 158,243 1,000,000
11 149,171 76,297 85,417 1,000,000 115,291 124,411 1,000,000 173,832 182,952 1,000,000
12 167,130 84,176 91,016 1,000,000 130,455 137,295 1,000,000 202,976 209,816 1,000,000
13 185,986 91,508 96,068 1,000,000 145,729 150,289 1,000,000 234,464 239,024 1,000,000
14 205,786 98,242 100,522 1,000,000 161,067 163,347 1,000,000 268,511 270,791 1,000,000
15 226,575 104,318 104,318 1,000,000 176,413 176,413 1,000,000 305,355 305,355 1,000,000
16 248,404 107,680 107,680 1,000,000 189,902 189,902 1,000,000 343,787 343,787 1,000,000
17 271,324 110,188 110,188 1,000,000 203,275 203,275 1,000,000 385,739 385,739 1,000,000
18 295,390 111,790 111,790 1,000,000 216,491 216,491 1,000,000 431,631 431,631 1,000,000
19 320,660 112,272 112,272 1,000,000 229,363 229,363 1,000,000 481,843 481,843 1,000,000
20 347,193 111,443 111,443 1,000,000 241,727 241,727 1,000,000 536,868 536,868 1,000,000
Age 60 58,019 26,283 43,383 1,000,000 34,938 52,038 1,000,000 45,078 62,178 1,000,000
Age 65 132,068 67,919 79,319 1,000,000 100,277 111,677 1,000,000 146,843 158,243 1,000,000
Age 70 226,575 104,318 104,318 1,000,000 176,413 176,413 1,000,000 305,355 305,355 1,000,000
Age 75 347,193 111,443 111,443 1,000,000 241,727 241,727 1,000,000 536,868 536,868 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME
A-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 2
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,240 1,009,240 0 9,809 1,009,809 0 10,378 1,010,378
2 21,525 5,467 18,182 1,018,182 7,179 19,894 1,019,894 8,959 21,674 1,021,674
3 33,101 7,807 26,807 1,026,807 11,239 30,239 1,030,239 14,952 33,952 1,033,952
4 45,256 16,850 35,090 1,035,090 22,583 40,823 1,040,823 29,037 47,277 1,047,278
5 58,019 25,904 43,004 1,043,004 34,521 51,621 1,051,621 44,619 61,719 1,061,719
6 71,420 34,552 50,512 1,050,512 46,634 62,594 1,062,594 61,380 77,340 1,077,340
7 85,491 42,745 57,565 1,057,565 58,871 73,691 1,073,691 79,379 94,199 1,094,199
8 100,266 50,421 64,101 1,064,101 71,164 84,844 1,084,844 98,664 112,344 1,112,344
9 115,779 57,493 70,033 1,070,033 83,416 95,956 1,095,956 119,259 131,799 1,131,800
10 132,068 63,859 75,259 1,075,259 95,504 106,904 1,106,904 141,175 152,575 1,152,575
11 149,171 70,549 79,669 1,079,669 108,435 117,555 1,117,555 165,549 174,669 1,174,669
12 167,130 76,295 83,135 1,083,135 120,909 127,749 1,127,749 191,222 198,062 1,198,062
13 185,986 80,971 85,531 1,085,531 132,757 137,317 1,137,317 218,169 222,729 1,222,729
14 205,786 84,438 86,718 1,086,718 143,789 146,069 1,146,069 246,346 248,626 1,248,626
15 226,575 86,532 86,532 1,086,532 153,777 153,777 1,153,777 275,675 275,675 1,275,675
16 248,404 84,970 84,970 1,084,970 160,530 160,530 1,160,530 304,419 304,419 1,304,419
17 271,324 81,398 81,398 1,081,398 165,465 165,465 1,165,465 333,940 333,940 1,333,940
18 295,390 75,626 75,626 1,075,626 168,274 168,274 1,168,274 364,077 364,077 1,364,077
19 320,660 67,063 67,063 1,067,063 168,215 168,215 1,168,215 394,224 394,224 1,394,224
20 347,193 55,158 55,158 1,055,158 164,548 164,548 1,164,549 423,743 423,743 1,423,743
Age 60 58,019 25,904 43,004 1,043,004 34,521 51,621 1,051,621 44,619 61,719 1,061,719
Age 65 132,068 63,859 75,259 1,075,259 95,504 106,904 1,106,904 141,175 152,575 1,152,575
Age 70 226,575 86,532 86,532 1,086,532 153,777 153,777 1,153,777 275,675 275,675 1,275,675
Age 75 347,193 55,158 55,158 1,055,158 164,548 164,548 1,164,549 423,743 423,743 1,423,743
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
CURRENT COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 2
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,244 1,009,244 0 9,813 1,009,813 0 10,382 1,010,382
2 21,525 5,491 18,207 1,018,207 7,204 19,919 1,019,919 8,985 21,701 1,021,701
3 33,101 7,881 26,881 1,026,881 11,317 30,317 1,030,317 15,034 34,034 1,034,034
4 45,256 17,021 35,261 1,035,261 22,765 41,005 1,041,005 29,232 47,472 1,047,472
5 58,019 26,239 43,339 1,043,339 34,883 51,983 1,051,983 45,011 62,111 1,062,111
6 71,420 35,152 51,112 1,051,112 47,292 63,252 1,063,252 62,102 78,062 1,078,062
7 85,491 43,751 58,571 1,058,571 59,987 74,807 1,074,807 80,618 95,438 1,095,438
8 100,266 52,025 65,705 1,065,705 72,964 86,644 1,086,644 100,686 114,366 1,114,366
9 115,779 59,959 72,499 1,072,500 86,210 98,750 1,098,750 122,435 134,975 1,134,975
10 132,068 67,540 78,940 1,078,940 99,716 111,116 1,111,116 146,014 157,414 1,157,414
11 149,171 75,772 84,892 1,084,893 114,485 123,605 1,123,605 172,594 181,714 1,181,714
12 167,130 83,458 90,298 1,090,298 129,312 136,152 1,136,152 201,148 207,988 1,207,988
13 185,986 90,541 95,101 1,095,101 144,129 148,689 1,148,689 231,803 236,363 1,236,363
14 205,786 96,959 99,239 1,099,239 158,861 161,141 1,161,141 264,690 266,970 1,266,970
15 226,575 102,641 102,641 1,102,641 173,416 173,416 1,173,417 299,942 299,942 1,299,942
16 248,404 105,518 105,518 1,105,518 185,879 185,879 1,185,879 336,199 336,199 1,336,200
17 271,324 107,431 107,431 1,107,431 197,927 197,927 1,197,927 375,200 375,200 1,375,201
18 295,390 108,322 108,322 1,108,322 209,467 209,467 1,209,467 417,148 417,148 1,417,148
19 320,660 107,952 107,952 1,107,953 220,211 220,211 1,220,211 462,068 462,068 1,462,068
20 347,193 106,115 106,115 1,106,115 229,890 229,890 1,229,890 510,023 510,023 1,510,023
Age 60 58,019 26,239 43,339 1,043,339 34,883 51,983 1,051,983 45,011 62,111 1,062,111
Age 65 132,068 67,540 78,940 1,078,940 99,716 111,116 1,111,116 146,014 157,414 1,157,414
Age 70 226,575 102,641 102,641 1,102,641 173,416 173,416 1,173,417 299,942 299,942 1,299,942
Age 75 347,193 106,115 106,115 1,106,115 229,890 229,890 1,229,890 510,023 510,023 1,510,023
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-9
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in Face Amount. The maximum surrender charge is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge equal to $8.50
per $1,000 of initial Face Amount (or Face Amount increase), and (b) is a
deferred sales charge of 48% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs), based on the joint life expectancy of both
Insureds, subject to the deferred sales charge that varies as shown below by
average issue Age or average Age at time of increase, as applicable:
<TABLE>
<CAPTION>
Applicable
Age Maximum GAPs
- ------------- --------------
<S> <C>
5-75 1.95
76 1.92
77 1.81
78 1.69
79 1.60
80 1.50
81 1.40
82 1.31
</TABLE>
A further limitation is imposed based on the Standard Non-Forfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in Face Amount, the actual surrender
charge may be less than the maximum. See CHARGES AND DEDUCTIONS -- Surrender
Charge.
The maximum surrender charge initially remains level for 40 months, declines by
one-half of one percent of the initial amount for 80 months, and then declines
by one percent each month thereafter, reaching zero at the end of 180 Policy
months (15 Policy years).
The factors used in calculating the maximum surrender charges vary with the
issue Age of the younger Insured as indicated in the table that follows.
A-10
<PAGE>
INITIAL MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Younger Initial Younger Initial Younger Initial
Issue Surrender Issue Surrender Issue Surrender
Age Charge Age Charge Age Charge
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
5 5.00 31 9.40 57 21.00
6 5.00 32 9.80 58 22.00
7 5.00 33 10.20 59 23.00
8 5.00 34 10.60 60 24.00
9 5.00 35 11.00 61 25.00
10 5.00 36 11.40 62 26.00
11 5.00 37 11.80 63 27.00
12 5.00 38 12.20 64 28.00
13 5.00 39 12.60 65 29.00
14 5.00 40 13.00 66 30.00
15 5.00 41 13.40 67 31.00
16 5.00 42 13.80 68 32.00
17 5.00 43 14.20 69 33.00
18 5.00 44 14.60 70 34.00
19 5.00 45 15.00 71 35.00
20 5.00 46 15.40 72 35.00
21 5.40 47 15.80 73 35.00
22 5.80 48 16.20 74 35.00
23 6.20 49 16.60 75 35.00
24 6.60 50 17.00 76 35.00
25 7.00 51 17.40 77 35.00
26 7.40 52 17.80 78 35.00
27 7.80 53 18.20 79 35.00
28 8.20 54 18.60 80 35.00
29 8.60 55 19.00
30 9.00 56 20.00
</TABLE>
A-11
<PAGE>
EXAMPLES
For the purposes of these examples, assume that two nonsmokers, each Age 55, are
covered as the Insureds under a $1,000,000 Policy. In this example the Guideline
Annual Premium ("GAP") equals $16,861.10. The maximum surrender charge for the
Policy is calculated as follows:
<TABLE>
<S> <C> <C>
(a) Deferred Administrative Charge $ 8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (48% X 1.95 GAPs) $15,781.99
----------
TOTAL $24,281.99
Maximum Surrender Charge per Table (19.00 X 1,000) $19,000.00
</TABLE>
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
<TABLE>
<S> <C> <C>
(a) Deferred Administrative Charge $ 8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (not to exceed 25% of Premiums Varies
received, up to one GAP, but less than the maximum
number of GAPs subject to the deferred sales charge)
----------
Sum of (a) and (b)
</TABLE>
The maximum surrender charge is $19,000. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the Policy in the 10th policy month,
having paid total premiums of $7,500. The actual surrender charge would be
$10,375.
Example 2:
Assume the Policyowner surrenders the Policy in the 120th month. After the
40th Policy month, the maximum surrender charge decreases by 0.5% per month
during this period ($95 per month in this example). In this example, the maximum
surrender charge would be $11,400.
A-12
<PAGE>
AFLIAC INHEIRITAGE
PROSPECTUS B (SELECT INHEIRITAGE)
The Inheiritage Account is a separate investment account of Allmerica Financial
Life Insurance and Annuity Company ("Company"). The Company issues individual
joint survivorship flexible premium variable life insurance policies ("Policy"
or "Policies") described in the Prospectus. Life insurance coverage is provided
for two Insureds, with death proceeds payable at death of the last surviving
Insured. Applicants must be Age 80 or under with respect to the younger Insured
and Age 85 or under with respect to the older Insured.
The Policies permit allocations to up to seven of the following funds of
Allmerica Investment Trust ("Trust"), Variable Insurance Products Fund
("Fidelity VIP") and T. Rowe Price International Series, Inc. ("T. Rowe Price"):
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
- ---------------------------------------------- -----------------------------------------------------
<S> <C>
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund Janus Capital Corporation
Select Growth Fund Putnam Investment Management, Inc.
Fidelity VIP Growth Portfolio Fidelity Management and Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Managment and Research Company
Fidelity VIP High Income Portfolio Fidelity Management and Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
Policyowners may, within limits, choose the amount of initial payment and vary
the frequency and amount of future payments. The Policy allows partial
withdrawals and full surrender of the Policy's Surrender Value, within limits.
The Policies are not suitable for short-term investment because of the
substantial nature of the surrender charge. If you think about surrendering the
Policy, consider the lower deferred sales charges that apply during the first
two years from the Date of Issue or an increase in Face Amount.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, AND T. ROWE
PRICE INTERNATIONAL SERIES, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO
INVESTS IN HIGHER YIELDING, HIGHER RISK, LOWER RATED DEBT SECURITIES
(SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THIS PROSPECTUS).
INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE POLICIES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY.
INVESTMENTS IN THE CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE
FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1997
440 LINCOLN STREET WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
<PAGE>
(Continued from cover page)
In certain circumstances, a Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code of 1986 ("Code"), any Policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value will also be adjusted for other factors, including the amount
of charges imposed. The Policy will remain in effect so long as the Policy Value
less any surrender charges and less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy Value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments.
If the Policy is in effect at the death of the last surviving Insured, the
Company will pay a death benefit (the "Death Proceeds") to the Beneficiary.
Prior to the Final Premium Payment Date, the Death Proceeds equal the Sum
Insured, less any Debt, partial withdrawals, and any due and unpaid charges. You
may choose either Sum Insured Option 1 (the Sum Insured is fixed in amount) or
Sum Insured Option 2 (the Sum Insured includes the Policy value in addition to a
fixed insurance amount). A Policyowner has the right to change the Sum Insured
option, subject to certain conditions. A Guideline Minimum Sum Insured,
equivalent to a percentage of the Policy Value, will apply if greater than the
Sum Insured otherwise payable under Option 1 or Option 2.
No claim is made that the Policy is in any way similar or comparable to a
systematic investment plan of a mutual fund.
------------------------
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS 4
SUMMARY 7
PERFORMANCE INFORMATION 15
DESCRIPTION OF THE COMPANY, THE INHEIRITAGE ACCOUNT, ALLMERICA INVESTMENT TRUST,
VARIABLE INSURANCE PRODUCTS FUND, AND T. ROWE PRICE INTERNATIONAL SERIES, INC. 18
Investment Objectives and Policies 19
Investment Advisory Services 20
Addition, Deletion or Substitution of Investments 23
Voting Rights 23
THE POLICY 24
Applying for a Policy 24
Free-Look Period 25
Conversion Privileges 25
Premium Payments 26
Incentive Funding Discount 27
Paid-up Insurance Option 27
Allocation of Net Premiums 27
Transfer Privilege 28
Death Proceeds 29
Sum Insured Options 29
Change in Sum Insured Option 32
Change in Face Amount 32
Policy Value and Surrender Value 33
Death Proceeds Payment Options 35
Optional Insurance Benefits 35
Policy Surrender 35
Partial Withdrawals 35
CHARGES AND DEDUCTIONS 36
Tax Expense Charge 36
Premium Expense Charge 36
Monthly Deduction from Policy Value 36
Charges Against Assets of the Inheiritage Account 38
Surrender Charge 39
Charges on Partial Withdrawal 40
Transfer Charges 41
Charge for Increase in Face Amount 41
Other Administrative Charges 41
POLICY LOANS 41
POLICY TERMINATION AND REINSTATEMENT 43
OTHER POLICY PROVISIONS 44
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY 46
DISTRIBUTION 46
SERVICES 47
REPORTS 47
LEGAL PROCEEDINGS 47
FURTHER INFORMATION 47
INDEPENDENT ACCOUNTANTS 48
FEDERAL TAX CONSIDERATIONS 48
The Company and the Inheiritage Account 48
</TABLE>
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<TABLE>
<S> <C>
Taxation of the Policies 48
Modified Endowment Contracts 50
Estate and Generation Skipping Taxes 50
MORE INFORMATION ABOUT THE GENERAL ACCOUNT 51
FINANCIAL STATEMENTS F-1
APPENDIX A -- OPTIONAL BENEFITS A-1
APPENDIX B -- PAYMENT OPTIONS A-2
APPENDIX C -- ILLUSTRATIONS A-4
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES A-10
</TABLE>
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SPECIAL TERMS
ACCUMULATION UNIT: A measure of your interest in a Sub-Account.
AGE: An Insured's age as of the nearest birthday measured from a Policy
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Policy to receive the
insurance proceeds upon the death of the last surviving Insured.
COMPANY: Allmerica Financial Life Insurance and Annuity Company.
DATE OF ISSUE: The date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option (Option 1 or
Option 2), less Debt outstanding at death of the last surviving Insured, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy.
DEBT: All unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, including medical information
satisfactory to the Company, that is used to determine the Insureds' Premium
Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Policy is set forth in the specification pages of the Policy.
FINAL PREMIUM PAYMENT DATE: The Policy anniversary nearest the younger
Insured's 95th birthday. The Final Premium Payment Date is the latest date on
which a premium payment may be made. After this date, the Death Proceeds equal
the Surrender Value of the Policy.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
separate account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Table D, Smoker or Non-Smoker, net investment earnings at an
annual effective rate of 5%, and fees and charges as set forth in the Policy and
any Policy riders. The Sum Insured Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
GUIDELINE MINIMUM SUM INSURED: The minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by Age. It is calculated by multiplying the Policy Value by a
percentage determined by the younger Insured's Age.
INHEIRITAGE ACCOUNT: A Separate Account of the Company to which you may make
Net Premium allocations.
INSURANCE AMOUNT AT RISK: The Sum Insured less the Policy Value.
INSUREDS: The two persons covered under the Policy.
LOAN VALUE: The maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: A monthly premium amount calculated by the Company and
specified in the Policy. If you pay this amount, the Company guarantees that the
Policy will not lapse prior to the 49th Monthly Deduction after the Date of
Issue or the effective date of an increase in the Face Amount. However, making
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<PAGE>
payments at least equal to the Minimum Monthly Factors will not prevent the
Policy from lapsing if (a) Debt exceeds Policy Value less surrender charges or
(b) partial withdrawals and partial withdrawal charges have reduced premium
payments below an amount equal to the Minimum Monthly Factor multiplied by the
number of months since the Date of Issue or the effective date of an increase.
MONTHLY DEDUCTION: Charges deducted monthly from the Policy Value of a Policy
prior to the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by riders, and the monthly
administrative charge.
MONTHLY PAYMENT DATE: The date on which the Monthly Deduction is deducted from
Policy Value.
NET PREMIUM: An amount equal to the premium less a tax expense charge and
premium expense charge.
PAID-UP INSURANCE: Joint survivorship insurance coverage for the lifetime of
the Insureds, with no further premiums due.
POLICY CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: The total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts and (b) the accumulation in the General Account
credited to that Policy.
POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: The risk classification that the Company assigns the Insureds
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insureds' Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Policy Value
will be allocated. If you do not, the Company will allocate the deduction or
Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A Separate Account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
Separate Account is determined separately from the other assets of the Company.
The assets of a Separate Account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A division of the Inheiritage Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Variable Insurance Products Fund or the
T. Rowe Price Intrrnational Series, Inc.
SUM INSURED: The amount payable upon the death of the last surviving Insured,
before the Final Premium Payment Date, prior to deductions for Debt outstanding
at the death of the last surviving Insured, partial withdrawals and partial
withdrawal charges, if any, and any due and unpaid Monthly Deductions. The
amount of the Sum Insured will depend on the Sum Insured Option chosen, but will
always be at least equal to the Face Amount.
SURRENDER VALUE: The amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS (FUNDS): the Funds of Allmerica Investment Trust, the
Portfolios of the Variable Insurance Products Fund, the Variable Insurance
Products Fund II, T. Rowe Price International Series, and the Series of Delaware
Group Premium Fund, Inc. available under the Policy.
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VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
WRITTEN REQUEST: A request by the Policyowner in writing, satisfactory to the
Company.
YOU OR YOUR: The Policyowner, as shown in the application or the latest change
filed with the Company.
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<PAGE>
SUMMARY
The following is a summary of the individual joint survivorship flexible premium
variable life insurance policy sold by Allmerica Financial Life Insurance and
Annuity Company ("Company"). It highlights key points from the Prospectus which
follows. If you are considering the purchase of this product, you should read
the Prospectus carefully before making a decision. It offers a more complete
presentation of the topics presented here, and will help you better understand
the product. However, the Policy together with its attached application
constitutes the entire agreement between the Company and You.
FREE-LOOK PERIOD -- The Policy provides for an initial free-look period. You may
cancel the Policy by mailing or delivering it to the Principal Office or to an
agent of the Company on or before the latest of:
- 45 days after the application for the Policy is signed,
- 10 days after you receive the Policy (or, if required by state law,
the longer period indicated in your Policy), or
- 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.
Upon returning the Policy, you will receive a refund equal to the sum of:
(1) the difference between the premium, including fees and charges paid, and any
amount allocated to the Inheiritage Account, PLUS
(2) the value of the amounts allocated to the Inheiritage Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Inheiritage
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, however, the Company will refund the
entire amount of premiums paid. A free-look privilege also applies after a
requested increase in the Face Amount. See THE POLICY -- "Free-Look Period."
CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, subject to certain restrictions, you may convert the Policy to a
non-variable flexible premium adjustable life insurance policy by simultaneously
transferring all accumulated value in the Sub-Accounts to the General Account
and instructing the Company to allocate all future premiums to the General
Account. A similar conversion privilege is in effect for 24 Policy months after
the date of an increase in the Face Amount. Where required by state law, and at
your request, the Company will issue a flexible premium adjustable life
insurance policy to you. The new policy will have the same Face Amount, issue
Age, Date of Issue, and Premium Class as the original Policy. See THE POLICY --
"Conversion Privileges."
ABOUT THE POLICY
The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insureds,
- Policy Value,
- surrender rights and partial withdrawal rights,
- loan privileges, and
- in some cases, additional insurance benefits available by rider for
an additional charge.
LIFE INSURANCE
The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is a
"joint survivorship" Policy because Death Proceeds are payable,
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<PAGE>
not on the death of the first Insured to die, but on the death of the last
surviving Insured. The Policy is "variable" because the Policy Value will
increase or decrease depending on the investment experience of the Sub-Accounts
of the Inheiritage Account. Under some circumstances, the death benefit may vary
with the investment experience of the Sub-Accounts.
FLEXIBLE PREMIUM
The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. You may vary the
frequency and amount of future premium payments, subject to certain limits,
restrictions and conditions set by Company standards and federal tax laws.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause the Policy to lapse. Because of the variable nature of the Policy, making
planned premium payments does not guarantee that the Policy will remain in
force. Thus, you may, but are not required to, pay additional premiums.
The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in the Face Amount, the Policy will not lapse if the total premiums
paid less the Debt, partial withdrawals and withdrawal charges are equal to or
exceed the sum of the Minimum Monthly Factors for the number of months the
Policy, increase in Face Amount, or a Policy Change which causes a change in the
Minimum Monthly Factor has been in force. Even during these periods, however,
making payments at least equal to the Minimum Monthly Factor will not prevent
the Policy from lapsing if the Debt equals or exceeds the Policy Value less
surrender charges.
CONDITIONAL INSURANCE
If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance, equal to the amount of insurance applied for but not to
exceed $500,000. If the application is approved, the Policy will be issued as of
the date the terms of the conditional insurance are met. If you do not wish to
make any payment at the time of application, insurance coverage will not be in
force until delivery of the Policy and payment of sufficient premium to place
the insurance in force.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the Company's General Account. If your application is approved and
the Policy is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Principal Office. IF A POLICY IS
NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in your Policy. If you pay this amount, the Company guarantees
that the Policy will not lapse prior to the 49th Monthly Deduction after the
Date of Issue or the effective date of an increase in the Face Amount. At all
other times, however, payments of such premiums do not guarantee that the Policy
will remain in force. See THE POLICY -- "Premium Payments." Moreover, even
during the 48-month period, if Debt exceeds the Policy Value less surrender
charges, then making payments at least equal to the Minimum Monthly Factor will
not prevent the Policy from lapsing.
ALLOCATION OF INITIAL PREMIUMS
Upon completion of issuance procedures, delivery of the Policy, and receipt of
any additional premiums, if you have paid less than $10,000 of initial Net
Premiums, such Net Premiums will be allocated to the Sub-Accounts according to
your instructions. If initial Net Premiums equal or exceed $10,000, or if the
Policy provides for planned premium payments during the first year equal to or
exceeding $10,000 annually, $5,000 semi-
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<PAGE>
annually, $2,500 quarterly or $1,000 monthly, the entire Net Premium plus any
interest earned will be allocated to the Sub-Accounts upon return to the Company
of a Delivery Receipt. See THE POLICY -- "Applying for a Policy."
Net Premiums may be allocated to one or more Sub-Accounts of the Inheiritage
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than seven Sub-Accounts at any one time. The minimum allocation
is 1% of Net Premium. All allocations must be in whole numbers and must total
100%. See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
Company's General Account will earn a fixed rate of interest. Net premiums and
minimum interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PARTIAL WITHDRAWALS
After the first Policy year, you may make partial withdrawals in a minimum
amount of $500 from the Policy Value. Under Option 1, the Face Amount is reduced
by the amount of the partial withdrawal. A partial withdrawal will not be
allowed under Option 1 if it would reduce the Face Amount below $100,000.
A transaction charge, which is described in CHARGES AND DEDUCTIONS -- "Charges
On Partial Withdrawals," will be assessed to reimburse the Company for the cost
of processing each partial withdrawal. A partial withdrawal charge also may be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawals" and CHARGES AND DEDUCTIONS -- "Charges
On Partial Withdrawals."
LOAN PRIVILEGE
You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions, and interest on Debt to
the end of the Policy year. Thereafter, Loan Value is 90% of an amount equal to
the Policy Value less the surrender charge.
Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.
PREFERRED LOAN OPTION -- A preferred loan option is available under the Policy.
The preferred loan option will be available upon Written Request. It may be
revoked by you at any time. If this option has been selected, after the tenth
Policy anniversary the Policy Value in the General Account equal to the loan
amount will be credited with interest at an effective annual yield of at least
7.5%. The Company's current practice is to credit a rate of interest equal to
the rate being charged for the preferred loan.
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There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
POLICY LAPSE AND REINSTATEMENT
The failure to make premium payments will not cause a Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any; or
(b) Debt exceeds Policy Value less surrender charges.
A 62-day grace period applies to each situation.
Even if the situation described in (a) above exists, the Policy will not lapse
if you meet the so-called "Minimum Monthly Factor" test. The Minimum Monthly
Factor test is only used to determine whether the Policy will enter the grace
period during the first 48 months or within 48 months following an increase in
the Face Amount. Under the Minimum Monthly Factor test, the Company determines
two amounts:
- the sum of the payments your have made, MINUS any Policy loans,
withdrawals and withdrawal charges., and
- the amount of the Minimum Monthly Factor (the amount is shown on
page 5 of the Policy) MULTIPLIED by the number of months the Policy
has been in force or the number of months which have elapsed since
the last increase in the Face Amount.
The Company then compares the first amount to the second amount. The Policy will
not enter the grace period if the first amount is greater than the second
amount. If the Policy lapses, it may be reinstated within three years of the
date of default (but not later that the Final Premium Payment Date.). In order
to reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement. See POLICY TERMINATION AND REINSTATEMENT.
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Inheiritage Account and all accumulations in the General
Account of the Company credited to the Policy. The Policy Value reflects the
amount and frequency of Net Premiums paid, charges and deductions imposed under
the Policy, interest credited to accumulations in the General Account,
investment performance of the Sub-Account(s) to which Policy Value has been
allocated, and partial withdrawals. The Policy Value may be relevant to the
computation of the Death Proceeds. You bear the entire investment risk for
amounts allocated to the Inheiritage Account. The Company does not guarantee a
minimum Policy Value.
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS
The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the last surviving Insured. There are no Death
Proceeds payable on death of the first Insured to die. Prior to the Final
Premium Payment Date, the Death Proceeds will be equal to the Sum Insured,
reduced by any outstanding Debt, partial withdrawals, partial withdrawal
charges, and any Monthly Deductions due and not yet deducted through the Policy
month in which the last surviving Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum
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Sum Insured is equivalent to a percentage (determined each month based on the
younger Insured's Age) of the Policy Value. On or after the Final Premium
Payment Date, the Death Proceeds will equal the Surrender Value. See THE POLICY
- -- "Death Proceeds."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED
Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Policy. Any change in the Face
Amount will affect the monthly cost of insurance charges and the amount of the
surrender charge. If the Face Amount is decreased, a pro-rata surrender charge
may be imposed. The Policy Value is reduced by the amount of the charge. See THE
POLICY -- "Change in Face Amount."
The minimum increase in Face Amount is $100,000 and any increase also may
require additional Evidence of Insurability satisfactory to the Company. The
increase is subject to a "free-look period" and, during the first 24 months
after the increase, to a conversion privilege. See THE POLICY -- "Free-Look
Period" and "Conversion Privileges."
ADDITIONAL INSURANCE BENEFITS
You have the flexibility to add additional insurance benefits by rider. These
include the Split Option Rider, Other Insured Rider and Four-Year Term Rider.
See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
PAID-UP INSURANCE OPTION
The Policyowner who elects this option will have, without further premiums due,
joint survivorship insurance coverage for the lifetime of the Insureds, with the
Death Proceeds payable on the death of the last surviving Insured. The
Policyowner who has elected the Paid-Up Insurance option may not pay additional
premiums, select Sum Insured Option 2, increase or decrease the Face Amount or
make partial withdrawals. Policy Value in the Inheiritage Account will be
transferred to the General Account on the date the Company receives written
request to exercise the option and transfers of Policy Value back to the
Inheiritage Account will not be permitted. Riders will continue only with the
consent of the Company. Surrender value and loan value are calculated
differently. See THE POLICY -- "Paid-Up Insurance Option."
POLICY FEES AND CHARGES
There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.
TAX EXPENSE CHARGE -- A charge will be deducted from each premium payment for
state and local premium taxes paid by the Company for the Policy and to
compensate the Company for federal taxes imposed for deferred acquisition costs
("DAC") taxes. The total charge is the actual state and local premium taxes paid
by the Company, varying according to jurisdiction, and a DAC tax deduction of 1%
of premiums. See CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
PREMIUM EXPENSE CHARGE -- A charge of 1% of premiums will be deducted from each
premium payment to partially compensate the Company for sales expenses related
to the Policies. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
11
<PAGE>
MONTHLY DEDUCTIONS FROM POLICY VALUE
On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS "Monthly Deduction from Policy Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE of $6 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyowner inquiries.
As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE INHEIRITAGE ACCOUNT
A daily charge currently equivalent to an effective annual rate of 1.15% of the
average daily net asset value of each Sub-Account of the Inheiritage Account is
imposed to compensate the Company for its assumption of certain mortality and
expense risks and for administrative costs associated with the Inheiritage
Amount. The rate is 0.90% for the mortality and expense risk and 0.25% for the
Inheiritage Account administrative charge. The administrative charge is
eliminated after the 15(th) Policy year. See CHARGES AND DEDUCTIONS -- "Charges
Against Assets of the Inheiritage Account."
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1996. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
OTHER FUND EXPENSES
(AFTER EXPENSE
MANAGEMENT REIMBURSEMENT, TOTAL FUND
UNDERLYING FUND FEE IF ANY) EXPENSES
- --------------------------------------------- ------------- --------------------- -----------
<S> <C> <C> <C>
Select International Equity Fund 1.00% 0.23%* 1.23%***
T. Rowe Price International Stock Portfolio 1.05% 0.00% 1.05%
Select Aggressive Growth Fund 1.00% 0.08%* 1.08%
Select Capital Appreciation Fund 1.00% 0.13%* 1.13%
Select Growth Fund 0.85% 0.08%* 0.93%***
Fidelity VIP Growth Portfolio 0.61% 0.08% 0.69%**
Select Growth and Income Fund 0.75% 0.08% 0.83%***
Fidelity VIP Equity-Income Portfolio 0.51% 0.07% 0.58%**
Fidelity VIP High Income Portfolio 0.59% 0.12% 0.71%
Select Income 0.60% 0.14%* 0.74%
Money Market Fund 0.28% 0.06%* 0.34%
</TABLE>
* Under the Management Agreement with Allmerica Investment Trust, Allmerica
Investment Management Company, Inc. ("Manager") has declared a voluntary expense
limitation of 1.50% of average net assets for the
12
<PAGE>
Select International Equity Fund, 1.35% for the Select Aggressive Growth Fund
and the Select Capital Appreciation Fund, 1.20% for the Select Growth Fund,
1.10% for the Select Growth and Income Fund, 1.00% for the Select Income Fund,
and 0.60% for the Money Market Fund. The total operating expenses of the funds
of the Trust were less than their respective expense limitations throughout
1996. The declaration of a voluntary expense limitation in any year does not
bind the Manager to declare future expense limitations with respect to these
funds.
** A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.56% for Fidelity VIP Equity Income Portfolio and 0.67% for
Fidelity VIP Growth Portfolio
*** These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses would have been 1.20% for the Select
International Equity Fund, 0.92% for the Select Growth Fund, and 0.80% for the
Select Growth and Income Fund.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn or $25. In addition to the
transaction charge, a partial withdrawal charge also may be made under certain
circumstances. See CHARGES AND DEDUCTIONS, -- "Charges On Partial Withdrawals."
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICY -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in Face
Amount."
TRANSFER CHARGE
The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES AND DEDUCTIONS
- -- "Transfer Charges."
SURRENDER CHARGES
At any time that the Policy is in effect, a Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in Face Amount. The duration
of the surrender charge is 15 years. The surrender charge is imposed only if,
during its duration, you request a full surrender or a decrease in the Face
Amount.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT -- The maximum surrender charge
calculated upon issuance of the Policy is equal to the sum of (a) plus (b) where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount and (b) is a deferred sales charge of 48% of premiums
received up to a maximum number of Guideline Annual Premiums subject to the
deferred sales charge that varies by average issue Age from 1.95 (for average
issue Ages 5 through 75) to 1.31 (for average issue Age 82). In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of initial Face
Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
13
<PAGE>
The maximum surrender charge remains level for the first 40 Policy months and
reduces by 0.5% or more per month thereafter, as described in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. If you surrender the Policy during the
first two Policy years following the Date of Issue, before making premium
payments associated with the initial Face Amount which are at least equal to one
Guideline Annual Premium, the deferred administrative charge will be $8.50 per
thousand dollars of initial Face Amount, but the deferred sales charge will not
exceed 25% of premiums received. See THE POLICY -- "Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR INCREASES IN FACE AMOUNT -- A separate surrender charge
will apply to and is calculated for each increase in Face Amount. The maximum
surrender charge for the increase is equal to the sum of (a) plus (b) where (a)
is equal to $8.50 per thousand dollars of increase, and (b) is a deferred sales
charge of 48% of premiums associated with the increase, up to a maximum number
of Guideline Annual Premiums (for the increase) subject to the deferred sales
charge that varies by average Age (at the time of increase) from 1.95 (for
average Ages 5 through 75) to 1.31 (for average Age 82). In accordance with
limitations under state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
As is true for the initial Face Amount, (a) is a deferred administrative charge
and (b) is a deferred sales charge. This maximum surrender charge remains level
for the first 40 Policy months following the increase and reduces by 0.5% or
more per month thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. If you surrender the Policy during the first two Policy years
following an increase in Face Amount before making premium payments associated
with the increase in Face Amount which are at least equal to one Guideline
Annual Premium, the deferred administrative charge will be $8.50 per thousand
dollars of Face Amount increase, but the deferred sales charge will not exceed
25% of premiums associated with the increase.
SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT -- In the event of a decrease
in the Face Amount, the surrender charge imposed is proportional to the charge
that would apply to a full Policy surrender. See THE POLICY -- "Policy
Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
TAX TREATMENT
A Policy is generally subject to the same federal income tax treatment as a
conventional fixed benefit life insurance policy. Under current tax law, to the
extent there is no change in benefits, you will be taxed on Policy Value
withdrawn from the Policy only to the extent that the amount withdrawn exceeds
the total premiums paid. Withdrawals in excess of premiums paid will be treated
as ordinary income. During the first 15 Policy years, however, an "interest
first" rule applies to any distribution of cash that is required under Section
7702 of the Code because of a reduction of benefits under the Policy. Death
Proceeds under the Policy are excludable from the gross income of the
Beneficiary, but in some circumstances the Death Proceeds or the Policy Value
may be subject to federal estate tax. See FEDERAL TAX CONSIDERATIONS --
"Taxation of the Policies."
A Policy offered by this Prospectus may be considered a "modified endowment
contract" if it fails a "seven-pay" test. A Policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the Policy at any time
during the first seven policy years exceeds the sum of the net level premiums
that would have been paid, had the Policy provided for paid-up future benefits
after the payment of seven level premiums. If the Policy is considered a
modified endowment contract, all distributions (including Policy loans, partial
withdrawals, surrenders or assignments) will be taxed on an "income-first"
basis. In addition, with certain exceptions, an additional 10% penalty will be
imposed on the portion of any distribution that is includible in income. For
more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
14
<PAGE>
PERFORMANCE INFORMATION
The Policies were first offered to the public in 1994. However, the Company may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Underlying Funds have been in
existence. The results for any period prior to the Policies being offered will
be calculated as if the Policies had been offered during that period of time,
with all charges assumed to be those applicable to the Sub-Accounts, the
Underlying Funds, and (in TABLE I) under a "representative" Policy that is
surrendered at the end of the applicable period.
Performance information may be compared, in reports and promotional literature,
to: (i) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other
unmanaged indices so that investors may compare results with those of a group of
unmanaged securities widely regarded by investors as representative of the
securities markets in general; (ii) other groups of variable life separate
accounts or other investment products tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds and other
investment products by overall performance, investment objectives, and assets,
or tracked by other services, companies, publications, or persons, such as
Morningstar, Inc., who rank such investment products on overall performance or
other criteria; or (iii) the Consumer Price Index (a measure for inflation) to
assess the real rate of return from an investment. Unmanaged indices may assume
the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1996. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
15
<PAGE>
TABLE I: SUB-ACCOUNT PERFORMANCE
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insureds
are male, Age 45, standard (nonsmoker) Premium Class, and female, Age 43,
standard (nonsmoker) Premium Class, that the Face Amount of the Policy is
$500,000, that an annual premium payment of $5,500 (approximately one Guideline
Annual Premium) was made at the beginning of each Policy year, that ALL premiums
were allocated to EACH Sub-Account individually, and that there was a full
surrender of the Policy at the end of the applicable period.
AVERAGE ANNUAL RETURN AS OF 12/31/96
<TABLE>
<CAPTION>
10 YEARS
YEARS SINCE
ONE-YEAR OR LIFE INCEPTION*
TOTAL 5 OF FUND (IF LESS
UNDERLYING FUND RETURN YEARS (IF LESS) THAN 10)
- --------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund -82.93% N/A -16.54% 2.67
T. Rowe Price International Stock Portfolio -89.96% N/A -22.54% 2.58
Select Aggressive Growth Fund -86.16% N/A 8.12% 4.36
Select Capital Appreciation Fund -95.42% N/A -30.82% 1.67
Select Growth Fund -82.87% N/A 0.33% 4.36
Fidelity VIP Growth Portfolio -89.81% 5.99% 12.20% 10.00
Select Growth and Income Fund -83.59% N/A 1.03% 4.36
Fidelity VIP Equity-Income Portfolio -90.21% 9.22% 10.74% 10.00
Fidelity VIP High Income Portfolio -90.45% 5.75% 8.00 10.00
Select Income Fund -100.00% N/A -8.66% 4.36
Money Market Fund -98.69% -6.84% 2.44% 10.00
</TABLE>
* The inception dates for the Underlying Funds are: 4/29/85 for Money Market
Fund; 8/21/92 for Select Aggressive Growth Fund, Select Growth Fund, and Select
Growth and Income Fund, and Select Income Fund; 5/01/94 for Select International
Equity Fund; 4/28/95 for Select Capital Appreciation Fund, 10/09/86 for Fidelity
VIP Equity-Income Portfolio and Fidelity VIP Growth Portfolio; 9/19/85 for
Fidelity VIP High Income Portfolio; and 3/31/94 for the T. Rowe Price
International Stock Portfolio.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
16
<PAGE>
TABLE II: SUB-ACCOUNT PERFORMANCE
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICIES OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $5,500
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.
AVERAGE ANNUAL RETURN AS OF 12/31/96
<TABLE>
<CAPTION>
YEARS
10 YEARS SINCE
ONE-YEAR OR LIFE INCEPTION*
TOTAL 5 OF FUND (IF LESS
UNDERLYING FUND RETURN YEARS (IF LESS) THAN 10)
- ------------------------------------------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Select International Equity Fund 20.55% N/A 12.37% 2.67
T. Rowe Price International Stock Portfolio 13.23% N/A 8.67% 2.58
Select Aggressive Growth Fund 17.19% N/A 18.39% 4.36
Select Capital Appreciation Fund 7.55% N/A 26.86% 1.67
Select Growth Fund 20.62% N/A 11.35% 4.36
Fidelity VIP Growth Portfolio 13.39% 13.83% 13.82% 10.00
Select Growth and Income Fund 19.87% N/A 12.47% 4.36
Fidelity VIP Equity-Income Portfolio 12.97% 16.62% 12.43% 10.00
Fidelity VIP High Income Portfolio 12.72% 13.63% 9.84% 10.00
Select Income Fund 2.13% N/A 4.69% 4.36
Money Market Fund 4.14% 3.18% 4.65% 10.00
</TABLE>
* The inception dates for the Underlying Funds are: 4/29/85 for Money Market
Fund; 8/21/92 for Select Aggressive Growth Fund, Select Growth Fund, and
Select Growth and Income Fund, and Select Income Fund; 5/01/94 for Select
International Equity Fund; 4/28/95 for Select Capital Appreciation Fund,
10/09/86 for Fidelity VIP Equity-Income Portfolio and Fidelity VIP Growth
Portfolio; 9/19/85 for Fidelity VIP High Income Portfolio; and 3/31/94 for the
T. Rowe Price International Stock Portfolio.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
17
<PAGE>
DESCRIPTION OF THE COMPANY, THE INHEIRITAGE ACCOUNT, ALLMERICA INVESTMENT TRUST,
VARIABLE INSURANCE PRODUCTS FUND, AND T. ROWE PRICE INTERNATIONAL SERIES, INC.
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000. The Company is subject to the laws
of the state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America.
THE INHEIRITAGE ACCOUNT
The Inheiritage Account was authorized by vote of the Board of Directors of the
Company on September 15, 1993. The Inheiritage Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Inheiritage Account or the Company by the SEC.
The assets used to fund the variable portion of the Policies are set aside in
the Inheiritage Account and are kept separate from the general assets of the
Company. Under Delaware law, assets equal to the reserves and other liabilities
of the Inheiritage Account may not be charged with any liabilities arising out
of any other business of the Company. Eleven Sub-Accounts of the Inheiritage
Account are currently offered under the Policy. Each Sub-Account is administered
and accounted for as part of the general business of the Company, but the
income, capital gains, or capital losses of each Sub-Account are allocated to
such Sub-Account, without regard to other income, capital gains, or capital
losses of the Company or the other Sub-Accounts. Each Sub-Account invests
exclusively in a corresponding investment portfolio of the Allmerica Investment
Trust, the Variable Insurance Products Fund, or the T. Rowe Price International
Series, Inc. ("Underlying Funds").
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle and the income or losses of one Underlying Fund generally have no effect
on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public but solely to separate
accounts of life insurance companies, such as the Inheiritage Account.
Each Sub-Account has two sub-divisions. One sub-division applies to Policies
during their first 15 Policy years, which are subject to a Inheiritage Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the Inheiritage Account." Thereafter, such Policies are automatically allocated
to the second sub-division to account for the elimination of the Inheiritage
Account administrative charge.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and Inheiritage Account.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment Funds.
18
<PAGE>
The Trust was established by First Allmerica as a Massachusetts business trust
on October 11, 1984, for the purpose of providing a vehicle for the investment
of assets of various separate accounts established by First Allmerica, the
Company, or other affiliated insurance companies. Seven investment portfolios
("Funds") of the Trust are available under the Policies, each issuing a series
of shares: the Money Market Fund, Select International Equity Fund, Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth Fund,
Select Growth and Income Fund, and Select Income Fund. Certain of the Funds may
not be available in all states.
Allmerica Investment Management Company, Inc. ("Allmerica Investment") serves as
investment adviser of the Trust and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Funds. See "Investment Advisory Services to the Trust."
VARIABLE INSURANCE PRODUCTS FUND
Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981 and registered with the SEC under the 1940 Act. Three of its investment
portfolios are available under the Policies: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, and Fidelity VIP Growth
Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services. The Portfolios of
Fidelity VIP as part of their operating expenses pay an investment management
fee to FMR. See "Investment Advisory Services to Fidelity VIP."
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (See "Investment Advisory
Services to T. Rowe Price"), is an open-end, diversified management investment
company organized as a Maryland corporation in 1994 and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Policies: the T. Rowe Price International Stock Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of the funds is set forth below. BEFORE
INVESTING, READ CAREFULLY THE PROSPECTUSES OF THE TRUST, FIDELITY VIP AND T.
ROWE PRICE THAT ACCOMPANY THIS PROSPECTUS. THE PROSPECTUSES OF THE TRUST,
FIDELITY VIP AND T. ROWE PRICE CONTAIN MORE DETAILED INFORMATION ON THE FUNDS'
INVESTMENT OBJECTIVES, RESTRICTIONS, RISKS AND EXPENSES. Statements of
Additional Information for the Funds are available on request. The investment
objectives of the Funds may not be achieved. Policy Value may be less than the
aggregate payments made under the Policy.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies. The Sub-Adviser for the Select International
Equity Fund is Bank of Ireland Asset Management Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies that are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management.
19
<PAGE>
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund will invest
primarily in common stock of industries and companies which are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate. The Sub-Adviser for
the Select Capital Appreciation Fund is Janus Capital Corporation.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected for their
long-term growth potential. The Sub-Adviser for the Select Growth Fund is Putnam
Investment Management, Inc.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is John A. Levin & Co., Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's 500 Composite Stock Price Index.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the
Fidelity VIP prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The fund will invest
primarily in investment grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund.
If there is a material change in the investment policy of an Underlying Fund, we
will notify you of the change. If you have Policy Value allocated to that Fund,
you may without charge reallocate the Policy Value to another Fund or to the
Fixed Account. We must receive your Written Request within 60 days of the LATEST
of the
- Effective date of the change in the investment policy OR
- Receipt of the notice of your right to transfer.
INVESTMENT ADVISORY SERVICES
RogersCasey, a leading pension consulting firm, assists the Company in the
selection of the Policy's Funds, all of which are managed by experienced
investment advisers. In addition, RogersCasey assists the Trust in the selection
of investment advisers for the Funds of the Trust. RogersCasey provides
consulting services to pension plans representing over $300 billion in total
assets. In its consulting capacity, RogersCasey monitors the investment
performance of over 1,000 investment advisers. Each investment adviser is
selected by using strict objective, quantitative, and qualitative criteria, with
special emphasis on the investment adviser's record in managing similar
portfolios. In consultation with RogersCasey, a committee monitors and evaluates
the ongoing performance of all of the Funds. The committee may recommend the
replacement of an investment adviser of
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one of the Trust's Funds, or the addition or deletion of Funds. The committee
includes members who may be affiliated or unaffiliated with the Company and the
Trust.
Allmerica Investment Management Company, Inc. ("Manager"), an affiliate of the
Company, is the investment manager of the Trust. The Manager has entered into
agreements with investment advisers ("Sub-Advisers") selected by the Manager and
Trustees in consultation with RogersCasey. The Sub-Advisers (other than
Allmerica Asset Management, Inc.) are not affiliated with the Company or the
Trust.
Fidelity Management & Research Company ("FMR") is the investment adviser of VIP.
FMR is one of America's largest investment management organizations and has its
principal business address at 82 Devonshire Street, Boston MA. It is composed of
a number of different companies, which provide a variety of financial services
and products. FMR is the original Fidelity company, founded in 1946. It provides
a number of mutual funds and other clients with investment research and
portfolio management services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $25 billion under management in its offices in Baltimore, London,
Tokyo and Hong Kong.
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
- ---------------------------------------------- -----------------------------------------------------
<S> <C>
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund Janus Capital Corporation
Select Growth Fund Putnam Investment Management, Inc.
Fidelity VIP Growth Portfolio Fidelity Management and Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management and Research Company
Fidelity VIP High Income Portfolio Fidelity Management and Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
INVESTMENT ADVISORY SERVICES TO THE TRUST
The Trustees have responsibility for the supervision of the affairs of the
Trust. The Trustees have entered into a management agreement with Allmerica
Investment Management Company, Inc. ("Manager") , an indirectly wholly owned
subsidiary of First Allmerica. The Manager, subject to Trustee review, is
responsible for the daily affairs of the Trust and the general management of the
Funds. The Manager performs administrative and management services for the
Trust, furnishes to the Trust all necessary office space, facilities and
equipment, and pays the compensation, if any, of officers and Trustees who are
affiliated with the Manager.
The Trust bears all expenses incurred in its operation, other than the expenses
the Manager assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the
Securities Act of 1933 ("1933 Act")
- Other fees payable to the SEC
- Independent public accountant, legal and custodian fees
- Association membership dues, taxes, interest, insurance payments
and brokerage commissions
- Fees and expenses of the Trustees who are not affiliated with the
Manager
- Expenses for proxies, prospectuses, reports to shareholders and
other expenses
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Under the management agreement with the Trust, the Manager has entered
agreements under which each Sub-Adviser manages the investments of one or more
of the Funds. Under each agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The terms of a Sub-Adviser agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the Fund.
Allmerica Asset Management, Inc., an indirect wholly owned subsidiary of First
Allmerica, is the Sub-Adviser for the Money Market Fund. The Sub-Advisers for
the other Funds are independent. The Manager selects the Sub-Advisers in
consultation with RogersCasey Consulting, Inc., a leading pension consulting
firm. RogersCasey Consulting, Inc. provides consulting services to pension plans
with over $300 billion in total assets. In its consulting capacity, RogersCasey
Consulting, Inc. monitors the investment performance of over 1,000 investment
advisers. The Manager bears the cost of the consultation. The Manager selected
each independent Sub-Adviser using strict objective and qualitative criteria,
with special emphasis on the Sub-Adviser's record in managing similar
portfolios. A committee that includes members affiliated with Allmerica
Financial monitors and evaluates ongoing performance of the independent
Sub-Advisers.
For providing its services under the management agreement, the Manager receives
a fee, computed daily at an annual rate based on the average daily net asset
value of each Fund as follows: 1.00% for the Select International Equity Fund,
the Select Capital Appreciation Fund and the Select Aggressive Growth Fund,
0.85% for the Select Growth Fund, 0.75% for the Select Growth and Income Fund,
and 0.60% for the Select Income Fund. For the Money Market Fund, the fee is
0.35% on net asset value up to $50,000,000, 0.25% on the next $200,000,000, and
0.20% on the balance. The fee computed for each Fund is paid from the assets of
the Fund.
The Manager is solely responsible for the payment of all fees to Sub-Advisers
for their investment management services. Sub-Adviser fees, described in the
Trust's prospectus, in no way increase the costs that the Funds, Inheiritage
Account and Policyowners bear.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectus of Fidelity VIP contains additional information
concerning the Portfolios, including information concerning additional expenses
paid by the Portfolios, and should be read in conjunction with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The Fidelity VIP Growth and the Fidelity VIP Equity-Income Portfolios' fee rates
are each made of two components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.30% for the Fidelity VIP Growth
Portfolio and 0.20% for the Fidelity VIP Equity-Income Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
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Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82%.
The Fidelity VIP Growth Portfolio may have a fee of as high as 0.82% of its
average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee as
high as 0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Prive-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. And Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers, with approximately $25 billion under management in its offices
in Baltimore, London, Tokyo and Hong Kong. To cover investment management and
operating expenses, the T. Rowe Price International Stock Portfolio pays
Price-Fleming a single, all-inclusive fee of 1.05% of its average daily net
assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Inheiritage Account or the affected Sub-Account,
the Company may redeem the shares of that Underlying Fund and substitute shares
of another registered open-end management company. The Company will not
substitute any shares attributable to a Policy interest in a Sub-Account without
notice to you and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law. The Inheiritage
Account may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by a Policy owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Inheiritage Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company. Subject to
applicable law and any required SEC approval, the Company may, in its sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts if
marketing needs, tax considerations or investment conditions warrant. Any new
Sub-Accounts may be made available to existing Policyowners on a basis to be
determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and of T. Rowe Price are
also issued to other unaffiliated insurance companies ("shared funding"). It is
conceivable that in the future such mixed funding or shared funding may be
disadvantageous for variable life Policyowners or variable annuity owners.
Although the Company and the Underlying Funds do not currently foresee any such
disadvantages, the Company and the respective Trustees intend to monitor events
in order to identify any material conflicts and to determine what action, if
any, should be taken. If the Trustees were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the expenses.
If any of these substitutions or changes are made, the Company may by
endorsement change the Policy to reflect the substitution or change and will
notify Policyowners of all such changes. If the Company deems it to be in the
best interest of Policyowners, and subject to any approvals that may be required
under applicable law, the Inheiritage Account or any Sub-Account(s) may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration is no longer required, or may be combined with
other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended or if the present interpretation of the 1940 Act or such rules
23
<PAGE>
should change, and as a result the Company determines that it is permitted to
vote shares in its own right, whether or not such shares are attributable to the
Policies, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account who
furnish instructions to the Company. The Company will also vote shares that it
owns and which are not attributable to Policies in the same proportion.
The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (a) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds or (b) to approve or disapprove
an investment advisory contract for the Underlying Funds. In addition, the
Company may disregard voting instructions in favor of any change in the
investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of that action and the reasons for that
action will be included in the next periodic report to Policyowners.
THE POLICY
APPLYING FOR A POLICY
A Policy cannot be issued until the underwriting procedure has been completed.
Upon receipt at its Principal Office of a completed application from a
prospective Policyowner, the Company will follow certain insurance underwriting
procedures designed to determine whether the proposed Insured is insurable. This
process may involve medical examinations, and may require that further
information be provided by the proposed Policyowner before a determination of
insurability can be made. The Company reserves the right to reject an
application which does not meet its underwriting guidelines, but in underwriting
insurance, the Company complies with all applicable federal and state
prohibitions concerning unfair discrimination.
CONDITIONAL INSURANCE AGREEMENT -- It is possible to obtain life insurance
protection during the underwriting process through a Conditional Insurance
Agreement. If at the time of application you make a payment equal to at least
one "Minimum Monthly Factor" for the Policy as applied for, the Company will
provide fixed conditional insurance in the amount of insurance applied for up to
a maximum of $500,000, pending underwriting approval. This coverage generally
will continue for a maximum of 90 days from the date of the application or the
completion of a medical exam, should one be required. In no event will any
insurance proceeds be paid under the Conditional Insurance Agreement if death is
by suicide.
If the application is approved, the Policy will be issued as of the date the
terms of the Conditional Insurance Agreement were met. If no Conditional
Insurance Agreement is in effect because the prospective Policyowner does not
wish to make any payment until the Policy is issued or has paid an initial
premium that is not sufficient to place the Policy in force, upon delivery of
the Policy the Company will require payment of sufficient premium to place the
insurance in force.
PREMIUMS HELD IN THE GENERAL ACCOUNT PENDING UNDERWRITING APPROVAL -- Pending
completion of insurance underwriting and Policy issuance procedures, the initial
premium will be held in the Company's General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of
24
<PAGE>
receipt of the premium at the Principal Office. IF A POLICY IS NOT ISSUED, THE
PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
If the Policy is issued to the trustee of an employee benefit plan, the amounts
held in the Company's General Account will be allocated to the Sub-Accounts
according to the Policyowner's instructions when the Delivery Receipt is
returned to the Principal Office. For all other Policyowners, the date we
transfer the initial net premium from the General Account to the selected
Sub-Accounts depends on the premium amount. If the initial net premiums are less
than $10,000, the amounts held in the General Account will be allocated to the
selected Sub-Accounts not later than three days after underwriting approval of
the Policy. If the initial net premiums equal or exceed $10,000, or if the
Policy provides for planned premium payments during the first year equal to or
exceeding $10,000 annually, $5,000 semi-annually, $2,500 quarterly or $1,000
monthly, the entire Net Premium, plus any interest earned, will remain in the
General Account until return of the Policy's Delivery Receipt to the Principal
Office. The entire amount held in the General Account for allocation to the
Inheiritage Account then will be allocated to the Sub-Accounts according to your
instructions.
FREE-LOOK PERIOD
The Policy provides for an initial "free-look" period. You may cancel the Policy
by mailing or delivering the Policy to the Principal Office or an agent of the
Company on or before the latest of:
- 45 days after the application for the Policy is signed, or
- 10 days after you receive the Policy (or longer if required by
state law), or
- 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you.
When you return the Policy, the Company will mail within seven days a refund
equal to the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Inheiritage Account, PLUS
(2) the value of the amounts allocated to the Inheiritage Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Inheiritage
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, the refund will equal the premiums paid.
The refund of any premium paid by check, however, may be delayed until the check
has cleared your bank.
FREE LOOK WITH FACE AMOUNT INCREASES -- After an increase in the Face Amount,
the Company will mail or personally deliver a notice of a "free look" with
respect to the increase. You will have the right to cancel the increase before
the latest of:
- 45 days after the application for the increase is signed, or
- 10 days after you receive the new specification pages issued for
the increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal
rights to you.
Upon canceling the increase, you will receive a credit to your Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount (assuming the Policy is in force), you may
convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Inheiritage Account to the General
Account and by
25
<PAGE>
simultaneously changing your premium allocation instructions to allocate future
premium payments to the General Account. Within 24 months after the effective
date of each increase, you can transfer, without charge, all or part of the
Policy Value in the Inheiritage Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, at your request the Company will issue a flexible
premium adjustable life insurance policy to you. The new policy will have the
same Face Amount, issue Age, Dates of Issue, and Premium Class as the original
Policy.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Inheiritage
Account or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY -- Unlike conventional insurance policies, the Policy does
not obligate you to pay premiums in accordance with a rigid and inflexible
premium schedule. You may establish a schedule of planned premiums which will be
billed by the Company at regular intervals. Failure to pay planned premiums,
however, will not itself cause the Policy to lapse.
You also may make unscheduled premium payments at any time prior to the Final
Premium Payment Date or skip planned premium payments, subject to the maximum
and minimum premium limitations described below.
You also may elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted each month,
generally on the Monthly Payment Date, from your checking account and applied as
a premium under a Policy. The minimum payment permitted under a MAP procedure is
$50.
Premiums are not limited as to frequency and number. No premium payment may be
less than $100, however, without the Company's consent. Moreover, premium
payments must be sufficient to provide a positive Surrender Value at the end of
each Policy month, or the Policy may lapse. See POLICY TERMINATION AND
REINSTATEMENT.
MINIMUM MONTHLY FACTOR -- If, in the first 48 Policy months following issue or
an increase in the Face Amount, you make premium payments, less partial
withdrawals and partial withdrawal charges, at least equal to the sum of the
Minimum Monthly Factor for the number of months the Policy, increase in Face
Amount, or Policy Change which causes a change in the Minimum Monthly Factor has
been in force and Debt does not exceed Policy Value less surrencder charges, the
Policy is guaranteed not to lapse during that period. EXCEPT FOR THE 48 POLICY
MONTHS AFTER THE DATE OF ISSUE, OR THE EFFECTIVE DATE OF AN INCREASE IN THE FACE
AMOUNT, MAKING MONTHLY PAYMENTS AT LEAST EQUAL TO THE MINIMUM MONTHLY FACTOR
DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by IRS rules. Notwithstanding the current maximum premium
limitations, however, the Company will accept a premium which is needed in order
to prevent a lapse of the Policy during a Policy year. See POLICY TERMINATION
AND REINSTATEMENT.
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INCENTIVE FUNDING DISCOUNT
We will lower the cost of insurance charges by 5% during any Policy year for
which you qualify for an incentive funding discount. To qualify, total premiums
paid under the Policy, less any Debt, withdrawals and withdrawal charges, and
transfers from other policies issued by the Company, must exceed 90% of the
guideline level premiums (as defined in Section 7702 of the Code) accumulated
from the Date of Issue to the date of qualification. The incentive funding
discount is not available in all states.
The amount needed to qualify for the incentive funding discount is determined on
the Date of Issue for the first Policy year and on each Policy anniversary for
each subsequent Policy year. If the Company receives the proceeds from a Policy
issued by an unaffiliated company to be exchanged for the Policy, however, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.
PAID-UP INSURANCE OPTION
Upon Written Request, a Policyowner may exercise a paid-up insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the Insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount, up to the Face Amount of the
Policy, that the Surrender Value of the Policy can purchase for a net single
premium at the Insured's Age and Premium Class on the date this option is
elected. The Company will transfer any Policy Value in the Inheiritage Account
to the General Account on the date it receives the Written Request to elect the
option. If the Surrender Value exceeds the net single premium necessary for the
fixed insurance, the Company will pay the excess to the Policyowner. The net
single premium is based on the Commissioners 1980 Standard Ordinary Mortality
Tables, Smoker or Non-Smoker, Male, Female (or Table B for unisex policies) with
increases in the tables for non-standard risks. Interest will not be less than
4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:
- As described above, the paid-up insurance benefit is computed
differently from the net death benefit, and the death benefit
options will not apply.
- The Company will transfer the Policy Value in the Inheiritage
Account to the General Account on the date it receives the Written
Request to elect the option. The Company will not allow transfers
of Policy Value from the General Account back to the Inheiritage
Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or
make partial withdrawals.
- Riders will continue only with the Company's consent.
After electing paid-up fixed insurance, the Policyowner may surrender the Policy
for its net cash value. The cash value is equal to the net single premium for
paid-up insurance at the Insured's attained age. The net cash value is the cash
value less any outstanding loans.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the tax expense charge and the
premium expense charge. In the application for a Policy, you indicate the
initial allocation of Net Premiums among the General Account and the
Sub-Accounts of the Inheiritage Account. You may allocate premiums to one or
more Sub-Accounts, but may not have Policy Value in more than seven Sub-Accounts
at any one time. The minimum amount which may be allocated to a Sub-Account is
1% of Net Premium paid. Allocation percentages must be in whole numbers (for
example, 33 1/3% may not be chosen) and must total 100%.
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<PAGE>
FUTURE CHANGES ALLOWED -- You may change the allocation of future Net Premiums
at any time pursuant to written or telephone request. An allocation change will
be effective as of the date of receipt of the notice at the Principal Office.
Currently, no charge is imposed for changing premium allocation instructions.
The Company reserves the right to impose such a charge in the future, but
guarantees that the charge will not exceed $25.
If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions.
The procedures the Company follows for telephone transactions include requiring
callers to identify themselves by name, and to identify the Policyowner by name,
date of birth and social security number. All transfer instructions by telephone
are tape recorded.
INVESTMENT RISK -- The Policy Value in the Sub-Accounts will vary with their
investment experience; you bear this investment risk. The investment performance
may affect the Death Proceeds as well. Policyowners periodically should review
their allocations of premiums and Policy Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. However, the Policy Value held in the General Account to secure a
Policy loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Account(s) next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Currently, transfers involving the General Account are permitted only if:
- there has been at least a 90-day period since the last transfer
from the General Account, and
- the amount transferred from the General Account in each transfer
does not exceed the lesser of $100,000 or 25% of the Accumulated
Value under the Policy.
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION -- You may have
automatic transfers of at least $100 a month made on a periodic basis:
- from the Sub-Account which invests in the Money Market Fund of the
Trust to one or more of the other Sub-Accounts ("Dollar-Cost
Averaging Option"), or
- to reallocate Policy Value among the Sub-Accounts ("Automatic
Rebalancing Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS -- The transfer privilege is
subject to the Company's consent. The Company reserves the right to impose
limitations on transfers including, but not limited to:
- the minimum amount that may be transferred,
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<PAGE>
- the minimum amount that may remain in a Sub-Account following a
transfer from that Sub-Account,
- the minimum period of time between transfers involving the General
Account, and
- the maximum amount that may be transferred each time from the
General Account.
Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.
DEATH PROCEEDS
The Policy provides for the payment of the Death Proceeds to the named
Beneficiary on the death of the last surviving Insured. There are no Death
Proceeds payable on the death of the first Insured to die. Within 90 days of the
death of the first Insured to die, or as soon thereafter as is reasonably
possible, the Policyowner must mail due proof of such death to the Principal
Office. As long as the Policy remains in force (see POLICY TERMINATION AND
REINSTATEMENT), the Company will pay the Death Proceeds of the Policy to the
named Beneficiary, upon due proof of the death of the last surviving Insured.
The Company will normally pay the Death Proceeds within seven days of receiving
due proof of the death of the last surviving Insured, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments." The Death Proceeds may be received by the
Beneficiary in cash or under one or more of the payment options set forth in the
Policy. See APPENDIX B -- PAYMENT OPTIONS.
Prior to the Final Premium Payment Date, the Death Proceeds are:
- the Sum Insured provided under Option 1 or Option 2, whichever is
elected and in effect on the date of death of the last surviving
Insured; plus
- any additional insurance on the Insureds' lives that is provided by
rider; minus
- any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid
through the Policy month in which the last surviving Insured dies.
After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value of the Policy. The amount of Death Proceeds payable will be determined as
of the date of the Company's receipt of due proof of death of the last surviving
Insured.
SUM INSURED OPTIONS
The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the option once per Policy year by Written Request. There is no charge
for a change in option.
Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED -- The Guideline Minimum Sum Insured is equal to a
percentage of the Policy Value as set forth in the first Table below (for all
Policies issued in Pennsylvania and for certain other Policies* described below,
TABLE 2 applies). The Guideline Minimum Sum Insured is determined in accordance
with Code regulations to ensure that the Policy qualifies as a life insurance
contract and that the insurance proceeds will be excluded from the gross income
of the Beneficiary.
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<PAGE>
GUIDELINE MINIMUM SUM INSURED TABLE
(AGE OF YOUNGER INSURED ON DEATH OF LAST SURVIVING INSURED)
<TABLE>
<CAPTION>
Age Percentage
- --------- -------------
<S> <C>
under 60 300%
60 300%
61 293%
62 286%
63 279%
64 272%
65 265%
66 258%
67 251%
68 244%
69 237%
70 230%
71 223%
72 217%
73 211%
74 205%
75 198%
76 192%
77 186%
<CAPTION>
Age Percentage
- --------- -------------
<S> <C>
78 180%
79 173%
80 167%
81 163%
82 159%
83 155%
84 151%
85 147%
86 143%
87 139%
88 135%
89 130%
90 125%
91 120%
92 115%
93 110%
94 105%
95 100%
Over 95 100%
</TABLE>
For all Policies issued in Pennsylvania and for certain other Policies*
described below, GUIDELINE MINIMUM SUM INSURED -- TABLE 2 applies, as follows:
GUIDELINE MINIMUM SUM INSURED -- TABLE 2
(AGE OF YOUNGER INSURED ON DEATH OF LAST SURVIVING INSURED)
<TABLE>
<CAPTION>
Age Percentage
- ---------- -------------
<S> <C>
thru 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%
<CAPTION>
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 thru 90 105%
91 104%
92 103%
93 102%
94 101%
95 100%
</TABLE>
* For a period of 90 days after a state insurance department has approved the
use of GUIDELINE MINIMUM SUM INSURED -- TABLE 2, the Company will permit
Policyowners in that state to endorse the Policy to elect GUIDELINE MINIMUM SUM
INSURED -- TABLE 2. After a state insurance department has approved its use, all
new Policies issued in that state will utilize GUIDELINE MINIMUM SUM INSURED --
TABLE 2.
30
<PAGE>
Under both Option 1 and Option 2 the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under Guideline Minimum Sum Insured exceeds the Face Amount, in
which case the Sum Insured will vary as the Policy Value varies. Under Option 2,
the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured and the Death Proceeds will
be greater under Option 2 than under Option 1, since the Policy Value is added
to the specified Face Amount and included in the Death Proceeds only under
Option 2. However, the cost of insurance included in the Monthly Deduction will
be greater, and thus the rate at which Policy Value will accumulate will be
slower, under Option 2 than under Option 1 (assuming the same specified Face
Amount and the same actual premiums paid). See "CHARGES AND DEDUCTIONS --
Monthly Deduction From Policy Value."
If the Policyowner desires to have premium payments and investment performance
reflected in the amount of the Sum Insured, the Policyowner should choose Option
2. If the Policyowner desires premium payments and investment performance
reflected to the maximum extent in the Policy Value, you should select Option 1.
ILLUSTRATIONS -- For purposes of this illustration, assume that the younger
Insured is under the Age of 40, and that there is no outstanding Debt.
ILLUSTRATION OF OPTION 1 -- Under Option 1, a Policy with a $300,000 Face Amount
will generally have a Sum Insured equal to $300,000. However, because the Sum
Insured must be equal to or greater than 300% of Policy Value, if at any time
the Policy Value exceeds $100,000, the Sum Insured will exceed the $300,000 Face
Amount. In this example, each additional dollar of Policy Value above $100,000
will increase the Sum Insured by $3.00. For example, a Policy with a Policy
Value of $125,000 will have a Guideline Minimum Sum Insured of $375,000
($125,000 X 3.00); Policy Value of $150,000 will produce a Guideline Minimum Sum
Insured of $450,000 ($150,000 X 3.00); and Policy Value of $200,000 will produce
a Guideline Minimum Sum Insured of $600,000 ($200,000 X 3.00).
Similarly, so long as Policy Value exceeds $100,000, each dollar taken out of
Policy Value will reduce the Sum Insured by $3.00. If, for example, the Policy
Value is reduced from $125,000 to $100,000 because of partial withdrawals,
charges or negative investment performance, the Sum Insured will be reduced from
$375,000 to $300,000. If at any time, however, the Policy Value multiplied by
the applicable percentage is less than the Face Amount, the Sum Insured will
equal the Face Amount of the Policy.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the younger Insured's Age in the above example were, for example, 70 (rather
than between 0 and 40), the applicable percentage would be 230%. The Sum Insured
would not exceed the $300,000 Face Amount unless the Policy Value exceeded
$130,436 (rather than $100,000), and each dollar then added to or taken from
Policy Value would change the Sum Insured by $2.30.
ILLUSTRATION OF OPTION 2 -- For purposes of this illustration, assume that the
younger Insured is under the Age of 40 and that there is no outstanding Debt.
Under Option 2, a Policy with a Face Amount of $300,000 will generally produce a
Sum Insured of $300,000 plus Policy Value. For example, a Policy with Policy
Value of $50,000 will produce a Sum Insured of $350,000 ($300,000 + $50,000);
Policy Value of $80,000 will produce a Sum Insured of $380,000 ($300,000 +
$80,000); Policy Value of $100,000 will produce a Sum Insured of $400,000
($300,000 + $100,000). However, the Sum Insured must be at least 300% of the
Policy Value. Therefore, if the Policy Value is greater than $150,000, 300% of
that amount will be the Sum Insured, which will be greater than the Face Amount
plus Policy Value. In this example, each additional dollar of Policy Value above
$150,000 will increase the Sum Insured by $3.00. For example, if the Policy
Value is $200,000, the Guideline Minimum Sum Insured will be $600,000 ($200,000
X 3.00); Policy Value of $250,000 will produce a Guideline Minimum Sum Insured
of $750,000 ($250,000 X 3.00); and Policy Value of $300,000 will produce a
Guideline Minimum Sum Insured of $900,000 ($300,000 X 3.00).
Similarly, if Policy Value exceeds $150,000, each dollar taken out of Policy
Value will reduce the Sum Insured by $3.00. If, for example, the Policy Value is
reduced from $200,000 to $150,000 because of partial
31
<PAGE>
withdrawals, charges or negative investment performance, the Sum Insured will be
reduced from $600,000 to $450,000. If at any time, however, Policy Value
multiplied by the applicable percentage is less than the Face Amount plus Policy
Value, then the Sum Insured will be the current Face Amount plus Policy Value.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the Insured's Age in the above example were 70, the applicable percentage
would be 230%, so that the Sum Insured must be at least 2.30 times the Policy
Value. The amount of the Sum Insured would be the sum of the Policy Value plus
$300,000 unless the Policy Value exceeded $230,769 (rather than $150,000). Each
dollar added to or subtracted from the Policy would change the Sum Insured by
$2.30.
The Sum Insured under Option 2 will always be the greater of the Face Amount
plus Policy Value or the Policy Value multiplied by the applicable percentage.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
CHANGE FROM OPTION 1 TO OPTION 2 -- If the Sum Insured Option is changed from
Option 1 to Option 2, the Face Amount will be decreased to equal the Sum Insured
less the Policy Value on the effective date of the change. This change may not
be made if it would result in a Face Amount less than $100,000. A change from
Option 1 to Option 2 will not alter the amount of the Sum Insured at the time of
the change, but will affect the determination of the Sum Insured from that point
on. Because the Policy Value will be added to the new specified Face Amount, the
Sum Insured will vary with the Policy Value. Thus, under Option 2, the Insurance
Amount at Risk will always equal the Face Amount unless the Guideline Minimum
Sum Insured is in effect. The cost of insurance may also be higher or lower than
it otherwise would have been without the change in Sum Insured Option. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value."
CHANGE FROM OPTION 2 TO OPTION 1 -- If the Sum Insured Option is changed from
Option 2 to Option 1, the Face Amount will be increased to equal the Sum Insured
which would have been payable under Option 2 on the effective date of the change
(i.e., the Face Amount immediately prior to the change plus the Policy Value on
the date of the change). The amount of the Sum Insured will not be altered at
the time of the change. However, the change in option will affect the
determination of the Sum Insured from that point on, since the Policy Value will
no longer be added to the Face Amount in determining the Sum Insured; the Sum
Insured will equal the new Face Amount (or, if higher, the Guideline Minimum Sum
Insured). The cost of insurance may be higher or lower than it otherwise would
have been since any increases or decreases in Policy Value will, respectively,
reduce or increase the Insurance Amount at Risk under Option 1. Assuming a
positive net investment return with respect to any amounts in the Inheiritage
Account, changing the Sum Insured Option from Option 2 to Option 1 will reduce
the Insurance Amount at Risk and therefore the cost of insurance charge for all
subsequent Monthly Deductions, compared to what such charge would have been if
no such change were made.
A change in Sum Insured Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by IRS rules. In such event,
the Company will pay the excess to you. See THE POLICY -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Policy at any time by submitting a Written Request to the Company.
Any increase or decrease in the specified Face Amount requested by you will
become effective on the Monthly Payment Date on or next following the date of
receipt of the request at the Principal Office, or, if Evidence of Insurability
is required, the date of approval of the request.
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<PAGE>
INCREASES IN THE FACE AMOUNT -- Along with the Written Request for an increase,
you must submit satisfactory Evidence of Insurability. The consent of the
Insureds is also required whenever the Face Amount is increased. A request for
an increase in Face Amount may not be less than $100,000. You may not increase
the Face Amount after the younger Insured reaches Age 80 or the older Insured
reaches Age 85. An increase must be accompanied by an additional premium if the
Surrender Value is less than $50 plus an amount equal to the sum of two Minimum
Monthly Factors.
On the effective date of each increase in Face Amount, a transaction charge of
$40 will be deducted from Policy Value for administrative costs. The effective
date of the increase will be the first Monthly Payment Date on or following the
date all of the conditions for the increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge will also
be calculated for the increase. See CHARGES AND DEDUCTIONS -- Monthly Deduction
from Policy Value," and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free Look
Period, to have the increase canceled and the charges which would not have been
deducted but for the increase will be credited to the Policy and (2) during the
first 24 months following the increase, to transfer any or all Policy Value to
the General Account free of charge. See THE POLICY -- "Free-Look Period" and
"Conversion Privileges." A refund of charges which would not have been deducted
but for the increase will be made at your request.
DECREASES IN THE FACE AMOUNT -- The minimum amount for a decrease in Face Amount
is $100,000. The Face Amount in force after any decrease may not be less than
$100,000. If, following a decrease in Face Amount, the Policy would not comply
with the maximum premium limitation applicable under the IRS rules, the decrease
may be limited or Policy Value may be returned to you (at your election) to the
extent necessary to meet the requirements. A return of Policy Value may result
in a tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policy owner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value." For purposes of
determining the cost of insurance charge, any decrease in the Face Amount will
reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase;
- the next most recent increases successively; and
- the initial Face Amount.
This order will also be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
See CHARGES AND DEDUCTIONS -- "Surrender Charge."
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of:
- your accumulation in the General Account, PLUS
- the value of the Accumulation Units in the Sub-Accounts.
The Policy Value is used in determining the Surrender Value (the Policy Value
less any Debt and applicable surrender charges). There is no guaranteed minimum
Policy Value. Because the Policy Value on any date depends upon a number of
variables, it cannot be predetermined.
33
<PAGE>
The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.
CALCULATION OF POLICY VALUE -- The Policy Value is determined first on the Date
of Issue and thereafter on each Valuation Date. On the Date of Issue, the Policy
Value will be the Net Premiums received, plus any interest earned during the
period when premiums are held in the General Account (before being transferred
to the Inheiritage Account; see THE POLICY -- Applying for a Policy") less any
Monthly Deductions due. On each Valuation Date after the Date of Issue the
Policy Value will be:
- the aggregate of the values in each of the Sub-Accounts on the
Valuation Date, determined for each Sub-Account by multiplying the
value of an Accumulation Unit in that Sub-Account on that date by
the number of such Accumulations Units allocated to the Policy;
PLUS
- the value in the General Account (including any amounts transferred
to the General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT -- Each Net Premium is allocated to the Sub-Account(s)
selected by you. Allocations to the Sub-Accounts are credited to the Policy in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Principal Office. The number of Accumulation
Units will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a Sub-
Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
The dollar value of an Accumulation Unit of each Sub-Account varies from
Valuation Date to Valuation Date based on the investment experience of that
Sub-Account. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit on a given Valuation Date
is determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a Sub-Account of the Inheiritage Account during the Valuation
Period just ended. The net investment factor for each Sub-Account is equal to
1.0000 plus the number arrived at by dividing (a) by (b) and subtracting (c) and
(d) from the result, where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal on an annual basis to
.90% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 1.275%; and
34
<PAGE>
(d) is the Inheiritage Account administrative charge for each day in the
Valuation Period equal on an annual basis to 0.25% of the daily net asset
value of that Sub-Account. This charge is applicable only during the first
15 Policy years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insureds' lifetimes, you may arrange for the Death Proceeds to be
paid in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- PAYMENT
OPTIONS. These choices are also available at the Final Premium Payment Date and
if the Policy is surrendered. The Company may make more payment options
available in the future. If no election is made, the Company will pay the Death
Proceeds in a single sum. When the Death Proceeds are payable in a single sum,
the Beneficiary may, within one year of the death of the last surviving Insured,
select one or more of the payment options if no payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Policy by rider.
The cost of any optional insurance benefits will be deducted as part of the
Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy
Value."
POLICY SURRENDER
You may at any time surrender the Policy and receive its Surrender Value. The
Surrender Value is the Policy Value less any Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Policy are received at the
Principal Office. A surrender charge will be deducted when a Policy is
surrendered if less than 15 full Policy years have elapsed from the Date of
Issue of the Policy or from the effective date of any increase in Face Amount.
See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a single lump sum or under one of the
payment options described in APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
For important tax consequences which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of the Policy, subject to the limits stated below, upon written
request filed at the Principal Office. The Written Request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500. Under Option 1, the Face Amount is reduced by the amount of the
partial withdrawal, and a partial withdrawal will not be allowed if it would
reduce the Face Amount below $100,000.
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<PAGE>
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Accumulation Units equivalent in value to the amount withdrawn. The
amount withdrawn equals the amount requested by you plus the transaction charge
and any applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges On Partial Withdrawals." The Company will normally pay
the amount of the partial withdrawal within seven days following the Company's
receipt of the partial withdrawal request, but the Company may delay payment
under certain circumstances described in OTHER POLICY PROVISIONS --
"Postponement of Payments."
For important tax consequences which may result from partial withdrawals, see
FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policies.
Certain of the charges and deductions described below may be reduced for
Policies issued to employees of First Allmerica and its affiliates located at
First Allmerica's home office (or at off-site locations if such employees are on
First Allmerica's home office payroll), employees and registered representatives
of any broker-dealer that has entered into a sales agreement with the Company or
Allmerica Investments, Inc. to sell the Policies, and any spouses or children of
the above persons. The Cost of Insurance Charges may be reduced, and no
surrender charges, partial withdrawal charges or front-end sales loads will be
imposed (and no commissions will be paid), where the Policyowner as of the date
of application is within these categories.
TAX EXPENSE CHARGE
A charge will be deducted from each premium payment for the actual state and
local premium taxes paid by the Company and a charge of 1% of premiums to
compensate the Company for federal taxes imposed for deferred acquisition costs
("DAC") taxes. The premium tax deduction will change if there is a change in tax
rates or if the applicable jurisdiction changes (the Company should be notified
of any change in address as soon as possible). The Company reserves the right to
increase or decrease the 1% DAC tax deduction to reflect changes in the
Company's expenses for DAC taxes.
PREMIUM EXPENSE CHARGE
A charge of 1% of premiums will be deducted from each premium payment to
partially compensate the Company for the cost of selling the Policies. The
premium expense charge is a factor the Company must use when calculating the
maximum sales load it can charge under SEC rules during the first two Policy
years.
MONTHLY DEDUCTION FROM POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from Policy Value
will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charges are
discussed below. The Monthly Deduction on or following the effective date of a
requested increase in the Face Amount will also include a $40 administrative
charge for the increase. See THE POLICY -- "Change in Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions, or, if
no allocation is specified, the Company will make a Pro-Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. However, if on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
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COST OF INSURANCE -- This charge is designed to compensate the Company for the
anticipated cost of providing Death Proceeds to Beneficiaries of those last
surviving Insureds who die prior to the Final Premium Payment Date. The cost of
insurance is determined on a monthly basis, and is determined separately for the
initial Face Amount and for each subsequent increase in Face Amount. Because the
cost of insurance depends upon a number of variables, it can vary from month to
month.
CALCULATION OF THE CHARGE -- If you select Sum Insured Option 2, the monthly
cost of insurance charge for the initial Face Amount will equal the applicable
cost of insurance rate multiplied by the initial Face Amount. If you select Sum
Insured Option 1, however, the applicable cost of insurance rate will be
multiplied by the initial Face Amount less the Policy Value (minus charges for
rider benefits) at the beginning of the Policy month. Thus, the cost of
insurance charge may be greater for Policyowners who have selected Sum Insured
Option 2 than for those who have selected Sum Insured Option 1, assuming the
same Face Amount in each case and assuming that the Guideline Minimum Sum
Insured is not in effect. In other words, since the Sum Insured under Option 1
remains constant while the Sum Insured under Option 2 varies with the Policy
Value, any Policy Value increases will reduce the insurance charge under Option
1 but not under Option 2.
If you select Sum Insured Option 2, the monthly insurance charge for each
increase in Face Amount (other than an increase caused by a change in the Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in Face Amount. If you select Sum Insured
Option 1, the applicable cost of insurance rate will be multiplied by the
increase in the Face Amount reduced by any Policy Value (minus rider charges) in
excess of the initial Face Amount at the beginning of the Policy month.
EFFECT OF THE GUIDELINE MINIMUM SUM INSURED -- If the Guideline Minimum Sum
Insured is in effect under either Option, a monthly cost of insurance charge
also will be calculated for that additional portion of the Sum Insured which is
required to comply with the Guideline rules. This charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial
Face Amount times the Guideline Minimum Sum Insured (Policy Value
times the applicable percentage), MINUS
- the greater of the Face Amount or the Policy Value (if you
selected Sum Insured Option 1)
OR
- the Face Amount PLUS the Policy Value (if you selected Sum
Insured Option 2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY, "Change in the Face Amount."
COST OF INSURANCE RATES -- Cost of insurance rates are based on a blended unisex
rate table, Age and Premium Class of the Insureds at the Date of Issue, the
effective date of an increase or date of rider, as applicable, the amount of
premiums paid less Debt, any partial withdrawals and withdrawal charges, and
risk classification. Sex-distinct rates do not apply, except in those states
that do not permit unisex rates.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in Face
Amount or rider are determined annually on the anniversary of the effective date
of each increase or rider. The cost of insurance rates generally increase as the
Insureds' Ages increase. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Table D, Smoker or Non-Smoker, and the Insureds'
Ages. The Tables used for this purpose set forth different mortality estimates
for smokers and non-smokers. Any change in the cost of insurance rates will
apply to all persons of the same insuring Age and Premium Class whose Policies
have been in force for the same length of time.
The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into standard Premium Classes and substandard
Premium Classes. In an otherwise identical Policy, an Insured in the Standard
Premium Class will have a lower cost of insurance than an Insured in a
substandard Premium Class with a higher mortality risk. The Premium Classes are
also divided into two categories: smokers and nonsmokers. Nonsmoking Insureds
will incur lower cost of insurance rates than Insureds who are classified as
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smokers but who are otherwise in the same Premium Class. Any Insured with an Age
at issuance under 18 will be classified initially as regular or substandard. The
Insured then will be classified as a smoker at Age 18 unless the Insured
provides satisfactory evidence that the Insured is a nonsmoker. The Company will
provide notice to you of the opportunity for an Insured to be classified as a
nonsmoker when the Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in Face Amount. For each increase in Face
Amount you request, at a time when an Insured is in a less favorable Premium
Class than previously, a correspondingly higher cost of insurance rate will
apply only to that portion of the Insurance Amount at Risk for the increase. For
the initial Face Amount and any prior increases, the Company will use the
Premium Class previously applicable. On the other hand, if an Insured's Premium
Class improves on an increase, the lower cost of insurance rate generally will
apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES -- Prior to the Final Premium Payment Date, a
monthly administrative charge of $6 per month will be deducted from Policy
Value. This charge will be used to compensate the Company for expenses incurred
in the administration of the Policy and will compensate the Company for first-
year underwriting and other start-up expenses incurred in connection with the
Policy. These expenses include the cost of processing applications, conducting
medical examinations, determining insurability and the Insureds' Premium Class,
and establishing Policy records. The Company does not expect to derive a profit
from these charges.
CHARGES AGAINST ASSETS OF THE INHEIRITAGE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company and a charge for administrative expenses of the
Inheiritage Account.
MORTALITY AND EXPENSE RISK CHARGE -- The Company currently makes a charge on an
annual basis of 0.90% of the daily net asset value in each Sub-Account. This
charge is for the mortality risk and expense risk which the Company assumes in
relation to the variable portion of the Policies. The total charges may be
increased or decreased by the Board of Directors of the Company once each year,
subject to compliance with applicable state and federal requirements, but it may
not exceed 1.275% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will therefore pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policies
will exceed the amounts realized from the administrative charges provided in the
Policies. If the charge for mortality and expense risks is not sufficient to
cover actual mortality experience and expenses, the Company will absorb the
losses. If costs are less than the amounts provided, the difference will be a
profit to the Company. To the extent this charge results in a current profit to
the Company, such profit will be available for use by the Company for, among
other things, the payment of distribution, sales and other expenses. Since
mortality and expense risks involve future contingencies which are not subject
to precise determination in advance, it is not feasible to identify specifically
the portion of the charge which is applicable to each.
INHEIRITAGE ACCOUNT ADMINISTRATIVE CHARGE -- During the first 15 Policy years,
the Company assesses a charge on an annual basis of 0.25% of the daily net asset
value in each Sub-Account. The charge is assessed to help defray administrative
expenses actually incurred in the administration of the Inheiritage Account and
the Sub-Accounts and is not expected to be a source of profit. The
administrative functions and expenses assumed by the Company in connection with
the Inheiritage Account and the Sub-Accounts include, but are not limited to,
clerical, accounting, actuarial and legal services, rent, postage, telephone,
office equipment and supplies, expenses of preparing and printing registration
statements, expenses of preparing and typesetting prospectuses and the cost of
printing prospectuses not allocable to sales expense, filing and other fees. No
Inheiritage Account administrative charge is imposed after the fifteenth Policy
year.
OTHER CHARGES AND EXPENSES -- Because the Sub-Accounts purchase shares of the
Underlying Funds, the value of the Accumulation Units of the Sub-Accounts will
reflect the investment advisory fee and other
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expenses incurred by the Underlying Funds. The prospectuses and statements of
additional information of the Trust, Fidelity VIP, and T. Rowe Price contain
additional information concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policy provides for a contingent surrender charge. A surrender charge may be
deducted if you request a full surrender of the Policy or a decrease in Face
Amount. The duration of the surrender charge is 15 years from Date of Issue or
from the effective date of any increase in the Face Amount. A separate surrender
charge, described in more detail below, is calculated upon the issuance of the
Policy and for each increase in the Face Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agent's
commissions, advertising and the printing of the prospectus and sales
literature.
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount and
(b) is a deferred sales charge of 48% of premiums received up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by average issue Age from 1.95 (for average issue Ages 5 through
75) to 1.31 (for average issue Age 82).
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months and reduces by 0.5% or more per month thereafter, as described
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This reduction in the
maximum surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 25% of
premiums received. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE -- A separate surrender
charge will apply to and is calculated for each increase in Face Amount. The
surrender charge for the increase is in addition to that for the initial Face
Amount. The maximum surrender charge for the increase is equal to the sum of (a)
plus (b), where (a) is equal to $8.50 per thousand dollars of increase, and (b)
is a deferred sales charge of 48% of premiums associated with the increase, up
to a maximum number of Guideline Annual Premiums (for the increase) subject to
the deferred sales charge that varies by average Age (at the time of increase)
from 1.95 (for average Ages 5 through 75) to 1.31 (for average Age 82). In
accordance with limitations under state insurance regulations, the amount of the
surrender charge will not exceed a specified amount per $1,000 of increase, as
indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is true
for the initial Face Amount, (a) is a deferred administrative charge and (b) is
a deferred sales charge. The maximum surrender charge for the increase continues
in a level amount for 40 Policy months and reduces by 0.5% or more per month
thereafter, as provided in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
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If you surrender the Policy during the first two Policy years following an
increase in Face Amount before making premium payments associated with the
increase in Face Amount which are at least equal to one Guideline Annual
Premium, the deferred administrative charge will be $8.50 per thousand dollars
of Face Amount increase, as described above, but the deferred sales charge will
not exceed 25% of premiums associated with the increase. See "APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES." The premiums associated with the
increase are determined as described below.
ALLOCATION OF POLICY VALUE AND PREMIUMS UPON AN INCREASE IN FACE AMOUNT --
Additional premium payments may not be required to fund a requested increase in
Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of existing Policy Value
to the increase and to allocate subsequent premium payments between the initial
Face Amount and the increase.
For example, suppose the Guideline Annual Premium is equal to $1,500 before an
increase and is equal to $2,000 as a result of the increase. The Policy Value on
the effective date of the increase would be allocated 75% ($1,500/$2,000) to the
initial Face Amount and 25% to the increase. All future premiums would also be
allocated 75% to the initial Face Amount and 25% to the increase. Thus, existing
Policy Value associated with the increase will equal the portion of Policy Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES, for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
POSSIBLE SURRENDER CHARGE ON A DECREASE IN THE FACE AMOUNT -- A surrender charge
may be deducted on a decrease in the Face Amount. In the event of a decrease,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Policy. The fraction will be determined by dividing the
amount of the decrease by the current Face Amount and multiplying the result by
the surrender charge. If more than one surrender charge is in effect (i.e.,
pursuant to one or more increases in the Face Amount of a Policy), the surrender
charge will be applied in the following order: (1) the most recent increase; (2)
the next most recent increases successively, and (3) the initial Face Amount.
Where a decrease causes a partial reduction in an increase or in the initial
Face Amount, a proportionate share of the surrender charge for that increase or
for the initial Face Amount will be deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Policy year, partial withdrawals of Surrender Value may be made.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $100,000.
A transaction charge, which is the smaller of 2% of the amount withdrawn or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company less the
total of any prior withdrawals in that Policy year which were not subject to the
partial withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal.
This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative
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charge component. The partial withdrawal charge deducted will decrease existing
surrender charges in the following order:
- first, the surrender charge for the most recent increase in the
Face Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICY -- "Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Account which invesst in the Money Market Fund of the
Trust to one or more of the other Sub-Accounts; or
- to reallocate Policy Value among the Sub-Accounts.
The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.
If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge, and in addition to the 12 free transfers in a Policy year. See THE
POLICY -- "Conversion Privileges," and POLICY LOANS.
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase
and the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
incurred for changing the Net Premium allocation instructions, for changing the
allocation of any Monthly Deductions among the various Sub-Accounts, or for a
projection of values. No such charges are currently imposed and any such charge
is guaranteed not to exceed $25.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value. In the first Policy year, the Loan Value is 75% of
Policy Value reduced by applicable surrender charges, as well as Monthly
Deductions and interest on Debt to the end of the Policy year. The Loan Value in
the second Policy year and thereafter is 90% of an amount equal to the Policy
Value reduced by applicable surrender charges. There is no minimum limit on the
amount of the loan.
The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."
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A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy Value so transferred will
be canceled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT -- As long as the Policy is in
force, the Policy Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 6.00% per year.
PREFERRED LOAN OPTION -- A preferred loan option is available under the Policy.
The preferred loan option will be available upon Written Request. It may be
revoked by you at any time. If this option has been selected, after the tenth
Policy anniversary the Policy Value in the General Account that is equal to the
loan amount will be credited with interest at an effective annual yield of at
least 7.5%. Our current practice is to credit a rate of interest equal to the
rate being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED -- Outstanding Policy loans are charged interest. Interest
accrues daily and is payable in arrears at the annual rate of 8%. Interest is
due and payable at the end of each Policy year or on a pro-rata basis for such
shorter period as the loan may exist. Interest not paid when due will be added
to the loan amount and will bear interest at the same rate. If the new loan
amount exceeds the Policy Value in the General Account after the due and unpaid
interest is added to the loan amount, the Company will transfer Policy Value
equal to that excess loan amount from the Policy Value in each Sub-Account to
the General Account as security for the excess loan amount. The Company will
allocate the amount transferred among the Sub-Accounts in the same proportion
that the Policy Value in each Sub-Account bears to the total Policy Value in all
Sub-Accounts.
REPAYMENT OF LOANS
Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Inheiritage Account cannot exceed
the Policy Value previously transferred from the Inheiritage Account to secure
the Debt.
If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Policy will terminate with no value. See
POLICY TERMINATION AND REINSTATEMENT.
EFFECT OF POLICY LOANS
Although Policy loans may be repaid at any time prior to the lapse of the
Policy, Policy loans will permanently affect the Policy Value and Surrender
Value, and may permanently affect the Death Proceeds. The effect could be
favorable or unfavorable, depending upon whether the investment performance of
the Sub-Account(s) is less than or greater than the interest credited to the
Policy Value in the General Account attributable to the loan. Moreover,
outstanding Policy loans and the accrued interest will be deducted from the
proceeds payable upon the death of the last surviving Insured or surrender.
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POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds still will be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies, and any other overdue
charge, will be deducted from the Death Proceeds.
LIMITED 48-MONTH GUARANTEE -- Except for the situation described in (b) above,
the Policy is guaranteed not to lapse during the first 48 months after the Date
of Issue or the effective date of an increase in the Face Amount if you make a
minimum amount of premium payments. The minimum amount paid, minus the Debt,
partial withdrawals and partial withdrawal charges, must be at least equal to
the sum of the Minimum Monthly Factor for the number of months the Policy,
increase in Face Amount, or a Policy Change which causes a change in the Minimum
Monthly Factor has been in force. A Policy Change which causes a change in the
Minimum Monthly Factor is a change in the Face Amount or the addition or
deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force.
REINSTATEMENT
If the Policy has not been surrendered and the Insured is alive, the terminated
Policy may be reinstated any time within three years after the date of default
and before the Final Premium Payment Date. The reinstatement will be effective
on the Monthly Payment Date following the date you submit the following to the
Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge and
premium expense charge, is large enough to cover the minimum amount
payable, as described below.
MINIMUM AMOUNT PAYABLE -- If reinstatement is requested when fewer than 48
Monthly Deductions have been made since the Date of Issue or the effective date
of an increase in the Face Amount, you must pay the lesser of the amount shown
in (a) or (b), above. Under (a), the minimum amount payable is the Minimum
Monthly Factor for the three-month period beginning on the date of
reinstatement. Under (b), the minimum amount payable is the sum of
- the amount by which the surrender charge as of the date of
reinstatement exceeds the Policy Value on the date of default, PLUS
- Monthly Deductions for the three-month period beginning on the date
of reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue of the Policy or any increase in the Face Amount, you must pay
the amount shown in (b) above. The Company reserves the right to increase the
Minimum Monthly Factor upon reinstatement.
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SURRENDER CHARGE -- The surrender charge on the date of reinstatement is the
surrender charge which would have been in effect had the Policy remained in
force from the Date of Issue. The Policy Value less Debt on the date of default
will be restored to the Policy to the extent it does not exceed the surrender
charge on the date of reinstatement. Any Policy Value less the Debt as of the
date of default which exceeds the surrender charge on the date of reinstatement
will not be restored.
POLICY VALUE ON REINSTATEMENT -- The Policy Value on the date of reinstatement
is:
- the Net Premium paid to reinstate the Policy increased by interest
from the date the payment was received at the Principal Office,
PLUS
- an amount equal to the Policy Value less Debt on the date of
default to the extent it does not exceed the surrender charge on
the date of reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations, and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is named in the application for the Policy. The Policyowner is
generally entitled to exercise all rights under a Policy while the Insureds are
alive, subject to the consent of any irrevocable Beneficiary (the consent of a
revocable Beneficiary is not required). The consent of the Insureds is required
whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the death of the last surviving Insured. Unless otherwise stated in
the Policy, the Beneficiary has no rights in the Policy before the death of the
last surviving Insured. While the Insureds are alive, you may change any
Beneficiary unless you have declared a Beneficiary to be irrevocable. If no
Beneficiary is alive when the last surviving Insured dies, the Policyowner (or
the Policyowner's estate) will be the Beneficiary. If more than one Beneficiary
is alive when the last surviving Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the last surviving
Insured dies will pass to surviving Beneficiaries proportionally.
INCONTESTABILITY
The Company will not contest the validity of a Policy after it has been in force
during the lifetimes of both Insureds for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the lifetimes of both Insureds
for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if either Insured commits suicide, while
sane or insane, within two years from the Date of Issue. Instead, the Company
will pay the Beneficiary an amount equal to all premiums paid for the Policy,
without interest, less any outstanding Debt and less any partial withdrawals. If
either Insured commits suicide, while sane or insane, generally within two years
from the effective date of any increase in the Sum Insured, the Company's
liability with respect to such increase will be limited to a refund of the cost
thereof. The Beneficiary will receive the administrative charges and insurance
charges paid for such increase.
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NOTICE OF FIRST INSURED TO DIE
Within 90 days of the death of the first Insured to die, or as soon thereafter
as is reasonably possible, you must mail to the Principal Office due proof of
such death.
AGE
If the Age of either Insured as stated in the application for a Policy is not
correct, benefits under a Policy will be adjusted to reflect the correct Age, if
death of the last surviving Insured occurs prior to the Final Premium Payment
Date. The adjusted benefit will be that which the most recent cost of insurance
charge would have purchased for the correct Age. In no event will the Sum
Insured be reduced to less than the Guideline Minimum Sum Insured.
ASSIGNMENT
The Policyowner may assign a Policy as collateral or make an absolute assignment
of the Policy. All rights under the Policy will be transferred to the extent of
the assignee's interest. The consent of the assignee may be required in order to
make changes in premium allocations, to make transfers, or to exercise other
rights under the Policy. The Company is not bound by an assignment or release
thereof, unless it is in writing and is recorded at the Principal Office. When
recorded, the assignment will take effect as of the date the Written Request was
signed. Any rights created by the assignment will be subject to any payments
made or actions taken by the Company before the assignment is recorded. The
Company is not responsible for determining the validity of any assignment or
release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Inheiritage Account upon surrender, partial
withdrawals, or death of the last surviving Insured, as well as payments of a
Policy loan and transfers may be postponed whenever: (a) the New York Stock
Exchange is closed other than customary weekend and holiday closings, or trading
on the New York Stock Exchange is restricted as determined by the SEC or (b) 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 Inheiritage Account's net assets. Payments under the
Policy of any amounts derived from the premiums paid by check may be delayed
until such time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the last
surviving Insured, as well as payments of Policy loans and transfers from the
General Account, for a period not to exceed six months.
45
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
- --------------------------------------- ---------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice
Director President, First Allmerica
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Chief Allmerica since 1996; Vice President, First
Investment Officer Allmerica
John F. Kelly Director of First Allmerica since 1996; Senior Vice
Director President, General Counsel and Assistant
Secretary, First Allmerica
J. Barry May Director of First Allmerica since 1996; Director
Director and President, The Hanover Insurance Company since
1996; Vice President, The Hanover Insurance
Company, 1993 to 1996
James R. McAuliffe Director of First Allmerica since 1996; President
Director and CEO, Citizens Insurance Company of America
since 1994; Vice President 1982 to 1994 and Chief
Investment Officer, First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board, President and
Director and Chairman of the Board Chief Executive Officer, First Allmerica since
1989
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Chief Allmerica since 1996; Vice President and
Financial Officer and Treasurer Treasurer, First Allmerica since 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director, President and Chief President, First Allmerica; Director, Allmerica
Executive Officer Investments, Inc.; Director and President,
Allmerica Investment Management Company, Inc.
Larry C. Renfro Director of First Allmerica since 1996; Vice
Director President, First Allmerica
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica; Chief Financial
Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director President, First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Policies pursuant to a Sales and Administrative
Services Agreement with the Company and the Inheiritage Account. Allmerica
Investments, Inc. is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). The Policies are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc., or of broker-dealers which have
entered into selling agreements with Allmerica Investments, Inc.
46
<PAGE>
The Company pay commissions to broker-dealers which sell the Policy based on a
commission schedule. After the Date of Issue or an increase in Face Amount,
commissions will be 90% of the first-year payments up to a payment amount we
established and 4% of any excess. Commissions will be 2% for subsequent
payments, plus 0.25% of unloaned Policy Value. To the extent permitted by NASD
rules, promotional incentives or payments may also be provided to broker-dealers
based on sales volumes, the assumption of wholesaling functions or other
sales-related criteria. Other payments may be made for other services that do
not directly involve the sale of the Policies. These services may include the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to you or to the
Inheiritage Account. Any surrender charge assessed on a Policy will be retained
by the Company except for amounts it may pay to Allmerica Investments, Inc. for
services it performs and expenses it may incur as principal underwriter and
general distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares of such Underlying Funds held by
the Inheiritage Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Inheiritage
Account. The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
REPORTS
The Company will maintain the records relating to the Inheiritage Account. You
will be promptly sent statements of significant transactions such as premium
payments, changes in specified Face Amount, changes in Sum Insured Option,
transfers among Sub-Accounts and the General Account, partial withdrawals,
increases in loan amount by you, loan repayments, lapse, termination for any
reason, and reinstatement. An annual statement will also be sent to you within
30 days after a Policy anniversary. The annual statement will summarize all of
the above transactions and deductions of charges during the Policy year. It will
also set forth the status of the Death Proceeds, Policy Value, Surrender Value,
amounts in the Sub-Accounts and General Account, and any Policy loan(s).
In addition, you will be sent periodic reports containing financial statements
and other information for the Inheiritage Account and the Underlying Funds as
required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Inheiritage Account is a
party, or to which the assets of the Inheiritage 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 Inheiritage Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, D.C., upon payment of the SEC's prescribed fees.
47
<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of Allmerica Financial Life Insurance and Annuity
Company prepared in accordance with generally accepted accounting principles as
of and for the year ended December 31, 1996, the statutory basis financial
statements of Allmerica Financial Life Insurance and Annuity Company for 1995
and each of the three years ended December 31, 1995 and the financial statements
of the Inheiritage Account of the Company at December 31, 1995 and for the
periods indicated included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Allmerica Financial Life Insurance and Annuity
Company included herein should be considered only as bearing on the ability of
Allmerica Financial Life Insurance and Annuity Company to meet its obligations
under the Policies.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to the Policyowner or the Beneficiary depends upon a variety of factors.
The following discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted. From time to
time legislation is proposed which, if passed, could significantly, adversely
and possibly retroactively affect the taxation of the Policies. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the Internal Revenue
Service ("IRS"). Moreover, no attempt has been made to consider any applicable
state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policies is not exhaustive, does not purport to
cover all situations and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the Trustee of an employee benefit plan.
A qualified tax adviser should always be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE INHEIRITAGE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
and files a consolidated tax return with its parent and affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the Inheiritage Account. Based on these expectations, no
charge is made for federal income taxes which may be attributable to the
Inheiritage Account.
The Company will review periodically the question of a charge to the Inheiritage
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the
Inheiritage Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Inheiritage Account.
TAXATION OF THE POLICIES
The Company believes that the Policies described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance contracts and places
limitations on the relationship of the Policy Value to the Insurance Amount at
risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value of the
Policy is not taxable until received by the Policyowner or the Policyowner's
designee. But see
48
<PAGE>
"Modified Endowment Contracts." Although the Company believes that the Policies
are in compliance with Section 7702 of the Code, the manner in which Section
7702 should be applied to certain features of a joint survivorship life
insurance contract is not directly addressed by Section 7702. In the absence of
final regulations or other guidance issued under Section 7702, there is
necessarily some uncertainty whether a Policy will meet the Section 7702
definition of a life insurance contract. This is true particularly if the
Policyowner pays the full amount of premiums permitted under the Policy. A
Policyowner contemplating the payment of such premiums should do so only after
consulting a tax adviser. If a Policy were determined not to be a life insurance
contract under Section 7702, it would not have most of the tax advantages
normally provided by a life insurance contract.
The Code requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance policy for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Policyowners may direct their
investments to particular divisions of a separate account. Regulations in this
regard may be issued in the future. It is possible that if and when regulations
are issued, the Policies may need to be modified to comply with such
regulations. For these reasons, the Policies or the Company's administrative
rules may be modified as necessary to prevent a Policyowner from being
considered the owner of the assets of the Inheiritage Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding, or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first fifteen years from Date of Issue that reduces future benefits under
the Policy will be taxed to the Policyowner as ordinary income to the extent of
any investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner, or
Beneficiary.
SPLIT OPTION RIDER -- The Split Option Rider permits a Policy to be split into
two other life insurance policies, one covering each Insured singly. A Policy
split may have adverse tax consequences. It is not clear whether a Policy split
will be treated as a nontaxable exchange under Section 1035 of the Code. Unless
a Policy split is so treated, it could result in recognition of taxable income
on the gain in the Policy. In addition, it is not clear whether, in all
circumstances, the individual policies that result from a Policy split would be
treated as life insurance policies under Section 7702 of the Code or would be
classified as modified endowment contracts. The Policyowner should consult a
competent tax adviser regarding the possible adverse tax consequences of a
Policy split.
POLICY LOANS -- The Company believes that non-preferred loans received under the
Policy will be treated as an indebtedness of the Policyowner for federal income
tax purposes. Under current law, these loans will not constitute income for the
Policyowner while the Policy is in force (but see "Modified Endowment
Contracts"). There is a risk, however, that a preferred loan may be
characterized by the IRS as a withdrawal and taxed accordingly. At the present
time, the IRS has not issued any guidance on whether loans with the attributes
of a preferred loan should be treated differently than a non-preferred loan.
This lack of specific guidance makes the tax treatment of preferred loans
uncertain. In the event IRS guidelines are issued in the future, you may revoke
your request for a preferred loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. Generally, no tax deduction for interest is allowed on Policy
loans, if the Insured is an officer or employee of, or is financially interested
in, any business carried on by the taxpayer. There is an exception to this rule
which permits a deduction for interest on loans up to $50,000 related to any
policies covering the greater of (1) five individuals or (2) the lesser of (a)
5% of the total number of officers and employees of the corporation or (b) 20
individuals.
49
<PAGE>
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including a Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. A Policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the Policy at any time
during the first seven Policy years exceeds the sum of the net level premiums
that would have been paid, had the Policy provided for paid-up future benefits
after the payment of seven level premiums.
If a Policy is considered a modified endowment contract, all distributions under
the Policy will be taxed on an "income first" basis. Most distributions received
by a Policyowner directly or indirectly (including loans, withdrawals, partial
surrenders, or the assignment or pledge of any portion of the value of the
Policy) will be includible in gross income to the extent that the cash Surrender
Value of the Policy exceeds the Policyowner's investment in the contract. Any
additional amounts will be treated as a return of capital to the extent of the
Policyowner's basis in the Policy. In addition, with certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same Policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be permanently classified as a
modified endowment contract.
ESTATE AND GENERATION-SKIPPING TAXES
When the last surviving Insured dies, the Death Proceeds will generally be
includible in the Policyowner's estate for purposes of federal estate tax if the
last surviving Insured owned the Policy. If the Policyowner was not the last
surviving Insured, the fair market value of the Policy would be included in the
Policy owner's estate upon the Policyowner's death. Nothing would be includible
in the last surviving Insured's estate if he or she neither retained incidents
of ownership at death nor had given up ownership within three years before
death.
Federal estate tax is integrated with federal gift tax under a unified rate
schedule. In general, estates less than $600,000 will not incur a federal estate
tax liability. In addition, an unlimited marital deduction may be available for
federal estate and gift tax purposes. The unlimited marital deduction permits
the deferral of taxes until the death of the surviving spouse, when the Death
Proceeds would be available to pay taxes due and other expenses incurred.
As a general rule, if an Insured is the Policyowner and Death Proceeds are
payable to a person two or more generations younger than the Policyowner, a
generation-skipping tax may be payable on the Death Proceeds at rates similar to
the maximum estate tax rate in effect at the time. If the Policyowner (whether
or not he or she is an Insured) transfers ownership of the Policy to someone two
or more generations younger, the transfer may be subject to the
generation-skipping tax, the taxable amount being the value of the Policy. (Such
a transfer is unlikely but not impossible.) If the Death Proceeds are not
includible in the Insured's estate (because the Insured retained no incidents of
ownership and did not relinquish ownership within three years before death), the
payment of the Death Proceeds to the beneficiary is not subject to the
generation-skipping tax regardless of the Beneficiary's generation. The
generation-skipping tax provisions generally apply to transfers which would be
subject to the gift and estate tax rules. Individuals are generally allowed an
aggregate generation-skipping tax exemption of $1 million. Because these rules
are complex, the Policyowner should consult with a tax adviser for specific
information where benefits are passing to younger generations.
50
<PAGE>
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities laws, any amount in the General Account is not generally subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this Section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Policyowner's Policy Value
in the General Account will not be less than an annual rate of 4% ("Guaranteed
Minimum Rate").
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. However, the excess interest rate, if any,
in effect on the date a premium is received at the Principal Office is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. YOU
ASSUME THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM
RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to Debt. However, such Policy Value will be credited interest at an
effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or Policy
Value transferred to the General Account, plus interest at an annual rate of 4%
per year, plus any excess interest which the Company credits, less the sum of
all Policy charges allocable to the General Account and any amounts deducted
from the General Account in connection with loans, partial withdrawals,
surrenders or transfers.
THE POLICY
This Prospectus describes an individual joint survivorship flexible premium
variable life insurance policy and is generally intended to serve as a
disclosure document only for the aspects of the Policy relating to the
Inheiritage Account. For complete details regarding the General Account, see the
Policy itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS
If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in Face Amount, the surrender charge deducted is a
51
<PAGE>
fraction of the charge that would apply to a full surrender of the Policy.
Partial withdrawals are made on a last-in/first-out basis from Policy Value
allocated to the General Account.
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans may also be made from the Policy Value in the General Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3.5% per year for the period of deferment.
Amounts from the General Account used to pay premiums on policies with the
Company will not be delayed.
FINANCIAL STATEMENTS
Financial statements for the Company and for the Inheiritage Account are
included in this Prospectus beginning immediately after this section. The
financial statements of the Company should be considered only as bearing on the
ability of the Company to meet its obligations under the Policy. They should not
be considered as bearing on the investment performance of the assets held in the
Inheiritage Account.
52
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding...... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities........... (5.1)
(Provision) benefit for deferred
federal income taxes.................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits)........................... (9.8)
Change in deferred policy
acquisition costs.................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (0.2)
Change in accrued investment
income............................... 1.2
Change in policy liabilities and
accruals, net........................ (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable.............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities.................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities.......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities.................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
The Company classifies all debt and equity securities as available-for-sale.
Realized gains and losses on sales of fixed maturities and equity securities are
determined on the specific-identification basis using amortized cost for fixed
maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage loans is
valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale are
carried at depreciated cost less valuation allowances, if necessary, to reduce
the carrying value to fair value. Depreciation is generally calculated using the
straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt, investments
such as fixed maturities, mortgage loans and equity securities, and investment
and loan commitments. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The Company evaluates
and monitors each financial instrument individually and, when appropriate,
obtains collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other
costs, which vary with, and are primarily related to, the production of
revenues. Acquisition costs related to universal life and group variable
universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected life
of the contracts using a revised interest rate applied to the remaining benefit
period. Acquisition costs related to annuity and other life insurance businesses
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. Assets consist
principally of bonds, common stocks, mutual funds, and short-term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contractholders and, therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from 2
1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Individual health benefit liabilities for active lives are estimated using the
net level premium method, and assumptions as to future morbidity, withdrawals
and interest which provide a margin for adverse deviation. Benefit liabilities
for disabled lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values.
I. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life tax losses that can be applied to offset life company taxable
income.
The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife return
of AFC is calculated on a separate return basis. Any current tax liability is
paid to AFC. Tax benefits resulting from taxable operating losses or credits of
AFC's subsidiaries are not reimbursed to the subsidiary until such losses or
credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). These differences result primarily from loss reserves,
policy acquisition expenses, and unrealized appreciation/ depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In March, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.
2. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order to
provide for certain commission arrangements prohibited by New York comparable to
AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.
There were no contractual fixed maturity investment commitments at December 31,
1996.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------
<S> <C> <C> <C>
1996
Fixed maturities............................................ $496.6 $4.3 $8.3
-------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
-------- ----- ------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1996
Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities............................................... (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $2.2 million.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>
Reserves for mortgage loans were $9.5 million at December 31, 1996.
During 1996, non-cash investing activities included real estate acquired through
foreclosure of mortgage loans, which had a fair value of $0.9 million.
At December 31, 1996, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $16.0 million. These
commitments generally expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:
South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>
At December 31, 1996, scheduled mortgage loan maturities were as follows: 1997
- -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 -- $52.3
million; 2001 -- $7.7 million; and $28.4 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1996, the Company refinanced $7.8 million of mortgage loans
based on terms which differed from those granted to new borrowers.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The carrying value of impaired loans was $21.5 million with related reserves of
$7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.
The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.
D. OTHER
At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
3. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------
<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>
At December 31, 1996, mortgage loans on non-accrual status were $5.0 million,
including restructured loans of $2.6 million. The effect of non-accruals,
compared with amounts that would have been recognized in accordance with the
original terms of the investments, was to reduce net income by $0.1 million in
1996. There were no fixed maturities on non-accrual status at December 31, 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1996.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.
4. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------
FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................. 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>
5. DEBT
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred tax (assets) liabilities are comprised of the following at December
31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>
Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>
11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$178.6 million at December 31, 1996. Accident and health claim liabilities have
been re-estimated for all prior years and were increased by $3.2 million in
1996.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may result in
an increase in mandatory assessments by state guaranty funds, or voluntary
payments by solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. The Company is not able to reasonably estimate the
potential effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
14. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coninsurance arrangement to Metroplitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive agreements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million to net income in the first quarter of 1997 related to the
reinsurance of this business.
F-17
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants..................................................... F-20
Statement of Assets, Liabilities, Surplus and Other Funds............................. F-22
Statement of Operations and Changes in Capital and Surplus............................ F-23
Statement of Cash Flows............................................................... F-24
Notes to Statutory Financial Statements............................................... F-25
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, MA
February 5, 1996
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................ 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations....................... 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments.............................. 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve.................................. (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded........................ 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................ (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)........................... (6,771) (19,603) (4828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
-Bonds considered to be "available-for-sale" or "trading" are not
carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
-The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve is
designed to include deferred realized gains and losses (net of
applicable federal income taxes) due to interest rate changes and
is also recorded as a liability, however, the deferred net
realized investment gains and losses are amortized into future
income generally over the original period to maturity of the
assets sold. These liabilities are not required under generally
accepted accounting principles;
-Total premiums, deposits and benefits on certain investment-type
contracts are reflected in the statement of operations, instead
of using the deposit method of accounting;
-Policy acquisition costs, such as commissions, premium taxes and
other items, are not deferred and amortized in relation to the
revenue/gross profit streams from the related contracts;
-Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for adverse
deviation;
-Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
-Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial statements
and those included in the tax returns;
-Certain adjustments related to prior years are recorded as direct
charges or credits to surplus;
-Certain assets, designated as "non-admitted" assets (principally
agents' balances), are not recorded as assets, but are charged to
surplus; and,
F-24
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
-Costs related to other postretirement benefits are recognized
only for employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS -- Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS -- In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS -- Separate account assets and liabilities represent
segregated funds administered and invested by the Company for the benefit of
certain variable annuity and variable life contract holders. Assets consist
principally of bonds, common stocks, mutual funds, and short term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contract holders and therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in capital and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES -- Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected
F-25
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
trends in frequency and severity. Withdrawal characteristics of annuity and
other fund reserves vary by contract. At December 31, 1995 and 1994,
approximately 84% and 77%, respectively, of the contracts (included in both the
general account and separate accounts of the Company) were not subject to
discretionary withdrawal or were subject to withdrawal at book value less
surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
FEDERAL INCOME TAXES -- AFC, its life insurance subsidiaries, First Allmerica
and Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES -- Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
F-26
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS -- The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds............................... $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds............... 13,607 2,290 23 15,874
Foreign government bonds............................... 12,121 772 249 12,644
Corporate securities................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities............................. 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total.................................................. $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds............................... $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds............... 1,110 54 -- 1,164
Foreign government bonds............................... 31,863 83 3,735 28,211
Corporate securities................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities............................. 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total.................................................. $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE -- Mortgage loans and real estate investments,
are diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by the
related properties and are generally no more than 75% of the property value at
the
F-27
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
time the original loan is made. At December 31, 1995 and 1994, mortgage loan and
real estate investments were distributed by the following types and geographic
regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME -- The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
F-28
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES -- Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS -- The carrying amounts reported in the
statement of assets, liabilities, surplus and other funds approximate fair
value.
BONDS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS -- Fair values are estimated by discounting the future
contractual cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The fair value of below
investment grade mortgage loans is limited to the lesser of the present value of
the cash flows or book value.
F-29
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS -- The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) -- Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies....................... 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
F-30
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively.
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company. Pursuant
to Delaware's statute, the maximum amount of dividends and other distributions
that an insurer may pay in any twelve month period, without the prior approval
of the Delaware Commissioner of Insurance, is limited to the greater of (i) 10%
of its statutory policyholder surplus as of the preceding December 31 or (ii)
the individual company's statutory net gain from operations for the preceding
calendar year (if such insurer is a life company) or its net income (not
including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
F-31
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial
Life Insurance and Annuity Company and Policyowners
of Inheiritage Account of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts (1, 2,
3, 4, 5, 6, 7, 8, 9, 11, 12, 102, 103, 104, 105, 106, 150, and 207) constituting
the Inheiritage Account of Allmerica Financial Life Insurance and Annuity
Company at December 31, 1996, and the results of each of their operations and
the changes in each of their net assets for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Allmerica Financial Life Insurance and Annuity Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at December 31, 1996 by correspondence with
the Funds, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
March 26, 1997
F-33
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4 5 6
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment
Trust....................................... $1,352,200 $ 591,174 $1,085,844 $ 590,879 $ 171,290 $1,631,287
Investments in shares of Fidelity Variable
Insurance Products Funds.................... -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................... -- -- -- -- -- --
Investment in shares of Delaware Group Premium
Fund, Inc................................... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total assets.............................. 1,352,200 591,174 1,085,844 590,879 171,290 1,631,287
LIABILITIES: -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net assets................................ $1,352,200 $ 591,174 $1,085,844 $ 590,879 $ 171,290 $1,631,287
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Net asset distribution by category:
Variable life policies...................... $1,352,200 $ 591,174 $1,085,844 $ 590,879 $ 171,290 $1,631,287
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Units outstanding, December 31, 1996.......... 836,197 497,531 977,434 370,668 149,524 1,095,338
Net asset value per unit, December 31, 1996... $ 1.617083 $ 1.188216 $ 1.110913 $ 1.594093 $ 1.145571 $ 1.489300
<CAPTION>
SELECT
SELECT GROWTH AND SMALL CAP
GROWTH INCOME VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
7 8 9
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment
Trust....................................... $ 491,280 $1,021,420 $ 878,415
Investments in shares of Fidelity Variable
Insurance Products Funds.................... -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................... -- -- --
Investment in shares of Delaware Group Premium
Fund, Inc................................... -- -- --
------------ ------------ ------------
Total assets.............................. 491,280 1,021,420 878,415
LIABILITIES: -- -- --
------------ ------------ ------------
Net assets................................ $ 491,280 $1,021,420 $ 878,415
------------ ------------ ------------
------------ ------------ ------------
Net asset distribution by category:
Variable life policies...................... $ 491,280 $1,021,420 $ 878,415
------------ ------------ ------------
------------ ------------ ------------
Units outstanding, December 31, 1996.......... 326,786 649,056 610,018
Net asset value per unit, December 31, 1996... $ 1.503368 $ 1.573700 $ 1.439983
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT SELECT VIPF
INTERNATIONAL CAPITAL VIPF EQUITY- VIPF
EQUITY APPRECIATION HIGH INCOME INCOME GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 102 103 104
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment
Trust........................................... $1,181,803 $ 968,966 -- -- --
Investments in shares of Fidelity Variable
Insurance Products Funds........................ -- -- $ 835,339 $2,708,857 $2,366,851
Investment in shares of T. Rowe Price
International Series, Inc....................... -- -- -- -- --
Investment in shares of Delaware Group Premium
Fund, Inc....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total assets.................................. 1,181,803 968,966 835,339 2,708,857 2,366,851
LIABILITIES: -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net assets.................................... $1,181,803 $ 968,966 $ 835,339 $2,708,857 $2,366,851
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net asset distribution by category:
Variable life policies.......................... $1,181,803 $ 968,966 $ 835,339 $2,708,857 $2,366,851
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Units outstanding, December 31, 1996.............. 865,291 650,428 627,695 1,703,598 1,470,373
Net asset value per unit, December 31, 1996....... $ 1.365787 $ 1.489735 $ 1.330804 $ 1.590080 $ 1.609695
<CAPTION>
T. ROWE
VIPF II PRICE DGPF
VIPF ASSET INTERNATIONAL INTERNATIONAL
OVERSEAS MANAGER STOCK EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
105 106 150 207
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica Investment
Trust........................................... -- -- -- --
Investments in shares of Fidelity Variable
Insurance Products Funds........................ $ 555,065 $ 536,104 -- --
Investment in shares of T. Rowe Price
International Series, Inc....................... -- -- $ 350,318 --
Investment in shares of Delaware Group Premium
Fund, Inc....................................... -- -- -- $ 314,535
------------ ------------ ------------ ------------
Total assets.................................. 555,065 536,104 350,318 314,535
LIABILITIES: -- -- -- --
------------ ------------ ------------ ------------
Net assets.................................... $ 555,065 $ 536,104 $ 350,318 $ 314,535
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net asset distribution by category:
Variable life policies.......................... $ 555,065 $ 536,104 $ 350,318 $ 314,535
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Units outstanding, December 31, 1996.............. 477,387 414,318 290,715 239,977
Net asset value per unit, December 31, 1996....... $ 1.162715 $ 1.293944 $ 1.205023 $ 1.310686
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants....................................................... 1
Statement of Assets, Liabilities, Surplus and Other Funds............................... 3
Statement of Operations and Changes in Capital and Surplus.............................. 4
Statement of Cash Flows................................................................. 5
Notes to Statutory Financial Statements................................................. 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
[LOGO]
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares.................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................. 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations........................ 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses.............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments............................... 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve................................... (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded......................... 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................. (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)............................ (6,771) (19,603) (4,828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are
not carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
- The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve
is designed to include deferred realized gains and losses (net
of applicable federal income taxes) due to interest rate
changes and is also recorded as a liability, however, the
deferred net realized investment gains and losses are amortized
into future income generally over the original period to
maturity of the assets sold. These liabilities are not required
under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain
investment-type contracts are reflected in the statement of
operations, instead of using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes
and other items, are not deferred and amortized in relation to
the revenue/gross profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for
adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial
statements and those included in the tax returns;
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
- Certain adjustments related to prior years are recorded as
direct charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets
(principally agents' balances), are not recorded as assets, but
are charged to surplus; and,
- Costs related to other postretirement benefits are recognized
only for employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS -- Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS -- In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS -- Separate account assets and liabilities represent
segregated funds administered and invested by the Company for the benefit of
certain variable annuity and variable life contract holders. Assets consist
principally of bonds, common stocks, mutual funds, and short term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
contract holders and therefore, are not included in the Company's net income.
Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in capital
and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES -- Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected trends in frequency and severity. Withdrawal
characteristics of annuity and other fund reserves vary by contract. At December
31, 1995 and 1994, approximately 84% and 77%, respectively, of the contracts
(included in both the general account and separate accounts of the Company) were
not subject to discretionary withdrawal or were subject to withdrawal at book
value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
FEDERAL INCOME TAXES -- AFC, its life insurance subsidiaries, First Allmerica
and Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES -- Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS -- The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds................ 13,607 2,290 23 15,874
Foreign government bonds................................ 12,121 772 249 12,644
Corporate securities.................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities.............................. 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds................ 1,110 54 -- 1,164
Foreign government bonds................................ 31,863 83 3,735 28,211
Corporate securities.................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities.............................. 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
MORTGAGE LOANS AND REAL ESTATE -- Mortgage loans and real estate investments,
are diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by the
related properties and are generally no more than 75% of the property value at
the time the original loan is made. At December 31, 1995 and 1994, mortgage loan
and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME -- The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES -- Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS -- The carrying amounts reported in the
statement of assets, liabilities, surplus and other funds approximate fair
value.
BONDS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS -- Fair values are estimated by discounting the future
contractual cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The fair value of below
investment grade mortgage loans is limited to the lesser of the present value of
the cash flows or book value.
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS -- The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) -- Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies........................ 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4
million, $13.1 million and $8.6 million, respectively, which include taxes
applicable to realized capital gains of $.4 million, $1.0 million and $3.3
million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities
as new information becomes available and further events occur which may impact
the resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders
by insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its statutory policyholder surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or
13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New
York. In connection with the withdrawal First Allmerica, which is licensed in
New York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements.
14
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER ENDED DECEMBER
31, FOR THE PERIOD 31, FOR THE PERIOD
1996 1995 5/12/94* TO 12/31/94 1996 1995 4/28/94* TO 12/31/94
-------- ------- -------------------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $136,012 $48,237 $ 7,437 $29,860 $14,621 $ 1,762
-------- ------- -------- ------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 8,082 2,845 277 3,961 1,689 73
Administrative fees................... 2,279 790 77 1,117 469 20
-------- ------- -------- ------- ------- --------
Total expenses...................... 10,361 3,635 354 5,078 2,158 93
-------- ------- -------- ------- ------- --------
Net investment income (loss).......... 125,651 44,602 7,083 24,782 12,463 1,669
-------- ------- -------- ------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 6,206 871 1 118 170 (51)
Net unrealized gain (loss)............ 24,343 35,675 (7,689) (11,188) 13,405 (1,514)
-------- ------- -------- ------- ------- --------
Net realized and unrealized gain
(loss) on investments............... 30,549 36,546 (7,688) (11,070) 13,575 (1,565)
-------- ------- -------- ------- ------- --------
Net increase (decrease) in net assets
from operations..................... $156,200 $81,148 $ (605) $13,712 $26,038 $ 104
-------- ------- -------- ------- ------- --------
-------- ------- -------- ------- ------- --------
<CAPTION>
MONEY MARKET
SUB-ACCOUNT 3
FOR THE YEAR
ENDED DECEMBER
31, FOR THE PERIOD
1996 1995 5/27/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $32,250 $32,514 $7,247
------- ------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 5,620 5,092 1,400
Administrative fees................... 1,585 1,415 389
------- ------- -------
Total expenses...................... 7,205 6,507 1,789
------- ------- -------
Net investment income (loss).......... 25,045 26,007 5,458
------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. -- -- --
Net unrealized gain (loss)............ -- -- --
------- ------- -------
Net realized and unrealized gain
(loss) on investments............... -- -- --
------- ------- -------
Net increase (decrease) in net assets
from operations..................... $25,045 $26,007 $5,458
------- ------- -------
------- ------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT 4 SUB-ACCOUNT 5
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER ENDED DECEMBER
31, FOR THE PERIOD 31, FOR THE PERIOD
1996 1995 8/15/94* TO 12/31/94 1996 1995 7/1/94* TO 12/31/94
------- ------- -------------------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $16,321 $ 6,792 $ 541 $ 9,371 $ 4,876 $ 2,198
------- ------- ------- ------- ------- ----------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 3,711 801 39 1,395 779 200
Administrative fees................... 1,047 223 11 394 216 56
------- ------- ------- ------- ------- ----------
Total expenses...................... 4,758 1,024 50 1,789 995 256
------- ------- ------- ------- ------- ----------
Net investment income (loss).......... 11,563 5,768 491 7,582 3,881 1,942
------- ------- ------- ------- ------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 13,582 650 (7) 416 2,220 47
Net unrealized gain (loss)............ 53,897 17,486 (544) (2,658) 3,911 (1,709)
------- ------- ------- ------- ------- ----------
Net realized and unrealized gain
(loss) on investments............... 67,479 18,136 (551) (2,242) 6,131 (1,662)
------- ------- ------- ------- ------- ----------
Net increase (decrease) in net assets
from operations..................... $79,042 $23,904 $ (60) $ 5,340 $10,012 $ 280
------- ------- ------- ------- ------- ----------
------- ------- ------- ------- ------- ----------
<CAPTION>
SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 6
FOR THE YEAR
ENDED DECEMBER 31, FOR THE PERIOD
1996 1995 4/22/94* TO 12/31/94
-------- -------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $110,059 $ -- $--
-------- -------- -----
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 10,984 4,636 370
Administrative fees................... 3,098 1,288 103
-------- -------- -----
Total expenses...................... 14,082 5,924 473
-------- -------- -----
Net investment income (loss).......... 95,977 (5,924) (473)
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 14,437 2,278 268
Net unrealized gain (loss)............ 65,265 135,550 (54)
-------- -------- -----
Net realized and unrealized gain
(loss) on investments............... 79,702 137,828 214
-------- -------- -----
Net increase (decrease) in net assets
from operations..................... $175,679 $131,904 $ (259)
-------- -------- -----
-------- -------- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 5/20/94* TO 12/31/94 1996 1995 4/28/94* TO 12/31/94
------- ------- -------------------- -------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $70,775 $ 25 $ 119 $ 81,334 $24,678 $ 3,878
------- ------- ---------- -------- ------- ----------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 2,634 1,047 65 6,466 2,675 358
Administrative fees................... 743 291 18 1,824 743 100
------- ------- ---------- -------- ------- ----------
Total expenses...................... 3,377 1,338 83 8,290 3,418 458
------- ------- ---------- -------- ------- ----------
Net investment income (loss).......... 67,398 (1,313) 36 73,044 21,260 3,420
------- ------- ---------- -------- ------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 8,490 1,936 (31) 5,532 1,275 290
Net unrealized gain (loss)............ (25,800) 18,467 (914) 50,803 53,136 (5,437)
------- ------- ---------- -------- ------- ----------
Net realized and unrealized gain
(loss) on investments............... (17,310) 20,403 (945) 56,335 54,411 (5,147)
------- ------- ---------- -------- ------- ----------
Net increase (decrease) in net assets
from operations..................... $50,088 $19,090 $ (909) $129,379 $75,671 $ (1,727)
------- ------- ---------- -------- ------- ----------
------- ------- ---------- -------- ------- ----------
<CAPTION>
SMALL CAP VALUE
SUB-ACCOUNT 9
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 6/2/94* TO 12/31/94
-------- ------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $ 44,323 $16,135 $ 743
-------- ------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 5,802 2,801 356
Administrative fees................... 1,636 778 99
-------- ------- -------
Total expenses...................... 7,438 3,579 455
-------- ------- -------
Net investment income (loss).......... 36,885 12,556 288
-------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 10,246 1,180 78
Net unrealized gain (loss)............ 107,671 34,744 (3,761)
-------- ------- -------
Net realized and unrealized gain
(loss) on investments............... 117,917 35,924 (3,683)
-------- ------- -------
Net increase (decrease) in net assets
from operations..................... $154,802 $48,480 $(3,395)
-------- ------- -------
-------- ------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY
SUB-ACCOUNT 11
FOR THE SELECT CAPITAL APPRECIATION
YEAR ENDED SUB-ACCOUNT 12
DECEMBER 31, FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
1996 1995 5/3/94* TO 12/31/94 12/31/96 4/28/95* TO 12/31/95
-------- ------- ------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $ 24,530 $ 4,810 $ 176 $1,660 $ 2,887
-------- ------- ------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 6,466 1,757 150 4,971 370
Administrative fees................... 1,824 488 42 1,402 103
-------- ------- ------- ------- --------
Total expenses...................... 8,290 2,245 192 6,373 473
-------- ------- ------- ------- --------
Net investment income (loss).......... 16,240 2,565 (16) (4,713) 2,414
-------- ------- ------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 6,398 1,625 (39) 1,850 219
Net unrealized gain (loss)............ 128,190 29,470 (3,111) 6,909 12,788
-------- ------- ------- ------- --------
Net realized and unrealized gain
(loss) on investments............... 134,588 31,095 (3,150) 8,759 13,007
-------- ------- ------- ------- --------
Net increase (decrease) in net assets
from operations..................... $150,828 $33,660 $(3,166) $4,046 $15,421
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
<CAPTION>
VIPF HIGH INCOME
SUB-ACCOUNT 102
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 5/13/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $29,150 $ 4,862 $--
------- ------- -----
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 4,702 1,284 114
Administrative fees................... 1,326 357 32
------- ------- -----
Total expenses...................... 6,028 1,641 146
------- ------- -----
Net investment income (loss).......... 23,122 3,221 (146)
------- ------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 1,765 1,048 (6)
Net unrealized gain (loss)............ 35,447 16,928 (155)
------- ------- -----
Net realized and unrealized gain
(loss) on investments............... 37,212 17,976 (161)
------- ------- -----
Net increase (decrease) in net assets
from operations..................... $60,334 $21,197 $ (307)
------- ------- -----
------- ------- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 4/28/94* TO 12/31/94 1996 1995 5/12/94* TO 12/31/94
-------- -------- -------------------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $ 65,464 $ 37,820 $ 2,581 $ 84,694 $ 1,827 $--
-------- -------- ------- -------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 18,682 6,818 707 16,095 6,109 837
Administrative fees................... 5,269 1,894 196 4,540 1,697 232
-------- -------- ------- -------- -------- --------
Total expenses...................... 23,951 8,712 903 20,635 7,806 1,069
-------- -------- ------- -------- -------- --------
Net investment income (loss).......... 41,513 29,108 1,678 64,059 (5,979) (1,069)
-------- -------- ------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 20,770 5,061 478 9,689 4,162 1,050
Net unrealized gain (loss)............ 197,470 178,135 (3,903) 129,705 157,014 8,355
-------- -------- ------- -------- -------- --------
Net realized and unrealized gain
(loss) on investments............... 218,240 183,196 (3,425) 139,394 161,176 9,405
-------- -------- ------- -------- -------- --------
Net increase (decrease) in net assets
from operations..................... $259,753 $212,304 $(1,747) $203,453 $155,197 $ 8,336
-------- -------- ------- -------- -------- --------
-------- -------- ------- -------- -------- --------
<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/21/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $14,705 $ 2,604 $--
------- ------- --------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 5,779 4,128 727
Administrative fees................... 1,630 1,146 202
------- ------- --------
Total expenses...................... 7,409 5,274 929
------- ------- --------
Net investment income (loss).......... 7,296 (2,670) (929)
------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 26,178 1,200 (15)
Net unrealized gain (loss)............ 36,231 43,023 (9,330)
------- ------- --------
Net realized and unrealized gain
(loss) on investments............... 62,409 44,223 (9,345)
------- ------- --------
Net increase (decrease) in net assets
from operations..................... $69,705 $41,553 $(10,274)
------- ------- --------
------- ------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF II ASSET MANAGER
SUB-ACCOUNT 106
FOR THE T. ROWE INTERNATIONAL STOCK
YEAR ENDED SUB-ACCOUNT 150
DECEMBER 31, FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
1996 1995 6/14/94* TO 12/31/94 12/31/96 6/30/95* TO 12/31/95
------- ------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $35,481 $ 7,071 $ 22 $ 5,000 $--
------- ------- -------- -------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 5,090 3,680 569 1,506 114
Administrative fees................... 1,435 1,022 158 425 32
------- ------- -------- -------- -------
Total expenses...................... 6,525 4,702 727 1,931 146
------- ------- -------- -------- -------
Net investment income (loss).......... 28,956 2,369 (705) 3,069 (146)
------- ------- -------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 19,047 2,905 (44) 786 25
Net unrealized gain (loss)............ 23,161 56,562 (8,236) 17,465 1,602
------- ------- -------- -------- -------
Net realized and unrealized gain
(loss) on investments............... 42,208 59,467 (8,280) 18,251 1,627
------- ------- -------- -------- -------
Net increase (decrease) in net assets
from operations..................... $71,164 $61,836 $(8,985) $21,320 $ 1,481
------- ------- -------- -------- -------
------- ------- -------- -------- -------
<CAPTION>
DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
FOR THE
YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 5/12/94* TO 12/31/94
------- ------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................. $ 6,505 $ 1,760 $--
------- ------- -------
EXPENSES (NOTE 4):
Mortality and expense risk fees....... 1,812 904 186
Administrative fees................... 511 252 52
------- ------- -------
Total expenses...................... 2,323 1,156 238
------- ------- -------
Net investment income (loss).......... 4,182 604 (238)
------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).............. 3,693 414 --
Net unrealized gain (loss)............ 28,077 11,496 (1,212)
------- ------- -------
Net realized and unrealized gain
(loss) on investments............... 31,770 11,910 (1,212)
------- ------- -------
Net increase (decrease) in net assets
from operations..................... $35,952 $12,514 $ (1,450)
------- ------- -------
------- ------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
DECEMBER 31, 5/20/94* TO DECEMBER 31, 4/28/94* TO
1996 1995 12/31/94 1996 1995 12/31/94
-------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 67,398 $ (1,313) $ 36 $ 73,044 $ 21,260 $ 3,420
Net realized gain (loss) on
investments....................... 8,490 1,936 (31) 5,532 1,275 290
Net unrealized gain (loss) on
investments....................... (25,800) 18,467 (914) 50,803 53,136 (5,437)
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net
assets from operations............ 50,088 19,090 (909) 129,379 75,671 (1,727)
-------- -------- ----------- ---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 122,752 56,664 13,108 216,938 106,450 34,562
Terminations........................ (1,127) -- -- (110) (539) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 149,609 54,862 27,143 161,338 202,145 97,313
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- -- -- -- --
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 271,234 111,526 40,251 378,166 308,056 131,875
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net
assets............................ 321,322 130,616 39,342 507,545 383,727 130,148
NET ASSETS:
Beginning of year..................... 169,958 39,342 -- 513,875 130,148 --
-------- -------- ----------- ---------- -------- -----------
End of year........................... $491,280 $169,958 $39,342 $1,021,420 $513,875 $130,148
-------- -------- ----------- ---------- -------- -----------
-------- -------- ----------- ---------- -------- -----------
<CAPTION>
SMALL CAP VALUE
SUB-ACCOUNT 9
YEAR ENDED PERIOD FROM
DECEMBER 31, 6/2/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 36,885 $ 12,556 $ 288
Net realized gain (loss) on
investments....................... 10,246 1,180 78
Net unrealized gain (loss) on
investments....................... 107,671 34,744 (3,761)
-------- -------- -----------
Net increase (decrease) in net
assets from operations............ 154,802 48,480 (3,395)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 150,169 121,457 64,114
Terminations........................ (1,360) -- --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 91,341 144,338 108,469
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
-------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 240,150 265,795 172,583
-------- -------- -----------
Net increase (decrease) in net
assets............................ 394,952 314,275 169,188
NET ASSETS:
Beginning of year..................... 483,463 169,188 --
-------- -------- -----------
End of year........................... $878,415 $483,463 $169,188
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
YEAR ENDED YEAR ENDED PERIOD FROM
DECEMBER 31, PERIOD FROM DECEMBER 31, 4/28/94* TO
1996 1995 5/12/94* TO 12/31/94 1996 1995 12/31/94
---------- -------- -------------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 125,651 $ 44,602 $ 7,083 $ 24,782 $ 12,463 $ 1,669
Net realized gain (loss) on
investments....................... 6,206 871 1 118 170 (51)
Net unrealized gain (loss) on
investments....................... 24,343 35,675 (7,689) (11,188) 13,405 (1,514)
---------- -------- ---------- -------- -------- -----------
Net increase (decrease) in net
assets from operations............ 156,200 81,148 (605) 13,712 26,038 104
---------- -------- ---------- -------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 347,739 133,682 34,411 172,317 129,213 19,120
Terminations........................ (11,851) (725) -- -- (186) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 306,635 197,720 107,846 73,887 101,623 55,346
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- -- -- -- --
---------- -------- ---------- -------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 642,523 330,677 142,257 246,204 230,650 74,466
---------- -------- ---------- -------- -------- -----------
Net increase (decrease) in net
assets............................ 798,723 411,825 141,652 259,916 256,688 74,570
NET ASSETS:
Beginning of year..................... 553,477 141,652 -- 331,258 74,570 --
---------- -------- ---------- -------- -------- -----------
End of year........................... $1,352,200 $553,477 $141,652 $591,174 $331,258 $74,570
---------- -------- ---------- -------- -------- -----------
---------- -------- ---------- -------- -------- -----------
<CAPTION>
MONEY MARKET
SUB-ACCOUNT 3
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/27/94* TO
1996 1995 12/31/94
---------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 25,045 $ 26,007 $ 5,458
Net realized gain (loss) on
investments....................... -- -- --
Net unrealized gain (loss) on
investments....................... -- -- --
---------- -------- -----------
Net increase (decrease) in net
assets from operations............ 25,045 26,007 5,458
---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 1,964,968 744,319 311,479
Terminations........................ (894) -- --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... (1,311,350) (859,523) 180,335
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
---------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 652,724 (115,204) 491,814
---------- -------- -----------
Net increase (decrease) in net
assets............................ 677,769 (89,197) 497,272
NET ASSETS:
Beginning of year..................... 408,075 497,272 --
---------- -------- -----------
End of year........................... $1,085,844 $408,075 $497,272
---------- -------- -----------
---------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY-INDEX GOVERNMENT BOND
SUB-ACCOUNT 4 SUB-ACCOUNT 5
YEAR ENDED YEAR ENDED PERIOD FROM
DECEMBER 31, PERIOD FROM DECEMBER 31, 7/1/94* TO
1996 1995 8/15/94* TO 12/31/94 1996 1995 12/31/94
-------- -------- -------------------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 11,563 $ 5,768 $ 491 $ 7,582 $ 3,881 $ 1,942
Net realized gain (loss) on
investments....................... 13,582 650 (7) 416 2,220 47
Net unrealized gain (loss) on
investments....................... 53,897 17,486 (544) (2,658) 3,911 (1,709)
-------- -------- -------- -------- ------- -----------
Net increase (decrease) in net
assets from operations............ 79,042 23,904 (60) 5,340 10,012 280
-------- -------- -------- -------- ------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 130,549 62,224 7,031 82,419 54,632 10,629
Terminations........................ -- -- -- -- -- --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 177,134 91,621 19,434 7,432 (98,107) 98,653
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- -- -- -- --
-------- -------- -------- -------- ------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 307,683 153,845 26,465 89,851 (43,475) 109,282
-------- -------- -------- -------- ------- -----------
Net increase (decrease) in net
assets............................ 386,725 177,749 26,405 95,191 (33,463) 109,562
NET ASSETS:
Beginning of year..................... 204,154 26,405 -- 76,099 109,562 --
-------- -------- -------- -------- ------- -----------
End of year........................... $590,879 $204,154 $26,405 $171,290 $76,099 $109,562
-------- -------- -------- -------- ------- -----------
-------- -------- -------- -------- ------- -----------
<CAPTION>
SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 6
YEAR ENDED PERIOD FROM
DECEMBER 31, 4/22/94* TO
1996 1995 12/31/94
---------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 95,977 $ (5,924) $ (473)
Net realized gain (loss) on
investments....................... 14,437 2,278 268
Net unrealized gain (loss) on
investments....................... 65,265 135,550 (54)
---------- -------- -----------
Net increase (decrease) in net
assets from operations............ 175,679 131,904 (259)
---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 375,474 214,367 81,071
Terminations........................ (15,451) (127) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 294,620 223,558 150,451
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
---------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 654,643 437,798 231,522
---------- -------- -----------
Net increase (decrease) in net
assets............................ 830,322 569,702 231,263
NET ASSETS:
Beginning of year..................... 800,965 231,263 --
---------- -------- -----------
End of year........................... $1,631,287 $800,965 $231,263
---------- -------- -----------
---------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
DECEMBER 31, 5/20/94* TO DECEMBER 31, 4/28/94* TO
1996 1995 12/31/94 1996 1995 12/31/94
-------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 67,398 $ (1,313) $ 36 $ 73,044 $ 21,260 $ 3,420
Net realized gain (loss) on
investments....................... 8,490 1,936 (31) 5,532 1,275 290
Net unrealized gain (loss) on
investments....................... (25,800) 18,467 (914) 50,803 53,136 (5,437)
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net
assets from operations............ 50,088 19,090 (909) 129,379 75,671 (1,727)
-------- -------- ----------- ---------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 122,752 56,664 13,108 216,938 106,450 34,562
Terminations........................ (1,127) -- -- (110) (539) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 149,609 54,862 27,143 161,338 202,145 97,313
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- -- -- -- --
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 271,234 111,526 40,251 378,166 308,056 131,875
-------- -------- ----------- ---------- -------- -----------
Net increase (decrease) in net
assets............................ 321,322 130,616 39,342 507,545 383,727 130,148
NET ASSETS:
Beginning of year..................... 169,958 39,342 -- 513,875 130,148 --
-------- -------- ----------- ---------- -------- -----------
End of year........................... $491,280 $169,958 $39,342 $1,021,420 $513,875 $130,148
-------- -------- ----------- ---------- -------- -----------
-------- -------- ----------- ---------- -------- -----------
<CAPTION>
SMALL CAP VALUE
SUB-ACCOUNT 9
YEAR ENDED PERIOD FROM
DECEMBER 31, 6/2/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 36,885 $ 12,556 $ 288
Net realized gain (loss) on
investments....................... 10,246 1,180 78
Net unrealized gain (loss) on
investments....................... 107,671 34,744 (3,761)
-------- -------- -----------
Net increase (decrease) in net
assets from operations............ 154,802 48,480 (3,395)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 150,169 121,457 64,114
Terminations........................ (1,360) -- --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 91,341 144,338 108,469
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
-------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 240,150 265,795 172,583
-------- -------- -----------
Net increase (decrease) in net
assets............................ 394,952 314,275 169,188
NET ASSETS:
Beginning of year..................... 483,463 169,188 --
-------- -------- -----------
End of year........................... $878,415 $483,463 $169,188
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT CAPITAL
SELECT INTERNATIONAL EQUITY APPRECIATION
SUB-ACCOUNT 11 SUB-ACCOUNT 12
YEAR ENDED PERIOD FROM
DECEMBER 31, PERIOD FROM YEAR ENDED 4/28/95* TO
1996 1995 5/3/94* TO 12/31/94 12/31/96 12/31/95
---------- -------- ------------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 16,240 $ 2,565 $ (16) $ (4,713) $ 2,414
Net realized gain (loss) on
investments....................... 6,398 1,625 (39) 1,850 219
Net unrealized gain (loss) on
investments....................... 128,190 29,470 (3,111) 6,909 12,788
---------- -------- -------- ---------- ------------
Net increase (decrease) in net
assets from operations............ 150,828 33,660 (3,166) 4,046 15,421
---------- -------- -------- ---------- ------------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 330,608 86,660 30,883 315,826 40,487
Terminations........................ (10,864) -- -- (789) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 346,431 163,641 53,154 497,943 96,126
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... (132) -- 100 (294) 200
---------- -------- -------- ---------- ------------
Net increase (decrease) in net
assets from capital
transactions...................... 666,043 250,301 84,137 812,686 136,813
---------- -------- -------- ---------- ------------
Net increase (decrease) in net
assets............................ 816,871 283,961 80,971 816,732 152,234
NET ASSETS:
Beginning of year..................... 364,932 80,971 -- 152,234 --
---------- -------- -------- ---------- ------------
End of year........................... $1,181,803 $364,932 $80,971 $968,966 $152,234
---------- -------- -------- ---------- ------------
---------- -------- -------- ---------- ------------
<CAPTION>
VIPF HIGH INCOME
SUB-ACCOUNT 102
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/13/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 23,122 $ 3,221 $ (146)
Net realized gain (loss) on
investments....................... 1,765 1,048 (6)
Net unrealized gain (loss) on
investments....................... 35,447 16,928 (155)
-------- -------- -----------
Net increase (decrease) in net
assets from operations............ 60,334 21,197 (307)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 227,688 111,201 29,339
Terminations........................ (3,177) (94) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 260,158 96,059 32,941
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
-------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 484,669 207,166 62,280
-------- -------- -----------
Net increase (decrease) in net
assets............................ 545,003 228,363 61,973
NET ASSETS:
Beginning of year..................... 290,336 61,973 --
-------- -------- -----------
End of year........................... $835,339 $290,336 $61,973
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
DECEMBER 31, 4/28/94* TO DECEMBER 31, 5/12/94* TO
1996 1995 12/31/94 1996 1995 12/31/94
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 41,513 $ 29,108 $ 1,678 $ 64,059 $ (5,979) $ (1,069)
Net realized gain (loss) on
investments....................... 20,770 5,061 478 9,689 4,162 1,050
Net unrealized gain (loss) on
investments....................... 197,470 178,135 (3,903) 129,705 157,014 8,355
---------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease) in net
assets from operations............ 259,753 212,304 (1,747) 203,453 155,197 8,336
---------- ---------- ----------- ---------- ---------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 718,282 382,477 95,195 617,121 330,994 79,238
Terminations........................ (19,458) (227) -- (14,686) (711) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 444,910 380,024 237,344 476,794 305,484 205,631
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 1,143,734 762,274 332,539 1,079,229 635,767 284,869
---------- ---------- ----------- ---------- ---------- -----------
Net increase (decrease) in net
assets............................ 1,403,487 974,578 330,792 1,282,682 790,964 293,205
NET ASSETS:
Beginning of year..................... 1,305,370 330,792 -- 1,084,169 293,205 --
---------- ---------- ----------- ---------- ---------- -----------
End of year........................... $2,708,857 $1,305,370 $330,792 $2,366,851 $1,084,169 $293,205
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
YEAR ENDED PERIOD FROM
DECEMBER 31, 4/21/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 7,296 $ (2,670) $ (929)
Net realized gain (loss) on
investments....................... 26,178 1,200 (15)
Net unrealized gain (loss) on
investments....................... 36,231 43,023 (9,330)
-------- -------- -----------
Net increase (decrease) in net
assets from operations............ 69,705 41,553 (10,274)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 142,056 152,554 92,813
Terminations........................ (3,164) (129) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... (228,656) 72,800 225,807
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
-------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... (89,764) 225,225 318,620
-------- -------- -----------
Net increase (decrease) in net
assets............................ (20,059) 266,778 308,346
NET ASSETS:
Beginning of year..................... 575,124 308,346 --
-------- -------- -----------
End of year........................... $555,065 $575,124 $308,346
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE INTERNATIONAL
VIPF II ASSET MANAGER STOCK
SUB-ACCOUNT 106 SUB-ACCOUNT 150
YEAR ENDED PERIOD FROM PERIOD FROM
DECEMBER 31, 6/14/94* TO YEAR ENDED 6/30/95* TO
1996 1995 12/31/94 12/31/96 12/31/95
-------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 28,956 $ 2,369 $ (705) $ 3,069 $ (146)
Net realized gain (loss) on
investments....................... 19,047 2,905 (44) 786 25
Net unrealized gain (loss) on
investments....................... 23,161 56,562 (8,236) 17,465 1,602
-------- -------- ----------- ---------- -----------
Net increase (decrease) in net
assets from operations............ 71,164 61,836 (8,985) 21,320 1,481
-------- -------- ----------- ---------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 117,653 161,011 85,685 83,905 13,744
Terminations........................ -- -- -- (405) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... (180,625) (13,418) 241,812 192,511 37,762
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... (129) -- 100 -- --
-------- -------- ----------- ---------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... (63,101) 147,593 327,597 276,011 51,506
-------- -------- ----------- ---------- -----------
Net increase (decrease) in net
assets............................ 8,063 209,429 318,612 297,331 52,987
NET ASSETS:
Beginning of year..................... 528,041 318,612 -- 52,987 --
-------- -------- ----------- ---------- -----------
End of year........................... $536,104 $528,041 $318,612 $350,318 $52,987
-------- -------- ----------- ---------- -----------
-------- -------- ----------- ---------- -----------
<CAPTION>
DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/12/94* TO
1996 1995 12/31/94
-------- -------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 4,182 $ 604 $ (238)
Net realized gain (loss) on
investments....................... 3,693 414 --
Net unrealized gain (loss) on
investments....................... 28,077 11,496 (1,212)
-------- -------- -----------
Net increase (decrease) in net
assets from operations............ 35,952 12,514 (1,450)
-------- -------- -----------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 81,837 40,691 18,949
Terminations........................ (193) (481) --
Other transfers from (to) the
General Account of Allmerica
Financial Life Insurance and
Annuity Company (Sponsor)......... 43,641 40,455 42,620
Net increase (decrease) in net
assets from investment by
Allmerica Financial Life Insurance
and Annuity Company (Sponsor)..... -- -- --
-------- -------- -----------
Net increase (decrease) in net
assets from capital
transactions...................... 125,285 80,665 61,569
-------- -------- -----------
Net increase (decrease) in net
assets............................ 161,237 93,179 60,119
NET ASSETS:
Beginning of year..................... 153,298 60,119 --
-------- -------- -----------
End of year........................... $314,535 $153,298 $60,119
-------- -------- -----------
-------- -------- -----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION
The Inheiritage Account (Inheiritage) is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company (the Company),
established on April 21, 1994 for the purpose of separating from the general
assets of the Company those assets used to fund the variable portion of certain
flexible premium variable life policies issued by the Company. The Company is a
wholly-owned subsidiary of First Allmerica Financial Life Insurance Company
(First Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Inheiritage are clearly identified and distinguished from the
other assets and liabilities of the Company. Inheiritage cannot be charged with
liabilities arising out of any other business of the Company.
Inheiritage is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Inheiritage currently offers
nineteen Sub-Accounts (See Note 3). Each Sub-Account invests exclusively in a
corresponding investment portfolio of the Allmerica Investment Trust (the Trust)
managed by Allmerica Investment Management Company, Inc., a wholly-owned
subsidiary of First Allmerica or of the Variable Insurance Products Fund (VIPF),
or the Variable Insurance Products Fund II (VIPF II) managed by Fidelity
Management & Research Company (FMR), or of T. Rowe Price International Series,
Inc. (T. Rowe) managed by Rowe Price-Fleming International, Inc. or of the
Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware International
Advisers, Ltd. The Trust, VIPF, VIPF II, T. Rowe, and DGPF (the Funds) are
open-end, diversified management investment companies registered under the 1940
Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust, VIPF, VIPF II, T. Rowe, or DGPF.
Net realized gains and losses on securities sold are determined using the
average cost method. Dividends and capital gain distributions are recorded on
the ex-dividend date and are reinvested in additional shares of the respective
investment portfolio of the Trust, VIPF, VIPF II, T. Rowe, or DGPF at net asset
value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return with First Allmerica. The Company anticipates no tax liability
resulting from the operations of Inheiritage. Therefore, no provision for income
taxes has been charged against Inheiritage.
F-49
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, VIPF, VIPF II, T. Rowe, and DGPF at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
SUB-ACCOUNT INVESTMENT PORTFOLIO SHARES COST PER SHARE
- --------------- ------------------------------------------------------------ ----------- ------------- -----------
<C> <S> <C> <C> <C>
Allmerica Investment Trust:
1 Growth...................................................... 579,597 $ 1,299,871 $ 2.333
2 Investment Grade Income..................................... 545,364 590,472 1.084
3 Money Market................................................ 1,085,844 1,085,844 1.000
4 Equity Index................................................ 272,923 520,040 2.165
5 Government Bond............................................. 165,338 171,746 1.036
6 Select Aggressive Growth.................................... 800,828 1,430,526 2.037
7 Select Growth............................................... 343,552 499,527 1.430
8 Select Growth and Income.................................... 726,990 922,918 1.405
9 Small Cap Value............................................. 581,347 739,761 1.511
10* Select Income............................................... -- -- --
11 Select International Equity................................. 871,536 1,027,255 1.356
12 Select Capital Appreciation................................. 652,502 949,268 1.485
Fidelity Variable Insurance Products Fund:
102 High Income................................................. 66,720 783,118 12.520
103 Equity-Income............................................... 128,809 2,337,154 21.030
104 Growth...................................................... 76,007 2,071,778 31.140
105 Overseas.................................................... 29,462 485,142 18.840
Fidelity Variable Insurance Products Fund II:
106 Asset Manager............................................... 31,666 464,616 16.930
T. Rowe Price International Series, Inc.:
150 International Stock......................................... 27,715 331,251 12.640
Delaware Group Premium Fund, Inc.:
207 International Equity........................................ 20,816 276,174 15.110
</TABLE>
- ------------------------
* Sub-Account was established during 1996 and there was no selection of this
investment option by any policyowner.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge of $6. The policyowner
may instruct the Company to deduct this monthly charge from a specific
Sub-Account, but if not so specified, it will be deducted on a pro-rata basis of
allocation which is the same proportion that the policy value in the General
Account of the Company and in each Sub-Account bear to the total policy value.
For the years ended December 31, 1996, 1995, and 1994, these monthly deductions
from sub-account policy values amounted to
F-50
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
$238,545, $137,108 and $26,519, respectively. These amounts are included on the
statements of changes in net assets with other transfers to the General Account.
The Company makes a charge of .90% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The mortality and expense risks annual charge may be increased or
decreased by the Board of Directors of the Company once each year, subject to
compliance with applicable state and federal requirements, but the total charge
may not exceed 1.275% per annum. During the first 15 policy years, the Company
also charges each Sub-Account .25% per annum based on the average daily net
assets of each Sub-Account for administrative expenses. These charges are
deducted in the daily computation of unit values but paid to the Company on a
monthly basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of First Allmerica, is principal underwriter and general distributor of
Inheiritage, and does not receive any compensation for sales of Inheiritage
policies. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of policies have a surrender
charge, no deduction is made for sales charges at the time of the sale. For the
years ended December 31, 1996, and 1995, the Company received $21,515 and
$1,739, respectively, for surrender charges applicable to Inheiritage. There
were no surrender charges for the year ended December 31, 1994.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable life insurance contract, other than a contract issued in connection
with certain types of employee benefit plans, will not be treated as a variable
life insurance contract for federal income tax purposes for any period for which
the investments of the segregated asset account on which the contract is based
are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy either
a statutory safe harbor test or diversification requirements set forth in
regulations issued by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that Inheiritage satisfies the current requirements
of the regulations, and it intends that Inheiritage will continue to meet such
requirements.
F-51
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, VIPF, VIPF II, T.
Rowe, and DGPF shares by Inheiritage during the year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
- --------------- -------------------------------------------------------------------- -------------- -------------
<C> <S> <C> <C>
Allmerica Investment Trust:
1 Growth.............................................................. $ 853,873 $ 82,480
2 Investment Grade Income............................................. 343,195 71,615
3 Money Market........................................................ 2,642,121 1,959,033
4 Equity Index........................................................ 417,027 97,967
5 Government Bond..................................................... 261,798 164,454
6 Select Aggressive Growth............................................ 832,803 82,968
7 Select Growth....................................................... 404,049 63,711
8 Select Growth and Income............................................ 497,166 46,446
9 Small Cap Value..................................................... 342,256 65,694
11 Select International Equity......................................... 753,171 71,226
12 Select Capital Appreciation......................................... 853,443 44,708
Fidelity Variable Insurance Products Fund:
102 High Income......................................................... 569,378 59,471
103 Equity-Income....................................................... 1,358,783 168,664
104 Growth.............................................................. 1,236,825 93,801
105 Overseas............................................................ 199,264 285,905
Fidelity Variable Insurance Products Fund II:
106 Asset Manager....................................................... 164,980 199,142
T. Rowe Price International Series, Inc.:
150 International Stock................................................. 303,087 23,143
Delaware Group Premium Fund, Inc.:
207 International Equity................................................ 182,668 49,755
-------------- -------------
Totals.............................................................. $ 12,215,887 $ 3,630,183
-------------- -------------
-------------- -------------
</TABLE>
F-52
<PAGE>
APPENDIX A -- OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, your agent should
be contacted.
The following supplemental benefits are available for issue under the Policies
for an additional charge.
SPLIT OPTION RIDER
This rider, available only at Date of Issue, permits you to split the Policy
into two life insurance policies, one covering each Insured singly, subject
to Company guidelines.
OTHER INSURED RIDER
This rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and minor children of
either primary Insured. The rider includes a feature that allows you to
convert the other-insured coverage to any permanent life insurance policy
acceptable to the Company.
FOUR-YEAR TERM RIDER
This rider provides a term insurance benefit during the first four Policy
years, payable upon the death of the last surviving Insured during the
coverage period.
A-1
<PAGE>
APPENDIX B -- PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that would otherwise be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of: (a) the rate per $1,000 of value applied based on the Company's
non-guaranteed current payment option rates for the Policies; or (b) the rate in
the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Inheiritage Account.
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30).
Payments may be made annually, semi-annually, quarterly or monthly.
Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's Age on
the date the first payment will be made. One of three variations may
be chosen. Depending upon this choice, payments will end:
(a) upon the death of the payee, with no further payments due (Life
Annuity);
(b) upon the death of the payee, but not before the sum of the payments
made first equals or exceeds the amount applied under this option
(Life Annuity with Installment Refund); or
(c) upon the death of the payee, but not before a selected period (5, 10
or 20 years) has elapsed (Life Annuity with Period Certain).
Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined
by the Company each year but which will not be less than 3.5%.
Payments may be made annually, semi-annually, quarterly or monthly.
Payments will end when the amount left with the Company has been
withdrawn. However, payments will not continue after the death of the
payee. Any unpaid balance plus accrued interest will be paid in a lump
sum.
Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the
unpaid balance is exhausted. Interest will be credited to the unpaid
balance. The rate of interest will be determined by the Company each
year but will not be less than 3.5%. Payments may be made annually,
semi-annually, quarterly or monthly. The payment level selected must
provide for the payment each year of at least 8% of the amount
applied.
Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may
be chosen. After the death of one payee, payments will continue to the
survivor:
(a) in the same amount as the original amount;
(b) in an amount equal to 2/3 of the original amount; or
(c) in an amount equal to 1/2 of the original amount.
Payments are based on the payees' ages on the date the first payment is
due. Payments will end upon the death of the surviving payee.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
the Policyowner's and/or the Beneficiary's provision, any option selection may
be changed before the Death Proceeds become payable. If the Policyowner makes no
selection, the Beneficiary may select an option when the Death Proceeds become
payable.
A-2
<PAGE>
If the amount of monthly income payments under Option B, choice (c) for the
attained Age of the payee are the same for different periods certain, the
Company will deem an election to have been made for the longest period certain
which could have been elected for such Age and amount.
The Policyowner may give the Beneficiary the right to change from Option C or D
to any other option at any time. If the payee selects Option C or D when this
policy becomes a claim, the right may be reserved to change to any other option.
The payee who elects to change options must be a payee under the option
selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the Written Request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the written request selecting the option.
A corporation or fiduciary payee may select only option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date
this Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
A-3
<PAGE>
APPENDIX C -- ILLUSTRATIONS
SURRENDER VALUE, POLICY VALUES AND DEATH BENEFITS
The following tables illustrate the way in which a Policy's Sum Insured and
Policy Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued on the lives of both Insureds, each Age
55, under a standard Premium Class and qualifying for the non-smoker discount.
The tables also illustrate the guaranteed cost of insurance rates and the
current cost of insurance rates.
The tables illustrate the Policy Values that would result based upon the
assumptions that no Policy loans have been made, that you have not requested an
increase or decrease in the initial Face Amount, that no partial withdrawals
have been made, and that no transfers above 12 have been made in any Policy year
(so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the
Inheiritage Account for the entire period shown and are based on hypothetical
gross investment rates of return for the Underlying Fund (i.e., investment
income and capital gains and losses, realized or unrealized) equivalent to
constant gross (after tax) annual rates of 0%, 6%, and 12%. The second column of
the tables shows the amount which would accumulate if an amount equal to the
Guideline Annual Premium were invested to earn interest, (after taxes) at 5%
compounded annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of a
Policy's total Policy Value among the Sub-Accounts of the Inheiritage Account,
if the actual rates of return averaged 0%, 6% or 12, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value, and the daily charge against the Inheiritage Account for mortality
and expense risks and the Inheiritage Account administrative charge for the
first fifteen Policy years, equivalent to an effective annual rate of 1.15% of
the average daily value of the assets in the Inheiritage Account attributable to
the Policies, and 0.90% thereafter.
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary, and in 1996 ranged from an annual
rate of 0.34% to an annual rate of 1.23% of average daily net assets. The fees
and expenses associated with your Policy may be more or less than 0.85% in the
aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
Under its Management Agreement with the Trust, Allmerica Investments has
declared a voluntary expense limitation of 1.50% of average net average assets
for the Select International Equity Fund, 0.60% for the Money Market Fund, 1.35%
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.20% for the Select Growth Fund, 1.10% for the Select Growth and Income Fund,
and 1.00% for the Select Income Fund. In 1996 none of the expenses of the
Underlying Funds exceeded the voluntary expense limitations.
NET ANNUAL RATES OF INVESTMENT
Taking into account the mortality and expense risk charge and the Inheiritage
Account administrative charge and the assumed 0.85% charge for Underlying Fund
advisory fees and operating expenses, the gross annual rates of investment
return of 0%, 6% and 12% correspond to net annual rates of -2.00%, 4.00%,
10.00%, respectively, during the first 15 Policy years and -1.75%, 4.25% and
10.25%, respectively, thereafter.
A-4
<PAGE>
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Inheiritage Account since no charges are currently
made. However, if in the future such charges are made, in order to produce
illustrated death benefits and cash values, the gross annual investment rate of
return would have to exceed 0%, 6% or 12% by a sufficient amount to cover the
tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSUREDS' AGES, AND PREMIUM CLASS, AND THE REQUESTED FACE AMOUNT, SUM
INSURED OPTION, AND RIDERS.
A-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INHEIRITAGE POLICY
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 1
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,240 1,000,000 0 9,809 1,000,000 0 10,378 1,000,000
2 21,525 5,470 18,186 1,000,000 7,182 19,898 1,000,000 8,963 21,678 1,000,000
3 33,101 7,819 26,819 1,000,000 11,252 30,252 1,000,000 14,967 33,967 1,000,000
4 45,256 16,879 35,119 1,000,000 22,617 40,857 1,000,000 29,077 47,317 1,000,000
5 58,019 25,962 43,062 1,000,000 34,591 51,691 1,000,000 44,704 61,804 1,000,000
6 71,420 34,656 50,616 1,000,000 46,766 62,726 1,000,000 61,546 77,506 1,000,000
7 85,491 42,919 57,739 1,000,000 59,101 73,921 1,000,000 79,680 94,500 1,000,000
8 100,266 50,697 64,377 1,000,000 71,542 85,222 1,000,000 99,179 112,859 1,000,000
9 115,779 57,914 70,454 1,000,000 84,013 96,553 1,000,000 120,106 132,646 1,000,000
10 132,068 64,479 75,879 1,000,000 96,419 107,819 1,000,000 142,524 153,924 1,000,000
11 149,171 71,437 80,557 1,000,000 109,798 118,918 1,000,000 167,642 176,762 1,000,000
12 167,130 77,535 84,375 1,000,000 122,890 129,730 1,000,000 194,392 201,232 1,000,000
13 185,986 82,661 87,221 1,000,000 135,571 140,131 1,000,000 222,871 227,431 1,000,000
14 205,786 86,690 88,970 1,000,000 147,705 149,985 1,000,000 253,186 255,466 1,000,000
15 226,575 89,469 89,469 1,000,000 159,123 159,123 1,000,000 285,458 285,458 1,000,000
16 248,404 88,738 88,738 1,000,000 167,729 167,729 1,000,000 318,247 318,247 1,000,000
17 271,324 86,156 86,156 1,000,000 175,045 175,045 1,000,000 353,300 353,300 1,000,000
18 295,390 81,519 81,519 1,000,000 180,840 180,840 1,000,000 390,879 390,879 1,000,000
19 320,660 74,232 74,232 1,000,000 184,525 184,525 1,000,000 431,068 431,068 1,000,000
20 347,193 63,695 63,695 1,000,000 185,488 185,488 1,000,000 474,082 474,082 1,000,000
Age 60 58,019 25,962 43,062 1,000,000 34,591 51,691 1,000,000 44,704 61,804 1,000,000
Age 65 132,068 64,479 75,879 1,000,000 96,419 107,819 1,000,000 142,524 153,924 1,000,000
Age 70 226,575 89,469 89,469 1,000,000 159,123 159,123 1,000,000 285,458 285,458 1,000,000
Age 75 347,193 63,695 63,695 1,000,000 185,488 185,488 1,000,000 474,082 474,082 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INHEIRITAGE POLICY
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 1
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,244 1,000,000 0 9,813 1,000,000 0 10,383 1,000,000
2 21,525 5,494 18,210 1,000,000 7,207 19,923 1,000,000 8,989 21,704 1,000,000
3 33,101 7,891 26,891 1,000,000 11,328 30,328 1,000,000 15,047 34,047 1,000,000
4 45,256 17,043 35,283 1,000,000 22,792 41,032 1,000,000 29,264 47,504 1,000,000
5 58,019 26,283 43,383 1,000,000 34,938 52,038 1,000,000 45,078 62,178 1,000,000
6 71,420 35,229 51,189 1,000,000 47,390 63,350 1,000,000 62,226 78,186 1,000,000
7 85,491 43,875 58,695 1,000,000 60,151 74,971 1,000,000 80,834 95,654 1,000,000
8 100,266 52,213 65,893 1,000,000 73,222 86,902 1,000,000 101,037 114,717 1,000,000
9 115,779 60,231 72,771 1,000,000 86,597 99,137 1,000,000 122,985 135,525 1,000,000
10 132,068 67,919 79,319 1,000,000 100,277 111,677 1,000,000 146,843 158,243 1,000,000
11 149,171 76,297 85,417 1,000,000 115,291 124,411 1,000,000 173,832 182,952 1,000,000
12 167,130 84,176 91,016 1,000,000 130,455 137,295 1,000,000 202,976 209,816 1,000,000
13 185,986 91,508 96,068 1,000,000 145,729 150,289 1,000,000 234,464 239,024 1,000,000
14 205,786 98,242 100,522 1,000,000 161,067 163,347 1,000,000 268,511 270,791 1,000,000
15 226,575 104,318 104,318 1,000,000 176,413 176,413 1,000,000 305,355 305,355 1,000,000
16 248,404 107,680 107,680 1,000,000 189,902 189,902 1,000,000 343,787 343,787 1,000,000
17 271,324 110,188 110,188 1,000,000 203,275 203,275 1,000,000 385,739 385,739 1,000,000
18 295,390 111,790 111,790 1,000,000 216,491 216,491 1,000,000 431,631 431,631 1,000,000
19 320,660 112,272 112,272 1,000,000 229,363 229,363 1,000,000 481,843 481,843 1,000,000
20 347,193 111,443 111,443 1,000,000 241,727 241,727 1,000,000 536,868 536,868 1,000,000
Age 60 58,019 26,283 43,383 1,000,000 34,938 52,038 1,000,000 45,078 62,178 1,000,000
Age 65 132,068 67,919 79,319 1,000,000 100,277 111,677 1,000,000 146,843 158,243 1,000,000
Age 70 226,575 104,318 104,318 1,000,000 176,413 176,413 1,000,000 305,355 305,355 1,000,000
Age 75 347,193 111,443 111,443 1,000,000 241,727 241,727 1,000,000 536,868 536,868 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME
A-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INHEIRITAGE POLICY
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 2
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,240 1,009,240 0 9,809 1,009,809 0 10,378 1,010,378
2 21,525 5,467 18,182 1,018,182 7,179 19,894 1,019,894 8,959 21,674 1,021,674
3 33,101 7,807 26,807 1,026,807 11,239 30,239 1,030,239 14,952 33,952 1,033,952
4 45,256 16,850 35,090 1,035,090 22,583 40,823 1,040,823 29,037 47,277 1,047,278
5 58,019 25,904 43,004 1,043,004 34,521 51,621 1,051,621 44,619 61,719 1,061,719
6 71,420 34,552 50,512 1,050,512 46,634 62,594 1,062,594 61,380 77,340 1,077,340
7 85,491 42,745 57,565 1,057,565 58,871 73,691 1,073,691 79,379 94,199 1,094,199
8 100,266 50,421 64,101 1,064,101 71,164 84,844 1,084,844 98,664 112,344 1,112,344
9 115,779 57,493 70,033 1,070,033 83,416 95,956 1,095,956 119,259 131,799 1,131,800
10 132,068 63,859 75,259 1,075,259 95,504 106,904 1,106,904 141,175 152,575 1,152,575
11 149,171 70,549 79,669 1,079,669 108,435 117,555 1,117,555 165,549 174,669 1,174,669
12 167,130 76,295 83,135 1,083,135 120,909 127,749 1,127,749 191,222 198,062 1,198,062
13 185,986 80,971 85,531 1,085,531 132,757 137,317 1,137,317 218,169 222,729 1,222,729
14 205,786 84,438 86,718 1,086,718 143,789 146,069 1,146,069 246,346 248,626 1,248,626
15 226,575 86,532 86,532 1,086,532 153,777 153,777 1,153,777 275,675 275,675 1,275,675
16 248,404 84,970 84,970 1,084,970 160,530 160,530 1,160,530 304,419 304,419 1,304,419
17 271,324 81,398 81,398 1,081,398 165,465 165,465 1,165,465 333,940 333,940 1,333,940
18 295,390 75,626 75,626 1,075,626 168,274 168,274 1,168,274 364,077 364,077 1,364,077
19 320,660 67,063 67,063 1,067,063 168,215 168,215 1,168,215 394,224 394,224 1,394,224
20 347,193 55,158 55,158 1,055,158 164,548 164,548 1,164,549 423,743 423,743 1,423,743
Age 60 58,019 25,904 43,004 1,043,004 34,521 51,621 1,051,621 44,619 61,719 1,061,719
Age 65 132,068 63,859 75,259 1,075,259 95,504 106,904 1,106,904 141,175 152,575 1,152,575
Age 70 226,575 86,532 86,532 1,086,532 153,777 153,777 1,153,777 275,675 275,675 1,275,675
Age 75 347,193 55,158 55,158 1,055,158 164,548 164,548 1,164,549 423,743 423,743 1,423,743
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INHEIRITAGE POLICY
CURRENT COST OF INSURANCE CHARGES
INSURED 1: UNISEX NONSMOKER ISSUE AGE 55
INSURED 2: UNISEX NONSMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 2
<TABLE>
<CAPTION>
HYPOTHETICAL GROSS 0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12%
-------------------------------- -------------------------------- --------------------------------
POLICY PREMIUM SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR + INTEREST(1) VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT VALUE VALUE(2) BENEFIT
- ------ ------------- --------- -------- --------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,244 1,009,244 0 9,813 1,009,813 0 10,382 1,010,382
2 21,525 5,491 18,207 1,018,207 7,204 19,919 1,019,919 8,985 21,701 1,021,701
3 33,101 7,881 26,881 1,026,881 11,317 30,317 1,030,317 15,034 34,034 1,034,034
4 45,256 17,021 35,261 1,035,261 22,765 41,005 1,041,005 29,232 47,472 1,047,472
5 58,019 26,239 43,339 1,043,339 34,883 51,983 1,051,983 45,011 62,111 1,062,111
6 71,420 35,152 51,112 1,051,112 47,292 63,252 1,063,252 62,102 78,062 1,078,062
7 85,491 43,751 58,571 1,058,571 59,987 74,807 1,074,807 80,618 95,438 1,095,438
8 100,266 52,025 65,705 1,065,705 72,964 86,644 1,086,644 100,686 114,366 1,114,366
9 115,779 59,959 72,499 1,072,500 86,210 98,750 1,098,750 122,435 134,975 1,134,975
10 132,068 67,540 78,940 1,078,940 99,716 111,116 1,111,116 146,014 157,414 1,157,414
11 149,171 75,772 84,892 1,084,893 114,485 123,605 1,123,605 172,594 181,714 1,181,714
12 167,130 83,458 90,298 1,090,298 129,312 136,152 1,136,152 201,148 207,988 1,207,988
13 185,986 90,541 95,101 1,095,101 144,129 148,689 1,148,689 231,803 236,363 1,236,363
14 205,786 96,959 99,239 1,099,239 158,861 161,141 1,161,141 264,690 266,970 1,266,970
15 226,575 102,641 102,641 1,102,641 173,416 173,416 1,173,417 299,942 299,942 1,299,942
16 248,404 105,518 105,518 1,105,518 185,879 185,879 1,185,879 336,199 336,199 1,336,200
17 271,324 107,431 107,431 1,107,431 197,927 197,927 1,197,927 375,200 375,200 1,375,201
18 295,390 108,322 108,322 1,108,322 209,467 209,467 1,209,467 417,148 417,148 1,417,148
19 320,660 107,952 107,952 1,107,953 220,211 220,211 1,220,211 462,068 462,068 1,462,068
20 347,193 106,115 106,115 1,106,115 229,890 229,890 1,229,890 510,023 510,023 1,510,023
Age 60 58,019 26,239 43,339 1,043,339 34,883 51,983 1,051,983 45,011 62,111 1,062,111
Age 65 132,068 67,540 78,940 1,078,940 99,716 111,116 1,111,116 146,014 157,414 1,157,414
Age 70 226,575 102,641 102,641 1,102,641 173,416 173,416 1,173,417 299,942 299,942 1,299,942
Age 75 347,193 106,115 106,115 1,106,115 229,890 229,890 1,229,890 510,023 510,023 1,510,023
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
"Premiums + Interest" column assumes premiums paid at 5% per year. Values
will be different if premiums are paid with a different frequency or in
different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-9
<PAGE>
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in Face Amount. The maximum surrender charge is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge equal to $8.50
per $1,000 of initial Face Amount (or Face Amount increase) and (b) is a
deferred sales charge of 48% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs), based on the joint life expectancy of both
Insureds, subject to the deferred sales charge that varies as shown below by
average issue Age or average Age at time of increase, as applicable:
<TABLE>
<CAPTION>
Applicable
Age Maximum GAPs
- ------------- --------------
<S> <C>
5-75 1.95
76 1.92
77 1.81
78 1.69
79 1.60
80 1.50
81 1.40
82 1.31
</TABLE>
A further limitation is imposed based on the Standard Non-Forfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in Face Amount, the actual surrender
charge may be less than the maximum. See CHARGES AND DEDUCTIONS -- "Surrender
Charge."
The maximum surrender charge initially remains level for 40 months, declines by
one-half of one percent of the initial amount for 80 months, and then declines
by one percent each month thereafter, reaching zero at the end of 180 Policy
months (15 Policy years).
The Factors used in calculating the maximum surrender charges vary with the
issue Age of the younger Insured as indicated in the table that follows.
A-10
<PAGE>
INITIAL MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Younger Initial Younger Initial Younger Initial
Issue Surrender Issue Surrender Issue Surrender
Age Charge Age Charge Age Charge
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
5 5.00 31 9.40 57 21.00
6 5.00 32 9.80 58 22.00
7 5.00 33 10.20 59 23.00
8 5.00 34 10.60 60 24.00
9 5.00 35 11.00 61 25.00
10 5.00 36 11.40 62 26.00
11 5.00 37 11.80 63 27.00
12 5.00 38 12.20 64 28.00
13 5.00 39 12.60 65 29.00
14 5.00 40 13.00 66 30.00
15 5.00 41 13.40 67 31.00
16 5.00 42 13.80 68 32.00
17 5.00 43 14.20 69 33.00
18 5.00 44 14.60 70 34.00
19 5.00 45 15.00 71 35.00
20 5.00 46 15.40 72 35.00
21 5.40 47 15.80 73 35.00
22 5.80 48 16.20 74 35.00
23 6.20 49 16.60 75 35.00
24 6.60 50 17.00 76 35.00
25 7.00 51 17.40 77 35.00
26 7.40 52 17.80 78 35.00
27 7.80 53 18.20 79 35.00
28 8.20 54 18.60 80 35.00
29 8.60 55 19.00
30 9.00 56 20.00
</TABLE>
EXAMPLES
For the purposes of these examples, assume that two nonsmokers, each Age 55, are
covered as the Insureds under a $1,000,000 Policy. In this example the Guideline
Annual Premium ("GAP") equals $16,861.10. The maximum surrender charge for the
Policy is calculated as follows:
<TABLE>
<S> <C>
(a) Deferred Administrative Charge $ 8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (48% X 1.95 GAPs) $15,781.99
----------
TOTAL $24,281.99
Maximum Surrender Charge per Table (19.00 X 1,000) $19,000.00
</TABLE>
A-11
<PAGE>
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
<TABLE>
<S> <C>
(a) Deferred Administrative Charge $8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (not to exceed 25% of Premiums received, up to Varies
one GAP, but less than the maximum number of GAPs subject to the
deferred sales charge)
----------
Sum of (a)
and (b)
</TABLE>
The maximum surrender charge is $19,000. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the Policy in the 10th policy month,
having paid total premiums of $7,500. The actual surrender charge would be
$10,375.
Example 2:
Assume the Policyowner surrenders the Policy in the 120th month. After the
40th Policy month, the maximum surrender charge decreases by 0.5% per month
during this period ($95 per month in this example). In this example, the maximum
surrender charge would be $11,400.
A-12
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
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 VIII of Registrant's Bylaws provides: Each Director and each Officer
of the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the defense
or reasonable settlement of any action, suit, or proceeding in which he is
made a party by reason of his being or having been a Director or Officer of
the Corporation, including any sums paid in settlement or to discharge
judgment, except in relation to matters as to which he shall be finally
adjudged in such action, suit, or proceeding to be liable for negligence or
misconduct in the performance of his duties as such Director or Officer; and
the foregoing right of indemnification or reimbursement shall not affect any
other rights to which he may be entitled under the Articles of Incorporation,
any statute, bylaw, agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
(AFLIAC Inheiritage)
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of ____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the Securities Act of 1933.
Representations Pursuant to Section 26(e) of the Investment Company Act of 1940
The signatures.
Written consents of the following persons:
1. Price Waterhouse LLP
2. Opinion of Counsel
3. Actuarial Consent
The following exhibits:
1. Exhibit 1
(Exhibits required by paragraph A of the instructions to Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors
of the Company of September 15, 1993 establishing the
Inheiritage Account was previously filed on October 25,
1993 and is herein incorporated by reference.
(2) Not Applicable.
(3) (a) Form of Sales and Administrative Services
Agreement between the Company and Allmerica
Investments, Inc. was previously filed on
October 25, 1993 and is herein incorporated
by reference.
(b) Registered Representative Agreement and
Resident Sponsor Agreement of Allmerica
Investment, Inc. (formerly "SMA Equities,
Inc.") were previously filed by the Company
on June 3, 1987, Registration No. 33-14672
and are incorporated herein by reference.
(4) Not Applicable.
(5) Forms of Policy and initial Policy riders were
previously filed on October 25, 1993 and are herein
incorporated by reference. The following is filed
herein:
- Preferred Loan Endorsement
(6) Organizational documents of the Company, as amended, were
previously filed in Post-Effective Amendment No.2, and are
herein incorporated by reference.
(7) Not Applicable.
(8) (a) Form of Participation Agreement with
Allmerica Investment Trust was previously
filed by the Company on June 3, 1987, in
Registration Statement
<PAGE>
No. 33-14672, and is incorporated herein by reference.
(b) Form of Participation Agreement with Variable
Insurance Products Fund and Variable
Insurance Products Fund II was previously
filed by the Company on June 3, 1987, in
Registration Statement No. 33-14672, and is
incorporated herein by reference.
(c) Form of Participation Agreement with Delaware Group Premium
Fund, Inc. was previously filed by the Company on December 27,
1991 in Registration Statement No. 33-44830, and is
incorporated herein by reference.
(d) Form of Participation Agreement with T. Rowe Price
International Series, Inc. was previously filed on May 1, 1995
and is incorporated herein by reference.
(e) Fidelity Service Agreement as of November 1, 1995 was
previously was filed on April 30, 1996 in Post-Effective
Amendment No. 4, and is incorporated herein by reference. An
Amendment to the Fidelity Service Agreement, effective as of
January 1, 1997, is filed herewith. A Proposed Form of
Fidelity Service Contract is filed herewith.
(f) Proposed Form of Service Agreement with Rowe Price-Fleming
International, Inc. is filed herewith.
(9) Not Applicable.
(10) Form of Application was previously filed on October 25,
1993 and is herein incorporated by reference.
2. Form of Policy and Policy riders are as set forth Exhibit 1 above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial opinion and Consent is filed herewith.
7. Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(iii) under
the 1940 Act which includes conversion procedures pursuant to Rule
6e-3(T)(b)(13)(v)(B) was previously filed on October 25, 1993 and
is herein incorporated by reference.
8. Consent of Independent Accountants is filed herewith.
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(5) Preferred Loan Endorsement
Exhibit (1)(8)(e) Amendment to Fidelity Service Agreement
Proposed Form of Fidelity Service Contract
Exhibit (1)(8)(f) Proposed Form of Service Agreement with Rowe Price-
Fleming International, Inc.
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Worcester, and Commonwealth of Massachusetts,
on the 2nd day of April, 1997.
INHEIRITAGE ACCOUNT
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
-------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John F. O'Brien Director and Chairman
- ------------------------------- of the Board
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President
- ------------------------------
Bruce C. Anderson
/s/ John P. Kavanaugh Director and Vice President
- ----------------------------
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President
- ----------------------------- and General Counsel April 2, 1997
John F. Kelly
/s/ J. Barry May Director
- -----------------------------
J. Barry May
/s/ James R. McAuliffe Director
- -----------------------------
James R. McAuliffe
/s/ Edward J. Parry III Director, Vice President,
- ----------------------------- Treasurer and Chief
Edward J. Parry III Financial Officer
Richard M. Reilly Director, President and
- ----------------------------- Chief Executive Officer
Richard M. Reilly
/s/ Larry C. Renfro Director and Vice President
- ----------------------------
Larry C. Renfro
/s/ Eric A. Simonsen Director and Vice President
- ----------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President
- -------------------------
Phillip E. Soule
</TABLE>
<PAGE>
EXHIBIT 1(5)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
PREFERRED LOAN ENDORSEMENT
This Endorsement is a part of the policy or certificate to which it is
attached.
While this Endorsement is in force, the interest rate credited to that
portion of the policy value equal to existing debt will not be less than 7 1/2%
after the tenth policy anniversary.
You may cancel this Endorsement at any time on written request. This
Endorsement will be canceled if the Paid-Up Life Insurance Option is elected.
Signed for the Company at Dover, Delaware
/s/ Richard M. Reilly /s/ Abigail M. Armstrong
President Secretary
<PAGE>
FORM OF
SERVICE CONTRACT
With respect to shares of:
( ) Variable Insurance Products Fund - High Income Portfolio
( ) Variable Insurance Products Fund - Equity-Income Portfolio
( ) Variable Insurance Products Fund - Growth Portfolio
( ) Variable Insurance Products Fund - Overseas Portfolio
( ) Variable Insurance Products Fund II - Investment Grade Bond Portfolio
( ) Variable Insurance Products Fund II - Asset Manager Portfolio
( ) Variable Insurance Products Fund II - Contrafund Portfolio
( ) Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
( ) Variable Insurance Products Fund III - Growth Opportunities Portfolio
( ) Variable Insurance Products Fund III - Balanced Portfolio
( ) Variable Insurance Products Fund III - Growth & Income Portfolio
To Fidelity Distributors Corporation:
We desire to enter into a Contract with you for activities in connection with
the distribution of shares and the servicing of shareholders of the Fund noted
above (the "Fund") of which you are the principal underwriter as defined in the
Investment Company Act of 1940 (the "Act") and for which you are the agent for
the continuous distribution of shares.
THE TERMS AND CONDITIONS OF THIS CONTRACT ARE AS FOLLOWS:
1. We shall provide distribution and certain shareholder services for our
clients who own Fund shares ("clients"), in which services may include, without
limitation: sale of shares of the Fund; answering client inquiries regarding the
Fund; assistance to clients in changing dividend options, account designations
and addresses; performance of subaccounting; processing purchase and redemption
transactions, including automatic investment and redemption of client account
cash balances; providing periodic statements showing a client's account balance
and the integration of such statements with other transactions; arranging for
bank wires; and providing such other information and services as you reasonably
may request.
2. We shall provide such office space and equipment, telephone facilities and
personnel (which may be all or any part of the space, equipment and facilities
currently used in our business, or all or any personnel employed by us) as is
necessary or beneficial for providing information and services to shareholders
of the Fund, and to assist you in servicing accounts of clients.
3. We agree to indemnify and hold you, the Fund, and the Fund's adviser and
transfer agent harmless from any and all direct or indirect liabilities or
losses resulting from requests, directions, actions or inactions, of or by us or
our officers, employees or agents regarding the purchase, redemption, transfer
or registration of shares for our clients. Such indemnification shall survive
the termination of this Contract.
Neither we nor any of our officers, employees or agents are authorized to
make any representation concerning Fund shares except those contained in the
then current Fund Prospectus, copies of which will be supplied by you to us; and
we shall have no authority to act as agent for the Fund or for you.
4. In consideration of the services and facilities described herein, we shall
be entitled to receive, and you shall cause to be paid to us by yourself or by
Fidelity Management & Research Company, investment adviser of the Fund, such
fees as are set forth in the accompanying "Fee Schedule for Qualified
Recipients." We understand that the payment of such fees has been authorized
pursuant to a Service Plan approved by the
<PAGE>
Board of Trustees of the Fund, and those Trustees who are not "interested
persons" of the fund (as defined in the Act) and who have no direct or indirect
financial interest in the operation of the Service Plan or in any agreements
related to the Service Plan (hereinafter referred to as "Qualified Trustees"),
and shareholders of the Fund, that such fees will be paid out of the fees paid
to the Fund's investment adviser, said adviser's past profits or any other
source available to said adviser; that the cost to the Fund for such fees shall
not exceed the amount of the advisory and service fee; and that such fees are
subject to change during the term of this Contract and shall be paid only so
long as this Contract is in effect.
5. We agree to conduct our activities in accordance with any applicable
federal or state laws, including securities laws and any obligation thereunder
to disclose to our clients the receipt of fees in connection with their
investment in the Fund.
6. You reserve the right, at your discretion and without notice, to suspend
the sale of shares or withdraw the sale of shares of the Fund.
7. This contract shall continue in force for one year from the effective date
(see below), and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically subject to termination
without penalty at any time if a majority of the Fund's Qualified Trustees vote
to terminate or not to continue the Service Plan. This Contract is also
terminable without penalty at any time the Service Plan is terminated by vote of
a majority of the Fund's outstanding voting securities upon 60 days' written
notice thereof to us. This Contract may also be terminated by us, for any
reason, upon 15 days' written notice to you. Notwithstanding anything contained
herein, in the event that the Service Plan shall terminate or we shall fail to
perform the distribution and shareholder servicing functions contemplated by
this Contract, such determination to be made in good faith by the Fund or you,
this Contract is terminable effective upon receipt of notice thereof by us.
This Contract will also terminate automatically in the event of its assignment
(as defined in the Act).
8. All communications to you shall be sent to you at your offices, 82
Devonshire Street, Boston, MA 02109. Any notice to us shall be duly given if
mailed or telegraphed to us at the address shown in this contract.
9. This Contract shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
Very truly yours,
_________________________________________________________________________
Name of Qualified Recipient (Please Print or Type)
_________________________________________________________________________
Street City State Zip Code
By: ______________________________________________________________________
Authorized Signature
Date: _______________________________
NOTE: Please return two signed copies of this Service Contract to Fidelity
Distributors Corporation. Upon acceptance, one countersigned copy will be
returned to you.
FOR INTERNAL USE ONLY:
EFFECTIVE DATE: JANUARY 1, 1997
<PAGE>
FEE SCHEDULE FOR QUALIFIED RECIPIENTS OF
Variable Insurance Products Fund - High Income Portfolio
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Investment Grade Bond Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
(1) Those who have signed the Service Agreement, who meet the requirements
of paragraph (4) below, and who render distribution, administrative support and
recordkeeping services as described therein, will hereafter be referred to as
"Qualified Recipients."
(2) Qualified Recipients who perform distribution services for their clients
including, without limitation, sale of Portfolio shares, answering routine
client inquiries about the Portfolio(s), completing Portfolio applications for
the client, and producing Portfolio sales brochures or other marketing
materials, will earn a quarterly fee at an annualized rate of 0.06% (six basis
points) of the average aggregate net assets of their clients invested in the
Portfolios.
(3) The fees paid to each Qualified Recipient will be calculated and paid
quarterly. Checks will be mailed to each Qualified Recipient by the 30th of the
following month.
(4) In order to be assured of receiving payment under this Agreement for a
given calendar quarter, a Qualified Recipient must have insurance company
clients with a minimum of $100 million of average net assets in the aggregate in
the mutual fund portfolios shown below. For any calendar quarter during which
assets in these portfolios are in the aggregate less than $100 million, the
amount of qualify assets may be considered to be zero for the purpose of
computing the payments due.
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
<PAGE>
AMENDMENT TO SERVICE AGREEMENT
This Amendment to Service Agreement, effective as of the 1st day of January,
1997, modifies an agreement entered into by and between FIDELITY INVESTMENTS
INSTITUTIONAL OPERATIONS COMPANY ("FIIOC") and ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY ("Company") as of the 1st day of November, 1995
(the "Agreement").
WHEREAS, Fidelity now has a third insurance-dedicated mutual fund, Variable
Insurance Products Fund III, which the parties are desirous of including in this
Agreement; and
WHEREAS, the parties also desire to make technical amendments to the
Agreement;
NOW, THEREFORE, the parties do hereby agree to amend the Agreement as
follows:
1. The term "Funds" now includes Variable Insurance Products Fund, Variable
Insurance Products Fund II, and Variable Insurance Products Fund III.
2. Paragraph 3 of the Agreement is amended to change the compensation rate
from 2 basis points to 4 basis points, and to place a cap on the maximum
quarterly payment, by making the following changes:
(a) Each place that the figure 0.0002 appears, it is hereby replaced with
the figure 0.0004, and each place that the words "two basis points" appear they
are hereby replaced with "four basis points;" and
(b) The following language is hereby added to the end of paragraph 3:
"Notwithstanding anything else in this Agreement, the maximum Payment to which
Company shall be entitled with respect to any calendar quarter or stub period is
One Million Dollars ($1,000,000)."
IN WITNESS WHEREOF, the parties have set their hand as of the date first
above written.
FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC.
By: /s/ Thomas J. Fryer
------------------------------
Thomas J. Fryer
Vice President
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
--------------------------------
Name: Richard M. Reilly
-------------------------------
Title: Vice President
-----------------------------
<PAGE>
(RPFI)
FORM OF
SERVICE AGREEMENT
______________, 1997
__________________Insurance Company
Ladies and Gentlemen:
This letter sets forth the agreement ("AGREEMENT") between __________________
Company ("YOU" or the "COMPANY") and the undersigned ("WE" or "RPFI") concerning
certain administration services to be provided by you, with respect to the T.
Rowe Price International Series, Inc. (the "FUND").
1. THE FUND. The Fund is a Maryland Corporation registered with the
Securities and Exchange Commission (the "SEC") under the Investment Company Act
of 1940 (the "ACT") as an open-end diversified management investment company.
The Fund serves as a funding vehicle for variable annuity contracts and variable
life insurance contracts and, as such, sells its shares to insurance companies
and their separate accounts. With respect to various provisions of the Act, the
SEC requires that owners of variable annuity contracts and variable life
insurance contracts be provided with materials and rights afforded to
shareholders of a publicly-available SEC-registered mutual fund.
2. THE COMPANY. The Company is a [STATE] insurance company. The Company
issues variable annuity and/or variable life insurance contracts (the
"CONTRACTS") supported by certain separate accounts (each a "SEPARATE ACCOUNT"),
as set forth on attached Schedule A, which are registered with the SEC as a unit
investment trust. The Company has entered into a participation agreement (the
"PARTICIPATION AGREEMENT") with the Fund pursuant to which the Company purchases
shares of the Fund for the Separate Account supporting the Company's Contracts.
3. RPFI. RPFI serves as the Fund's investment adviser. RPFI supervises and
assists in the overall management of the Fund's affairs under an Investment
Management Agreement with the Fund, subject to the overall authority of the
Fund's Board of Directors in accordance with Maryland law. Under the Investment
Management Agreement, RPFI is compensated by the Fund for providing investment
advisory and certain administrative services (either directly or through its
affiliates).
4. ADMINISTRATIVE SERVICES. You have agreed to assist us and/or our
affiliates, as we may request from time to time, with the provision of
administrative services to the Fund, as they may relate to the investment in the
Fund by the Separate Account. It is anticipated that such services may include
(but shall not be limited to): the mailing of Fund reports, notices, proxies and
proxy statements and other informational materials to holders of the Contracts
supported by the Separate Account; the transmission of purchase and redemption
requests to the Fund's transfer agent; the maintenance of separate records for
each holder of the
<PAGE>
_________________ Insurance Company
_____________, 1997
Page Two
Contract reflecting shares purchased and redeemed and share balances; the
preparation of various reports for submission to the Fund Directors; the
provision of advice and recommendations concerning the operation of the series
of the Fund as funding vehicles for the Contracts; the provision of shareholder
support services with respect to the Portfolios serving as funding vehicles for
the Company's Contracts; telephonic support for holders of Contracts with
respect to inquiries about the Fund; and the provision of other administrative
services as shall be mutually agreed upon from time to time.
5. PAYMENT FOR ADMINISTRATIVE SERVICES. In consideration of the services to
be provided by you, we shall pay you on a quarterly basis ("PAYMENTS"), from our
assets, including our BONA FIDE profits as investment adviser to the Fund, an
amount equal to 15 basis points (0.15%) per annum of the average aggregate net
asset value of shares of the Fund held by the Separate Account under the
Participation Agreement, PROVIDED, HOWEVER, that such payments shall only be
payable for each calendar quarter during which the total dollar value of shares
of the Fund purchased pursuant to the Participation Agreement exceeds
$50,000,000. For purposes of computing the payment to the Company contemplated
under this Paragraph 5, the average aggregate net asset value of shares of the
Fund held by the Separate Account over a quarterly period shall be computed by
totaling the Separate Account's aggregate investment (share net asset value
multiplied by total number of shares held by the Separate Account) on each
business day during the calendar quarter, and dividing by the total number of
business days during such quarter. The payment contemplated by this Paragraph 5
shall be calculated by RPFI at the end of each calendar quarter and will be paid
to the Company within 30 business days thereafter.
6. NATURE OF PAYMENTS. The parties to this Agreement recognize and agree
that RPFI's Payments to the Company under this Agreement represent compensation
for administrative services only and do not constitute payment in any manner for
investment advisory services or for costs of distribution of the Contracts or of
Fund shares; and further, that these payments are not otherwise related to
investment advisory or distribution services or expenses, or administrative
services which RPFI is required to provide to owners of the Contracts pursuant
to the terms thereof. You represent that you may legally receive the payments
contemplated by this Agreement.
7. TERM. This Agreement shall remain in full force and effect for an
initial term of one year, and shall automatically renew for successive one-year
periods unless either party notifies the other upon 60-days written notice of
its intent not to continue this agreement. This Agreement and all obligations
hereunder shall terminate automatically upon the redemption of the Company's and
the Separate Account's investment in the Fund, or upon termination of the
Participation Agreement.
8. AMENDMENT. This Agreement may be amended only upon mutual agreement of
the parties hereto in writing.
9. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which shall together constitute one
and the same instrument.
<PAGE>
________________ Insurance Company
_____________, 1997
Page Three
If this Agreement is consistent with your understanding of the matters we
discussed concerning your administration services, kindly sign below and return
a signed copy to us.
Very truly yours,
ROWE PRICE-FLEMING
INTERNATIONAL, INC.
By: ____________________________________
Name: _________________________________
Title: __________________________________
Acknowledged and Agreed to:
___________________________LIFE INSURANCE COMPANY
By: __________________________________
Name: ________________________________
Title: _________________________________
<PAGE>
EXHIBIT 3
April 2, 1997
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of this
Post-Effective Amendment to the Registration Statement for the Inheiritage
Account on Form S-6 under the Securities Act of 1933 with respect to the
Company's individual flexible premium second-to-die variable life insurance
policies.
I am of the following opinion:
1. The Inheiritage Account is a separate account of the Company validly
existing pursuant to the Delaware Insurance Code and the regulations
issued thereunder.
2. The assets held in the Inheiritage Account equal to the reserves and
other Policy liabilities of the Policies which are supported by the
Inheiritage are not chargeable with liabilities arising out of any
other business the Company may conduct.
3. The individual flexible premium variable life insurance policies, when
issued in accordance with the Prospectuses contained in the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of the Inheiritage
Account on Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
EXHIBIT 6
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
April 2, 1997
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
This opinion is furnished in connection with the filing by Allmerica
Financial Life Insurance and Annuity Company of an amendment to the
Registration Statement on Form S-6 of its second-to-die flexible premium
variable life insurance policies ("Policies") allocated to the Inheiritage
Account under the Securities Act of 1933. The prospectus included in the
amendment to the Registration Statement describes the Policies. I am
familiar with and have provided actuarial advice concerning the preparation
of the amendment to the Registration Statement, including exhibits.
In my professional opinion, the illustration of death benefits and cash
values included in Appendix C of the prospectus, based on the assumptions
stated in the illustrations, are consistent with the provisions of the
Policy. 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 more favorable to a prospective purchaser of a Policy
for Insureds age 55 than to prospective purchasers of Policies for Insureds
at other ages or underwriting classes.
I am also of the opinion that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to the amendment to
the Registration Statement.
Sincerely,
/s/ William H. Mawdsley
William H. Mawdsley, FSA, MAAA
Vice President and Actuary
<PAGE>
Exhibit 1 (8)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 5 to the Registration Statement on Form S-6 of
our report dated February 3, 1997, relating to the financial statements of
Allmerica Financial Life Insurance and Annuity Company, our report dated
February 5, 1996 relating to the statutory basis financial statements of
Allmerica Financial Life Insurance and Annuity Company and our report dated
March 26, 1997, relating to the financial statements of the Inheiritage
Account of Allmerica Financial Life Insurance and Annuity Company, all of
which appear in such Prospectus. We also consent to the reference to us
under the heading "Independent Accountants" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 21, 1997
