VEL II ACCT OF STATE MUTUAL LIFE ASSUR CO OF AMERICA, 497, 1997-05-09

VEL II ACCT OF STATE MUTUAL LIFE ASSUR CO OF AMERICA
497, 1997-05-09

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This Prospectus describes an individual or group flexible premium variable life
insurance policy ("Policy") offered by First Allmerica Financial Life Insurance
Company ("Company" or "First Allmerica") to applicants Age 85 years old and
under.

The Policy permits you to allocate net premiums among up to seven of 18
sub-accounts ("Sub-Accounts") of the VEL II 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
-------------------
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 THE 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 POLICY IS AN OBLIGATION OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY,
AND IS DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICY IS NOT A DEPOSIT OR
OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT UNION. THE
POLICY IS NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE POLICY ARE
SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS
OF PRINCIPAL.

PROSPECTUS DATED MAY 1, 1997
WORCESTER, MASSACHUSETTS 01653 (508) 855-1000
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(Continued from cover page)

Each Underlying Fund has its own investment objectives. The accompanying
prospectuses of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF
describe the investment objectives and certain attendant risks of each
Underlying Fund.

Within limits, you may choose the amount of initial premium desired and the
initial Sum Insured. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Policy's Surrender Value, or the Policy may be fully
surrendered at any time, subject to certain limitations. Because of the
substantial nature of the surrender charge, the Policy is not suitable for
short-term investment purposes. A Policyowner contemplating surrender of a
Policy should pay special attention to the limitation of deferred sales charges
on surrenders in the first two years following issuance or Face Amount increase.

There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value also will be adjusted for other factors, including the amount
of charges imposed. A Policy will remain in effect so long as the Policy Value
less any surrender charges and less any outstanding debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy Value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments.

If the Policy is in effect at the death of the Insured, the Company will pay a
death benefit (the "Death Proceeds") to the Beneficiary. Prior to the Final
Premium Payment Date, the Death Proceeds equal the Sum Insured, less any debt,
partial withdrawals, and any due and unpaid charges. You may choose either Sum
Insured Option 1 (the Sum Insured is fixed in amount) or Sum Insured Option 2
(the Sum Insured includes the Policy Value in addition to a fixed insurance
amount). A Policyowner has the right to change the Sum Insured Option, subject
to certain conditions. A Guideline Minimum Sum Insured, equivalent to a
percentage of the Policy Value, will apply if greater than the Sum Insured
otherwise payable under Option 1 or Option 2.

In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code (the "Code"), any policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."

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.

THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE POLICY,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.

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TABLE OF CONTENTS

<TABLE>
<S> <C>
SPECIAL TERMS........................................................................ 5
SUMMARY.............................................................................. 8
PERFORMANCE INFORMATION.............................................................. 17
DESCRIPTION OF THE COMPANY, THE VEL II 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.................... 21
INVESTMENT OBJECTIVES AND POLICIES................................................... 23
INVESTMENT ADVISORY SERVICES......................................................... 25
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................................... 28
VOTING RIGHTS........................................................................ 29
THE POLICY........................................................................... 29
Applying for a Policy.............................................................. 29
Free-Look Period................................................................... 30
Conversion Privileges.............................................................. 31
Premium Payments................................................................... 31
Incentive Funding Discount......................................................... 32
Paid-Up Insurance Option........................................................... 32
Allocation of Net Premiums......................................................... 33
Transfer Privilege................................................................. 33
Death Proceeds..................................................................... 34
Sum Insured Options................................................................ 35
Change in Sum Insured Option....................................................... 37
Change in the Face Amount.......................................................... 37
Policy Value and Surrender Value................................................... 38
Death Proceeds Payment Options..................................................... 40
Optional Insurance Benefits........................................................ 40
Policy Surrender................................................................... 40
Partial Withdrawals................................................................ 41
CHARGES AND DEDUCTIONS............................................................... 41
Tax Expense Charge................................................................. 41
Monthly Deduction from the Policy Value............................................ 42
Charges Against Assets of the VEL II Account....................................... 44
Surrender Charge................................................................... 44
Charges on Partial Withdrawal...................................................... 46
Transfer Charges................................................................... 47
Charge for Increase in the Face Amount............................................. 47
Other Administrative Charges....................................................... 47
POLICY LOANS......................................................................... 47
Loan Interest...................................................................... 48
Repayment of Loans................................................................. 48
Effect of Policy Loans............................................................. 49
Policies Issued in Connection with TSA Plans....................................... 49
POLICY TERMINATION AND REINSTATEMENT................................................. 49
Termination........................................................................ 49
Reinstatement...................................................................... 50
OTHER POLICY PROVISIONS.............................................................. 51
Policyowner........................................................................ 51
Beneficiary........................................................................ 51
Incontestability................................................................... 51
</TABLE>

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<TABLE>
<S> <C>
Suicide............................................................................ 51
Age and Sex........................................................................ 52
Assignment......................................................................... 52
Postponement of Payments........................................................... 52
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY...................................... 53
DISTRIBUTION......................................................................... 53
SERVICES............................................................................. 54
REPORTS.............................................................................. 54
LEGAL PROCEEDINGS.................................................................... 54
FURTHER INFORMATION.................................................................. 54
INDEPENDENT ACCOUNTANTS.............................................................. 55
FEDERAL TAX CONSIDERATIONS........................................................... 55
The Company and The VEL II Account................................................. 55
Taxation of the Policy............................................................. 55
Modified Endowment Contracts....................................................... 57
MORE INFORMATION ABOUT THE GENERAL ACCOUNT........................................... 57
General Description................................................................ 58
General Account Values............................................................. 58
The Policy......................................................................... 58
FINANCIAL STATEMENTS................................................................. F-1
APPENDIX A -- OPTIONAL BENEFITS...................................................... A-1
APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS......................................... A-2
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, POLICY VALUES AND ACCUMULATED PREMIUMS... 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: the Insured's age as of the nearest birthday measured from a Policy
anniversary.

BENEFICIARY: the person(s) designated by the Policyowner to receive the
insurance proceeds upon the death of the Insured.

COMPANY: First Allmerica Financial Life Insurance 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 the time of the Insured's death, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy.

DEBT: all unpaid Policy loans plus interest due or accrued on such loans.

DELIVERY RECEIPT: an acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.

EVIDENCE OF INSURABILITY: information, including medical information
satisfactory to the Company, that is used to determine the Insured's Premium
Class.

FACE AMOUNT: the amount of insurance coverage applied for; the Face Amount of
each Policy is set forth in the specification pages of the Policy.

FINAL PREMIUM PAYMENT DATE: the Policy anniversary nearest the Insured's 95th
birthday. The Final Premium Payment Date is the latest date on which a premium
payment may be made. After this date, the Death Proceeds equal the Surrender
Value of the Policy.

GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.

GUIDELINE ANNUAL PREMIUM: the annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Tables (Mortality Table B, Smoker or Non-Smoker, for unisex
Policies), net investment earnings at an annual effective rate of 5%, and fees
and charges as set forth in the Policy and any Policy riders. The Sum Insured
Option 1 Guideline Annual Premium is used when calculating the maximum surrender
charge.

GUIDELINE MINIMUM SUM INSURED: the minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by age; it is calculated by multiplying the Policy Value by a
percentage determined by the Insured's Age.

INSURANCE AMOUNT AT RISK: the Sum Insured less the Policy Value.

LOAN VALUE: the maximum amount that may be borrowed under the Policy.

MINIMUM MONTHLY FACTOR: a monthly premium amount calculated by the Company and
specified in your Policy. If you pay this amount, the Company guarantees that
your 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. Making payments
at least equal to the Minimum Monthly Factors, however, will not prevent the
Policy from lapsing if (a) Debt exceeds Policy Value less surrender charges, or
(b) partial withdrawals and partial

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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
the Policy Value.

NET PREMIUM: an amount equal to the premium less a tax expense charge.

POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.

POLICY VALUE: the total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Policy.

POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.

PREMIUM CLASS: the risk classification that the Company assigns the Insured
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insured's Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.

PRINCIPAL OFFICE: the Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.

PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account the Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account 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 VEL II 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
("Fidelity VIP") or the Variable Insurance Products Fund II ("Fidelity VIP II"),
the T. Rowe Price International Stock Portfolio of T. Rowe Price International
Series, Inc. ("T. Rowe Price") or the International Equity Series of the
Delaware Group Premium Fund, Inc. ("DGPF").

SUM INSURED: the amount payable upon the death of the Insured, before the Final
Premium Payment Date, prior to deductions for Debt outstanding at the time of
the Insured's death, partial withdrawals and partial withdrawal charges, if any,
and any due and unpaid Monthly Deductions. The amount of the Sum Insured will
depend on the Sum Insured Option chosen, but always will be at least equal to
the Face Amount.

SURRENDER VALUE: the amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.

UNDERLYING FUNDS (FUNDS): the Funds of the Allmerica Investment Trust, the
Portfolios of the Variable Insurance Products Fund and Variable Insurance
Products Fund II, the Portfolio of T. Rowe Price

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International Series, Inc., and the Series of the Delaware Group Premium Fund,
Inc. available under the Policy.

VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
affected materially.

VEL II ACCOUNT: a separate account of the Company to which the Policyowner may
make Net Premium allocations.

WRITTEN REQUEST: a request in writing, by the Policyowner, satisfactory to the
Company.

YOU OR YOUR: the Policyowner, as shown in the application or the latest change
filed with the Company.

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SUMMARY

The following is a summary of the flexible premium variable life insurance
Policy sold by First Allmerica Financial Life Insurance 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.

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 VEL II Account, PLUS

(2) the value of the amounts allocated to the VEL II Account, PLUS

(3) any fees or charges imposed on the amounts allocated to the VEL II
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 Insured,

- - Policy Value,

- - surrender rights and partial withdrawal rights,

- - loan privileges, and

- - in some cases, additional insurance benefits available by rider for an
additional charge.

LIFE INSURANCE

The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is
"variable" because the Policy Value will increase or decrease

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depending on the investment experience of the Sub-Accounts of the VEL II
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, 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.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS

The Policies may be issued in connection with Code Section 403(b) tax-sheltered
annuity plans ("TSA Plans") of certain public school systems and organizations
that are tax exempt under Section 501(c)(3) of the Code. A Policy issued in
connection with a TSA Plan will be endorsed to reflect the restrictions imposed
on assignment, premium payments, withdrawals, and surrender under Code Section
403(b). The Policyowner may terminate the endorsement at any time. However, the
termination of the endorsement may cause the Policy to fail to qualify under
Code Section 403(b). See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN
CONNECTION WITH TSA PLANS." A Policy issued in connection with a TSA Plan may
also have limitations on Policy loans. See "POLICY LOANS -- "POLICIES ISSUED IN
CONNECTION WITH TSA PLANS."

MINIMUM MONTHLY FACTOR

The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in 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.

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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 VEL II 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 $40,000.

A transaction charge, which is described in CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawal," will be assessed to reimburse the Company for the cost
of processing each partial withdrawal. A 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 Withdrawal" and CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal."

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

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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.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS -- Loans from Policies issued in
connection with tax-sheltered annuity plans ("TSA Plans") of certain public
school systems and organizations that are tax exempt under Section 501(c)(3) of
the Code are subject to additional restrictions. See POLICY LOANS -- "POLICIES
ISSUED IN CONNECTION WITH TSA PLANS."

POLICY LAPSE AND REINSTATEMENT

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 you 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 VEL II 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

11
<PAGE>
the Death Proceeds. You bear the entire investment risk for amounts allocated to
the VEL II Account. The Company does not guarantee a minimum Policy Value.

The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.

DEATH PROCEEDS

The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Sum Insured, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Policy month in which
the Insured dies.

Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the Insured's Age) of the Policy Value. On or after the Final Premium Payment
Date, the Death Proceeds will equal the Surrender Value. 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 -- DEATH
PROCEEDS PAYMENT OPTIONS."

FLEXIBILITY TO ADJUST SUM INSURED

Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Policy. Any change in the Face
Amount will affect the monthly cost of insurance charges and the amount of the
surrender charge. If 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 $10,000 and any increase also may require
additional Evidence of Insurability satisfactory to the Company. The increase is
subject to a "free-look period" and, during the first 24 months after the
increase, to a conversion privilege. See THE POLICY -- "Free-Look Period" and
"Conversion Privileges."

ADDITIONAL INSURANCE BENEFITS

You have the flexibility to add additional insurance benefits by rider. These
include the Waiver of Premium Rider, Accidental Death Benefit Rider, Guaranteed
Insurability Rider, Other Insured Rider, Children's Insurance Rider, Exchange
Option Rider, and Living Benefits 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 the Policy Value."

POLICY FEES AND CHARGES

There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.

DEDUCTIONS FROM EACH PREMIUM

A tax expense charge will be deducted from each premium payment to compensate
the Company for premium taxes imposed by various states and local jurisdictions
and for federal taxes imposed for deferred

12
<PAGE>

acquisition costs ("DAC taxes"). The tax expense charge is currently 3 1/2% but
may be increased or decreased to reflect changing tax rates. See CHARGES AND
DEDUCTIONS -- "Tax Expense Charge."

MONTHLY DEDUCTIONS FROM THE POLICY VALUE

On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy
Value."

The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.

A MONTHLY ADMINISTRATIVE CHARGE of $5 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyholder inquiries.

As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See "APPENDIX A -- OPTIONAL
BENEFITS."

DEDUCTIONS FROM THE VEL II ACCOUNT

A daily charge currently equivalent to an effective annual rate of 0.80% of the
average daily net asset value of each Sub-Account of the VEL II Account is
imposed to compensate the Company for its assumption of certain mortality and
expense risks and for administrative costs associated with the VEL II Amount.
The rate is 0.65% for the mortality and expense risk and 0.15% for the VEL II
Account administrative charge. The administrative charge is eliminated after the
tenth Policy year. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of the
VEL II Account."

The Underlying Funds also incur certain expenses which are reflected in the net
asset value of the Sub-Accounts. See "INVESTMENT OPTIONS -- CHARGES OF THE
UNDERLYING FUNDS," below.

OTHER CHARGES (NON-PERIODIC)

TRANSACTION CHARGE ON PARTIAL WITHDRAWALS

A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn or $25. In addition to the
transaction charge, a partial withdrawal charge also may be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."

CHARGE FOR INCREASE IN THE FACE AMOUNT

For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See "THE POLICY," "Change
In the Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase In the
Face Amount."

13
<PAGE>
TRANSFER CHARGE

The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES AND DEDUCTIONS
- -- "Transfer Charges."

SURRENDER CHARGES

At any time that the Policy is in effect, a Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in Face Amount. The duration
of the surrender charge is 15 years for issue Ages 0 through 50, grading down to
10 years for issue Ages 55 and above. The surrender charge is imposed only if,
during its duration, you request a full surrender or a decrease in the Face
Amount.

SURRENDER CHARGE ON THE INITIAL FACE AMOUNT

The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b), where (a) is a DEFERRED ADMINISTRATIVE CHARGE, and (b)
is a DEFERRED SALES CHARGE.

The DEFERRED ADMINISTRATIVE CHARGE is $8.50 per thousand dollars of the initial
Face Amount or of an increase in the Face Amount. The charge is designed to
reimburse the Company for administrative costs associated with product research
and development, underwriting, Policy administration, decreasing the Face
Amount, and surrendering a Policy. Because the maximum surrender charge reduces
by 0.5% or more per month (depending on issue Age) after the 40th Policy month
from the Date of Issue or the effective date of an increase in the Face Amount,
in certain situations some or all of the deferred administrative charge may not
be assessed upon surrender of the Policy. The deferred sales charge is equal to
49% of premiums received up to a maximum number of Guideline Annual Premiums
that vary by issue Age. This maximum number varies from 1.660714 (for Ages 0
through 55) to 0.948980 (for Age 80). See THE POLICY -- "Surrender" and CHARGES
AND DEDUCTIONS -- "Surrender Charge."

In accordance with state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of the initial
Face Amount, as indicated in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES."

If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above. The deferred sales charge, however, will not exceed
29% of premiums received, up to one Guideline Annual Premium, plus 9% of
premiums received that are in excess of one Guideline Annual Premium, but less
than the maximum number of Guideline Annual Premiums subject to the deferred
sales charge. See THE POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."

SURRENDER CHARGES FOR INCREASES IN THE FACE AMOUNT

A separate surrender charge will apply to, and is calculated for, each increase
in the Face Amount. The maximum surrender charge for the increase is equal to
the sum of (a) plus (b), where (a) is the deferred administrative charge, and
(b) is a deferred sales charge. The deferred administrative charge is equal to
$8.50 per thousand dollars of increase. The deferred sales charge is equal to
49% of premiums associated with the increase, up to a maximum number of
Guideline Annual Premiums that varies by issue Age. This maximum number varies
from 1.660714 (for Ages 0 through 55) to 0.948980 (for Age 80).

In accordance with state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES." This maximum
surrender charge remains level for the first 40 Policy months following the
increase, and reduces by 0.5% or more per month (depending on Age at

14
<PAGE>

increase) thereafter. See "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES." The actual surrender charge with respect to the increase may be less
than the maximum. See THE POLICY -- "Policy Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."

SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT

In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full Policy surrender. See THE
POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."

OTHER CHARGES

The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. No such charges currently are imposed, and any such
charge is guaranteed not to exceed $25. See CHARGES AND DEDUCTIONS -- "Other
Administrative Charges."

INVESTMENT OPTIONS

The Policy permits Net Premiums to be allocated either to the Company's General
Account or to the VEL II Account. The VEL II Account currently is comprised of
18 Sub-Accounts ("Sub-Accounts"). Each Sub-Account invests exclusively in a
corresponding Underlying Fund of the Allmerica Investment Trust ("Trust")
managed by Allmerica Investment Management Company, Inc., Fidelity Variable
Insurance Products Fund ("Fidelity VIP") and Fidelity Variable Insurance
Products Fund II ("Fidelity VIP II") managed by Fidelity Management, T. Rowe
Price International Series, Inc. ("T. Rowe Price") managed by Rowe Price-Fleming
International, Inc., with respect to the T. Rowe Price International Stock
Portfolio, or the Delaware Group Premium Fund, Inc. ("DGPF") managed by Delaware
International Advisers, Ltd. with respect to the International Equity Series.
The Policy permits you to transfer Policy Value among the available Sub-Accounts
and between the Sub-Accounts and the General Account of the Company, subject to
certain limitations described under "THE POLICY," "Transfer Privilege." The
Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified series management investment companies. The following Underlying
Funds are available under the Policy:

<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Small-Mid Cap Value Fund High Income Portfolio
Select Growth Fund FIDELITY VIP II
Growth Fund Asset Manager Portfolio
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund T. Rowe Price
Investment Grade Income Fund International Stock
Government Bond Fund Portfolio
Money Market Fund DGPF
International Equity
Series
</TABLE>

Each of the Underlying Funds has its own investment objectives. Certain
Underlying Funds, however, have investment objectives similar to certain other
Underlying Funds.

The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved.

15
<PAGE>
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 ANY
MANAGEMENT APPLICABLE TOTAL FUND
UNDERLYING FUND FEE 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

16
<PAGE>

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, 0.67% for Fidelity VIP Growth Portfolio, 0.92% for
Fidelity VIP Overseas Portfolio and 0.73% for Fidelity VIP II Asset Manager
Portfolio.

TAXATION OF THE POLICIES

The Policy generally is subject to the same federal income tax treatment as a
conventional fixed benefit life insurance Policy. Under current tax law, to the
extent there is no change in benefits, the Policyowner will be taxed on Policy
Value withdrawn from the Policy only to the extent that the amount withdrawn
exceeds the total premiums paid. Withdrawals in excess of premiums paid will be
treated as ordinary income. During the first 15 Policy years, however, an
"interest first" rule applies to any distribution of cash that is required under
Section 7702 of the Code because of a reduction in benefits under the Policy.
Death Proceeds under the Policy are generally excludable from the gross income
of the Beneficiary, but in some circumstances the Death Proceeds or the Policy
Value may be subject to federal estate tax. See FEDERAL TAX CONSIDERATIONS --
"Taxation of the Policy."

A Policy may be considered a "modified endowment contract" if it fails a
"seven-pay" test at any time during the first seven Policy years. The Policy
fails to satisfy the seven-pay test if the cumulative premiums paid under the
Policy at any time during the first seven Policy years exceed the sum of the net
level premiums that would have been paid had the Policy provided for paid-up
future benefits after the payment of seven level premiums. If the Policy is
considered a modified endowment contract, all distributions (including Policy
loans, partial withdrawals, Policy surrenders or assignments) will be taxed on
an "income-first" basis. With certain exceptions, an additional 10% penalty will
be imposed on the portion of any distribution that is includible in income. For
more information, see "FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."

17
<PAGE>
------------------------

PERFORMANCE INFORMATION

The Policy was first offered to the public in 1994. The Company, however, 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 Policy being offered will be
calculated as if the Policy had been offered during that period of time, with
all charges assumed to be those applicable to the Sub-Accounts, the Underlying
Funds, and (in Table I) under a "representative" Policy that is surrendered at
the end of the applicable period. FOR MORE INFORMATION ON CHARGES UNDER THE
POLICY, SEE "CHARGES AND DEDUCTIONS."

In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
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.

Performance information may be compared, in reports and promotional literature,
to:

- - Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow Jones
Industrial Average (DJIA), Shearson, Lehman Aggregate Bond Index, or other
unmanaged indices so that investors may compare results with those of a group
of unmanaged securities widely regarded by investors as representative of the
securities markets in general (unmanaged indices may assume the reinvestment
of dividends, but generally do not reflect deductions for administrative and
management costs and expenses); or

- - other groups of variable life separate accounts or other investment products
tracked by Lipper 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

- - the Consumer Price Index (a measure for inflation) to assess the real rate of
return from an investment.

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.

18
<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 Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.

AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/96

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 -94.80% N/A -29.55% 2.67
DGPF International Equity Series -96.54% N/A -9.69% 4.17
Fidelity VIP Overseas Portfolio -100.00% -7.76% 1.38% 9.92
T. Rowe Price International Stock Portfolio -100.00% N/A -36.19% 2.58
Select Aggressive Growth Fund -97.86% N/A 0.99% 4.36
Select Capital Appreciation Fund -100.00% N/A -44.47% 1.67
Small-Mid Cap Value Fund -88.86% N/A -12.58% 3.67
Select Growth Fund -94.74% N/A -8.03% 4.36
Growth Fund -96.39% -3.13% 9.11% 10.00
Fidelity VIP Growth Portfolio -100.00% -0.21% 9.49% 10.00
Equity Index Fund -94.48% 0.88% 7.36% 6.26
Select Growth and Income Fund -95.42% N/A -6.56% 4.36
Fidelity VIP Equity-Income Portfolio -100.00% 3.22% 7.96% 10.00
Fidelity VIP II Asset Manager Portfolio -100.00% -5.06% 2.64% 7.32
Fidelity VIP High Income Portfolio -100.00% -0.46% 5.08% 10.00
Investment Grade Income Fund -100.00% -10.18% 1.94% 10.00
Government Bond Fund -100.00% -12.07% -9.15% 5.35
Money Market Fund -100.00% -14.06% 0.85% 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 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.

<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 Policy or
surrender charges. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.

AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/96

10 Years
One-Year or Life Years
Total of Fund Since
Underlying Fund Return 5 Years (if less) Inception*
<S> <C> <C> <C> <C>
Select International Equity Fund 20.89% N/A 12.37% 2.67
DGPF International Equity Series 18.98% N/A 11.15% 4.17
Fidelity VIP Overseas Portfolio 12.23% 7.89% 6.64% 9.92
T. Rowe Price International Stock Portfolio 13.67% N/A 8.67% 2.58
Select Aggressive Growth Fund 17.52% N/A 18.39% 4.36
Select Capital Appreciation Fund 7.85% N/A 26.86% 1.67
Small-Mid Cap Value Fund 27.42% N/A 13.54% 3.67
Select Growth Fund 20.96% N/A 11.35% 4.36
Growth Fund 19.14% 11.50% 13.47% 10.00
Fidelity VIP Growth Portfolio 13.71% 13.83% 13.82% 10.00
Equity Index Fund 21.24% 13.29% 16.40% 6.26
Select Growth and Income Fund 20.21% N/A 12.47% 4.36
Fidelity VIP Equity-Income Portfolio 13.29% 16.62% 12.43% 10.00
Fidelity VIP II Asset Manager Portfolio 13.61% 9.98% 10.40% 7.32
Fidelity VIP High Income Portfolio 13.04% 13.63% 9.84% 10.00
Investment Grade Income Fund 2.65% 6.05% 7.06% 10.00
Government Bond Fund 2.60% 4.64% 5.68% 5.35
Money Market Fund 4.43% 3.18% 4.65% 10.00
</TABLE>

20
<PAGE>
DESCRIPTION OF THE COMPANY, THE VEL II 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, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. The Company is a wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). The Company's principal office is located at 440
Lincoln Street, Worcester, Massachusetts 01653, telephone 508-855-1000
("Principal Office").

The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.

THE VEL II ACCOUNT

The VEL II Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The VEL II 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 VEL II
Account or the Company by the SEC.

The assets used to fund the variable portion of the Policy are set aside in the
VEL II Account, and are kept separate from the general assets of the Company.
Under Massachusetts law, assets equal to the reserves and other liabilities of
the VEL II Account may not be charged with any liabilities arising out of any
other business of the Company. The VEL II Account currently has 18 Sub-Accounts.
Each Sub-Account is administered and accounted for as part of the general
business of the Company, but the income, capital gains, or capital losses of
each Sub-Account are allocated to such Sub-Account, without regard to other
income, capital gains or capital losses of the Company, or the other
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of one of the following investment companies:

- - Allmerica Investment Trust

- - Variable Insurance Products Fund

- - Variable Insurance Products Fund II

- - T. Rowe Price International Series, Inc.

- - Delaware Group Premium Fund, Inc.

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 VEL II Account.

Each Sub-Account has two subdivisions. One subdivision applies to a Policy
during the first ten Policy years, which are subject to the VEL II Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the VEL II Account." Thereafter, such a Policy

21
<PAGE>
automatically is allocated to the second subdivision to account for the
elimination of the VEL II Account administrative charge.

The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and VEL II 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
policies 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 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.

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.

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 under the 1940 Act. One of its investment portfolios is available under the
Policy: the T. Rowe Price International Stock Portfolio.

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<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.

Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policy: the International Equity
Series. The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."

INVESTMENT OBJECTIVES AND POLICIES

A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.

SELECT 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.

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

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<PAGE>
prices. The objective of the Growth Fund is to achieve long-term growth of
capital. Realization of current investment income, if any, is incidental to this
objective.

FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.

EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.

SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund 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.

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 the Fidelity VIP prspectus.

INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.

GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.

MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.

CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.

If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Policy Value in that Sub-Account, the
Company will transfer it without charge on written request within sixty (60)
days of the

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<PAGE>
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 * 1.00%
Fund

Select Aggressive Growth Fund * 1.00%

Select Capital Appreciation * 1.00%
Fund

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>

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<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.

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 Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
applicable Fund, subject to such general or specific instructions as may be
given by the Trustees. 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 Select International Equity First $50 million 0.45%
Management (U.S.) Limited Fund 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 First $100 million 0.60%
Fund
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, Select Growth Fund First $50 million 0.50%
Inc. $50 - 150 million 0.45%
$150 - 250 million 0.35%
$250 - 350 million 0.30%
Over $350 million 0.25%

Miller, Anderson & Sherrerd, Growth Fund * *
LLP

Allmerica Asset Management, Equity Index Fund ** 0.10%
Inc.

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, Investment Grade Income Fund ** 0.20%
Inc.

Allmerica Asset Management, Government Bond Fund ** 0.20%
Inc.

Allmerica Asset Management, Money Market Fund ** 0.10%
Inc.
</TABLE>

*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:

26
<PAGE>

<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.

The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds, and
should be read in conjunction with this Prospectus.

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 Fidelity VIP Overseas
Portfolio may have a fee as high as 0.97% of its average net assets. The actual
fee rate may be less depending on the total assets in the funds advised by FMR.

INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE

The Investment Adviser for the 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,

27
<PAGE>
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.

INVESTMENT ADVISORY SERVICES TO DGPF

Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is 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 VEL II Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy interest in a Sub-Account without notice to
the Policyowner and prior approval of the SEC and state insurance authorities,
to the extent required by law. The VEL II Account may, to the extent permitted
by law, purchase other securities for other policies or permit a conversion
between policies upon request by a Policyowner.

The Company also reserves the right to establish additional Sub-Accounts of the
VEL II Account, each of which would invest in shares of a new Underlying Fund or
in shares of another investment company. Subject to applicable law and any
required SEC approval, the Company may, in its sole discretion, establish new
Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Sub-Accounts may be
made available to existing Policyowners on a basis to be determined by the
Company.

Shares of the Funds of the Trust also are issued to Separate Accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price and the Series of DGPF also are issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policyowners or variable annuity contract owners. Although the
Company and the Underlying Funds currently do not foresee any such disadvantages
to either variable life insurance Policyowners or variable annuity contract
owners, the Company and the respective Trustees intend to monitor events in
order to identify any material conflicts and to determine what action, if any,
should be taken. If the Trustees were to conclude that separate Funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the expenses.

If any of these substitutions or changes are made, the Company may endorse the
Policy to reflect the substitution or change, and will notify Policyowners of
all such changes. If the Company deems it to be in the best interest of
Policyowners, and subject to any approvals that may be required under applicable
law, the VEL II Account or any Sub-Account(s) may be operated as a management
company under the 1940 Act, may be deregistered under the 1940 Act if
registration is no longer required, or may be combined with other Sub-Accounts
or other Separate Accounts of the Company.

VOTING RIGHTS

To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended, or if the present interpretation of the 1940 Act or such
rules should change and, as a result the Company determines that it is permitted
to vote shares in its own right, whether or not such shares are attributable to
the Policy, the Company reserves the right to do so.

28
<PAGE>
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions which have been received by the Company. The Company also will vote
shares held in the VEL II Account that it owns and which are not attributable to
the Policy in the same proportion.

The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.

The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the sub-classification or investment
objective of one or more of the Underlying Funds, or (2) 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 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

29
<PAGE>
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 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 VEL
II 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 VEL II Account, PLUS

(2) the value of the amounts allocated to the VEL II Account, PLUS

(3) any fees or charges imposed on the amounts allocated to the VEL II 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.

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<PAGE>
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 VEL II 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 VEL II 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 VEL II 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, 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.

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<PAGE>
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."

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 underwriting class on the date this option is
elected. The Company will transfer any Policy Value in the Variable Account to
the General Account on the date it receives the written request to elect the
option. If the Surrender Value exceeds the net single premium necessary for the
fixed insurance, the Company will pay the excess to the Policyowner. The net
single premium is based on the Commissioners 1980 Standard Ordinary Mortality
Tables, Smoker or Non-Smoker (Table B for unisex policies) with increases in the
tables for non-standard risks. Interest will not be less than 4.5%.

IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:

- - As described above, the paid-up insurance benefit is computed differently from
the net death benefit, and the death benefit options will not apply.

- - The Company will transfer the Policy Value in the Variable 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 Variable 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.

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<PAGE>
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 3 1/2% tax expense charge. In
the application for a Policy, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the VEL II 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 Company and its agents and affiliates will not be responsible for
losses resulting from acting upon telephone requests reasonably believed to be
genuine. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; otherwise, the Company may
be liable for any losses due to unauthorized or fraudulent instructions.

The procedures the Company follows for telephone transactions 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.

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<PAGE>
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION

You may have automatic transfers of at least $100 a month made on a periodic
basis:

- - from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust, respectively, to one or more of the other Sub-Accounts
("Dollar-Cost Averaging Option"), or

- - to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").

Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.

TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS

The transfer privilege is subject to the Company's consent. The Company reserves
the right to impose limitations on transfers including, but not limited to:

- - the minimum amount that may be transferred,

- - the minimum amount that may remain in a Sub-Account following a transfer from
that Sub-Account,

- - the minimum period of time between transfers involving the General Account,
and

- - the maximum amount that may be transferred each time from the General Account.

Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.

DEATH PROCEEDS

As long as the Policy remains in force (see "POLICY TERMINATION AND
REINSTATEMENT"), upon due proof of the Insured's death, the Company will pay the
Death Proceeds of the Policy to the named Beneficiary. The Company normally will
pay the Death Proceeds within seven days of receiving due proof of the Insured's
death, but the Company may delay payments under certain circumstances. See OTHER
POLICY PROVISIONS -- "Postponement of Payments." The Death Proceeds may be
received by the Beneficiary in cash or under one or more of the payment options
set forth in the Policy. See "APPENDIX B --DEATH PROCEEDS PAYMENT OPTIONS."

Prior to the Final Premium Payment Date, the Death Proceeds are equal to:

- - the Sum Insured provided under Option 1 or Option 2, whichever is elected and
in effect on the date of death; PLUS

- - any additional insurance on the Insured's life that is provided by rider;
MINUS

- - any outstanding Debt, any partial withdrawals and partial withdrawal charges,
and any Monthly Deductions due and unpaid through the Policy month in which
the Insured dies.

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 the Insured's death.

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<PAGE>
SUM INSURED OPTIONS

The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the Option once per Policy year by Written Request. There is no charge
for a change in Option.

Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.

GUIDELINE MINIMUM SUM INSURED

To remain qualified as "life insurance" for federal tax purposes, federal tax
law requires that policies have a minimum amount of pure life insurance
protection in relation to the size of the Policy Value. The Guideline Minimum
Sum Insured is used to determine compliance with this requirement. So long as
the Policy qualifies as a life insurance contract, the insurance proceeds will
be excluded from the gross income of the Beneficiary.

GUIDELINE MINIMUM SUM INSURED TABLE

<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
- ------------------------------------------------- ---------------
<S> <C>
40 and under................................. 250%
45........................................... 215%
50........................................... 185%
55........................................... 150%
60........................................... 130%
65........................................... 120%
70........................................... 115%
75........................................... 105%
80........................................... 105%
85........................................... 105%
90........................................... 105%
95 and above................................. 100%
</TABLE>

For the Ages not listed, the progression between the listed Ages is linear.

Under both Option 1 and Option 2, the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under the Guideline Minimum Sum Insured exceeds the Face Amount,
in which case the Sum Insured will vary as the Policy Value varies. Under Option
2, the Sum Insured varies as the Policy Value changes.

For any Face Amount, the amount of the Sum Insured (and the Death Proceeds) will
be greater under Option 2 than under Option 1. This is because the Policy Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. Under Option 2, however, the cost of insurance included in the
Monthly Deduction will be greater, and the rate at which Policy Value will
accumulate will be slower (assuming the same specified Face Amount and the same
actual premiums paid). See CHARGES AND DEDUCTIONS -- "Monthly Deduction from the
Policy Value."

If you desire to have premium payments and investment performance reflected in
the amount of the Sum Insured, you should choose Option 2. If you desire premium
payments and investment performance reflected to the maximum extent in the
Policy Value, you should select Option 1.

ILLUSTRATIONS

For the purposes of the following illustrations, assume that the Insured is
under the Age of 40 and that there is no outstanding Debt.

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<PAGE>
ILLUSTRATION OF OPTION 1 -- Under Option 1, the Face Amount of the Policy
generally will equal the Sum Insured. If at any time, however, the Policy Value
multiplied by the applicable percentage is less than the Face Amount, the Sum
Insured will equal the Face Amount of the Policy.

For example, a Policy with a $50,000 Face Amount will generally have a Sum
Insured equal to $50,000. Because the Sum Insured must be equal to or greater
than 250% of Policy Value, however, if at any time the Policy Value exceeds
$20,000, the Sum Insured will exceed the $50,000 Face Amount. In this example,
each additional dollar of Policy Value above $20,000 will increase the Sum
Insured by $2.50. For example, a Policy with a Policy Value of $35,000 will have
a Guideline Minimum Sum Insured of $87,500 ($35,000 x 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 x
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 x 2.50).

Similarly, so long as Policy Value exceeds $20,000, each dollar taken out of
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $25,000 to $20,000 (because of partial withdrawals,
charges or negative investment performance), the Sum Insured will be reduced
from $62,500 to $50,000.

The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Sum Insured would not
exceed the $50,000 Face Amount unless the Policy Value exceeded $27,027 (rather
than $20,000), and each dollar then added to or taken from Policy Value would
change the Sum Insured by $1.85.

ILLUSTRATION OF OPTION 2 -- Under Option 2, the Sum Insured is generally equal
to the Face Amount of the Policy plus the Policy Value. The Sum Insured under
Option 2, however, always will be the greater of:

- - the Face Amount plus Policy Value; or

- - the Policy Value multiplied by the applicable percentage from the Guideline
Minimum Sum Insured table.

For example, a Policy with a Face Amount of $50,000 and with Policy Value of
$5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000). Policy Value of
$10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000); Policy Value
of $25,000 will produce a Sum Insured of $75,000 ($50,000 + $25,000).

According to the Guideline Minimum Sum Insured table, however, the Sum Insured
for the example must be at least 250% of the Policy Value. Therefore, if the
Policy Value is greater than $33,333, 250% of that amount will be the required
Sum Insured, which will be greater than the Face Amount plus Policy Value. In
this example, each additional dollar of Policy Value above $33,333 will increase
the Sum Insured by $2.50. For example, if the Policy Value is $35,000, the
Guideline Minimum Sum Insured will be $87,500 ($35,000 x 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 x
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 x 2.50).

Similarly, if the Policy Value exceeds $33,333, each dollar taken out of the
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $45,000 to $40,000 because of partial withdrawals, charges
or negative investment performance, the Sum Insured will be reduced from
$112,500 to $100,000. If at any time, however, Policy Value multiplied by the
applicable percentage is less than the Face Amount plus Policy Value, then the
Sum Insured will be the current Face Amount plus the Policy Value.

The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Sum Insured must be at least
1.85 times the Policy Value. The amount of the Sum Insured would be the sum of
the Policy Value plus $50,000 unless the Policy Value exceeded $58,824 (rather
than $33,000). Each dollar added to or subtracted from the Policy would change
the Sum Insured by $1.85.

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<PAGE>
CHANGE IN SUM INSURED OPTION

Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a written request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.

CHANGE FROM OPTION 1 TO OPTION 2

If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount of less than $40,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Under Option 2, the Insurance Amount at Risk always will
equal the Face Amount unless the Guideline Minimum Sum Insured is in effect. The
cost of insurance also may be higher or lower than it otherwise would have been
without the change in Sum Insured Option. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from the Policy Value."

CHANGE FROM OPTION 2 TO OPTION 1

If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. The change in
option, however, will affect the determination of the Sum Insured from that
point on, since the Policy Value no longer will be added to the Face Amount in
determining the Sum Insured; the Sum Insured will equal the new Face Amount (or,
if higher, the Guideline Minimum Sum Insured). The cost of insurance may be
higher or lower than it otherwise would have been since any increases or
decreases in Policy Value will reduce or increase, respectively, the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the VEL II Account, changing the Sum Insured Option
from Option 2 to Option 1 will reduce the Insurance Amount at Risk and therefore
the cost of insurance charge for all subsequent Monthly Deductions, compared to
what such charge would have been if no such change were made.

A change in Sum Insured Option may result in total premiums paid exceeding the
then-current maximum premium limitation determined by IRS Rules. In such event,
the Company will pay the excess to the Policyowner. See THE POLICY -- "Premium
Payments."

CHANGE IN THE FACE AMOUNT

Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Policy at any time by submitting a Written Request to the Company.
Any increase or decrease in the specified Face Amount requested by you will
become effective on the Monthly Payment Date on or next following the date of
receipt of the request at the Principal Office or, if Evidence of Insurability
is required, the date of approval of the request.

INCREASES IN THE FACE AMOUNT

Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured also is required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than $10,000. You may not increase the Face Amount after the Insured
reaches Age 80. 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.

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<PAGE>
On the effective date of each increase in the Face Amount, a transaction charge
of $40 will be deducted from the Policy Value for administrative costs. The
effective date of the increase will be the first Monthly Payment Date on or
following the date all of the conditions for the increase are met.

An increase in the Face Amount generally will affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge also will
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly Deduction
from the Policy Value" and "Surrender Charge."

After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase canceled and the charges which would not have been
deducted but for the increase will be credited to the Policy, and (2) during the
first 24 months following the increase, to transfer any or all Policy Value to
the General Account free of charge. See THE POLICY -- "Free-Look Period" and
"Conversion Privileges." A refund of charges which would not have been deducted
but for the increase will be made at your request.

DECREASES IN THE FACE AMOUNT

The minimum amount for a decrease in the Face Amount is $10,000. The Face Amount
in force after any decrease may not be less than $50,000. If, following a
decrease in the Face Amount, the Policy would not comply with the maximum
premium limitation applicable under the IRS Rules, the decrease may be limited
or Policy Value may be returned to the Policyowner (at your election) to the
extent necessary to meet the requirements. A return of Policy Value may result
in tax liability to you.

A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS "Monthly Deduction from the Policy Value." For purposes
of determining the cost of insurance charge, any decrease in the Face Amount
will reduce the Face Amount in the following order:

- - the Face Amount provided by the most recent increase;

- - the next most recent increases successively; and

- - the initial Face Amount.

This order also will be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
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). See THE POLICY -- "Policy
Surrender." There is no guaranteed minimum Policy Value. Because the Policy
Value on any date depends upon a number of variables, it cannot be
predetermined.

The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-

38
<PAGE>
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 VEL II 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 VEL II 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;

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(c) is a charge for each day in the Valuation Period equal, on an annual basis,
to 0.65% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 1.275%; and

(d) is the VEL II Account administrative charge for each day in the Valuation
Period equal, on an annual basis, to 0.15% of the daily net asset value of
that Sub-Account. The administrative charge may be increased or decreased by
the Company, but may not exceed 0.25%. This charge is applicable only during
the first ten Policy years.

The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.

Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See "MORE
INFORMATION ABOUT THE GENERAL ACCOUNT."

DEATH PROCEEDS PAYMENT OPTIONS

During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the available payment options. The
payment options currently available are described in "APPENDIX B -- DEATH
PROCEEDS PAYMENT OPTIONS." These choices also are available at the Final Premium
Payment Date and if the Policy is surrendered. The Company may make more payment
options available in the future.

If no election is made, the Company will pay the Death Proceeds in a single sum.
When the Death Proceeds are payable in a single sum, the Beneficiary may, within
one year of the Insured's death, select one or more of the payment options if no
payments have yet been made.

OPTIONAL INSURANCE BENEFITS

Subject to certain requirements, one or more of the optional insurance benefits
described in "APPENDIX A -- OPTIONAL BENEFITS" may be added to a Policy by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from the
Policy Value."

POLICY SURRENDER

You may surrender the Policy at any time and receive its Surrender Value. The
Surrender Value is equal to:

- - the Policy Value, MINUS

- - any Debt and applicable surrender charges.

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 the 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 -- DEATH PROCEEDS PAYMENT OPTIONS."
Normally, the Company will pay the Surrender Value within seven days following
the Company's receipt of the surrender request, but the Company may delay
payment under the circumstances described in OTHER POLICY PROVISIONS --
"Postponement Of Payments."

The surrender rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas Optional Retirement Program ("Texas
ORP") are restricted; see FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN
CONNECTION WITH TSA PLANS."

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For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.

PARTIAL WITHDRAWALS

Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of your Policy, subject to the limits stated below, upon Written
Request filed at the Principal Office. The Written Request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions, the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500.

Under Option 1, the Face Amount is reduced by the amount of the withdrawal, and
a withdrawal will not be allowed if it would reduce the Face Amount below
$40,000.

A withdrawal from a Sub-Account will result in the cancellation of the number of
Accumulation Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- --"Charges On Partial Withdrawal." Normally, the Company will pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."

The withdrawal rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas ORP are restricted; see FEDERAL TAX
CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS." For important
tax consequences which may result from partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.

CHARGES AND DEDUCTIONS

Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policy. Each of the
charges identified as an administrative charge is intended to reimburse the
Company for actual administrative costs incurred, and is not intended to result
in a profit to the Company.

TAX EXPENSE CHARGE

Currently, a deduction of 3 1/2% of premiums for state and local premium taxes
and federal taxes imposed for deferred acquisition costs ("DAC taxes") is made
from each premium payment. The premium payment, less the tax expense charge,
equals the Net Premium. The total charge is a combined state and local premium
tax deduction of 2 1/2% of premiums and a DAC tax deduction of 1% of premiums.

While the premium tax of 2 1/2% is deducted from each premium payment, some
jurisdictions may not impose premium taxes. Premium taxes vary from state to
state, ranging from zero to 4.0%, and the 2 1/2% rate attributable to premiums
for state and local premium taxes approximates the average expenses to the
Company associated with the premium taxes. The 2 1/2% charge may be higher or
lower than the actual premium tax imposed by the applicable jurisdiction. The
Company, however, does not expect to make a profit from this charge.

The 1% rate attributable to premiums for DAC taxes approximates the Company's
expenses in paying federal taxes for deferred acquisition costs associated with
the Policy. The Company reserves the right to increase or decrease the DAC tax
charge to reflect changes in the Company's expenses for premium taxes and DAC
taxes.

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MONTHLY DEDUCTION FROM THE POLICY VALUE

Prior to the Final Premium Payment Date, a Monthly Deduction from the Policy
Value will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider, and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charge is discussed
below. The Monthly Deduction on or following the effective date of a requested
increase in the Face Amount also will include a $40 administrative charge for
the increase. See THE POLICY -- "Change in the Face Amount."

Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions or, if no
allocation is specified, the Company will make a Pro-Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. If, however, on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.

COST OF INSURANCE

This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the 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 Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If you select Sum
Insured Option 1, the applicable cost of insurance rate will be multiplied by
the increase in the Face Amount reduced by any Policy Value (minus rider
charges) in excess of the initial Face Amount at the beginning of the Policy
month.

EFFECT OF THE GUIDELINE MINIMUM SUM INSURED -- If the Guideline Minimum Sum
Insured is in effect under either Option, a monthly cost of insurance charge
also will be calculated for that additional portion of the Sum Insured which is
required to comply with the Guideline rules. This charge will be calculated by:

- - multiplying the cost of insurance rate applicable to the initial Face Amount
times the Guideline Minimum Sum Insured (Policy Value times the applicable
percentage), MINUS

- the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)

- the Face Amount PLUS the Policy Value (if you selected Sum Insured Option
2).

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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"
and "Decreases."

COST OF INSURANCE RATES -- Cost of insurance rates are based on male, female or
a blended unisex rate table, Age and Premium Class of the Insured, the effective
date of an increase or date of rider, as applicable, the amount of premiums paid
less Debt, any partial withdrawals and withdrawal charges, and risk
classification. For those Policies issued on a unisex basis in certain states or
in certain cases, sex-distinct rates do not apply.

The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in the
Face Amount or rider are determined annually on the anniversary of the effective
date of each increase or rider. The cost of insurance rates generally increase
as the Insured's Age increases. The actual monthly cost of insurance rates will
be based on the Company's expectations as to future mortality experience. They
will not, however, be greater than the guaranteed cost of insurance rates set
forth in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker or Non-Smoker, for
unisex Policies) and the Insured's sex and Age. The Tables used for this purpose
set forth different mortality estimates for males and females and for smokers
and non-smokers. Any change in the cost of insurance rates will apply to all
persons of the same insuring Age, sex and Premium Class whose Policies have been
in force for the same length of time.

The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into preferred Premium Classes, standard
Premium Classes and substandard Premium Classes. In an otherwise identical
Policy, an Insured in the preferred Premium Class will have a lower cost of
insurance than an Insured in a standard Premium Class who, in turn, will have a
lower cost of insurance than an Insured in a substandard Premium Class with a
higher mortality risk.

Premium Classes also are divided into two categories: smokers and non-smokers.
Non-smoking Insureds will incur lower cost of insurance rates than Insureds who
are classified as smokers but who are otherwise in the same Premium Class. Any
Insured with an Age at issuance under 18 will be classified initially as regular
or substandard. The Insured then will be classified as a smoker at Age 18 unless
the Insured provides satisfactory evidence that the Insured is a non-smoker. The
Company will provide notice to you of the opportunity for the Insured to be
classified as a non-smoker when the Insured reaches Age 18.

The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if the Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.

MONTHLY ADMINISTRATIVE CHARGES

Prior to the Final Premium Payment Date, a monthly administrative charge of $5
per month will be deducted from the Policy Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Policy, and will compensate the Company for first-year underwriting and other
start-up expenses incurred in connection with the Policy. These expenses include
the cost of processing applications, conducting medical examinations,
determining insurability and the Insured's Premium Class, and establishing
Policy records. The Company does not expect to derive a profit from these
charges.

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CHARGES AGAINST ASSETS OF THE VEL II 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
VEL II Account.

MORTALITY AND EXPENSE RISK CHARGE

The Company currently makes a charge on an annual basis of 0.65% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policy. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 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 therefore will pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policy
will exceed the amounts realized from the administrative charges provided in the
Policy. If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses. If
costs are less than the amounts provided, the difference will be a profit to the
Company. To the extent this charge results in a current profit to the Company,
such profit will be available for use by the Company for, among other things,
the payment of distribution, sales and other expenses. Since mortality and
expense risks involve future contingencies which are not subject to precise
determination in advance, it is not feasible to identify specifically the
portion of the charge which is applicable to each.

VEL II ACCOUNT ADMINISTRATIVE CHARGE

During the first ten Policy years, the Company assesses a charge on an annual
basis of 0.15% of the daily net asset value in each Sub-Account. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the VEL II Account and the Sub-Accounts. The administrative
functions and expenses assumed by the Company in connection with the VEL II
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
VEL II Account administrative charge is imposed after the tenth Policy year. The
charge may be increased or decreased by the Board of Directors of the Company,
subject to compliance with applicable state and federal requirements, but it may
not exceed 0.25% on an annual basis.

OTHER CHARGES AND EXPENSES

Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price and DGPF contain additional information concerning such fees
and expenses.

Currently, no charges are made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See "FEDERAL
TAX CONSIDERATIONS." The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.

SURRENDER CHARGE

The Policy provides for a contingent surrender charge. A separate surrender
charge is calculated upon the issuance of the Policy and for each increase in
the Face Amount. A surrender charge may be deducted if you request a full
surrender of the Policy or a decrease in the Face Amount.

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The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.

The duration of the surrender charge is 15 years from the Date of Issue or from
the effective date of any increase in the Face Amount for issue Ages 0 through
50, grading down to 10 years for issue Ages 55 and above.

The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:

(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and

(b) is a deferred sales charge of 49% of premiums received, up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by issue Age from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80).

In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial face Amount, as indicated in "APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES." The maximum surrender charge continues in a level amount for
40 Policy months, and reduces by 0.5% or more per month (depending on issue Age)
thereafter, as described in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES." This reduction in the maximum surrender charge will reduce the
deferred sales charge and the deferred administrative charge proportionately.

MAXIMUM SURRENDER CHARGE DURING FIRST TWO POLICY YEARS

If you surrender the Policy during the first two Policy years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above, but the deferred sales charge will not exceed 29% of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See "APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES."

SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE

A separate surrender charge will apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is
equal to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand
dollars of increase, and (b) is a deferred sales charge of 49% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge that varies by
Age (at the time of increase) from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80).

In accordance with limitations under state insurance regulations, the amount of
the Surrender charge will not exceed a specified amount per $1,000 of increase,
as indicated in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES." As is
true for the initial Face Amount, (a) is a deferred administrative charge, and
(b) is a deferred sales charge. The maximum Surrender charge for the increase
continues in a level amount for 40 Policy months, and reduces by 0.5% or more
per month (depending on Age) thereafter, as provided in "APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES."

REDUCED CHARGE DURING FIRST TWO YEARS FOLLOWING INCREASE -- During the first two
Policy years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge

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will be $8.50 per thousand dollars of the Face Amount increase, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a Surrender, the deferred sales charge will not
exceed 29% of premiums associated with the increase, up to one Guideline Annual
Premium (for the increase), plus 9% of premiums associated with the increase in
excess of one Guideline Annual Premium. See "APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES." The premiums associated with the increase are
determined as described below.

Additional premium payments may not be required to fund a requested increase in
the Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of the existing Policy
Value to the increase, and to allocate subsequent premium payments between the
initial Policy and the increase. For example, suppose the Guideline Annual
Premium is equal to $1,500 before an increase, and is equal to $2,000 as a
result of the increase. The Policy Value on the effective date of the increase
would be allocated 75% ($1,500/$2,000) to the initial Face Amount and 25% to the
increase. All future premiums also would be allocated 75% to the initial Face
Amount and 25% to the increase. Thus, existing Policy Value associated with the
increase will equal the portion of the Policy Value allocated to the increase on
the effective date of the increase, before any deductions are made. Premiums
associated with the increase will equal the portion of the premium payments
actually made on or after the effective date of the increase which are allocated
to the increase.

See "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES," for examples
illustrating the calculation of the maximum Surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.

POSSIBLE SURRENDER CHARGE ON A FACE AMOUNT DECREASE

A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Policy), the surrender charge will be applied in the following order:

- - the most recent increase;

- - the next most recent increases successively, and

- - the initial Face Amount. Where a decrease causes a partial reduction in an
increase or in the initial Face Amount, a proportionate share of the surrender
charge for that increase or for the initial Face Amount will be deducted.

CHARGES ON PARTIAL WITHDRAWAL

Partial withdrawals of Surrender Value may be made after the first Policy year.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.

A transaction charge, which is the smaller of 2% of the amount withdrawn or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.

A partial withdrawal charge also may be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company less the
total of any prior withdrawals in that Policy year which were not subject to the
Partial Withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial

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withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal.

This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.

The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:

- - first, the surrender charge for the most recent increase in the Face Amount;

- - second, the surrender charge for the next most recent increases successively;

- - last, the surrender charge for the initial Face Amount.

TRANSFER CHARGES

The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICY -- "Transfer Privilege."

You may have automatic transfers of at least $100 a month made on a periodic
basis:

- - from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts; or

- - to reallocate Policy Value among the Sub-Accounts.

The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.

If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge, and in addition to the 12 free transfers in a Policy year. See THE
POLICY -- "Conversion Privileges," and POLICY LOANS.

CHARGE FOR INCREASE IN THE FACE AMOUNT

For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase
and the Company does not expect to make a profit on this charge.

OTHER ADMINISTRATIVE CHARGES

The Company reserves the right to impose a charge 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.

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<PAGE>
In the first Policy year, the Loan Value is 75% of Policy Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on Debt
to the end of the Policy year. The Loan Value in the second Policy year and
thereafter is 90% of an amount equal to the Policy Value reduced by applicable
surrender charges. There is no minimum limit on the amount of the loan.

The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."

A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy 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 cancelled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.

The Policy loan rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas ORP are restricted; see FEDERAL TAX
CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS."

LOAN INTEREST

LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT

As long as the Policy is in force, the Policy Value in the General Account equal
to the loan amount will be credited with interest at an effective annual yield
of at least 6.00% per year.

PREFERRED LOAN OPTION -- A preferred loan option is available under the Policy.
The preferred loan option will be available upon written request. It may be
revoked by you at any time. If this option has been selected, after the tenth
Policy anniversary the Policy Value in the General Account that is equal to the
loan amount will be credited with interest at an effective annual yield of at
least 7.5%. 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 the transfer Policy Value equal to that excess
loan amount from the Policy Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Policy Value
in each Sub-Account bears to the total Policy Value in all Sub-Accounts.

REPAYMENT OF LOANS

Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the VEL II

48
<PAGE>
Account cannot exceed the Policy Value previously transferred from the VEL II
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 Insured or surrender.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS

Policies loans are permitted in accordance with the terms of the Policy.
However, if a Policy loan does not comply with the requirements of Code Section
72(p), the Policyowner's TSA plan may become disqualified and Policy Values may
be includible in current income. Policy loans must meet the following additional
requirements:

- - Loans must be repaid within five (5) years, except when the loan is used to
acquire any dwelling unit which within a reasonable time is to be used as the
Policyowner's principal residence.

- - All Policy loans must be amortized on a level basis with loan repayments being
made not less frequently than quarterly.

- - The sum of all outstanding loan balances for all loans from all the
Policyowner's TSA plans may not exceed the lesser of:

- $50,000 reduced by the excess (if any) of

- the highest outstanding balance of loans from all of the Policyowner's
TSA plans during the one-year period preceding the date of the loan,
MINUS

- the outstanding balance of loans from the Policyowner's TSA plans on
the date on which such loan was made

- 50% of the Policyowner's non-forfeitable accrued benefit in all of
his/her TSA plans, but not less than $10,000.

See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA
PLANS."

A QUALIFIED TAX ADVISER SNOULD BE CONSULTED BEFORE REQUESTING A POLICY LOAN.

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

49
<PAGE>
default, the Company will send a notice to you and to any assignee of record.
The notice will state the amount of premium due and the date on which it is due.

Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds still will be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies, and any other overdue
charge, will be deducted from the Death Proceeds.

LIMITED 48-MONTH GUARANTEE

Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months after the Date of Issue or the effective date
of an increase in the Face Amount if you make a minimum amount of premium
payments. The minimum amount paid, minus the Debt, partial withdrawals and
partial withdrawal charges, must be at least equal to the sum of the Minimum
Monthly Factors for the number of months the Policy, increase, or a Policy
Change which causes a change in the Minimum Monthly Factor has been in force. A
Policy change which 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, is large enough
to cover the minimum amount payable, as described below.

MINIMUM AMOUNT PAYABLE

If reinstatement is requested when fewer than 48 Monthly Deductions have been
made since the Date of Issue or the effective date of an increase in the Face
Amount, you must pay the lesser of the amount shown in (a) or (b). Under (a),
the minimum amount payable is the Minimum Monthly Factor for the three-month
period beginning on the date of reinstatement. Under B, the minimum amount
payable is the sum of:

(a) the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default, PLUS

(b) Monthly Deductions for the three-month period beginning on the date of
reinstatement.

If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue of the Policy or any increase in the Face Amount, you must pay
the amount shown in (b) above. The Company reserves the right to increase the
Minimum Monthly Factor upon reinstatement.

SURRENDER CHARGE

The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the Policy remained in force from the Date of
Issue. The Policy Value less Debt on the date of default will be restored to the
Policy to the extent it does not exceed the surrender charge on the date of

50
<PAGE>
reinstatement. Any Policy Value less the Debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will not be restored.

POLICY VALUE ON REINSTATEMENT

The Policy Value on the date of reinstatement is:

- - the Net Premium paid to reinstate the Policy increased by interest from the
date the payment was received at the Principal Office, PLUS

- - an amount equal to the Policy Value less Debt on the date of default to the
extent it does not exceed the surrender charge on the date of reinstatement,
MINUS

- - the Monthly Deduction due on the date of reinstatement.

You may not reinstate any Debt outstanding on the date of default or
foreclosure.

OTHER POLICY PROVISIONS

The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations and insurance regulatory
agencies in those states.

POLICYOWNER

The Policyowner is the Insured unless another Policyowner has been named in the
application for the Policy. The Policyowner generally is entitled to exercise
all rights under the Policy while the Insured is alive, subject to the consent
of any irrevocable Beneficiary (the consent of a revocable Beneficiary is not
required). The consent of the Insured is required whenever the Face Amount of
insurance is increased.

BENEFICIARY

The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Policy, the
Beneficiary has no rights in the Policy before the death of the Insured. While
the Insured is alive, you may change any Beneficiary unless you have declared a
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Policyowner (or the Policyowner's estate) will be the Beneficiary. If more
than one Beneficiary is alive when the Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the Insured will pass
to surviving Beneficiaries proportionally.

INCONTESTABILITY

The Company will not contest the validity of the Policy after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the Insured's lifetime for two
years from its effective date.

SUICIDE

The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Policy, without
interest, and less any outstanding Debt and any partial withdrawals. If the
Insured commits suicide, while sane or insane, generally within two years from
the effective date of any increase in the Sum Insured, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.

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<PAGE>
AGE AND SEX

If the Insured's Age or sex as stated in the application for the Policy is not
correct, benefits under the Policy will be adjusted to reflect the correct Age
and sex, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age and sex. In no event will the Sum Insured be
reduced to less than the Guideline Minimum Sum Insured. In the case of a Policy
issued on a unisex basis, this provision as it relates to misstatement of sex
does not apply.

ASSIGNMENT

The Policyowner may assign the Policy as collateral or make an absolute
assignment of the Policy. All rights under the Policy will be transferred to the
extent of the assignee's interest. The consent of the assignee may be required
in order to make changes in premium allocations, to make transfers, or to
exercise other rights under the Policy. The Company is not bound by an
assignment or release thereof, unless it is in writing and is recorded at the
Principal Office. When recorded, the assignment will take effect as of the date
the Written Request was signed. Any rights created by the assignment will be
subject to any payments made or actions taken by the Company before the
assignment is recorded. The Company is not responsible for determining the
validity of any assignment or release.

POSTPONEMENT OF PAYMENTS

Payments of any amount due from the VEL II Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the SEC or (ii) 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 VEL II Account's net assets. Payments under the Policy of any
amounts derived from the premiums paid by check may be delayed until such time
as the check has cleared your bank.

The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the Insured, as
well as payments of Policy loans and transfers from the General Account, for a
period not to exceed six months.

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<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 and Vice President 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 since 1991

John F. Kelly Director of First Allmerica since 1996; Senior
Director, Senior Vice President Vice President, General Counsel and Assistant
and General Counsel 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, Chairman of the Board, Chief Executive Officer, First Allmerica since
President 1989
and Chief Executive Officer

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 and Vice President President, First Allmerica since 1990; Director,
Allmerica Investments, Inc. since 1990; Director
and President, Allmerica Investment Management
Company, Inc. since 1990

Larry C. Renfro Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990

Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Chief
Financial Officer, First Allmerica 1990 to 1996

Phillip E. Soule Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica
</TABLE>

DISTRIBUTION

Allmerica Investments, Inc. an indirect wholly owned subsidiary of the Company,
acts as the principal underwriter of the Policies pursuant to a Sales and
Administrative Services Agreement with the Company and the VEL II 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
certain independent broker-dealers which are members of the NASD.

53
<PAGE>

The Company pays commissions to registered representatives who sell the Policy
based on a commission schedule. After issue of the Policy or an increase in Face
Amount, commissions generally will equal 50% of the first year premiums up to a
basic premium amount established by the Company. Thereafter, commissions will
generally equal 4% of any additional premiums. Certain registered
representatives, including registered representatives enrolled in the Company's
training program for new agents, may receive additional first year and renewal
commissions and training reimbursements. General Agents of the Company and
certain registered representatives 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% of first year or
14% of renewal premiums.

The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policy Owners or
the Separate Account. Any surrender charge assessed on a Policy will be retained
by the Company except for amounts it may pay to Allmerica Investments, Inc. for
services it performs and expenses it may incur as principal underwriter and
general distributor.

SERVICES

The Company receives fees from the investment advisers or other service
providers of certain 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
VEL II 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 VEL II 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 VEL II Account. Statements
of significant transactions such as premium payments, changes in specified Face
Amount, changes in Sum Insured Option, transfers among Sub-Accounts and the
General Account, partial withdrawals, increases in loan amount by you, loan
repayments, lapse, termination for any reason, and reinstatement will be sent to
you promptly. An annual statement also will be sent to you within 30 days after
a Policy anniversary. The annual statement will summarize all of the above
transactions and deductions of charges during the Policy year. It also will set
forth the status of the Death Proceeds, Policy Value, Surrender Value, amounts
in the Sub-Accounts and General Account, and any Policy loan(s). In addition,
you will be sent periodic reports containing financial statements and other
information for the VEL II Account and the Underlying Funds as required by the
1940 Act.

LEGAL PROCEEDINGS

There are no legal proceedings pending to which the VEL II Account is a party,
or to which the assets of the VEL II 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 VEL II 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

54
<PAGE>
other legal documents are summaries. The complete documents and omitted
information may be obtained from the SEC's principal office in Washington, D.C.,
upon payment of the SEC's prescribed fees.

INDEPENDENT ACCOUNTANTS

The financial statements of the Company as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996 and of the VEL
II Account as of December 31, 1996 and for the periods in 1996 and 1995
indicated, included in this Prospectus constituting part of the Registration
Statement, have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.

FEDERAL TAX CONSIDERATIONS

The effect of federal income taxes on the value of the Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they currently are interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and
possibly retroactively affect the taxation of the Policy. No representation is
made regarding the likelihood of continuation of current federal income tax laws
or of current interpretations by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.

It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policy is not exhaustive, does not purport to
cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the Trustee of an employee benefit plan.
A qualified tax adviser always should be consulted with regard to the
application of law to individual circumstances.

THE COMPANY AND THE VEL II 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 VEL II Account. Based on this, no charge is made for
federal income taxes which may be attributable to the VEL II Account.

Periodically, the Company will review the question of a charge to the VEL II
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company ultimately is determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the VEL II
Account.

Under current laws the Company also may incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the VEL
II Account.

TAXATION OF THE POLICY

The Company believes that the Policy described in this Prospectus will be
considered a life insurance contract under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the policy value to the insurance amount at
risk. As a

55
<PAGE>

result, the death proceeds payable are excludable from the gross income of the
beneficiary. Moreover, any increase in the policy value is not taxable until
received by the policyowner or the policyowner's designee. But see "Modified
Endowment Contracts."

The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Policy for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which policyowners may direct their
investments to particular divisions of a separate account. Regulations in this
regard may be issued in the future. It is possible that if and when regulations
are issued, the Policy may need to be modified to comply with such regulations.
For these reasons, the Policy or the Company's administrative rules may be
modified as necessary to prevent a Policyowner from being considered the owner
of the assets of the VEL II 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.

POLICY LOANS

The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Policies"). There is a
risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal and taxed accordingly. At the present time, the IRS has not issued
any guidance on whether loans with the attributes of a preferred loan 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.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS

The Policies may be issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code.

A Policy issued in connection with a TSA Plan will be endorsed to reflect the
restrictions under Section 403(b) of the Code. The Policyowner may terminate the
endorsement at any time. However, the termination of the endorsement may cause
the Policy to fail to qualify under Section 403(b) of the Code. A Policy issued
in connection with a TSA Plan may also have limitations on Policy loans. See
"POLICY LOANS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS."

Under the provisions of Section 403(b) of the Code, payments made for annuity
policies purchased for employees under TSA Plans are excludable from the gross
income of such employees, to the extent that the aggregate purchase payments in
any year do not exceed the maximum contribution permitted under

56
<PAGE>

the Code. The Company has received a Private Letter Ruling with respect to the
status of the Policies as providing "incidental life insurance" when issued in
connection with TSA Plans. In the Private Letter Ruling, the IRS has taken the
position that the purchase of a life insurance policy by the employer as part of
a TSA Plan will not violate the "incidental benefit" rules of Section 403(b) and
the regulations thereunder. The Private Letter Ruling also stated that the use
of current or accumulated contributions to purchase a life insurance Policy will
not result in current taxation of the premium payments for the life insurance
policy, except for the current cost of the life insurance protection.

A Policy qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings) may not begin before the employee attains age
59 1/2, separates from service, dies, or becomes disabled. In the case of
hardship, a Policyowner may withdraw amounts contributed by salary reduction,
but not the earnings on such amounts. Even though a distribution may be
permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax.

Policy loans are generally permitted in accordance with the terms of the Policy.
However, if a Policy loan does not comply with the requirements of Code Section
72(p), the Policyowner's TSA plan may become disqualified and Policy values may
be includible in current income.

MODIFIED ENDOWMENT CONTRACTS

The Technical and Miscellaneous Revenue Act of 1988 ("the 1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. The policy would fail to satisfy the
seven-pay test if the cumulative premiums paid under the policy at any time
during the first seven policy years exceed the sum of the net level premiums
that would have been paid, had the policy provided for paid-up future benefits
after the payment of seven level premiums.

If the policy is considered a modified endowment contract, all distributions
under the policy will be taxed on an "income-first" basis. Most distributions
received by the policyowner directly or indirectly (including loans,
withdrawals, surrenders, or the assignment or pledge of any portion of the
policy value) will be includible in gross income to the extent that the cash
surrender value of the policy exceeds the policyowner's investment in the
policy. Any additional amounts will be treated as a return of capital to the
extent of the policyowner's basis in the policy. With certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.

Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be classified permanently as a
modified endowment contract.

MORE INFORMATION ABOUT THE GENERAL ACCOUNT

As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities law, any amount in the General Account generally is not 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.

57
<PAGE>
GENERAL DESCRIPTION

The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any Separate Account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.

A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.

GENERAL ACCOUNT VALUES

The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").

The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. The excess interest rate, if any, in effect
on the date a premium is received at the Principal Office, however, is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE
POLICYOWNER ASSUMES THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE
GUARANTEED MINIMUM RATE.

Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to the Debt. Such Policy Value, however, will be credited interest at an
effective annual yield of at least 6%.

The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or the
Policy Value transferred to the General Account, plus interest at an annual rate
of 4% 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 a flexible premium variable life insurance Policy and
is intended generally to serve as a disclosure document only for the aspects of
the Policy relating to the VEL II Account. For complete details regarding the
General Account, see the Policy itself.

SURRENDERS AND PARTIAL WITHDRAWALS

If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in the Face Amount, the surrender charge deducted is a fraction of
the charge that would apply to a full surrender of the Policy. Partial
withdrawals are made on a last-in/first-out basis from the Policy Value
allocated to the General Account.

TRANSFERS

The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.

58
<PAGE>
Policy loans also may be made from the Policy Value in the General Account.

DELAY OF PAYMENTS

Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days (10 days in New York) or more, however, the Company will pay
interest at least equal to an effective annual yield of 3 1/2% per year for the
period of deferment. Amounts from the General Account used to pay premiums on
policies with the Company will not be delayed.

FINANCIAL STATEMENTS

Financial Statements for the Company and the VEL II 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 VEL II Account.

59
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in the accompanying notes to the consolidated financial statements,
the Company changed its method of accounting for investments
(Note 1) and postemployment benefits (Note 11) in 1994.
/s/ Price Waterhouse LLP

Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997, except as to Notes 1 and 2,
which are as of February 19, 1997
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,236.3 $2,222.8 $2,181.8
Universal life and investment product
policy fees............................... 197.2 172.4 156.8
Net investment income...................... 669.9 710.1 743.1
Net realized investment gains.............. 66.8 19.1 1.1
Realized gain on sale of mutual fund
processing business....................... -- 20.7 --
Other income............................... 102.7 95.4 112.3
--------- --------- ---------
Total revenues......................... 3,272.9 3,240.5 3,195.1
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 1,957.0 2,010.3 2,047.0
Policy acquisition expenses................ 483.5 470.3 475.7
Other operating expenses................... 483.2 455.0 518.9
--------- --------- ---------
Total benefits, losses and expenses.... 2,923.7 2,935.6 3,041.6
--------- --------- ---------
Income before federal income taxes............. 349.2 304.9 153.5
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 96.8 119.7 45.4
Deferred................................... (15.7) (37.0) 8.0
--------- --------- ---------
Total federal income tax expense....... 81.1 82.7 53.4
--------- --------- ---------
Income before minority interest, extraordinary
item, and cumulative effect of accounting
change........................................ 268.1 222.2 100.1
Minority interest.............................. (74.6) (73.1) (51.0)
--------- --------- ---------
Income before extraordinary item and cumulative
effect of accounting changes.................. 193.5 149.1 49.1
Extraordinary item -- demutualization
expenses...................................... -- (12.1) (9.2)
Cumulative effect of changes in accounting
principles.................................... -- -- (1.9)
--------- --------- ---------
Net income..................................... $ 193.5 $ 137.0 $ 38.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities--at fair value (amortized cost of
$7,279.1 and $7,467.9)............................. $ 7,461.5 $ 7,739.3
Equity securities--at fair value (cost of $327.9 and
$410.6)............................................ 473.1 517.2
Mortgage loans...................................... 650.1 799.5
Real estate......................................... 120.7 179.6
Policy loans........................................ 132.4 123.2
Other long-term investments......................... 128.8 71.9
---------- ----------
Total investments............................... 8,966.6 9,430.7
---------- ----------
Cash and cash equivalents............................. 175.9 236.6
Accrued investment income............................. 148.6 163.0
Deferred policy acquisition costs..................... 822.7 735.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 102.8 97.1
Outstanding claims, losses and loss adjustment
expenses........................................... 663.8 799.6
Unearned premiums................................... 46.2 43.8
Other............................................... 62.8 58.9
---------- ----------
Total reinsurance receivables................... 875.6 999.4
---------- ----------
Deferred federal income taxes......................... 93.2 81.2
Premiums, accounts and notes receivable............... 533.0 526.7
Other assets.......................................... 302.2 361.4
Closed Block assets................................... 811.8 818.9
Separate account assets............................... 6,233.0 4,348.8
---------- ----------
Total assets.................................... $18,962.6 $17,702.4
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,613.7 $ 2,639.3
Outstanding claims, losses and loss adjustment
expenses........................................... 2,944.1 3,081.3
Unearned premiums................................... 822.5 800.9
Contractholder deposit funds and other policy
liabilities........................................ 2,060.4 2,737.4
---------- ----------
Total policy liabilities and accruals........... 8,440.7 9,258.9
---------- ----------
Expenses and taxes payable............................ 615.3 600.3
Reinsurance premiums payable.......................... 31.4 42.0
Short-term debt....................................... 38.4 28.0
Deferred federal income taxes......................... 34.6 47.8
Long-term debt........................................ 2.7 2.8
Closed Block liabilities.............................. 892.1 902.0
Separate account liabilities.......................... 6,227.2 4,337.8
---------- ----------
Total liabilities............................... 16,282.4 15,219.6
---------- ----------
Minority interest..................................... 784.0 758.5
Commitments and contingencies (Notes 14 and 19)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding.... 5.0 5.0
Additional paid-in-capital............................ 392.4 392.4
Unrealized appreciation on investments, net........... 131.4 153.0
Retained earnings..................................... 1,367.4 1,173.9
---------- ----------
Total shareholder's equity...................... 1,896.2 1,724.3
---------- ----------
Total liabilities and shareholder's equity...... $18,962.6 $17,702.4
---------- ----------
---------- ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year............... $ 5.0 $ -- $ --
Demutualization transaction................ -- 5.0 --
--------- --------- ---------
Balance at end of year..................... 5.0 5.0 --
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 392.4 -- --
Contributed from parent.................... -- 392.4 --
--------- --------- ---------
Balance at end of year..................... 392.4 392.4 --
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year............... 1,173.9 1,071.4 1,033.4
Net income prior to demutualization........ -- 93.2 38.0
--------- --------- ---------
1,173.9 1,164.6 1,071.4
Demutualization transaction................ -- (34.5) --
Net income subsequent to demutualization... 193.5 43.8 --
--------- --------- ---------
Balance at end of year..................... 1,367.4 1,173.9 1,071.4
--------- --------- ---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 153.0 (79.0) 17.5
--------- --------- ---------
Cumulative effect of accounting change:
Net appreciation on available-for-sale
debt securities....................... -- -- 296.1
Provision for deferred federal income
taxes and minority interest........... -- -- (149.1)
--------- --------- ---------
-- -- 147.0
--------- --------- ---------
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities....................... -- 22.4 --
Provision for deferred federal income
taxes and minority interest........... -- (9.6) --
--------- --------- ---------
-- 12.8 --
--------- --------- ---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities......... (35.1) 466.0 (492.1)
(Provision) benefit for deferred
federal income taxes.................. 11.8 (163.1) 171.9
Minority interest...................... 1.7 (83.7) 76.7
--------- --------- ---------
(21.6) 219.2 (243.5)
--------- --------- ---------
Balance at end of year................. 131.4 153.0 (79.0)
--------- --------- ---------
Total shareholder's equity......... $1,896.2 $1,724.3 $ 992.4
--------- --------- ---------
--------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 193.5 $ 137.0 $ 38.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 74.6 73.1 50.1
Net realized gains.................. (66.8) (39.8) (1.1)
Net amortization and depreciation... 44.7 57.7 45.9
Deferred federal income taxes....... (15.7) (37.0) 8.0
Change in deferred acquisition
costs................................ (73.9) (38.4) (34.6)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (16.8) (42.0) (25.6)
Change in accrued investment
income............................... 16.7 7.0 4.6
Change in policy liabilities and
accruals, net........................ (184.3) 116.2 175.9
Change in reinsurance receivable.... 123.8 (75.6) (31.9)
Change in expenses and taxes
payable.............................. 26.0 7.5 88.0
Separate account activity, net...... 5.2 (0.1) 0.4
Other, net.......................... 38.5 (33.8) 14.0
---------- ---------- ----------
Net cash provided by operating
activities.................... 165.5 131.8 331.7
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 3,985.8 2,738.4 2,097.8
Proceeds from disposals of
held-to-maturity fixed maturities...... -- 271.3 304.4
Proceeds from disposals of equity
securities............................. 228.7 120.0 143.9
Proceeds from disposals of other
investments............................ 99.3 40.5 25.9
Proceeds from mortgages matured or
collected.............................. 176.9 230.3 256.4
Purchase of available-for-sale fixed
maturities............................. (3,771.1) (3,273.3) (2,150.1)
Purchase of held-to-maturity fixed
maturities............................. -- -- (111.6)
Purchase of equity securities........... (90.9) (254.0) (172.2)
Purchase of other investments........... (168.0) (24.8) (26.6)
Proceeds from sale of mutual fund
processing business.................... -- 32.9 --
Capital expenditures.................... (12.8) (14.1) (43.1)
Other investing activities, net......... 4.3 4.7 2.4
---------- ---------- ----------
Net cash provided by (used in)
provided by investing
activities.................... 452.2 (128.1) 327.2
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 268.7 445.8 786.3
Withdrawals from contractholder deposit
funds.................................. (905.0) (1,069.9) (1,187.0)
Change in short-term debt............... 10.4 (4.8) (6.0)
Change in long-term debt................ (0.1) 0.2 0.3
Dividends paid to minority
shareholders........................... (3.9) (4.1) (4.2)
Capital contributed from parent......... -- 392.4 --
Payments for policyholders' membership
interests.............................. -- (27.9) --
Subsidiary treasury stock purchased, at
cost................................... (42.0) (20.9) --
---------- ---------- ----------
Net cash used in financing
activities.................... (671.9) (289.2) (410.6)
---------- ---------- ----------
Net change in cash and cash equivalents..... (54.2) (285.5) 248.3
Net change in cash held in the Closed
Block...................................... (6.5) (17.6) --
Cash and cash equivalents, beginning of
year....................................... 236.6 539.7 291.4
---------- ---------- ----------
Cash and cash equivalents, end of year...... $ 175.9 $ 236.6 $ 539.7
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 18.6 $ 4.1 $ 4.3
Income taxes paid....................... $ 72.0 $ 90.6 $ 46.1
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

First Allmerica Financial Life Insurance Company ("FAFLIC", or the
"Company", formerly State Mutual Life Assurance Company of America ["State
Mutual"]) was organized as a mutual life insurance company until October 16,
1995. FAFLIC converted to a stock life insurance company pursuant to a plan of
reorganization effective October 16, 1995 and became a wholly owned subsidiary
of Allmerica Financial Corporation ("AFC"). The consolidated financial
statements have been prepared as if FAFLIC were organized as a stock life
insurance company for all periods presented. Thus, generally accepted accounting
principles for stock life insurance companies have been applied retroactively
for all periods presented.

The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly SMA
Life Assurance Company), its wholly owned life insurance subsidiary,
non-insurance subsidiaries (principally brokerage and investment advisory
subsidiaries), and Allmerica Property and Casualty Companies, Inc. ("Allmerica
P&C", a 59.5%-owned non-insurance holding company). The Closed Block assets and
liabilities at December 31, 1996 and 1995, and its results of operations
subsequent to demutualization are presented in the consolidated financial
statements as single line items. Prior to demutualization such amounts are
presented line by line in the consolidated financial statements (see Note 6).
Unless specifically stated, all disclosures contained herein supporting the
consolidated financial statements at December 31, 1996 and 1995, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.

Minority interest relates to the Company's investment in Allmerica P&C and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.

On February 19, 1997, AFC announced a definitive merger agreement under
which it would acquire, at consideration of $33.00 per share, all of the shares
of Allmerica P&C currently held by the minority stockholders. Additional
information pertaining to the merger agreement is included in Note 2,
significant transactions.

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. CLOSED BLOCK

As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC allocated to the Closed Block assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy benefits, certain future
expenses and taxes and for continuation of policyholder dividend scales

F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

payable in 1994 so long as the experience underlying such dividend scales
continues. The Company expects that the factors underlying such experience will
fluctuate in the future and policyholder dividend scales for Closed Block
Business will be set accordingly.

Although the assets and income allocated to the Closed Block inure solely to
the benefit of the holders of policies included in the Closed Block, the excess
of Closed Block liabilities over Closed Block assets at October 16, 1995
measured on a GAAP basis represent the expected future post-tax income from the
Closed Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.

If the actual income from the Closed Block in any given period equals or
exceeds the expected income for such period as determined at October 16, 1995,
the expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.

If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.

C. VALUATION OF INVESTMENTS

Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115). SFAS No. 115 requires that
investments be classified into one of three categories; held-to-maturity,
available-for-sale, or trading.

The effect of implementing SFAS No. 115, as of January 1, 1994, was an
increase in the carrying value of fixed maturity investments of $335.3 million,
a decrease in deferred policy acquisition costs of $20.8 million, an increase in
policyholder liabilities of $18.4 million, a net increase in deferred income tax
liabilities of $103.7 million, an increase in minority interest of $45.4 million
and an increase in shareholder's equity of $147.0 million, which resulted from
changing the carrying value of certain fixed maturities from amortized cost to
fair value and related adjustments. The implementation had no effect on net
income.

In November 1995, the Financial Accounting Standards Board issued a Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.

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.

F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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.

D. 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, investment and
loan commitments, and interest rate futures contracts. 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.

E. 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.

F. 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. Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to 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.

F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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.

G. PROPERTY AND EQUIPMENT

Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.

H. 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.

I. 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. Estimated
liabilities are established for group life and health policies that contain
experience rating provisions. 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.

Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made on property and casualty and health insurance
for reported losses and estimates of losses incurred but not reported. These
liabilities are determined using case basis evaluations and statistical analyses
and represent estimates of the ultimate cost of all losses incurred but not
paid. These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. Estimated amounts of salvage
and subrogation on unpaid property and casualty losses are deducted from the
liability for unpaid claims.

Premiums for property and casualty, group life, and 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 such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.

F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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.

J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES

Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, 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 products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values.

K. POLICYHOLDER DIVIDENDS

Prior to demutualization, certain life, health and annuity insurance
policies contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.

Prior to demutualization, the participating life insurance in force was
16.2% of the face value of total life insurance in force at December 31, 1994.
The premiums on participating life, health and annuity policies were 11.3% and
6.4% of total life, health and annuity statutory premiums prior to
demutualization in 1995 and 1994, respectively. Total policyholders' dividends
were $23.3 million and $32.8 million prior to demutualization in 1995 and 1994,
respectively.

L. FEDERAL INCOME TAXES

AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
consolidated United States federal income tax return. Entities included within
the consolidated group are segregated into either a life insurance or non-life
insurance company subgroup. The consolidation of these subgroups is subject to
certain statutory restrictions on the percentage of eligible non-life tax losses
that can be applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax return.

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-9
<PAGE>
NOTES TO CONSOLIDATED 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.

M. 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.

N. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

2. SIGNIFICANT TRANSACTIONS

On February 19, 1997, AFC and Allmerica P&C entered into an Agreement and Plan
of Merger (the "Merger Agreement") pursuant to which AFC will acquire all of the
outstanding Common Stock, $1.00 par value per share, of Allmerica P&C that it
does not already own for consideration consisting of $33.00 per share of Common
Stock, subject to adjustment, payable in cash and shares of common stock, par
value $0.01 per share, AFC (the "AFC Common Stock"). In addition, a shareholder
of Allmerica P&C may elect to receive the consideration in cash, without
interest, or in shares of AFC Common Stock, subject to proration as set forth in
the Merger Agreement. The maximum number of shares of AFC Common Stock to be
issued in the Merger is approximately 9.67 million shares. The acquisition will
be accomplished by merging a newly-created, wholly-owned subsidiary of AFC with
and into Allmerica P&C (the "Merger"), resulting in Allmerica P&C becoming a
wholly-owned subsidiary of AFC. Also, immediately prior to the Merger, Allmerica
P&C's Certificate of Incorporation will be amended to authorize a new class of
Common Stock, one share of which will be exchanged for each share of Common
Stock currently held by SMA Financial Corp., a wholly-owned subsidiary of AFC.
The consummation of the Merger is subject to the satisfaction of various
conditions, including the approval of regulatory authorities.

On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of Allmerica P&C pursuant
to an Agreement and Plan of Merger dated February 19, 1997.

Pursuant to the plan of reorganization effective October 16, 1995, AFC
issued 37.5 million shares of its common stock to eligible policyholders. AFC
also issued 12.6 million shares of its common stock at a price of $21.00 per
share in a public offering, resulting in net proceeds of $248.0 million, and
issued Senior Debentures in the principal amount of $200.0 million which
resulted in net proceeds of $197.2 million. AFC contributed $392.4 million of
these proceeds to FAFLIC.

Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company

F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.

3. INVESTMENTS

A. SUMMARY OF INVESTMENTS

The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with 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....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------

1995
-----------------------------------------------
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....... $ 377.0 $ 21.0 -- $ 398.0
States and political subdivisions....... 2,110.6 60.7 4.0 2,167.3
Foreign governments..................... 60.6 3.4 0.6 63.4
Corporate fixed maturities.............. 4,582.1 200.8 16.4 4,766.5
Mortgage-backed securities.............. 337.6 8.6 2.1 344.1
--------- ---------- ----------- --------
Total fixed maturities.................. $7,467.9 $294.5 $ 23.1 $7,739.3
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 410.6 $111.7 $ 5.1 $ 517.2
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</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. At December 31,
1995, the amortized cost and market value of assets on deposit were $295.0
million and $303.6 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$98.0 million and $82.2 million were on deposit with various state and
governmental authorities at December 31, 1996 and 1995, respectively.

F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

There were no contractual fixed maturity investment commitments at December
31, 1996 and 1995, respectively.

The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties, or the Company may have the right to put
or sell the obligations back to the issuers. Mortgage backed securities are
included in the category representing their ultimate maturity.

<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------

<S> <C> <C>
Due in one year or less................. $ 567.1 $ 570.7
Due after one year through five years... 2,216.4 2,297.2
Due after five years through ten
years.................................. 2,373.1 2,432.0
Due after ten years..................... 2,122.5 2,161.6
--------- --------
Total............................... $7,279.1 $7,461.5
--------- --------
--------- --------
</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>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31 VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- --------------------------------------------- ------------------ ----- ------

<S> <C> <C> <C>
1996

Fixed maturities............................. $2,432.8 $19.3 $30.5
-------- ----- ------
Equity securities............................ $ 228.1 $56.1 $ 1.3
-------- ----- ------
1995

Fixed maturities............................. $1,612.3 $23.7 $33.0
-------- ----- ------
Equity securities............................ $ 122.2 $23.1 $ 6.9
-------- ----- ------
1994

Fixed maturities............................. $1,026.2 $12.6 $21.6
-------- ----- ------
Equity securities............................ $ 124.3 $17.4 $ 4.5
-------- ----- ------
</TABLE>

F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:

<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------

<S> <C> <C> <C>
1996

Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
Net (depreciation) appreciation on available-for-sale
fixed maturities......................................... (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................. 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................... $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------

1995

Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
---------- ----------- -------
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale fixed maturities... 29.2 -- 29.2
Effect of transfer on deferred policy acquisition costs
and on policy liabilities................................ (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................. (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------

1994

Net appreciation, beginning of year......................... $-- $ 17.5 $ 17.5
---------- ----------- -------
Cumulative effect of accounting change:
Net appreciation on available-for-sale fixed maturities... 335.3 -- 335.3
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities.............................................. (39.2) -- (39.2)
Provision for deferred federal income taxes and minority
interest................................................. (149.1) -- (149.1)
---------- ----------- -------
147.0 -- 147.0
---------- ----------- -------
Net depreciation on available-for-sale securities........... (547.9) (17.4) (565.3)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 73.2 -- 73.2
Provision for deferred federal income taxes and minority
interest................................................... 238.3 10.3 248.6
---------- ----------- -------
(236.4) (7.1) (243.5)
---------- ----------- -------
Net (depreciation) appreciation, end of year................ $(89.4) $ 10.4 $ (79.0)
---------- ----------- -------
---------- ----------- -------
</TABLE>

(1) Includes net appreciation on other investments of $0.6 million, 2.2
million, and $0.6 million in 1996, 1995, and 1994, respectively.

F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

B. MORTGAGE LOANS AND REAL ESTATE

FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.

The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ---------------------------------------- ------ --------

<S> <C> <C>
Mortgage loans.......................... $650.1 $ 799.5
------ --------
Real estate:
Held for sale......................... 110.4 168.9
Held for production of income......... 10.3 10.7
------ --------
Total real estate................... 120.7 179.6
------ --------
Total mortgage loans and real estate.... $770.8 $ 979.1
------ --------
------ --------
</TABLE>

Reserves for mortgage loans were $19.6 million and $33.8 million at December
31, 1996 and 1995, respectively.

During 1996, 1995 and 1994, non-cash investing activities included real
estate acquired through foreclosure of mortgage loans, which had a fair value of
$0.9 million, $26.1 million and $39.2 million, respectively.

At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $22.1 million, of
which $3.1 million related to the Closed Block. These commitments generally
expire within one year.

F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Mortgage loans and real estate investments comprised the following property
types and geographic regions:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ---------------------------------------- ------ --------

<S> <C> <C>
Property type:
Office building....................... $317.1 $ 435.9
Residential........................... 95.4 145.3
Retail................................ 177.0 205.6
Industrial / warehouse................ 124.8 93.8
Other................................. 91.0 151.9
Valuation allowances.................. (34.5) (53.4)
------ --------
Total................................... $770.8 $ 979.1
------ --------
------ --------
Geographic region:
South Atlantic........................ 227.0 $ 281.4
Pacific............................... 154.4 191.9
East North Central.................... 119.2 118.2
Middle Atlantic....................... 112.6 148.9
West South Central.................... 41.6 79.7
New England........................... 50.9 94.9
Other................................. 99.6 117.5
Valuation allowances.................. (34.5) (53.4)
------ --------
Total................................... $770.8 $ 979.1
------ --------
------ --------
</TABLE>

F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $131.9 million; 1998 -- $161.7 million; 1999 -- $99.9 million; 2000 --
$138.0 million; 2001 -- $34.4 million; and $84.2 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.

C. INVESTMENT VALUATION ALLOWANCES

Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------

<S> <C> <C> <C> <C>
1996

Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----

1995

Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----

1994

Mortgage loans........... $73.8 $14.6 $41.2 $47.2
Real estate.............. 21.0 3.2 1.3 22.9
----- --------- ----- -----
Total................ $94.8 $17.8 $42.5 $70.1
----- --------- ----- -----
----- --------- ----- -----
</TABLE>

The carrying value of impaired loans was $33.6 million and $55.7 million,
with related reserves of $11.9 million and $22.3 million as of December 31, 1996
and 1995, respectively. All impaired loans were reserved as of December 31, 1996
and 1995.

The average carrying value of impaired loans was $50.4 million, $117.9
million and $155.5 million, with related interest income while such loans were
impaired of $5.8 million, $9.3 million and $12.4 million as of December 31,
1996, 1995 and 1994 respectively.

D. FUTURES CONTRACTS

FAFLIC purchases long futures contracts and sells short futures contracts on
margin to hedge against interest rate fluctuations and their effect on the net
cash flows from the sales of guaranteed investment contracts. The notional
amount of such futures contracts outstanding were $(33.0) million net short and
$74.7 million long contracts at December 31, 1996 and 1995, respectively.
Because the Company purchases and sells futures contracts through brokers who
assume the risk of loss, the Company's exposure to credit risk under futures
contracts is limited to the margin deposited with the broker. The maturity of
all futures contracts outstanding are less than one year. The fair value of
futures contracts outstanding were $(32.4) million and $75.7 million at December
31, 1996 and 1995, respectively.

Gains and losses on hedge contracts related to interest rate fluctuations
are deferred and recognized in income over the period being hedged corresponding
to related guaranteed investment contracts. Deferred hedging gains (losses) were
$0.5 million, $5.6 million, and $(7.7) million in 1996, 1995 and 1994,

F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

respectively. Gains and losses on hedge contracts that are deemed ineffective by
management are realized immediately.

A reconciliation of the notional amount of futures contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 74.7 $126.6 $141.7
New contracts................................ (1.1) 349.2 816.0
Contracts terminated......................... (106.6) (401.1) (831.1)
------ ------ ------
Contracts outstanding, end of year........... $(33.0) $ 74.7 $126.6
------ ------ ------
------ ------ ------
</TABLE>

E. FOREIGN CURRENCY SWAP CONTRACTS

The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $(9.2) million and $(1.8) million at December 31, 1996 and
1995, respectively.

The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1996, 1995 and 1994. The Company had no deferred
gains or losses on foreign currency swap contracts.

A reconciliation of the notional amount of swap contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $104.6 $118.7 $128.8
New contracts................................ -- -- 10.1
Contracts expired............................ (36.0) -- (15.1)
Contracts terminated......................... -- (14.1) (5.1)
------ ------ ------
Contracts outstanding, end of year........... $ 68.6 $104.6 $118.7
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of foreign currency swap contracts are $18.2 million in
1997 and $50.4 million in 1999 and thereafter. There are no expected maturities
of foreign currency swap contracts in 1998.

F. INTEREST RATE AND OTHER SWAP CONTRACTS

The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. In
addition, the Company has entered into two new types of swap contracts in 1996:
security return-linked swap contracts and insurance portfolio-linked swap
contracts for investment purposes. Under the security return-linked contracts,
the Company agrees to exchange cash flows according to the performance of a
specified security or portfolio of securities. Under the insurance
portfolio-linked swap contracts, the Company agrees to exchange cash flows
according to the performance of a specified underwriter's portfolio of insurance
business. Because the underlying principal of swap contracts is not exchanged,
the Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged.

F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The increase or (decrease)
in net investment income related to interest rate and other swap contracts was
$0.6 million, $0.7 million and $(1.3) million for the years ended December 31,
1996, 1995 and 1994, respectively. The Company had no deferred gains or losses
relating to interest rate and other swap contracts. The fair values of interest
rate and other swap contracts outstanding were $0.1 million, $0.4 million and
$0.6 million for the years ended December 31, 1996, 1995 and 1994, respectively.

A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 17.5 $ 22.8 $ 22.8
New contracts................................ 63.6 -- --
Contracts expired............................ (17.5) (5.3) --
------ ------ ------
Contracts outstanding, end of year........... $ 63.6 $ 17.5 $ 22.8
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of interest rate and other swap contracts outstanding at
December 31 are as follows: $43.6 million in 1997, $5.0 million in 1998, and
$15.0 million in 1999 and thereafter.

G. OTHER

At December 31, 1996, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.8 million.

4. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Fixed maturities............................. $553.8 $555.1 $578.3
Mortgage loans............................... 69.5 97.0 119.9
Equity securities............................ 11.1 13.2 9.9
Policy loans................................. 10.3 20.3 23.3
Real estate.................................. 40.8 48.7 44.6
Other long-term investments.................. 19.0 7.1 5.7
Short-term investments....................... 10.6 21.2 10.3
------ ------ ------
Gross investment income...................... 715.1 762.6 792.0
Less investment expenses..................... (45.2) (52.5) (48.9)
------ ------ ------
Net investment income........................ $669.9 $710.1 $743.1
------ ------ ------
------ ------ ------
</TABLE>

At December 31, 1996, fixed maturities and mortgage loans on non-accrual
status were $2.0 million and $6.8 million, including restructured loans of $4.4
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 $0.5 million, $0.6 million and $5.1 million in 1996, 1995
and 1994, respectively.

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 $51.3 million, $98.9 million and $126.8 million at December
31, 1996, 1995 and 1994, respectively. Interest income on restructured

F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $7.7 million, $11.1 million and $14.4 million in
1996, 1995 and 1994, respectively. Actual interest income on these loans
included in net investment income aggregated $4.5 million, $7.1 million and $8.2
million in 1996, 1995 and 1994, respectively.

At December 31, 1996, fixed maturities with a carrying value of $2.0 million
were non-income producing for the twelve months ended December 31, 1996. There
were no mortgage loans which were non-income producing for the twelve months
ended December 31, 1996.

Included in long-term investments is income from limited partnerships of
$13.7 million, $0.1 million and $0.6 million in 1996, 1995 and 1994,
respectively.

B. REALIZED INVESTMENT GAINS AND LOSSES

Realized gains (losses) on investments were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Fixed maturities............................. $ (9.7) $ (7.0) $ 2.4
Mortgage loans............................... (2.4) 1.4 (12.1)
Equity securities............................ 54.8 16.2 12.4
Real estate.................................. 21.1 5.3 1.4
Other........................................ 3.0 3.2 (3.0)
------ ------ ------
Net realized investment gains................ $ 66.8 $ 19.1 $ 1.1
------ ------ ------
------ ------ ------
</TABLE>

Proceeds from voluntary sales of investments in fixed maturities were
$2,432.8 million, $1,612.3 million and $1,036.5 million in 1996, 1995 and 1994,
respectively. Realized gains on such sales were $19.3 million, $23.7 million and
$12.9 million; and realized losses were $30.5 million, $33.0 million and $21.6
million for 1996, 1995 and 1994, respectively.

5. 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. Fair values of
interest rate futures were not material at December 31, 1996 and 1995.

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.

F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

EQUITY SECURITIES

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.

POLICY LOANS

The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.

REINSURANCE RECEIVABLES

The carrying amount reported in the consolidated balance sheets approximates
fair value.

INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)

Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.

DEBT

The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.

F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The estimated fair values of the financial instruments were as follows:

<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------

<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 175.9 $ 175.9 $ 236.6 $ 236.6
Fixed maturities........................... 7,461.5 7,461.5 7,739.3 7,739.3
Equity securities.......................... 473.1 473.1 517.2 517.2
Mortgage loans............................. 650.1 675.7 799.5 845.4
Policy loans............................... 132.4 132.4 123.2 123.2
--------- -------- --------- --------
$ 8,893.0 $8,918.6 $ 9,415.8 $9,461.7
--------- -------- --------- --------
--------- -------- --------- --------

FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 1,101.3 $1,119.2 $ 1,632.8 $1,677.0
Supplemental contracts without life
contingencies............................ 23.1 23.1 24.4 24.4
Dividend accumulations..................... 87.3 87.3 86.2 86.2
Other individual contract deposit funds.... 76.9 74.3 95.7 92.8
Other group contract deposit funds......... 789.1 788.3 894.0 902.8
Individual annuity contracts............... 935.6 719.0 966.3 810.0
Short-term debt............................ 38.4 38.4 28.0 28.0
Long-term debt............................. 2.7 2.7 2.8 2.9
--------- -------- --------- --------
$ 3,054.4 $2,852.3 $ 3,730.2 $3,624.1
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>

6. CLOSED BLOCK

Included in other income in the Consolidated Statement of Income in 1996 and
1995 is a net pre-tax contribution from the Closed Block of $8.6 million and
$2.9 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1996 and 1995 and for the period ended December 31, 1996, and
the period from October 1, 1995 through December 31, 1995, is as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $397.2 and $447.4, respectively).......... $ 403.9 $ 458.0
Mortgage loans............................................................................... 114.5 57.1
Policy loans................................................................................. 230.2 242.4
Cash and cash equivalents.................................................................... 24.1 17.6
Accrued investment income.................................................................... 14.3 16.6
Deferred policy acquisition costs............................................................ 21.1 24.5
Other assets................................................................................. 3.7 2.7
--------- ---------
Total assets................................................................................... $ 811.8 $ 818.9
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 883.4 $ 899.2
Other liabilities............................................................................ 8.7 2.8
--------- ---------
Total liabilities.............................................................................. $ 892.1 $ 902.0
--------- ---------
--------- ---------
</TABLE>

F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 31, DECEMBER 31, OCTOBER 1 THROUGH
(IN MILLIONS) 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Revenues
Premiums...................................................................... $ 61.7 $ 11.5
Net investment income......................................................... 52.6 12.8
Realized investment loss...................................................... (0.7) --
------------ -------
Total revenues.................................................................. 113.6 24.3
------------ -------
Benefits and expenses
Policy benefits............................................................... 101.2 20.6
Policy acquisition expenses................................................... 3.2 0.8
Other operating expenses...................................................... 0.6 --
------------ -------
Total benefits and expenses..................................................... 105.0 21.4
------------ -------
Contribution from the Closed Block.............................................. $ 8.6 $ 2.9
------------ -------
------------ -------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block.......................................... $ 8.6 $ 2.9
Initial cash transferred to the Closed Block................................ -- 139.7
Change in deferred policy acquisition costs, net............................ 3.4 0.4
Change in premiums and other receivables.................................... 0.2 (0.1)
Change in policy liabilities and accruals................................... (13.9) 2.0
Change in accrued investment income......................................... 2.3 (1.3)
Other, net.................................................................. 2.5 0.8
------------ -------
Net cash provided by operating activities....................................... 3.1 144.4
------------ -------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................. 188.1 29.0
Purchases of investments.................................................... (196.9) (158.8)
Other, net.................................................................. 12.2 3.0
------------ -------
Net cash provided by (used in) investing activities............................. 3.4 (126.8)
------------ -------
Net increase in cash and cash equivalents....................................... 6.5 17.6
Cash and cash equivalents, beginning of year.................................... 17.6 --
------------ -------
Cash and cash equivalents, end of year.......................................... $ 24.1 $ 17.6
------------ -------
------------ -------
</TABLE>

On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1996 or 1995, respectively.

Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.

F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

7. DEBT

Short- and long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 37.8 $ 27.7
Other.......................................................................................... 0.6 0.3
--------- ---------
Total short-term debt............................................................................ $ 38.4 $ 28.0
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.7 $ 2.8
--------- ---------
--------- ---------
</TABLE>

FAFLIC issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments. Commercial paper borrowing
arrangements are supported by various lines of credit. At December 31, 1996, the
weighted average interest rate for outstanding commercial paper was
approximately 5.5%.

At December 31, 1996, FAFLIC had approximately $140.0 million in committed
lines of credit provided by U.S. banks, of which $102.2 million was available
for borrowing. These lines of credit generally have terms of less than one year,
and require the Company to pay annual commitment fees of 0.07% of the available
credit. Interest that would be charged for usage of these lines of credit is
based upon negotiated arrangements.

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.

In October, 1995, AFC issued $200.0 million face amount of Senior Debentures
for proceeds of $197.2 million net of discounts and issuance costs. These
securities have an effective interest rate of 7.65%, and mature on October 16,
2025. Interest is payable semiannually on October 15 and April 15 of each year.
The Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC.

Interest expense was $16.8 million, $4.1 million and $4.3 million in 1996,
1995 and 1994, respectively. Interest expense included $11.0 million related to
interest payments on repurchase agreements. All interest expense is recorded in
other operating expenses.

8. 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 consolidated statements of income is shown below:

F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The federal income taxes attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the expected federal income tax rate. The sources
of the difference and the tax effects of each were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 122.3 $ 105.6 $ 53.7
Tax-exempt interest................................................................ (35.3) (32.2) (35.9)
Differential earnings amount....................................................... (10.2) (7.6) 35.0
Dividend received deduction........................................................ (1.6) (4.0) (2.5)
Changes in tax reserve estimates................................................... 4.7 19.3 4.0
Other, net......................................................................... 1.2 1.6 (0.9)
--------- --------- ---------
Federal income tax expense........................................................... $ 81.1 $ 82.7 $ 53.4
--------- --------- ---------
--------- --------- ---------
</TABLE>

Until conversion to a stock life insurance company, FAFLIC, as a mutual
company, reduced its deduction for policyholder dividends by the differential
earnings amount. This amount was computed, for each tax year, by multiplying the
average equity base of the FAFLIC/AFLIAC consolidated group, as determined for
tax purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.

The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (16.3) $ (9.8)
Loss reserve discounting................................................................... (182.1) (178.3)
Deferred acquisition costs................................................................. 57.5 55.1
Employee benefit plans..................................................................... (25.1) (25.5)
Investments, net........................................................................... 73.4 77.4
Bad debt reserve........................................................................... (1.7) (1.8)
Other, net................................................................................. 1.1 1.7
--------- ---------
Deferred tax asset, net...................................................................... $ (93.2) $ (81.2)
--------- ---------
--------- ---------
</TABLE>

F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The deferred income tax liability represents the tax effects of temporary
differences attributable to the FAFLIC/AFLIAC consolidated federal tax return
group. Its components were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
Loss reserve discounting................................................................... $ (153.7) $ (129.1)
Deferred acquisition costs................................................................. 189.6 169.7
Employee benefit plans..................................................................... (16.3) (14.6)
Investments, net........................................................................... 55.1 67.0
Bad debt reserve........................................................................... (24.5) (26.3)
Other, net................................................................................. (15.6) (18.9)
--------- ---------
Deferred tax liability, net.................................................................. $ 34.6 $ 47.8
--------- ---------
--------- ---------
</TABLE>

Gross deferred income tax assets totaled $435.3 million and $405.1 million
at December 31, 1996 and 1995, respectively. Gross deferred income tax
liabilities totaled $376.7 million and $371.7 million at December 31, 1996 and
1995, respectively.

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.

At December 31, 1996, there are available non-life net operating loss
carryforwards of $0.8 million, and alternative minimum tax credit carryforwards
of $16.3 million.

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 FAFLIC/AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
Allmerica P&C 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 federal income tax returns for 1989, 1990 and 1991
for both the FAFLIC/AFLIAC consolidated group, as well as the Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In 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.

9. PENSION PLANS

FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Through December 31, 1994,
retirement benefits were based primarily on employees' years of service and
compensation during the highest five consecutive plan years of employment.
Benefits under this defined benefit formula were frozen for most employees (but
not for eligible agents) effective December 31, 1994. In their place, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee as a percentage of
that employee's salary, similar to a defined contribution plan arrangement. The
1996 and 1995 allocations were based on 7.0% of each eligible employee's salary.
The Company's policy for the plans is to fund at least the minimum amount
required by the Employee Retirement Income Security Act of 1974.

F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Components of net pension expense were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.0 $ 19.7 $ 13.0
Interest accrued on projected benefit obligations..................................... 21.9 21.1 20.0
Actual return on assets............................................................... (42.2) (89.3) (2.6)
Net amortization and deferral......................................................... 9.3 66.1 (16.3)
--------- --------- ---------
Net pension expense................................................................... $ 8.0 $ 17.6 $ 14.1
--------- --------- ---------
--------- --------- ---------
</TABLE>

The following table summarizes the combined status of the three pension
plans. At December 31, 1996 the plans' assets exceeded their projected benefit
obligations and in 1995 the plans' projected benefit obligations exceeded their
assets.

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 308.9 $ 325.6
Unvested benefit obligation.................................................................. 6.6 5.0
--------- ---------
Accumulated benefit obligation................................................................. $ 315.5 $ 330.6
--------- ---------
--------- ---------

Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 344.2 $ 367.1
Plan assets at fair value.................................................................... 347.8 321.2
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 3.6 (45.9)
Unrecognized net (gain) loss from past experience............................................ (9.1) 48.8
Unrecognized prior service benefit........................................................... (11.5) (13.8)
Unamortized transition asset................................................................. (24.7) (26.5)
--------- ---------
Net pension liability.......................................................................... $ (41.7) $ (37.4)
--------- ---------
--------- ---------
</TABLE>

Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1996 and 1995, and the assumed long-term rate
of return on plan assets was 9%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.5% to 6.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.

The Company has a profit sharing and 401(k) plan for its employees.
Effective for plan years beginning after 1994, the profit sharing formula for
employees has been discontinued and a 401(k) match feature has been added to the
continuing 401(k) plan for the employees. Total plan expense in 1996, 1995 and
1994 was $5.5 million, $5.2 million and $12.6 million, respectively. In addition
to this Plan, the Company has a defined contribution plan for substantially all
of its agents. The Plan expense in 1996, 1995 and 1994 was $2.0 million, $3.5
million and $2.7 million, respectively.

10. OTHER POSTRETIREMENT BENEFIT PLANS

In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit

F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

payments and to restrict eligibility to current employees. The medical plans
have varying copayments and deductibles, depending on the plan. These plans are
unfunded.

The plan changes effective January 1, 1996 resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.

The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.4 $ 44.9
Fully eligible active plan participants..................................................... 7.5 14.0
Other active plan participants.............................................................. 24.4 45.9
--------- ---------
72.3 104.8
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 72.3 104.8
Unrecognized prior service benefit............................................................ 23.8 --
Unrecognized loss............................................................................. (5.0) (13.4)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 91.1 $ 91.4
--------- ---------
--------- ---------
</TABLE>

The components of net periodic postretirement benefit expense were as
follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.2 $ 4.2 $ 6.6
Interest cost........................................................................... 4.6 6.9 6.9
Amortization of (gain) loss............................................................. (2.8) (0.5) 1.4
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 5.0 $ 10.6 $ 14.9
--------- --------- ---------
--------- --------- ---------
</TABLE>

For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1996, health care costs were assumed to increase 9.0% in 1997,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1996
by $5.3 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1996 by $0.7 million.

The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1996 and 1995.

11. POSTEMPLOYMENT BENEFITS

Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, (SFAS No. 112), "Employers' Accounting
for Postemployment Benefits", which requires employers to recognize the costs
and obligations of severance, disability and related life insurance and health
care benefits to be paid to inactive or former employees after employment but
before retirement. Prior to adoption, the Company had recognized the cost of
these benefits on an accrual or paid

F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

basis, depending on the plan. Implementation of SFAS No. 112 resulted in a
transition obligation of $1.9 million, net of federal income taxes and minority
interest, and is reported as a cumulative effect of a change in accounting
principle in the consolidated statement of income. The impact of this accounting
change, after recognition of the cumulative effect, was not significant.

12. STOCK-BASED COMPENSATION PLANS

In October 1995 the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Standard is
effective for fiscal years beginning after December 15, 1995, and requires the
company either to apply a fair value measure to any stock-based compensation
granted by the company, or continue to apply the valuation provisions of
existing accounting standards, but with pro-forma net income and earnings per
share disclosures using a fair value methodology to value the stock-based
compensation. Beginning for the year ended December 31, 1996, AFC has elected to
continue to apply the valuation provisions of existing accounting standards (APB
25). The pro-forma effect of applying SFAS 123 is not material.

Effective June 17, 1996, AFC adopted a Long Term Stock Incentive Plan for
employees of AFC (the "Employees' Plan"). Key employees of AFC and its
subsidiaries are eligible for awards pursuant to the Plan administered by the
Compensation Committee of the Board of Directors (the "Committee") of AFC. Under
the terms of the Employees' Plan, options may be granted to eligible employees
at a price not less than the market price of AFC's common stock on the date of
grant. Option shares may be exercised subject to the terms prescribed by the
Committee at the time of grant, otherwise options vest at the rate of 20%
annually for five consecutive years and must be exercised not later than ten
years from the date of grant. At June 17, 1996, 231,500 option shares were
granted at an option price of $27.50. During 1996, 22,000 option shares were
forfeited leaving 209,500 option shares outstanding at December 31, 1996. There
were no options exercised during 1996. At December 31, 1996, there were no
options exercisable and 2,140,500 option shares were available for future grant.

13. DIVIDEND RESTRICTIONS

Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.

Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, 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 for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. At January 1, 1997, FAFLIC could pay
dividends of $151.8 million to AFC without prior approval of the Commissioner.

Dividends from FAFLIC to AFC will be the primary source of cash for
repayment of the debt by AFC and payment of dividends to AFC stockholders.

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

F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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.

Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
At January 1, 1997, the maximum dividend and other distributions that could be
paid to Allmerica P&C by Hanover, without prior approval of the Insurance
Commissioner, was approximately $15.4 million, which considers dividends
declared to Allmerica P&C of $105.0 million during 1996, including $80.0 million
which was declared in December. On January 2, 1997, Hanover declared an
extraordinary dividend in the amount of $120.0 million, payable on or after
January 21, 1997 to Allmerica P&C. The dividend, which was approved by the New
Hampshire Department on January 9, 1997, is to be paid in a lump sum or in such
installments as Allmerica P&C in its discretion may determine.

Pursuant to Michigan's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Michigan Insurance Commissioner, is limited to the greater of
10% of policyholders' surplus as of December 31 of the immediately preceding
year or the statutory net income less realized gains, for the immediately
preceding calendar year. At January 1, 1997, Citizens Insurance could pay
dividends of $39.9 million to Citizens Corporation without prior approval.

14. SEGMENT INFORMATION

The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas, the
Company conducts business principally in five operating segments.

The Risk Management group includes two segments: Regional Property and
Casualty and Corporate Risk Management Services.

The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.

The Retirement and Asset Management group includes three segments: Retail
Financial Services, Institutional Services and Allmerica Asset Management. The
Retail Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.

F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Summarized below is financial information with respect to business segments
for the year ended and as of December 31.

<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995 1994
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty.......... $ 2,193.7 $ 2,095.1 $ 2,004.8
Corporate Risk Management............... 361.5 328.5 302.4
---------- ---------- ----------
Subtotal.............................. 2,555.2 2,423.6 2,307.2
---------- ---------- ----------
Retirement and Asset Management
Retail Financial Services............... 450.9 486.7 507.9
Institutional Services.................. 266.7 330.2 397.9
Allmerica Asset Management.............. 8.8 4.4 4.0
---------- ---------- ----------
Subtotal.............................. 726.4 821.3 909.8
---------- ---------- ----------
Eliminations.............................. (8.7) (4.4) (21.9)
---------- ---------- ----------
Total....................................... $ 3,272.9 $ 3,240.5 $ 3,195.1
---------- ---------- ----------
---------- ---------- ----------
Income (loss) from continuing operations
before income taxes:
Risk Management
Regional Property and Casualty.......... $ 197.7 $ 206.3 $ 113.1
Corporate Risk Management............... 20.7 18.3 19.9
---------- ---------- ----------
Subtotal.............................. 218.4 224.6 133.0
---------- ---------- ----------
Retirement and Asset Management...........
Retail Financial Services............... 76.9 35.2 14.2
Institutional Services.................. 52.8 42.8 4.4
Allmerica Asset Management.............. 1.1 2.3 1.9
---------- ---------- ----------
Subtotal.............................. 130.8 80.3 20.5
---------- ---------- ----------
Total....................................... $ 349.2 $ 304.9 $ 153.5
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty.......... $ 5,703.9 $ 5,741.8 $ 5,408.7
Corporate Risk Management............... 506.0 458.9 386.3
---------- ---------- ----------
Subtotal.............................. 6,209.9 6,200.7 5,795.0
---------- ---------- ----------
Retirement and Asset Management
Retail Financial Services............... 8,871.3 7,218.7 5,639.8
Institutional Services.................. 3,879.0 4,280.9 4,484.5
Allmerica Asset Management.............. 2.4 2.1 2.2
---------- ---------- ----------
Subtotal.............................. 12,752.7 11,501.7 10,126.5
---------- ---------- ----------
Total....................................... $18,962.6 $17,702.4 $15,921.5
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

15. LEASE COMMITMENTS

Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $36.4 million and $35.2 million in 1996, 1995 and
1994, respectively. At December 31, 1996, future minimum rental payments under
non-cancelable operating leases were approximately $71.7 million, payable as
follows: 1997 -- $26.4 million; 1998 -- $19.6 million; 1999 -- $12.8 million;
2000 -- $8.0 million; and $5.0 million thereafter.

F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other property and equipment; thus, it
is anticipated that future minimum lease commitments will not be less than the
amounts shown for 1997.

16. REINSURANCE

In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other 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 Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers.

These market mechanisms and pooling arrangements include the Massachusetts
Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers' Compensation
Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association
("MCCA"). At December 31, 1996, the MCCA and CAR were the only two reinsurers
which represented 10% or more of the Company's reinsurance business. As a
servicing carrier in Massachusetts, the Company cedes a significant portion of
its private passenger and commercial automobile premiums to CAR. Net premiums
earned and losses and loss adjustment expenses ceded to CAR in 1996, 1995 and
1994 were $38.0 million and $21.8 million, $49.1 million and $33.7 million, and
$50.0 million and $29.8 million, respectively.

From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company was involved in
legal proceedings regarding the MWCRP's deficit which through a legislated
settlement issued on June 23, 1995 provided for an initial funding of $220.0
million, of which the insurance carriers were responsible for $65.0 million.
Hanover paid its allocation of $4.2 million in December 1995. Some of the small
carriers are currently appealing this decision. The Company's right to recover
reinsurance balances for claims properly paid is not at issue in any such
proceedings. The Company expects to collect its reinsurance balance; however,
funding of the cash flow needs of the MWCRP may in the future be affected by
issues related to certain litigation, the outcome of which the Company cannot
predict. The Company ceded to MCCA net premiums earned and losses and loss
adjustment expenses in 1996, 1995 and 1994 of $50.5 million and $(52.9) million,
$66.8 million and $62.9 million, and $80.0 million and $24.2 million,
respectively. Because the MCCA is supported by assessments permitted by statute,
and all amounts billed by the Company to CAR, MWCRP and MCCA have been paid when
due, the Company believes that it has no significant exposure to uncollectible
reinsurance balances.

F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The effects of reinsurance were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life insurance premiums:
Direct....................................... $ 389.1 $ 438.9 $ 447.2
Assumed...................................... 87.8 71.0 54.3
Ceded........................................ (138.9) (150.3) (111.0)
--------- --------- ---------
Net premiums................................... $ 338.0 $ 359.6 $ 390.5
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................... $2,039.7 $2,039.4 $1,992.4
Assumed...................................... 108.7 125.0 128.6
Ceded........................................ (234.0) (279.1) (298.1)
--------- --------- ---------
Net premiums................................... $1,914.4 $1,885.3 $1,822.9
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................... $2,018.5 $2,021.7 $1,967.1
Assumed...................................... 112.4 137.7 116.1
Ceded........................................ (232.6) (296.2) (291.9)
--------- --------- ---------
Net premiums................................... $1,898.3 $1,863.2 $1,791.3
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 618.0 $ 749.6 $ 773.0
Assumed...................................... 44.9 38.5 28.9
Ceded........................................ (77.8) (69.5) (61.6)
--------- --------- ---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 585.1 $ 718.6 $ 740.3
--------- --------- ---------
--------- --------- ---------
Property and casualty benefits, claims, losses
and loss adjustment expenses:
Direct....................................... $1,288.3 $1,372.7 $1,364.4
Assumed...................................... 85.8 146.1 102.7
Ceded........................................ (2.2) (229.1) (160.4)
--------- --------- ---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $1,371.9 $1,289.7 $1,306.7
--------- --------- ---------
--------- --------- ---------
</TABLE>

17. DEFERRED POLICY ACQUISITION COSTS

The following reflects changes to the deferred policy acquisition asset:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
-------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 735.7 $ 802.8 $ 746.9
Acquisition expenses deferred................... 560.8 504.8 510.3
Amortized to expense during the year............ (483.5) (470.3) (475.7)
Adjustment to equity during the year............ 9.7 (50.4) 21.3
Transferred to the Closed Block................. -- (24.8) --
Adjustment for cession of term life insurance... -- (26.4) --
-------- -------- --------
Balance at end of year............................ $ 822.7 $ 735.7 $ 802.8
-------- -------- --------
-------- -------- --------
</TABLE>

F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

18. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. 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 $471.7 million, $446.9 million and $371.4 million at December 31, 1996, 1995
and 1994, respectively. Accident and health claim liabilities have been re-
estimated for all prior years and were increased by $0.6 million and $2.2
million in 1996 and 1994, respectively, and increased by $17.6 million in 1995.
Unfavorable development in the accident and health business during 1995 is
primarily due to reserve strengthening and adverse experience in the Company's
individual disability line of business

The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of
year.......................................... $2,896.0 $2,821.7 $2,717.3
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of the current
year....................................... 1,513.3 1,427.3 1,434.8
Decrease in provision for insured events of
prior years................................ (141.4) (137.6) (128.1)
--------- --------- ---------
Total incurred losses and LAE.................. 1,371.9 1,289.7 1,306.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year............................ 759.6 652.2 650.2
Losses and LAE attributable to insured events
of prior years............................. 627.6 614.3 566.9
--------- --------- ---------
Total payments................................. 1,387.2 1,266.5 1,217.1
--------- --------- ---------
Change in reinsurance recoverable on unpaid
losses........................................ (136.6) 51.1 14.8
--------- --------- ---------
Reserve for losses and LAE, end of year........ $2,744.1 $2,896.0 $2,821.7
--------- --------- ---------
--------- --------- ---------
</TABLE>

As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $141.4 million,
$137.6 million and $128.1 million in 1996, 1995 and 1994, respectively. The
increase in favorable development on prior years' reserves of $3.8 million in
1996 results primarily from an $11.4 million increase in favorable development
at Citizens.

The increase in Citizens' favorable development of $11.4 million in 1996
reflects improved severity in the personal automobile line, where favorable
development increased $28.6 million to $33.0 million in 1996, partially offset
by less favorable development in the workers' compensation line. In 1995, the
workers' compensation line had favorable development of $32.7 million, primarily
as a result of Citizens re-estimating reserves to reflect the new claims cost
management programs and the Michigan Supreme Court ruling, which decreases the
maximum to be paid for indemnity cases on all existing and future claims. In
1996, the favorable development in the workers' compensation line of $21.8
million also reflected these developments. Hanover's favorable development,
including voluntary and involuntary pools, decreased $7.7 million in 1996 to
$82.9 million, primarily attributable to a decrease in favorable development in
the workers' compensation line of $19.8 million to favorable development of
$17.3 million in 1996. This decrease is primarily attributable to a re-estimate
of reserves with respect to certain types of workers' compensation policies
including large deductibles and excess of loss policies. In addition, during

F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

1995 the Regional Property and Casualty subsidiaries refined their estimation of
unallocated loss adjustment expenses which increased favorable development in
that year. Favorable development in the personal automobile line also decreased
$4.7 million, to $42.4 million in 1996. These decreases were offset by increases
in favorable development of $1.9 million and $5.6 million, to $12.6 million and
$5.7 million, in the commercial automobile and commercial multiple peril lines,
respectively. Favorable development in other lines increased by $8.8 million,
primarily as a result of environmental reserve strengthening in 1995. Favorable
development in Hanover's voluntary and involuntary pools increased $3.7 million
to $4.1 million during 1996.

The increase in favorable development on prior years' reserves of $9.5
million in 1995 results primarily from a $34.6 million increase in favorable
development at Citizens. Favorable development in Citizens' personal automobile
and workers' compensation lines increased $16.6 million and $15.5 million, to
favorable development of $4.4 million and $32.7 million, respectively, due to
the aforementioned change in claims cost management and the Michigan Supreme
Court ruling. Hanover's favorable development, not including the effect of
voluntary and involuntary pools, was relatively unchanged at $90.2 million in
1995 compared to $91.7 million in 1994. Favorable development in Hanover's
workers' compensation line increased $27.7 million to $31.0 million during 1995.
This was offset by decreases of $14.6 million and $12.6 million, to $45.5
million and $0.1 million, in the personal automobile and commercial multiple
peril lines, respectively. Favorable development in Hanover's voluntary and
involuntary pools decreased $23.6 million to $0.4 million during 1995.

This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.

Due to the nature of business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small, and
therefore, their reserves are relatively small compared to other types of
liabilities. Losses and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE, were $50.8
million and $43.2 million, net of reinsurance of $20.2 million and $8.4 million,
at the end of 1996 and 1995, respectively. During 1995, the Regional Property
and Casualty subsidiaries redefined their environmental liabilities in
conformity with new guidelines issued by the NAIC. This had no impact on results
of operations. The Regional Property and Casualty subsidiaries do not
specifically underwrite policies that include this coverage, but as case law
expands policy provisions and insurers' liability beyond the intended coverage,
the Regional Property and Casualty subsidiaries may be required to defend such
claims. During 1995, Hanover performed an actuarial review of its environmental
reserves. This resulted in Hanover's providing additional reserves for "IBNR"
(incurred but not reported) claims, in addition to existing reserves for
reported claims. Although these claims are not material, their existence gives
rise to uncertainty and is discussed because of the possibility, however remote,
that they may become material. Management believes that, notwithstanding the
evolution of case law expanding liability in environmental claims, recorded
reserves related to these claims for environmental liability are adequate. In
addition, management is not aware of any litigation or pending claims that may
result in additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.

19. MINORITY INTEREST

The Company's interest in Allmerica P&C is represented by ownership of 59.5%,
58.3% and 57.4% of the outstanding shares of common stock at December 31, 1996,
1995 and 1994, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.

F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

20. 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

On June 23, 1995, the governor of Maine approved a legislative settlement
for the Maine Workers' Compensation Residual Market Pool deficit for the years
1988 through 1992. The settlement provides for an initial funding of $220.0
million toward the deficit. The insurance carriers are liable for $65.0 million,
and employers will contribute $110.0 million payable through surcharges on
premiums over the course of the next ten years. The major insurers are
responsible for 90% of the $65.0 million. Hanover's allocated share of the
settlement is approximately $4.2 million, which was paid in December 1995. The
remainder of the deficit of $45.0 million will be paid by the Maine Guaranty
Fund, payable in quarterly contributions over ten years. A group of smaller
carriers filed litigation to appeal the settlement. The Company believes that
adequate reserves have been established for any additional liability.

The Company has been named a defendant in various other 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 consolidated 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.

RESIDUAL MARKETS

The Company is required to participate in residual markets in various
states. The results of the residual markets are not subject to the
predictability associated with the Company's own managed business, and are
significant to the workers' compensation line of business and both the private
passenger and commercial automobile lines of business.

21. STATUTORY FINANCIAL INFORMATION

The insurance subsidiaries are 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, postretirement benefit costs are based on different
assumptions and reflect a different method of adoption, 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 1995 1994
--------------------------------------------------- --------- --------- -------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.................. $ 155.3 $ 155.3 $ 79.9
Life and Health Companies........................ 133.3 134.3 40.7
--------- --------- -------
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.................. $1,201.6 $1,128.4 $974.3
Life and Health Companies........................ 1,120.1 965.6 465.3
--------- --------- -------
</TABLE>

F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The quarterly results of operations for 1996 and 1995 are summarized below:

<TABLE>
<CAPTION>
For the Three Months Ended
(In millions)

<S> <C> <C> <C> <C>
1996 March 31 June 30 Sept. 30 Dec. 31
Total revenues............................ $827.9 $799.4 $806.3 $839.3
-------- ------- -------- -------
Net income................................ $ 50.6 $ 45.3 $ 49.4 $ 48.2
-------- ------- -------- -------
-------- ------- -------- -------
1995
Total revenues............................ $841.4 $791.9 $822.8 $784.4
-------- ------- -------- -------
Income before extraordinary item.......... $ 39.2 $ 29.9 $ 34.8 $ 45.2
Extraordinary item -- demutualization
expense.................................. (2.5) (3.5) (4.7) (1.4)
-------- ------- -------- -------
Net income................................ $ 36.7 $ 26.4 $ 30.1 $ 43.8
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>

23. 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%
coinsurance arrangement to Metropolitan 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-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of First Allmerica
Financial Life Insurance Company and Policyowners
of VEL II Account of First Allmerica Financial Life Insurance 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 VEL II Account of First Allmerica Financial Life
Insurance 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 First Allmerica Financial Life
Insurance 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-37
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENT EQUITY
GROWTH GRADE INCOME MONEY MARKET INDEX GOVERNMENT 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.......................... $ 518,328 $ 211,359 $ 876,285 $ 322,469 $ 195,343
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.............................. 518,328 211,359 876,285 322,469 195,343

LIABILITIES:................................ -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Net assets................................ $ 518,328 $ 211,359 $ 876,285 $ 322,469 $ 195,343
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------

Net asset distribution by category:
Variable life policies.................... $ 518,328 $ 211,359 $ 876,285 $ 322,469 $ 195,343
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------

Units outstanding, December 31, 1996........ 326,356 177,085 785,603 187,745 167,477
Net asset value per unit, December 31,
1996...................................... $1.588229 $1.193542 $1.115430 $1.717595 $1.166383

<CAPTION>
SELECT SELECT SMALL CAP
AGGRESSIVE GROWTH SELECT GROWTH GROWTH AND 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.......................... $ 975,199 $ 438,632 $ 383,551 $ 503,546
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.............................. 975,199 438,632 383,551 503,546
LIABILITIES:................................ -- -- -- --
----------------- ------------- ----------------- -----------
Net assets................................ $ 975,199 $ 438,632 $ 383,551 $ 503,546
----------------- ------------- ----------------- -----------
----------------- ------------- ----------------- -----------
Net asset distribution by category:
Variable life policies.................... $ 975,199 $ 438,632 $ 383,551 $ 503,546
----------------- ------------- ----------------- -----------
----------------- ------------- ----------------- -----------
Units outstanding, December 31, 1996........ 672,992 295,364 240,415 360,302
Net asset value per unit, December 31,
1996...................................... $1.449050 $1.485058 $1.595372 $1.397567
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-38
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT SELECT
INTERNATIONAL CAPITAL VIPF VIPF VIPF VIPF
EQUITY APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 102 103 104 105
------------- ------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 469,402 $ 497,643 $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- 488,867 1,372,991 1,383,032 537,647
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
------------- ------------ ------------- ------------- ----------- ------------
Total assets.............................. 469,402 497,643 488,867 1,372,991 1,383,032 537,647

LIABILITIES:................................ -- -- -- -- -- --
------------- ------------ ------------- ------------- ----------- ------------
Net assets................................ $ 469,402 $ 497,643 $ 488,867 $1,372,991 $1,383,032 $ 537,647
------------- ------------ ------------- ------------- ----------- ------------
------------- ------------ ------------- ------------- ----------- ------------

Net asset distribution by category:
Variable life policies.................... $ 469,402 $ 497,643 $ 488,867 $1,372,991 $1,383,032 $ 537,647
------------- ------------ ------------- ------------- ----------- ------------
------------- ------------ ------------- ------------- ----------- ------------

Units outstanding, December 31, 1996........ 342,761 333,104 367,751 840,541 907,481 447,104
Net asset value per unit, December 31,
1996...................................... $1.369476 $1.493954 $1.329342 $ 1.633460 $ 1.524035 $1.202510

<CAPTION>
T. ROWE PRICE DGPF
VIPF II INTERNATIONAL INTERNATIONAL
ASSET MANAGER STOCK EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
106 150 207
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. 362,258 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- 234,780 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- 345,776
------------- ------------- -------------
Total assets.............................. 362,258 234,780 345,776
LIABILITIES:................................ -- -- --
------------- ------------- -------------
Net assets................................ $ 362,258 $ 234,780 $ 345,776
------------- ------------- -------------
------------- ------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 362,258 $ 234,780 $ 345,776
------------- ------------- -------------
------------- ------------- -------------
Units outstanding, December 31, 1996........ 279,174 196,169 255,910
Net asset value per unit, December 31,
1996...................................... $1.297607 $1.196828 $1.351161
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-39
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 4/6/94* TO 12/31/94 1996 1995 4/19/94* TO 12/31/94
--------- --------- ------------------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 51,697 $ 17,788 $ 1,998 $ 11,714 $ 8,047 $ 1,541
--------- --------- ------- -------- -------- -------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 2,195 1,111 69 1,160 1,014 137
Administrative expense
fees.................... 610 308 19 322 282 38
--------- --------- ------- -------- -------- -------
Total expenses.......... 2,805 1,419 88 1,482 1,296 175
--------- --------- ------- -------- -------- -------
Net investment income
(loss).................. 48,892 16,369 1,910 10,232 6,751 1,366
--------- --------- ------- -------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 1,118 4,355 6 826 1,691 (4)
Net unrealized gain
(loss).................. 9,486 11,702 (1,891) (5,164) 8,501 (1,166)
--------- --------- ------- -------- -------- -------
Net realized and
unrealized gain (loss)
on investments.......... 10,604 16,057 (1,885) (4,338) 10,192 (1,170)
--------- --------- ------- -------- -------- -------
Net increase (decrease) in
net assets from
operations.............. $ 59,496 $ 32,426 $ 25 $ 5,894 $ 16,943 $ 196
--------- --------- ------- -------- -------- -------
--------- --------- ------- -------- -------- -------

MONEY MARKET
SUB-ACCOUNT 3
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 5/3/94* TO 12/31/94
-------- -------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 29,482 $ 19,962 $2,989
-------- -------- ------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 3,818 3,134 563
Administrative expense
fees.................... 1,061 870 156
-------- -------- ------
Total expenses.......... 4,879 4,004 719
-------- -------- ------
Net investment income
(loss).................. 24,603 15,958 2,270
-------- -------- ------
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.............. $ 24,603 $ 15,958 $2,270
-------- -------- ------
-------- -------- ------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-40
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT 4 SUB-ACCOUNT 5
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIOD ENDED
DECEMBER 31, 4/19/94* TO DECEMBER 31, FOR THE PERIOD
1996 1995 12/31/94 1996 1995 5/9/94* TO 12/31/94
-------- -------- ------------------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 8,129 $ 4,030 $ 551 $ 11,232 $ 11,211 $ 2,751
-------- -------- ----- -------- -------- -------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 1,224 491 92 1,307 1,678 246
Administrative expense
fees.................... 340 136 26 363 466 68
-------- -------- ----- -------- -------- -------
Total expenses.......... 1,564 627 118 1,670 2,144 314
-------- -------- ----- -------- -------- -------
Net investment income
(loss).................. 6,565 3,403 433 9,562 9,067 2,437
-------- -------- ----- -------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 4,070 100 1 413 1,190 35
Net unrealized gain
(loss).................. 27,526 10,948 (631) (4,855) 10,688 (2,305)
-------- -------- ----- -------- -------- -------
Net realized and
unrealized gain (loss)
on investments.......... 31,596 11,048 (630) (4,442) 11,878 (2,270)
-------- -------- ----- -------- -------- -------
Net increase (decrease) in
net assets from
operations.............. $ 38,161 $ 14,451 $(197) $ 5,120 $ 20,945 $ 167
-------- -------- ----- -------- -------- -------
-------- -------- ----- -------- -------- -------

<CAPTION>
SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 6
FOR THE YEAR
ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/5/94* TO 12/31/94
-------- -------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 64,509 $ -- $ --
-------- -------- -----
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 4,437 2,474 449
Administrative expense
fees.................... 1,232 687 125
-------- -------- -----
Total expenses.......... 5,669 3,161 574
-------- -------- -----
Net investment income
(loss).................. 58,840 (3,161) (574)
-------- -------- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 22,167 1,962 (10)
Net unrealized gain
(loss).................. 18,048 72,394 563
-------- -------- -----
Net realized and
unrealized gain (loss)
on investments.......... 40,215 74,356 553
-------- -------- -----
Net increase (decrease) in
net assets from
operations.............. $ 99,055 $ 71,195 $(21)
-------- -------- -----
-------- -------- -----
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-41
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 4/6/94* TO 12/31/94 1996 1995 4/15/94* TO 12/31/94
--------- -------- ------------------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 62,882 $ 23 $113 $ 29,763 $ 7,647 $ 1,673
--------- -------- ----- -------- -------- -------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 1,569 875 45 1,619 876 174
Administrative expense
fees.................... 435 243 12 450 244 48
--------- -------- ----- -------- -------- -------
Total expenses.......... 2,004 1,118 57 2,069 1,120 222
--------- -------- ----- -------- -------- -------
Net investment income
(loss).................. 60,878 (1,095) 56 27,694 6,527 1,451
--------- -------- ----- -------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 5,615 1,381 23 3,046 390 (24)
Net unrealized gain
(loss).................. (23,258) 13,793 47 15,235 17,723 (2,617)
--------- -------- ----- -------- -------- -------
Net realized and
unrealized gain (loss)
on investments.......... (17,643) 15,174 70 18,281 18,113 (2,641)
--------- -------- ----- -------- -------- -------
Net increase (decrease) in
net assets from
operations.............. $ 43,235 $ 14,079 $126 $ 45,975 $ 24,640 $(1,190)
--------- -------- ----- -------- -------- -------
--------- -------- ----- -------- -------- -------

SMALL CAP VALUE
SUB-ACCOUNT 9
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/5/94* TO 12/31/94
-------- -------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 25,540 $ 6,195 $ 370
-------- -------- -------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 1,989 1,266 327
Administrative expense
fees.................... 552 352 91
-------- -------- -------
Total expenses.......... 2,541 1,618 418
-------- -------- -------
Net investment income
(loss).................. 22,999 4,577 (48)
-------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 20,692 2,486 (244)
Net unrealized gain
(loss).................. 31,714 14,137 (1,797)
-------- -------- -------
Net realized and
unrealized gain (loss)
on investments.......... 52,406 16,623 (2,041)
-------- -------- -------
Net increase (decrease) in
net assets from
operations.............. $ 75,405 $ 21,200 $(2,089)
-------- -------- -------
-------- -------- -------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-42
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY
SUB-ACCOUNT 11 SELECT CAPITAL APPRECIATION
FOR THE YEAR SUB-ACCOUNT 12
ENDED FOR THE
DECEMBER 31, FOR THE PERIOD YEAR ENDED FOR THE PERIOD
1996 1995 5/20/94* TO 12/31/94 12/31/96 4/28/95* TO 12/31/95
-------- -------- -------------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 9,710 $ 2,081 $ 31 $ 724 $ 2,134
-------- -------- ----- ---------- -------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 1,791 700 35 1,775 312
Administrative expense
fees.................... 497 194 10 493 87
-------- -------- ----- ---------- -------
Total expenses.......... 2,288 894 45 2,268 399
-------- -------- ----- ---------- -------
Net investment income
(loss).................. 7,422 1,187 (14) (1,544) 1,735
-------- -------- ----- ---------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 888 441 (6) 829 169
Net unrealized gain
(loss).................. 51,093 9,816 (537) 6,477 12,007
-------- -------- ----- ---------- -------
Net realized and
unrealized gain (loss)
on investments.......... 51,981 10,257 (543) 7,306 12,176
-------- -------- ----- ---------- -------
Net increase (decrease) in
net assets from
operations.............. $ 59,403 $ 11,444 $(557) $ 5,762 $13,911
-------- -------- ----- ---------- -------
-------- -------- ----- ---------- -------

<CAPTION>
VIPF HIGH INCOME
SUB-ACCOUNT 102
FOR THE YEAR
ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/5/94* TO 12/31/94
-------- -------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 22,069 $ 8,429 $ --
-------- -------- -----
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 2,268 1,535 297
Administrative expense
fees.................... 630 426 82
-------- -------- -----
Total expenses.......... 2,898 1,961 379
-------- -------- -----
Net investment income
(loss).................. 19,171 6,468 (379)
-------- -------- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 561 2,195 (38)
Net unrealized gain
(loss).................. 20,923 20,200 (163)
-------- -------- -----
Net realized and
unrealized gain (loss)
on investments.......... 21,484 22,395 (201)
-------- -------- -----
Net increase (decrease) in
net assets from
operations.............. $ 40,655 $ 28,863 $(580)
-------- -------- -----
-------- -------- -----
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-43
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31, FOR THE PERIOD
1996 1995 4/5/94* TO 12/31/94 1996 1995 4/5/94* TO 12/31/94
--------- --------- ------------------- --------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 32,440 $ 21,950 $2,239 $ 51,006 $ 1,164 $ --
--------- --------- ------ --------- -------- ------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 6,486 3,803 413 6,641 3,677 524
Administrative expense
fees.................... 1,802 1,056 115 1,845 1,021 146
--------- --------- ------ --------- -------- ------
Total expenses.......... 8,288 4,859 528 8,486 4,698 670
--------- --------- ------ --------- -------- ------
Net investment income
(loss).................. 24,152 17,091 1,711 42,520 (3,534) (670)
--------- --------- ------ --------- -------- ------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 24,619 1,925 129 63,811 25,500 101
Net unrealized gain
(loss).................. 82,687 100,571 1,283 16,128 74,665 8,600
--------- --------- ------ --------- -------- ------
Net realized and
unrealized gain (loss)
on investments.......... 107,306 102,496 1,412 79,939 100,165 8,701
--------- --------- ------ --------- -------- ------
Net increase (decrease) in
net assets from
operations.............. $ 131,458 $ 119,587 $3,123 $ 122,459 $ 96,631 $8,031
--------- --------- ------ --------- -------- ------
--------- --------- ------ --------- -------- ------

VIPF OVERSEAS
SUB-ACCOUNT 105
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/5/94* TO 12/31/94
-------- -------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 9,836 $ 1,981 $ --
-------- -------- -------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 3,195 2,877 724
Administrative expense
fees.................... 888 799 201
-------- -------- -------
Total expenses.......... 4,083 3,676 925
-------- -------- -------
Net investment income
(loss).................. 5,753 (1,695) (925)
-------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 12,559 6,939 14
Net unrealized gain
(loss).................. 36,434 25,493 (5,398)
-------- -------- -------
Net realized and
unrealized gain (loss)
on investments.......... 48,993 32,432 (5,384)
-------- -------- -------
Net increase (decrease) in
net assets from
operations.............. $ 54,746 $ 30,737 $(6,309)
-------- -------- -------
-------- -------- -------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-44
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF II ASSET MANAGER T. ROWE PRICE INTERNATIONAL
SUB-ACCOUNT 106 STOCK
FOR THE YEAR SUB-ACCOUNT 150
ENDED FOR THE
DECEMBER 31, FOR THE PERIOD YEAR ENDED FOR THE PERIOD
1996 1995 4/6/94* TO 12/31/94 12/31/96 6/21/95* TO 12/31/95
-------- -------- ------------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 21,090 $ 4,679 $ 27 $ 3,112 $ --
-------- -------- ------- ---------- -----
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 2,266 2,345 410 708 60
Administrative expense
fees.................... 629 651 114 197 17
-------- -------- ------- ---------- -----
Total expenses.......... 2,895 2,996 524 905 77
-------- -------- ------- ---------- -----
Net investment income
(loss).................. 18,195 1,683 (497) 2,207 (77)
-------- -------- ------- ---------- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 5,309 1,938 39 162 7
Net unrealized gain
(loss).................. 18,987 36,035 (4,843) 12,983 984
-------- -------- ------- ---------- -----
Net realized and
unrealized gain (loss)
on investments.......... 24,296 37,973 (4,804) 13,145 991
-------- -------- ------- ---------- -----
Net increase (decrease) in
net assets from
operations.............. $ 42,491 $ 39,656 $(5,301) $15,352 $914
-------- -------- ------- ---------- -----
-------- -------- ------- ---------- -----

DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
FOR THE YEAR
ENDED
DECEMBER 31, FOR THE PERIOD
1996 1995 4/5/94* TO 12/31/94
-------- -------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 6,712 $ 2,054 $ --
-------- -------- -------
EXPENSES( NOTE 4):
Mortality and expense risk
fees.................... 1,546 1,028 150
Administrative expense
fees.................... 430 285 42
-------- -------- -------
Total expenses.......... 1,976 1,313 192
-------- -------- -------
Net investment income
(loss).................. 4,736 741 (192)
-------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain
(loss).................. 2,086 533 (4)
Net unrealized gain
(loss).................. 34,758 13,079 (840)
-------- -------- -------
Net realized and
unrealized gain (loss)
on investments.......... 36,844 13,612 (844)
-------- -------- -------
Net increase (decrease) in
net assets from
operations.............. $ 41,580 $ 14,353 $(1,036)
-------- -------- -------
-------- -------- -------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-45
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT GRADE
GROWTH INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31,
1996 1995 4/6/94* TO 12/31/94 1996 1995
-------- -------- -------------------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................. $ 48,892 $ 16,369 $ 1,910 $ 10,232 $ 6,751
Net realized gain (loss) on investments...... 1,118 4,355 6 826 1,691
Net unrealized gain (loss) on investments.... 9,486 11,702 (1,891) (5,164) 8,501
-------- -------- -------- --------- ---------
Net increase (decrease) in net assets from
operations................................. 59,496 32,426 25 5,894 16,943
-------- -------- -------- --------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums................................. 203,910 84,927 27,126 75,471 46,181
Terminations................................. (2,803) (1,044) (1,879) (424) (3,228)
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor).......................... 58,877 45,543 11,724 795 2,432
Net increase (decrease) in net assets from
investment by First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- -- --
-------- -------- -------- --------- ---------
Net increase in net assets from capital
transactions............................... 259,984 129,426 36,971 75,842 45,385
-------- -------- -------- --------- ---------
Net increase in net assets................... 319,480 161,852 36,996 81,736 62,328

NET ASSETS:
Beginning of year.............................. 198,848 36,996 -- 129,623 67,295
-------- -------- -------- --------- ---------
End of year.................................... $518,328 $198,848 $ 36,996 $ 211,359 $ 129,623
-------- -------- -------- --------- ---------
-------- -------- -------- --------- ---------

MONEY MARKET
SUB-ACCOUNT 3
YEAR ENDED
PERIOD FROM DECEMBER 31, PERIOD FROM

4/19/94* TO 12/31/94 1996 1995 5/3/94* TO 12/31/94

-------------------- --------- --------- --------------------

<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................. $ 1,366 $ 24,603 $ 15,958 $ 2,270

Net realized gain (loss) on investments...... (4) -- -- --

Net unrealized gain (loss) on investments.... (1,166) -- -- --

-------- --------- --------- --------

Net increase (decrease) in net assets from
operations................................. 196 24,603 15,958 2,270

-------- --------- --------- --------

FROM CAPITAL TRANSACTIONS:
Net premiums................................. 43,549 967,172 446,809 368,294

Terminations................................. (1,473) (5,135) (443) (146)

Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor).......................... 25,023 (475,914) (414,373) (52,810)

Net increase (decrease) in net assets from
investment by First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- --

-------- --------- --------- --------

Net increase in net assets from capital
transactions............................... 67,099 486,123 31,993 315,338

-------- --------- --------- --------

Net increase in net assets................... 67,295 510,726 47,951 317,608

NET ASSETS:
Beginning of year.............................. -- 365,559 317,608 --

-------- --------- --------- --------

End of year.................................... $ 67,295 $ 876,285 $ 365,559 $317,608

-------- --------- --------- --------

</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-46
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT 4 SUB-ACCOUNT 5
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31,
1996 1995 4/19/94* TO 12/31/94 1996 1995
--------- --------- -------------------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................. $ 6,565 $ 3,403 $ 433 $ 9,562 $ 9,067
Net realized gain (loss) on investments...... 4,070 100 1 413 1,190
Net unrealized gain (loss) on investments.... 27,526 10,948 (631) (4,855) 10,688
--------- --------- -------- --------- ---------
Net increase (decrease) in net assets from
operations................................. 38,161 14,451 (197) 5,120 20,945
--------- --------- -------- --------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums................................. 115,667 42,559 11,918 16,260 24,923
Terminations................................. (386) (100) -- (509) (81)
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor).......................... 61,514 24,073 14,809 (10,580) (14,095)
Net increase (decrease) in net assets from
investment by First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- -- --
--------- --------- -------- --------- ---------
Net increase in net assets from capital
transactions............................... 176,795 66,532 26,727 5,171 10,747
--------- --------- -------- --------- ---------
Net increase in net assets................... 214,956 80,983 26,530 10,291 31,692

NET ASSETS:
Beginning of year.............................. 107,513 26,530 -- 185,052 153,360
--------- --------- -------- --------- ---------
End of year.................................... $ 322,469 $ 107,513 $ 26,530 $ 195,343 $ 185,052
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------

<CAPTION>
SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 6
YEAR ENDED
PERIOD FROM DECEMBER 31, PERIOD FROM

5/9/94* TO 12/31/94 1996 1995 4/5/94* TO 12/31/94

-------------------- --------- --------- --------------------

<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................. $ 2,437 $ 58,840 $ (3,161) $ (574)

Net realized gain (loss) on investments...... 35 22,167 1,962 (10)

Net unrealized gain (loss) on investments.... (2,305) 18,048 72,394 563

-------- --------- --------- --------

Net increase (decrease) in net assets from
operations................................. 167 99,055 71,195 (21)

-------- --------- --------- --------

FROM CAPITAL TRANSACTIONS:
Net premiums................................. 150,537 372,698 171,463 81,409

Terminations................................. -- (5,233) (2,228) (1,652)

Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor).......................... 2,656 79,970 51,490 57,053

Net increase (decrease) in net assets from
investment by First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- --

-------- --------- --------- --------

Net increase in net assets from capital
transactions............................... 153,193 447,435 220,725 136,810

-------- --------- --------- --------

Net increase in net assets................... 153,360 546,490 291,920 136,789

NET ASSETS:
Beginning of year.............................. -- 428,709 136,789 --

-------- --------- --------- --------

End of year.................................... $153,360 $ 975,199 $ 428,709 $136,789

-------- --------- --------- --------

</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-47
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH AND
SELECT GROWTH INCOME
SUB-ACCOUNT 7 SUB-ACCOUNT 8
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31,
1996 1995 4/6/94* TO 12/31/94 1996 1995
--------- --------- -------------------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................. $ 60,878 $ (1,095) $ 56 $ 27,694 $ 6,527
Net realized gain (loss) on investments...... 5,615 1,381 23 3,046 390
Net unrealized gain (loss) on investments.... (23,258) 13,793 47 15,235 17,723
--------- --------- -------- --------- ---------
Net increase (decrease) in net assets from
operations................................. 43,235 14,079 126 45,975 24,640
--------- --------- -------- --------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums................................. 145,541 66,424 23,133 119,171 65,999
Terminations................................. (3,538) (792) (48) (2,514) (54)
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor).......................... 98,938 36,695 14,839 63,066 14,335
Net increase (decrease) in net assets from
investment by First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- -- --
--------- --------- -------- --------- ---------
Net increase in net assets from capital
transactions............................... 240,941 102,327 37,924 179,723 80,280
--------- --------- -------- --------- ---------
Net increase in net assets................... 284,176 116,406 38,050 225,698 104,920

NET ASSETS:
Beginning of year.............................. 154,456 38,050 -- 157,853 52,933
--------- --------- -------- --------- ---------
End of year.................................... $ 438,632 $ 154,456 $ 38,050 $ 383,551 $ 157,853
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------

SMALL CAP VALUE
SUB-ACCOUNT 9
YEAR ENDED
PERIOD FROM DECEMBER 31, PERIOD FROM

4/5/94* TO 12/31/94 1996 1995 4/5/94* TO 12/31/94

-------------------- --------- --------- --------------------

<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)................. $ 1,451 $ 22,999 $ 4,577 $ (48)

Net realized gain (loss) on investments...... (24) 20,692 2,486 (244)

Net unrealized gain (loss) on investments.... (2,617) 31,714 14,137 (1,797)

-------- --------- --------- --------

Net increase (decrease) in net assets from
operations................................. (1,190) 75,405 21,200 (2,089)

-------- --------- --------- --------

FROM CAPITAL TRANSACTIONS:
Net premiums................................. 45,043 161,845 102,108 77,321

Terminations................................. (206) (1,968) (372) (367)

Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor).......................... 9,286 82,739 (22,257) 9,981

Net increase (decrease) in net assets from
investment by First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- --

-------- --------- --------- --------

Net increase in net assets from capital
transactions............................... 54,123 242,616 79,479 86,935

-------- --------- --------- --------

Net increase in net assets................... 52,933 318,021 100,679 84,846

NET ASSETS:
Beginning of year.............................. -- 185,525 84,846 --

-------- --------- --------- --------

End of year.................................... $ 52,933 $ 503,546 $ 185,525 $ 84,846

-------- --------- --------- --------

</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-48
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY SELECT CAPITAL APPRECIATION
SUB-ACCOUNT 11 SUB-ACCOUNT 12
YEAR ENDED
DECEMBER 31, PERIOD FROM YEAR ENDED PERIOD FROM
1996 1995 5/20/94* TO 12/31/94 12/31/96 4/28/95* TO 12/31/95
-------- -------- -------------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).................. $ 7,422 $ 1,187 $ (14) $ (1,544) $ 1,735
Net realized gain (loss) on investments....... 888 441 (6) 829 169
Net unrealized gain (loss) on investments..... 51,093 9,816 (537) 6,477 12,007
-------- -------- -------- ---------- --------
Net increase (decrease) in net assets from
operations.................................. 59,403 11,444 (557) 5,762 13,911
-------- -------- -------- ---------- --------

FROM CAPITAL TRANSACTIONS:
Net premiums.................................. 139,918 54,409 9,176 219,527 33,186
Terminations.................................. (219) (309) -- (106) --
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)........................... 114,587 76,026 5,556 160,841 64,617
Net increase (decrease) in net assets from
investment by First Allmerica Financial Life
Insurance Company (Sponsor)................. (132) -- 100 (295) 200
-------- -------- -------- ---------- --------
Net increase in net assets from capital
transactions................................ 254,154 130,126 14,832 379,967 98,003
-------- -------- -------- ---------- --------
Net increase in net assets.................... 313,557 141,570 14,275 385,729 111,914

NET ASSETS:
Beginning of year............................... 155,845 14,275 -- 111,914 --
-------- -------- -------- ---------- --------
End of year..................................... $469,402 $155,845 $ 14,275 $497,643 $111,914
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------

<CAPTION>
VIPF HIGH INCOME
SUB-ACCOUNT 102
YEAR ENDED
DECEMBER 31, PERIOD FROM
1996 1995 4/5/94* TO 12/31/94
-------- -------- --------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).................. $ 19,171 $ 6,468 $ (379)
Net realized gain (loss) on investments....... 561 2,195 (38)
Net unrealized gain (loss) on investments..... 20,923 20,200 (163)
-------- -------- --------
Net increase (decrease) in net assets from
operations.................................. 40,655 28,863 (580)
-------- -------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................. 202,526 137,014 90,016
Terminations.................................. (4,802) (4,400) (714)
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)........................... 17,345 (22,591) 5,535
Net increase (decrease) in net assets from
investment by First Allmerica Financial Life
Insurance Company (Sponsor)................. -- -- --
-------- -------- --------
Net increase in net assets from capital
transactions................................ 215,069 110,023 94,837
-------- -------- --------
Net increase in net assets.................... 255,724 138,886 94,257
NET ASSETS:
Beginning of year............................... 233,143 94,257 --
-------- -------- --------
End of year..................................... $488,867 $233,143 $ 94,257
-------- -------- --------
-------- -------- --------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-49
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31, PERIOD FROM
1996 1995 4/5/94* TO 12/31/94 1996 1995 4/5/94* TO 12/31/94
---------- -------- -------------------- ---------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 24,152 $ 17,091 $ 1,711 $ 42,520 $ (3,534) $ (670)
Net realized gain (loss) on
investments....................... 24,619 1,925 129 63,811 25,500 101
Net unrealized gain (loss) on
investments....................... 82,687 100,571 1,283 16,128 74,665 8,600
---------- -------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from operations............ 131,458 119,587 3,123 122,459 96,631 8,031
---------- -------- -------- ---------- -------- --------

FROM CAPITAL TRANSACTIONS:
Net premiums........................ 500,943 293,480 130,274 616,709 291,237 142,021
Terminations........................ (10,042) (5,120) (1,557) (10,719) (6,100) (2,575)
Other transfers from (to) the
General Account of First Allmerica
Financial Life Insurance Company
(Sponsor)......................... 73,862 75,382 61,601 10,975 45,930 68,433
Net increase (decrease) in net
assets from investment by First
Allmerica Financial Life Insurance
Company (Sponsor)................. -- -- -- -- -- --
---------- -------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from capital
transactions...................... 564,763 363,742 190,318 616,965 331,067 207,879
---------- -------- -------- ---------- -------- --------
Net increase in net assets.......... 696,221 483,329 193,441 739,424 427,698 215,910

NET ASSETS:
Beginning of year..................... 676,770 193,441 -- 643,608 215,910 --
---------- -------- -------- ---------- -------- --------
End of year........................... $1,372,991 $676,770 $193,441 $1,383,032 $643,608 $215,910
---------- -------- -------- ---------- -------- --------
---------- -------- -------- ---------- -------- --------

<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
YEAR ENDED
DECEMBER 31, PERIOD FROM
1996 1995 4/5/94* TO 12/31/94
-------- -------- --------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)........ $ 5,753 $ (1,695) $ (925)
Net realized gain (loss) on
investments....................... 12,559 6,939 14
Net unrealized gain (loss) on
investments....................... 36,434 25,493 (5,398)
-------- -------- --------
Net increase (decrease) in net
assets from operations............ 54,746 30,737 (6,309)
-------- -------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums........................ 165,063 203,407 163,685
Terminations........................ (5,594) (4,920) (1,640)
Other transfers from (to) the
General Account of First Allmerica
Financial Life Insurance Company
(Sponsor)......................... (94,132) (23,786) 56,390
Net increase (decrease) in net
assets from investment by First
Allmerica Financial Life Insurance
Company (Sponsor)................. -- -- --
-------- -------- --------
Net increase (decrease) in net
assets from capital
transactions...................... 65,337 174,701 218,435
-------- -------- --------
Net increase in net assets.......... 120,083 205,438 212,126
NET ASSETS:
Beginning of year..................... 417,564 212,126 --
-------- -------- --------
End of year........................... $537,647 $417,564 $212,126
-------- -------- --------
-------- -------- --------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-50
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE
PRICE
INTERNATIONAL
STOCK
VIPF II ASSET MANAGER SUB-ACCOUNT
SUB-ACCOUNT 106 150
YEAR ENDED YEAR
DECEMBER 31, PERIOD FROM ENDED
1996 1995 4/6/94* TO 12/31/94 12/31/96
--------- --------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)......................... $ 18,195 $ 1,683 $ (497) $ 2,207
Net realized gain (loss) on investments.............. 5,309 1,938 39 162
Net unrealized gain (loss) on investments............ 18,987 36,035 (4,843) 12,983
--------- --------- -------- ---------
Net increase (decrease) in net assets from
operations......................................... 42,491 39,656 (5,301) 15,352
--------- --------- -------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums......................................... 75,597 153,730 84,953 93,585
Terminations......................................... (1,519) (287) -- (34)
Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance Company
(Sponsor).......................................... (66,800) (69,108) 108,875 99,822
Net increase (decrease) in net assets from investment
by First Allmerica Financial Life Insurance Company
(Sponsor).......................................... (129) -- 100 --
--------- --------- -------- ---------
Net increase in net assets from capital
transactions....................................... 7,149 84,335 193,928 193,373
--------- --------- -------- ---------
Net increase in net assets........................... 49,640 123,991 188,627 208,725

NET ASSETS:
Beginning of year...................................... 312,618 188,627 -- 26,055
--------- --------- -------- ---------
End of year............................................ $ 362,258 $ 312,618 $188,627 $234,780
--------- --------- -------- ---------
--------- --------- -------- ---------

DGPF INTERNATIONAL EQUITY

SUB-ACCOUNT 207
YEAR ENDED
PERIOD FROM DECEMBER 31, PERIOD FROM

6/21/95* TO 12/31/95 1996 1995 4/5/94* TO 12/31/94

-------------------- --------- --------- --------------------

<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)......................... $ (77) $ 4,736 $ 741 $ (192)

Net realized gain (loss) on investments.............. 7 2,086 533 (4)

Net unrealized gain (loss) on investments............ 984 34,758 13,079 (840)

------- --------- --------- -------

Net increase (decrease) in net assets from
operations......................................... 914 41,580 14,353 (1,036)

------- --------- --------- -------

FROM CAPITAL TRANSACTIONS:
Net premiums......................................... 6,491 102,071 99,444 47,581

Terminations......................................... -- (1,727) (1,057) --

Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance Company
(Sponsor).......................................... 18,650 39,897 (5,037) 9,707

Net increase (decrease) in net assets from investment
by First Allmerica Financial Life Insurance Company
(Sponsor).......................................... -- -- -- --

------- --------- --------- -------

Net increase in net assets from capital
transactions....................................... 25,141 140,241 93,350 57,288

------- --------- --------- -------

Net increase in net assets........................... 26,055 181,821 107,703 56,252

NET ASSETS:
Beginning of year...................................... -- 163,955 56,252 --

------- --------- --------- -------

End of year............................................ $ 26,055 $ 345,776 $ 163,955 $ 56,252

------- --------- --------- -------

</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

F-51
<PAGE>
VEL II ACCOUNT

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

NOTE 1 -- ORGANIZATION

The VEL II Account (VEL II) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company), established on April
1, 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
subsidary of Allmerica Financial Corporation (AFC). Under applicable insurance
law, the assets and liabilities of VEL II are clearly identified and
distinguished from the other assets and liabilities of the Company. VEL II
cannot be charged with liabilities arising out of any other business of the
Company.

VEL II is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VEL II currently offers eighteen
Sub-Accounts. 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 the Company,
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 on 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. The Company anticipates no tax liability resulting from the
operations of VEL II. Therefore, no provision for income taxes has been charged
against VEL II.

F-52
<PAGE>
VEL II 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
------------------------------------
<C> <S> <C> <C> <C>
NET ASSET
NUMBER OF AGGREGATE VALUE
SUB-ACCOUNT PORTFOLIO INVESTMENT SHARES COST PER SHARE
- --------------- --------------------------------------------------------------- ----------- ---------- -----------
Allmerica Investment Trust:
1 Growth....................................................... 222,172 $ 499,031 $ 2.333
2 Investment Grade Income...................................... 194,980 209,188 1.084
3 Money Market................................................. 876,285 876,285 1.000
4 Equity Index................................................. 148,947 284,626 2.165
5 Government Bond.............................................. 188,555 191,816 1.036
6 Select Aggressive Growth..................................... 478,743 884,195 2.037
7 Select Growth................................................ 306,736 448,049 1.430
8 Select Growth and Income..................................... 272,990 353,210 1.405
9 Small Cap Value.............................................. 333,254 459,492 1.511
11 Select International Equity.................................. 346,167 409,031 1.356
12 Select Capital Appreciation.................................. 335,113 479,158 1.485

Fidelity Variable Insurance Products Fund:
102 High Income.................................................. 39,047 447,907 12.520
103 Equity-Income................................................ 65,287 1,188,451 21.030
104 Growth....................................................... 44,413 1,283,639 31.140
105 Overseas..................................................... 28,538 481,118 18.840

Fidelity Variable Insurance Products Fund II:
106 Asset Manager................................................ 21,397 312,079 16.930

T. Rowe Price International Series, Inc.:
150 International Stock.......................................... 18,574 220,813 12.640

Delaware Group Premium Fund, Inc.:
207 International Equity......................................... 22,884 298,779 15.110
</TABLE>

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 $5. 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 $915,196 and $465,796, and $127,002,
respectively. These amounts are included on the statements of changes in net
assets with other transfers to the General Account.

F-53
<PAGE>
VEL II ACCOUNT

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The Company currently makes a charge of .65% 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 risk 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. The Company also charges each Sub-Account .15%
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 the Company, is the principal underwriter and general distributor
of VEL II, and does not receive any compensation for sales of VEL II policies.
Commissions are paid to registered representatives of Allmerica Investments and
of certain independent broker-dealers 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, 1995 and 1994, the
Company received $52,133, $14,169, and $8,186, respectively, for surrender
charges applicable to VEL II.

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 VEL II satisfies the current requirements of
the regulations, and it intends that VEL II will continue to meet such
requirements.

F-54
<PAGE>
VEL II 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 VEL II during the period ended December 31, 1996 were
as follows:

<TABLE>
<CAPTION>
SUB-ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
- --------------- ------------------------------------------------------------------------ ------------ ------------
<C> <S> <C> <C>
Allmerica Investment Trust:
1 Growth................................................................ $ 323,622 $ 15,019
2 Investment Grade Income............................................... 125,546 39,634
3 Money Market.......................................................... 2,550,717 2,040,945
4 Equity Index.......................................................... 219,590 36,288
5 Government Bond....................................................... 28,707 14,121
6 Select Aggressive Growth.............................................. 597,945 92,029
7 Select Growth......................................................... 343,471 41,817
8 Select Growth and Income.............................................. 232,879 25,604
9 Small Cap Value....................................................... 471,109 205,784
11 Select International Equity........................................... 271,260 9,786
12 Select Capital Appreciation........................................... 391,853 13,499

Fidelity Variable Insurance Products Fund:
102 High Income........................................................... 244,214 9,722
103 Equity-Income......................................................... 780,777 191,500
104 Growth................................................................ 1,619,568 959,530
105 Overseas.............................................................. 275,538 204,367

Fidelity Variable Insurance Products Fund II:
106 Asset Manager......................................................... 98,711 73,695

T. Rowe Price International Series, Inc.:
150 International Stock................................................... 199,076 3,527

Delaware Group Premium Fund, Inc.:
207 International Equity.................................................. 164,450 19,711
------------ ------------
Totals.................................................................. $ 8,939,033 $ 3,996,578
------------ ------------
------------ ------------
</TABLE>

F-55
<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, contact your agent.

The following supplemental benefits are available for issue under the Policy for
an additional charge.

WAIVER OF PREMIUM RIDER

This rider provides that during periods of total disability, continuing more
than four months, the Company will add to the Policy Value each month an
amount selected by you or the amount needed to pay the Policy charges,
whichever is greater. This value will be used to keep the Policy in force.
This benefit is subject to the Company's maximum issue benefits. Its cost
will change yearly.

GUARANTEED INSURABILITY RIDER

This rider guarantees that insurance may be added at various option dates
without Evidence of Insurability. This benefit may be exercised on the
option dates even if the Insured is disabled.

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 children of the
primary Insured. The rider includes a feature that allows the "other
Insured" to convert the coverage to a flexible premium adjustable life
insurance Policy.

CHILDREN'S INSURANCE RIDER

This rider provides coverage for eligible minor children. It also covers
future children, including adopted children and stepchildren.

ACCIDENTAL DEATH BENEFIT RIDER

This rider pays an additional benefit for death resulting from a covered
accident prior to the Policy anniversary nearest the Insured's Age 70.

EXCHANGE OPTION RIDER

This rider allows you to use the Policy to insure a different person,
subject to Company guidelines.

LIVING BENEFITS RIDER

This rider permits part of the proceeds of the Policy to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.

A-1
<PAGE>
APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS

PAYMENT OPTIONS

Upon written request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that otherwise would be deducted from the Sum
Insured.

The amounts payable under a payment option for each $1,000 value applied will be
the greater of:

- - the rate per $1,000 of value applied based on the Company's non-guaranteed
current payment option rates for the Policy, or

- - the rate in the Policy for the applicable payment option.

The following payment options currently are available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the VEL II 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:

(1) upon the death of the payee, with no further payments due (Life
Annuity), or

(2) upon the death of the payee, but not before the sum of the
payments made first equals or exceeds the amount applied under this
option (Life Annuity with Installment Refund), or

(3) upon the death of the payee, but not before a selected period (5,
10 or 20 years) has elapsed (Life Annuity with Period Certain).

Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined
by the Company each year, but which will not be less than 3 1/2%.
Payments may be made annually, semi-annually, quarterly or monthly.
Payments will end when the amount left with the Company has been
withdrawn. Payments will not continue, however, 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 1/2%. Payments may be made annually,
semi-annually, quarterly or monthly. The payment level selected must
provide for the payment each year of at least 8% of the amount
applied.

Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may
be chosen. After the death of one payee, payments will continue to the
survivor:

(1) in the same amount as the original amount; or

(2) in an amount equal to 2/3 of the original amount; or

(3) in an amount equal to 1/2 of the original amount.

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.

A-2
<PAGE>
SELECTION OF PAYMENT OPTIONS

The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds becomes payable.

If the amount of monthly income payments under Option B(3) for the attained age
of the payee are the same for different periods certain, the Company will deem
an election to have been made for the longest period certain which could have
been elected for such age and amount.

You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If the payee selects Option C or D when the Policy becomes a
claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.

ADDITIONAL DEPOSITS

An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.

RIGHTS AND LIMITATIONS

A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the written request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the written request selecting the option.

A corporation or fiduciary payee may select only option A, C or D. Such
selection will be subject to the consent of the Company.

PAYMENT DATES

The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.

The last payment under any option will be made as stated in the description of
that option. Should a payee under Option B or E die prior to the due date of the
second monthly payment, however, 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 OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS

The following tables illustrate the way in which the Policy's Sum Insured and
Policy Value could vary over an extended period of time.

ASSUMPTIONS

The tables illustrate a Policy issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Policy issued to
a male, Age 45, under a standard Premium Class and qualifying for the non-smoker
discount. In each case, one table illustrate the guaranteed cost of insurance
rates and the other table illustrates the current cost of insurance rates as
presently in effect.

The tables assume that no Policy loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Policy year (so that no transaction or transfer charges have been incurred).

The tables assume that all premiums are allocated to and remain in the VEL II
Account for the entire period shown. The tables are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
show 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 also would be different depending on the allocation of the
Policy's total Policy Value among the Sub-Accounts of the VEL II 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 the 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 VEL II Account for mortality
and expense risks and the VEL II Account administrative charge for the first ten
Policy years. In the Current Cost of Insurance Charges Tables, the VEL II
Account charges are equivalent to an effective annual rate of 0.80% of the
average daily value of the assets in the VEL II Account in the first ten Policy
Years, and 0.65% thereafter. In the Guaranteed Cost of Insurance Charges tables,
the VEL II Account charges are equivalent to an effective annual rate of 1.15%
of the average daily value of the assets in the VEL II Account in the first ten
Policy years, and 0.90% thereafter.

EXPENSES OF THE UNDERLYING FUNDS

The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying 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 the Policy may be more or less than 0.85% in the
aggregate, depending upon how you make allocations of the 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

A-4
<PAGE>
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 expenses of the International Equity Series would have been 1.04%.

NET ANNUAL RATES OF INVESTMENT

Taking into account the mortality and expense risk charge and the VEL II 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% in the Current Cost of Insurance Charges Tables correspond to net
annual rates of -1.65%, 4.35%, 10.35%, respectively, during the first ten Policy
years and -1.50%, 4.50% and 10.50%, respectively, thereafter.

Taking into account the mortality and expense risk charge and the VEL II 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% in the Guaranteed Cost of Insurance Charges Tables correspond to net
annual rates of -2.00%, 4.00%, 10.00%, respectively, during the first ten Policy
years and -1.75%, 4.25% and 10.25%, respectively, thereafter.

The hypothetical returns shown in the table do not reflect any charges for
income taxes against the VEL II Account since no charges are currently made. If
in the future, however, 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 INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.

TO CHOOSE THE SUB-ACCOUNTS WHICH BEST WILL MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T.
ROWE PRICE AND DGPF ALONG WITH THIS PROSPECTUS.

A-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2

CURRENT COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------ ------------------------------ -------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR(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 1,470 283 1,178 76,178 359 1,254 76,254 435 1,331 76,331
2 3,013 1,312 2,333 77,333 1,538 2,559 77,559 1,774 2,795 77,795
3 4,634 2,398 3,465 78,465 2,850 3,917 78,917 3,339 4,407 79,407
4 6,336 3,549 4,574 79,574 4,305 5,329 80,329 5,156 6,180 81,180
5 8,123 4,699 5,659 80,659 5,837 6,797 81,797 7,171 8,132 83,132

6 9,999 5,825 6,721 81,721 7,427 8,324 83,324 9,383 10,280 85,280
7 11,969 6,927 7,759 82,759 9,077 9,910 84,910 11,810 12,643 87,643
8 14,037 8,000 8,768 83,768 10,784 11,553 86,553 14,470 15,238 90,238
9 16,209 9,049 9,753 84,753 12,555 13,260 88,260 17,390 18,094 93,094
10 18,490 10,062 10,703 85,703 14,381 15,021 90,021 20,585 21,226 96,226

11 20,884 11,161 11,673 86,673 16,390 16,903 91,903 24,222 24,735 99,735
12 23,398 12,237 12,621 87,621 18,476 18,860 93,860 28,219 28,603 103,603
13 26,038 13,287 13,544 88,544 20,638 20,895 95,895 32,610 32,866 107,866
14 28,810 14,312 14,440 89,440 22,880 23,008 98,008 37,436 37,564 112,564
15 31,720 15,309 15,309 90,309 25,201 25,201 100,201 42,740 42,740 117,740

16 34,777 16,147 16,147 91,147 27,476 27,476 102,476 48,441 48,441 123,441
17 37,985 16,950 16,950 91,950 29,829 29,829 104,829 54,715 54,715 129,715
18 41,355 17,714 17,714 92,714 32,261 32,261 107,261 61,621 61,621 136,621
19 44,892 18,440 18,440 93,440 34,775 34,775 109,775 69,223 69,223 144,223
20 48,607 19,126 19,126 94,126 37,371 37,371 112,371 77,592 77,592 152,592

Age 60 97,665 23,624 23,624 98,624 68,489 68,489 143,489 225,810 225,810 302,586
Age 65 132,771 23,633 23,633 98,633 87,621 87,621 162,621 374,826 374,826 457,288
Age 70 177,576 21,275 21,275 96,275 108,731 108,731 183,731 615,951 615,951 714,503
Age 75 234,759 15,583 15,583 90,583 131,003 131,003 206,003 1,007,907 1,007,907 1,082,907
</TABLE>

(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.

THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, 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>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2

GUARANTEED COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------ ------------------------------ ------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR(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 1,470 262 1,158 76,158 338 1,233 76,233 414 1,309 76,309
2 3,013 1,269 2,290 77,290 1,492 2,514 77,514 1,725 2,747 77,747
3 4,634 2,330 3,398 78,398 2,776 3,843 78,843 3,258 4,326 79,326
4 6,336 3,455 4,479 79,479 4,197 5,222 80,222 5,034 6,058 81,058
5 8,123 4,574 5,535 80,535 5,690 6,651 81,651 6,999 7,960 82,960

6 9,999 5,667 6,563 81,563 7,234 8,131 83,131 9,149 10,045 85,045
7 11,969 6,733 7,565 82,565 8,832 9,664 84,664 11,500 12,333 87,333
8 14,037 7,770 8,539 83,539 10,482 11,250 86,250 14,072 14,840 89,840
9 16,209 8,780 9,484 84,484 12,186 12,891 87,891 16,884 17,589 92,589
10 18,490 9,760 10,400 85,400 13,946 14,586 89,586 19,961 20,601 95,601

11 20,884 10,803 11,316 86,316 15,865 16,377 91,377 23,446 23,958 98,958
12 23,398 11,818 12,202 87,202 17,846 18,230 93,230 27,260 27,644 102,644
13 26,038 12,803 13,059 88,059 19,892 20,149 95,149 31,438 31,694 106,694
14 28,810 13,758 13,886 88,886 22,004 22,132 97,132 36,014 36,142 111,142
15 31,720 14,682 14,682 89,682 24,184 24,184 99,184 41,030 41,030 116,030

16 34,777 15,446 15,446 90,446 26,304 26,304 101,304 46,398 46,398 121,398
17 37,985 16,177 16,177 91,177 28,493 28,493 103,493 52,296 52,296 127,296
18 41,355 16,873 16,873 91,873 30,752 30,752 105,752 58,775 58,775 133,775
19 44,892 17,533 17,533 92,533 33,084 33,084 108,084 65,893 65,893 140,893
20 48,607 18,156 18,156 93,156 35,488 35,488 110,488 73,713 73,713 148,713

Age 60 97,665 21,524 21,524 96,524 63,150 63,150 138,150 209,388 209,388 284,388
Age 65 132,771 20,153 20,153 95,153 78,566 78,566 153,566 342,324 342,324 417,635
Age 70 177,576 15,057 15,057 90,057 93,126 93,126 168,126 553,120 553,120 641,619
Age 75 234,759 3,935 3,935 78,935 103,642 103,642 178,642 887,453 887,453 962,453
</TABLE>

(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.

A-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1

CURRENT COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST AT ------------------------------ ------------------------------ ------------------------------
POLICY 5% PER SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR YEAR(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 4,410 0 3,200 250,000 75 3,418 250,000 293 3,636 250,000
2 9,041 2,566 6,301 250,000 3,203 6,937 250,000 3,866 7,601 250,000
3 13,903 3,384 9,287 250,000 4,644 10,546 250,000 6,011 11,913 250,000
4 19,008 6,494 12,161 250,000 8,584 14,251 250,000 10,945 16,612 250,000
5 24,368 9,609 14,921 250,000 12,740 18,052 250,000 16,424 21,736 250,000

6 29,996 12,594 17,552 250,000 16,981 21,939 250,000 22,359 27,317 250,000
7 35,906 15,464 20,068 250,000 21,325 25,929 250,000 28,815 33,419 250,000
8 42,112 18,216 22,466 250,000 25,775 30,024 250,000 35,848 40,098 250,000
9 48,627 20,851 24,747 250,000 30,335 34,231 250,000 43,524 47,420 250,000
10 55,469 23,355 26,897 250,000 35,000 38,542 250,000 51,904 55,446 250,000

11 62,652 26,251 29,084 250,000 40,312 43,145 250,000 61,627 64,460 250,000
12 70,195 29,021 31,146 250,000 45,758 47,883 250,000 72,264 74,389 250,000
13 78,114 31,648 33,064 250,000 51,331 52,748 250,000 83,911 85,328 250,000
14 86,430 34,120 34,828 250,000 57,030 57,739 250,000 96,687 97,395 250,000
15 95,161 36,422 36,422 250,000 62,852 62,852 250,000 110,720 110,720 250,000

16 104,330 37,861 37,861 250,000 68,112 68,112 250,000 125,477 125,477 250,000
17 113,956 39,125 39,125 250,000 73,515 73,515 250,000 141,838 141,838 250,000
18 124,064 40,195 40,195 250,000 79,058 79,058 250,000 160,007 160,007 250,000
19 134,677 41,027 41,027 250,000 84,722 84,722 250,000 180,212 180,212 250,000
20 145,821 41,647 41,647 250,000 90,544 90,544 250,000 202,749 202,749 250,000

Age 60 95,161 36,422 36,422 250,000 62,852 62,852 250,000 110,720 110,720 250,000
Age 65 145,821 41,647 41,647 250,000 90,544 90,544 250,000 202,749 202,749 250,000
Age 70 210,477 40,696 40,696 250,000 122,197 122,197 250,000 355,914 355,914 412,861
Age 75 292,995 30,366 30,366 250,000 159,685 159,685 250,000 605,316 605,316 647,688
</TABLE>

(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.

A-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1

GUARANTEED COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------ ------------------------------ ------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR(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 4,410 0 3,102 250,000 0 3,317 250,000 190 3,533 250,000
2 9,041 2,352 6,087 250,000 2,976 6,711 250,000 3,627 7,362 250,000
3 13,903 3,051 8,953 250,000 4,279 10,182 250,000 5,614 11,516 250,000
4 19,008 6,033 11,700 250,000 8,064 13,731 250,000 10,360 16,027 250,000
5 24,368 9,008 14,321 250,000 12,041 17,353 250,000 15,612 20,924 250,000

6 29,996 11,857 16,815 250,000 16,092 21,051 250,000 21,290 26,248 250,000
7 35,906 14,567 19,171 250,000 20,209 24,813 250,000 27,426 32,030 250,000
8 42,112 17,127 21,377 250,000 24,381 28,631 250,000 34,060 38,310 250,000
9 48,627 19,527 23,423 250,000 28,601 32,497 250,000 41,237 45,133 250,000
10 55,469 21,752 25,293 250,000 32,856 36,398 250,000 49,005 52,546 250,000

11 62,652 24,215 27,049 250,000 37,592 40,425 250,000 57,918 60,751 250,000
12 70,195 26,483 28,608 250,000 42,360 44,484 250,000 67,584 69,709 250,000
13 78,114 28,548 29,965 250,000 47,157 48,573 250,000 78,095 79,512 250,000
14 86,430 30,399 31,107 250,000 51,978 52,686 250,000 89,552 90,260 250,000
15 95,161 32,013 32,013 250,000 56,808 56,808 250,000 102,063 102,063 250,000

16 104,330 32,658 32,658 250,000 60,924 60,924 250,000 115,051 115,051 250,000
17 113,956 33,018 33,018 250,000 65,019 65,019 250,000 129,377 129,377 250.000
18 124,064 33,055 33,055 250,000 69,068 69,068 250,000 145,217 145,217 250,000
19 134,677 32,723 32,723 250,000 73,042 73,042 250,000 162,780 162,780 250,000
20 145,821 31,972 31,972 250,000 76,910 76,910 250,000 182,323 182,323 250,000

Age 60 95,161 32,013 32,013 250,000 56,808 56,808 250,000 102,063 102,063 250,000
Age 65 142,821 31,972 31,972 250,000 76,910 76,910 250,000 182,323 182,323 250,000
Age 70 210,477 20,174 20,174 250,000 93,746 93,746 250,000 316,131 316,131 366,712
Age 75 292,995 0 0 0 101,672 101,672 250,000 529,651 529,651 566,726
</TABLE>

(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.

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 the Face Amount. The maximum surrender charge is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$8.50 per $1,000 of the initial Face Amount (or Face Amount increase), and (b)
is a deferred sales charge of 49% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs) subject to the deferred sales charge that
varies by issue Age or Age at time of increase as applicable:

<TABLE>
<CAPTION>
Applicable Age Maximum GAPs Applicable Age Maximum GAPs
- ----------------- --------------- ------------------- ---------------
<S> <C> <C> <C>
0-55 1.660714 68 1.290612
56 1.632245 69 1.262143
57 1.603776 70 1.233673
58 1.575306 71 1.205204
59 1.546837 72 1.176735
60 1.518367 73 1.148265
61 1.489898 74 1.119796
62 1.461429 75 1.091327
63 1.432959 76 1.062857
64 1.404490 77 1.034388
65 1.376020 78 1.005918
66 1.347551 79 0.977449
67 1.319082 80 0.948980
</TABLE>

A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in the Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in the Face Amount, the actual
surrender charge may be less than the maximum. See CHARGES AND DEDUCTIONS --
"Surrender Charge."

The maximum surrender charge initially remains level and then grades down
according to the following schedule:

<TABLE>
<S> <C>
Ages The maximum surrender charge remains level for the first 40 Policy months,
0-50 reduces by 0.5% for the next 80 Policy months, then decreases by 1% per month
to zero at the end of 180 Policy months (15 Policy years).

51 and The maximum surrender charge remains level for 40 Policy months and decreases
above per month by the percentages below:

age 51 -- 0.78% per month for 128 months
age 52 -- 0.86% per month for 116 months
age 53 -- 0.96% per month for 104 months
age 54 -- 1.09% per month for 92 months
age 55 and over -- 1.25% per month for 80 months
</TABLE>

A-10
<PAGE>
The Factors used in calculating the maximum surrender charges vary with the
issue Age, sex and Premium Class (Smoker) as indicated in the table below.

MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT

<TABLE>
<CAPTION>
Age of
issue or Male Male Female Female
increase Non-smoker Smoker Non-smoker Smoker
- ------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
0 8.63 7.68
1 8.63 7.70
2 8.78 7.81
3 8.94 7.93
4 9.10 8.05
5 9.27 8.18
6 9.46 8.32
7 9.65 8.47
8 9.86 8.62
9 10.08 8.78
10 10.31 8.95
11 10.55 9.13
12 10.81 9.32
13 11.07 9.51
14 11.34 9.71
15 11.62 9.92
16 11.89 10.14
17 12.16 10.36
18 10.65 12.44 9.73 10.59
19 10.87 12.73 9.93 10.83
20 11.10 13.02 10.15 11.09
21 11.34 13.33 10.37 11.35
22 11.59 13.66 10.60 11.63
23 11.85 14.01 10.85 11.92
24 12.14 14.38 11.10 12.22
25 12.44 14.77 11.37 12.54
26 12.75 15.19 11.66 12.88
27 13.09 15.64 11.95 13.23
28 13.45 16.11 12.26 13.60
29 13.83 16.62 12.59 13.99
30 14.23 17.15 12.93 14.40
31 14.66 17.72 13.29 14.83
32 15.10 18.32 13.67 15.28
33 15.58 18.96 14.07 15.75
34 16.08 19.63 14.49 16.25
35 16.60 20.35 14.93 16.77
36 17.16 21.10 15.39 17.33
37 17.75 21.89 15.88 17.91
38 18.37 22.73 16.39 18.51
39 19.02 23.55 16.93 19.15
40 19.71 24.28 17.50 19.81
41 20.44 25.04 18.09 20.51
42 21.20 25.85 18.71 21.23
43 22.02 26.71 19.36 21.98
44 22.87 27.61 20.04 22.77
</TABLE>

A-11
<PAGE>
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT (continued)

45 23.61 28.56 20.76 23.56
46 24.36 29.57 21.52 24.23
47 25.15 30.63 22.33 24.94
48 26.00 31.16 23.14 24.69
49 26.90 32.95 23.83 26.47
50 27.85 34.21 24.57 27.31
51 28.87 35.56 25.35 28.18
52 29.96 36.99 26.17 29.11
53 31.12 38.25 27.05 30.09
54 32.56 38.25 27.95 31.12
55 33.67 38.25 28.97 32.21
56 34.62 38.25 29.65 32.94
57 35.61 38.25 30.36 33.70
58 36.65 38.25 31.11 34.49
59 37.73 38.25 31.90 35.33
60 38.25 38.25 32.74 36.23
61 38.25 38.25 33.63 37.18
62 38.25 38.25 34.57 38.18
63 38.25 38.25 35.56 38.25
64 38.25 38.25 36.60 38.25
65 38.25 38.25 37.68 38.25
66 38.25 38.25 38.25 38.25
67 38.25 38.25 38.25 38.25
68 38.25 38.25 38.25 38.25
69 38.25 38.25 38.25 38.25
70 38.25 38.25 38.25 38.25
71 38.25 38.25 38.25 38.25
72 38.25 38.25 38.25 38.25
73 38.25 38.25 38.25 38.25
74 38.25 38.25 38.25 38.25
75 38.25 38.25 38.25 38.25
76 38.25 38.25 38.25 38.25
77 38.25 38.25 38.25 38.25
78 38.25 38.25 38.25 38.25
79 38.25 38.25 38.25 38.25
80 38.25 38.25 38.25 38.25

A-12
<PAGE>
EXAMPLES

For the purposes of these examples, assume that a male, Age 35, non-smoker,
purchases a $100,000 Policy. In this example the Guideline Annual Premium
("GAP") equals $1,118.22. His maximum surrender charge is calculated as follows:

<TABLE>
<S> <C> <C>
(a) Deferred administrative charge $ 850.00
($8.50/$1,000 of Face Amount)

(b) Deferred sales charge $ 909.95
(49% x 1.660714 GAPs)
---------
TOTAL $1,759.95

Maximum surrender charge per table on page A-11 (16.60 x 100) $1,660.00
</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 $ 850.00
($8.50/$1,000 of Face Amount)

(b) Deferred sales charge (not to exceed 29% of Premiums Varies
received, up to one GAP, plus 9% of premiums received in
excess of one GAP)
---------
Sum of (a) and (b)
</TABLE>

The maximum surrender charge is $1,660. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.

Example 1:

Assume the Policyowner surrenders the Policy in the tenth Policy month,
having paid total premiums of $900. The actual surrender charge would be $1,111.

Example 2:

Assume the Policyowner surrenders the Policy in the 120th month. After the
40th Policy month, the maximum surrender charge decreases by 0.5% per month
($8.30 per month in this example). In this example, the maximum surrender charge
would be $996.

A-13