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Registration No. 33-74184
811-8304
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Post-Effective Amendment No. 8
INHEIRITAGE ACCOUNT
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Esq.
440 Lincoln Street
Worcester, Massachusetts 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
----
X on May 1, 1998 pursuant to paragraph (b)
----
60 days after filing pursuant to paragraph (a) (1)
----
on (date) pursuant to paragraph (a) (1) of Rule 485
----
this post-effective amendment designates a new effective
---- date for a previously filed post-effective amendment.
FLEXIBLE PREMIUM VARIABLE LIFE
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1997 was filed on or
before March 30, 1998.
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RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
THIS REGISTRATION STATEMENT CONTAINS TWO PROSPECTUSES: PROSPECTUS A AND
PROSPECTUS B.
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS
1. . . . . . . . . Cover Page
2. . . . . . . . . Cover Page
3. . . . . . . . . Not Applicable
4. . . . . . . . . Distribution
5. . . . . . . . . The Company, The Inheiritage Account
6. . . . . . . . . The Inheiritage Account
7. . . . . . . . . Not Applicable
8. . . . . . . . . Not Applicable
9. . . . . . . . . Legal Proceedings
10 . . . . . . . . Prospectus A: Summary; Description of the Company, the
Inheiritage Account and the Underlying Funds; The Policy;
Policy Termination and Reinstatement; Other Policy
Provisions
Prospectus B: Summary; Description of the Company, The
Inheiritage Account and the Underlying Funds; The Policy;
Policy Termination and Reinstatement; Other Policy
Provisions
11 . . . . . . . . Prospectus A: Summary; Description of the Company, the
Inheiritage Account, Allmerica Investment Trust, Variable
Insurance Products Fund, Variable Insurance Products Fund
II, T. Rowe Price International Series, Inc., and Delaware
Group Premium Fund, Inc.; Investment Objectives and
Policies
Prospectus B: Summary; Allmerica Investment Trust;
Variable Insurance Products Fund; and T. Rowe Price
International Series, Inc.; Investment Objectives and
Policies
12 . . . . . . . . Prospectus A: Summary; Allmerica Investment Trust,
Variable Insurance Products Fund, Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc.,
and Delaware Group Premium Fund, Inc.
Prospectus B: Summary; Allmerica Investment Trust; Variable
Insurance Products Fund; and T. Rowe Price International
Series
13 . . . . . . . . Prospectus A: Summary; Allmerica Investment Trust, Variable
Insurance Products Fund, Variable Insurance Products Fund
II, T. Rowe Price International Series, Inc., and Delaware
Group Premium Fund, Inc.; Investment Advisory Services to
Allmerica Investment Trust, Investment Advisory Services to
Variable Insurance Products Fund and Variable Insurance
Products Fund II, Investment Advisory Services to T. Rowe
Price International Series, Inc.; Investment Advisory
Services to Delaware Group Premium Fund, Inc. ; Charges and
Deductions
Prospectus B: Summary; Allmerica Investment Trust;
Variable Insurance Products Fund; T. Rowe Price
International Series, Inc.; Investment Advisory Services to
the Trust; Investment Advisory Services to Variable
Insurance Products Fund; Investment Advisory Services to
T. Rowe Price International Series, Inc.; Charges and
Deductions
14 . . . . . . . . Summary; Application for a Policy
15 . . . . . . . . Summary; Application for a Policy; Premium Payments;
Allocation of Net Premiums
16 . . . . . . . . Prospectus A: The Inheiritage Account: Allmerica Investment
Trust, Variable Insurance Products Fund and Variable
Insurance Products Fund II, T. Rowe Price International
Series, Inc., and Delaware Group Premium Fund, Inc.;
International Series, Inc.; Premium Payments; Allocation of
Net Premiums
Prospectus B: The Inheiritage Account; Allmerica Investment
Trust; Variable Insurance Products Fund; and T. Rowe Price
International Series, Inc.; Premium
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Payments; Allocation of Net Premiums
17 . . . . . . . . Summary; Surrender; Partial Withdrawal; Charges and
Deductions; Policy Termination and Reinstatement
18 . . . . . . . . Prospectus A: The Inheiritage Account: Allmerica Investment
Trust, Variable Insurance Products Fund and Variable
Insurance Products Fund II, T. Rowe Price International
Series, Inc., and Delaware Group Premium Fund, Inc.;
International Series, Inc.; Premium Payments
Prospectus B: The Inheiritage Account; Allmerica Investment
Trust; Variable Insurance Products Fund; and T. Rowe Price
International Series, Inc.; Premium Payments
19 . . . . . . . . Reports; Voting Rights
20 . . . . . . . . Not Applicable
21 . . . . . . . . Summary; Policy Loans; Other Policy Provisions
22 . . . . . . . . Other Policy Provisions
23 . . . . . . . . Not Required
24 . . . . . . . . Other Policy Provisions
25 . . . . . . . . The Company
26 . . . . . . . . Not Applicable
27 . . . . . . . . The Company
28 . . . . . . . . Directors and Principal Officers of the Company
29 . . . . . . . . The Company
30 . . . . . . . . Not Applicable
31 . . . . . . . . Not Applicable
32 . . . . . . . . Not Applicable
33 . . . . . . . . Not Applicable
34 . . . . . . . . Not Applicable
35 . . . . . . . . Distribution
36 . . . . . . . . Not Applicable
37 . . . . . . . . Not Applicable
38 . . . . . . . . Summary; Distribution
39 . . . . . . . . Summary; Distribution
40 . . . . . . . . Not Applicable
41 . . . . . . . . The Company, Distribution
42 . . . . . . . . Not Applicable
43 . . . . . . . . Not Applicable
44 . . . . . . . . Premium Payments; Policy Value and Cash Surrender Value
45 . . . . . . . . Not Applicable
46 . . . . . . . . Policy Value and Cash Surrender Value; Federal Tax
Considerations
47 . . . . . . . . The Company
48 . . . . . . . . Not Applicable
49 . . . . . . . . Not Applicable
50 . . . . . . . . The Inheiritage Account
51 . . . . . . . . Cover Page; Summary; Charges and Deductions; The Policy;
Policy Termination and Reinstatement; Other Policy
Provisions
52 . . . . . . . . Addition, Deletion or Substitution of Investments
53 . . . . . . . . Federal Tax Considerations
54 . . . . . . . . Not Applicable
55 . . . . . . . . Not Applicable
56 . . . . . . . . Not Applicable
57 . . . . . . . . Not Applicable
58 . . . . . . . . Not Applicable
59 . . . . . . . . Not Applicable
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VARIABLE INHEIRITAGE
(INDIVIDUAL JOINT SURVIVORSHIP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE)
First Allmerica Financial Life Insurance Company ("Company" or "First
Allmerica") issues the individual joint survivorship flexible premium variable
life insurance policies ("Policy" or "Policies") described in this Prospectus.
The Policies are funded by the Inheiritage Account ("Separate Account"), a
separate investment account of the Company. Life insurance coverage is provided
for two Insureds, with Death Proceeds payable at death of the last surviving
Insured. Applicants must be Age 80 or under with respect to the younger Insured,
and Age 85 or under with respect to the older Insured.
The Policy permits allocations among up to 20 of the following Funds:
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ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select Aggressive Growth Fund Overseas Portfolio
Select Capital Appreciation Fund Equity-Income Portfolio
Select Value Opportunity Fund Growth Portfolio
Select Emerging Markets Fund High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VIP II
Select Strategic Growth Fund Asset Manager Portfolio
Growth Fund
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund T. Rowe Price International Stock
Portfolio
Investment Grade Income Fund
Government Bond Fund DGPF
Select Income Fund International Equity Series
Money Market Fund
</TABLE>
CERTAIN FUNDS MAY NOT BE AVAILABLE IN ALL STATES.
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 MAY INVEST IN HIGHER-
YIELDING, HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES
AND POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE POLICIES ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICIES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
CORRESPONDENCE MAY BE MAILED TO
VARIABLE INHEIRITAGE, P.O. BOX 8014,
BOSTON, MA 02266-8014
DATED MAY 1, 1998
440 LINCOLN STREET WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
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(Continued from cover page)
Policyowners may, within limits, choose the amount of initial payment and vary
the frequency and amount of future payments. The Policy allows partial
withdrawals and full surrender of the Policy's Surrender Value, within limits.
The Policies are not suitable for short-term investment because of the
substantial nature of the surrender charge. If the Policyowner thinks about
surrendering the Policy, the lower deferred sales charges that apply during the
first two years from the Date of Issue or an increase in the Face Amount should
be considered.
In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code of 1986 ("Code"), any Policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value will also be adjusted for other factors, including the amount
of charges imposed. The Policy will remain in effect so long as the Policy
Value, less any surrender charges and less any outstanding Debt, is sufficient
to pay certain monthly charges imposed in connection with the Policy. The Policy
Value may decrease to the point where the Policy will lapse and provide no
further death benefit without additional premium payments, unless the optional
Guaranteed Death Benefit Rider is in effect. (This Rider may not be available in
all states.)
If the Policy is in effect at the death of the last surviving Insured, the
Company will pay a death benefit (the "Death Proceeds") to the Beneficiary.
Prior to the Final Premium Payment Date, the Death Proceeds equal the Sum
Insured, less any Debt, partial withdrawals, and any due and unpaid charges. The
Policyowner may choose either Sum Insured Option 1 (the Sum Insured is fixed in
amount) or Sum Insured Option 2 (the Sum Insured includes the Policy Value in
addition to a fixed insurance amount). A Policyowner has the right to change the
Sum Insured option, subject to certain conditions. A Guideline Minimum Sum
Insured, equivalent to a percentage of the Policy Value, will apply if greater
than the Sum Insured otherwise payable under Option 1 or Option 2.
No claim is made that the Policy is in any way similar or comparable to a
systematic investment plan of a mutual fund.
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR THE POLICYOWNER'S CURRENT LIFE INSURANCE OR IF THE
POLICYOWNER ALREADY OWNS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
2
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TABLE OF CONTENTS
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SPECIAL TERMS......................................................................... 5
SUMMARY............................................................................... 8
PERFORMANCE INFORMATION............................................................... 18
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS............ 23
INVESTMENT OBJECTIVES AND POLICIES.................................................... 25
INVESTMENT ADVISORY SERVICES.......................................................... 27
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 30
VOTING RIGHTS......................................................................... 31
THE POLICY............................................................................ 32
Applying for the Policy............................................................. 32
Free-Look Period.................................................................... 33
Conversion Privileges............................................................... 33
Premium Payments.................................................................... 34
Incentive Funding Discount.......................................................... 34
Guaranteed Death Benefit Rider...................................................... 35
Paid-up Insurance Option............................................................ 36
Allocation of Net Premiums.......................................................... 36
Transfer Privilege.................................................................. 37
Death Proceeds...................................................................... 38
Sum Insured Options................................................................. 39
Change in Sum Insured Option........................................................ 41
Change in Face Amount............................................................... 41
Policy Value and Surrender Value.................................................... 43
Death Proceeds Payment Options...................................................... 44
Optional Insurance Benefits......................................................... 44
Policy Surrender.................................................................... 44
Partial Withdrawals................................................................. 45
CHARGES AND DEDUCTIONS................................................................ 45
Tax Expense Charge.................................................................. 45
Premium Expense Charge.............................................................. 46
Monthly Deduction from Policy Value................................................. 46
Charges Against Assets of the Separate Account...................................... 48
Surrender Charge.................................................................... 48
Charges on Partial Withdrawals...................................................... 50
Transfer Charges.................................................................... 51
Charge for Increase in Face Amount.................................................. 51
Other Administrative Charges........................................................ 51
POLICY LOANS.......................................................................... 51
Repayment of Loans.................................................................. 52
Effect of Policy Loans.............................................................. 53
POLICY TERMINATION AND REINSTATEMENT.................................................. 53
Termination......................................................................... 53
Reinstatement....................................................................... 53
OTHER POLICY PROVISIONS............................................................... 54
Policyowner......................................................................... 54
Beneficiary......................................................................... 54
Incontestability.................................................................... 55
Suicide............................................................................. 55
Notice of First Insured to Die...................................................... 55
Age................................................................................. 55
Assignment.......................................................................... 55
</TABLE>
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<TABLE>
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Postponement of Payments............................................................ 55
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY....................................... 57
DISTRIBUTION.......................................................................... 58
SERVICES.............................................................................. 58
LEGAL PROCEEDINGS..................................................................... 58
FURTHER INFORMATION................................................................... 59
INDEPENDENT ACCOUNTANTS............................................................... 59
FEDERAL TAX CONSIDERATIONS............................................................ 59
The Company and The Separate Account................................................ 59
Taxation of the Policies............................................................ 60
Modified Endowment Contracts........................................................ 61
Estate and Generation-Skipping Taxes................................................ 61
MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................................ 62
General Description................................................................. 62
General Account Value............................................................... 62
The Policy.......................................................................... 63
FINANCIAL STATEMENTS.................................................................. 63
APPENDIX A -- OPTIONAL BENEFITS....................................................... A-1
APPENDIX B -- PAYMENT OPTIONS......................................................... B-1
APPENDIX C -- ILLUSTRATIONS........................................................... C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES................................ D-1
</TABLE>
4
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SPECIAL TERMS
ACCUMULATION UNIT: A measure of the Policyowner's interest in a Sub-Account.
AGE: An Insured's age as of the nearest birthday measured from the Policy
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Policy to receive the
insurance proceeds upon the death of the last surviving Insured.
COMPANY: 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 death of the last surviving Insured, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy, unless the Guaranteed Death Benefit Rider is in
effect. If the Rider is in effect, the Death Proceeds will be the greater of (a)
the Face Amount as of the Final Premium Payment Date, or (b) the Policy Value as
of the date due proof of death is received by the Company. This Rider may not be
available in all states.
DEBT: All unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, including medical information
satisfactory to the Company, that is used to determine the Insureds' Premium
Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Policy is set forth in the specifications pages of the Policy.
FINAL PREMIUM PAYMENT DATE: The Policy anniversary nearest the younger Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Policy, unless the optional Guaranteed Death Benefit
Rider is in effect. This Rider may not be available in all states.
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 the Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Table D, Smoker or Non-Smoker, net investment earnings at an
annual effective rate of 5%, and fees and charges as set forth in the Policy and
any Policy riders. The Sum Insured Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
GUIDELINE MINIMUM SUM INSURED: The minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by Age. It is calculated by multiplying the Policy Value by a
percentage determined by the younger Insured's Age.
INSURANCE AMOUNT AT RISK: The Sum Insured less the Policy Value.
5
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INSUREDS: The two persons covered under the Policy.
LOAN VALUE: The maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: A monthly premium amount calculated by the Company and
specified in the Policy. If the Policyowner pays 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.
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 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 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 and
premium expense charge.
PAID-UP INSURANCE: Joint survivorship insurance coverage for the lifetime of the
Insureds, with no further premiums due.
POLICY CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: The total amount available for investment under the Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to the Policy in the Sub-Accounts, and (b) the accumulation in the General
Account credited to the Policy.
POLICYOWNER: The person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: The risk classification that the Company assigns the Insureds
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insureds' Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, the Policyowner may specify from
which Sub-Account certain deductions will be made or to which Sub-Account Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of a 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 policy
liabilities are not chargeable with liabilities arising out of any other
business which the Company may conduct.
SUB-ACCOUNT: A division of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Variable Insurance Products Fund or of
Variable Insurance Products Fund II, Series of the Delaware Group Premium Fund,
Inc, or Portfolio of the T. Rowe Price International Series, Inc.
6
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SUM INSURED: The amount payable upon the death of the last surviving Insured,
before the Final Premium Payment Date, prior to deductions for Debt outstanding
at the death of the last surviving Insured, partial withdrawals and partial
withdrawal charges, if any, and any due and unpaid Monthly Deductions. The
amount of the Sum Insured will depend on the Sum Insured Option chosen, but will
always be at least equal to the Face Amount.
SURRENDER VALUE: The amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS ("FUNDS"): The Funds of Allmerica Investment Trust and the
Portfolios of the Variable Insurance Products Fund and T. Rowe Price
International Series.
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
WRITTEN REQUEST: A request by the Policyowner in writing, satisfactory to the
Company.
YOU OR YOUR: The Policyowner, as shown in the application or the latest change
filed with the Company.
7
<PAGE>
SUMMARY
The following is a summary of the individual joint survivorship flexible premium
variable life insurance policy sold by First Allmerica Financial Life Insurance
Company ("Company"). It highlights key points from the Prospectus which follows.
If you are considering the purchase of this product, you should read the
Prospectus carefully before making a decision. It offers a more complete
presentation of the topics presented here, and will help you better understand
the product. However, the Policy, together with its attached application,
constitutes the entire agreement between you and the Company.
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 applications for the Policy are signed,
- 10 days after you receive the Policy (or, if required by state law, the
longer period indicated in the 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 Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the
General Account. Where required by state law, however, the Company will refund
the entire amount of premiums paid. A free-look privilege also applies after a
requested increase in the Face Amount. See THE POLICY -- "Free-Look Period."
CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, subject to certain restrictions, you may convert the Policy to a
non-variable flexible premium adjustable life insurance policy by
simultaneously transferring all accumulated value in the Sub-Accounts to the
General Account and instructing the Company to allocate all future premiums to
the General Account. A similar conversion privilege is in effect for 24 Policy
months after the date of an increase in the Face Amount. Where required by
state law, and at your request, the Company will issue a flexible premium
adjustable life insurance policy to you. The new policy will have the same
Face Amount, issue Age, Date of Issue, and Premium Class as the original
Policy. See THE POLICY -- "Conversion Privileges."
ABOUT THE POLICY
The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insureds,
- Policy Value,
- surrender rights and partial withdrawal rights,
- loan privileges, and
- in some cases, additional insurance benefits available by rider for an
additional charge.
8
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LIFE INSURANCE
The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is a
"joint survivorship" policy because Death Proceeds are payable, not on the death
of the first Insured to die, but on the death of the last surviving Insured. The
Policy is "variable" because the Policy Value will increase or decrease
depending on the investment experience of the Sub-Accounts of the Separate
Account. Under some circumstances, the death benefit may vary with the
investment experience of the Sub-Accounts.
FLEXIBLE PREMIUM
The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. You may vary the
frequency and amount of future premium payments, subject to certain limits,
restrictions and conditions set by Company standards and federal tax laws.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause the Policy to lapse. Because of the variable nature of the Policy, making
planned premium payments does not guarantee that the Policy will remain in
force. Thus, you may, but are not required to, pay additional premiums. If the
Guaranteed Death Benefit Rider is in effect, however, certain minimum premium
payment tests must be met. (This Rider may not be available in all states.)
The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in the Face Amount, the Policy will not lapse if the total premiums
paid less the Debt, partial withdrawals and withdrawal charges are equal to or
exceed the sum of the Minimum Monthly Factor for the number of months the
Policy, increase in the Face Amount, or a Policy Change which causes a change in
the Minimum Monthly Factor, has been in force. Even during these periods,
however, making payments at least equal to the Minimum Monthly Factor will not
prevent the Policy from lapsing if the Debt equals or exceeds the Policy Value
less surrender charges.
CONDITIONAL INSURANCE
If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance, equal to the amount of insurance applied for but not to
exceed $500,000. If the application is approved, the Policy will be issued as of
the date the terms of the conditional insurance are met. If you do not wish to
make any payment at the time of application, insurance coverage will not be in
force until delivery of the Policy and payment of sufficient premium to place
the insurance in force.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the 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 THE POLICY IS NOT ISSUED AND
ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
GUARANTEED DEATH BENEFIT RIDER (MAY NOT BE AVAILABLE IN ALL STATES)
This Rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE:
- guarantees that the Policy will not lapse, regardless of the investment
performance of the Separate Account; and
- provides a guaranteed death benefit.
In order to maintain the Rider, certain minimum premium payment tests must be
met on each Policy anniversary and within 48 months following the Date of Issue
and/or the date of any increase in Face Amount. In addition, a one-time
administrative charge of $25 will be deducted from the Policy Value when the
Rider is
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<PAGE>
elected. Certain transactions, including Policy loans, partial withdrawals, and
changes in the Death Benefit Options, can result in the termination of the
Rider. If this Rider is terminated, it cannot be reinstated.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in the Policy. If you pay this amount, the Company guarantees that
the Policy will not lapse prior to the 49th Monthly Deduction after the Date of
Issue or the effective date of an increase in the Face Amount. At all other
times, however, payments of such premiums do not guarantee that the Policy will
remain in force. See THE POLICY -- "Premium Payments." Moreover, even during the
48-month period, if: (1) Debt exceeds the Policy Value less surrender charges,
or (2) Debt, partial withdrawal and partial withdrawal charges have reduced
premium payments below an amount equal to the Minimum Monthly Factor multiplied
by the number of months since the Date of Issue or the effective date of an
increase in the Face Amount, 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, during
the first year, the Policy provides for planned premium payments 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 Separate
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than 20 Sub-Accounts at any one time. The minimum allocation is
1% of Net Premium. All allocations must be in whole numbers and must total 100%.
See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
General Account will earn a fixed rate of interest. Net premiums and minimum
interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PARTIAL WITHDRAWALS
After the first Policy year, you may make partial withdrawals from the Policy
Value in a minimum amount of $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal. A partial withdrawal will not be allowed
under Option 1 if it would reduce the Face Amount below $100,000.
A transaction charge, which is described in CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawals," will be assessed to reimburse the Company for the cost
of processing each partial withdrawal. A partial withdrawal charge also may be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawals" and CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawals."
LOAN PRIVILEGE
You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions, and interest on Debt to
the end of the Policy year. Thereafter, Loan Value is 90% of an amount equal to
the Policy Value less the surrender charge.
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Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time. If
this option has been selected, after the tenth Policy anniversary the Policy
Value in the General Account equal to the loan amount will be credited with
interest at an effective annual yield of at least 7.5%. The Company's current
practice is to credit a rate of interest equal to the rate being charged for the
preferred loan. There is some uncertainty as to the tax treatment of preferred
loans. Consult a qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE
PREFERRED LOAN OPTION IS NOT AVAILABLE IN ALL STATES.
POLICY LAPSE AND REINSTATEMENT
Except as otherwise provided in the optional Guaranteed Death Benefit Rider, 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, 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 Debt, 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 than 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.
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In addition, if the Guaranteed Death Benefit Rider is in effect, the Company
guarantees that the Policy will not lapse, regardless of the investment
performance of the Separate Account. The Policy may lapse, however, under
certain circumstances. See THE POLICY -- "Guaranteed Death Benefit Rider." (This
Rider may not be available in all states.)
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account credited to the Policy. The Policy Value reflects the amount and
frequency of Net Premiums paid, charges and deductions imposed under the Policy,
interest credited to accumulations in the General Account, investment
performance of the Sub-Account(s) to which Policy Value has been allocated, and
partial withdrawals. The Policy Value may be relevant to the computation of the
Death Proceeds. You bear the entire investment risk for amounts allocated to the
Separate Account. The Company does not guarantee a minimum Policy Value.
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS
The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the last surviving Insured. There are no Death
Proceeds payable on the death of the first Insured to die. Prior to the Final
Premium Payment Date, the Death Proceeds will be equal to the Sum Insured,
reduced by any outstanding Debt, partial withdrawals, partial withdrawal
charges, and any Monthly Deductions due and not yet deducted through the Policy
month in which the last surviving Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the younger Insured's Age) of the Policy Value. On or after the Final Premium
Payment Date, the Death Proceeds will equal the Surrender Value. See THE POLICY
- -- "Death Proceeds."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED
Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount. 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 the Face Amount is $10,000, and any increase also may
require additional Evidence of Insurability. 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 Exchange Option Rider ("Split Option Rider"), Other Insured Rider,
Guaranteed Death Benefit Rider, and Four-Year Term Rider. See APPENDIX A --
OPTIONAL BENEFITS. (All riders may not be available in all states.)
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The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
PAID-UP INSURANCE OPTION
The Policyowner who elects this option will have, without further premiums due,
joint survivorship insurance coverage for the lifetime of the Insureds, with the
Death Proceeds payable on the death of the last surviving Insured. The
Policyowner who has elected the Paid-Up Insurance option may not pay additional
premiums, select Sum Insured Option 2, increase or decrease the Face Amount, or
make partial withdrawals. Policy Value in the Separate Account will be
transferred to the General Account on the date the Company receives Written
Request to exercise the option, and transfers of Policy Value back to the
Separate Account will not be permitted. Riders will continue only with the
consent of the Company. Surrender Value and Loan Value are calculated
differently. See THE POLICY -- "Paid-Up Insurance Option." This option may not
be available in all states.
POLICY FEES AND CHARGES
There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.
TAX EXPENSE CHARGE
A charge will be deducted from each premium payment for state and local premium
taxes paid by the Company for the Policy and to compensate the Company for
federal taxes imposed for deferred acquisition cost ("DAC") taxes. The total
charge is the actual state and local premium taxes paid by the Company, varying
according to jurisdiction, and a DAC tax deduction of 1% of premiums. See
CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
PREMIUM EXPENSE CHARGE
A charge of 1% of premiums will be deducted from each premium payment to
partially compensate the Company for sales expenses related to the Policies. See
CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM POLICY VALUE
On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from Policy
Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE of $6 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyowner inquiries.
As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
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DEDUCTIONS FROM THE SEPARATE ACCOUNT
A daily charge, currently equivalent to an effective annual rate of 1.15% of the
average daily net asset value of each Sub-Account of the Separate Account, is
imposed to compensate the Company for its assumption of certain mortality and
expense risks and for administrative costs associated with the Separate Account.
The rate is 0.90% for the mortality and expense risk and 0.25% for the Separate
Account administrative charge. The administrative charge is eliminated after the
15th Policy year. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of the
Separate Account."
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AFTER ANY TOTAL FUND
VOLUNTARY OTHER FUND EXPENSES (AFTER ANY
UNDERLYING FUND WAIVER) EXPENSES APPLICABLE LIMITATIONS)
- ------------------------------------------------------ ------------------ --------------------- -----------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund......................... 0.89%* 0.09% 0.98%(1)(3)
Select Capital Appreciation Fund...................... 0.95% 0.15% 1.10%(1)
Select Value Opportunity Fund......................... 0.90%** 0.14% 1.04%(1)(3)
Select Emerging Markets Fund @........................ 1.35% 0.65% 2.00%(1)
Select International Equity Fund...................... 0.92% 0.20% 1.12%(1)(3)
DGPF International Equity Series...................... 0.75%(4) 0.15% 0.90%(4)
Fidelity VIP Overseas Portfolio....................... 0.75% 0.17% 0.92%(2)
T. Rowe Price International Stock Portfolio........... 1.05% 0.00% 1.05%
Select Growth Fund.................................... 0.85% 0.08% 0.93%(1)(3)
Select Strategic Growth Fund @........................ 0.85% 0.13% 0.98%(1)
Growth Fund........................................... 0.46%* 0.06% 0.52%(1)(3)
Fidelity VIP Growth Portfolio......................... 0.60% 0.09% 0.69%(2)
Equity Index Fund..................................... 0.31% 0.13% 0.44%(1)
Select Growth and Income Fund......................... 0.70%* 0.07% 0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio.................. 0.50% 0.08% 0.58%(2)
Fidelity VIP II Asset Manager Portfolio............... 0.55% 0.10% 0.65%(2)
Fidelity VIP High Income Portfolio.................... 0.59% 0.12% 0.71%
Investment Grade Income Fund.......................... 0.44%* 0.10% 0.54%(1)
Government Bond Fund.................................. 0.50% 0.17% 0.67%(1)
Select Income Fund.................................... 0.58%* 0.13% 0.71%(1)
Money Market Fund..................................... 0.27% 0.08% 0.35%(1)
</TABLE>
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntarily limitations took effect on January 1, 1997. Without
these adjustments, the management fee ratio and the total fund expense ratio
would have been 0.95% and 1.09%, respectively. The management fee limitation may
be terminated at any time.
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(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Select Income
Fund, 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 these
Funds of the Trust were less than their respective expense limitations
throughout 1997.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas Portfolio and
0.64% for Fidelity VIP II Asset Manager Portfolio.
(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses ratios would have been 0.93% for the
Select Aggressive Growth Fund, 1.10% for the Select International Equity Fund,
0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for the
Select Value Opportunity Fund, and 0.74% for the Select Growth and Income Fund.
(4) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntarily limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn, or $25. In addition to the
transaction charge, a partial withdrawal charge also may be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawals."
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICY -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in Face
Amount."
TRANSFER CHARGE
The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY-- "Transfer Privilege" and CHARGES AND DEDUCTIONS
- -- "Transfer Charges."
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<PAGE>
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 the Face Amount. The
duration of the surrender charge is 15 years. The surrender charge is imposed
only if, during its duration, you request a full surrender of the Policy or a
decrease in the Face Amount.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where (a) is a deferred administrative charge equal to
$8.50 per thousand dollars of the initial Face Amount, and (b) is a deferred
sales charge of 48% of premiums received up to a maximum number of Guideline
Annual Premiums subject to the deferred sales charge. Such deferred sales charge
varies by average issue Age from 1.95 (for average issue Ages 5 through 75) to
1.31 (for average issue Age 82). In accordance with limitations under state
insurance regulations, the amount of the maximum surrender charge will not
exceed a specified amount per $1,000 of the initial Face Amount, as indicated in
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
The maximum surrender charge remains level for the first 40 Policy months, and
reduces by 0.5% or more per month thereafter, as described in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. If you surrender the Policy during the
first two Policy years following the Date of Issue, before making premium
payments associated with the initial Face Amount which are at least equal to one
Guideline Annual Premium, the deferred administrative charge will be $8.50 per
thousand dollars of the initial Face Amount, but the deferred sales charge will
not exceed 25% of premiums received. See THE POLICY -- "Policy Surrender," and
CHARGES AND DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR INCREASES IN FACE AMOUNT
A separate surrender charge will apply to, and is calculated for, each increase
in the Face Amount. The maximum surrender charge for the increase is equal to
the sum of (a) plus (b) where (a) is equal to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of 48% of premiums associated with
the increase, up to a maximum number of Guideline Annual Premiums (for the
increase) subject to the deferred sales charge. Such deferred sales charge
varies by average Age (at the time of increase) from 1.95 (for average Ages 5
through 75) to 1.31 (for average Age 82). In accordance with limitations under
state insurance regulations, the amount of the surrender charge will not exceed
a specified amount per $1,000 of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
As is true for the initial Face Amount, (a) is a deferred administrative charge,
and (b) is a deferred sales charge. This maximum surrender charge remains level
for the first 40 Policy months following the increase, and reduces by 0.5% or
more per month thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. If you surrender the Policy during the first two Policy years
following an increase in the Face Amount before making premium payments
associated with the increase in the Face Amount which are at least equal to one
Guideline Annual Premium, the deferred administrative charge will be $8.50 per
thousand dollars of the Face Amount increase, but the deferred sales charge will
not exceed 25% of premiums associated with the increase.
SURRENDER CHARGES ON DECREASES IN 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."
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<PAGE>
TAX TREATMENT
The Policy is generally subject to the same federal income tax treatment as a
conventional fixed benefit life insurance policy. Under current tax law, to the
extent there is no change in benefits, you will be taxed on Policy Value
withdrawn from the Policy only to the extent that the amount withdrawn exceeds
the total premiums paid. Withdrawals in excess of premiums paid will be treated
as ordinary income. During the first 15 Policy years, however, an
"interest-first" rule applies to any distribution of cash that is required under
Section 7702 of the Code because of a reduction of benefits under the Policy.
Death Proceeds under the Policy are excludable from the gross income of the
Beneficiary, but in some circumstances the Death Proceeds or the Policy Value
may be subject to federal estate tax. See FEDERAL TAX CONSIDERATIONS --
"Taxation of the Policies."
The Policy offered by this Prospectus may be considered a "modified endowment
contract" if it fails a "seven-pay" test at any time during the first seven
Policy years, or within seven years of a material change in the Policy. The
Policy fails to satisfy the seven-pay test if the cumulative premiums paid under
the Policy at any time during the first seven Policy years, or within seven
years of a material change in the Policy, exceeds the sum of the net level
premiums that would have been paid had the Policy provided for paid-up future
benefits after the payment of seven level premiums. If the Policy is considered
a modified endowment contract, all distributions (including Policy loans,
partial withdrawals, surrenders or assignments) will be taxed on an
"income-first" basis. In addition, with certain exceptions, an additional 10%
penalty will be imposed on the portion of any distribution that is includible in
income. For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
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PERFORMANCE INFORMATION
The Policies were 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 Sub-Accounts have been in existence
(TABLES I[A]) and I[B]), and based on the periods that the Underlying Funds have
been in existence (TABLES II[A] and II[B]). The results for any period prior to
the Policies being offered will be calculated as if the Policies had been
offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in TABLES I[A] and
II[A]) under a "representative" Policy that is surrendered at the end of the
applicable period. For more information on charges under the Policy, see CHARGES
AND DEDUCTIONS.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index, or
other unmanaged indices so that investors may compare results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities markets in general; (2) 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 (3) the Consumer Price Index (a measure for inflation) to
assess the real rate of return from an investment. Unmanaged indices may assume
the reinvestment of dividends, but generally do not reflect deductions for
administrative and management costs and expenses.
At times, the Company also may advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P"), and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinions of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues,
and do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar-cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective Tables, for the one-year period ended December 31,
1997. "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.
18
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the Sub-
Accounts have been in existence. The data is net of expenses of the Underlying
Funds, all Sub-Account charges, and all Policy charges (including surrender
charges) for a representative Policy. It is assumed that the Insureds are male,
Age 45, standard (nonsmoker) Premium Class, and female, Age 43, standard
(nonsmoker) Premium Class, that the Face Amount of the Policy is $500,000, that
an annual premium payment of $5,500 (approximately one Guideline Annual Premium)
was made at the beginning of each Policy year, that ALL premiums were allocated
to EACH Sub-Account individually, and that there was a full surrender of the
Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF
TOTAL 5 SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -83.88% N/A -15.18%
Select Capital Appreciation Fund -88.08% N/A -4.29%
Select Value Opportunity Fund -78.04% N/A -8.88%
T. Rowe Price International Stock Portfolio -98.69% N/A -26.14%
Fidelity VIP Overseas Portfolio -90.67% N/A -22.99%
Select International Equity Fund -97.22% N/A -7.46%
DGPF International Equity Series -95.37% N/A -22.09%
Fidelity VIP Growth Portfolio -79.33% N/A -17.63%
Select Growth Fund -69.29% N/A -8.22%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -77.76% N/A -10.65%
Equity Index Fund -70.85% N/A -6.03%
Fidelity VIP Equity-Income Portfolio -74.94% N/A -9.20%
Select Growth and Income Fund -80.26% N/A -11.36%
Fidelity VIP II Asset Manager Portfolio -82.02% N/A -4.17%
Fidelity VIP High Income Portfolio -84.86% N/A -21.28%
Select Income Fund N/A N/A N/A
Investment Grade Income Fund -92.65% N/A -90.26%
Government Bond Fund -94.88% N/A -32.01%
Money Market Fund -96.45% N/A -33.68%
</TABLE>
The inception dates for the Sub-Accounts are: 9/17/95 for Growth and Select
Value Opportunity; 12/15/96 for Investment Grade Income; 11/20/95 for Money
Market; 10/19/95 for Equity Index and for Government Bond; 8/28/95 for Select
Aggressive Growth and for Select Growth; 9/10/95 for Select Growth and Income
and Fidelity VIP Overseas; 5/1/95 for Select Income; 5/2/94 for Select
International Equity; 4/30/95 for the Select Capital Appreciation; 8/28/95 for
Fidelity VIP Equity-Income and for Fidelity VIP Growth; 12/4/95 for Fidelity VIP
High Income; 5/11/94 for Fidelity VIP II Asset Manager; 10/1/95 for DGPF
International Equity; and 8/28/95 for the T. Rowe Price International Stock. The
Select Emerging Markets Fund and the Select Strategic Growth Fund commenced
operations in February 1998.
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.
19
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the Sub-
Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, 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 $5,500 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year, and
that ALL premiums were allocated to EACH Sub-Account individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.36 % N/A 16.39 %
Select Capital Appreciation Fund 12.98 % N/A 21.53 %
Select Value Opportunity Fund 23.44 % N/A 22.13 %
T. Rowe Price International Stock Portfolio 1.93 % N/A 7.76 %
Fidelity VIP Overseas Portfolio 10.29 % N/A 10.57 %
Select International Equity Fund 3.46 % N/A 9.91 %
DGPF International Equity Series 5.39 % N/A 12.40 %
Fidelity VIP Growth Portfolio 22.09 % N/A 14.43 %
Select Growth Fund 32.55 % N/A 22.04 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 23.73 % N/A 20.67 %
Equity Index Fund 30.92 % N/A 25.50 %
Fidelity VIP Equity-Income Portfolio 26.66 % N/A 21.24 %
Select Growth and Income Fund 21.13 % N/A 19.88 %
Fidelity VIP II Asset Manager Portfolio 19.29 % N/A 12.69 %
Fidelity VIP High Income Portfolio 16.34 % N/A 14.41 %
Select Income Fund N/A N/A 0.00 %
Investment Grade Income Fund 8.22 % N/A 7.86 %
Government Bond Fund 5.90 % N/A 4.65 %
Money Market Fund 4.27 % N/A 4.22 %
</TABLE>
The inception dates for the Sub-Accounts are: 9/17/95 for Growth and Select
Value Opportunity; 12/15/96 for Investment Grade Income; 11/20/95 for Money
Market; 10/19/95 for Equity Index and for Government Bond; 8/28/95 for Select
Aggressive Growth and for Select Growth; 9/10/95 for Select Growth and Income
and Fidelity VIP Overseas; 5/1/95 for Select Income; 5/2/94 for Select
International Equity; 4/30/95 for the Select Capital Appreciation; 8/28/95 for
Fidelity VIP Equity-Income and for Fidelity VIP Growth; 12/4/95 for Fidelity VIP
High Income; 5/11/94 for Fidelity VIP II Asset Manager; 10/1/95 for DGPF
International Equity; and 8/28/95 for the T. Rowe Price International Stock. The
Select Emerging Markets Fund and the Select Strategic Growth Fund commenced
operations in February 1998.
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.
20
<PAGE>
TABLE II(A):
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insureds
are male, Age 45, standard (nonsmoker) Premium Class, and female, Age 43,
standard (nonsmoker) Premium Class, that the Face Amount of the Policy is
$500,000, that an annual premium payment of $5,500 (approximately one Guideline
Annual Premium) was made at the beginning of each Policy year, that ALL premiums
were allocated to EACH Sub-Account individually, and that there was a full
surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF SUB-
TOTAL 5 ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -83.88% 8.01% 12.03%
Select Capital Appreciation Fund -88.08% N/A -4.28%
Select Value Opportunity Fund -78.04% N/A 6.56%
T. Rowe Price International Stock Portfolio -98.69% N/A -10.42%
Fidelity VIP Overseas Portfolio -90.67% 4.94% 6.45%
Select International Equity Fund -97.22% N/A -7.44%
DGPF International Equity Series -95.37% 2.04% 2.13%
Fidelity VIP Growth Portfolio -79.33% 9.38% 14.32%
Select Growth Fund -69.29% 6.12% 8.45%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -77.76% 7.52% 14.26%
Equity Index Fund -70.85% 11.12% 15.35%
Fidelity VIP Equity-Income Portfolio -74.94% 11.82% 13.82%
Select Growth and Income Fund -80.26% 7.76% 7.32%
Fidelity VIP II Asset Manager Portfolio -82.02% 3.62% 8.82%
Fidelity VIP High Income Portfolio -84.86% 4.70% 9.79%
Select Income Fund -92.95% -3.65% -2.97%
Investment Grade Income Fund -92.65% -2.84% 6.00%
Government Bond Fund -94.88% -4.72% 0.10%
Money Market Fund -96.45% -6.24% 2.38%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Growth and Income,
and Select Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income, and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.
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.
21
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, 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 $5.500
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.36 % 15.47% 18.19 %
Select Capital Appreciation Fund 12.98 % N/A 21.48 %
Select Value Opportunity Fund 23.44 % N/A 15.61 %
T. Rowe Price International Stock Portfolio 1.93 % N/A 6.84 %
Fidelity VIP Overseas Portfolio 10.29 % 12.82% 8.37 %
Select International Equity Fund 3.46 % N/A 9.90 %
DGPF International Equity Series 5.39 % 10.36% 10.02 %
Fidelity VIP Growth Portfolio 22.09 % 16.66% 15.85 %
Select Growth Fund 32.55 % 13.84% 15.03 %
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 23.73 % 15.04% 15.79 %
Equity Index Fund 30.92 % 18.18% 18.31 %
Fidelity VIP Equity-Income Portfolio 26.66 % 18.80% 15.37 %
Select Growth and Income Fund 21.13 % 15.25% 14.04 %
Fidelity VIP II Asset Manager Portfolio 19.29 % 11.70% 11.43 %
Fidelity VIP High Income Portfolio 16.34 % 12.62% 11.52 %
Select Income Fund 7.91 % 5.63% 5.28 %
Investment Grade Income Fund 8.22 % 6.29% 7.95 %
Government Bond Fund 5.90 % 4.75% 5.73 %
Money Market Fund 4.27 % 3.52% 4.59 %
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Growth and Income,
and Select Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.
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.
22
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. As of December 31, 1997, the Company
and its subsidiaries had over $16.3 billion in combined assets. 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 a charter member of the Insurance Marketplace Standard
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
The 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 SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Policies are set aside in
the Separate 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 Separate Account may not be charged with any liabilities
arising out of any other business of the Company. Twenty Sub-Accounts of the
Separate Account are currently offered under the Policy. Each Sub-Account is
administered and accounted for as part of the general business of the Company,
but the income, capital gains, or capital losses of each Sub-Account are
allocated to such Sub-Account, without regard to other income, capital gains, or
capital losses of the Company or the other Sub-Accounts. Each Sub-Account
invests exclusively in a corresponding Underlying Fund of one of the following
investment companies:
- Allmerica Investment Trust
- Variable Insurance Products Fund
- Variable Insurance Products Fund II
- T. Rowe Price International Series, Inc.
- Delaware Group Premium Fund, Inc.
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund
23
<PAGE>
generally have no effect on the investment performance of another Underlying
Fund. Shares of each Underlying Fund are not offered to the general public, but
solely to separate accounts of life insurance companies, such as the Separate
Account.
Each Sub-Account has two sub-divisions. One sub-division applies to Policies
during their first 15 Policy years, which are subject to a Separate Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the Separate Account." Thereafter, such Policies are automatically allocated to
the second sub-division to account for the elimination of the Separate Account
administrative charge.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and the Separate Account.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment Funds.
The Trust was established by the Company as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by the Company, or other
affiliated insurance companies. Thirteen investment portfolios of the Trust
("Funds") are available under the Policy, each issuing a series of shares:
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, the Select Emerging Markets Fund, Select International Equity
Fund, Select Growth Fund, Select Strategic Growth Fund, Growth Fund, Equity
Index Fund, Select Growth and Income Fund, Investment Grade Income Fund,
Government Bond Fund and Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment adviser of the Trust, and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Funds. See "Investment Advisory Services to The Trust."
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Policy: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity
VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. The
Portfolios of Fidelity VIP, as part of their operating expenses, pay an
investment management fee to FMR. See "Investment Advisory Services to Fidelity
VIP and Fidelity VIP II."
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see discussion under "Variable Insurance Products Fund"), is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on March 21, 1988 and is registered with the SEC under the 1940 Act. One
of its investment portfolios is available under the Policy: the Fidelity VIP II
Asset Manager Portfolio. The
24
<PAGE>
Portfolios of Fidelity VIP II, as part of their operating expenses, pay an
investment management fee to FMR. See "Investment Advisory Services to Fidelity
VIP and Fidelity VIP II."
T. ROWE PRICE INTERNATIONAL SERIES, INC.
Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), is an open-end, diversified
management investment company organized in 1994 as a Maryland corporation, and
is registered with the SEC under the 1940 Act. One of its investment portfolios
is available under the Policies: the T. Rowe Price International Stock
Portfolio. (See "Investment Advisory Services to T. Rowe Price"). An affiliate
of Price-Fleming, T. Rowe Price Associates, Inc. serves as Sub-Adviser to the
Select Capital Appreciation Fund of the Trust.
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policy: the International Equity
Series. The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. [The Underlying Funds are listed by general investment risk
characteristics.] MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- 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 -- 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.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the Sub-
Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- 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.
25
<PAGE>
FIDELITY VIP OVERSEAS PORTFOLIO -- 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 -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
GROWTH FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Growth Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- 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 -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500 Stocks.
SELECT GROWTH AND INCOME FUND -- 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 -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S & P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating. See "Risk of Lower-Rated Debt Securities" in the Fidelity VIP
prospectus.
INVESTMENT GRADE INCOME FUND -- 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.
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GOVERNMENT BOND FUND -- 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.
SELECT INCOME FUND -- seeks a high level of current income. The Fund will invest
primarily in investment grade, fixed-income securities.
MONEY MARKET FUND -- 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
WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
Policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Policy Value in that Sub-Account, the
Company will transfer it without charge on written request within sixty (60)
days of the later of (1) the effective date of such change in the investment
policy, or (2) your receipt of the notice of the right to transfer. You may then
change the percentages of your premium and deduction allocations.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trustees have entered into a Management Agreement with
AFIMS to handle the day-to-day affairs of the Trust. AFIMS, subject to review by
the Trustees, is responsible for the general management of the Funds. AFIMS also
performs certain administrative and management services for the Trust, furnishes
to the Trust all necessary office space, facilities and equipment, and pays the
compensation, if any, of officers and Trustees who are affiliated with AFIMS.
AFIMS, an indirect wholly owned subsidiary of Allmerica Financial Corporation,
is an affiliate of the Company.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.
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For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Emerging Markets Fund * 1.35%
Select International Equity First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Growth Fund * 0.85%
Select Strategic Growth Fund * 0.85%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Select Income Fund First $50 million 0.60%
Next $50 million 0.70%
Over $100 million 0.45%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund, the Select Growth Fund, the Select
Strategic Growth Fund and Government Bond Fund, the investment management fee
does not vary according to the level of assets in the Fund. AFIMS' fee computed
for each Fund will be paid from the assets of such Fund.
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the
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investments of one or more of the Funds. Under the Sub-Adviser Agreements, the
Sub-Advisers are authorized to engage in portfolio transactions on behalf of the
applicable Fund, subject to such general or specific instructions as may be
given by the Trustees. The terms of a Sub-Adviser Agreement cannot be materially
changed without the approval of a majority in interest of the shareholders of
the affected Fund. Allmerica Investment is solely responsible for the payment of
all fees for investment management services to the Sub-Advisers.
AFIMS is solely responsible for payment of all fees to Sub-Advisers for their
investment to management services. Sub-Adviser fees, described in the Trust's
prospectus, in no way increase the costs that the funds, the Separate Account
and Policyowners bear. 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. AFIMS is solely
responsible for the payment of all fees for investment management services to
the Sub-Advisers.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS
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
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.
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<PAGE>
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 $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF
The Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to the Policy interest in a Sub-Account without notice
to you and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Separate Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by a Policyowner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company. Subject to
applicable law and any required SEC approval, the Company may, in its sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts if
marketing needs, tax considerations or investment conditions warrant. Any new
Sub-Accounts may be made available to existing Policyowners on a basis to be
determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, T. Rowe
Price and the Series of DGPF are also issued to other unaffiliated insurance
companies ("shared funding"). It is conceivable that in the future such mixed
funding or shared funding may be disadvantageous for variable life Policyowners
or variable annuity Policyowners. Although the Company and the Underlying Funds
do not currently foresee any such disadvantages, the Company and the respective
Trustees intend to monitor events in order to identify any material conflicts
and to determine what action, if any, should be taken. If the Trustees were to
conclude that separate funds should be established for variable life and
variable annuity separate accounts, the Company will bear the expenses.
If any of these substitutions or changes is made, the Company may, by
endorsement, change the Policy to reflect the substitution or change, and will
notify Policyowners of all such changes. If the Company deems it to be in the
best interest of Policyowners, and subject to any approvals that may be required
under applicable law, the Separate Account or any Sub-Account(s) may be operated
as a management company under the 1940 Act, may be deregistered under the 1940
Act if registration is no longer required, or may be combined with other
Sub-Accounts or other separate accounts of the Company.
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<PAGE>
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended, or if the present interpretation of the 1940 Act or such
rules should change, and as a result the Company determines that it is permitted
to vote shares in its own right, whether or not such shares are attributable to
the Policies, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account who
furnish instructions to the Company. The Company will also vote shares that it
owns and which are not attributable to Policies in the same proportion. The
number of votes which a Policyowner has the right to instruct will be determined
by the Company as of the record date established for the Underlying Fund. This
number is determined by dividing each Policyowner's Policy Value in the
Sub-Account, if any, by the net asset value of one share in the corresponding
Underlying Fund in which the assets of the Sub-Account are invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (a) to cause a change in the sub-classification or investment
objective of one or more of the Underlying Funds, or (b) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good-faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of that action and the reasons for that
action will be included in the next periodic report to Policyowners.
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<PAGE>
THE POLICY
APPLYING FOR THE POLICY
The 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 Insureds are 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 General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of receipt of the premium at the Principal
Office. IF THE 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 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 the Company transfers 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
Separate Account then will be allocated to the Sub-Accounts according to your
instructions.
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<PAGE>
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, within seven days, mail a refund
equal to the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. 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 specifications pages issued for the
increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal rights
to you.
Upon cancelling the increase, you will receive a credit to the Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in the Face Amount (assuming the Policy is in force), you
may convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Separate Account to the General Account
and by simultaneously changing your premium allocation instructions to allocate
future premium payments to the General Account. Within 24 months after the
effective date of each increase, you can transfer, without charge, all or part
of the Policy Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, the Company will, at your request, 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 Classes as the original
Policy.
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<PAGE>
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Separate Account
or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY
Unlike conventional insurance policies, the Policy does not obligate you to pay
premiums in accordance with a rigid and inflexible premium schedule. You may
establish a schedule of planned premiums which will be billed by the Company at
regular intervals. Failure to pay planned premiums, 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
procedure. Under this procedure, amounts will be deducted from your checking
account each month, generally on the Monthly Payment Date, and applied as a
premium under the Policy. The minimum payment permitted under a monthly
automatic payment procedure is $50.
Premiums are not limited as to frequency and number. No premium payment,
however, may be less than $100 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 the Face Amount, or Policy Change
which causes a change in the Minimum Monthly Factor has been in force, and Debt
does not exceed Policy Value less surrender charges, the Policy is guaranteed
not to lapse during that period. EXCEPT FOR THE 48 POLICY MONTHS AFTER THE DATE
OF ISSUE, OR THE EFFECTIVE DATE OF AN INCREASE IN THE FACE AMOUNT, MAKING
MONTHLY PAYMENTS AT LEAST EQUAL TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE
THAT THE POLICY WILL REMAIN IN FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Policy during a
Policy year. See POLICY TERMINATION AND REINSTATEMENT.
INCENTIVE FUNDING DISCOUNT
The Company will lower the cost of insurance charges by 5% during any Policy
year for which you qualify for an incentive funding discount. To qualify, total
premiums paid under the Policy, less any Debt, withdrawals and withdrawal
charges, and transfers from other policies issued by the Company, must exceed
90% of the guideline level premiums (as defined in Section 7702 of the Code)
accumulated from the Date of Issue to the date of qualification. The incentive
funding discount is not available in all states.
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<PAGE>
The amount needed to qualify for the incentive funding discount is determined on
the Date of Issue for the first Policy year and on each Policy anniversary for
each subsequent Policy year. If, however, the Company receives the proceeds from
a Policy issued by an unaffiliated company to be exchanged for the Policy, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.
GUARANTEED DEATH BENEFIT RIDER (MAY NOT BE AVAILABLE IN ALL STATES)
An optional Guaranteed Death Benefit Rider is available only at issue of the
Policy. If this Rider is in effect, the Company:
- guarantees that the Policy will not lapse, regardless of the investment
performance of the Separate Account, and
- provides a guaranteed death benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in the Face Amount,
as described below. In addition, a one-time administrative charge of $25 will be
deducted from the Policy Value when the Rider is elected. Certain transactions,
including Policy loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the Rider. If this Rider is terminated, it
cannot be reinstated.
GUARANTEED DEATH BENEFIT TESTS
While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:
(1) Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any debt,
partial withdrawals and withdrawal charges, must be greater than the Minimum
Monthly Factors (if any) multiplied by the number of months which have
elapsed since the Date of Issue or the effective date of increase; and
(2) On each Policy anniversary, (a) must exceed (b) where, since the Date of
Issue:
(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and Debt which is classified as a preferred loan; and
(b) is the sum of the minimum guaranteed Death Benefit premiums, as shown on
the specifications page of the Policy.
GUARANTEED DEATH BENEFIT
If the Guaranteed Death Benefit Rider is in effect on the Final Premium Payment
Date, guaranteed Death Proceeds will be provided as long as the Rider is in
force. The Death Proceeds will be the greater of:
- the Face Amount as of the Final Premium Payment Date; or
- the Policy Value as of the date due proof of death is received by the
Company.
TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER
The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:
- foreclosure of a Policy loan, or
- the date on which the sum of your payments does not meet or exceed the
applicable Guaranteed Death Benefit test (above), or
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<PAGE>
- any Policy change that results in a negative guideline level premium, or
- the effective date of a change from Sum Insured Option 2 to Sum Insured
Option 1, if such change occurs within five Policy years of the Final
Premium Payment Date, or
- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.
It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates. The net amount payable to keep the Policy in force will never exceed
the surrender charge plus three Monthly Deductions.
PAID-UP INSURANCE OPTION
Upon Written Request, a Policyowner may exercise a Paid-Up Insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the Insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount, up to the Face Amount of the
Policy, that the Surrender Value of the Policy can purchase for a net single
premium at the Insureds' Ages and Premium Class on the date this option is
elected. The Company will transfer any Policy Value in the Separate Account to
the General Account on the date it receives the Written Request to elect the
option. If the Surrender Value exceeds the net single premium necessary for the
fixed insurance, the Company will pay the excess to the Policyowner. The net
single premium is based on the Commissioners 1980 Standard Ordinary Mortality
Table D, Smoker or Non-Smoker, with increases in the tables for non-standard
risks. Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING
POLICYOWNER RIGHTS AND BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit is computed differently
from the net death benefit, and the death benefit options will not apply.
- The Company will transfer the Policy Value in the Separate Account to the
General Account on the date it receives the Written Request to elect the
option. The Company will not allow transfers of Policy Value from the
General Account back to the Separate Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.
- Riders will continue only with the Company's consent.
After electing paid-up fixed insurance, the Policyowner may surrender the Policy
for its net cash value. The cash value is equal to the net single premium for
Paid-Up Insurance at the Insureds' attained Ages. The net cash value is the cash
value less any outstanding loans.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the tax expense charge and the
premium expense charge. In the application for the Policy, you may indicate the
initial allocation of Net Premiums among the General Account and the
Sub-Accounts of the Separate Account. You may allocate premiums to one or more
Sub-Accounts, but may not have Policy Value in more than 20 Sub-Accounts at any
one time. The minimum amount which may be allocated to a Sub-Account is 1% of
Net Premium paid. Allocation percentages must be in whole numbers (for example,
33 1/3% may not be chosen) and must total 100%.
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FUTURE CHANGES ALLOWED
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. Currently, no charge is
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions.
The procedures the Company follows for telephone transactions include requiring
callers to identify themselves by name, and to identify the Policyowner by name,
date of birth and social security number. All transfer instructions by telephone
are tape recorded.
INVESTMENT RISK
The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners periodically should review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. The Policy Value held in the General Account to secure a Policy loan,
however, may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Account(s) next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Currently, transfers involving the General Account are permitted only if:
- there has been at least a 90-day period since the last transfer from the
General Account, and
- the amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000, or 25% of the Accumulated Value under the
Policy.
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Account which invests in the Money Market Fund of the Trust
to one or more of the other Sub-Accounts ("Dollar-Cost Averaging Option"),
or
- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business
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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
The Policy provides for the payment of the Death Proceeds to the named
Beneficiary on the death of the last surviving Insured. There are no Death
Proceeds payable on the death of the first Insured to die. Within 90 days of the
death of the first Insured to die, or as soon thereafter as is reasonably
possible, due proof of such death must be received at the Principal Office. As
long as the Policy remains in force (see POLICY TERMINATION AND REINSTATEMENT),
the Company will pay the Death Proceeds to the named Beneficiary upon due proof
of the death of the last surviving Insured.
Normally, the Company will pay the Death Proceeds within seven days of receiving
due proof of the death of the last surviving Insured, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments." The Death Proceeds may be received by the
Beneficiary in cash or under one or more of the payment options set forth in the
Policy. See APPENDIX B -- PAYMENT OPTIONS.
Prior to the Final Premium Payment Date, the Death Proceeds are:
- the Sum Insured provided under Option 1 or Option 2, whichever is elected
and in effect on the date of death of the last surviving Insured; plus
- any additional insurance on the Insureds' lives that is provided by rider;
minus
- any outstanding Debt, any partial withdrawals and partial withdrawal
charges, and any Monthly Deductions due and unpaid through the Policy
month in which the last surviving Insured dies.
After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value. The amount of Death Proceeds payable will be determined as of the date of
the Company's receipt of due proof of death of the last surviving Insured.
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SUM INSURED OPTIONS
The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the option once per Policy year by Written Request. There is no charge
for a change in option.
Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED
The Guideline Minimum Sum Insured is equal to a percentage of the Policy Value
as set forth in the Table below. The Guideline Minimum Sum Insured is determined
in accordance with Code regulations to ensure that the Policy qualifies as a
life insurance contract and that the insurance proceeds will be excluded from
the gross income of the Beneficiary.
GUIDELINE MINIMUM SUM INSURED TABLE
(Age of Younger Insured on Death of Last Surviving Insured)
<TABLE>
<CAPTION>
Age Percentage Age Percentage
- ----------------------------- ---------- ----------------------------- ----------
<S> <C> <C> <C> <C>
thru 40...................... 250% 61........................... 128%
41........................... 243% 62........................... 126%
42........................... 236% 63........................... 124%
43........................... 229% 64........................... 122%
44........................... 222% 65........................... 120%
45........................... 215% 66........................... 119%
46........................... 209% 67........................... 118%
47........................... 203% 68........................... 117%
48........................... 197% 69........................... 116%
49........................... 191% 70........................... 115%
50........................... 185% 71........................... 113%
51........................... 178% 72........................... 111%
52........................... 171% 73........................... 109%
53........................... 164% 74........................... 107%
54........................... 157% 75 thru 90................... 105%
55........................... 150% 91........................... 104%
56........................... 146% 92........................... 103%
57........................... 142% 93........................... 102%
58........................... 138% 94........................... 101%
59........................... 134% 95........................... 100%
60........................... 130%
</TABLE>
Under both Option 1 and Option 2 the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under Guideline Minimum Sum Insured exceeds the Face Amount, in
which case the Sum Insured will vary as the Policy Value varies. Under Option 2,
the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured and the Death Proceeds will
be greater under Option 2 than under Option 1, since the Policy Value is added
to the specified Face Amount and included in the Death Proceeds only under
Option 2. The cost of insurance included in the Monthly Deduction will be
greater, however, and thus the rate at which Policy Value will accumulate will
be slower under Option 2 than under
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Option 1 (assuming the same specified Face Amount and the same actual premiums
paid). See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value."
If the Policyowner desires to have premium payments and investment performance
reflected in the amount of the Sum Insured, the Policyowner should choose Option
2. If the Policyowner desires premium payments and investment performance
reflected to the maximum extent in the Policy Value, Option 1 should be
selected.
ILLUSTRATIONS
For purposes of this illustration, assume that the younger Insured is under the
Age of 40 and that there is no outstanding Debt.
ILLUSTRATION OF OPTION 1
Under Option 1, a Policy with a $250,000 Face Amount generally will have a Sum
Insured equal to $250,000. However, because the Sum Insured must be equal to or
greater than 250% of the Policy Value, if at any time the Policy Value exceeds
$100,000, the Sum Insured will exceed the $250,000 Face Amount. In this example,
each additional dollar of Policy Value above $100,000 will increase the Sum
Insured by $2.50. For example, a Policy with a Policy Value of $125,000 will
have a Guideline Minimum Sum Insured of $312,500 ($125,000 X 2.50); Policy Value
of $150,000 will produce a Guideline Minimum Sum Insured of $375,000 ($150,000 X
2.50); and Policy Value of $200,000 will produce a Guideline Minimum Sum Insured
of $500,000 ($200,000 X 2.50).
Similarly, so long as the Policy Value exceeds $100,000, 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 $125,000 to $100,000 because of partial
withdrawals, charges or negative investment performance, the Sum Insured will be
reduced from $312,500 to $250,000. If at any time, however, the Policy Value
multiplied by the applicable percentage is less than the Face Amount, the Sum
Insured will equal the Face Amount of the Policy.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the younger Insured's Age in the above example were, for example, 70 (rather
than between 0 and 40), the applicable percentage would be 115%. The Sum Insured
would not exceed the $250,000 Face Amount unless the Policy Value exceeded
$217,391 (rather than $100,000), and each dollar then added to or taken from the
Policy Value would change the Sum Insured by $1.15.
ILLUSTRATION OF OPTION 2
For purposes of this illustration, assume that the younger Insured is under the
Age of 40 and that there is no outstanding Debt.
Under Option 2, a Policy with a Face Amount of $250,000 will generally produce a
Sum Insured of $250,000 plus Policy Value. For example, a Policy with a Policy
Value of $50,000 will produce a Sum Insured of $300,000 ($250,000 + $50,000); a
Policy Value of $80,000 will produce a Sum Insured of $330,000 ($250,000 +
$80,000); a Policy Value of $100,000 will produce a Sum Insured of $350,000
($250,000 + $100,000). However, the Sum Insured must be at least 250% of the
Policy Value. Therefore, if the Policy Value is greater than $100,000 , 250% of
that amount will be the Sum Insured, which will be greater than the Face Amount
plus Policy Value. In this example, each additional dollar of Policy Value above
$100,000 will increase the Sum Insured by $2.50. For example, if the Policy
Value is $200,000, the Guideline Minimum Sum Insured will be $500,000 ($200,000
X 2.50); a Policy Value of $250,000 will produce a Guideline Minimum Sum Insured
of $625,000 ($250,000 X 2.50); and a Policy Value of $250,000 will produce a
Guideline Minimum Sum Insured of $750,000 ($250,000 X 2.50).
Similarly, if the Policy Value exceeds $100,000, 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 $200,000 to $150,000 because of partial withdrawals,
charges or negative investment performance, the Sum Insured will be reduced from
$500,000 to
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<PAGE>
$375,000. If at any time, however, the Policy Value multiplied by the applicable
percentage is less than the Face Amount plus the Policy Value, then the Sum
Insured will be the current Face Amount plus the Policy Value.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the Insured's Age in the above example were 70, the applicable percentage
would be 115%, so that the Sum Insured must be at least 1.15 times the Policy
Value. The amount of the Sum Insured would be the sum of the Policy Value plus
$250,000 unless the Policy Value exceeded $217,391 (rather than $100,000). Each
dollar added to or subtracted from the Policy would change the Sum Insured by
$1.15.
The Sum Insured under Option 2 will always be the greater of the Face Amount
plus the Policy Value or the Policy Value multiplied by the applicable
percentage.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
CHANGE FROM OPTION 1 TO OPTION 2
If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount less than $100,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Thus, under Option 2, the Insurance Amount at Risk will
always equal the Face Amount unless the Guideline Minimum Sum Insured is in
effect. The cost of insurance may also be higher or lower than it otherwise
would have been without the change in Sum Insured Option. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Policy Value."
CHANGE FROM OPTION 2 TO OPTION 1
If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. 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, respectively, reduce or increase the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the Separate Account, changing the Sum Insured Option
from Option 2 to Option 1 will reduce the Insurance Amount at Risk and therefore
the cost of insurance charge for all subsequent Monthly Deductions, compared to
what such charge would have been if no such change were made.
A change in the Sum Insured Option may result in total premiums paid exceeding
the then current maximum premium limitation determined by IRS rules. In such
event, the Company will pay the excess to you. See THE POLICY -- "Premium
Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount at any time by submitting a Written Request to the Company. Any increase
or decrease in the specified Face Amount
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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 FACE AMOUNT
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insureds is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be for less than $100,000. You may not increase the Face Amount after the
younger Insured reaches Age 80 or the older Insured reaches Age 85. An increase
must be accompanied by an additional premium if the Surrender Value is less than
$50, plus an amount equal to the sum of two Minimum Monthly Factors.
On the effective date of each increase in 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 will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge will also
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly Deduction
from Policy Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (a) during a Free-Look
Period, to have the increase cancelled, and the charges which would not have
been deducted but for the increase will be credited to the Policy, and (b)
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 FACE AMOUNT
The minimum amount for a decrease in the Face Amount is $100,000. The Face
Amount in force after any decrease may not be less than $100,000. If, following
a decrease in 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 you (at your election) to the extent
necessary to meet the requirements. A return of Policy Value may result in a tax
liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value." For purposes of
determining the cost of insurance charge, any decrease in the Face Amount will
reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase,
- the next most recent increases successively; and
- the initial Face Amount.
This order 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."
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POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of:
- your accumulation in the General Account, plus
- the value of the Accumulation Units in the Sub-Accounts.
The Policy Value is used in determining the Surrender Value (the Policy Value
less any Debt and applicable surrender charges). There is no guaranteed minimum
Policy Value. Because the Policy Value on any date depends upon a number of
variables, it cannot be predetermined.
The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.
CALCULATION OF POLICY VALUE
The Policy Value is determined first on the Date of Issue and thereafter on each
Valuation Date. On the Date of Issue, the Policy Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
POLICY -- "Applying for a Policy") less any Monthly Deductions due. On each
Valuation Date after the Date of Issue the Policy Value will be:
- the aggregate of the values in each of the Sub-Accounts on the Valuation
Date, determined for each Sub-Account by multiplying the value of an
Accumulation Unit in that Sub-Account on that date by the number of such
Accumulation Units allocated to the Policy; plus
- the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT
Each Net Premium is allocated to the Sub-Account(s) selected by you. Allocations
to the Sub-Accounts are credited to the Policy in the form of Accumulation
Units. Accumulation Units are credited separately for each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Principal Office. The number of Accumulation
Units will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a
Sub-Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
The dollar value of an Accumulation Unit of each Sub-Account varies from
Valuation Date to Valuation Date based on the investment experience of that
Sub-Account. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit
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on a given Valuation Date is determined by multiplying the dollar value of the
corresponding Accumulation Unit as of the immediately preceding Valuation Date
by the appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b) and subtracting (c) and (d) from the result,
where:
(a) is the investment income of that Sub-Account for the Valuation Period,
plus capital gains, realized or unrealized, credited during the Valuation
Period; minus capital losses, realized or unrealized, charged during the
Valuation Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for each day in the Valuation Period equal on an annual
basis to 0.90% of the daily net asset value of that Sub-Account for
mortality and expense risks. This charge may be increased or decreased by
the Company, but may not exceed 0.90%; and
(d) is the Separate Account administrative charge for each day in the
Valuation Period equal on an annual basis to 0.25% of the daily net asset
value of that Sub-Account. This charge is applicable only during the
first 15 Policy years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insureds' lifetimes, you may arrange for the Death Proceeds to be
paid in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- PAYMENT
OPTIONS. These choices are also available at the Final Premium Payment Date and
if the Policy is surrendered. The Company may make more payment options
available in the future. If no election is made, the Company will pay the Death
Proceeds in a single sum. When the Death Proceeds are payable in a single sum,
the Beneficiary may, within one year of the death of the last surviving Insured,
select one or more of the payment options if no payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Policy by rider.
The cost of any optional insurance benefits will be deducted as part of the
Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy
Value."
POLICY SURRENDER
You may at any time surrender the Policy and receive its Surrender Value. The
Surrender Value is the Policy Value less any Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Policy are received at the
Principal Office. A surrender charge will be deducted when a Policy is
surrendered if less than 15 full Policy years have elapsed from the Date of
Issue of the Policy or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
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The proceeds on surrender may be paid in a lump sum or under one of the payment
options described in APPENDIX B -- 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."
For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of the Policy, subject to the limits stated below, upon Written
Request filed at the Principal Office. The Written Request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions, the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500. Under Option 1, the Face Amount is reduced by the amount of the
partial withdrawal, and a partial withdrawal will not be allowed if it would
reduce the Face Amount below $100,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Accumulation Units equivalent in value to the amount withdrawn. The
amount withdrawn equals the amount requested by you plus the transaction charge
and any applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawals." 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 as described in OTHER POLICY PROVISIONS --
"Postponement of Payments."
For important tax consequences which may result from partial withdrawals, see
FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policies.
Certain of the charges and deductions described below may be reduced for
Policies issued to employees of the Company and its affiliates located at the
Company's home office (or at off-site locations if such employees are on the
Company's home office payroll), employees and registered representatives of any
broker-dealer that has entered into a sales agreement with the Company or
Allmerica Investments, Inc. to sell the Policies, and any spouses or children of
the above persons. The cost of insurance charges may be reduced, and no
surrender charges, partial withdrawal charges or front-end sales loads will be
imposed (and no commissions will be paid), where the Policyowner as of the date
of application is within these categories.
TAX EXPENSE CHARGE
A charge will be deducted from each premium payment for the actual state and
local premium taxes paid by the Company, and a charge of 1% of premiums to
compensate the Company for federal taxes imposed for deferred acquisition cost
("DAC") taxes. The premium tax deduction will change if there is a change in tax
rates or if the applicable jurisdiction changes (the Company should be notified
of any change in address as soon as possible). The Company reserves the right to
increase or decrease the 1% DAC tax deduction to reflect changes in the
Company's expenses for DAC taxes.
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PREMIUM EXPENSE CHARGE
A charge of 1% of premiums will be deducted from each premium payment to
partially compensate the Company for the cost of selling the Policies. The
premium expense charge is a factor the Company must use when calculating the
maximum sales load it can charge under SEC rules during the first two Policy
years.
MONTHLY DEDUCTION FROM POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from Policy Value
will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider, and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charges are
discussed below. The Monthly Deduction on or following the effective date of a
requested increase in the Face Amount will also include a $40 administrative
charge for the increase. See THE POLICY -- "Change in Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instruction 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 on subsequent Monthly Payment Dates there is
sufficient Policy Value in the Sub-Account you specified, however, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those last surviving Insureds who
die prior to the Final Premium Payment Date. The cost of insurance is determined
on a monthly basis, and is determined separately for the initial Face 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 the 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:
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- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Sum Insured (Policy Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)
OR
- the Face Amount PLUS the Policy Value (if you selected Sum Insured
Option 2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY -- "Change in Face Amount."
COST OF INSURANCE RATES
Cost of insurance rates are based on a blended unisex rate table, Age and
Premium Class of the Insureds at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less Debt,
any partial withdrawals and withdrawal charges, and risk classification.
Sex-distinct rates do not apply, except in those states that do not permit
unisex rates.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in Face
Amount or rider are determined annually on the anniversary of the effective date
of each increase or rider. The cost of insurance rates generally increase as the
Insureds' Ages increase. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Table D, Smoker or Non-Smoker, and the Insureds'
Ages. The Tables used for this purpose set forth different mortality estimates
for smokers and non-smokers. Any change in the cost of insurance rates will
apply to all persons of the same insuring Age and Premium Class whose Policies
have been in force for the same length of time.
The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into Standard Premium Classes and Substandard
Premium Classes. In an otherwise identical Policy, an Insured in the Standard
Premium Class will have a lower cost of insurance than an Insured in a
Substandard Premium Class with a higher mortality risk. The Premium Classes are
also divided into two categories: smokers and 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 an 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 that you request, at a time when an Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if an Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES
Prior to the Final Premium Payment Date, a monthly administrative charge of $6
per month will be deducted from 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
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expenses incurred in connection with the Policy. These expenses include the cost
of processing applications, conducting medical examinations, determining
insurability and the Insureds' Premium Class, and establishing Policy records.
The Company does not expect to derive a profit from these charges.
CHARGES AGAINST ASSETS OF THE SEPARATE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company and a charge for administrative expenses of the
Separate Account.
MORTALITY AND EXPENSE RISK CHARGE
The Company currently makes a charge on an annual basis of 0.90% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policies. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 0.90% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will therefore pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policies
will exceed the amounts realized from the administrative charges provided in the
Policies. If the charge for mortality and expense risks is not sufficient to
cover actual mortality experience and expenses, the Company will absorb the
losses. If costs are less than the amounts provided, the difference will be a
profit to the Company. To the extent this charge results in a current profit to
the Company, such profit will be available for use by the Company for, among
other things, the payment of distribution, sales and other expenses. Since
mortality and expense risks involve future contingencies which are not subject
to precise determination in advance, it is not feasible to identify specifically
the portion of the charge which is applicable to each.
SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
During the first 15 Policy years, the Company assesses a charge on an annual
basis of 0.25% of the daily net asset value in each Sub-Account. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the Separate Account and the Sub-Accounts, and is not expected
to be a source of profit. The administrative functions and expenses assumed by
the Company in connection with the Separate Account and the Sub-Accounts
include, but are not limited to, clerical, accounting, actuarial and legal
services, rent, postage, telephone, office equipment and supplies, expenses of
preparing and printing registration statements, expenses of preparing and
typesetting prospectuses, and the cost of printing prospectuses not allocable to
sales expense, filing and other fees. No Separate Account administrative charge
is imposed after the 15th Policy year.
OTHER CHARGES AND EXPENSES
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, and T. Rowe
Price 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-Accounts to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policy provides for a contingent surrender charge. A surrender charge may be
deducted if you request a full surrender of the Policy or a decrease in the Face
Amount. The duration of the surrender charge is 15 years
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from Date of Issue or from the effective date of any increase in the Face
Amount. A separate surrender charge, described in more detail below, is
calculated upon the issuance of the Policy and for each increase in the Face
Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agent's
commissions, advertising and the printing of the prospectus and sales
literature.
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:
(a) is a deferred administrative charge equal to $8.50 per thousand dollars
of the initial Face Amount, and
(b) is a deferred sales charge of 48% of premiums received up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by average issue Age from 1.95 (for average issue Ages 5
through 75) to 1.31 (for average issue Age 82).
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months and reduces by 0.5% or more per month thereafter, as described
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This reduction in the
maximum surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 25% of
premiums received. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE
A separate surrender charge will apply to and is calculated for each increase in
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 48% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge. Such deferred
sales charge varies by average Age (at the time of increase) from 1.95 (for
average Ages 5 through 75) to 1.31 (for average Age 82). In accordance with
limitations under state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is true for the
initial Face Amount, (a) is a deferred administrative charge, and (b) is a
deferred sales charge. The maximum surrender charge for the increase continues
in a level amount for 40 Policy months, and reduces by 0.5% or more per month
thereafter, as provided in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
If you surrender the Policy during the first two Policy years following an
increase in the Face Amount before making premium payments associated with the
increase in Face Amount which are at least equal to one Guideline Annual
Premium, the deferred administrative charge will be $8.50 per thousand dollars
of the Face Amount increase, as described above, but the deferred sales charge
will not exceed 25% of premiums associated with the increase. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below.
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ALLOCATION OF POLICY VALUE AND PREMIUMS UPON AN INCREASE IN FACE AMOUNT
Additional premium payments may not be required to fund a requested increase in
Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies whereby the Policy Value will be allocated
between the initial Face Amount and the increase. Subsequent premium payments
are allocated between the initial Face Amount and the increase.
For example, suppose the Guideline Annual Premium is equal to $1,500 before an
increase and is equal to $2,000 as a result of the increase. The Policy Value on
the effective date of the increase would be allocated 75% ($1,500/$2,000) to the
initial Face Amount and 25% to the increase. All future premiums 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 DECREASE IN THE FACE AMOUNT
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Policy), the surrender charge will be applied in the following order: (1)
the most recent increase; (2) the next most recent increases successively, and
(3) the initial Face Amount. Where a decrease causes a partial reduction in an
increase or in the initial Face Amount, a proportionate share of the surrender
charge for that increase or for the initial Face Amount will be deducted.
CHARGES ON PARTIAL WITHDRAWALS
After the first Policy year, partial withdrawals of Surrender Value may be made.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $100,000.
A transaction charge, which is the smaller of 2% of the amount withdrawn, or
$25, will be assessed on each partial withdrawal to reimburse the Company for
the cost of processing the withdrawal. The Company does not expect to make a
profit on this charge.
A partial withdrawal charge also may be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company, less the
total of any prior withdrawals in that Policy year which were not subject to the
partial withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal.
This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative
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charge component. The partial withdrawal charge deducted will decrease existing
surrender charges in the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICY -- "Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Account which invests in the Money Market Fund of the Trust
to one or more of the other Sub-Accounts; or
- to reallocate Policy Value among the Sub-Accounts.
The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge, and does not reduce the remaining number of transfers which may
be made without charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate Policy
Value within 20 days of the Date of Issue, any resulting transfer of Policy
Value from the Sub-Accounts to the General Account will be free of charge and in
addition to the 12 free transfers in a Policy year. See THE POLICY --
"Conversion Privileges," and POLICY LOANS.
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in the Face Amount that you request, a transaction charge of
$40 will be deducted from the 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. Currently, no such charges are imposed, and any such
charge is guaranteed not to exceed $25.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value. In the first Policy year, the Loan Value is 75% of
the Policy Value reduced by applicable surrender charges, as well as Monthly
Deductions and interest on Policy loans to the end of the Policy year. The Loan
Value in the second Policy year
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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.
Normally, the loan amount 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.
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%.
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 may not be available in all states.
LOAN INTEREST CHARGED
Outstanding Policy loans are charged interest. Interest accrues daily, and is
payable in arrears at the annual rate of 8%. Interest is due and payable at the
end of each Policy year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount, and
will bear interest at the same rate. If the new loan amount exceeds the Policy
Value in the General Account after the due and unpaid interest is added to the
loan amount, the Company will transfer the 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 repaid loan will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Separate Account cannot exceed
the Policy Value previously transferred from the Separate Account to secure the
Debt.
If the 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.
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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 surrender or the death of the last surviving Insured.
POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued,
OR
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the last surviving Insured dies during the grace
period, the Death Proceeds will still be payable, but any Monthly Deductions due
and unpaid through the Policy month in which the last surviving Insured dies,
and any other overdue charge, will be deducted from the Death Proceeds.
LIMITED 48-MONTH GUARANTEE
Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months after the Date of Issue or the effective date
of an increase in the Face Amount if you make a minimum amount of premium
payments. The minimum amount paid, minus the Debt, partial withdrawals and
partial withdrawal charges, must be at least equal to the sum of the Minimum
Monthly Factor for the number of months the Policy, increase in the Face Amount,
or a Policy Change which causes a change in the Minimum Monthly Factor has been
in force. A Policy change which causes a change in the Minimum Monthly Factor is
a change in the Face Amount or the addition or deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force.
REINSTATEMENT
If the Policy has not been surrendered and the Insureds are alive, the
terminated Policy may be reinstated any time within three years after the date
of default and before the Final Premium Payment Date. The reinstatement will be
effective on the Monthly Payment Date following the date you submit the
following to the Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insureds are insurable according
to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge and premium
expense charge, is large enough to cover the minimum amount payable, as
described below.
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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 (1) or (2). Under (1),
the minimum amount payable is the Minimum Monthly Factor for the three-month
period beginning on the date of reinstatement. Under (2), the minimum amount
payable is the sum of:
- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default, PLUS
- Monthly Deductions for the three-month period beginning on the date of
reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue or any increase in the Face Amount, you must pay the amount
shown in (2) above. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the Policy remained in force from the Date of
Issue. The Policy Value less Debt on the date of default will be restored to the
Policy to the extent it does not exceed the surrender charge on the date of
reinstatement. Any Policy Value less the Debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will not be restored.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Policy increased by interest from
the date the payment was received at the Principal Office, PLUS
- an amount equal to the Policy Value less Debt on the date of default to
the extent it does not exceed the surrender charge on the date of
reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations, and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is named in the application for the Policy. The Policyowner is
generally entitled to exercise all rights under a Policy while the Insureds are
alive, subject to the consent of any irrevocable Beneficiary (the consent of a
revocable Beneficiary is not required). The consent of the Insureds is required
whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the death of the last surviving Insured. Unless otherwise stated in
the Policy, the Beneficiary has no rights in the Policy before the death of the
last surviving Insured. While the Insureds are alive, you may change any
Beneficiary unless you have declared a Beneficiary to be irrevocable. If no
Beneficiary is alive when the last surviving Insured
54
<PAGE>
dies, the Policyowner (or the Policyowner's estate) will be the Beneficiary. If
more than one Beneficiary is alive when the last surviving Insured dies, they
will be paid in equal shares, unless you have chosen otherwise. Where there is
more than one Beneficiary, the interest of a Beneficiary who dies before the
last surviving Insured dies will pass to surviving Beneficiaries proportionally.
INCONTESTABILITY
The Company will not contest the validity of a Policy after it has been in force
during the lifetimes of both Insureds for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the lifetimes of both Insureds
for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if either Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Policy, without interest, less any
outstanding Debt and less any partial withdrawals. If either Insured commits
suicide, 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.
NOTICE OF FIRST INSURED TO DIE
Within 90 days of the death of the first Insured to die, or as soon thereafter
as is reasonably possible, you must mail to the Principal Office due proof of
such death.
AGE
If the Age of either Insured as stated in the application for the Policy is not
correct, benefits under a Policy will be adjusted to reflect the correct Age, if
death of the last surviving Insured occurs prior to the Final Premium Payment
Date. The adjusted benefit will be that which the most recent cost of insurance
charge would have purchased for the correct Age. In no event will the Sum
Insured be reduced to less than the Guideline Minimum Sum Insured.
ASSIGNMENT
The Policyowner may assign a Policy as collateral or make an absolute assignment
of the Policy. All rights under the Policy will be transferred to the extent of
the assignee's interest. The consent of the assignee may be required in order to
make changes in premium allocations, to make transfers, or to exercise other
rights under the Policy. The Company is not bound by an assignment or release
thereof, unless it is in writing and is recorded at the Principal Office. When
recorded, the assignment will take effect as of the date the Written Request was
signed. Any rights created by the assignment will be subject to any payments
made or actions taken by the Company before the assignment is recorded. The
Company is not responsible for determining the validity of any assignment or
release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the last surviving Insured, as well as payments of a
Policy loan and transfers, may be postponed whenever (a) the New York Stock
Exchange is closed for other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the SEC,
or (b) an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the Separate Account's net assets.
Payments under the Policy of any
55
<PAGE>
amounts derived from the premiums paid by check may be delayed until such time
as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the last
surviving Insured, as well as payments of Policy loans and transfers from the
General Account, for a period not to exceed six months.
56
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996) and Vice President (since 1984) of
Director and Vice President First Allmerica
Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of First
Secretary and Counsel Allmerica
Robert E. Bruce Director and Chief Information Officer (since 1997),
Director, Vice President and Vice President (since 1995) of First Allmerica; and
Chief Information Officer Corporate Manager (1979 to 1995) of Digital Equipment
Corporation
John P. Kavanaugh
Director, Vice President and Director and Chief Investment Officer (since 1996) and
Chief Investment Officer Vice President (since 1991) of First Allmerica
John F. Kelly
Director, Senior Vice President, Director (since 1996), General Counsel (since 1981),
General Counsel and Assistant Senior Vice President (since 1986), and Assistant
Secretary Secretary (since 1986) of First Allmerica
J. Barry May Director (since 1996) of First Allmerica; Director and
Director President (since 1996), Vice President (1993 to 1996)
and General Manager (1989 to 1993) of The Hanover
Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994), and CEO (since
1996) of Citizens Insurance Company of America; Vice
President (1982 to 1994), and Chief Investment Officer
(1986 to 1994) of First Allmerica
John F. O'Brien
Director, Chairman of the Board,
President and Chief Executive Director, Chairman of the Board, President and Chief
Officer Executive Officer (since 1989) of First Allmerica
Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice
Director, Vice President, Chief President and Treasurer (since 1993), and Assistant Vice
Financial Officer and Treasurer President (1992 to 1993) of First Allmerica
Richard M. Reilly Director (since 1996), Vice President (since 1990) of
Director and Vice President First Allmerica; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1990) of Allmerica Financial Investment Management
Services, Inc.
Eric A. Simonsen Director (since 1996), Vice President (since 1990), and
Director and Vice President Chief Financial Officer (1990 to 1996) of First
Allmerica
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of
Director and Vice President First Allmerica
</TABLE>
57
<PAGE>
DISTRIBUTION
Allmerica Investments, Inc. ("Allmerica Investments"), an indirect 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 Separate
Account. Allmerica Investments is registered with the SEC 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 or of broker-dealers which have selling
agreements with Allmerica Investments.
The Company pays commissions based on a commission schedule. After the Date of
Issue or an increase in the Face Amount, commissions paid to agents who are
registered representatives of Allmerica Investments generally will be up to 50%
of the first-year premiums up to a basic premium amount established by the
Company. Thereafter, commissions will generally equal up to 3.5% 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.
Commissions and expense reimbursements paid to broker-dealers, after issue of
the Policy or an increase in the Face Amount, generally will equal 90% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions will generally equal up to 4% of any additional
premiums. To the extent permitted by NASD rules, promotional incentives or
payments may also be provided to broker-dealers based on sales volumes, the
assumption of wholesaling functions or other sales-related criteria. Other
payments may be made for other services that do not directly involve the sale of
the Policies. These services may include the recruitment and training of
personnel, production of promotional literature, and similar services.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policyowners 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 for
services it performs and expenses it may incur as principal underwriter and
general distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares of such Underlying Funds held by
the Separate Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% of the
aggregate net asset value of shares held by the Separate Account. The Company
may in the future render services for which it will receive compensation from
the investment advisers or other service providers of other Underlying Funds.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
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<PAGE>
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, and the financial
statements of the Inheiritage Account of the Company as of December 31, 1997 and
for the period 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
Policies.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to the Policyowner or the Beneficiary depends upon a variety of factors.
The following discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted. From time to
time legislation is proposed which, if passed, could significantly adversely,
and possibly retroactively, affect the taxation of the Policies. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policies is not exhaustive, does not purport to
cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the trustee of an employee benefit plan.
A qualified tax adviser should always be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code,
and files a consolidated tax return with its parent and affiliates. Because the
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account, no charge is made for
federal income taxes which may be attributable to the Separate Account.
The Company periodically will review the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be; if there are changes made in the federal income
tax treatment of variable life insurance at the Company level; or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws, the Company may also incur state and local taxes (in
addition to premium taxes) in several states. At present these taxes are not
significant. If there is a material change in applicable state or local tax
laws, charges may be made for such taxes paid, or reserves for such taxes,
attributable to the Separate Account.
59
<PAGE>
TAXATION OF THE POLICIES
The Company believes that the Policies described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance contracts and places
limitations on the relationship of the Policy Value to the Insurance Amount at
Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value is not
taxable until received by the Policyowner or the Policyowner's designee (but see
"Modified Endowment Contracts"). Although the Company believes that the Policies
are in compliance with Section 7702 of the Code, the manner in which Section
7702 should be applied to certain features of a joint survivorship life
insurance contract is not directly addressed by Section 7702. In the absence of
final regulations or other guidance issued under Section 7702, there is
necessarily some uncertainty whether a Policy will meet the Section 7702
definition of a life insurance contract. This is true particularly if the
Policyowner pays the full amount of premiums permitted under the Policy. A
Policyowner contemplating the payment of such premiums should do so only after
consulting a tax adviser. If a Policy were determined not to be a life insurance
contract under Section 7702, it would not have most of the tax advantages
normally provided by a life insurance contract.
The Code requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury Department regulations in order to be
treated as a life insurance policy for tax purposes. Although the Company does
not have control over the investments of the Underlying Funds, the Company
believes that the Underlying Funds currently meet the Treasury's diversification
requirements, and the Company will monitor continued compliance with these
requirements. In connection with the issuance of previous regulations relating
to diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which Policyowners
may direct their investments to particular divisions of a separate account.
Regulations in this regard may be issued in the future. It is possible that if
and when regulations are issued, the Policies may need to be modified to comply
with such regulations. For these reasons, the Policies or the Company's
administrative rules may be modified as necessary to prevent a Policyowner from
being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding, or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner or
Beneficiary.
SPLIT OPTION RIDER/EXCHANGE OPTION RIDER
The Split Option Rider permits a Policy to be split into two other life
insurance policies, one covering each Insured singly. A Policy split may have
adverse tax consequences. It is not clear whether a Policy split will be treated
as a non-taxable exchange under Section 1035 of the Code. Unless a Policy split
is so treated, it could result in recognition of taxable income on the gain in
the Policy. In addition, it is not clear whether, in all circumstances, the
individual policies that result from a Policy split would be treated as life
insurance policies under Section 7702 of the Code or would be classified as
modified endowment contracts. The Policyowner should consult a competent tax
adviser regarding the possible adverse tax consequences of a Policy split.
POLICY LOANS
The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Contracts"). There is
a risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal and be 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
60
<PAGE>
of preferred loans uncertain. In the event pertinent IRS guidelines are issued
in the future, you may revoke your request for a preferred loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. 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.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. A policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the policy at any time
during the first seven policy years, or within seven years of a material change
in the Policy, exceeds the sum of the net level premiums that would have been
paid, had the policy provided for paid-up future benefits after the payment of
seven level premiums.
If a policy is considered a modified endowment contract, all distributions under
the policy will be taxed on an "income-first" basis. Most distributions received
by a policyowner directly or indirectly (including loans, withdrawals, partial
surrenders, or the assignment or pledge of any portion of the value of the
policy) will be includible in gross income to the extent that the cash surrender
value of the policy exceeds the policyowner's investment in the contract. Any
additional amounts will be treated as a return of capital to the extent of the
policyowner's basis in the policy. In addition, with certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be permanently classified as a
modified endowment contract.
ESTATE AND GENERATION-SKIPPING TAXES
When the last surviving Insured dies, the Death Proceeds will generally be
includible in the Policyowner's estate for purposes of federal estate tax if the
last surviving Insured owned the Policy. If the Policyowner was not the last
surviving Insured, the fair market value of the Policy would be included in the
Policyowner's estate upon the Policyowner's death. Nothing would be includible
in the last surviving Insured's estate if he or she neither retained incidents
of ownership at death nor had given up ownership within three years before
death.
Federal estate tax is integrated with federal gift tax under a unified rate
schedule. In general, estates less than $625,000 will not incur a federal estate
tax liability. In addition, an unlimited marital deduction may be available for
federal estate and gift tax purposes. The unlimited marital deduction permits
the deferral of taxes until the death of the surviving spouse, when the death
proceeds would be available to pay taxes due and other expenses incurred.
As a general rule, if an insured is the policyowner, and death proceeds are
payable to a person two or more generations younger than the policyowner, a
generation-skipping tax may be payable on the death proceeds at rates similar to
the maximum estate tax rate in effect at the time. If the policyowner (whether
or not he or she is an insured) transfers ownership of the policy to someone two
or more generations younger, the transfer may be
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subject to the generation-skipping tax, the taxable amount being the value of
the policy. (Such a transfer is unlikely but not impossible.) If the death
proceeds are not includible in the insured's estate (because the insured
retained no incidents of ownership and did not relinquish ownership within three
years before death), the payment of the death proceeds to the beneficiary is not
subject to the generation-skipping tax regardless of the beneficiary's
generation. The generation-skipping tax provisions generally apply to transfers
which would be subject to the gift and estate tax rules. Individuals are
generally allowed an aggregate generation-skipping tax exemption of $1 million.
Because these rules are complex, the Policyowner should consult with a tax
adviser for specific information where benefits are passing to younger
generations.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities laws, any amount in the General Account is not generally subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
GENERAL DESCRIPTION
The General Account is made up of all of the general assets of the Company other
than those allocated to any Separate Account. Allocations to the General Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. Subject to applicable law, the Company has sole discretion
over the investment of assets of the General Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. However, the excess interest rate, if any,
in effect on the date a premium is received at the Principal Office is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. YOU
ASSUME THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM
RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to Debt. 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 Policy
Value transferred to the General Account, plus interest at an annual rate of 4%,
plus any excess interest which the Company credits, less the sum of all Policy
charges
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<PAGE>
allocable to the General Account, and any amounts deducted from the General
Account in connection with loans, partial withdrawals, surrenders or transfers.
THE POLICY
This Prospectus describes an individual joint survivorship flexible premium
variable life insurance policy, and is generally intended to serve as a
disclosure document only for the aspects of the Policy relating to the Separate
Account. For complete details regarding the General Account, see the Policy
itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS
If the 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 Policy Value allocated to
the General Account.
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans also may be made from the Policy Value in the General Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days or more, however, the Company will pay interest at least
equal to an effective annual yield of 3.5% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed. ability of First Allmerica Financial Life Insurance Company to
meet its obligations under the Policies.
FINANCIAL STATEMENTS
Financial statements for the Company and for the Separate 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
Separate Account.
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FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<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,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<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) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</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) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
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............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</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) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
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
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</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) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</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")
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"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, 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 (APY) 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.
APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. 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
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect 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
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
In November 1995, the Financial Accounting Standards Board ("FASB") 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.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company considers,
among other things, the estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
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.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.
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
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
costs related to universal life products, variable annuities and contractholder
deposit funds are deferred and amortized in proportion to total estimated gross
profits from investment yields, mortality, surrender charges and expense margins
over the expected life of the contracts. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from this group of products, including
realized and unrealized gains and losses from investments. Acquisition costs
related to fixed annuities and other life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
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
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife consolidated United States Federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated United States Federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT TRANSACTIONS
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 APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
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
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$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
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>
1997
-----------------------------------------------
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....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<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
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, 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>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------
<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</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>
1997
Fixed maturities............................. $1,894.8 $27.6 $ 16.2
Equity securities............................ $ 145.5 $55.8 $ 1.3
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
</TABLE>
F-13
<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>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
Net appreciation (depreciation) on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.6 $ 86.7 $ 209.3
---------- ----------- -------
---------- ----------- -------
1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
Net (depreciation) appreciation on available-for-sale
securities.............................................. (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 securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change 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
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, respectively.
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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 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 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the 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>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----
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
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.
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. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</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 $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.
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 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. INTEREST RATE 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. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally recognized rating agencies. 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, which at
December 31, 1997 was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.
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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.
G. OTHER SWAP CONTRACTS
The Company enters into 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. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
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, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.
H. OTHER
At December 31, 1997, 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 $262.5 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>
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, 1997 and 1996.
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-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
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-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</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, 1997 or 1996, 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-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 33.0 $ 37.8
Other.......................................................................................... -- 0.6
--------- ---------
Total short-term debt............................................................................ $ 33.0 $ 38.4
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.6 $ 2.7
--------- ---------
--------- ---------
</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, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 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 limited to 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. These repurchase agreements were settled by the end of 1996.
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 and
APY.
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also 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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................ $ 83.3 $ 96.8 $ 119.7
Deferred........................................................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total................................................................................ $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<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) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 131.8 $ 122.3 $ 105.6
Tax-exempt interest................................................................ (37.9) (35.3) (32.2)
Differential earnings amount....................................................... - (10.2) (7.6)
Dividend received deduction........................................................ (3.2) (1.6) (4.0)
Changes in tax reserve estimates................................................... 7.8 4.7 19.3
Other, net......................................................................... (1.0) 1.2 1.6
--------- --------- ---------
Federal income tax expense........................................................... $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</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 liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (15.6) $ (16.3)
Loss reserve discounting................................................................... (391.6) (355.1)
Deferred acquisition costs................................................................. 291.8 249.4
Employee benefit plans..................................................................... (48.0) (41.4)
Investments, net........................................................................... 175.4 128.5
Bad debt reserve........................................................................... (14.3) (26.2)
Other, net................................................................................. 15.2 (5.8)
--------- ---------
Deferred tax (asset) liability, net.......................................................... $ 12.9 $ (66.9)
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed 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 former 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. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. 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.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.9 $ 19.0 $ 19.7
Interest accrued on projected benefit obligations..................................... 23.5 21.9 21.1
Actual return on assets............................................................... (64.0) (42.2) (89.3)
Net amortization and deferral......................................................... 29.0 9.3 66.1
--------- --------- ---------
Net pension expense................................................................... $ 8.4 $ 8.0 $ 17.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. 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 three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $2.8 million and $2.0 million,
respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.
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 payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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) 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.7 $ 40.4
Fully eligible active plan participants..................................................... 7.0 7.5
Other active plan participants.............................................................. 24.1 24.4
--------- ---------
71.8 72.3
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 71.8 72.3
Unrecognized prior service benefit............................................................ 15.3 23.8
Unrecognized loss............................................................................. (0.8) (5.0)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 86.3 $ 91.1
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.0 $ 3.2 $ 4.2
Interest cost........................................................................... 4.6 4.6 6.9
Amortization of gain.................................................................... (2.8) (2.8) (0.5)
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 4.8 $ 5.0 $ 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
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, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. 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.
Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.
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. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 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.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
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 $127.6 million.
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. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. 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 Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica 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.
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. 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 1998.
14. 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, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.
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
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, 1997, CAR was the only reinsurer 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 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 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.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................................................... $ 822.7 $ 735.7 $ 802.8
Acquisition expenses deferred................................................... 617.7 560.8 504.8
Amortized to expense during the year............................................ (476.0) (483.5) (470.3)
Adjustment to equity during the year............................................ (11.1) 9.7 (50.4)
Transferred to the Closed Block................................................. -- -- (24.8)
Adjustment for cession of term life insurance................................... -- -- (26.4)
Adjustment for cession of disability income insurance........................... (38.6) -- --
Adjustment for revision of universal and variable universal life insurance
mortality assumptions......................................................... 50.8 -- --
--------- --------- ---------
Balance at end of year............................................................ $ 965.5 $ 822.7 $ 735.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. 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
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
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 of $10.9 million 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. 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.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
In 1995, Hanover's favorable development was 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 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Due to the nature of the 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. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. 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. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. 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. The Company 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, the Company 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.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. 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
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
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 were liable for $65.0 million and
employers would 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. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
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.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its 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) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Inheiritage Account of First Allmercia 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
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select Income, Select International Equity, Select Capital
Appreciation, Fidelity VIP High Income, Fidelity VIP Equity-Income, Fidelity VIP
Growth, Fidelity VIP Overseas, Fidelity VIP II Asset Manager, T. Rowe Price
International Stock, and DGPF International Equity) constituting the Inheiritage
Account of First Allmerica Financial Life Insurance Company at December 31,
1997, 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 at
December 31, 1997 by correspondence with the Funds, provide a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE SELECT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH GROWTH
----------- ------------ ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment
Trust....................... $ 261,517 $ 2,656 $ 564,829 $ 290,259 $ 21,938 $ 314,260 $ 281,284
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)........ -- -- -- -- -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc................. -- -- -- -- -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc......................... -- -- -- -- -- -- --
----------- ------------ ------------ ------------ ---------- ---------- ------------
Total assets.............. 261,517 2,656 564,829 290,259 21,938 314,260 281,284
LIABILITIES: -- -- -- -- -- -- --
----------- ------------ ------------ ------------ ---------- ---------- ------------
Net assets................ $ 261,517 $ 2,656 $ 564,829 $ 290,259 $ 21,938 $ 314,260 $ 281,284
----------- ------------ ------------ ------------ ---------- ---------- ------------
----------- ------------ ------------ ------------ ---------- ---------- ------------
Net asset distribution by
category:
Variable life policies...... $ 261,517 $ 2,656 $ 564,829 $ 290,259 $ 21,938 $ 314,260 $ 281,284
----------- ------------ ------------ ------------ ---------- ---------- ------------
----------- ------------ ------------ ------------ ---------- ---------- ------------
Units outstanding, December
31, 1997.................... 170,097 2,454 517,534 176,052 19,849 220,200 176,354
Net asset value per unit,
December 31, 1997........... $ 1.537459 $1.082110 $1.091385 $1.648710 $1.105239 $1.427158 $1.594998
<CAPTION>
SELECT
GROWTH AND SELECT VALUE SELECT
INCOME OPPORTUNITY** INCOME(a)
---------- ------------- -----------
<S> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment
Trust....................... $ 131,606 $ 255,483 $ --
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)........ -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc................. -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc......................... -- -- --
---------- ------------- -----------
Total assets.............. 131,606 255,483 --
LIABILITIES: -- -- --
---------- ------------- -----------
Net assets................ $ 131,606 $ 255,483 $ --
---------- ------------- -----------
---------- ------------- -----------
Net asset distribution by
category:
Variable life policies...... $ 131,606 $ 255,483 $ --
---------- ------------- -----------
---------- ------------- -----------
Units outstanding, December
31, 1997.................... 86,605 161,681 --
Net asset value per unit,
December 31, 1997........... $1.519604 $1.580163 $1.000000
</TABLE>
** Name changed. See Note 1.
(a) For the period ended 12/31/97, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT FIDELITY FIDELITY
INTERNATIONAL CAPITAL VIP HIGH VIP FIDELITY
EQUITY APPRECIATION INCOME EQUITY-INCOME VIP GROWTH
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ 189,093 $ 171,290 $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products
Funds (VIP)............................... -- -- 132,038 354,957 373,852
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
------------- ------------ ------------- ------------- ------------
Total assets............................ 189,093 171,290 132,038 354,957 373,852
LIABILITIES: -- -- -- -- --
------------- ------------ ------------- ------------- ------------
Net assets.............................. $ 189,093 $ 171,290 $ 132,038 $ 354,957 $ 373,852
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Net asset distribution by category:
Variable life policies.................... $ 189,093 $ 171,290 $ 132,038 $ 354,957 $ 373,852
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Units outstanding, December 31, 1997........ 133,787 101,731 99,852 226,032 272,587
Net asset value per unit, December 31,
1997...................................... $ 1.413391 $ 1.683750 $ 1.322332 $ 1.570383 $ 1.371496
<CAPTION>
FIDELITY T. ROWE PRICE DGPF
FIDELITY VIP II ASSET INTERNATIONAL INTERNATIONAL
VIP OVERSEAS MANAGER STOCK EQUITY
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products
Funds (VIP)............................... 11,698 36,458 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- 107,552 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- 99,997
------------ ------------- ------------- -------------
Total assets............................ 11,698 36,458 107,552 99,997
LIABILITIES: -- -- -- --
------------ ------------- ------------- -------------
Net assets.............................. $ 11,698 $ 36,458 $ 107,552 $ 99,997
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 11,698 $ 36,458 $ 107,552 $ 99,997
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Units outstanding, December 31, 1997........ 9,276 23,601 90,276 77,313
Net asset value per unit, December 31,
1997...................................... $ 1.261047 $ 1.544770 $ 1.191375 $ 1.293411
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME
FOR THE
GROWTH YEAR
FOR THE FOR THE ENDED
YEAR ENDED PERIOD DECEMBER FOR THE
DECEMBER 31, 9/15/95* 31, PERIOD
---------------------- TO --------- 12/13/96* TO
1997 1996 12/31/95 1997 12/31/96
---------- --------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 2,362 $ 813 $84 $119 $ 1
---------- --------- -------- --------- -----
EXPENSES:
Mortality and expense risk fees........... 1,221 338 22 14 1
Administrative expense fees............... 344 94 6 4 --
---------- --------- -------- --------- -----
Total expenses.......................... 1,565 432 28 18 1
---------- --------- -------- --------- -----
Net investment income (loss)............ 797 381 56 101 --
---------- --------- -------- --------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 38,579 5,093 568 -- --
Net realized gain (loss) from sales of
investments............................. 8,712 (915) -- 1 --
---------- --------- -------- --------- -----
Net realized gain (loss)................ 47,291 4,178 568 1 --
Net unrealized gain (loss)................ (29,295) 1,497 (223) 60 (1)
---------- --------- -------- --------- -----
Net realized and unrealized gain
(loss)................................ 17,996 5,675 345 61 (1)
---------- --------- -------- --------- -----
Net increase (decrease) in net assets
from
operations............................ $ 18,793 $ 6,056 $401 $162 $ (1)
---------- --------- -------- --------- -----
---------- --------- -------- --------- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 11/20/95* DECEMBER 31, 10/19/95*
------------------- TO ----------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $16,784 $ 4,621 $ 32 $ 2,248 $ 884 $ --
-------- -------- --- ------------ -------- --------
EXPENSES:
Mortality and expense risk fees........... 2,785 808 5 1,391 363 22
Administrative expense fees............... 786 224 1 393 101 6
-------- -------- --- ------------ -------- --------
Total expenses.......................... 3,571 1,032 6 1,784 464 28
-------- -------- --- ------------ -------- --------
Net investment income (loss)............ 13,213 3,589 26 464 420 (28)
-------- -------- --- ------------ -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- 7,681 1,414 --
Net realized gain (loss) from sales of
investments............................. -- -- -- 18,875 5,463 (1,224)
-------- -------- --- ------------ -------- --------
Net realized gain (loss)................ -- -- -- 26,556 6,877 (1,224)
Net unrealized gain (loss)................ -- -- -- 10,769 (927) (26)
-------- -------- --- ------------ -------- --------
Net realized and unrealized gain
(loss)................................ -- -- -- 37,325 5,950 (1,250)
-------- -------- --- ------------ -------- --------
Net increase (decrease) in net assets
from
operations............................ $13,213 $ 3,589 $ 26 $ 37,789 $ 6,370 $(1,278)
-------- -------- --- ------------ -------- --------
-------- -------- --- ------------ -------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 10/19/95* DECEMBER 31, 8/28/95*
-------------------- TO ---------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- --------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 566 $307 $78 $ -- $ -- $ --
-------- --------- --- ----------- -------- --------
EXPENSES:
Mortality and expense risk fees........... 53 49 6 2,003 681 30
Administrative expense fees............... 15 14 2 565 189 8
-------- --------- --- ----------- -------- --------
Total expenses.......................... 68 63 8 2,568 870 38
-------- --------- --- ----------- -------- --------
Net investment income (loss)............ 498 244 70 (2,568) (870) (38)
-------- --------- --- ----------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- 24,088 7,614 --
Net realized gain (loss) from sales of
investments............................. -- (36) -- 27,548 15,832 --
-------- --------- --- ----------- -------- --------
Net realized gain (loss)................ -- (36) -- 51,636 23,446 --
Net unrealized gain (loss)................ (128) (65) 6 (6,950) (5,567) (74)
-------- --------- --- ----------- -------- --------
Net realized and unrealized gain
(loss)................................ (128) (101) 6 44,686 17,879 (74)
-------- --------- --- ----------- -------- --------
Net increase (decrease) in net assets
from
operations............................ $ 370 $143 $76 $ 42,118 $17,009 $(112)
-------- --------- --- ----------- -------- --------
-------- --------- --- ----------- -------- --------
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 8/28/95* DECEMBER 31, 9/8/95*
------------------- TO ------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 812 $ 77 $ 1 $ 1,377 $ 503 $ 106
-------- -------- -------- -------- -------- ---------
EXPENSES:
Mortality and expense risk fees........... 1,169 139 24 904 284 12
Administrative expense fees............... 330 38 7 255 79 3
-------- -------- -------- -------- -------- ---------
Total expenses.......................... 1,499 177 31 1,159 363 15
-------- -------- -------- -------- -------- ---------
Net investment income (loss)............ (687) (100) (30) 218 140 91
-------- -------- -------- -------- -------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 13,732 3,679 -- 11,213 4,275 1,044
Net realized gain (loss) from sales of
investments............................. 12,531 3,602 -- 549 (255) 86
-------- -------- -------- -------- -------- ---------
Net realized gain (loss)................ 26,263 7,281 -- 11,762 4,020 1,130
Net unrealized gain (loss)................ 9,365 (2,989) (317) 6,825 1,076 (834)
-------- -------- -------- -------- -------- ---------
Net realized and unrealized gain
(loss)................................ 35,628 4,292 (317) 18,587 5,096 296
-------- -------- -------- -------- -------- ---------
Net increase (decrease) in net assets
from
operations............................ $34,941 $ 4,192 $(347) $18,805 $ 5,236 $ 387
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY
SELECT VALUE OPPORTUNITY**
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED
DECEMBER 31, 9/15/95* DECEMBER 31,
---------------------- TO ------------------------------
1997 1996 12/31/95 1997 1996 1995
-------- ----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,402 $ 227 $ 61 $ 6,590 $ 1,058 $ 1
-------- ----------- --------- -------- -------- ---
EXPENSES:
Mortality and expense risk fees........... 1,190 189 21 1,146 214 1
Administrative expense fees............... 335 53 6 323 59 --
-------- ----------- --------- -------- -------- ---
Total expenses.......................... 1,525 242 27 1,469 273 1
-------- ----------- --------- -------- -------- ---
Net investment income (loss)............ (123) (15) 34 5,121 785 --
-------- ----------- --------- -------- -------- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 33,367 1,440 229 9,317 126 --
Net realized gain (loss) from sales of
investments............................. 14,580 3,045 -- (1,218) 685 --
-------- ----------- --------- -------- -------- ---
Net realized gain (loss)................ 47,947 4,485 229 8,099 811 --
Net unrealized gain (loss)................ (16,439) (26) (121) (8,910) 3,572 17
-------- ----------- --------- -------- -------- ---
Net realized and unrealized gain
(loss)................................ 31,508 4,459 108 (811) 4,383 17
-------- ----------- --------- -------- -------- ---
Net increase (decrease) in net assets
from
operations............................ $31,385 $4,444 $142 $ 4,310 $ 5,168 $ 17
-------- ----------- --------- -------- -------- ---
-------- ----------- --------- -------- -------- ---
<CAPTION>
SELECT CAPITAL APPRECIATION
FOR THE
YEAR ENDED FOR THE
DECEMBER 31, PERIOD
------------------- 4/28/95* TO
1997 1996 12/31/95
-------- -------- ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ -- $ 86
-------- -------- -----
EXPENSES:
Mortality and expense risk fees........... 894 165 10
Administrative expense fees............... 252 46 3
-------- -------- -----
Total expenses.......................... 1,146 211 13
-------- -------- -----
Net investment income (loss)............ (1,146) (211) 73
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 28 --
Net realized gain (loss) from sales of
investments............................. 10,252 (724) 1
-------- -------- -----
Net realized gain (loss)................ 10,252 (696) 1
Net unrealized gain (loss)................ 12,967 (814) 322
-------- -------- -----
Net realized and unrealized gain
(loss)................................ 23,219 (1,510) 323
-------- -------- -----
Net increase (decrease) in net assets
from
operations............................ $22,073 $(1,721) $ 396
-------- -------- -----
-------- -------- -----
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 12/5/95* DECEMBER 31, 8/28/95*
-------------------- TO ------------------ TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 5,394 $ 1,230 $ -- $ 2,557 $ 90 $ 85
-------- --------- -------- -------- -------- --------
EXPENSES:
Mortality and expense risk fees........... 1,080 506 9 1,988 815 25
Administrative expense fees............... 305 141 3 561 227 7
-------- --------- -------- -------- -------- --------
Total expenses.......................... 1,385 647 12 2,549 1,042 32
-------- --------- -------- -------- -------- --------
Net investment income (loss)............ 4,009 583 (12) 8 (952) 53
-------- --------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 667 240 -- 12,855 2,564 --
Net realized gain (loss) from sales of
investments............................. 15,572 5,531 -- 329 (844) 1
-------- --------- -------- -------- -------- --------
Net realized gain (loss)................ 16,239 5,771 -- 13,184 1,720 1
-------- --------- -------- -------- -------- --------
Net unrealized gain (loss)................ 587 625 138 37,086 9,822 673
-------- --------- -------- -------- -------- --------
Net realized and unrealized gain (loss) 16,826 6,396 138 50,270 11,542 674
-------- --------- -------- -------- -------- --------
Net increase (decrease) in net assets
from
operations............................ $20,835 $ 6,979 $ 126 $50,278 $10,590 $727
-------- --------- -------- -------- -------- --------
-------- --------- -------- -------- -------- --------
<CAPTION>
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 8/28/95* DECEMBER 31, 9/8/95*
------------------- TO ------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,211 $ 212 $ -- $ 86 $ 15 $ --
-------- -------- ---------- -------- -------- --------
EXPENSES:
Mortality and expense risk fees........... 2,263 1,017 46 120 27 9
Administrative expense fees............... 638 282 12 34 7 2
-------- -------- ---------- -------- -------- --------
Total expenses.......................... 2,901 1,299 58 154 34 11
-------- -------- ---------- -------- -------- --------
Net investment income (loss)............ (1,690) (1,087) (58) (68) (19) (11)
-------- -------- ---------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 5,419 5,366 -- 340 17 --
Net realized gain (loss) from sales of
investments............................. 1,306 (57) -- 9,680 338 339
-------- -------- ---------- -------- -------- --------
Net realized gain (loss)................ 6,725 5,309 -- 10,020 355 339
-------- -------- ---------- -------- -------- --------
Net unrealized gain (loss)................ 38,619 11,462 (947) (557) 267 (35)
-------- -------- ---------- -------- -------- --------
Net realized and unrealized gain (loss) 45,344 16,771 (947) 9,463 622 304
-------- -------- ---------- -------- -------- --------
Net increase (decrease) in net assets
from
operations............................ $43,654 $ 15,684 $(1,005) $9,395 $ 603 $ 293
-------- -------- ---------- -------- -------- --------
-------- -------- ---------- -------- -------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER T. ROWE PRICE INTERNATIONAL STOCK
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
DECEMBER 31, DECEMBER 31, PERIOD
-------------------------------- --------------------- 8/28/95* TO
1997 1996 1995 1997 1996 12/31/95
-------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 404 $ 98 $ 2 $ 989 $ 170 $ --
-------- --------- --- --------- --------- -----
EXPENSES:
Mortality and expense risk fees........... 228 58 4 625 102 2
Administrative expense fees............... 65 16 1 177 28 1
-------- --------- --- --------- --------- -----
Total expenses.......................... 293 74 5 802 130 3
-------- --------- --- --------- --------- -----
Net investment income (loss)............ 111 24 (3) 187 40 (3)
-------- --------- --- --------- --------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 1,014 80 -- 1,401 101 --
Net realized gain (loss) from sales of
investments............................. 32 17 -- 6,413 3,240 --
-------- --------- --- --------- --------- -----
Net realized gain (loss)................ 1,046 97 -- 7,814 3,341 --
Net unrealized gain (loss)................ 3,696 750 87 (2,178) (74) 23
-------- --------- --- --------- --------- -----
Net realized and unrealized gain
(loss)................................ 4,742 847 87 5,636 3,267 23
-------- --------- --- --------- --------- -----
Net increase (decrease) in net assets
from
operations............................ $ 4,853 $ 871 $ 84 $ 5,823 $ 3,307 $ 20
-------- --------- --- --------- --------- -----
-------- --------- --- --------- --------- -----
<CAPTION>
DGPF INTERNATIONAL EQUITY
FOR THE
YEAR ENDED FOR THE
DECEMBER 31, PERIOD
------------------ 10/19/95* TO
1997 1996 12/31/95
-------- -------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,076 $ 585 $ --
-------- -------- -----
EXPENSES:
Mortality and expense risk fees........... 613 180 6
Administrative expense fees............... 173 50 2
-------- -------- -----
Total expenses.......................... 786 230 8
-------- -------- -----
Net investment income (loss)............ 290 355 (8)
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 157 --
Net realized gain (loss) from sales of
investments............................. 9,879 12 --
-------- -------- -----
Net realized gain (loss)................ 9,879 169 --
Net unrealized gain (loss)................ (1,771) 2,667 169
-------- -------- -----
Net realized and unrealized gain
(loss)................................ 8,108 2,836 169
-------- -------- -----
Net increase (decrease) in net assets
from
operations............................ $ 8,398 $ 3,191 $161
-------- -------- -----
-------- -------- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME
YEAR
GROWTH ENDED
YEAR ENDED DECEMBER DECEMBER PERIOD
31, PERIOD 31, FROM
-------------------- FROM 9/15/95* TO --------- 12/13/96* TO
1997 1996 12/31/95 1997 12/31/96
--------- -------- -------------------- --------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 797 $ 381 $ 56 $ 101 $ --
Net realized gain (loss)......... 47,291 4,178 568 1 --
Net unrealized gain (loss)....... (29,295) 1,497 (223) 60 (1)
--------- -------- ------ --------- -----
Net increase (decrease) in net
assets from operations......... 18,793 6,056 401 162 (1)
--------- -------- ------ --------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 35,548 22,048 2,038 2,479 85
Terminations..................... -- -- -- -- --
Insurance and other charges...... (783) (147) (5) (70) (4)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 147,282 23,759 6,527 5 --
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- --
--------- -------- ------ --------- -----
Net increase (decrease) in net
assets from capital
transactions................... 182,047 45,660 8,560 2,414 81
--------- -------- ------ --------- -----
Net increase (decrease) in net
assets......................... 200,840 51,716 8,961 2,576 80
NET ASSETS:
Beginning of period.............. 60,677 8,961 -- 80 --
--------- -------- ------ --------- -----
End of period.................... $ 261,517 $ 60,677 $8,961 $2,656 $ 80
--------- -------- ------ --------- -----
--------- -------- ------ --------- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, PERIOD 31, PERIOD
------------------ FROM 11/20/95* TO -------------------- FROM 10/19/95* TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- --------------------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 13,213 $ 3,589 $ 26 $ 464 $ 420 $ (28)
Net realized gain (loss)......... -- -- -- 26,556 6,877 (1,224)
Net unrealized gain (loss)....... -- -- -- 10,769 (927) (26)
-------- -------- ----- --------- -------- --------
Net increase (decrease) in net
assets from operations......... 13,213 3,589 26 37,789 6,370 (1,278)
-------- -------- ----- --------- -------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 392,241 71,860 971 72,231 8,653 71,958
Terminations..................... -- -- -- -- -- --
Insurance and other charges...... (7,672) (975) (13) (15,253) (9,327) (14)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... (112,984) 204,595 (22) 137,114 38,845 (56,829)
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
-------- -------- ----- --------- -------- --------
Net increase (decrease) in net
assets from capital
transactions................... 271,585 275,480 936 194,092 38,171 15,115
-------- -------- ----- --------- -------- --------
Net increase (decrease) in net
assets......................... 284,798 279,069 962 231,881 44,541 13,837
NET ASSETS:
Beginning of period.............. 280,031 962 -- 58,378 13,837 --
-------- -------- ----- --------- -------- --------
End of period.................... $564,829 $280,031 $962 $ 290,259 $ 58,378 $ 13,837
-------- -------- ----- --------- -------- --------
-------- -------- ----- --------- -------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 31,
31, PERIOD PERIOD
-------------------- FROM 10/19/95* TO ------------------------- FROM 8/28/95*
1997 1996 12/31/95 1997 1996 TO 12/31/95
--------- -------- -------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 498 $ 244 $ 70 $ (2,568) $ (870) $ (38)
Net realized gain (loss)......... -- (36) -- 51,636 23,446 --
Net unrealized gain (loss)....... (128) (65) 6 (6,950) (5,567) (74)
--------- -------- ------ ----------- ----------- -------------
Net increase (decrease) in net
assets from operations......... 370 143 76 42,118 17,009 (112)
--------- -------- ------ ----------- ----------- -------------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 492 3,490 2,326 53,541 45,627 3,536
Terminations..................... -- -- -- (3,454) -- --
Insurance and other charges...... (6) (36) (1) (1,033) (458) (14)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 15,339 (2,903) 2,648 102,695 41,406 13,399
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
--------- -------- ------ ----------- ----------- -------------
Net increase (decrease) in net
assets from capital
transactions................... 15,825 551 4,973 151,749 86,575 16,921
--------- -------- ------ ----------- ----------- -------------
Net increase (decrease) in net
assets......................... 16,195 694 5,049 193,867 103,584 16,809
NET ASSETS:
Beginning of period.............. 5,743 5,049 -- 120,393 16,809 --
--------- -------- ------ ----------- ----------- -------------
End of period.................... $ 21,938 $ 5,743 $5,049 $ 314,260 $ 120,393 $ 16,809
--------- -------- ------ ----------- ----------- -------------
--------- -------- ------ ----------- ----------- -------------
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, PERIOD 31, PERIOD
------------------ FROM 8/28/95* TO -------------------- FROM 9/8/95* TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- --------------------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (687) $ (100) $ (30) $ 218 $ 140 $ 91
Net realized gain (loss)......... 26,263 7,281 -- 11,762 4,020 1,130
Net unrealized gain (loss)....... 9,365 (2,989) (317) 6,825 1,076 (834)
-------- -------- ------ --------- -------- -------
Net increase (decrease) in net
assets from operations......... 34,941 4,192 (347) 18,805 5,236 387
-------- -------- ------ --------- -------- -------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 53,947 12,649 3,045 29,588 37,896 2,580
Terminations..................... -- -- -- (2,515) -- --
Insurance and other charges...... (757) (82) (11) (828) (266) (45)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 167,075 104 6,528 21,252 (5,491) 25,007
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- --
---
-------- -------- ------ -------- -------
---------
Net increase (decrease) in net
assets from capital
transactions................... 220,265 12,671 9,562 47,497 32,139 27,542
-------- -------- ------ --------- -------- -------
Net increase (decrease) in net
assets......................... 255,206 16,863 9,215 66,302 37,375 27,929
NET ASSETS:
Beginning of period.............. 26,078 9,215 -- 65,304 27,929 --
-------- -------- ------ --------- -------- -------
End of period.................... $281,284 $ 26,078 $9,215 $ 131,606 $ 65,304 $ 27,929
-------- -------- ------ --------- -------- -------
-------- -------- ------ --------- -------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY** SELECT INTERNATIONAL EQUITY
YEAR ENDED DECEMBER YEAR ENDED
31, PERIOD DECEMBER 31,
--------------------- FROM 9/15/95* TO ----------------------------------
1997 1996 12/31/95 1997 1996 1995
--------- --------- -------------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (123) $ (15) $ 34 $ 5,121 $ 785 $ --
Net realized gain (loss)......... 47,947 4,485 229 8,099 811 --
Net unrealized gain (loss)....... (16,439) (26) (121) (8,910) 3,572 17
--------- --------- ------ ---------- --------- ---------
Net increase (decrease) in net
assets from
operations..................... 31,385 4,444 142 4,310 5,168 17
--------- --------- ------ ---------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 45,084 10,199 2,038 26,346 32,320 --
Terminations..................... -- -- -- (1,344) -- --
Insurance and other charges...... (822) (138) (5) (498) (122) --
Other transfers from (to) the
General Account
of First Allmerica Financial
Life Insurance
Company (Sponsor).............. 145,702 10,927 6,527 101,522 21,410 --
Net increase (decrease) in
investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. -- -- -- -- (132) --
--------- --------- ------ ---------- --------- ---------
Net increase (decrease) in net
assets from
capital transactions........... 189,964 20,988 8,560 126,026 53,476 --
--------- --------- ------ ---------- --------- ---------
Net increase (decrease) in net
assets......................... 221,349 25,432 8,702 130,336 58,644 17
NET ASSETS:
Beginning of period.............. 34,134 8,702 -- 58,757 113 96
--------- --------- ------ ---------- --------- ---------
End of period.................... $ 255,483 $ 34,134 $8,702 $189,093 $58,757 $ 113
--------- --------- ------ ---------- --------- ---------
--------- --------- ------ ---------- --------- ---------
<CAPTION>
SELECT CAPITAL APPRECIATION
YEAR ENDED
DECEMBER 31, PERIOD
------------------ FROM 4/28/95* TO
1997 1996 12/31/95
-------- -------- ---------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (1,146) $ (211) $ 73
Net realized gain (loss)......... 10,252 (696) 1
Net unrealized gain (loss)....... 12,967 (814) 322
-------- -------- ------
Net increase (decrease) in net
assets from
operations..................... 22,073 (1,721) 396
-------- -------- ------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 44,247 17,225 3,918
Terminations..................... -- -- --
Insurance and other charges...... (846) (278) (19)
Other transfers from (to) the
General Account
of First Allmerica Financial
Life Insurance
Company (Sponsor).............. 65,093 21,296 --
Net increase (decrease) in
investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. -- (294) 200
-------- -------- ------
Net increase (decrease) in net
assets from
capital transactions........... 108,494 37,949 4,099
-------- -------- ------
Net increase (decrease) in net
assets......................... 130,567 36,228 4,495
NET ASSETS:
Beginning of period.............. 40,723 4,495 --
-------- -------- ------
End of period.................... $171,290 $ 40,723 $4,495
-------- -------- ------
-------- -------- ------
</TABLE>
* Date of initial investment.
** Name Changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 31,
31, PERIOD PERIOD
------------------- FROM 12/5/95* TO ----------------------- FROM 8/28/95*
1997 1996 12/31/95 1997 1996 TO 12/31/95
-------- -------- -------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 4,009 $ 583 $ (12) $ 8 $ (952) $ 53
Net realized gain (loss)......... 16,239 5,771 -- 13,184 1,720 1
Net unrealized gain (loss)....... 587 625 138 37,086 9,822 673
-------- -------- ------- ---------- ---------- -------
Net increase (decrease) in net
assets from operations......... 20,835 6,979 126 50,278 10,590 727
-------- -------- ------- ---------- ---------- -------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 37,579 39,315 1,957 91,656 58,682 11,736
Terminations..................... -- -- -- -- -- --
Insurance and other charges...... (1,001) (471) (6) (1,977) (869) (78)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 605 12,376 13,744 70,023 17,709 46,480
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
-------- -------- ------- ---------- ---------- -------
Net increase (decrease) in net
assets from capital
transactions................... 37,183 51,220 15,695 159,702 75,522 58,138
-------- -------- ------- ---------- ---------- -------
Net increase (decrease) in net
assets......................... 58,018 58,199 15,821 209,980 86,112 58,865
NET ASSETS:
Beginning of period.............. 74,020 15,821 -- 144,977 58,865 --
-------- -------- ------- ---------- ---------- -------
End of period.................... $132,038 $ 74,020 $15,821 $354,957 $144,977 $58,865
-------- -------- ------- ---------- ---------- -------
-------- -------- ------- ---------- ---------- -------
<CAPTION>
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS
YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, PERIOD 31, PERIOD
------------------ FROM 8/28/95* TO ------------------- FROM 9/8/95* TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- ---------------------- -------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (1,690) $ (1,087) $ (58) $ (68) $ (19) $ (11)
Net realized gain (loss)......... 6,725 5,309 -- 10,020 355 339
Net unrealized gain (loss)....... 38,619 11,462 (947) (557) 267 (35)
-------- -------- ------- -------- -------- ------
Net increase (decrease) in net
assets from operations......... 43,654 15,684 (1,005) 9,395 603 293
-------- -------- ------- -------- -------- ------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 64,784 60,044 12,819 3,393 3,103 1,032
Terminations..................... (3,119) -- -- -- -- --
Insurance and other charges...... (2,303) (888) (68) (267) (83) (18)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 98,870 69,327 16,053 (5,216) (272) (265)
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
-------- -------- ------- -------- -------- ------
Net increase (decrease) in net
assets from capital
transactions................... 158,232 128,483 28,804 (2,090) 2,748 749
-------- -------- ------- -------- -------- ------
Net increase (decrease) in net
assets......................... 201,886 144,167 27,799 7,305 3,351 1,042
NET ASSETS:
Beginning of period.............. 171,966 27,799 -- 4,393 1,042 --
-------- -------- ------- -------- -------- ------
End of period.................... $373,852 $171,966 $27,799 $ 11,698 $ 4,393 $ 1,042
-------- -------- ------- -------- -------- ------
-------- -------- ------- -------- -------- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER T. ROWE PRICE INTERNATIONAL STOCK
YEAR ENDED YEAR ENDED PERIOD
DECEMBER 31, DECEMBER 31, FROM
------------------------------ ------------------- 8/28/95* TO
1997 1996 1995 1997 1996 12/31/95
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 111 $ 24 $ (3) $ 187 $ 40 $ (3)
Net realized gain (loss).................. 1,046 97 -- 7,814 3,341 --
Net unrealized gain (loss)................ 3,696 750 87 (2,178) (74) 23
-------- -------- -------- -------- -------- -----
Net increase (decrease) in net assets from
operations.............................. 4,853 871 84 5,823 3,307 20
-------- -------- -------- -------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums.............................. 7,867 7,874 2,064 20,514 15,072 671
Terminations.............................. -- -- -- -- -- --
Insurance and other charges............... (453) (214) (36) (457) (189) (4)
Other transfers from (to) the General
Account
of First Allmerica Financial Life
Insurance
Company (Sponsor)....................... 13,549 28 1 60,469 2,325 1
Net increase (decrease) in investment by
First
Allmerica Financial Life Insurance
Company (Sponsor)....................... -- (128) -- -- -- --
-------- -------- -------- -------- -------- -----
Net increase (decrease) in net assets from
capital transactions.................... 20,963 7,560 2,029 80,526 17,208 668
-------- -------- -------- -------- -------- -----
Net increase (decrease) in net assets..... 25,816 8,431 2,113 86,349 20,515 688
NET ASSETS:
Beginning of period....................... 10,642 2,211 98 21,203 688 --
-------- -------- -------- -------- -------- -----
End of period............................. $ 36,458 $ 10,642 $ 2,211 $107,552 $ 21,203 $688
-------- -------- -------- -------- -------- -----
-------- -------- -------- -------- -------- -----
<CAPTION>
DGPF INTERNATIONAL EQUITY
YEAR ENDED
DECEMBER 31, PERIOD
------------------- FROM 10/19/95* TO
1997 1996 12/31/95
-------- -------- ---------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 290 $ 355 $ (8)
Net realized gain (loss).................. 9,879 169 --
Net unrealized gain (loss)................ (1,771) 2,667 169
-------- -------- ------
Net increase (decrease) in net assets from
operations.............................. 8,398 3,191 161
-------- -------- ------
FROM CAPITAL TRANSACTIONS:
Net premiums.............................. 10,520 1,484 2,326
Terminations.............................. -- -- --
Insurance and other charges............... (284) (32) (1)
Other transfers from (to) the General
Account
of First Allmerica Financial Life
Insurance
Company (Sponsor)....................... 55,716 15,870 2,648
Net increase (decrease) in investment by
First
Allmerica Financial Life Insurance
Company (Sponsor)....................... -- -- --
-------- -------- ------
Net increase (decrease) in net assets from
capital transactions.................... 65,952 17,322 4,973
-------- -------- ------
Net increase (decrease) in net assets..... 74,350 20,513 5,134
NET ASSETS:
Beginning of period....................... 25,647 5,134 --
-------- -------- ------
End of period............................. $ 99,997 $ 25,647 $ 5,134
-------- -------- ------
-------- -------- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Inheiritage Account (Inheiritage) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company), established on May 1,
1995, for the purpose of separating from the general assets of the Company those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of Inheiritage are clearly identified and distinguished
from the other assets and liabilities of the Company. Inheiritage cannot be
charged with liabilities arising out of any other business of the Company.
Inheiritage is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Inheiritage currently offers
nineteen Sub-Accounts under the contracts. 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 (Fidelity
VIP) or the Variable Insurance Products Fund II (Fidelity VIP II) managed by
Fidelity Management & Research Company (FMR), or of T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price, and DGPF (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, this portfolio changed its name to Select Value Opportunity
Fund.
Certain prior year balances have been reclassified to conform with current year
presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, or DGPF. Net realized gains and losses on securities sold are
determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, 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 (the Code) and files a consolidated
federal income tax return. The Company anticipates no tax liability resulting
from the operations of Inheiritage. Therefore, no provision for income taxes has
been charged against Inheiritage.
SA-13
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, and DGPF at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth................................................ 108,244 $ 289,538 $ 2.416
Investment Grade Income............................... 2,388 2,597 1.112
Money Market.......................................... 564,829 564,829 1.000
Equity Index.......................................... 105,434 280,442 2.753
Government Bond....................................... 20,953 22,124 1.047
Select Aggressive Growth.............................. 141,240 326,851 2.225
Select Growth......................................... 155,319 275,225 1.811
Select Growth and Income.............................. 84,797 124,539 1.552
Select Value Opportunity*............................. 157,123 272,068 1.626
Select Income......................................... -- -- --
Select International Equity........................... 141,009 194,418 1.341
Select Capital Appreciation........................... 100,937 158,815 1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income........................................... 9,723 130,689 13.580
Equity-Income......................................... 14,619 307,376 24.280
Growth................................................ 10,077 324,718 37.100
Overseas.............................................. 609 12,023 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager......................................... 2,024 31,926 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock................................... 8,442 109,782 12.740
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity............................. 6,443 98,932 15.520
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of $6. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1997, 1996 and 1995, these monthly deductions from policy
values amounted to $35,310, $13,818 and $336, respectively. These amounts are
included on the statements of changes in net assets in Insurance and other
charges.
SA-14
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The Company makes a charge of .90% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The mortality and expense 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. During the first 15 policy years, the Company
also charges each Sub-Account .25% per annum based on the average daily net
assets of each Sub-Account for administrative expenses. These charges are
deducted in the daily computation of unit values and paid to the Company on a
daily basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of the Company, is the principal underwriter and general distributor of
Inheiritage, and does not receive any compensation for sales of Inheiritage
policies. Commissions are paid to registered representatives of Allmerica
Investments and to 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, 1997,
1996 and 1995, the Company received no surrender charges applicable to
Inheiritage.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the 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 The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that Inheiritage satisfies the current requirements
of the regulations, and it intends that Inheiritage will continue to meet such
requirements.
SA-15
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, and DGPF shares by Inheiritage during the year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth........................................................... $ 450,250 $ 228,827
Investment Grade Income.......................................... 2,594 80
Money Market..................................................... 3,843,200 3,558,403
Equity Index..................................................... 525,296 323,059
Government Bond.................................................. 16,396 73
Select Aggressive Growth......................................... 673,374 500,104
Select Growth.................................................... 593,569 360,259
Select Growth and Income......................................... 64,177 5,249
Select Value Opportunity*........................................ 524,481 301,273
Select Income.................................................... -- --
Select International Equity...................................... 353,239 212,773
Select Capital Appreciation...................................... 230,028 122,679
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income...................................................... 1,732,543 1,690,685
Equity-Income.................................................... 175,766 3,199
Growth........................................................... 174,070 12,109
Overseas......................................................... 1,281,361 1,283,178
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager.................................................... 22,538 450
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.............................................. 803,241 721,128
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity........................................ 310,386 244,143
----------- ----------
Totals........................................................... $11,776,509 $9,567,671
----------- ----------
----------- ----------
</TABLE>
* Name changed. See Note 1.
SA-16
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, your agent should
be contacted.
The following supplemental benefits are available for issue under the Policies
for an additional charge. CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL
STATES.
SPLIT OPTION RIDER/EXCHANGE OPTION RIDER
This Rider, which is AVAILABLE ONLY AT DATE OF ISSUE, permits you to split
the Policy into two life insurance policies, one covering each Insured
singly, subject to Company guidelines.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and minor children of
either primary Insured. The Rider includes a feature that allows you to
convert the other-insured coverage to any permanent life insurance policy
acceptable to the Company.
FOUR-YEAR TERM RIDER
This Rider provides a term insurance benefit during the first four Policy
years, payable upon the death of the last surviving Insured during the
coverage period.
GUARANTEED DEATH BENEFIT RIDER
This Rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE, (a) guarantees that
the Policy will not lapse regardless of the performance of the Separate
Account, and (b) provides a guaranteed net death benefit.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that would otherwise be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of (a) the rate per $1,000 of value applied based on the Company's
non-guaranteed current payment option rates for the Policies; or (b) the rate in
the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Separate Account.
<TABLE>
<C> <S>
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30). Payments
may be made annually, semi- annually, quarterly or monthly.
Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's Age on the date
the first payment will be made. One of three variations may be chosen.
Depending upon this choice, payments will end:
(a) upon the death of the payee, with no further payments due (Life Annuity);
(b) upon the death of the payee, but not before the sum of the payments made
first equals or exceeds the amount applied under this option (Life Annuity
with Installment Refund); or
(c) upon the death of the payee, but not before a selected period (5, 10 or 20
years) has elapsed (Life Annuity with Period Certain).
Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined by the
Company each year but which will not be less than 3.5%. Payments may be made
annually, semi-annually, quarterly or monthly. Payments will end when the
amount left with the Company has been withdrawn. However, payments will not
continue after the death of the payee. Any unpaid balance plus accrued
interest will be paid in a lump sum.
Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the unpaid
balance is exhausted. Interest will be credited to the unpaid balance. The
rate of interest will be determined by the Company each year but will not be
less than 3.5%. Payments may be made annually, semi-annually, quarterly or
monthly. The payment level selected must provide for the payment each year
of at least 8% of the amount applied.
Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may be
chosen. After the death of one payee, payments will continue to the
survivor:
(a) in the same amount as the original amount;
(b) in an amount equal to 2/3 of the original amount; or
(c) in an amount equal to 1/2 of the original amount.
</TABLE>
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.
B-1
<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
the Policyowner's and/or the Beneficiary's provision, any option selection may
be changed before the Death Proceeds become payable. If the Policyowner makes no
selection, the Beneficiary may select an option when the Death Proceeds become
payable.
If the amount of monthly income payments under Option B, choice (c) for the
attained Age of the payee are the same for different periods certain, the
Company will deem an election to have been made for the longest period certain
which could have been elected for such Age and amount.
The Policyowner may give the Beneficiary the right to change from Option C or D
to any other option at any time. If the payee selects Option C or D when this
Policy becomes a claim, the right may be reserved to change to any other option.
The payee who elects to change options must be a payee under the option
selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the Written Request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the Written Request selecting the option.
A corporation or fiduciary payee may select only option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
B-2
<PAGE>
APPENDIX C
ILLUSTRATIONS
SURRENDER VALUE, POLICY VALUES AND DEATH BENEFITS
The following tables illustrate the way in which the Sum Insured and the Policy
Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued on the lives of both Insureds, each Age
55, under a Standard Premium Class and qualifying for the non-smoker discount.
The tables also illustrate the guaranteed cost of insurance rates and the
current cost of insurance rates.
The tables illustrate the Policy Values that would result based upon the
assumptions that no Policy loans have been made, that you have not requested an
increase or decrease in the initial Face Amount, that no partial withdrawals
have been made, and that no transfers above 12 have been made in any Policy year
(so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown, and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested to earn interest (after taxes) at 5% compounded
annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of a
Policy's total Policy Value among the Sub-Accounts of the Separate Account, if
the actual rates of return averaged 0%, 6% or 12, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value. The amounts shown also take into account the daily charge against
the Separate Account for mortality and expense risks and for the Separate
Account administrative charge. In both the Current Cost of Insurance Charges
illustrations and in the Guaranteed Cost of Insurance Charges illustrations, the
Separate Account charges currently are equivalent to an effective annual rate of
1.15% of the average daily value of the assets in the Separate Account in the
first fifteen Policy Years, and 0.90% thereafter.
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary, and in 1997 ranged from an
annual rate of 0.35% to an annual rate of 2.00% of average daily net assets. The
fees and expenses associated with your Policy may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Growth Fund and Select Growth Fund, 1.10% for
the
C-1
<PAGE>
Select Growth and Income, 1.00% for the Select Income Fund, 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 these Funds of the Trust were
less than their respective expense limitations throughout 1997. These
limitations may be terminated at any time.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser. These limitations may be terminated at any time.
Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. In 1997, the actual ratio of total annual expenses of
the International Equity Series was 0.85%.
NET ANNUAL RATES OF INVESTMENT
Taking into account the Separate Account mortality and expense risk charge of
0.90%, the Separate Account administrative charge of 0.25% (for the first 15
Policy years), and the assumed 0.85% charge for Underlying Fund advisory fees
and operating expenses, the gross annual rates of investment return of 0%, 6%
and 12% correspond to net annual rates of (-2.00%), 4.00% and 10.00%,
respectively, during the first 15 Policy years and (-1.75%), 4.25% and 10.25%,
respectively, thereafter.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and Policy Values, the gross annual investment rate of return
would have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax
charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSUREDS' AGES AND UNDERWRITING CLASSIFICATIONS, AND THE REQUESTED FACE
AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE INHEIRITAGE
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NON-SMOKER ISSUE AGE 55
INSURED 2: UNISEX NON-SMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 1
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,327 1,000,000 0 9,903 1,000,000 0 10,480 1,000,000
2 21,525 5,661 18,322 1,000,000 7,392 20,052 1,000,000 9,191 21,852 1,000,000
3 33,101 8,471 26,971 1,000,000 11,932 30,432 1,000,000 15,678 34,178 1,000,000
4 45,256 17,494 35,254 1,000,000 23,265 41,025 1,000,000 29,763 47,523 1,000,000
5 58,019 26,500 43,150 1,000,000 35,157 51,807 1,000,000 45,306 61,956 1,000,000
6 71,420 35,089 50,629 1,000,000 47,208 62,748 1,000,000 62,005 77,545 1,000,000
7 85,491 43,220 57,650 1,000,000 59,375 73,805 1,000,000 79,925 94,355 1,000,000
8 100,266 50,843 64,163 1,000,000 71,602 84,922 1,000,000 99,129 112,449 1,000,000
9 115,779 57,884 70,094 1,000,000 83,809 96,019 1,000,000 119,667 131,877 1,000,000
10 132,068 64,254 75,354 1,000,000 95,900 107,000 1,000,000 141,586 152,686 1,000,000
11 149,171 70,970 79,850 1,000,000 108,882 117,762 1,000,000 166,050 174,930 1,000,000
12 167,130 76,814 83,474 1,000,000 121,522 128,182 1,000,000 192,000 198,660 1,000,000
13 185,986 81,677 86,117 1,000,000 133,695 138,135 1,000,000 219,510 223,950 1,000,000
14 205,786 85,436 87,656 1,000,000 145,260 147,480 1,000,000 248,662 250,882 1,000,000
15 226,575 87,942 87,942 1,000,000 156,051 156,051 1,000,000 279,546 279,546 1,000,000
16 248,404 86,998 86,998 1,000,000 164,019 164,019 1,000,000 310,730 310,730 1,000,000
17 271,324 84,208 84,208 1,000,000 170,629 170,629 1,000,000 343,863 343,863 1,000,000
18 295,390 79,374 79,374 1,000,000 175,648 175,648 1,000,000 379,153 379,153 1,000,000
19 320,660 71,909 71,909 1,000,000 178,481 178,481 1,000,000 416,613 416,613 1,000,000
20 347,193 61,222 61,222 1,000,000 178,513 178,513 1,000,000 456,370 456,370 1,000,000
Age 60 58,019 26,500 43,150 1,000,000 35,157 51,807 1,000,000 45,306 61,956 1,000,000
Age 65 132,068 64,254 75,354 1,000,000 95,900 107,000 1,000,000 141,586 152,686 1,000,000
Age 70 226,575 87,942 87,942 1,000,000 156,051 156,051 1,000,000 279,546 279,546 1,000,000
Age 75 347,193 61,222 61,222 1,000,000 178,513 178,513 1,000,000 456,370 456,370 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
Premiums + Interest column assumes premiums paid at 5% per year. Values will
be different if premiums are paid with a different frequency or in different
amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE INHEIRITAGE
CURRENT COST OF INSURANCE CHARGES
INSURED 1: UNISEX NON-SMOKER ISSUE AGE 55
INSURED 2: UNISEX NON-SMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 1
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,367 1,000,000 0 9,944 1,000,000 0 10,520 1,000,000
2 21,525 5,791 18,452 1,000,000 7,527 20,188 1,000,000 9,332 21,993 1,000,000
3 33,101 8,751 27,251 1,000,000 12,234 30,734 1,000,000 16,002 34,502 1,000,000
4 45,256 17,999 35,759 1,000,000 23,825 41,585 1,000,000 30,382 48,142 1,000,000
5 58,019 27,322 43,972 1,000,000 36,093 52,743 1,000,000 46,368 63,018 1,000,000
6 71,420 36,349 51,889 1,000,000 48,674 64,214 1,000,000 63,709 79,249 1,000,000
7 85,491 45,074 59,504 1,000,000 61,570 76,000 1,000,000 82,531 96,961 1,000,000
8 100,266 53,489 66,809 1,000,000 74,783 88,103 1,000,000 102,974 116,294 1,000,000
9 115,779 61,583 73,793 1,000,000 88,308 100,518 1,000,000 125,189 137,399 1,000,000
10 132,068 69,345 80,445 1,000,000 102,145 113,245 1,000,000 149,345 160,445 1,000,000
11 149,171 77,765 86,645 1,000,000 117,295 126,175 1,000,000 176,636 185,516 1,000,000
12 167,130 85,684 92,344 1,000,000 132,604 139,264 1,000,000 206,120 212,780 1,000,000
13 185,986 93,056 97,496 1,000,000 148,033 152,473 1,000,000 237,992 242,432 1,000,000
14 205,786 99,829 102,049 1,000,000 163,535 165,755 1,000,000 272,469 274,689 1,000,000
15 226,575 105,943 105,943 1,000,000 179,059 179,059 1,000,000 309,799 309,799 1,000,000
16 248,404 109,408 109,408 1,000,000 192,804 192,804 1,000,000 348,847 348,847 1,000,000
17 271,324 112,018 112,018 1,000,000 206,448 206,448 1,000,000 391,488 391,488 1,000,000
18 295,390 113,724 113,724 1,000,000 219,952 219,952 1,000,000 438,149 438,149 1,000,000
19 320,660 114,311 114,311 1,000,000 233,131 233,131 1,000,000 489,224 489,224 1,000,000
20 347,193 113,589 113,589 1,000,000 245,824 245,824 1,000,000 545,221 545,221 1,000,000
Age 60 58,019 27,322 43,972 1,000,000 36,093 52,743 1,000,000 46,368 63,018 1,000,000
Age 65 132,068 69,345 80,445 1,000,000 102,145 113,245 1,000,000 149,345 160,445 1,000,000
Age 70 226,575 105,943 105,943 1,000,000 179,059 179,059 1,000,000 309,799 309,799 1,000,000
Age 75 347,193 113,589 113,589 1,000,000 245,824 245,824 1,000,000 545,221 545,221 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
Premiums + Interest column assumes premiums paid at 5% per year. Values will
be different if premiums are paid with a different frequency or in different
amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE INHEIRITAGE
CURRENT COST OF INSURANCE CHARGES
INSURED 1: UNISEX NON-SMOKER ISSUE AGE 55
INSURED 2: UNISEX NON-SMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 2
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,366 1,009,366 0 9,943 1,009,943 0 10,520 1,010,520
2 21,525 5,788 18,449 1,018,449 7,524 20,184 1,020,184 9,328 21,989 1,021,989
3 33,101 8,741 27,241 1,027,241 12,223 30,723 1,030,723 15,989 34,489 1,034,489
4 45,256 17,976 35,736 1,035,736 23,797 41,557 1,041,557 30,350 48,110 1,048,110
5 58,019 27,277 43,927 1,043,927 36,037 52,687 1,052,687 46,301 62,951 1,062,951
6 71,420 36,271 51,811 1,051,811 48,574 64,114 1,064,114 63,582 79,122 1,079,122
7 85,491 44,948 59,378 1,059,378 61,404 75,834 1,075,834 82,312 96,742 1,096,742
8 100,266 53,299 66,619 1,066,619 74,522 87,842 1,087,842 102,617 115,937 1,115,937
9 115,779 61,308 73,518 1,073,518 87,916 100,126 1,100,126 124,632 136,842 1,136,842
10 132,068 68,960 80,060 1,080,060 101,576 112,676 1,112,676 148,505 159,605 1,159,605
11 149,171 77,233 86,113 1,086,113 116,478 125,358 1,125,358 175,381 184,261 1,184,261
12 167,130 84,956 91,616 1,091,616 131,444 138,104 1,138,104 204,267 210,927 1,210,927
13 185,986 92,075 96,515 1,096,515 146,410 150,850 1,150,850 235,294 239,734 1,239,734
14 205,786 98,528 100,748 1,100,748 161,298 163,518 1,163,518 268,595 270,815 1,270,815
15 226,575 104,242 104,242 1,104,242 176,019 176,019 1,176,019 304,309 304,309 1,304,309
16 248,404 107,214 107,214 1,107,214 188,722 188,722 1,188,722 341,153 341,153 1,341,153
17 271,324 109,219 109,219 1,109,219 201,022 201,022 1,201,022 380,799 380,799 1,380,799
18 295,390 110,202 110,202 1,110,202 212,824 212,824 1,212,824 423,458 423,458 1,423,458
19 320,660 109,922 109,922 1,109,922 223,841 223,841 1,223,841 469,163 469,163 1,469,163
20 347,193 108,173 108,173 1,108,173 233,804 233,804 1,233,804 517,983 517,983 1,517,983
Age 60 58,019 27,277 43,927 1,043,927 36,037 52,687 1,052,687 46,301 62,951 1,062,951
Age 65 132,068 68,960 80,060 1,080,060 101,576 112,676 1,112,676 148,505 159,605 1,159,605
Age 70 226,575 104,242 104,242 1,104,242 176,019 176,019 1,176,019 304,309 304,309 1,304,309
Age 75 347,193 108,173 108,173 1,108,173 233,804 233,804 1,233,804 517,983 517,983 1,517,983
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
Premiums + Interest column assumes premiums paid at 5% per year. Values will
be different if premiums are paid with a different frequency or in different
amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE INHEIRITAGE
GUARANTEED COST OF INSURANCE CHARGES
INSURED 1: UNISEX NON-SMOKER ISSUE AGE 55
INSURED 2: UNISEX NON-SMOKER ISSUE AGE 55
$1,000,000 SUM INSURED OPTION 2
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,326 1,009,326 0 9,903 1,009,903 0 10,479 1,010,479
2 21,525 5,658 18,319 1,018,319 7,388 20,049 1,020,049 9,187 21,848 1,021,848
3 33,101 8,459 26,959 1,026,959 11,919 30,419 1,030,419 15,663 34,163 1,034,163
4 45,256 17,466 35,226 1,035,226 23,232 40,992 1,040,992 29,724 47,484 1,047,484
5 58,019 26,443 43,093 1,043,093 35,087 51,737 1,051,737 45,221 61,871 1,061,871
6 71,420 34,985 50,525 1,050,525 47,077 62,617 1,062,617 61,839 77,379 1,077,379
7 85,491 43,047 57,477 1,057,477 59,147 73,577 1,073,577 79,625 94,055 1,094,055
8 100,266 50,569 63,889 1,063,889 71,226 84,546 1,084,546 98,617 111,937 1,111,937
9 115,779 57,467 69,677 1,069,677 83,217 95,427 1,095,427 118,828 131,038 1,131,038
10 132,068 63,640 74,740 1,074,740 94,995 106,095 1,106,095 140,252 151,352 1,151,352
11 149,171 70,094 78,974 1,078,974 107,537 116,417 1,116,417 163,985 172,865 1,172,865
12 167,130 75,592 82,252 1,082,252 119,570 126,230 1,126,230 188,878 195,538 1,195,538
13 185,986 80,015 84,455 1,084,455 130,929 135,369 1,135,369 214,891 219,331 1,219,331
14 205,786 83,226 85,446 1,085,446 141,422 143,642 1,143,642 241,960 244,180 1,244,180
15 226,575 85,067 85,067 1,085,067 150,824 150,824 1,150,824 269,986 269,986 1,269,986
16 248,404 83,318 83,318 1,083,318 156,998 156,998 1,156,998 297,255 297,255 1,297,255
17 271,324 79,572 79,572 1,079,572 161,312 161,312 1,161,312 325,051 325,051 1,325,051
18 295,390 73,649 73,649 1,073,649 163,461 163,461 1,163,461 353,186 353,186 1,353,186
19 320,660 64,965 64,965 1,064,965 162,713 162,713 1,162,713 381,027 381,027 1,381,027
20 347,193 52,981 52,981 1,052,981 158,337 158,337 1,158,337 407,906 407,906 1,407,906
Age 60 58,019 26,443 43,093 1,043,093 35,087 51,737 1,051,737 45,221 61,871 1,061,871
Age 65 132,068 63,640 74,740 1,074,740 94,995 106,095 1,106,095 140,252 151,352 1,151,352
Age 70 226,575 85,067 85,067 1,085,067 150,824 150,824 1,150,824 269,986 269,986 1,269,986
Age 75 347,193 52,981 52,981 1,052,981 158,337 158,337 1,158,337 407,906 407,906 1,407,906
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year.
Premiums + Interest column assumes premiums paid at 5% per year. Values will
be different if premiums are paid with a different frequency or in different
amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in the Face Amount. The maximum surrender charge is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$8.50 per $1,000 of initial Face Amount (or Face Amount increase), and (b) is a
deferred sales charge of 48% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs), based on the joint life expectancy of both
Insureds, subject to the deferred sales charge that varies as shown below by
average issue Age or average Age at time of increase, as applicable:
<TABLE>
<CAPTION>
APPLICABLE AGE MAXIMUM GAPS
- -------------- ---------------
<S> <C>
5-75 1.95
76 1.92
77 1.81
78 1.69
79 1.60
80 1.50
81 1.40
82 1.31
</TABLE>
A further limitation is imposed based on the Standard 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 for 40 months, declines by
one-half of one percent of the initial amount for 80 months, and then declines
by one percent each month thereafter, reaching zero at the end of 180 Policy
months (15 Policy years).
The factors used in calculating the maximum surrender charges vary with the
issue Age of the younger Insured as indicated in the table that follows.
INITIAL MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Younger Initial Younger Initial Younger Initial
Issue Surrender Issue Surrender Issue Surrender
Age Charge Age Charge Age Charge
- --------- ------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
5 5.00 31 9.40 57 21.00
6 5.00 32 9.80 58 22.00
7 5.00 33 10.20 59 23.00
8 5.00 34 10.60 60 24.00
9 5.00 35 11.00 61 25.00
10 5.00 36 11.40 62 26.00
11 5.00 37 11.80 63 27.00
12 5.00 38 12.20 64 28.00
13 5.00 39 12.60 65 29.00
14 5.00 40 13.00 66 30.00
15 5.00 41 13.40 67 31.00
16 5.00 42 13.80 68 32.00
17 5.00 43 14.20 69 33.00
18 5.00 44 14.60 70 34.00
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
Younger Initial Younger Initial Younger Initial
Issue Surrender Issue Surrender Issue Surrender
Age Charge Age Charge Age Charge
- --------- ------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
19 5.00 45 15.00 71 35.00
20 5.00 46 15.40 72 35.00
21 5.40 47 15.80 73 35.00
22 5.80 48 16.20 74 35.00
23 6.20 49 16.60 75 35.00
24 6.60 50 17.00 76 35.00
25 7.00 51 17.40 77 35.00
26 7.40 52 17.80 78 35.00
27 7.80 53 18.20 79 35.00
28 8.20 54 18.60 80 35.00
29 8.60 55 19.00
30 9.00 56 20.00
</TABLE>
EXAMPLES
For the purposes of these examples, assume that two non-smokers, each Age 55,
are covered as the Insureds under a $1,000,000 Policy. In this example the
Guideline Annual Premium ("GAP") equals $16,861.10. The maximum surrender charge
for the Policy is calculated as follows:
(a) Deferred Administrative Charge $8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (48% X 1.95 GAPs) $15,781.99
-----------
TOTAL $24,281.99
Maximum Surrender Charge per Table (19.00 X 1,000) $19,000.00
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
(a) Deferred Administrative Charge $8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (not to exceed 25% of Premiums received, Varies
up to one GAP, but less than the maximum number of GAPs
subject to the deferred sales charge)
--------------------
Sum of (a) and (b)
The maximum surrender charge is $19,000. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the Policy in the 10th Policy month, having
paid total premiums of $7,500. The actual surrender charge would be $10,375.
Example 2:
Assume the Policyowner surrenders the Policy in the 120th month. After the 40th
Policy month, the maximum surrender charge decreases by 0.5% per month during
this period ($95 per month in this example). In this example, the maximum
surrender charge would be $11,400.
D-2
<PAGE>
ALLMERICA SELECT INHEIRITAGE
(INDIVIDUAL JOINT SURVIVORSHIP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE)
First Allmerica Financial Life Insurance Company ("Company" or "First
Allmerica") issues Allmerica Select Inheiritage, the individual joint
survivorship flexible premium variable life insurance policies ("Policy" or
"Policies") described in this Prospectus. The Policies are funded by the
Inheiritage Account ("Separate Account"), a separate investment account of the
Company. Life insurance coverage is provided for two Insureds, with Death
Proceeds payable at death of the last surviving Insured. Applicants must be Age
80 or under with respect to the younger Insured, and Age 85 or under with
respect to the older Insured.
The Policies permit allocations to the following Funds of Allmerica Investment
Trust ("Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"), and
T. Rowe Price International Series, Inc. ("T. Rowe Price"). Certain Funds may
not be available in all states.
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
<S> <C>
Select Emerging Markets Fund Schroder Capital Management International Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Rowe Price-Fleming International, Inc.
Portfolio Nicholas-Applegate Capital Management, L.P.
Select Aggressive Growth Fund T. Rowe Price Associates, Inc.
Select Capital Appreciation Fund Cramer Rosenthal McGlynn, LLC
Select Value Opportunity Fund Putnam Investment Management, Inc.
Select Growth Fund Cambiar Investors, Inc.
Select Strategic Growth Fund Fidelity Management and Research Company
Fidelity VIP Growth Portfolio John A. Levin & Co., Inc.
Select Growth and Income Fund Fidelity Management and Research Company
Fidelity VIP Equity-Income Portfolio Fidelity Management and Research Company
Fidelity VIP High Income Portfolio Standish, Ayer & Wood, Inc.
Select Income Fund Allmerica Asset Management, Inc.
Money Market Fund
</TABLE>
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, AND T. ROWE PRICE
INTERNATIONAL SERIES, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY INVEST IN
HIGHER-YIELDING, HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT
OBJECTIVES AND POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF
THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE POLICIES ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICIES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
CORRESPONDENCE MAY BE MAILED TO
SELECT INHEIRITAGE, P.O. BOX 8179,
BOSTON, MA 02266-8179
DATED MAY 1, 1998
440 LINCOLN STREET WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
<PAGE>
(Continued from cover page)
Policyowners may, within limits, choose the amount of initial payment and vary
the frequency and amount of future payments. The Policy allows partial
withdrawals and full surrender of the Policy's surrender value, within limits.
The Policies are not suitable for short-term investment because of the
substantial nature of the surrender charge. If the Policyowner thinks about
surrendering the Policy, the lower deferred sales charges that apply during the
first two years from the Date of Issue or an increase in the Face Amount should
be considered.
In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code of 1986 ("Code"), any Policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value will also be adjusted for other factors, including the amount
of charges imposed. The Policy will remain in effect so long as the Policy
Value, less any surrender charges and less any outstanding Debt, is sufficient
to pay certain monthly charges imposed in connection with the Policy. The Policy
Value may decrease to the point where the Policy will lapse and provide no
further death benefit without additional premium payments, unless the optional
Guaranteed Death Benefit Rider is in effect This Rider may not be available in
all states.
If the Policy is in effect at the death of the last surviving Insured, the
Company will pay a death benefit (the "Death Proceeds") to the Beneficiary.
Prior to the Final Premium Payment Date, the Death Proceeds equal the Sum
Insured, less any Debt, partial withdrawals, and any due and unpaid charges. The
Policyowner may choose either Sum Insured Option 1 (the Sum Insured is fixed in
amount) or Sum Insured Option 2 (the Sum Insured includes the Policy Value in
addition to a fixed insurance amount). A Policyowner has the right to change the
Sum Insured option, subject to certain conditions. A Guideline Minimum Sum
Insured, equivalent to a percentage of the Policy Value, will apply if greater
than the Sum Insured otherwise payable under Option 1 or Option 2.
No claim is made that the Policy is in any way similar or comparable to a
systematic investment plan of a mutual fund.
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR THE POLICYOWNER'S CURRENT LIFE INSURANCE OR IF THE
POLICYOWNER ALREADY OWNS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 5
SUMMARY............................................................................... 8
PERFORMANCE INFORMATION............................................................... 17
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS............ 23
INVESTMENT OBJECTIVES AND POLICIES.................................................... 25
INVESTMENT ADVISORY SERVICES.......................................................... 26
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 29
VOTING RIGHTS......................................................................... 30
THE POLICY............................................................................ 31
Applying for the Policy............................................................. 31
Free-Look Period.................................................................... 32
Conversion Privileges............................................................... 32
Premium Payments.................................................................... 33
Incentive Funding Discount.......................................................... 34
Guaranteed Death Benefit Rider...................................................... 34
Paid-up Insurance Option............................................................ 35
Allocation of Net Premiums.......................................................... 36
Transfer Privilege.................................................................. 36
Death Proceeds...................................................................... 37
Sum Insured Options................................................................. 38
Change in Sum Insured Option........................................................ 40
Change in Face Amount............................................................... 41
Policy Value and Surrender Value.................................................... 42
Death Proceeds Payment Options...................................................... 44
Optional Insurance Benefits......................................................... 44
Policy Surrender.................................................................... 44
Partial Withdrawals................................................................. 44
CHARGES AND DEDUCTIONS................................................................ 45
Tax Expense Charge.................................................................. 45
Premium Expense Charge.............................................................. 45
Monthly Deduction from Policy Value................................................. 45
Charges Against Assets of the Separate Account...................................... 47
Surrender Charge.................................................................... 48
Charges on Partial Withdrawals...................................................... 50
Transfer Charges.................................................................... 50
Charge for Increase in Face Amount.................................................. 51
Other Administrative Charges........................................................ 51
POLICY LOANS.......................................................................... 51
Repayment of Loans.................................................................. 52
Effect of Policy Loans.............................................................. 52
POLICY TERMINATION AND REINSTATEMENT.................................................. 52
Termination......................................................................... 52
Reinstatement....................................................................... 53
OTHER POLICY PROVISIONS............................................................... 54
Policyowner......................................................................... 54
Beneficiary......................................................................... 54
Incontestability.................................................................... 54
Suicide............................................................................. 54
Notice of First Insured to Die...................................................... 55
Age................................................................................. 55
Assignment.......................................................................... 55
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Postponement of Payments............................................................ 55
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY....................................... 56
DISTRIBUTION.......................................................................... 57
SERVICES.............................................................................. 57
LEGAL PROCEEDINGS..................................................................... 57
FURTHER INFORMATION................................................................... 58
INDEPENDENT ACCOUNTANTS............................................................... 58
FEDERAL TAX CONSIDERATIONS............................................................ 58
The Company and the Separate Account................................................ 58
Taxation of the Policies............................................................ 59
Modified Endowment Contracts........................................................ 60
Estate and Generation-Skipping Taxes................................................ 60
MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................................ 61
General Description................................................................. 61
General Account Value............................................................... 61
The Policy.......................................................................... 62
Transfers, Surrenders, Partial Withdrawals and Policy Loans......................... 62
FINANCIAL STATEMENTS.................................................................. 62
APPENDIX A -- OPTIONAL BENEFITS....................................................... A-1
APPENDIX B -- PAYMENT OPTIONS......................................................... B-1
APPENDIX C -- ILLUSTRATIONS........................................................... C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES................................ D-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
ACCUMULATION UNIT: A measure of the Policyowner's interest in a Sub-Account.
AGE: An Insured's age as of the nearest birthday measured from the Policy
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Policy to receive the
insurance proceeds upon the death of the last surviving Insured.
COMPANY: 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 death of the last surviving Insured, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy, unless the Guaranteed Death Benefit Rider is in
effect. If the Rider is in effect, the Death Proceeds will be the greater of (a)
the Face Amount as of the Final Premium Payment Date, or (b) the Policy Value as
of the date due proof of death is received by the Company. This Rider may not be
available in all states.
DEBT: All unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, including medical information
satisfactory to the Company, that is used to determine the Insureds' Premium
Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Policy is set forth in the specifications pages of the Policy.
FINAL PREMIUM PAYMENT DATE: The Policy anniversary nearest the younger Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Policy, unless the optional Guaranteed Death Benefit
Rider is in effect. This Rider may not be available in all states.
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 the Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Table D, Smoker or Non-Smoker, net investment earnings at an
annual effective rate of 5%, and fees and charges as set forth in the Policy and
any Policy riders. The Sum Insured Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
GUIDELINE MINIMUM SUM INSURED: The minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by Age. It is calculated by multiplying the Policy Value by a
percentage determined by the younger Insured's Age.
INSURANCE AMOUNT AT RISK: The Sum Insured less the Policy Value.
5
<PAGE>
INSUREDS: The two persons covered under the Policy.
LOAN VALUE: The maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: A monthly premium amount calculated by the Company and
specified in the Policy. If the Policyowner pays 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.
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 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 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 and
premium expense charge.
PAID-UP INSURANCE: Joint survivorship insurance coverage for the lifetime of the
Insureds, with no further premiums due.
POLICY CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: The total amount available for investment under the Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to the Policy in the Sub-Accounts, and (b) the accumulation in the General
Account credited to the Policy.
POLICYOWNER: The person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: The risk classification that the Company assigns the Insureds
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insureds' Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, the Policyowner may specify from
which Sub-Account certain deductions will be made or to which Sub-Account Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of a 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 policy
liabilities are not chargeable with liabilities arising out of any other
business which the Company may conduct.
SUB-ACCOUNT: A division of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Variable Insurance Products Fund, or the
T. Rowe Price International Series, Inc.
6
<PAGE>
SUM INSURED: The amount payable upon the death of the last surviving Insured,
before the Final Premium Payment Date, prior to deductions for Debt outstanding
at the death of the last surviving Insured, partial withdrawals and partial
withdrawal charges, if any, and any due and unpaid Monthly Deductions. The
amount of the Sum Insured will depend on the Sum Insured Option chosen, but will
always be at least equal to the Face Amount.
SURRENDER VALUE: The amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS ("FUNDS"): The Funds of Allmerica Investment Trust, the
Portfolios of the Variable Insurance Products Fund and T. Rowe Price
International Series.
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
WRITTEN REQUEST: A request by the Policyowner in writing, satisfactory to the
Company.
YOU OR YOUR: The Policyowner, as shown in the application or the latest change
filed with the Company.
7
<PAGE>
SUMMARY
The following is a summary of the individual joint survivorship flexible premium
variable life insurance policy sold by First Allmerica Financial Life Insurance
Company ("Company"). It highlights key points from the Prospectus which follows.
If you are considering the purchase of this product, you should read the
Prospectus carefully before making a decision. It offers a more complete
presentation of the topics presented here, and will help you better understand
the product. However, the Policy, together with its attached application,
constitutes the entire agreement between you and the Company.
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 applications for the Policy are signed,
- 10 days after you receive the Policy (or, if required by state law, the
longer period indicated in the 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 Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, however, the Company will refund the
entire amount of premiums paid. A free-look privilege also applies after a
requested increase in the Face Amount. See THE POLICY -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Policy months after the Date of Issue, subject to certain
restrictions, you may convert the Policy to a non-variable flexible premium
adjustable life insurance policy by simultaneously transferring all accumulated
value in the Sub-Accounts to the General Account and instructing the Company to
allocate all future premiums to the General Account. A similar conversion
privilege is in effect for 24 Policy months after the date of an increase in the
Face Amount. Where required by state law, and at your request, the Company will
issue a flexible premium adjustable life insurance policy to you. The new policy
will have the same Face Amount, issue Age, Date of Issue, and Premium Class as
the original Policy. See THE POLICY -- "Conversion Privileges."
ABOUT THE POLICY
The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insureds,
- Policy Value,
- surrender rights and partial withdrawal rights,
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<PAGE>
- loan privileges, and
- in some cases, additional insurance benefits available by rider for an
additional charge.
LIFE INSURANCE
The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is a
"joint survivorship" policy because Death Proceeds are payable, not on the death
of the first Insured to die, but on the death of the last surviving Insured. The
Policy is "variable" because the Policy Value will increase or decrease
depending on the investment experience of the Sub-Accounts of the Separate
Account. Under some circumstances, the death benefit may vary with the
investment experience of the Sub-Accounts.
FLEXIBLE PREMIUM
The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. You may vary the
frequency and amount of future premium payments, subject to certain limits,
restrictions and conditions set by Company standards and federal tax laws.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause the Policy to lapse. Because of the variable nature of the Policy, making
planned premium payments does not guarantee that the Policy will remain in
force. Thus, you may, but are not required to, pay additional premiums. If the
Guaranteed Death Benefit Rider is in effect, however, certain minimum premium
payment tests must be met. (This Rider may not be available in all states.)
The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in the Face Amount, the Policy will not lapse if the total premiums
paid less the Debt, partial withdrawals and withdrawal charges are equal to or
exceed the sum of the Minimum Monthly Factor for the number of months the
Policy, increase in the Face Amount, or a Policy Change which causes a change in
the Minimum Monthly Factor, has been in force. Even during these periods,
however, making payments at least equal to the Minimum Monthly Factor will not
prevent the Policy from lapsing if the Debt equals or exceeds the Policy Value
less surrender charges.
CONDITIONAL INSURANCE
If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance, equal to the amount of insurance applied for but not to
exceed $500,000. If the application is approved, the Policy will be issued as of
the date the terms of the conditional insurance are met. If you do not wish to
make any payment at the time of application, insurance coverage will not be in
force until delivery of the Policy and payment of sufficient premium to place
the insurance in force.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the 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 THE POLICY IS NOT ISSUED AND
ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
GUARANTEED DEATH BENEFIT RIDER (MAY NOT BE AVAILABLE IN ALL STATES)
This Rider, which is available only at Date of Issue:
- guarantees that the Policy will not lapse regardless of the investment
performance of the Separate Account; and
- provides a guaranteed death benefit.
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<PAGE>
In order to maintain the Rider, certain minimum premium payment tests must be
met on each Policy anniversary and within 48 months following the Date of Issue
and/or the date of any increase in the Face Amount. In addition, a one-time
administrative charge of $25 will be deducted from the Policy Value when the
Rider is elected. Certain transactions, including Policy loans, partial
withdrawals, and changes in the Death Benefit Options, can result in the
termination of the Rider. If this Rider is terminated, it cannot be reinstated.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in the Policy. If you pay this amount, the Company guarantees that
the Policy will not lapse prior to the 49th Monthly Deduction after the Date of
Issue or the effective date of an increase in the Face Amount. At all other
times, however, payments of such premiums do not guarantee that the Policy will
remain in force. See THE POLICY -- "Premium Payments." Moreover, even during the
48-month period, if: (1) Debt exceeds the Policy Value less surrender charges,
or (2) Debt, partial withdrawal and partial withdrawal charges have reduced
premium payments below an amount equal to the Minimum Monthly Factor multiplied
by the number of months since the Date of Issue or the effective date of an
increase in the Face Amount, 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, during
the first year, the Policy provides for planned premium payments 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 Separate
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than 20 Sub-Accounts at any one time. The minimum allocation is
1% of Net Premium. All allocations must be in whole numbers and must total 100%.
See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
General Account will earn a fixed rate of interest. Net premiums and minimum
interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PARTIAL WITHDRAWALS
After the first Policy year, you may make partial withdrawals from the Policy
Value in a minimum amount of $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal. A partial withdrawal will not be allowed
under Option 1 if it would reduce the Face Amount below $100,000.
A transaction charge, which is described in CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawals," will be assessed to reimburse the Company for the cost
of processing each partial withdrawal. A partial withdrawal charge also may be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawals" and CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawals."
LOAN PRIVILEGE
You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions,
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<PAGE>
and interest on Debt to the end of the Policy year. Thereafter, Loan Value is
90% of an amount equal to the Policy Value less the surrender charge.
Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time. If
this option has been selected, after the tenth Policy anniversary the Policy
Value in the General Account equal to the loan amount will be credited with
interest at an effective annual yield of at least 7.5%. The Company's current
practice is to credit a rate of interest equal to the rate being charged for the
preferred loan. There is some uncertainty as to the tax treatment of preferred
loans. Consult a qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). The
preferred loan option may not be available in all states.
POLICY LAPSE AND REINSTATEMENT
Except as otherwise provided in the optional Guaranteed Death Benefit Rider, 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, 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 Debt, 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 than the Final Premium Payment Date). In order to
reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves
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<PAGE>
the right to increase the Minimum Monthly Factor upon reinstatement. See POLICY
TERMINATION AND REINSTATEMENT.
In addition, if the Guaranteed Death Benefit Rider is in effect, the Company
guarantees that the Policy will not lapse, regardless of the investment
performance of the Separate Account. The Policy may lapse, however, under
certain circumstances. See THE POLICY -- "Guaranteed Death Benefit Rider." This
Rider may not be available in all states.
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account credited to the Policy. The Policy Value reflects the amount and
frequency of Net Premiums paid, charges and deductions imposed under the Policy,
interest credited to accumulations in the General Account, investment
performance of the Sub-Account(s) to which Policy Value has been allocated, and
partial withdrawals. The Policy Value may be relevant to the computation of the
Death Proceeds. You bear the entire investment risk for amounts allocated to the
Separate Account. The Company does not guarantee a minimum Policy Value.
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS
The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the last surviving Insured. There are no Death
Proceeds payable on the death of the first Insured to die. Prior to the Final
Premium Payment Date, the Death Proceeds will be equal to the Sum Insured,
reduced by any outstanding Debt, partial withdrawals, partial withdrawal
charges, and any Monthly Deductions due and not yet deducted through the Policy
month in which the last surviving Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the younger Insured's Age) of the Policy Value. On or after the Final Premium
Payment Date, the Death Proceeds will equal the Surrender Value. See THE POLICY
- -- "Death Proceeds."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED
Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount. 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 the Face Amount is $10,000, and any increase also may
require additional Evidence of Insurability. 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."
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ADDITIONAL INSURANCE BENEFITS
You have the flexibility to add additional insurance benefits by rider. These
include the Split Option Rider, Other Insured Rider, Guaranteed Death Benefit
Rider, and Four-Year Term Rider. See APPENDIX A -- OPTIONAL BENEFITS. (All
riders may not be available in all states.)
The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Policy Value."
PAID-UP INSURANCE OPTION
The Policyowner who elects this option will have, without further premiums due,
joint survivorship insurance coverage for the lifetime of the Insureds, with the
Death Proceeds payable on the death of the last surviving Insured. The
Policyowner who has elected the Paid-Up Insurance option may not pay additional
premiums, select Sum Insured Option 2, increase or decrease the Face Amount, or
make partial withdrawals. Policy Value in the Separate Account will be
transferred to the General Account on the date the Company receives Written
Request to exercise the option, and transfers of Policy Value back to the
Separate Account will not be permitted. Riders will continue only with the
consent of the Company. Surrender Value and Loan Value are calculated
differently. See THE POLICY -- "Paid-Up Insurance Option." This option may not
be available in all states.
POLICY FEES AND CHARGES
THERE ARE COSTS RELATED TO THE INSURANCE AND INVESTMENT FEATURES OF THE POLICY.
FEES AND CHARGES TO COVER THESE COSTS ARE DEDUCTED IN SEVERAL WAYS.
TAX EXPENSE CHARGE
A charge will be deducted from each premium payment for state and local premium
taxes paid by the Company for the Policy and to compensate the Company for
federal taxes imposed for deferred acquisition cost ("DAC") taxes. The total
charge is the actual state and local premium taxes paid by the Company, varying
according to jurisdiction, and a DAC tax deduction of 1% of premiums. See
CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
PREMIUM EXPENSE CHARGE
A charge of 1% of premiums will be deducted from each premium payment to
partially compensate the Company for sales expenses related to the Policies. See
CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM POLICY VALUE
On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from Policy
Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE of $6 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death
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<PAGE>
claims. These charges also help cover the cost of providing annual statements
and responding to Policyowner inquiries.
As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE SEPARATE ACCOUNT
A daily charge, currently equivalent to an effective annual rate of 1.15% of the
average daily net asset value of each Sub-Account of the Separate Account, is
imposed to compensate the Company for its assumption of certain mortality and
expense risks and for administrative costs associated with the Separate Account.
The rate is 0.90% for the mortality and expense risk and 0.25% for the Separate
Account administrative charge. The administrative charge is eliminated after the
15th Policy year. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of the
Separate Account."
CHARGES OF THE UNDERLYING INVESTMENT COMPANIES
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT TOTAL FUND
FEE (AFTER ANY OTHER EXPENSES (AFTER ANY
VOLUNTARY FUND APPLICABLE
UNDERLYING FUND WAIVER) EXPENSES REIMBURSEMENTS)
- --------------------------------------------- ------------------- ------------ ----------------------
<S> <C> <C> <C>
Select Emerging Markets Fund(@).............. 1.35% 0.65% 2.00%(1)
Select International Equity Fund............. 0.92%* 0.20% 1.12%(1)(3)
T. Rowe Price International Stock
Portfolio................................... 1.05% 0.00% 1.05%
Select Aggressive Growth Fund................ 0.89%* 0.09% 0.98%(1)(3)
Select Capital Appreciation Fund............. 0.95%* 0.15% 1.10%(1)
Select Value Opportunity Fund................ 0.90%** 0.14% 1.04%(1)(3)
Select Growth Fund........................... 0.85% 0.08% 0.93%(1)(3)
Select Strategic Growth Fund(@).............. 0.85% 0.13% 0.98%(1)
Fidelity VIP Growth Portfolio................ 0.60% 0.09% 0.69%(2)
Select Growth and Income Fund................ 0.70%* 0.07% 0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio......... 0.50% 0.08% 0.58%(2)
Fidelity VIP High Income Portfolio........... 0.59% 0.12% 0.71%
Select Income Fund........................... 0.58%* 0.13% 0.71%(1)
Money Market Fund............................ 0.27% 0.08% 0.35%(1)
</TABLE>
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntarily limitations that took effect on January 1, 1997.
Without these adjustments, the management fee ratio and the total fund expense
ratio would have been 0.95% and 1.09%, respectively. The management fee
limitation may be terminated at any time.
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(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Select Income
Fund, and 0.60% for the Money Market Fund. The total operating expenses of these
Funds of the Trust were less than their respective expense limitations
throughout 1997.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by the manager from the Fund after subtracting fees paid
by the manager to a sub-adviser.
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity-Income Portfolio and 0.67% for
Fidelity VIP Growth Portfolio.
(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses ratios would have been 0.93% for the
Select Aggressive Growth Fund, 0.98% for the Select Value Opportunity Fund,
1.10% for the Select International Equity Fund, 0.91% for the Select Growth
Fund, 0.98% for the Select Value Opportunity Fund, and 0.74% for the Select
Growth and Income Fund.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn, or $25. In addition to the
transaction charge, a partial withdrawal charge also may be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawals."
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICY -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in Face
Amount."
TRANSFER CHARGE
The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES AND DEDUCTIONS
- -- "Transfer Charges."
SURRENDER CHARGES
At any time that the Policy is in effect, a Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in the Face Amount. The
duration of the surrender charge is 15 years. The surrender charge is imposed
only if, during its duration, you request a full surrender of the Policy or a
decrease in the Face Amount.
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<PAGE>
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where (a) is a deferred administrative charge equal to
$8.50 per thousand dollars of the initial Face Amount, and (b) is a deferred
sales charge of 48% of premiums received up to a maximum number of Guideline
Annual Premiums subject to the deferred sales charge. Such deferred sales charge
varies by average issue Age from 1.95 (for average issue Ages 5 through 75) to
1.31 (for average issue Age 82). In accordance with limitations under state
insurance regulations, the amount of the maximum surrender charge will not
exceed a specified amount per $1,000 of the initial Face Amount, as indicated in
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
The maximum surrender charge remains level for the first 40 Policy months, and
reduces by 0.5% or more per month thereafter, as described in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. If you surrender the Policy during the
first two Policy years following the Date of Issue, before making premium
payments associated with the initial Face Amount which are at least equal to one
Guideline Annual Premium, the deferred administrative charge will be $8.50 per
thousand dollars of the initial Face Amount, but the deferred sales charge will
not exceed 25% of premiums received. See THE POLICY -- "Policy Surrender," and
CHARGES AND DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR INCREASES IN FACE AMOUNT
A separate surrender charge will apply to, and is calculated for, each increase
in the Face Amount. The maximum surrender charge for the increase is equal to
the sum of (a) plus (b) where (a) is equal to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of 48% of premiums associated with
the increase, up to a maximum number of Guideline Annual Premiums (for the
increase) subject to the deferred sales charge. Such deferred sales charge
varies by average Age (at the time of increase) from 1.95 (for average Ages 5
through 75) to 1.31 (for average Age 82). In accordance with limitations under
state insurance regulations, the amount of the surrender charge will not exceed
a specified amount per $1,000 of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
As is true for the initial Face Amount, (a) is a deferred administrative charge,
and (b) is a deferred sales charge. This maximum surrender charge remains level
for the first 40 Policy months following the increase, and reduces by 0.5% or
more per month thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. If you surrender the Policy during the first two Policy years
following an increase in the Face Amount before making premium payments
associated with the increase in the Face Amount which are at least equal to one
Guideline Annual Premium, the deferred administrative charge will be $8.50 per
thousand dollars of the Face Amount increase, but the deferred sales charge will
not exceed 25% of premiums associated with the increase.
SURRENDER CHARGES ON DECREASES IN FACE AMOUNT
In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full Policy surrender. See THE
POLICY -- "Policy Surrender," and CHARGES AND DEDUCTIONS -- "Surrender Charge."
TAX TREATMENT
The Policy is generally subject to the same federal income tax treatment as a
conventional fixed benefit life insurance policy. Under current tax law, to the
extent there is no change in benefits, you will be taxed on Policy Value
withdrawn from the Policy only to the extent that the amount withdrawn exceeds
the total premiums paid. Withdrawals in excess of premiums paid will be treated
as ordinary income. During the first 15 Policy years, however, an
"interest-first" rule applies to any distribution of cash that is required under
Section 7702 of the Code because of a reduction of benefits under the Policy.
Death Proceeds under the Policy are excludable from the gross income of the
Beneficiary, but in some circumstances the Death Proceeds or the Policy Value
may be subject to federal estate tax. See FEDERAL TAX CONSIDERATIONS --
"Taxation of the Policies."
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<PAGE>
The Policy offered by this Prospectus may be considered a "modified endowment
contract" if it fails a "seven-pay" test at any time during the first seven
Policy years, or within seven years of a material change in the Policy. The
Policy fails to satisfy the seven-pay test if the cumulative premiums paid under
the Policy at any time during the first seven Policy years, or within seven
years of a material change in the Policy, exceeds the sum of the net level
premiums that would have been paid had the Policy provided for paid-up future
benefits after the payment of seven level premiums. If the Policy is considered
a modified endowment contract, all distributions (including Policy loans,
partial withdrawals, surrenders or assignments) will be taxed on an
"income-first" basis. In addition, with certain exceptions, an additional 10%
penalty will be imposed on the portion of any distribution that is includible in
income. For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
PERFORMANCE INFORMATION
The Policies were 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 Sub-Accounts have been in existence
(Tables 1A and 1B), and based on the periods that the Underlying Funds have been
in existence (Tables IIA and IIB). The results for any period prior to the
Policies being offered will be calculated as if the Policies had been offered
during that period of time, with all charges assumed to be those applicable to
the Sub-Accounts, the Underlying Funds, and (in TABLES IA and IIA) 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.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index, or
other unmanaged indices so that investors may compare results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities markets in general; (2) 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 (3) the Consumer Price Index (a measure for inflation) to
assess the real rate of return from an investment. Unmanaged indices may assume
the reinvestment of dividends, but generally do not reflect deductions for
administrative and management costs and expenses.
At times, the Company also may advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P"), and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinions of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues,
and do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
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, 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.
17
<PAGE>
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,
1997. "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.
18
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the Sub-
Accounts have been in existence. The data is net of expenses of the Underlying
Funds, all Sub-Account charges, and all Policy charges (including surrender
charges) for a representative Policy. It is assumed that the Insureds are male,
Age 45, standard (nonsmoker) Premium Class, and female, Age 43, standard
(nonsmoker) Premium Class, that the Face Amount of the Policy is $500,000, that
an annual premium payment of $5,500 (approximately one Guideline Annual Premium)
was made at the beginning of each Policy year, that ALL premiums were allocated
to EACH Sub-Account individually, and that there was a full surrender of the
Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund -97.22% N/A -7.46%
T. Rowe Price International Stock Portfolio -98.69% N/A -26.14%
Select Aggressive Growth Fund -83.88% N/A -15.18%
Select Capital Appreciation Fund -88.08% N/A -4.29%
Select Value Opportunity Fund -78.04% N/A -8.88%
Select Growth Fund -69.29% N/A -8.22%
Select Strategic Growth Fund N/A N/A N/A
Fidelity VIP Growth Portfolio -79.33% N/A -17.63%
Select Growth and Income Fund -80.26% N/A -11.36%
Fidelity VIP Equity-Income Portfolio -74.94% N/A -9.20%
Fidelity VIP High Income Portfolio -84.86% N/A -21.28%
Select Income Fund N/A N/A N/A
Money Market Fund -96.45% N/A -33.68%
</TABLE>
The inception dates for the Sub-Accounts are: 5/3/94 for Select International
Equity; 5/11/94 for Fidelity VIP II Asset Manager; 4/30/95 for the Select
Capital Appreciation; 8/28/95 for the Fidelity VIP Equity-Income, Fidelity VIP
Growth, T. Rowe Price International Stock, Select Aggressive Growth, and Select
Growth; 9/10/95 for Select Growth and Income and Fidelity VIP Overseas; 9/17/95
for Growth and Select Value Opportunity; 10/1/95 for DGPF International Equity;
10/19/95 for Equity Index and for Government Bond; 11/20/95 for Money Market;
12/4/95 for Fidelity VIP High Income; and 12/15/96 for Investment Grade Income.
The Select Emerging Markets Fund and the Select Strategic Growth Fund commenced
operations in February 1998.
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.
19
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the Sub-
Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, 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 $5,500 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year, and
that ALL premiums were allocated to EACH Sub-Account individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund 3.46% N/A 9.91%
T. Rowe Price International Stock Portfolio 1.93% N/A 7.76%
Select Aggressive Growth Fund 17.36% N/A 16.39%
Select Capital Appreciation Fund 12.98% N/A 21.53%
Select Value Opportunity Fund 23.44% N/A 22.13%
Select Growth Fund 32.55% N/A 22.04%
Select Strategic Growth Fund N/A N/A 0.00%
Fidelity VIP Growth Portfolio 22.09% N/A 14.43%
Select Growth and Income Fund 21.13% N/A N/A
Fidelity VIP Equity-Income Portfolio 26.66% N/A 21.24%
Fidelity VIP High Income Portfolio 16.34% N/A 14.41%
Select Income Fund N/A N/A 0.00%
Money Market Fund 4.27% N/A 4.22%
</TABLE>
The inception dates for the Sub-Accounts are: 5/3/94 for Select International
Equity; 5/11/94 for Fidelity VIP II Asset Manager; 4/30/95 for the Select
Capital Appreciation; 8/28/95 for the Fidelity VIP Equity-Income, Fidelity VIP
Growth, T. Rowe Price International Stock, Select Aggressive Growth, and Select
Growth; 9/10/95 for Select Growth and Income and Fidelity VIP Overseas; 9/17/95
for Growth and Select Value Opportunity; 10/1/95 for DGPF International Equity;
10/19/95 for Equity Index and for Government Bond; 11/20/95 for Money Market;
12/4/95 for Fidelity VIP High Income; and 12/15/96 for Investment Grade Income.
The Select Emerging Markets Fund and the Select Strategic Growth Fund commenced
operations in February 1998.
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.
20
<PAGE>
TABLE II(A):
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insureds
are male, Age 45, standard (nonsmoker) Premium Class, and female, Age 43,
standard (nonsmoker) Premium Class, that the Face Amount of the Policy is
$500,000, that an annual premium payment of $5,500 (approximately one Guideline
Annual Premium) was made at the beginning of each Policy year, that ALL premiums
were allocated to EACH Sub-Account individually, and that there was a full
surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund -97.22% N/A -7.44%
T. Rowe Price International Stock Portfolio -98.69% N/A -10.42%
Select Aggressive Growth Fund -83.88% 8.01% 12.03%
Select Capital Appreciation Fund -88.08% N/A -4.28%
Select Value Opportunity Fund -78.04% N/A 6.56%
Select Growth Fund -69.29% 6.12% 8.45%
Select Strategic Growth Fund N/A N/A N/A
Fidelity VIP Growth Portfolio -79.33% 9.38% 14.32%
Select Growth and Income Fund -80.26% 7.76% 7.32%
Fidelity VIP Equity-Income Portfolio -74.94% 11.82% 13.82%
Fidelity VIP High Income Portfolio -84.86% 4.70% 9.79%
Select Income Fund -92.95% -3.65% -2.97%
Money Market Fund -96.45% -6.24% 2.38%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Growth and Income,
and Select Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.
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
21
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, 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 $5,500
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund 3.46% N/A 9.90%
T. Rowe Price International Stock Portfolio 1.93% N/A 6.84%
Select Aggressive Growth Fund 17.36% 15.47% 18.19%
Select Capital Appreciation Fund 12.98% N/A 21.48%
Select Value Opportunity Fund 23.44% N/A 15.61%
Select Growth Fund 32.55% 13.84% 15.03%
Select Strategic Growth Fund N/A N/A 0.00%
Fidelity VIP Growth Portfolio 22.09% 16.66% 15.85%
Select Growth and Income Fund 21.13% 15.25% N/A
Fidelity VIP Equity-Income Portfolio 26.66% 18.80% 15.37%
Fidelity VIP High Income Portfolio 16.34% 12.62% 11.52%
Select Income Fund 7.91% 5.63% 5.28%
Money Market Fund 4.27% 3.52% 4.59%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Growth and Income,
and Select Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.
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.
22
<PAGE>
DESCRIPTION OF THE COMPANY,
THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
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. As of December 31, 1997, the Company and its subsidiaries had
over $16.3 billion in combined assets. 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 Company is a charter member of the Insurance Marketplace Standard
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Policies are set aside in
the Separate Account and are kept separate from the general assets of the
Company. Under Delaware law, assets equal to the reserves and other liabilities
of the Separate Account may not be charged with any liabilities arising out of
any other business of the Company. Fourteen Sub-Accounts of the Separate Account
are currently offered under the Policy. Each Sub-Account is administered and
accounted for as part of the general business of the Company, but the income,
capital gains, or capital losses of each Sub-Account are allocated to such
Sub-Account, without regard to other income, capital gains, or capital losses of
the Company or the other Sub-Accounts. Each Sub-Account invests exclusively in a
corresponding investment portfolio of the Allmerica Investment Trust, the
Variable Insurance Products Fund, or the T. Rowe Price International Series,
Inc. ("Underlying Funds").
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle and the income or losses of one Underlying Fund generally have no effect
on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public but solely to separate
accounts of life insurance companies, such as the Separate Account.
Each Sub-Account has two sub-divisions. One sub-division applies to Policies
during their first 15 Policy years, which are subject to a Separate Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the Separate Account." Thereafter, such Policies are automatically allocated to
the second sub-division to account for the elimination of the Separate Account
administrative charge.
23
<PAGE>
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and Separate Account.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment Funds.
The Trust was established by the Company as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by the Company or other
affiliated insurance companies. Ten investment portfolios ("Funds") of the Trust
are available under the Policies, each issuing a series of shares: Select
Emerging Markets Fund, Select International Equity Fund, Select Aggressive
Growth Fund, Select Capital Appreciation Fund, Select Value Opportunity Fund,
Select Growth Fund, Select Strategic Growth Fund, Select Growth and Income Fund,
Select Income Fund and Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment adviser of the Trust, and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Funds. See "Investment Advisory Services to The Trust."
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("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 is registered with the SEC under the 1940 Act. Three of its investment
portfolios are available under the Policies: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, and Fidelity VIP Growth
Portfolio.
Various Fidelity companies perform certain activities required to operate VIP.
FMR is one of America's largest investment management organizations, and has its
principal business address at 82 Devonshire Street, Boston, Massachusetts. It is
composed of a number of different companies which provide a variety of financial
services and products. FMR is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services. The Portfolios of VIP, as part of their operating
expenses, pay an investment management fee to FMR. See "Investment Advisory
Services to VIP."
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), is an open-end, diversified
management investment company organized in 1994 as a Maryland corporation, and
is registered with the SEC under the 1940 Act. One of its investment portfolios
is available under the Policies: the T. Rowe Price International Stock
Portfolio. (See "Investment Advisory Services to T. Rowe Price"). An affiliate
of Price-Fleming, T. Rowe Price Associates, Inc. serves as Sub-Adviser to the
Select Capital Appreciation Fund of the Trust.
24
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of the Funds is set forth below. BEFORE
INVESTING, READ CAREFULLY THE PROSPECTUSES OF THE TRUST, VIP AND T. ROWE PRICE
THAT ACCOMPANY THIS PROSPECTUS. THE PROSPECTUSES OF THE TRUST, VIP AND T. ROWE
PRICE CONTAIN MORE DETAILED INFORMATION ON THE FUNDS' INVESTMENT OBJECTIVES,
RESTRICTIONS, RISKS AND EXPENSES. Statements of Additional Information for the
Funds are available on request. The investment objectives of the Funds may not
be achieved. Policy Value may be less than the aggregate payments made under the
Policy.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Capital Management International Inc.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies. The Sub-Adviser for the Select International
Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The Manager of the Portfolio is Rowe Price-Fleming International,
Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies that are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management, L.P.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund will invest
primarily in common stock of industries and companies which are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate. The Sub-Adviser for
the Select Capital Appreciation Fund is T. Rowe Price Associates, Inc.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies whose securities at the time of purchase are considered by the Sub-
Adviser to be undervalued. The Sub-Adviser for the Select Value Opportunity Fund
is Cramer Rosenthal McGlynn, LLC.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected for their
long-term growth potential. The Sub-Adviser for the Select Growth Fund is Putnam
Investment Management, Inc.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is John A. Levin & Co., Inc.
25
<PAGE>
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high-yielding,
lower-rated securities (commonly referred to as "junk bonds") which are subject
to greater risk than investments in higher-rated securities. For a further
discussion of lower-rated securities, see "Risks of Lower-Rated Debt Securities"
in the Fidelity VIP prospectus.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see "Risks of
Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The Fund will invest
primarily in investment-grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund. If there is a material change in the
investment policy of a Fund, we will notify you of the change. If you have
Policy Value allocated to that Fund, you may, without charge, reallocate the
Policy Value to another Fund or to the General Account. We must receive your
Written Request within 60 days of the latest of the:
- - Effective date of the change in the investment policy, or
- - Receipt of the notice of your right to transfer.
INVESTMENT ADVISORY SERVICES
RogersCasey, a leading pension consulting firm, assists the Company in the
selection of the Policy's Funds, all of which are managed by experienced
investment advisers. In addition, RogersCasey assists the Trust in the selection
of investment advisers for the Funds of the Trust. RogersCasey provides
consulting services to pension plans representing over $500 billion in total
assets. In its consulting capacity, RogersCasey monitors the investment
performance of over 1,800 investment advisers. Each investment adviser is
selected by using strict objective, quantitative and qualitative criteria, with
special emphasis on the investment adviser's record in managing similar
portfolios. In consultation with RogersCasey, a committee monitors and evaluates
the ongoing performance of all of the Funds. The committee may recommend the
replacement of an investment adviser of one of the Trust's Funds, or the
addition or deletion of Funds. The committee includes members who may be
affiliated or unaffiliated with the Company and the Trust.
Allmerica Financial Investment Management Services,, Inc. ("AFIMS"), an
affiliate of the Company, is the investment manager of the Trust. AFIMS has
entered into agreements with investment advisers ("Sub-Advisers") selected by
AFIMS and Trustees in consultation with RogersCasey. The Sub-Advisers (other
than Allmerica Asset Management, Inc.), are not affiliated with the Company or
the Trust. In addition, Rogers, Casey Sponsor Services, Inc., a wholly owned
subsidiary of RogersCasey, provides asset allocation recommendations that may be
utilized at no cost by registered representatives who are assisting clients in
developing portfolios.
26
<PAGE>
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
- -------------------------------------------- --------------------------------------------
<S> <C>
Schroder Capital Management International
Select Emerging Markets Fund Inc.
Bank of Ireland Asset Management (U.S.)
Select International Equity Fund Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management and Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management and Research Company
Fidelity VIP High Income Portfolio Fidelity Management and Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
INVESTMENT ADVISORY SERVICES TO THE TRUST
The Trustees have responsibility for the supervision of the affairs of the
Trust. The Trustees have entered into a management agreement with Allmerica
Financial Investment Management Services, Inc. ("AFIMS"), an indirectly wholly
owned subsidiary of the Company. AFIMS, subject to Trustee review, is
responsible for the daily affairs of the Trust and the general management of the
Funds. AFIMS performs administrative and management services for the Trust,
furnishes to the Trust all necessary office space, facilities and equipment, and
pays the compensation, if any, of officers and Trustees who are affiliated with
AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- - Costs to register and qualify the Trust's shares under the Securities Act of
1933 ("1933 Act"),
- - Other fees payable to the SEC,
- - Independent public accountant, legal and custodian fees,
- - Association membership dues, taxes, interest, insurance payments and brokerage
commissions,
- - Fees and expenses of the Trustees who are not affiliated with AFIMS,
- - Expenses for proxies, prospectuses, reports to shareholders and other
expenses.
Under the management agreement with the Trust, AFIMS has entered into agreements
under which each Sub-Adviser manages the investments of one or more of the
Funds. Under each agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The terms of a Sub-Adviser agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the Fund.
Allmerica Asset Management, Inc., an indirectly wholly owned subsidiary of the
Company, is the Sub-Adviser for the Money Market Fund. The Sub-Advisers for the
other Funds are independent. AFIMS selects the Sub-Advisers in consultation with
RogersCasey. RogersCasey provides consulting services to pension plans with over
$500 billion in total assets. In its consulting capacity, RogersCasey monitors
the investment performance of over 1,800 investment advisers. AFIMS bears the
cost of the consultation. AFIMS selected each independent Sub-Adviser using
strict objectives and qualitative criteria, with special emphasis on the
27
<PAGE>
Sub-Adviser's record in managing similar portfolios. A committee that includes
members affiliated with Allmerica Financial Corporation monitors and evaluates
ongoing performance of the independent Sub-Advisers.
For providing its services under the management agreement, AFIMS receives 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 Emerging Markets Fund * 1.35%
Select International Equity First $100
Fund million 1.00%
Next $150
million 0.90%
Over $250
million 0.85%
Select Aggressive Growth Fund First $100
million 1.00%
Next $150
million 0.90%
Over $250
million 0.85%
Select Capital Appreciation First $100
Fund million 1.00%
Next $150
million 0.90%
Over $250
million 0.85%
Select Value Opportunity Fund First $100
million 1.00%
Next $150
million 0.85%
Next $250
million 0.80%
Next $250
million 0.75%
Over $750
million 0.70%
Select Growth Fund * 0.85%
Select Strategic Growth Fund * 0.85%
Select Growth and Income Fund First $100
million 0.75%
Next $150
million 0.70%
Over $250
million 0.65%
Select Income Fund First $50
million 0.60%
Next $50 million 0.55%
Over $100
million 0.45%
Money Market Fund First $50
million 0.35%
Next $200
million 0.25%
Over $250
million 0.20%
</TABLE>
* For the Select Emerging Markets Fund, the Select Growth Fund, and the Select
Strategic Growth Fund, the investment management fee does not vary according to
the level of assets in the Fund. AFIMS's investment fee, computed for each Fund,
will be paid from the assets of such Fund.
AFIMS is solely responsible for the payment of all fees to Sub-Advisers for
their investment management services. Sub-Adviser fees, described in the Trust's
prospectus, in no way increase the costs that the Funds, the Separate Account
and Policyowners bear.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP FUNDS
Fidelity Management and Research Company ("FMR") is the investment adviser of
VIP. FMR is one of America's largest investment management organizations, and
has its principal business address at 82 Devonshire Street, Boston,
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.
28
<PAGE>
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectus of Fidelity VIP contains additional information
concerning the Portfolios, including information concerning additional expenses
paid by the Portfolios, and should be read in conjunction with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
(1) A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these Funds rise.
(2) An individual Fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The Fidelity VIP Growth and the Fidelity VIP Equity-Income Portfolios' fee rates
are each made of two components:
(1) A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
(2) An individual Portfolio fee rate of 0.30% for the Fidelity VIP Growth
Portfolio, and 0.20% for the Fidelity VIP Equity-Income Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82%.
The Fidelity VIP Growth Portfolio may have a fee as high as 0.82% of its average
net assets. The Fidelity VIP Equity-Income Portfolio may have a fee as high as
0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe 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 $30 billion under management in its offices
in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires.
To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to the Policy interest in a Sub-Account without notice
to you and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Separate Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by a Policyowner.
29
<PAGE>
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company. Subject to
applicable law and any required SEC approval, the Company may, in its sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts if
marketing needs, tax considerations or investment conditions warrant. Any new
Sub-Accounts may be made available to existing Policyowners on a basis to be
determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and of T. Rowe Price are
also issued to other unaffiliated insurance companies ("shared funding"). It is
conceivable that in the future such mixed funding or shared funding may be
disadvantageous for variable life Policyowners or variable annuity Policyowners.
Although the Company and the Underlying Funds do not currently foresee any such
disadvantages, the Company and the respective Trustees intend to monitor events
in order to identify any material conflicts and to determine what action, if
any, should be taken. If the Trustees were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the expenses.
If any of these substitutions or changes is made, the Company may, by
endorsement, change the Policy to reflect the substitution or change, and will
notify Policyowners of all such changes. If the Company deems it to be in the
best interest of Policyowners, and subject to any approvals that may be required
under applicable law, the Separate Account or any Sub-Account(s) may be operated
as a management company under the 1940 Act, may be deregistered under the 1940
Act if registration is no longer required, or may be combined with other
Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended, or if the present interpretation of the 1940 Act or such
rules should change, and as a result the Company determines that it is permitted
to vote shares in its own right, whether or not such shares are attributable to
the Policies, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account who
furnish instructions to the Company. The Company will also vote shares that it
owns and which are not attributable to Policies in the same proportion. The
number of votes which a Policyowner has the right to instruct will be determined
by the Company as of the record date established for the Underlying Fund. This
number is determined by dividing each Policyowner's Policy Value in the
Sub-Account, if any, by the net asset value of one share in the corresponding
Underlying Fund in which the assets of the Sub-Account are invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (a) to cause a change in the sub-classification or investment
objective of one or more of the Underlying Funds, or (b) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good-faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of that action and the reasons for that
action will be included in the next periodic report to Policyowners.
30
<PAGE>
THE POLICY
APPLYING FOR THE POLICY
The 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 Insureds are 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 General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of receipt of the premium at the Principal
Office. IF THE 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 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 the Company transfers 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
Separate Account then will be allocated to the Sub-Accounts according to your
instructions.
31
<PAGE>
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, within seven days, mail a refund
equal to the sum of:
(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. 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 specifications pages issued for the
increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal rights
to you.
Upon cancelling the increase, you will receive a credit to your Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in the Face Amount (assuming the Policy is in force), you
may convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Separate Account to the General Account
and by simultaneously changing your premium allocation instructions to allocate
future premium payments to the General Account. Within 24 months after the
effective date of each increase, you can transfer, without charge, all or part
of the Policy Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
32
<PAGE>
Where required by state law, the Company will, at your request, 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 Classes 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 Separate Account
or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY
Unlike conventional insurance policies, the Policy does not obligate you to pay
premiums in accordance with a rigid and inflexible premium schedule. You may
establish a schedule of planned premiums which will be billed by the Company at
regular intervals. Failure to pay planned premiums, 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
procedure. Under this procedure, amounts will be deducted from your checking
account each month, generally on the Monthly Payment Date, and applied as a
premium under the Policy. The minimum payment permitted under a monthly
automatic payment procedure is $50.
Premiums are not limited as to frequency and number. No premium payment,
however, may be less than $100 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 the Face Amount, or Policy Change
which causes a change in the Minimum Monthly Factor has been in force, and Debt
does not exceed Policy Value less surrender charges, the Policy is guaranteed
not to lapse during that period. EXCEPT FOR THE 48 POLICY MONTHS AFTER THE DATE
OF ISSUE, OR THE EFFECTIVE DATE OF AN INCREASE IN THE FACE AMOUNT, MAKING
MONTHLY PAYMENTS AT LEAST EQUAL TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE
THAT THE POLICY WILL REMAIN IN FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Policy during a
Policy year. See POLICY TERMINATION AND REINSTATEMENT.
33
<PAGE>
INCENTIVE FUNDING DISCOUNT
The Company will lower the cost of insurance charges by 5% during any Policy
year for which you qualify for an incentive funding discount. To qualify, total
premiums paid under the Policy, less any Debt, withdrawals and withdrawal
charges, and transfers from other policies issued by the Company, must exceed
90% of the guideline level premiums (as defined in Section 7702 of the Code)
accumulated from the Date of Issue to the date of qualification. The incentive
funding discount may not be 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, however, the Company receives the proceeds from
a Policy issued by an unaffiliated company to be exchanged for the Policy, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.
GUARANTEED DEATH BENEFIT RIDER (MAY NOT BE AVAILABLE IN ALL STATES)
An optional Guaranteed Death Benefit Rider is available only at issue of the
Policy. If this Rider is in effect, the Company:
- Account, and
- guarantees that the Policy will not lapse, regardless of the investment
performance of the Separate provides a guaranteed death benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in the Face Amount,
as described below. In addition, a one-time administrative charge of $25 will be
deducted from the Policy Value when the Rider is elected. Certain transactions,
including Policy loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the Rider. If this Rider is terminated, it
cannot be reinstated.
GUARANTEED DEATH BENEFIT TESTS
While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:
(1) Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any Debt,
partial withdrawals and withdrawal charges, must be greater than the
Minimum Monthly Factors (if any) multiplied by the number of months which
have elapsed since the Date of Issue or the effective date of increase;
and
(2) On each Policy anniversary, (a) must exceed (b) where, since the Date of
Issue:
(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and Debt which is classified as a preferred loan; and
(b) is the sum of the minimum Guaranteed Death Benefit premiums, as shown
on the specifications page of the Policy.
GUARANTEED DEATH BENEFIT
If the Guaranteed Death Benefit Rider is in effect on the Final Premium Payment
Date, guaranteed Death Proceeds will be provided as long as the Rider is in
force. The Death Proceeds will be the greater of:
- the Face Amount as of the Final Premium Payment Date; or
34
<PAGE>
- the Policy Value as of the date due proof of death is received by the
Company.
TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER
The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:
- foreclosure of a Policy loan, or
- the date on which the sum of your payments does not meet or exceed the
applicable Guaranteed Death Benefit test (above), or
- any Policy change that results in a negative guideline level premium, or
- the effective date of a change from Sum Insured Option 2 to Sum Insured
Option 1, if such change occurs within five Policy years of the Final
Premium Payment Date, or
- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.
It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates. The net amount payable to keep the Policy in force will never exceed
the surrender charge plus three Monthly Deductions.
PAID-UP INSURANCE OPTION
Upon Written Request, a Policyowner may exercise a Paid-Up Insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the Insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount, up to the Face Amount of the
Policy, that the Surrender Value of the Policy can purchase for a net single
premium at the Insureds' Ages and Premium Class on the date this option is
elected. The Company will transfer any Policy Value in the Separate Account to
the General Account on the date it receives the Written Request to elect the
option. If the Surrender Value exceeds the net single premium necessary for the
fixed insurance, the Company will pay the excess to the Policyowner. The net
single premium is based on the Commissioners 1980 Standard Ordinary Mortality
Table D, Smoker or Non-Smoker with increases in the tables for non-standard
risks. Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit is computed differently
from the net death benefit, and the death benefit options will not apply.
- The Company will transfer the Policy Value in the Separate Account to the
General Account on the date it receives the Written Request to elect the
option. The Company will not allow transfers of Policy Value from the
General Account back to the Separate Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.
- Riders will continue only with the Company's consent.
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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 Insureds' attained Ages. The net cash value is the cash
value less any outstanding loans.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the tax expense charge and the
premium expense charge. In the application for the Policy, you may indicate the
initial allocation of Net Premiums among the General Account and the
Sub-Accounts of the Separate Account. You may allocate premiums to one or more
Sub-Accounts, but may not have Policy Value in more than 20 Sub-Accounts at any
one time. The minimum amount which may be allocated to a Sub-Account is 1% of
Net Premium paid. Allocation percentages must be in whole numbers (for example,
33 1/3% may not be chosen) and must total 100%.
FUTURE CHANGES ALLOWED
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. Currently, no charge is
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions.
The procedures the Company follows for telephone transactions include requiring
callers to identify themselves by name, and to identify the Policyowner by name,
date of birth and social security number. All transfer instructions by telephone
are tape recorded.
INVESTMENT RISK
The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners periodically should review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. The Policy Value held in the General Account to secure a Policy loan,
however, 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
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- the amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000, or 25%, of the Accumulated Value under the
Policy.
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Account which invests in the Money Market Fund of the Trust
to one or more of the other Sub-Accounts ("Dollar-Cost Averaging Option"),
or
- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS
The transfer privilege is subject to the Company's consent. The Company reserves
the right to impose limitations on transfers including, but not limited to:
- the minimum amount that may be transferred,
- the minimum amount that may remain in a Sub-Account following a transfer
from that Sub-Account,
- the minimum period of time between transfers involving the General
Account, and
- the maximum amount that may be transferred each time from the General
Account.
Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.
DEATH PROCEEDS
The Policy provides for the payment of the Death Proceeds to the named
Beneficiary on the death of the last surviving Insured. There are no Death
Proceeds payable on the death of the first Insured to die. Within 90 days of the
death of the first Insured to die, or as soon thereafter as is reasonably
possible, due proof of such death must be received at the Principal Office. As
long as the Policy remains in force (see POLICY TERMINATION AND REINSTATEMENT),
the Company will pay the Death Proceeds of the Policy to the named Beneficiary
upon due proof of the death of the last surviving Insured.
Normally, the Company will pay the Death Proceeds within seven days of receiving
due proof of the death of the last surviving Insured, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments." The Death Proceeds may be received by the
Beneficiary in cash or under one or more of the payment options set forth in the
Policy. See APPENDIX B -- PAYMENT OPTIONS.
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Prior to the Final Premium Payment Date, the Death Proceeds are:
- the Sum Insured provided under Option 1 or Option 2, whichever is elected
and in effect on the date of death of the last surviving Insured; plus
- any additional insurance on the Insureds' lives that is provided by rider;
minus
- any outstanding Debt, any partial withdrawals and partial withdrawal
charges, and any Monthly Deductions due and unpaid through the Policy
month in which the last surviving Insured dies.
After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value. The amount of Death Proceeds payable will be determined as of the date of
the Company's receipt of due proof of death of the last surviving Insured.
SUM INSURED OPTIONS
The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the option once per Policy year by Written Request. There is no charge
for a change in option.
Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED
The Guideline Minimum Sum Insured is equal to a percentage of the Policy Value
as set forth in the Table below. The Guideline Minimum Sum Insured is determined
in accordance with Code regulations to ensure that the Policy qualifies as a
life insurance contract and that the insurance proceeds will be excluded from
the gross income of the Beneficiary.
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GUIDELINE MINIMUM SUM INSURED TABLE
(AGE OF YOUNGER INSURED ON DEATH OF LAST SURVIVING INSURED)
<TABLE>
<CAPTION>
AGE PERCENTAGE AGE PERCENTAGE
- ----------------------------- ---------- ----------------------------- ----------
<S> <C> <C> <C> <C>
thru 40...................... 250% 61........................... 128%
41........................... 243% 62........................... 126%
42........................... 236% 63........................... 124%
43........................... 229% 64........................... 122%
44........................... 222% 65........................... 120%
45........................... 215% 66........................... 119%
46........................... 209% 67........................... 118%
47........................... 203% 68........................... 117%
48........................... 197% 69........................... 116%
49........................... 191% 70........................... 115%
50........................... 185% 71........................... 113%
51........................... 178% 72........................... 111%
52........................... 171% 73........................... 109%
53........................... 164% 74........................... 107%
54........................... 157% 75 thru 90................... 105%
55........................... 150% 91........................... 104%
56........................... 146% 92........................... 103%
57........................... 142% 93........................... 102%
58........................... 138% 94........................... 101%
59........................... 134% 95........................... 100%
60........................... 130%
</TABLE>
Under both Option 1 and Option 2 the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under Guideline Minimum Sum Insured exceeds the Face Amount, in
which case the Sum Insured will vary as the Policy Value varies. Under Option 2,
the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured and the Death Proceeds will
be greater under Option 2 than under Option 1, since the Policy Value is added
to the specified Face Amount and included in the Death Proceeds only under
Option 2. The cost of insurance included in the Monthly Deduction will be
greater, however, and thus the rate at which Policy Value will accumulate will
be slower under Option 2 than under Option 1 (assuming the same specified Face
Amount and the same actual premiums paid). See CHARGES AND DEDUCTIONS --
"Monthly Deduction from Policy Value."
If the Policyowner desires to have premium payments and investment performance
reflected in the amount of the Sum Insured, the Policyowner should choose Option
2. If the Policyowner desires premium payments and investment performance
reflected to the maximum extent in the Policy Value, Option 1 should be
selected.
ILLUSTRATIONS
For purposes of this illustration, assume that the younger Insured is under the
Age of 40, and that there is no outstanding Debt.
ILLUSTRATION OF OPTION 1 -- Under Option 1, a Policy with a $2500,000 Face
Amount generally will have a Sum Insured equal to $250,000. However, because the
Sum Insured must be equal to or greater than 250% of the Policy Value, if at any
time the Policy Value exceeds $100,000, the Sum Insured will exceed the $300,000
Face Amount. In this example, each additional dollar of Policy Value above
$100,000 will increase the Sum Insured by $2.50. For example, a Policy with a
Policy Value of $125,000 will have a Guideline Minimum Sum
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<PAGE>
Insured of $312,000 ($125,000 X 2.50); Policy Value of $150,000 will produce a
Guideline Minimum Sum Insured of $375,000 ($150,000 X 2.50); and Policy Value of
$200,000 will produce a Guideline Minimum Sum Insured of $500,000 ($200,000 X
2.50).
Similarly, so long as the Policy Value exceeds $100,000, 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 $125,000 to $100,000 because of partial
withdrawals, charges or negative investment performance, the Sum Insured will be
reduced from $312,500 to $250,000. If at any time, however, the Policy Value
multiplied by the applicable percentage is less than the Face Amount, the Sum
Insured will equal the Face Amount of the Policy.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the younger Insured's Age in the above example were, for example, 70 (rather
than between 0 and 40), the applicable percentage would be 115%. The Sum Insured
would not exceed the $250,000 Face Amount unless the Policy Value exceeded
$217,391 (rather than $100,000), and each dollar then added to or taken from the
Policy Value would change the Sum Insured by $1.15.
ILLUSTRATION OF OPTION 2 -- For purposes of this illustration, assume that the
younger Insured is under the Age of 40 and that there is no outstanding Debt.
Under Option 2, a Policy with a Face Amount of $250,000 will generally produce a
Sum Insured of $250,000 plus Policy Value. For example, a Policy with a Policy
Value of $50,000 will produce a Sum Insured of $300,000 ($250,000 + $50,000); a
Policy Value of $80,000 will produce a Sum Insured of $330,000 ($250,000 +
$80,000); a Policy Value of $100,000 will produce a Sum Insured of $350,000
($250,000 + $100,000). However, the Sum Insured must be at least 250% of the
Policy Value. Therefore, if the Policy Value is greater than $100,000, 250% of
that amount will be the Sum Insured, which will be greater than the Face Amount
plus Policy Value. In this example, each additional dollar of Policy Value above
$100,000 will increase the Sum Insured by $2.50. For example, if the Policy
Value is $200,000, the Guideline Minimum Sum Insured will be $500,000 ($200,000
X 2.50); a Policy Value of $250,000 will produce a Guideline Minimum Sum Insured
of $625,000 ($250,000 X 2.50); and a Policy Value of $300,000 will produce a
Guideline Minimum Sum Insured of $750,000 ($300,000 X 2.50).
Similarly, if the Policy Value exceeds $100,000, 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 $200,000 to $150,000 because of partial withdrawals,
charges or negative investment performance, the Sum Insured will be reduced from
$500,000 to $375,000. If at any time, however, the Policy Value multiplied by
the applicable percentage is less than the Face Amount plus the Policy Value,
then the Sum Insured will be the current Face Amount plus the Policy Value.
The applicable percentage becomes lower as the younger Insured's Age increases.
If the Insured's Age in the above example were 70, the applicable percentage
would be 115%, so that the Sum Insured must be at least 1.15 times the Policy
Value. The amount of the Sum Insured would be the sum of the Policy Value plus
$250,000 unless the Policy Value exceeded $217,391 (rather than $100,000). Each
dollar added to or subtracted from the Policy would change the Sum Insured by
$1.15.
The Sum Insured under Option 2 will always be the greater of the Face Amount
plus the Policy Value or the Policy Value multiplied by the applicable
percentage.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
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<PAGE>
CHANGE FROM OPTION 1 TO OPTION 2
If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount less than $100,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Thus, under Option 2, the Insurance Amount at Risk will
always equal the Face Amount unless the Guideline Minimum Sum Insured is in
effect. The cost of insurance may also be higher or lower than it otherwise
would have been without the change in Sum Insured Option. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Policy Value."
CHANGE FROM OPTION 2 TO OPTION 1
If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. 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, respectively, reduce or increase the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the Separate Account, changing the Sum Insured Option
from Option 2 to Option 1 will reduce the Insurance Amount at Risk and therefore
the cost of insurance charge for all subsequent Monthly Deductions, compared to
what such charge would have been if no such change were made.
A change in the Sum Insured Option may result in total premiums paid exceeding
the then current maximum premium limitation determined by IRS rules. In such
event, the Company will pay the excess to you. See THE POLICY -- "Premium
Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount 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 FACE AMOUNT
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insureds is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be for less than $100,000. You may not increase the Face Amount after the
younger Insured reaches Age 80 or the older Insured reaches Age 85. An increase
must be accompanied by an additional premium if the Surrender Value is less than
$50, plus an amount equal to the sum of two Minimum Monthly Factors.
On the effective date of each increase in 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 will generally affect the Insurance Amount at Risk, and may
affect the portion of the Insurance Amount at Risk included in various Premium
Classes (if more than one Premium Class applies), both of which may affect the
monthly cost of insurance charges. A surrender charge will also be calculated
for the increase. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy
Value" and "Surrender Charge."
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<PAGE>
After increasing the Face Amount, you will have the right (a) during a Free-Look
Period, to have the increase cancelled, and the charges which would not have
been deducted but for the increase will be credited to the Policy, and (b)
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 FACE AMOUNT
The minimum amount for a decrease in the Face Amount is $100,000. The Face
Amount in force after any decrease may not be less than $100,000. If, following
a decrease in 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 you (at your election) to the extent
necessary to meet the requirements. A return of Policy Value may result in a tax
liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy Value." For purposes of
determining the cost of insurance charge, any decrease in the Face Amount will
reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase,
- the next most recent increases successively; and
- the initial Face Amount.
This order 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). 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-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 Separate Account; see THE
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<PAGE>
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
Accumulation 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 Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b) and subtracting (c) and (d) from the result,
where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal on an annual basis to
.90% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 0.90%; and
(d) is the Separate Account administrative charge for each day in the Valuation
Period equal on an annual basis to 0.25% of the daily net asset value of
that Sub-Account. This charge is applicable only during the first 15 Policy
years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
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<PAGE>
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insureds' lifetimes, you may arrange for the Death Proceeds to be
paid in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- PAYMENT
OPTIONS. These choices are also available at the Final Premium Payment Date and
if the Policy is surrendered. The Company may make more payment options
available in the future. If no election is made, the Company will pay the Death
Proceeds in a single sum. When the Death Proceeds are payable in a single sum,
the Beneficiary may, within one year of the death of the last surviving Insured,
select one or more of the payment options if no payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Policy by rider.
The cost of any optional insurance benefits will be deducted as part of the
Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Policy
Value."
POLICY SURRENDER
You may at any time surrender the Policy and receive its Surrender Value. The
Surrender Value is the Policy Value less any Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Policy are received at the
Principal Office. A surrender charge will be deducted when a Policy is
surrendered if less than 15 full Policy years have elapsed from the Date of
Issue of the Policy or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options described in APPENDIX B -- 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."
For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value of the Policy, subject to the limits stated below, upon Written
Request filed at the Principal Office. The Written Request must indicate the
dollar amount you wish to receive and the Accounts from which such amount is to
be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts and
the General Account. If you do not provide allocation instructions, the Company
will make a Pro-Rata Allocation. Each partial withdrawal must be in a minimum
amount of $500. Under Option 1, the Face Amount is reduced by the amount of the
partial withdrawal, and a partial withdrawal will not be allowed if it would
reduce the Face Amount below $100,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Accumulation Units equivalent in value to the amount withdrawn. The
amount withdrawn equals the amount requested by you plus the transaction charge
and any applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawals." 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
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the Company may delay payment under certain circumstances as described in OTHER
POLICY PROVISIONS -- "Postponement of Payments."
For important tax consequences which may result from partial withdrawals, see
FEDERAL TAX CONSIDERATIONS
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policies.
Certain of the charges and deductions described below may be reduced for
Policies issued to employees of the Company and its affiliates located at the
Company's home office (or at off-site locations if such employees are on the
Company's home office payroll), employees and registered representatives of any
broker-dealer that has entered into a sales agreement with the Company or
Allmerica Investments, Inc. to sell the Policies, and any spouses or children of
the above persons. The cost of insurance charges may be reduced, and no
surrender charges, partial withdrawal charges or front-end sales loads will be
imposed (and no commissions will be paid), where the Policyowner as of the date
of application is within these categories.
TAX EXPENSE CHARGE
A charge will be deducted from each premium payment for the actual state and
local premium taxes paid by the Company and a charge of 1% of premiums to
compensate the Company for federal taxes imposed for deferred acquisition costs
("DAC") taxes. The premium tax deduction will change if there is a change in tax
rates or if the applicable jurisdiction changes (the Company should be notified
of any change in address as soon as possible). The Company reserves the right to
increase or decrease the 1% DAC tax deduction to reflect changes in the
Company's expenses for DAC taxes.
PREMIUM EXPENSE CHARGE
A charge of 1% of premiums will be deducted from each premium payment to
partially compensate the Company for the cost of selling the Policies. The
premium expense charge is a factor the Company must use when calculating the
maximum sales load it can charge under SEC rules during the first two Policy
years.
MONTHLY DEDUCTION FROM POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from Policy Value
will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider, and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charges are
discussed below. The Monthly Deduction on or following the effective date of a
requested increase in the Face Amount will also include a $40 administrative
charge for the increase. See THE POLICY -- "Change in Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instruction 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 on subsequent Monthly Payment Dates there is
sufficient Policy Value in the Sub-Account you specified, however, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
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COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those last surviving Insureds who
die prior to the Final Premium Payment Date. The cost of insurance is determined
on a monthly basis, and is determined separately for the initial Face Amount and
for each subsequent increase in 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 the Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If you select Sum
Insured Option 1, the applicable cost of insurance rate will be multiplied by
the increase in the Face Amount reduced by any Policy Value (minus rider
charges) in excess of the initial Face Amount at the beginning of the Policy
month.
EFFECT OF THE GUIDELINE MINIMUM SUM INSURED
If the Guideline Minimum Sum Insured is in effect under either Option, a monthly
cost of insurance charge also will be calculated for that additional portion of
the Sum Insured which is required to comply with the Guideline rules. This
charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Sum Insured (Policy Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)
OR
- the Face Amount PLUS the Policy Value (if you selected Sum Insured Option
2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY -- "Change in Face Amount."
COST OF INSURANCE RATES
Cost of insurance rates are based on a blended unisex rate table, Age and
Premium Class of the Insureds at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less Debt,
any partial withdrawals and withdrawal charges, and risk classification.
Sex-distinct rates do not apply, except in those states that do not permit
unisex rates.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in Face
Amount or rider are determined annually on the anniversary of the effective date
of each increase or rider. The cost of insurance rates generally increase as the
Insureds' Ages increase. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set
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forth in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Table D, Smoker or Non-Smoker, and the Insureds'
Ages. The Tables used for this purpose set forth different mortality estimates
for smokers and non-smokers. Any change in the cost of insurance rates will
apply to all persons of the same insuring Age and Premium Class whose Policies
have been in force for the same length of time.
The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into Standard Premium Classes and Substandard
Premium Classes. In an otherwise identical Policy, an Insured in the Standard
Premium Class will have a lower cost of insurance than an Insured in a
Substandard Premium Class with a higher mortality risk. The Premium Classes are
also divided into two categories: smokers and 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 an 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 that you request, at a time when an Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if an Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES
Prior to the Final Premium Payment Date, a monthly administrative charge of $6
per month will be deducted from 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 Insureds' Premium Class, and establishing
Policy records. The Company does not expect to derive a profit from these
charges.
CHARGES AGAINST ASSETS OF THE SEPARATE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company and a charge for administrative expenses of the
Separate Account.
MORTALITY AND EXPENSE RISK CHARGE
The Company currently makes a charge on an annual basis of 0.90% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policies. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 0.90% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will therefore pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policies
will exceed the amounts realized from the administrative charges provided in the
Policies. If the charge for mortality and expense risks is not sufficient to
cover actual mortality experience and expenses, the Company will absorb the
losses. If costs are less than the amounts provided, the difference will be a
profit to the Company. To the extent this charge results in a current profit to
the Company, such profit will be available for use by the Company for, among
other things, the payment of distribution, sales and other expenses. Since
mortality and expense risks
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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.
SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
During the first 15 Policy years, the Company assesses a charge on an annual
basis of 0.25% of the daily net asset value in each Sub-Account. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the Separate Account and the Sub-Accounts, and is not expected
to be a source of profit. The administrative functions and expenses assumed by
the Company in connection with the Separate Account and the Sub-Accounts
include, but are not limited to, clerical, accounting, actuarial and legal
services, rent, postage, telephone, office equipment and supplies, expenses of
preparing and printing registration statements, expenses of preparing and
typesetting prospectuses, and the cost of printing prospectuses not allocable to
sales expense, filing and other fees. No Separate Account administrative charge
is imposed after the 15th Policy year.
OTHER CHARGES AND EXPENSES
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, and T. Rowe
Price 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-Accounts to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policy provides for a contingent surrender charge. A surrender charge may be
deducted if you request a full surrender of the Policy or a decrease in the Face
Amount. The duration of the surrender charge is 15 years from Date of Issue or
from the effective date of any increase in the Face Amount. A separate surrender
charge, described in more detail below, is calculated upon the issuance of the
Policy and for each increase in the Face Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agent's
commissions, advertising and the printing of the prospectus and sales
literature.
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and
(b) is a deferred sales charge of 48% of premiums received up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by average issue Age from 1.95 (for average issue Ages 5 through
75) to 1.31 (for average issue Age 82).
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months and reduces by 0.5% or more per month thereafter, as described
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This reduction in the
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maximum surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 25% of
premiums received. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE
A separate surrender charge will apply to and is calculated for each increase in
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 48% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge. Such deferred
sales charge varies by average Age (at the time of increase) from 1.95 (for
average Ages 5 through 75) to 1.31 (for average Age 82). In accordance with
limitations under state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is true for the
initial Face Amount, (a) is a deferred administrative charge, and (b) is a
deferred sales charge. The maximum surrender charge for the increase continues
in a level amount for 40 Policy months, and reduces by 0.5% or more per month
thereafter, as provided in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
If you surrender the Policy during the first two Policy years following an
increase in the Face Amount before making premium payments associated with the
increase in Face Amount which are at least equal to one Guideline Annual
Premium, the deferred administrative charge will be $8.50 per thousand dollars
of the Face Amount increase, as described above, but the deferred sales charge
will not exceed 25% of premiums associated with the increase. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below.
ALLOCATION OF POLICY VALUE AND PREMIUMS UPON AN INCREASE IN FACE AMOUNT
Additional premium payments may not be required to fund a requested increase in
Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies whereby the Policy Value will be allocated
between the initial Face Amount and the increase. Subsequent premium payments
are allocated between the initial Face Amount and the increase.
For example, suppose the Guideline Annual Premium is equal to $1,500 before an
increase and is equal to $2,000 as a result of the increase. The Policy Value on
the effective date of the increase would be allocated 75% ($1,500/$2,000) to the
initial Face Amount and 25% to the increase. All future premiums 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 DECREASE IN THE FACE AMOUNT
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
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multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Policy), the surrender charge will be applied in the following order: (1)
the most recent increase; (2) the next most recent increases successively, and
(3) the initial Face Amount. Where a decrease causes a partial reduction in an
increase or in the initial Face Amount, a proportionate share of the surrender
charge for that increase or for the initial Face Amount will be deducted.
CHARGES ON PARTIAL WITHDRAWALS
After the first Policy year, partial withdrawals of Surrender Value may be made.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $100,000. A transaction charge,
which is the smaller of 2% of the amount withdrawn, or $25, will be assessed on
each partial withdrawal to reimburse the Company for the cost of processing the
withdrawal. The Company does not expect to make a profit on this charge.
A partial withdrawal charge also may be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company, less the
total of any prior withdrawals in that Policy year which were not subject to the
partial withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal.
This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy year. See THE POLICY -- "Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Account which invests in the Money Market Fund of the Trust
to one or more of the other Sub-Accounts; or
- to reallocate Policy Value among the Sub-Accounts.
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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, any resulting transfer of Policy
Value from the Sub-Accounts to the General Account will be free of charge and in
addition to the 12 free transfers in a Policy year. See THE POLICY --
"Conversion Privileges," and POLICY LOANS.
CHARGE FOR INCREASE IN FACE AMOUNT
For each increase in the Face Amount that you request, a transaction charge of
$40 will be deducted from the 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. Currently, no such charges are imposed, and any such
charge is guaranteed not to exceed $25.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value. In the first Policy year, the Loan Value is 75% of
the Policy Value reduced by applicable surrender charges, as well as Monthly
Deductions and interest on Policy loans 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.
Normally, the loan amount 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.
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%.
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.
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There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). The preferred loan
option may not be available in all states.
LOAN INTEREST CHARGED
Outstanding Policy loans are charged interest. Interest accrues daily, and is
payable in arrears at the annual rate of 8%. Interest is due and payable at the
end of each Policy year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount, and
will bear interest at the same rate. If the new loan amount exceeds the Policy
Value in the General Account after the due and unpaid interest is added to the
loan amount, the Company will transfer the 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 repaid loan will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate Policy Value in
accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Separate Account cannot exceed
the Policy Value previously transferred from the Separate Account to secure the
Debt.
If the 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.
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 surrender or the death of the last surviving Insured.
POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, or
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the last surviving Insured dies during the grace
period, the Death Proceeds will still be payable, but any Monthly
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Deductions due and unpaid through the Policy month in which the last surviving
Insured dies, and any other overdue charge, will be deducted from the Death
Proceeds.
LIMITED 48-MONTH GUARANTEE
Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months after the Date of Issue or the effective date
of an increase in the Face Amount if you make a minimum amount of premium
payments. The minimum amount paid, minus the Debt, partial withdrawals and
partial withdrawal charges, must be at least equal to the sum of the Minimum
Monthly Factor for the number of months the Policy, increase in the Face Amount,
or a Policy Change which causes a change in the Minimum Monthly Factor has been
in force. A Policy change which causes a change in the Minimum Monthly Factor is
a change in the Face Amount or the addition or deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force.
REINSTATEMENT
If the Policy has not been surrendered and the Insureds are alive, the
terminated Policy may be reinstated any time within three years after the date
of default and before the Final Premium Payment Date. The reinstatement will be
effective on the Monthly Payment Date following the date you submit the
following to the Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insureds are insurable according
to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge and premium
expense charge, is large enough to cover the minimum amount payable, as
described below.
MINIMUM AMOUNT PAYABLE
If reinstatement is requested when fewer than 48 Monthly Deductions have been
made since the Date of Issue or the effective date of an increase in the Face
Amount, you must pay the lesser of the amount shown in (1) or (2). Under (1),
the minimum amount payable is the Minimum Monthly Factor for the three-month
period beginning on the date of reinstatement. Under (2), the minimum amount
payable is the sum of:
1) - the amount by which the surrender charge as of the date of
reinstatement exceeds the Policy Value on the date of default, PLUS
2) - 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 or any increase in the Face Amount, you must pay the amount
shown in (2) above. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the Policy remained in force from the Date of
Issue. The Policy Value less Debt on the date of default will be restored to the
Policy to the extent it does not exceed the surrender charge on the date of
reinstatement. Any Policy Value less the Debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will not be restored.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
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- the Net Premium paid to reinstate the Policy increased by interest from
the date the payment was received at the Principal Office, PLUS
- an amount equal to the Policy Value less Debt on the date of default to
the extent it does not exceed the surrender charge on the date of
reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations, and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is named in the application for the Policy. The Policyowner is
generally entitled to exercise all rights under a Policy while the Insureds are
alive, subject to the consent of any irrevocable Beneficiary (the consent of a
revocable Beneficiary is not required). The consent of the Insureds is required
whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the death of the last surviving Insured. Unless otherwise stated in
the Policy, the Beneficiary has no rights in the Policy before the death of the
last surviving Insured. While the Insureds are alive, you may change any
Beneficiary unless you have declared a Beneficiary to be irrevocable. If no
Beneficiary is alive when the last surviving Insured dies, the Policyowner (or
the Policyowner's estate) will be the Beneficiary. If more than one Beneficiary
is alive when the last surviving Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the last surviving
Insured dies will pass to surviving Beneficiaries proportionally.
INCONTESTABILITY
The Company will not contest the validity of a Policy after it has been in force
during the lifetimes of both Insureds for two years from the Date of Issue. The
Company will not contest the validity of any increase in the Face Amount after
such increase or rider has been in force during the lifetimes of both Insureds
for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if either Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Policy, without interest, less any
outstanding Debt and less any partial withdrawals. If either Insured commits
suicide, generally within two years from the effective date of any increase in
the Sum Insured, the Company's liability with respect to such increase will be
limited to a refund of the cost thereof. The Beneficiary will receive the
administrative charges and insurance charges paid for such increase.
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NOTICE OF FIRST INSURED TO DIE
Within 90 days of the death of the first Insured to die, or as soon thereafter
as is reasonably possible, you must mail to the Principal Office due proof of
such death.
AGE
If the Age of either Insured as stated in the application for the Policy is not
correct, benefits under a Policy will be adjusted to reflect the correct Age, if
death of the last surviving Insured occurs prior to the Final Premium Payment
Date. The adjusted benefit will be that which the most recent cost of insurance
charge would have purchased for the correct Age. In no event will the Sum
Insured be reduced to less than the Guideline Minimum Sum Insured.
ASSIGNMENT
The Policyowner may assign a Policy as collateral or make an absolute assignment
of the Policy. All rights under the Policy will be transferred to the extent of
the assignee's interest. The consent of the assignee may be required in order to
make changes in premium allocations, to make transfers, or to exercise other
rights under the Policy. The Company is not bound by an assignment or release
thereof, unless it is in writing and is recorded at the Principal Office. When
recorded, the assignment will take effect as of the date the Written Request was
signed. Any rights created by the assignment will be subject to any payments
made or actions taken by the Company before the assignment is recorded. The
Company is not responsible for determining the validity of any assignment or
release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the last surviving Insured, as well as payments of a
Policy loan and transfers, may be postponed whenever (a) the New York Stock
Exchange is closed for other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the SEC,
or (b) an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the Separate Account's net assets.
Payments under the Policy of any amounts derived from the premiums paid by check
may be delayed until such time as the check has cleared your bank. The Company
also reserves the right to defer payment of any amount due from the General
Account upon surrender, partial withdrawal or death of the last surviving
Insured, as well as payments of Policy loans and transfers from the General
Account, for a period not to exceed six months.
55
<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 since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer of First
Director, Vice President and Allmerica since 1997; Vice President of First
Chief Information Officer Allmerica since 1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Allmerica since 1996; Vice President, First Allmerica
Chief Investment Officer since 1991
John F. Kelly
Director, Senior Vice President, Director since 1996; General Counsel since 1981;
General Counsel and Assistant Senior Vice President since 1986; and Assistant
Secretary Secretary since 1991, all of First Allmerica
J. Barry May Director of First Allmerica since 1996; Director of
Director Citizens Insurance Company and President, The
Hanover Insurance Company since 1996;
Vice President, The Hanover Insurance Company, 1993
to 1996; General Manager, The Hanover Insurance
Company, 1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996; Director
Director since 1992, President since 1994, and CEO since
1996 of Citizens Insurance Company of America;
Vice President 1982 to 1994, and Chief
Investment Officer 1986 to 1994, of First Allmerica
John F. O'Brien
Director, Chairman of the Board,
President and Chief Executive Director, Chairman of the Board, President and Chief
Officer Executive Officer, First Allmerica since 1989
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and
Chief Financial Officer and Treasurer, First Allmerica since 1993; Assistant
Treasurer Vice President, First Allmerica 1992 to 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 Financial Investment
Management Services, Inc. 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 since 1987
</TABLE>
56
<PAGE>
DISTRIBUTION
Allmerica Investments, Inc. ("Allmerica Investments"), an indirect subsidiary of
First Allmerica, acts as the principal underwriter of the Policies pursuant to a
Sales and Administrative Services Agreement with the Company and the Separate
Account. Allmerica Investments is registered with the SEC 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 or of broker-dealers which have selling
agreements with Allmerica Investments.
The Company pays commissions based on a commission schedule. After issue of the
Policy or an increase in the Face Amount, commissions paid to agents who are
registered representatives of Allmerica Investments generally will be up to 50%
of the first-year premiums up to a basic premium amount established by the
Company. Thereafter, commissions will generally equal up to 3.5% 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.
Commissions and expense reimbursements paid to broker-dealers, after issue of
the Policy or an increase in the Face Amount, generally will equal 90% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions will generally equal up to 4% of any additional
premiums. To the extent permitted by NASD rules, promotional incentives or
payments may also be provided to broker-dealers based on sales volumes, the
assumption of wholesaling functions or other sales-related criteria. Other
payments may be made for other services that do not directly involve the sale of
the Policies. These services may include the recruitment and training of
personnel, production of promotional literature, and similar services.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policyowners 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 for
services it performs and expenses it may incur as principal underwriter and
general distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares of such Underlying Funds held by
the Separate Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% of the
aggregate net asset value of shares held by the Separate Account. The Company
may in the future render services for which it will receive compensation from
the investment advisers or other service providers of other Underlying Funds.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
57
<PAGE>
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, and the financial
statements of the Inheiritage Account of the Company as of December 31, 1997 and
the periods 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
Policies.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to the Policyowner or the Beneficiary depends upon a variety of factors.
The following discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted. From time to
time legislation is proposed which, if passed, could significantly adversely,
and possibly retroactively, affect the taxation of the Policies. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policies is not exhaustive, does not purport to
cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the trustee of an employee benefit plan.
A qualified tax adviser should always be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code,
and files a consolidated tax return with its parent and affiliates. Because the
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account, no charge is made for
federal income taxes which may be attributable to the Separate Account.
The Company periodically will review the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be; if there are changes made in the federal income
tax treatment of variable life insurance at the Company level; or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws, the Company may also incur state and local taxes (in
addition to premium taxes) in several states. At present these taxes are not
significant. If there is a material change in applicable state or local tax
laws, charges may be made for such taxes paid, or reserves for such taxes,
attributable to the Separate Account.
58
<PAGE>
TAXATION OF THE POLICIES
The Company believes that the Policies described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance contracts and places
limitations on the relationship of the Policy Value to the Insurance Amount at
Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value is not
taxable until received by the Policyowner or the Policyowner's designee (but see
"Modified Endowment Contracts"). Although the Company believes that the Policies
are in compliance with Section 7702 of the Code, the manner in which Section
7702 should be applied to certain features of a joint survivorship life
insurance contract is not directly addressed by Section 7702. In the absence of
final regulations or other guidance issued under Section 7702, there is
necessarily some uncertainty whether a Policy will meet the Section 7702
definition of a life insurance contract. This is true particularly if the
Policyowner pays the full amount of premiums permitted under the Policy. A
Policyowner contemplating the payment of such premiums should do so only after
consulting a tax adviser. If a Policy were determined not to be a life insurance
contract under Section 7702, it would not have most of the tax advantages
normally provided by a life insurance contract.
The Code requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury Department regulations in order to be
treated as a life insurance policy for tax purposes. Although the Company does
not have control over the investments of the Underlying Funds, the Company
believes that the Underlying Funds currently meet the Treasury's diversification
requirements, and the Company will monitor continued compliance with these
requirements. In connection with the issuance of previous regulations relating
to diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which Policyowners
may direct their investments to particular divisions of a separate account.
Regulations in this regard may be issued in the future. It is possible that if
and when regulations are issued, the Policies may need to be modified to comply
with such regulations. For these reasons, the Policies or the Company's
administrative rules may be modified as necessary to prevent a Policyowner from
being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding, or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner or
Beneficiary.
SPLIT OPTION RIDER/EXCHANGE OPTION RIDER
The Split Option Rider permits a Policy to be split into two other life
insurance policies, one covering each Insured singly. A Policy split may have
adverse tax consequences. It is not clear whether a Policy split will be treated
as a non-taxable exchange under Section 1035 of the Code. Unless a Policy split
is so treated, it could result in recognition of taxable income on the gain in
the Policy. In addition, it is not clear whether, in all circumstances, the
individual policies that result from a Policy split would be treated as life
insurance policies under Section 7702 of the Code or would be classified as
modified endowment contracts. The Policyowner should consult a competent tax
adviser regarding the possible adverse tax consequences of a Policy split.
POLICY LOANS
The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Contracts"). There is
a risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal and be 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
59
<PAGE>
of preferred loans uncertain. In the event pertinent IRS guidelines are issued
in the future, you may revoke your request for a preferred loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. 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.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. A policy fails to satisfy the
seven-pay test if the cumulative premiums paid under the policy at any time
during the first seven policy years or within seven years of a material change
in the policy exceeds the sum of the net level premiums that would have been
paid, had the policy provided for paid-up future benefits after the payment of
seven level premiums.
If a policy is considered a modified endowment contract, all distributions under
the policy will be taxed on an "income-first" basis. Most distributions received
by a policyowner directly or indirectly (including loans, withdrawals, partial
surrenders, or the assignment or pledge of any portion of the value of the
policy) will be includible in gross income to the extent that the cash surrender
value of the policy exceeds the policyowner's investment in the contract. Any
additional amounts will be treated as a return of capital to the extent of the
policyowner's basis in the policy. In addition, with certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be permanently classified as a
modified endowment contract.
ESTATE AND GENERATION-SKIPPING TAXES
When the last surviving Insured dies, the Death Proceeds will generally be
includible in the Policyowner's estate for purposes of federal estate tax if the
last surviving Insured owned the Policy. If the Policyowner was not the last
surviving Insured, the fair market value of the Policy would be included in the
Policyowner's estate upon the Policyowner's death. Nothing would be includible
in the last surviving Insured's estate if he or she neither retained incidents
of ownership at death nor had given up ownership within three years before
death.
Federal estate tax is integrated with federal gift tax under a unified rate
schedule. In general, estates less than $625,000 will not incur a federal estate
tax liability. In addition, an unlimited marital deduction may be available for
federal estate and gift tax purposes. The unlimited marital deduction permits
the deferral of taxes until the death of the surviving spouse, when the death
proceeds would be available to pay taxes due and other expenses incurred.
As a general rule, if an insured is the policyowner, and death proceeds are
payable to a person two or more generations younger than the policyowner, a
generation-skipping tax may be payable on the death proceeds at rates similar to
the maximum estate tax rate in effect at the time. If the policyowner (whether
or not he or she is
60
<PAGE>
an insured) transfers ownership of the policy to someone two or more generations
younger, the transfer may be subject to the generation-skipping tax, the taxable
amount being the value of the policy. (Such a transfer is unlikely but not
impossible.) If the death proceeds are not includible in the insured's estate
(because the insured retained no incidents of ownership and did not relinquish
ownership within three years before death), the payment of the death proceeds to
the beneficiary is not subject to the generation-skipping tax regardless of the
beneficiary's generation. The generation-skipping tax provisions generally apply
to transfers which would be subject to the gift and estate tax rules.
Individuals are generally allowed an aggregate generation-skipping tax exemption
of $1 million. Because these rules are complex, the Policyowner should consult
with a tax adviser for specific information where benefits are passing to
younger generations.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities laws, any amount in the General Account is not generally subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
GENERAL DESCRIPTION
The General Account is made up of all of the general assets of the Company other
than those allocated to any Separate Account. Allocations to the General Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. Subject to applicable law, the Company has sole discretion
over the investment of assets of the General Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").
The Company may, at its sole discretion, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. However, the excess interest rate, if any,
in effect on the date a premium is received at the Principal Office is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. YOU
ASSUME THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM
RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to Debt. 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 Policy
Value transferred to the General Account, plus interest
61
<PAGE>
at an annual rate of 4%, plus any excess interest which the Company credits,
less the sum of all Policy charges allocable to the General Account, and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
THE POLICY
This Prospectus describes an individual joint survivorship flexible premium
variable life insurance policy, and is generally intended to serve as a
disclosure document only for the aspects of the Policy relating to the Separate
Account. For complete details regarding the General Account, see the Policy
itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS
If the 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 Policy Value allocated to
the General Account.
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans also may be made from the Policy Value in the General Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days or more, however, the Company will pay interest at least
equal to an effective annual yield of 3.5% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
FINANCIAL STATEMENTS
Financial statements for the Company and for the Separate 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
Separate Account.
62
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<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,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<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) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</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) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
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............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</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) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
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
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</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) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</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")
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"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, 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 (APY) 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.
APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. 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
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect 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
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
In November 1995, the Financial Accounting Standards Board ("FASB") 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.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company considers,
among other things, the estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
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.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.
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
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
costs related to universal life products, variable annuities and contractholder
deposit funds are deferred and amortized in proportion to total estimated gross
profits from investment yields, mortality, surrender charges and expense margins
over the expected life of the contracts. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from this group of products, including
realized and unrealized gains and losses from investments. Acquisition costs
related to fixed annuities and other life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
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
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife consolidated United States Federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated United States Federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT TRANSACTIONS
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 APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
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
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$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
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>
1997
-----------------------------------------------
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....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<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
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, 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>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------
<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</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>
1997
Fixed maturities............................. $1,894.8 $27.6 $ 16.2
Equity securities............................ $ 145.5 $55.8 $ 1.3
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
</TABLE>
F-13
<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>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
Net appreciation (depreciation) on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.6 $ 86.7 $ 209.3
---------- ----------- -------
---------- ----------- -------
1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
Net (depreciation) appreciation on available-for-sale
securities.............................................. (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 securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change 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
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, respectively.
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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 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 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the 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>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----
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
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.
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. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</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 $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.
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 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. INTEREST RATE 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. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally recognized rating agencies. 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, which at
December 31, 1997 was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.
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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.
G. OTHER SWAP CONTRACTS
The Company enters into 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. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
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, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.
H. OTHER
At December 31, 1997, 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 $262.5 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>
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, 1997 and 1996.
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-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
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-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</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, 1997 or 1996, 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-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 33.0 $ 37.8
Other.......................................................................................... -- 0.6
--------- ---------
Total short-term debt............................................................................ $ 33.0 $ 38.4
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.6 $ 2.7
--------- ---------
--------- ---------
</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, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 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 limited to 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. These repurchase agreements were settled by the end of 1996.
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 and
APY.
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also 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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................ $ 83.3 $ 96.8 $ 119.7
Deferred........................................................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total................................................................................ $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<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) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 131.8 $ 122.3 $ 105.6
Tax-exempt interest................................................................ (37.9) (35.3) (32.2)
Differential earnings amount....................................................... - (10.2) (7.6)
Dividend received deduction........................................................ (3.2) (1.6) (4.0)
Changes in tax reserve estimates................................................... 7.8 4.7 19.3
Other, net......................................................................... (1.0) 1.2 1.6
--------- --------- ---------
Federal income tax expense........................................................... $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</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 liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (15.6) $ (16.3)
Loss reserve discounting................................................................... (391.6) (355.1)
Deferred acquisition costs................................................................. 291.8 249.4
Employee benefit plans..................................................................... (48.0) (41.4)
Investments, net........................................................................... 175.4 128.5
Bad debt reserve........................................................................... (14.3) (26.2)
Other, net................................................................................. 15.2 (5.8)
--------- ---------
Deferred tax (asset) liability, net.......................................................... $ 12.9 $ (66.9)
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed 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 former 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. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. 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.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.9 $ 19.0 $ 19.7
Interest accrued on projected benefit obligations..................................... 23.5 21.9 21.1
Actual return on assets............................................................... (64.0) (42.2) (89.3)
Net amortization and deferral......................................................... 29.0 9.3 66.1
--------- --------- ---------
Net pension expense................................................................... $ 8.4 $ 8.0 $ 17.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. 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 three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $2.8 million and $2.0 million,
respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.
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 payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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) 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.7 $ 40.4
Fully eligible active plan participants..................................................... 7.0 7.5
Other active plan participants.............................................................. 24.1 24.4
--------- ---------
71.8 72.3
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 71.8 72.3
Unrecognized prior service benefit............................................................ 15.3 23.8
Unrecognized loss............................................................................. (0.8) (5.0)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 86.3 $ 91.1
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.0 $ 3.2 $ 4.2
Interest cost........................................................................... 4.6 4.6 6.9
Amortization of gain.................................................................... (2.8) (2.8) (0.5)
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 4.8 $ 5.0 $ 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
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, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. 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.
Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.
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. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 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.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
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 $127.6 million.
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. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. 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 Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica 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.
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. 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 1998.
14. 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, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.
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
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, 1997, CAR was the only reinsurer 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 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 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.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................................................... $ 822.7 $ 735.7 $ 802.8
Acquisition expenses deferred................................................... 617.7 560.8 504.8
Amortized to expense during the year............................................ (476.0) (483.5) (470.3)
Adjustment to equity during the year............................................ (11.1) 9.7 (50.4)
Transferred to the Closed Block................................................. -- -- (24.8)
Adjustment for cession of term life insurance................................... -- -- (26.4)
Adjustment for cession of disability income insurance........................... (38.6) -- --
Adjustment for revision of universal and variable universal life insurance
mortality assumptions......................................................... 50.8 -- --
--------- --------- ---------
Balance at end of year............................................................ $ 965.5 $ 822.7 $ 735.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. 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
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
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 of $10.9 million 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. 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.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
In 1995, Hanover's favorable development was 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 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Due to the nature of the 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. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. 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. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. 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. The Company 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, the Company 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.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. 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
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
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 were liable for $65.0 million and
employers would 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. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
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.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its 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) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Inheiritage Account of First Allmercia 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
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select Income, Select International Equity, Select Capital
Appreciation, Fidelity VIP High Income, Fidelity VIP Equity-Income, Fidelity VIP
Growth, Fidelity VIP Overseas, Fidelity VIP II Asset Manager, T. Rowe Price
International Stock, and DGPF International Equity) constituting the Inheiritage
Account of First Allmerica Financial Life Insurance Company at December 31,
1997, 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 at
December 31, 1997 by correspondence with the Funds, provide a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE SELECT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH GROWTH
----------- ------------ ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment
Trust....................... $ 261,517 $ 2,656 $ 564,829 $ 290,259 $ 21,938 $ 314,260 $ 281,284
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)........ -- -- -- -- -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc................. -- -- -- -- -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc......................... -- -- -- -- -- -- --
----------- ------------ ------------ ------------ ---------- ---------- ------------
Total assets.............. 261,517 2,656 564,829 290,259 21,938 314,260 281,284
LIABILITIES: -- -- -- -- -- -- --
----------- ------------ ------------ ------------ ---------- ---------- ------------
Net assets................ $ 261,517 $ 2,656 $ 564,829 $ 290,259 $ 21,938 $ 314,260 $ 281,284
----------- ------------ ------------ ------------ ---------- ---------- ------------
----------- ------------ ------------ ------------ ---------- ---------- ------------
Net asset distribution by
category:
Variable life policies...... $ 261,517 $ 2,656 $ 564,829 $ 290,259 $ 21,938 $ 314,260 $ 281,284
----------- ------------ ------------ ------------ ---------- ---------- ------------
----------- ------------ ------------ ------------ ---------- ---------- ------------
Units outstanding, December
31, 1997.................... 170,097 2,454 517,534 176,052 19,849 220,200 176,354
Net asset value per unit,
December 31, 1997........... $ 1.537459 $1.082110 $1.091385 $1.648710 $1.105239 $1.427158 $1.594998
<CAPTION>
SELECT
GROWTH AND SELECT VALUE SELECT
INCOME OPPORTUNITY** INCOME(a)
---------- ------------- -----------
<S> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment
Trust....................... $ 131,606 $ 255,483 $ --
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)........ -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc................. -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc......................... -- -- --
---------- ------------- -----------
Total assets.............. 131,606 255,483 --
LIABILITIES: -- -- --
---------- ------------- -----------
Net assets................ $ 131,606 $ 255,483 $ --
---------- ------------- -----------
---------- ------------- -----------
Net asset distribution by
category:
Variable life policies...... $ 131,606 $ 255,483 $ --
---------- ------------- -----------
---------- ------------- -----------
Units outstanding, December
31, 1997.................... 86,605 161,681 --
Net asset value per unit,
December 31, 1997........... $1.519604 $1.580163 $1.000000
</TABLE>
** Name changed. See Note 1.
(a) For the period ended 12/31/97, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT FIDELITY FIDELITY
INTERNATIONAL CAPITAL VIP HIGH VIP FIDELITY
EQUITY APPRECIATION INCOME EQUITY-INCOME VIP GROWTH
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ 189,093 $ 171,290 $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products
Funds (VIP)............................... -- -- 132,038 354,957 373,852
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
------------- ------------ ------------- ------------- ------------
Total assets............................ 189,093 171,290 132,038 354,957 373,852
LIABILITIES: -- -- -- -- --
------------- ------------ ------------- ------------- ------------
Net assets.............................. $ 189,093 $ 171,290 $ 132,038 $ 354,957 $ 373,852
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Net asset distribution by category:
Variable life policies.................... $ 189,093 $ 171,290 $ 132,038 $ 354,957 $ 373,852
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Units outstanding, December 31, 1997........ 133,787 101,731 99,852 226,032 272,587
Net asset value per unit, December 31,
1997...................................... $ 1.413391 $ 1.683750 $ 1.322332 $ 1.570383 $ 1.371496
<CAPTION>
FIDELITY T. ROWE PRICE DGPF
FIDELITY VIP II ASSET INTERNATIONAL INTERNATIONAL
VIP OVERSEAS MANAGER STOCK EQUITY
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products
Funds (VIP)............................... 11,698 36,458 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- 107,552 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- 99,997
------------ ------------- ------------- -------------
Total assets............................ 11,698 36,458 107,552 99,997
LIABILITIES: -- -- -- --
------------ ------------- ------------- -------------
Net assets.............................. $ 11,698 $ 36,458 $ 107,552 $ 99,997
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 11,698 $ 36,458 $ 107,552 $ 99,997
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Units outstanding, December 31, 1997........ 9,276 23,601 90,276 77,313
Net asset value per unit, December 31,
1997...................................... $ 1.261047 $ 1.544770 $ 1.191375 $ 1.293411
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME
FOR THE
GROWTH YEAR
FOR THE FOR THE ENDED
YEAR ENDED PERIOD DECEMBER FOR THE
DECEMBER 31, 9/15/95* 31, PERIOD
---------------------- TO --------- 12/13/96* TO
1997 1996 12/31/95 1997 12/31/96
---------- --------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 2,362 $ 813 $84 $119 $ 1
---------- --------- -------- --------- -----
EXPENSES:
Mortality and expense risk fees........... 1,221 338 22 14 1
Administrative expense fees............... 344 94 6 4 --
---------- --------- -------- --------- -----
Total expenses.......................... 1,565 432 28 18 1
---------- --------- -------- --------- -----
Net investment income (loss)............ 797 381 56 101 --
---------- --------- -------- --------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 38,579 5,093 568 -- --
Net realized gain (loss) from sales of
investments............................. 8,712 (915) -- 1 --
---------- --------- -------- --------- -----
Net realized gain (loss)................ 47,291 4,178 568 1 --
Net unrealized gain (loss)................ (29,295) 1,497 (223) 60 (1)
---------- --------- -------- --------- -----
Net realized and unrealized gain
(loss)................................ 17,996 5,675 345 61 (1)
---------- --------- -------- --------- -----
Net increase (decrease) in net assets
from
operations............................ $ 18,793 $ 6,056 $401 $162 $ (1)
---------- --------- -------- --------- -----
---------- --------- -------- --------- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 11/20/95* DECEMBER 31, 10/19/95*
------------------- TO ----------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $16,784 $ 4,621 $ 32 $ 2,248 $ 884 $ --
-------- -------- --- ------------ -------- --------
EXPENSES:
Mortality and expense risk fees........... 2,785 808 5 1,391 363 22
Administrative expense fees............... 786 224 1 393 101 6
-------- -------- --- ------------ -------- --------
Total expenses.......................... 3,571 1,032 6 1,784 464 28
-------- -------- --- ------------ -------- --------
Net investment income (loss)............ 13,213 3,589 26 464 420 (28)
-------- -------- --- ------------ -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- 7,681 1,414 --
Net realized gain (loss) from sales of
investments............................. -- -- -- 18,875 5,463 (1,224)
-------- -------- --- ------------ -------- --------
Net realized gain (loss)................ -- -- -- 26,556 6,877 (1,224)
Net unrealized gain (loss)................ -- -- -- 10,769 (927) (26)
-------- -------- --- ------------ -------- --------
Net realized and unrealized gain
(loss)................................ -- -- -- 37,325 5,950 (1,250)
-------- -------- --- ------------ -------- --------
Net increase (decrease) in net assets
from
operations............................ $13,213 $ 3,589 $ 26 $ 37,789 $ 6,370 $(1,278)
-------- -------- --- ------------ -------- --------
-------- -------- --- ------------ -------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 10/19/95* DECEMBER 31, 8/28/95*
-------------------- TO ---------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- --------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 566 $307 $78 $ -- $ -- $ --
-------- --------- --- ----------- -------- --------
EXPENSES:
Mortality and expense risk fees........... 53 49 6 2,003 681 30
Administrative expense fees............... 15 14 2 565 189 8
-------- --------- --- ----------- -------- --------
Total expenses.......................... 68 63 8 2,568 870 38
-------- --------- --- ----------- -------- --------
Net investment income (loss)............ 498 244 70 (2,568) (870) (38)
-------- --------- --- ----------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- 24,088 7,614 --
Net realized gain (loss) from sales of
investments............................. -- (36) -- 27,548 15,832 --
-------- --------- --- ----------- -------- --------
Net realized gain (loss)................ -- (36) -- 51,636 23,446 --
Net unrealized gain (loss)................ (128) (65) 6 (6,950) (5,567) (74)
-------- --------- --- ----------- -------- --------
Net realized and unrealized gain
(loss)................................ (128) (101) 6 44,686 17,879 (74)
-------- --------- --- ----------- -------- --------
Net increase (decrease) in net assets
from
operations............................ $ 370 $143 $76 $ 42,118 $17,009 $(112)
-------- --------- --- ----------- -------- --------
-------- --------- --- ----------- -------- --------
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 8/28/95* DECEMBER 31, 9/8/95*
------------------- TO ------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 812 $ 77 $ 1 $ 1,377 $ 503 $ 106
-------- -------- -------- -------- -------- ---------
EXPENSES:
Mortality and expense risk fees........... 1,169 139 24 904 284 12
Administrative expense fees............... 330 38 7 255 79 3
-------- -------- -------- -------- -------- ---------
Total expenses.......................... 1,499 177 31 1,159 363 15
-------- -------- -------- -------- -------- ---------
Net investment income (loss)............ (687) (100) (30) 218 140 91
-------- -------- -------- -------- -------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 13,732 3,679 -- 11,213 4,275 1,044
Net realized gain (loss) from sales of
investments............................. 12,531 3,602 -- 549 (255) 86
-------- -------- -------- -------- -------- ---------
Net realized gain (loss)................ 26,263 7,281 -- 11,762 4,020 1,130
Net unrealized gain (loss)................ 9,365 (2,989) (317) 6,825 1,076 (834)
-------- -------- -------- -------- -------- ---------
Net realized and unrealized gain
(loss)................................ 35,628 4,292 (317) 18,587 5,096 296
-------- -------- -------- -------- -------- ---------
Net increase (decrease) in net assets
from
operations............................ $34,941 $ 4,192 $(347) $18,805 $ 5,236 $ 387
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY
SELECT VALUE OPPORTUNITY**
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED
DECEMBER 31, 9/15/95* DECEMBER 31,
---------------------- TO ------------------------------
1997 1996 12/31/95 1997 1996 1995
-------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,402 $ 227 $61 $ 6,590 $ 1,058 $ 1
-------- ----------- -------- -------- -------- ---
EXPENSES:
Mortality and expense risk fees........... 1,190 189 21 1,146 214 1
Administrative expense fees............... 335 53 6 323 59 --
-------- ----------- -------- -------- -------- ---
Total expenses.......................... 1,525 242 27 1,469 273 1
-------- ----------- -------- -------- -------- ---
Net investment income (loss)............ (123) (15) 34 5,121 785 --
-------- ----------- -------- -------- -------- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 33,367 1,440 229 9,317 126 --
Net realized gain (loss) from sales of
investments............................. 14,580 3,045 -- (1,218) 685 --
-------- ----------- -------- -------- -------- ---
Net realized gain (loss)................ 47,947 4,485 229 8,099 811 --
Net unrealized gain (loss)................ (16,439) (26) (121) (8,910) 3,572 17
-------- ----------- -------- -------- -------- ---
Net realized and unrealized gain
(loss)................................ 31,508 4,459 108 (811) 4,383 17
-------- ----------- -------- -------- -------- ---
Net increase (decrease) in net assets
from
operations............................ $31,385 $4,444 $142 $ 4,310 $ 5,168 $ 17
-------- ----------- -------- -------- -------- ---
-------- ----------- -------- -------- -------- ---
<CAPTION>
SELECT CAPITAL APPRECIATION
FOR THE
YEAR ENDED FOR THE
DECEMBER 31, PERIOD
------------------- 4/28/95* TO
1997 1996 12/31/95
-------- -------- ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ -- $ 86
-------- -------- -----
EXPENSES:
Mortality and expense risk fees........... 894 165 10
Administrative expense fees............... 252 46 3
-------- -------- -----
Total expenses.......................... 1,146 211 13
-------- -------- -----
Net investment income (loss)............ (1,146) (211) 73
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 28 --
Net realized gain (loss) from sales of
investments............................. 10,252 (724) 1
-------- -------- -----
Net realized gain (loss)................ 10,252 (696) 1
Net unrealized gain (loss)................ 12,967 (814) 322
-------- -------- -----
Net realized and unrealized gain
(loss)................................ 23,219 (1,510) 323
-------- -------- -----
Net increase (decrease) in net assets
from
operations............................ $22,073 $(1,721) $ 396
-------- -------- -----
-------- -------- -----
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, 12/5/95* DECEMBER 31, 8/28/95*
---------------------- TO ------------------ TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 5,394 $ 1,230 $ -- $ 2,557 $ 90 $ 85
-------- ----------- -------- -------- -------- --------
EXPENSES:
Mortality and expense risk fees........... 1,080 506 9 1,988 815 25
Administrative expense fees............... 305 141 3 561 227 7
-------- ----------- -------- -------- -------- --------
Total expenses.......................... 1,385 647 12 2,549 1,042 32
-------- ----------- -------- -------- -------- --------
Net investment income (loss)............ 4,009 583 (12) 8 (952) 53
-------- ----------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 667 240 -- 12,855 2,564 --
Net realized gain (loss) from sales of
investments............................. 15,572 5,531 -- 329 (844) 1
-------- ----------- -------- -------- -------- --------
Net realized gain (loss)................ 16,239 5,771 -- 13,184 1,720 1
-------- ----------- -------- -------- -------- --------
Net unrealized gain (loss)................ 587 625 138 37,086 9,822 673
-------- ----------- -------- -------- -------- --------
Net realized and unrealized gain (loss) 16,826 6,396 138 50,270 11,542 674
-------- ----------- -------- -------- -------- --------
Net increase (decrease) in net assets
from
operations............................ $20,835 $ 6,979 $ 126 $50,278 $10,590 $727
-------- ----------- -------- -------- -------- --------
-------- ----------- -------- -------- -------- --------
<CAPTION>
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS
FOR THE FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED PERIOD
DECEMBER 31, PERIOD DECEMBER 31, 9/8/95*
------------------- 8/28/95* TO ------------------- TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,211 $ 212 $ -- $ 86 $ 15 $ --
-------- -------- ----------- -------- -------- --------
EXPENSES:
Mortality and expense risk fees........... 2,263 1,017 46 120 27 9
Administrative expense fees............... 638 282 12 34 7 2
-------- -------- ----------- -------- -------- --------
Total expenses.......................... 2,901 1,299 58 154 34 11
-------- -------- ----------- -------- -------- --------
Net investment income (loss)............ (1,690) (1,087) (58) (68) (19) (11)
-------- -------- ----------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 5,419 5,366 -- 340 17 --
Net realized gain (loss) from sales of
investments............................. 1,306 (57) -- 9,680 338 339
-------- -------- ----------- -------- -------- --------
Net realized gain (loss)................ 6,725 5,309 -- 10,020 355 339
-------- -------- ----------- -------- -------- --------
Net unrealized gain (loss)................ 38,619 11,462 (947) (557) 267 (35)
-------- -------- ----------- -------- -------- --------
Net realized and unrealized gain (loss) 45,344 16,771 (947) 9,463 622 304
-------- -------- ----------- -------- -------- --------
Net increase (decrease) in net assets
from
operations............................ $43,654 $ 15,684 $(1,005) $9,395 $ 603 $ 293
-------- -------- ----------- -------- -------- --------
-------- -------- ----------- -------- -------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER T. ROWE PRICE INTERNATIONAL STOCK
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
DECEMBER 31, DECEMBER 31, PERIOD
---------------------------------- --------------------- 8/28/95* TO
1997 1996 1995 1997 1996 12/31/95
-------- ----------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 404 $ 98 $ 2 $ 989 $ 170 $ --
-------- ----------- --- --------- --------- -----
EXPENSES:
Mortality and expense risk fees........... 228 58 4 625 102 2
Administrative expense fees............... 65 16 1 177 28 1
-------- ----------- --- --------- --------- -----
Total expenses.......................... 293 74 5 802 130 3
-------- ----------- --- --------- --------- -----
Net investment income (loss)............ 111 24 (3) 187 40 (3)
-------- ----------- --- --------- --------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 1,014 80 -- 1,401 101 --
Net realized gain (loss) from sales of
investments............................. 32 17 -- 6,413 3,240 --
-------- ----------- --- --------- --------- -----
Net realized gain (loss)................ 1,046 97 -- 7,814 3,341 --
Net unrealized gain (loss)................ 3,696 750 87 (2,178) (74) 23
-------- ----------- --- --------- --------- -----
Net realized and unrealized gain
(loss)................................ 4,742 847 87 5,636 3,267 23
-------- ----------- --- --------- --------- -----
Net increase (decrease) in net assets
from
operations............................ $ 4,853 $ 871 $ 84 $ 5,823 $ 3,307 $ 20
-------- ----------- --- --------- --------- -----
-------- ----------- --- --------- --------- -----
<CAPTION>
DGPF INTERNATIONAL EQUITY
FOR THE
YEAR ENDED FOR THE
DECEMBER 31, PERIOD
------------------ 10/19/95* TO
1997 1996 12/31/95
-------- -------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,076 $ 585 $ --
-------- -------- -----
EXPENSES:
Mortality and expense risk fees........... 613 180 6
Administrative expense fees............... 173 50 2
-------- -------- -----
Total expenses.......................... 786 230 8
-------- -------- -----
Net investment income (loss)............ 290 355 (8)
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 157 --
Net realized gain (loss) from sales of
investments............................. 9,879 12 --
-------- -------- -----
Net realized gain (loss)................ 9,879 169 --
Net unrealized gain (loss)................ (1,771) 2,667 169
-------- -------- -----
Net realized and unrealized gain
(loss)................................ 8,108 2,836 169
-------- -------- -----
Net increase (decrease) in net assets
from
operations............................ $ 8,398 $ 3,191 $161
-------- -------- -----
-------- -------- -----
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME
YEAR
GROWTH ENDED
YEAR ENDED DECEMBER DECEMBER PERIOD
31, PERIOD 31, FROM
-------------------- FROM 9/15/95* TO --------- 12/13/96* TO
1997 1996 12/31/95 1997 12/31/96
--------- -------- -------------------- --------- ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 797 $ 381 $ 56 $ 101 $ --
Net realized gain (loss)......... 47,291 4,178 568 1 --
Net unrealized gain (loss)....... (29,295) 1,497 (223) 60 (1)
--------- -------- ------ --------- -----
Net increase (decrease) in net
assets from operations......... 18,793 6,056 401 162 (1)
--------- -------- ------ --------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 35,548 22,048 2,038 2,479 85
Terminations..................... -- -- -- -- --
Insurance and other charges...... (783) (147) (5) (70) (4)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 147,282 23,759 6,527 5 --
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- --
--------- -------- ------ --------- -----
Net increase (decrease) in net
assets from capital
transactions................... 182,047 45,660 8,560 2,414 81
--------- -------- ------ --------- -----
Net increase (decrease) in net
assets......................... 200,840 51,716 8,961 2,576 80
NET ASSETS:
Beginning of period.............. 60,677 8,961 -- 80 --
--------- -------- ------ --------- -----
End of period.................... $ 261,517 $ 60,677 $8,961 $2,656 $ 80
--------- -------- ------ --------- -----
--------- -------- ------ --------- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, PERIOD 31, PERIOD
------------------ FROM 11/20/95* TO -------------------- FROM 10/19/95* TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- --------------------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 13,213 $ 3,589 $ 26 $ 464 $ 420 $ (28)
Net realized gain (loss)......... -- -- -- 26,556 6,877 (1,224)
Net unrealized gain (loss)....... -- -- -- 10,769 (927) (26)
-------- -------- ----- --------- -------- --------
Net increase (decrease) in net
assets from operations......... 13,213 3,589 26 37,789 6,370 (1,278)
-------- -------- ----- --------- -------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 392,241 71,860 971 72,231 8,653 71,958
Terminations..................... -- -- -- -- -- --
Insurance and other charges...... (7,672) (975) (13) (15,253) (9,327) (14)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... (112,984) 204,595 (22) 137,114 38,845 (56,829)
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
-------- -------- ----- --------- -------- --------
Net increase (decrease) in net
assets from capital
transactions................... 271,585 275,480 936 194,092 38,171 15,115
-------- -------- ----- --------- -------- --------
Net increase (decrease) in net
assets......................... 284,798 279,069 962 231,881 44,541 13,837
NET ASSETS:
Beginning of period.............. 280,031 962 -- 58,378 13,837 --
-------- -------- ----- --------- -------- --------
End of period.................... $564,829 $280,031 $962 $ 290,259 $ 58,378 $ 13,837
-------- -------- ----- --------- -------- --------
-------- -------- ----- --------- -------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 31,
31, PERIOD PERIOD
-------------------- FROM 10/19/95* TO ------------------------- FROM 8/28/95*
1997 1996 12/31/95 1997 1996 TO 12/31/95
--------- -------- -------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 498 $ 244 $ 70 $ (2,568) $ (870) $ (38)
Net realized gain (loss)......... -- (36) -- 51,636 23,446 --
Net unrealized gain (loss)....... (128) (65) 6 (6,950) (5,567) (74)
--------- -------- ------ ----------- ----------- -------------
Net increase (decrease) in net
assets from operations......... 370 143 76 42,118 17,009 (112)
--------- -------- ------ ----------- ----------- -------------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 492 3,490 2,326 53,541 45,627 3,536
Terminations..................... -- -- -- (3,454) -- --
Insurance and other charges...... (6) (36) (1) (1,033) (458) (14)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 15,339 (2,903) 2,648 102,695 41,406 13,399
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
--------- -------- ------ ----------- ----------- -------------
Net increase (decrease) in net
assets from capital
transactions................... 15,825 551 4,973 151,749 86,575 16,921
--------- -------- ------ ----------- ----------- -------------
Net increase (decrease) in net
assets......................... 16,195 694 5,049 193,867 103,584 16,809
NET ASSETS:
Beginning of period.............. 5,743 5,049 -- 120,393 16,809 --
--------- -------- ------ ----------- ----------- -------------
End of period.................... $ 21,938 $ 5,743 $5,049 $ 314,260 $ 120,393 $ 16,809
--------- -------- ------ ----------- ----------- -------------
--------- -------- ------ ----------- ----------- -------------
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, PERIOD 31, PERIOD
------------------ FROM 8/28/95* TO -------------------- FROM 9/8/95* TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- --------------------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (687) $ (100) $ (30) $ 218 $ 140 $ 91
Net realized gain (loss)......... 26,263 7,281 -- 11,762 4,020 1,130
Net unrealized gain (loss)....... 9,365 (2,989) (317) 6,825 1,076 (834)
-------- -------- ------ --------- -------- -------
Net increase (decrease) in net
assets from operations......... 34,941 4,192 (347) 18,805 5,236 387
-------- -------- ------ --------- -------- -------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 53,947 12,649 3,045 29,588 37,896 2,580
Terminations..................... -- -- -- (2,515) -- --
Insurance and other charges...... (757) (82) (11) (828) (266) (45)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 167,075 104 6,528 21,252 (5,491) 25,007
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- --
---
-------- -------- ------ -------- -------
---------
Net increase (decrease) in net
assets from capital
transactions................... 220,265 12,671 9,562 47,497 32,139 27,542
-------- -------- ------ --------- -------- -------
Net increase (decrease) in net
assets......................... 255,206 16,863 9,215 66,302 37,375 27,929
NET ASSETS:
Beginning of period.............. 26,078 9,215 -- 65,304 27,929 --
-------- -------- ------ --------- -------- -------
End of period.................... $281,284 $ 26,078 $9,215 $ 131,606 $ 65,304 $ 27,929
-------- -------- ------ --------- -------- -------
-------- -------- ------ --------- -------- -------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY** SELECT INTERNATIONAL EQUITY
YEAR ENDED DECEMBER YEAR ENDED
31, PERIOD DECEMBER 31,
--------------------- FROM 9/15/95* TO ----------------------------------
1997 1996 12/31/95 1997 1996 1995
--------- --------- -------------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (123) $ (15) $ 34 $ 5,121 $ 785 $ --
Net realized gain (loss)......... 47,947 4,485 229 8,099 811 --
Net unrealized gain (loss)....... (16,439) (26) (121) (8,910) 3,572 17
--------- --------- ------ ---------- --------- ---------
Net increase (decrease) in net
assets from
operations..................... 31,385 4,444 142 4,310 5,168 17
--------- --------- ------ ---------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 45,084 10,199 2,038 26,346 32,320 --
Terminations..................... -- -- -- (1,344) -- --
Insurance and other charges...... (822) (138) (5) (498) (122) --
Other transfers from (to) the
General Account
of First Allmerica Financial
Life Insurance
Company (Sponsor).............. 145,702 10,927 6,527 101,522 21,410 --
Net increase (decrease) in
investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. -- -- -- -- (132) --
--------- --------- ------ ---------- --------- ---------
Net increase (decrease) in net
assets from
capital transactions........... 189,964 20,988 8,560 126,026 53,476 --
--------- --------- ------ ---------- --------- ---------
Net increase (decrease) in net
assets......................... 221,349 25,432 8,702 130,336 58,644 17
NET ASSETS:
Beginning of period.............. 34,134 8,702 -- 58,757 113 96
--------- --------- ------ ---------- --------- ---------
End of period.................... $ 255,483 $ 34,134 $8,702 $189,093 $58,757 $ 113
--------- --------- ------ ---------- --------- ---------
--------- --------- ------ ---------- --------- ---------
<CAPTION>
SELECT CAPITAL APPRECIATION
YEAR ENDED
DECEMBER 31, PERIOD
------------------ FROM 4/28/95* TO
1997 1996 12/31/95
-------- -------- ---------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (1,146) $ (211) $ 73
Net realized gain (loss)......... 10,252 (696) 1
Net unrealized gain (loss)....... 12,967 (814) 322
-------- -------- ------
Net increase (decrease) in net
assets from
operations..................... 22,073 (1,721) 396
-------- -------- ------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 44,247 17,225 3,918
Terminations..................... -- -- --
Insurance and other charges...... (846) (278) (19)
Other transfers from (to) the
General Account
of First Allmerica Financial
Life Insurance
Company (Sponsor).............. 65,093 21,296 --
Net increase (decrease) in
investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. -- (294) 200
-------- -------- ------
Net increase (decrease) in net
assets from
capital transactions........... 108,494 37,949 4,099
-------- -------- ------
Net increase (decrease) in net
assets......................... 130,567 36,228 4,495
NET ASSETS:
Beginning of period.............. 40,723 4,495 --
-------- -------- ------
End of period.................... $171,290 $ 40,723 $4,495
-------- -------- ------
-------- -------- ------
</TABLE>
* Date of initial investment.
** Name Changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 31,
31, PERIOD PERIOD
------------------- FROM 12/5/95* TO ----------------------- FROM 8/28/95*
1997 1996 12/31/95 1997 1996 TO 12/31/95
-------- -------- -------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ 4,009 $ 583 $ (12) $ 8 $ (952) $ 53
Net realized gain (loss)......... 16,239 5,771 -- 13,184 1,720 1
Net unrealized gain (loss)....... 587 625 138 37,086 9,822 673
-------- -------- ------- ---------- ---------- -------
Net increase (decrease) in net
assets from operations......... 20,835 6,979 126 50,278 10,590 727
-------- -------- ------- ---------- ---------- -------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 37,579 39,315 1,957 91,656 58,682 11,736
Terminations..................... -- -- -- -- -- --
Insurance and other charges...... (1,001) (471) (6) (1,977) (869) (78)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 605 12,376 13,744 70,023 17,709 46,480
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
-------- -------- ------- ---------- ---------- -------
Net increase (decrease) in net
assets from capital
transactions................... 37,183 51,220 15,695 159,702 75,522 58,138
-------- -------- ------- ---------- ---------- -------
Net increase (decrease) in net
assets......................... 58,018 58,199 15,821 209,980 86,112 58,865
NET ASSETS:
Beginning of period.............. 74,020 15,821 -- 144,977 58,865 --
-------- -------- ------- ---------- ---------- -------
End of period.................... $132,038 $ 74,020 $15,821 $354,957 $144,977 $58,865
-------- -------- ------- ---------- ---------- -------
-------- -------- ------- ---------- ---------- -------
<CAPTION>
FIDELITY VIP GROWTH FIDELITY VIP OVERSEAS
YEAR ENDED YEAR ENDED DECEMBER
DECEMBER 31, PERIOD 31, PERIOD
------------------ FROM 8/28/95* TO ------------------- FROM 9/8/95* TO
1997 1996 12/31/95 1997 1996 12/31/95
-------- -------- ---------------------- -------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..... $ (1,690) $ (1,087) $ (58) $ (68) $ (19) $ (11)
Net realized gain (loss)......... 6,725 5,309 -- 10,020 355 339
Net unrealized gain (loss)....... 38,619 11,462 (947) (557) 267 (35)
-------- -------- ------- -------- -------- ------
Net increase (decrease) in net
assets from operations......... 43,654 15,684 (1,005) 9,395 603 293
-------- -------- ------- -------- -------- ------
FROM CAPITAL TRANSACTIONS:
Net premiums..................... 64,784 60,044 12,819 3,393 3,103 1,032
Terminations..................... (3,119) -- -- -- -- --
Insurance and other charges...... (2,303) (888) (68) (267) (83) (18)
Other transfers from (to) the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor).... 98,870 69,327 16,053 (5,216) (272) (265)
Net increase (decrease) in
investment by First Allmerica
Financial Life Insurance
Company (Sponsor).............. -- -- -- -- -- --
-------- -------- ------- -------- -------- ------
Net increase (decrease) in net
assets from capital
transactions................... 158,232 128,483 28,804 (2,090) 2,748 749
-------- -------- ------- -------- -------- ------
Net increase (decrease) in net
assets......................... 201,886 144,167 27,799 7,305 3,351 1,042
NET ASSETS:
Beginning of period.............. 171,966 27,799 -- 4,393 1,042 --
-------- -------- ------- -------- -------- ------
End of period.................... $373,852 $171,966 $27,799 $ 11,698 $ 4,393 $ 1,042
-------- -------- ------- -------- -------- ------
-------- -------- ------- -------- -------- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
INHEIRITAGE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER T. ROWE PRICE INTERNATIONAL STOCK
YEAR ENDED YEAR ENDED PERIOD
DECEMBER 31, DECEMBER 31, FROM
------------------------------ ------------------- 8/28/95* TO
1997 1996 1995 1997 1996 12/31/95
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 111 $ 24 $ (3) $ 187 $ 40 $ (3)
Net realized gain (loss).................. 1,046 97 -- 7,814 3,341 --
Net unrealized gain (loss)................ 3,696 750 87 (2,178) (74) 23
-------- -------- -------- -------- -------- -----
Net increase (decrease) in net assets from
operations.............................. 4,853 871 84 5,823 3,307 20
-------- -------- -------- -------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums.............................. 7,867 7,874 2,064 20,514 15,072 671
Terminations.............................. -- -- -- -- -- --
Insurance and other charges............... (453) (214) (36) (457) (189) (4)
Other transfers from (to) the General
Account
of First Allmerica Financial Life
Insurance
Company (Sponsor)....................... 13,549 28 1 60,469 2,325 1
Net increase (decrease) in investment by
First
Allmerica Financial Life Insurance
Company (Sponsor)....................... -- (128) -- -- -- --
-------- -------- -------- -------- -------- -----
Net increase (decrease) in net assets from
capital transactions.................... 20,963 7,560 2,029 80,526 17,208 668
-------- -------- -------- -------- -------- -----
Net increase (decrease) in net assets..... 25,816 8,431 2,113 86,349 20,515 688
NET ASSETS:
Beginning of period....................... 10,642 2,211 98 21,203 688 --
-------- -------- -------- -------- -------- -----
End of period............................. $ 36,458 $ 10,642 $ 2,211 $107,552 $ 21,203 $688
-------- -------- -------- -------- -------- -----
-------- -------- -------- -------- -------- -----
<CAPTION>
DGPF INTERNATIONAL EQUITY
YEAR ENDED
DECEMBER 31, PERIOD
------------------- FROM 10/19/95* TO
1997 1996 12/31/95
-------- -------- ---------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).............. $ 290 $ 355 $ (8)
Net realized gain (loss).................. 9,879 169 --
Net unrealized gain (loss)................ (1,771) 2,667 169
-------- -------- ------
Net increase (decrease) in net assets from
operations.............................. 8,398 3,191 161
-------- -------- ------
FROM CAPITAL TRANSACTIONS:
Net premiums.............................. 10,520 1,484 2,326
Terminations.............................. -- -- --
Insurance and other charges............... (284) (32) (1)
Other transfers from (to) the General
Account
of First Allmerica Financial Life
Insurance
Company (Sponsor)....................... 55,716 15,870 2,648
Net increase (decrease) in investment by
First
Allmerica Financial Life Insurance
Company (Sponsor)....................... -- -- --
-------- -------- ------
Net increase (decrease) in net assets from
capital transactions.................... 65,952 17,322 4,973
-------- -------- ------
Net increase (decrease) in net assets..... 74,350 20,513 5,134
NET ASSETS:
Beginning of period....................... 25,647 5,134 --
-------- -------- ------
End of period............................. $ 99,997 $ 25,647 $ 5,134
-------- -------- ------
-------- -------- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Inheiritage Account (Inheiritage) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company), established on May 1,
1995, for the purpose of separating from the general assets of the Company those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of Inheiritage are clearly identified and distinguished
from the other assets and liabilities of the Company. Inheiritage cannot be
charged with liabilities arising out of any other business of the Company.
Inheiritage is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Inheiritage currently offers
nineteen Sub-Accounts under the contracts. 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 (Fidelity
VIP) or the Variable Insurance Products Fund II (Fidelity VIP II) managed by
Fidelity Management & Research Company (FMR), or of T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price, and DGPF (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, this portfolio changed its name to Select Value Opportunity
Fund.
Certain prior year balances have been reclassified to conform with current year
presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, or DGPF. Net realized gains and losses on securities sold are
determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, 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 (the Code) and files a consolidated
federal income tax return. The Company anticipates no tax liability resulting
from the operations of Inheiritage. Therefore, no provision for income taxes has
been charged against Inheiritage.
SA-13
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, and DGPF at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth................................................ 108,244 $ 289,538 $ 2.416
Investment Grade Income............................... 2,388 2,597 1.112
Money Market.......................................... 564,829 564,829 1.000
Equity Index.......................................... 105,434 280,442 2.753
Government Bond....................................... 20,953 22,124 1.047
Select Aggressive Growth.............................. 141,240 326,851 2.225
Select Growth......................................... 155,319 275,225 1.811
Select Growth and Income.............................. 84,797 124,539 1.552
Select Value Opportunity*............................. 157,123 272,068 1.626
Select Income......................................... -- -- --
Select International Equity........................... 141,009 194,418 1.341
Select Capital Appreciation........................... 100,937 158,815 1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income........................................... 9,723 130,689 13.580
Equity-Income......................................... 14,619 307,376 24.280
Growth................................................ 10,077 324,718 37.100
Overseas.............................................. 609 12,023 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager......................................... 2,024 31,926 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock................................... 8,442 109,782 12.740
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity............................. 6,443 98,932 15.520
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of $6. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1997, 1996 and 1995, these monthly deductions from policy
values amounted to $35,310, $13,818 and $336, respectively. These amounts are
included on the statements of changes in net assets in Insurance and other
charges.
SA-14
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The Company makes a charge of .90% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The mortality and expense 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. During the first 15 policy years, the Company
also charges each Sub-Account .25% per annum based on the average daily net
assets of each Sub-Account for administrative expenses. These charges are
deducted in the daily computation of unit values and paid to the Company on a
daily basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of the Company, is the principal underwriter and general distributor of
Inheiritage, and does not receive any compensation for sales of Inheiritage
policies. Commissions are paid to registered representatives of Allmerica
Investments and to 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, 1997,
1996 and 1995, the Company received no surrender charges applicable to
Inheiritage.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the 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 The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that Inheiritage satisfies the current requirements
of the regulations, and it intends that Inheiritage will continue to meet such
requirements.
SA-15
<PAGE>
INHEIRITAGE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, and DGPF shares by Inheiritage during the year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth........................................................... $ 450,250 $ 228,827
Investment Grade Income.......................................... 2,594 80
Money Market..................................................... 3,843,200 3,558,403
Equity Index..................................................... 525,296 323,059
Government Bond.................................................. 16,396 73
Select Aggressive Growth......................................... 673,374 500,104
Select Growth.................................................... 593,569 360,259
Select Growth and Income......................................... 64,177 5,249
Select Value Opportunity*........................................ 524,481 301,273
Select Income.................................................... -- --
Select International Equity...................................... 353,239 212,773
Select Capital Appreciation...................................... 230,028 122,679
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income...................................................... 1,732,543 1,690,685
Equity-Income.................................................... 175,766 3,199
Growth........................................................... 174,070 12,109
Overseas......................................................... 1,281,361 1,283,178
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager.................................................... 22,538 450
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.............................................. 803,241 721,128
DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity........................................ 310,386 244,143
----------- ----------
Totals........................................................... $11,776,509 $9,567,671
----------- ----------
----------- ----------
</TABLE>
* Name changed. See Note 1.
SA-16
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, your Representative
should be contacted.
The following supplemental benefits are available for issue under the Policies
for an additional charge. CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL
STATES.
SPLIT OPTION RIDER/EXCHANGE OPTION RIDER
This Rider, available only at Date of Issue, permits you to split the Policy
into two life insurance policies, one covering each Insured singly, subject
to Company guidelines.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and minor children of
either primary Insured. The rider includes a feature that allows you to
convert the other-insured coverage to any permanent life insurance policy
acceptable to the Company.
FOUR-YEAR TERM RIDER
This Rider provides a term insurance benefit during the first four Policy
years, payable upon the death of the last surviving Insured during the
coverage period.
GUARANTEED DEATH BENEFIT RIDER
This Rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE, (a) guarantees that
the Policy will not lapse regardless of the performance of the Separate
Account, and (b) provides a guaranteed net death benefit.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that would otherwise be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of (a) the rate per $1,000 of value applied based on the Company's
non-guaranteed current payment option rates for the Policies; or (b) the rate in
the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Separate Account.
<TABLE>
<C> <S>
OPTION A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30). Payments
may be made annually, semi-annually, quarterly or monthly.
OPTION B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's Age on the
date the first payment will be made. One of three variations may be
chosen. Depending upon this choice, payments will end:
(a) upon the death of the payee, with no further payments due (Life Annuity);
(b) upon the death of the payee, but not before the sum of the payments made
first equals or exceeds the amount applied under this option (Life Annuity
with Installment Refund); or
(c) upon the death of the payee, but not before a selected period (5, 10 or 20
years) has elapsed (Life Annuity with Period Certain).
OPTION C: INTEREST PAYMENTS. The Company will pay interest at a rate determined by
the Company each year but which will not be less than 3.5%. Payments may
be made annually, semi-annually, quarterly or monthly. Payments will end
when the amount left with the Company has been withdrawn. However,
payments will not continue after the death of the payee. Any unpaid
balance plus accrued interest will be paid in a lump sum.
OPTION D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the unpaid
balance is exhausted. Interest will be credited to the unpaid balance. The
rate of interest will be determined by the Company each year but will not
be less than 3.5%. Payments may be made annually, semi-annually, quarterly
or monthly. The payment level selected must provide for the payment each
year of at least 8% of the amount applied.
OPTION E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may be
chosen. After the death of one payee, payments will continue to the
survivor:
(a) in the same amount as the original amount;
(b) in an amount equal to 2/3 of the original amount; or
(c) in an amount equal to 1/2 of the original amount.
</TABLE>
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.
B-1
<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
the Policyowner's and/or the Beneficiary's provision, any option selection may
be changed before the Death Proceeds become payable. If the Policyowner makes no
selection, the Beneficiary may select an option when the Death Proceeds become
payable.
If the amount of monthly income payments under Option B, choice (c) for the
attained Age of the payee are the same for different periods certain, the
Company will deem an election to have been made for the longest period certain
which could have been elected for such Age and amount.
The Policyowner may give the Beneficiary the right to change from Option C or D
to any other option at any time. If the payee selects Option C or D when this
Policy becomes a claim, the right may be reserved to change to any other option.
The payee who elects to change options must be a payee under the option
selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the Written Request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the Written Request selecting the option.
A corporation or fiduciary payee may select only option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
B-2
<PAGE>
APPENDIX C
ILLUSTRATIONS
SURRENDER VALUE, POLICY VALUES AND DEATH BENEFITS
The following tables illustrate the way in which the Sum Insured and the Policy
Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued on the lives of both Insureds, each Age
55, under a Standard Premium Class and qualifying for the non-smoker discount.
The tables also illustrate the guaranteed cost of insurance rates and the
current cost of insurance rates.
The tables illustrate the Policy Values that would result based upon the
assumptions that no Policy loans have been made, that you have not requested an
increase or decrease in the initial Face Amount, that no partial withdrawals
have been made, and that no transfers above 12 have been made in any Policy year
(so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown, and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested to earn interest (after taxes) at 5% compounded
annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of a
Policy's total Policy Value among the Sub-Accounts of the Separate Account, if
the actual rates of return averaged 0%, 6% or 12, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value. The amounts shown also take into account the daily charge against
the Separate Account for mortality and expense risks and for the Separate
Account administrative charge. In both the Current Cost of Insurance Charges
illustrations and the Guaranteed Cost of Insurance Charges illustrations, the
Separate Account charges currently are equivalent to an effective annual rate of
1.15% of the average daily value of the assets in the Separate Account in the
first fifteen Policy Years, and 0.90% thereafter
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.95% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary, and in 1997 ranged from an
annual rate of 0.35% to an annual rate of 2.00% of average daily net assets. The
fees and expenses associated with your Policy may be more or less than 0.95% in
the aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Growth Fund and Select Growth Fund, 1.10% for
the Select Growth and Income, 1.00% for the Select Income Fund, and 0.60% for
the Money Market Fund. The
C-1
<PAGE>
total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1997. These limitations may be
terminated at any time.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
the manager has agreed to voluntarily waive its management fee to the extent
that expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's
average daily net assets, except that such waiver shall not exceed the net
amount of management fees earned by AFIMS from the Fund after subtracting fees
paid by AFIMS to a sub-adviser. These limitations may be terminated at any time.
NET ANNUAL RATES OF INVESTMENT
Taking into account the Separate Account mortality and expense risk charge of
0.90%, the Separate Account administrative charge of 0.25% (for the first 15
years only), and the assumed 0.95% charge for Underlying Fund advisory fees and
operating expenses, the gross annual rates of investment return of 0%, 6% and
12% correspond to net annual rates of (-2.10%), 3.90% and 9.90%, respectively,
during the first 15 Policy years and (-1.85%), 4.15% and 10.15%, respectively,
thereafter.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and Policy Values, the gross annual investment rate of return
would have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax
charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSUREDS' AGES AND UNDERWRITING CLASSIFICATIONS, AND THE REQUESTED FACE
AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT INHEIRITAGE
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT 1,000,000
SUM INSURED OPTION 1
CURRENT 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 VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,357 1,000,000 0 9,934 1,000,000 0 10,511 1,000,000
2 21,525 5,763 18,424 1,000,000 7,498 20,158 1,000,000 9,301 21,962 1,000,000
3 33,101 8,695 27,195 1,000,000 12,174 30,674 1,000,000 15,937 34,437 1,000,000
4 45,256 17,908 35,668 1,000,000 23,722 41,482 1,000,000 30,267 48,027 1,000,000
5 58,019 27,188 43,838 1,000,000 35,935 52,585 1,000,000 46,184 62,834 1,000,000
6 71,420 36,164 51,704 1,000,000 48,448 63,988 1,000,000 63,433 78,973 1,000,000
7 85,491 44,832 59,262 1,000,000 61,261 75,691 1,000,000 82,139 96,569 1,000,000
8 100,266 53,183 66,503 1,000,000 74,376 87,696 1,000,000 102,437 115,757 1,000,000
9 115,779 61,207 73,417 1,000,000 87,788 99,998 1,000,000 124,472 136,682 1,000,000
10 132,068 68,893 79,993 1,000,000 101,494 112,594 1,000,000 148,410 159,510 1,000,000
11 149,171 77,233 86,113 1,000,000 116,496 125,376 1,000,000 175,438 184,318 1,000,000
12 167,130 85,067 91,727 1,000,000 131,637 138,297 1,000,000 204,606 211,266 1,000,000
13 185,986 92,349 96,789 1,000,000 146,877 151,317 1,000,000 236,101 240,541 1,000,000
14 205,786 99,029 101,249 1,000,000 162,170 164,390 1,000,000 270,134 272,354 1,000,000
15 226,575 105,047 105,047 1,000,000 177,460 177,460 1,000,000 306,938 306,938 1,000,000
16 248,404 108,411 108,411 1,000,000 190,945 190,945 1,000,000 345,363 345,363 1,000,000
17 271,324 110,917 110,917 1,000,000 204,300 204,300 1,000,000 387,271 387,271 1,000,000
18 295,390 112,518 112,518 1,000,000 217,486 217,486 1,000,000 433,074 433,074 1,000,000
19 320,660 112,997 112,997 1,000,000 230,315 230,315 1,000,000 483,142 483,142 1,000,000
20 347,193 112,167 112,167 1,000,000 242,624 242,624 1,000,000 537,960 537,960 1,000,000
Age 60 58,019 27,188 43,838 1,000,000 35,935 52,585 1,000,000 46,184 62,834 1,000,000
Age 65 132,068 68,893 79,993 1,000,000 101,494 112,594 1,000,000 148,410 159,510 1,000,000
Age 70 226,575 105,047 105,047 1,000,000 177,460 177,460 1,000,000 306,938 306,938 1,000,000
Age 75 347,193 112,167 112,167 1,000,000 242,624 242,624 1,000,000 537,960 537,960 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year and
earns interest at 5% per year. Values will be different if premiums are paid
with a different frequency or in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT INHEIRITAGE POLICY
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
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 VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,353 1,000,000 0 9,930 1,000,000 0 10,506 1,000,000
2 21,525 5,739 18,400 1,000,000 7,473 20,133 1,000,000 9,276 21,936 1,000,000
3 33,101 8,623 27,123 1,000,000 12,098 30,598 1,000,000 15,857 34,357 1,000,000
4 45,256 17,743 35,503 1,000,000 23,546 41,306 1,000,000 30,080 47,840 1,000,000
5 58,019 26,867 43,517 1,000,000 35,588 52,238 1,000,000 45,810 62,460 1,000,000
6 71,420 35,592 51,132 1,000,000 47,824 63,364 1,000,000 62,755 78,295 1,000,000
7 85,491 43,878 58,308 1,000,000 60,213 74,643 1,000,000 80,988 95,418 1,000,000
8 100,266 51,671 64,991 1,000,000 72,702 86,022 1,000,000 100,584 113,904 1,000,000
9 115,779 58,896 71,106 1,000,000 85,212 97,422 1,000,000 121,603 133,813 1,000,000
10 132,068 65,463 76,563 1,000,000 97,649 108,749 1,000,000 144,106 155,206 1,000,000
11 149,171 72,388 81,268 1,000,000 111,022 119,902 1,000,000 169,271 178,151 1,000,000
12 167,130 78,448 85,108 1,000,000 124,100 130,760 1,000,000 196,059 202,719 1,000,000
13 185,986 83,535 87,975 1,000,000 136,761 141,201 1,000,000 224,563 229,003 1,000,000
14 205,786 87,522 89,742 1,000,000 148,866 151,086 1,000,000 254,888 257,108 1,000,000
15 226,575 90,259 90,259 1,000,000 160,251 160,251 1,000,000 287,153 287,153 1,000,000
16 248,404 89,549 89,549 1,000,000 168,881 168,881 1,000,000 319,977 319,977 1,000,000
17 271,324 86,993 86,993 1,000,000 176,217 176,217 1,000,000 355,041 355,041 1,000,000
18 295,390 82,386 82,386 1,000,000 182,031 182,031 1,000,000 392,602 392,602 1,000,000
19 320,660 75,139 75,139 1,000,000 185,734 185,734 1,000,000 432,740 432,740 1,000,000
20 347,193 64,655 64,655 1,000,000 186,719 186,719 1,000,000 475,663 475,663 1,000,000
Age 60 58,019 26,867 43,517 1,000,000 35,588 52,238 1,000,000 45,810 62,460 1,000,000
Age 65 132,068 65,463 76,563 1,000,000 97,649 108,749 1,000,000 144,106 155,206 1,000,000
Age 70 226,575 90,259 90,259 1,000,000 160,251 160,251 1,000,000 287,153 287,153 1,000,000
Age 75 347,193 64,655 64,655 1,000,000 186,719 186,719 1,000,000 475,663 475,663 1,000,000
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year and
earns interest at 5% per year. Values will be different if premiums are paid
with a different frequency or in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT INHEIRITAGE
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
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 VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,357 1,009,357 0 9,933 1,009,933 0 10,510 1,010,510
2 21,525 5,760 18,421 1,018,421 7,494 20,155 1,020,155 9,298 21,959 1,021,959
3 33,101 8,685 27,185 1,027,185 12,162 30,662 1,030,662 15,924 34,424 1,034,424
4 45,256 17,885 35,645 1,035,645 23,695 41,455 1,041,455 30,235 47,995 1,047,995
5 58,019 27,143 43,793 1,043,793 35,879 52,529 1,052,529 46,116 62,766 1,062,766
6 71,420 36,086 51,626 1,051,626 48,348 63,888 1,063,888 63,307 78,847 1,078,847
7 85,491 44,706 59,136 1,059,136 61,096 75,526 1,075,526 81,922 96,352 1,096,352
8 100,266 52,994 66,314 1,066,314 74,117 87,437 1,087,437 102,082 115,402 1,115,402
9 115,779 60,933 73,143 1,073,143 87,398 99,608 1,099,608 123,919 136,129 1,136,129
10 132,068 68,511 79,611 1,079,611 100,929 112,029 1,112,029 147,575 158,675 1,158,675
11 149,171 76,705 85,585 1,085,585 115,684 124,564 1,124,564 174,192 183,072 1,183,072
12 167,130 84,345 91,005 1,091,005 130,486 137,146 1,137,146 202,767 209,427 1,209,427
13 185,986 91,376 95,816 1,095,816 145,268 149,708 1,149,708 233,426 237,866 1,237,866
14 205,786 97,739 99,959 1,099,959 159,953 162,173 1,162,173 266,295 268,515 1,268,515
15 226,575 103,362 103,362 1,103,362 174,450 174,450 1,174,450 301,503 301,503 1,301,503
16 248,404 106,239 106,239 1,106,239 186,905 186,905 1,186,905 337,750 337,750 1,337,750
17 271,324 108,149 108,149 1,108,149 198,934 198,934 1,198,934 376,703 376,703 1,376,703
18 295,390 109,036 109,036 1,109,036 210,442 210,442 1,210,442 418,559 418,559 1,418,559
19 320,660 108,662 108,662 1,108,662 221,143 221,143 1,221,143 463,338 463,338 1,463,338
20 347,193 106,822 106,822 1,106,822 230,765 230,765 1,230,765 511,093 511,093 1,511,093
Age 60 58,019 27,143 43,793 1,043,793 35,879 52,529 1,052,529 46,116 62,766 1,062,766
Age 65 132,068 68,511 79,611 1,079,611 100,929 112,029 1,112,029 147,575 158,675 1,158,675
Age 70 226,575 103,362 103,362 1,103,362 174,450 174,450 1,174,450 301,503 301,503 1,301,503
Age 75 347,193 106,822 106,822 1,106,822 230,765 230,765 1,230,765 511,093 511,093 1,511,093
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year and
earns interest at 5% per year. Values will be different if premiums are paid
with a different frequency or in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SELECT INHEIRITAGE
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
INSURED #1: UNISEX NONSMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
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 VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 0 9,353 1,009,353 0 9,929 1,009,929 0 10,506 1,010,506
2 21,525 5,736 18,397 1,018,397 7,469 20,130 1,020,130 9,271 21,932 1,021,932
3 33,101 8,612 27,112 1,027,112 12,084 30,584 1,030,584 15,842 34,342 1,034,342
4 45,256 17,715 35,475 1,035,475 23,513 41,273 1,041,273 30,040 47,800 1,047,800
5 58,019 26,809 43,459 1,043,459 35,518 52,168 1,052,168 45,724 62,374 1,062,374
6 71,420 35,488 51,028 1,051,028 47,691 63,231 1,063,231 62,587 78,127 1,078,127
7 85,491 43,703 58,133 1,058,133 59,982 74,412 1,074,412 80,685 95,115 1,095,115
8 100,266 51,393 64,713 1,064,713 72,321 85,641 1,085,641 100,065 113,385 1,113,385
9 115,779 58,472 70,682 1,070,682 84,610 96,820 1,096,820 120,750 132,960 1,132,960
10 132,068 64,839 75,939 1,075,939 96,727 107,827 1,107,827 142,748 153,848 1,153,848
11 149,171 71,494 80,374 1,080,374 109,650 118,530 1,118,530 167,165 176,045 1,176,045
12 167,130 77,200 83,860 1,083,860 122,106 128,766 1,128,766 192,870 199,530 1,199,530
13 185,986 81,834 86,274 1,086,274 133,930 138,370 1,138,370 219,835 224,275 1,224,275
14 205,786 85,256 87,476 1,087,476 144,929 147,149 1,147,149 248,013 250,233 1,250,233
15 226,575 87,304 87,304 1,087,304 154,877 154,877 1,154,877 277,325 277,325 1,277,325
16 248,404 85,760 85,760 1,085,760 161,648 161,648 1,161,648 306,094 306,094 1,306,094
17 271,324 82,208 82,208 1,082,208 166,596 166,596 1,166,596 335,614 335,614 1,335,614
18 295,390 76,460 76,460 1,076,460 169,414 169,414 1,169,414 365,722 365,722 1,365,722
19 320,660 67,928 67,928 1,067,928 169,364 169,364 1,169,364 395,809 395,809 1,395,809
20 347,193 56,064 56,064 1,056,064 165,708 165,708 1,165,708 425,233 425,233 1,425,233
Age 60 58,019 26,809 43,459 1,043,459 35,518 52,168 1,052,168 45,724 62,374 1,062,374
Age 65 132,068 64,839 75,939 1,075,939 96,727 107,827 1,107,827 142,748 153,848 1,153,848
Age 70 226,575 87,304 87,304 1,087,304 154,877 154,877 1,154,877 277,325 277,325 1,277,325
Age 75 347,193 56,064 56,064 1,056,064 165,708 165,708 1,165,708 425,233 425,233 1,425,233
</TABLE>
(1) Assumes a $10,000 premium is paid at the beginning of each Policy year and
earns interest at 5% per year. Values will be different if premiums are paid
with a different frequency or in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT, NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in the Face Amount. The maximum surrender charge is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$8.50 per $1,000 of initial Face Amount (or Face Amount increase), and (b) is a
deferred sales charge of 48% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs), based on the joint life expectancy of both
Insureds, subject to the deferred sales charge that varies as shown below by
average issue Age or average Age at time of increase, as applicable:
<TABLE>
<CAPTION>
APPLICABLE AGE MAXIMUM GAPS
- -------------- ------------
<S> <C>
5-75 1.95
76 1.92
77 1.81
78 1.69
79 1.60
80 1.50
81 1.40
82 1.31
</TABLE>
A further limitation is imposed based on the Standard 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 for 40 months, declines by
one-half of one percent of the initial amount for 80 months, and then declines
by one percent each month thereafter, reaching zero at the end of 180 Policy
months (15 Policy years).
The factors used in calculating the maximum surrender charges vary with the
issue Age of the younger Insured as indicated in the table that follows.
INITIAL MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Younger Initial Younger Initial Younger Initial
Issue Surrender Issue Surrender Issue Surrender
Age Charge Age Charge Age Charge
- --------- ------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
5 5.00 31 9.40 57 21.00
6 5.00 32 9.80 58 22.00
7 5.00 33 10.20 59 23.00
8 5.00 34 10.60 60 24.00
9 5.00 35 11.00 61 25.00
10 5.00 36 11.40 62 26.00
11 5.00 37 11.80 63 27.00
12 5.00 38 12.20 64 28.00
13 5.00 39 12.60 65 29.00
14 5.00 40 13.00 66 30.00
15 5.00 41 13.40 67 31.00
16 5.00 42 13.80 68 32.00
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
Younger Initial Younger Initial Younger Initial
Issue Surrender Issue Surrender Issue Surrender
Age Charge Age Charge Age Charge
- --------- ------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
17 5.00 43 14.20 69 33.00
18 5.00 44 14.60 70 34.00
19 5.00 45 15.00 71 35.00
20 5.00 46 15.40 72 35.00
21 5.40 47 15.80 73 35.00
22 5.80 48 16.20 74 35.00
23 6.20 49 16.60 75 35.00
24 6.60 50 17.00 76 35.00
25 7.00 51 17.40 77 35.00
26 7.40 52 17.80 78 35.00
27 7.80 53 18.20 79 35.00
28 8.20 54 18.60 80 35.00
29 8.60 55 19.00
30 9.00 56 20.00
</TABLE>
EXAMPLES
For the purposes of these examples, assume that two non-smokers, each Age 55,
are covered as the Insureds under a $1,000,000 Policy. In this example the
Guideline Annual Premium ("GAP") equals $16,861.10. The maximum surrender charge
for the Policy is calculated as follows:
(a) Deferred Administrative Charge $8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (48% X 1.95 GAPs) $15,781.99
-----------
TOTAL $24,281.99
Maximum Surrender Charge per Table (19.00 X 1,000) $19,000.00
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
(a) Deferred Administrative Charge $8,500.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge (not to exceed 25% of Premiums received, up to one
GAP, Varies
but less than the maximum number of GAPs subject to the deferred sales
charge)
--------------------
Sum of (a) and (b)
The maximum surrender charge is $19,000. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the Policy in the 10th policy month, having
paid total premiums of $7,500. The actual surrender charge would be $10,375.
Example 2:
D-2
<PAGE>
Assume the Policyowner surrenders the Policy in the 120th month. After the 40th
Policy month, the maximum surrender charge decreases by 0.5% per month during
this period ($95 per month in this example). In this example, the maximum
surrender charge would be $11,400.
D-3
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission ("SEC") such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
RULE 484 UNDERTAKING
Article VIII of Registrant's Bylaws provides: Each Director and each Officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation against
all expenses actually and necessarily incurred by him in the defense or
reasonable settlement of any action, suit, or proceeding in which he is made a
party by reason of his being or having been a Director or Officer of the
Corporation, including any sums paid in settlement or to discharge judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2 in Prospectus A.
Cross-reference to items required by form N-8B-2 in Prospectus B.
Prospectus A consisting of ____ pages.
Prospectus B consisting of ____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the 1933 Act.
Representations pursuant to Section 26(e) of the 1940 Act.
The signatures.
Written consents of the following persons:
1. Actuarial Consent
2. Opinion Counsel
3. Consent of Independent Accountants
The following exhibits:
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company of August 20, 1991 authorizing the establishment of the
Inheiritage Account is filed herewith.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement between
the Company and Allmerica Investments, Inc. is filed
herewith.
(b) Registered Representatives/Agents Agreement is filed
herewith.
(c) Sales Agreements (Select) are filed herewith.
(d) Sales Agreements are filed herewith.
(e) Commission Schedule is filed herewith.
(f) General Agents Agreement is filed herewith.
(g) Career Agents Agreement is filed herewith.
(4) Not Applicable.
(5) Policy and initial Policy riders are filed herewith. Guaranteed
Death Benefit Rider is filed herewith. The Preferred Loan
Endorsement was previously filed on May 1, 1997 in Post-Effective
Amendment No. 6 and is incorporated by reference herein.
(6) Company's restated Articles of Incorporation and Bylaws were
previously filed in Post-Effective Amendment No. 3 on October 1,
1995 and are incorporated by reference herein. Revised Bylaws
were previously filed on April 30, 1996 in Post-Effective
Amendment No. 4 and are incorporated by reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement with Allmerica Investment Trust is
filed herewith.
(b) Participation Agreement, as amended, with Variable Insurance
Products Fund is filed herewith.
<PAGE>
(c) Participation Agreement, as amended, with Variable Insurance
Products Fund II is filed herewith.
(d) Form of Participation Agreement with Delaware Group Premium
Fund, Inc. is filed herewith.
(e) Participation Agreement with T. Rowe Price International
Series, Inc. is filed herewith.
(f) Fidelity Service Agreement was previously filed on April 30,
1996 in Post-Effective Amendment No. 4 and is incorporated
by reference herein.
(g) An Amendment to the Fidelity Service Agreement was
previously filed on May 1, 1997 in Post-Effective Amendment
No. 6 and is incorporated by reference herein.
(h) Fidelity Service Contract was previously filed on May 1,
1997 in Post-Effective Amendment No. 6 and is incorporated
by reference herein.
(i) Service Agreement with Rowe Price-Fleming International,
Inc. is filed herewith.
(j) BFDS Agreements for lockbox and mailroom services are filed
herewith.
(9) Not Applicable.
(10) Application is filed herewith.
2. Policy and Policy riders are as set forth in Exhibit 1(5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum dated December, 1993 pursuant to Rule
6e-3(T)(b)(12)(iii) under the 1940 Act which includes conversion
procedures pursuant to Rule 6e-3(T)(b)(13)(v)(B) is filed herewith.
8. Consent of Independent Accountants is filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts, on the 15th day of April, 1998.
INHEIRITAGE ACCOUNT OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Abigail M. Armstrong
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and April 15, 1998
- -------------------------- Chief Executive Officer
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President
- --------------------------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and
- -------------------------- Chief Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and
- -------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President
- -------------------------- and General Counsel
John F. Kelly
/s/ J. Barry May Director
- --------------------------
J. Barry May
/s/ James R. McAuliffe Director
- --------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief
- -------------------------- Financial Officer and Treasurer
Edward J. Parry III
/s/ Richard M. Reilly Director and Vice President
- --------------------------
Richard M. Reilly
/s/ Eric A. Simonsen Director and Vice President
- --------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President
- --------------------------
Phillip E. Soule
</TABLE>
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1 Certified Copy of Resolutions of the Board of Directors
Exhibit 1(3)(a) Underwriting and Administrative Services Agreement
Exhibit 1(3)(b) Registered Representatives/Agents Agreement
Exhibit 1(3)(c) Sales Agreements (Select)
Exhibit 1(3)(d) Sales Agreements
Exhibit 1(3)(e) Commission Schedule
Exhibit 1(3)(f) General Agents Agreement
Exhibit 1(3)(g) Career Agent Agreement
Exhibit 1(5) Policy, initial Policy Riders and Guaranteed Death
Benefit Rider
Exhibit 1(8)(a) Participation Agreement with Allmerica Investment Trust
Exhibit 1(8)(b) Form of Participation Agreement with Variable Insurance
Products Fund
Exhibit 1(8)(c) Participation Agreement with Variable Insurance Products
Fund II
Exhibit 1(8)(d) Form of Participation Agreement with Delaware Group Premium
Fund, Inc.
Exhibit 1(8)(e) Participation Agreement with T. Rowe Price International
Series, Inc.
Exhibit 1(8)(i) Service Agreement with Rowe Price-Fleming International,
Inc.
Exhibit 1(8)(j) BFDS Agreements
Exhibit 1(10) Application
Exhibit 3 Consent of Counsel
Exhibit 6 Actuarial Consent
Exhibit 7 Procedures Memorandum
Exhibit 8 Consent of Independent Accountants
<PAGE>
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
Worcester, Massachusetts
************
The following is taken from the minutes of a regular meeting of the Board of
Directors of State Mutual Life Assurance Company of America held on August 20,
1991, a quorum present:
"On motion duly made and seconded, it was:
"Voted:
"1. That pursuant to the provisions of Section 132G of Massachusetts General
Laws, Chapter 175, appropriate officers of the Company are authorized to
establish from time to time and to maintain individual customer and
pooled separate accounts independent of the Company's general investment
account. Such separate accounts shall be in addition to those
previously authorized by the Board and shall be established and
maintained subject to the following:
"(a) Separate accounts may be established from time to time in order
to provide equity or other investment choices to certain contract
holders of the Company who elect to participate therein.
"(b) Contract holders who elect to participate shall be issued group
or individual annuity contracts or other policies or contracts
("contracts"), which contracts (other than contracts described in
paragraph (c) below) shall provide that benefits or contractual
payments shall vary, in whole or in part, so as to reflect the
investment results of the separate account or accounts in which
amounts received in connection with such contract have been
placed.
"(c) In addition to contracts described in paragraph (b), separate
account contracts may provide that benefits shall be payable in
fixed amounts and that contract values shall be guaranteed by the
Company as to principal amount or such separate account
contracts may provide a guarantee by the Company of principal and
a stated rate of interest.
"(d) The Company may, with respect to any separate account it
establishes and registers with the Securities and Exchange
Commission, provide to contract holders with interests in any
such separate account appropriate voting rights with respect to
the management of such separate account and the investment of
assets therein.
<PAGE>
"(e) As is the case with respect to all separate accounts previously
established by the Company, the portion of the assets of each
separate account established by the Company equal to the separate
account reserves and other contract liabilities shall not be
chargeable with liabilities arising out of any other business the
Company may conduct.
"(f) The establishment of a separate account shall be reported to the
Board or Executive Committee.
"2. That appropriate officers of the Company are authorized to determine
investment objectives and appropriate underwriting criteria, investment
management policies and other requirements necessary or desirable for
the operation and management of the Company's separate accounts.
"3. That appropriate officers of the Company are authorized to initially
fund separate accounts established by the Company on such basis as they
deem appropriate, with the amounts and sources of such funding to be
reported to the Company's Investment Committee.
"4. That appropriate officers of the Company are authorized to contract with
an independent investment manager to manage one or more of the Company's
separate accounts directly, or indirectly through agreement with a
Company affiliate or subsidiary, or in any other manner they determine
to be appropriate."
A true copy, attest: /s/ Elaine D. Marcoux
---------------------
Assistant Secretary
<PAGE>
UNDERWRITING AND
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made this 26th day of November, 1997 between and among First Allmerica
Financial Life Insurance Company, a Massachusetts corporation (the "Company"),
each of its separate investment accounts (the "Accounts") which is a
registered investment company under the Investment Company Act of 1940 (the
"1940 Act"), as may be established by the Company from time-to-time, and
Allmerica Investments, Inc., a Massachusetts corporation (the "Distributor").
WITNESSETH:
WHEREAS, the Company and the respective Accounts issue certain variable annuity
contracts or variable insurance policies (the "contracts") which may be deemed
to be securities under the Securities Act of 1933 (the "1933 Act"), and the laws
of some states;
WHEREAS, the Distributor, an affiliate of the Company, is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "1934 Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD");
WHEREAS, the parties desire to have the Distributor act as principal underwriter
for the Accounts set forth in Exhibit A, as may be amended from time-to-time by
mutual consent of the parties, and to assume full responsibility for the
securities activities of all "persons associated" (as that term is defined in
Section 3(a)(18) of the 1934 Act) with the Distributor and engaged directly or
indirectly in the variable contract operation (the "associated persons");
WHEREAS, the parties desire to have the Company perform certain administrative
services in connection with the sale and servicing of the contracts.
NOW, THEREFORE, in consideration of the covenants and mutual promises of the
parties made to each other, it is hereby covenanted and agreed as follows:
1. The Distributor will act as the exclusive principal underwriter for the
Accounts and as such will assume full responsibility for the securities
activities of all the associated persons in connection with the sale of the
contracts. The Distributor will train the associated persons, use its best
efforts to prepare them to complete satisfactorily the applicable NASD and
state examinations so that they may be qualified, register the associated
persons as its registered representatives before they engage in the sale of
the contracts, and supervise and control them in the performance of such
activities. Notwithstanding anything in this Agreement to the contrary,
the Distributor may enter into sales agreements with independent
broker-dealers for the sale of the contracts. All such sales agreements
entered into by the Distributor with independent broker-dealers shall
provide that each independent broker-dealer will assume full responsibility
for continued compliance by itself and its associated persons with the NASD
Rules of Fair Practice and Federal and state securities laws.
2. The Distributor will assume full responsibility for the continued
compliance by itself and its associated persons with the NASD Rules of Fair
Practice and Federal and state securities laws, to the extent applicable in
connection with the sale of the contracts. The Distributor, directly or
through the Company as its agent, will make timely filings with the SEC,
NASD, and any other securities regulatory authorities of all reports and
any sales literature relating to the Accounts required by law to be filed
by the Distributor.
3. The Company will prepare and submit to the Accounts (a) all registration
statements and prospectuses (including amendments) and all reports required
by law to be filed by the Accounts with Federal and state securities
regulatory authorities, and (b) all notices, proxies, proxy statements, and
periodic
- 1 -
<PAGE>
reports that are to be transmitted to persons having voting rights with
respect to the Accounts.
4. The Company will, except as otherwise provided in this Agreement, bear the
cost of all services and expenses, including legal services and expenses,
filing fees, and other fees incurred in connection with (a) registering and
qualifying the Accounts and the contracts, and (b) preparing, printing, and
distributing all registration statements and prospectuses (including
amendments), contracts, notices, periodic reports, proxy solicitation
material, sales literature, and advertising filed or distributed in
connection with the sale of the contracts.
All cost associated with the variable contract compliance function
including, but not limited to, fees and expenses associated with qualifying
and licensing associated persons with Federal and state regulatory
authorities and the NASD and with performing compliance-related
administrative services, shall be allocated to the Company. To the extent
that the Distributor incurs out-of-pocket expenses in connection with the
variable contracts compliance function, the Company shall reimburse the
Distributor for such expenses. To the extent that such costs are in
connection with services provided by employees of the Company, they shall
be charged to the Company. The determination and allocation of all such
costs shall be pursuant to the Cost Distribution Policy as stated in the
Consolidated Service Agreement (effective January 1, 1993) among the
Allmerica Financial group of affiliated companies, as may be amended from
time.
5. All purchase payments made under the contracts will be forwarded by or on
behalf of Contract Owners directly to the Company and shall become the
exclusive property of the Company. The Company agrees to pay on behalf of
Distributor all sales commissions and any other remuneration due in
connection with the sale of the contracts by associated persons of the
Distributor and any independent broker-dealers having a sales agreement
with the Distributor. The Distributor or the Company as agent for the
Distributor shall pay all other remuneration due any other person for
activities relating to the sale of the contracts. The Company shall
reimburse the Distributor fully and completely for all amounts paid by the
Distributor to any person pursuant to this Section.
6. The Company will, as the Distributor's agent, (a) maintain and preserve in
accordance with Rules 17a-3 and 17a-4 under the 1934 Act all books and
records required to be maintained by the Distributor in connection with the
offer and sale of the contracts being offered for sale pursuant to this
Agreement, which books and records shall remain the property of the
Distributor, and shall at all times be subject to inspection by the SEC in
accordance with Section 17(a) of the 1934 Act, and all other regulatory
bodies having jurisdiction, and (b) send a written confirmation for each
such transaction reflecting the facts of the transaction and showing that
it is being sent on behalf of the Distributor acting in the capacity of
agent for the Accounts, in conformance with the requirements of Rule 10b-10
of the 1934 Act.
7. Each party hereto shall advise the others promptly of (a) any action of the
SEC or any authorities of any state or territory of which it has knowledge,
affecting registration or qualification of the Accounts or the contracts,
or the right to offer the contracts for sale, and (b) the happening of any
event which makes untrue any statement, or which requires the making of any
change in the registration statement or prospectus in order to make the
statements therein not misleading.
8. The Company agrees to be responsible to the Accounts for all sales and
administrative expenses incurred in connection with the administration of
the contracts and the Accounts other than applicable taxes arising from
income and capital gains of the Accounts and any other taxes arising from
the existence and operation of the Accounts.
9. As compensation for services performed and expenses incurred under this
Agreement, the Company will receive the charges and deductions as provided
in each outstanding series of the Company's contracts. Distributor will
receive the compensation provided for in Section 4, and may receive such
additional compensation, if any, as may be agreed upon by the parties from
time-to-time.
- 2 -
<PAGE>
10. Each party hereto agrees to furnish any other state insurance commissioner
or regulatory authority with jurisdiction over the contracts with any
information or reports in connection with services provided under this
Agreement which may be requested in order to ascertain whether the variable
insurance product operations of the Company are being conducted in a manner
consistent with applicable statutes, rules and regulations.
11. This Agreement shall upon execution become effective as of the date first
above written, and
(a) Unless otherwise terminated, this Agreement shall continue in effect
from year-to-year;
(b) This Agreement may be terminated by any party at any time upon giving
60 days' written notice to the other parties hereto; and
(c) This Agreement shall automatically terminate in the event of its
assignment.
12. The initial Accounts covered by this Agreement are set forth in Appendix A.
This Agreement, including Appendix A, may be amended at any time by mutual
consent of the parties.
13. This Agreement shall be governed by and construed in accordance with the
laws of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first above written.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By: /s/ David J. Mueller
-------------------------------------
Title: Vice President
ALLMERICA INVESTMENTS, INC.
By: /s/ Thomas P. Cunningham
-------------------------------------
Title: Vice President
- 3 -
<PAGE>
Appendix A
SEPARATE ACCOUNTS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AS OF SEPTEMBER 1, 1997
VEL II Account
Inheiritage Account
Group VEL Account
Separate Account I
Separate Account VA-K
Separate Account VA-P
Allmerica Select Separate Account
Separate Account KG
Separate Account KGC
- 4 -
<PAGE>
Registered
[LOGO] ALLMERICA Allmerica 440 Lincoln Street Representative's
FINANCIAL(R) Investments, Inc. Worcester, MA 01653 Agreement
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints ________________________
("Registered Representative") for the purpose of selling and servicing variable
contracts offered by Allmerica Financial Life Insurance and Annuity Company,
mutual funds, limited partnerships and other investment products and services
(collectively "Investment Products and Services") offered and distributed by
Company. Registered Representative will submit Investment Products and Services
business through the office of _________________________________________________
("General Agent") or successor at ______________________________________________
("Agency") or successor. This appointment is effective as of the date accepted
by Registered Representative and acknowledged by General Agent.
1. DUTY OF COMPLIANCE/SUPERVISION: Registered Representative is assigned to
the above named Agency and General Agent for the purposes of training,
supervision and recordkeeping. Registered Representative agrees to comply
with all of the applicable laws, rules and regulations of the Securities
and Exchange Commission (SEC), National Association of Securities Dealers,
Inc. (NASD) and all other applicable federal and state insurance and
securities laws and regulations.
Registered Representative agrees to comply with all procedures and
requirements outlined in Company manuals, memoranda and other publications
as may be amended from time-to-time.
Registered Representative agrees to abide by Company's Compliance Program
including his/her mandatory attendance, on at least an annual basis, at
Agency's Compliance Meeting(s) and/or Interview(s). Failure to attend
Compliance Meeting and/or Interview is grounds for immediate termination
for cause.
2. LIMITATIONS OF AUTHORITY: Registered Representative may not delegate any
authority granted under this Agreement and shall not appoint any
solicitors or subagents to act on his/her behalf. Registered
Representative may not sign and/or submit any customer applications or
orders on behalf of any individual who is not fully qualified as a
Registered Representative of Company.
Registered Representative will only offer for sale those Investment
Products and Services for which he/she is properly NASD registered,
securities-licensed through Company and, if required by state law, state
insurance-licensed through Allmerica Financial Life Insurance and Annuity
Company, and for which Company has fully executed sales agreements with
the sponsor or issuer. To participate in the sale of Investment Products
and Services for which no agreement has been executed is to "sell-away"
from Company and is grounds for immediate termination of this Agreement
upon written notice to Registered Representative.
Registered Representative will maintain his/her NASD registration solely
through Company and will provide full disclosure to Company of his/her
background. Registered Representative agrees to notify Company immediately
of any matter requiring disclosure on the NASD Form U-4, Uniform
Application for Securities Industry Registration, including but not
limited to any income generating business activity, other than personal,
passive investment, which is outside the scope of Registered
Representative's Agreement with Company.
Customer accounts or applications may only be accepted on behalf of
Company based on approval by a Home Office principal. Registered
Representative has no authority to accept any risk on Company's behalf, to
incur any indebtedness or liability on behalf of Company and understands
and agrees to Company's prohibition against assuming discretionary
authority over client investments.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any of
the rights, claims or interests under it may be made by Registered
Representative without the prior written consent of Company. Such
assignment, sale or transfer by Registered Representative without written
consent of Company will immediately make this Agreement void, and will be
a release in full to Company of any and all of its obligations hereunder.
4. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: All
applications and/or payments collected by Registered Representative on
behalf of Company or any issuer or sponsor are to be delivered immediately
to Registered Representative's Agency no later than noon of the business
day following receipt by Registered Representative.
Investment Product and Services purchase checks are to be client personal
checks, cashier's checks or money orders made payable to either the
Company, appropriate issuer, sponsor or other designated agent. Such
checks may not be made payable to Registered Representative, General Agent
or any personal or Agency account.
5. SUITABILITY/RESPONSIBILITY TO EXPLAIN INVESTMENT PRODUCTS: Registered
Representative agrees to make Investment Product and Services
recommendations to clients only after obtaining sufficient information
regarding a client's financial background, goals and objectives so as to
make a reasonable determination that the proposed Investment Product
and/or Service is suitable based on such background, goals and
objectives. Registered Representative agrees to fully explain the risks,
terms and conditions of the purchase of an Investment Product or Service
and that he/she will not make untrue statements, interpretations,
misrepresentations nor omit or evade material facts concerning such
Investment Product or Service.
6. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: Registered
Representative agrees not to directly or indirectly use or distribute
any advertising or sales literature material (including but not limited
to prospectuses, illustrations, circulars, form letters or postal cards,
business cards, stationery, booklets, schedules, broadcasting and other
sales material of any kind) concerning Company and/or the offering of
Investment Products and Services of any kind until the material has been
approved by Company in writing.
Registered Representative also agrees to provide to General Agent copies
of all correspondence pertaining to the solicitation of execution of any
Investment Products and Services transaction, and to any other aspect of
his/her Investment Products and Services business in order to allow for
the review and endorsement of the correspondence in writing, on an
official internal record of Company by a registered principal located at
Home Office.
SMAE-050NS (11/95)
<PAGE>
7. RECORDKEEPING: Registered Representative agrees, in accordance with
Company guidelines and requirements, to cooperate in the maintenance of
complete customer account files and other records at the assigned Agency
which pertain to the conduct of Investment Products and Services business
through Company. Customer account files of Registered Representative are
to be considered the property of Company and are not to be taken from the
immediate Agency premises for any purpose.
8. COMMISSIONS: Commissions for the sale of Investment Products and Services
offered or effected by Registered Representative will be paid after
compensation for those sales is paid to Company. Commissions for
Investment Products and Services will be paid at the rates established and
published by Company.
Commissions may be changed by Company at any time without advance notice.
However, this policy shall not be applied retroactively to divest any
Registered Representative of specific commission amounts already due
him/her.
Registered Representative agrees not to share commissions with
non-qualified representatives or with clients.
Under certain circumstances, i.e., termination of agents subject to
variable contract commission vesting, retirement or death, Registered
Representative or his/her estate may be entitled to receive continuing
commissions from Company for transactions conducted prior to the cessation
of his/her service with Company. Continuing commissions will be paid based
on vesting schedules established and published by Company, as may be
amended from time-to-time.
If Company or any issuer or sponsor returns or waives payments on any
application or order, commissions will not be due or payable on the
payments. Registered Representative shall repay to Company on demand any
commissions already received by Registered Representative with respect to
such returned or waived payments.
Where cancellation of any Investment Products and Services order results
in expense or loss to Company, Registered Representative is liable for
reimbursement to Company of the expense or loss including but not limited
to any sales charge levied by an issuer and any decline in the price of an
Investment Product, as of the time of cancellation.
In the event Registered Representative becomes party to a Career Builder
Supplemental Agreement (Supplemental Agreement) with First Allmerica
Financial Life Insurance Company ("First Allmerica"), and its affiliate,
Allmerica Financial Life Insurance and Annuity Company, commissions
payable under this Registered Representative's Agreement will be credited
to the Reserve Account described in such Supplemental Agreement during the
period such Supplemental Agreement is in effect and will be paid to
Registered Representative only as provided therein.
Company reserves the right to pay commissions to the Registered
Representative for Investment Products and Services sold or performed by
utilizing one check issued by Allmerica Financial or one of its
wholly-owned subsidiaries. Such check may also contain compensation for
traditional life, health and disability policies as well as other products
and services sold by Registered Representatives through Allmerica
Financial.
9. RIGHT OF OFF-SET: Company, for its own benefit and/or the benefit of its
affiliates, will have a lien on any commissions and other compensation
payable under this Agreement, and may deduct any monies owed Company or
affiliates from such commissions or other compensation to the extent
permitted by law.
10. TERMINATION FOR CAUSE: If Registered Representative withholds or
misappropriates monies, securities, certificates, payments, receipts,
"sells-away," commits any willful or dishonest act which, in the sole
discretion of Company, is detrimental to Company, or fails to comply with
any of the conditions, duties or obligations of this Agreement, this
Agreement will immediately terminate without notice.
11. TERMINATIONS WITHOUT CAUSE: Registered Representative or company may
terminate this Agreement without cause during the first twelve (12) months
following the date this Agreement is executed by providing ten (10) days'
notice in writing to the other party of the intention to terminate. After
the first twelve (12) months, Registered Representative or Company may
terminate this Agreement without cause upon thirty (30) days' notice in
writing of the intention to terminate.
In the event Registered Representative terminates his/her Career Agent
Agreement with First Allmerica Financial Life Insurance Company, this
Agreement will be terminated upon written notice as described herein.
12. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and Registered Representative or between Company's General Agent
and Registered Representative. Registered Representative shall exercise
his/her own judgment concerning the individual(s) to whom he/she will
solicit Investment Products and Services as well as the time, place and
manner of the solicitations. Registered Representative, however, shall
comply with all applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations
and procedures concerning the conduct of Investment Products and
Services business, as may be amended from time-to-time.
13. EFFECTIVENESS OF CONTRACT: This Agreement constitutes the entire contract
between Registered Representative and Company.
Registered Representative accepts the appointment, subject to all of the
conditions and provisions set forth in this Agreement. This Agreement
supersedes all previous agreements, whether oral or written between the
parties, and no modification, except to attached Compensation Schedules
(if any), will be valid unless made in writing and signed by both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned on the
____________________________________ day of
_________________________ ,19 _______. Allmerica Investments, Inc.
By__________________________
__________________________________ ____________________________
Registered Representative General Agent
<PAGE>
SALES
AGREEMENT ALLMERICA SELECT
ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- -------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica") and
_________________________________________________________________, a
________________________ corporation (herein the "Broker-Dealer").
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints the Broker-Dealer to solicit applications for the
sale of Contracts. The Broker-Dealer accepts this appointment and agrees to
the terms and conditions set forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with the Broker-Dealer
who are licensed as life insurance agents in those jurisdictions in which
applications for the sale of Contracts are to be solicited and who are also
duly registered with the National Association of Securities Dealers, Inc.
(herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
INDEPENDENT CONTRACTOR STATUS
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and the Broker-Dealer or any Registered Representative. The
Broker-Dealer and each Registered Representatives will be free to exercise
their independent judgment as to the time, place and manner of solicitation
and servicing of business underwritten by the Insurance Companies. However,
the Broker-Dealer and Registered
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Representatives shall have no authority to act on behalf of Allmerica or the
Insurance Companies in a manner which does not conform to applicable
statutes, ordinances, or governmental regulations or to reasonable rules
adopted from time to time by Allmerica or the Insurance Companies.
LIMITATIONS OF AUTHORITY
SECTION 2. The Broker-Dealer and Registered Representatives will have no
authority to accept risks of any kind; to make, alter or discharge Contracts;
to waive forfeitures or exclusions; to alter or amend any papers received
from either Insurance Company; to deliver any life insurance Contract or any
document, agreement or endorsement changing the amount of insurance coverage
if the Broker-Dealer or the soliciting Registered Representative knows or has
reason to believe that the insured is uninsurable; or to accept any payment
unless the payment meets the minimum payment requirement for the Contract
established by the Insurance Company.
LICENSING AND REGISTRATION
SECTION 3. The Broker-Dealer is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by the Broker-Dealer shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives. Until
Contracts of First Allmerica are offered for sale, applications for
appointments shall only be made on behalf of Allmerica Financial Life.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative or firm who has been appointed by
the Insurance Companies.
AGREEMENTS BY BROKER-DEALER
SECTION 4. The Broker-Dealer agrees that at all times when performing its
duties under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
The Broker-Dealer agrees that at all times when performing its duties under
this Agreement it shall be duly licensed to sell Contracts in each
jurisdiction in which the Broker-Dealer intends to perform hereunder.
The Broker-Dealer shall be responsible for carrying out its sales and
administrative obligations under this Agreement in continued compliance with
the NASD Rules of Fair Practice, federal and state securities laws and
regulations, and state insurance laws and regulations. The Broker-Dealer
agrees to offer the Contracts for sale through its Registered Representatives
and to offer such Contracts only in accordance with the
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<PAGE>
prospectus. The Broker-Dealer and Registered Representatives are not
authorized to give any information or make any representations concerning
such Contracts other than those contained in the prospectus or in such sales
literature or advertising as may be authorized by Allmerica.
The Broker-Dealer agrees that it shall be fully responsible for ensuring that
no person shall offer or sell Contracts on its behalf until such person is
appropriately licensed, registered or otherwise qualified to offer and sell
such Contracts under the state and federal securities laws and the insurance
laws of each jurisdiction in which such person intends to solicit.
The Broker-Dealer agrees to train, supervise and be solely responsible for
the conduct of its Registered Representatives in the solicitation and sale of
the Contracts and for the supervision as to their strict compliance with
Allmerica's rules and procedures, the NASD rules of Fair Practice, and
applicable rules and regulations of any other governmental or other agency
that has jurisdiction over the offering for sale of the Contracts.
The Broker-Dealer shall take reasonable steps to ensure that its Registered
Representatives shall not make recommendations to an applicant to purchase a
Contract in the absence of reasonable grounds to believe that the purchase of
such Contract is suitable for such applicant. Such determination will be
based upon, but will not be limited to, information furnished to a Registered
Representative after reasonable inquiry of such applicant concerning the
applicant's insurance and investment objectives, financial situation and
needs.
The Broker-Dealer agrees that Registered Representatives shall conduct their
business with respect to the Contracts at all times in compliance with all
applicable federal and state laws and regulations and shall be subject to a
standard of conduct including, but not limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit for the sale of Contracts
without delivering the then currently effective prospectus for such
Contracts and any then applicable amendments or supplements thereto,
including the current prospectus(es) for any fund(s) in which Contract
separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
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<PAGE>
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered Broker-Dealer under the '34 Act and be
a member in good standing of the NASD.
During the term of this Agreement, Allmerica will provide to, or cause to be
provided to, the Broker-Dealer, without charge, with as many copies of the
prospectus(es) for the Contracts (and any amendments, or supplements
thereto), the current prospectus(es) for any underlying fund(s) and
applications for the Contracts as the Broker-Dealer may reasonably request.
Upon termination of the Agreement, any prospectuses, applications, and other
materials and supplies furnished by Allmerica to the Broker-Dealer shall be
promptly returned to Allmerica.
Allmerica agrees to promptly notify the Broker-Dealer of newly declared
effective prospectus(es) for the Contracts and any amendments or supplements
thereto.
Allmerica agrees to keep the Broker-Dealer informed of all jurisdictions in
which the Insurance Companies are licensed to sell the Contracts and in which
the Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. The Broker-Dealer will submit, or cause to be submitted, directly
to the Principal Office of the Insurance Companies all Contract applications
solicited by its Registered Representatives. The Broker-Dealer will deliver,
or cause to be delivered, within 10 days of the date of issue all Contracts
issued on applications submitted by the Broker-Dealer or its Registered
Representatives. The Broker-Dealer will promptly return, or cause to be
returned, to the Insurance Companies any Contract which is declined by the
applicant or which cannot be delivered within the time permitted by the
Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. The Broker-Dealer nor any Registered Representatives will not
furnish any prospective Contract owner with an illustration of the financial
or other aspects of a Contract or a proposal for a Contract unless the same
has been either furnished by the Insurance Companies or prepared from
computer software or other material furnished or approved by the Insurance
Companies. Any illustration or proposal will conform to standards of
completeness and accuracy established by the Insurance Companies. If the
proposal or illustration was not furnished by the Insurance Companies, the
Broker-Dealer will retain in its records for availability to the Insurance
Companies a copy thereof or the means to duplicate the same. Any computer
software or materials furnished by either Insurance Company will be and
remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies, the
Broker-Dealer will account for and remit immediately to the Principal Office
of the Insurance Companies all funds received or collected for or on behalf
of either Insurance Company without deduction for any commissions, or other
claim the Broker-Dealer or the Registered Representative may have against
either Insurance
4
<PAGE>
Company or Allmerica and will make such reports and file such substantiating
documents and records as the Insurance Companies may reasonably require.
INDEMNIFICATION
SECTION 9. The Broker-Dealer shall indemnify and hold Allmerica and the
Insurance Companies and their officers, directors and employees harmless from
any liability arising from any act or omission of the Broker-Dealer or of any
affiliate of the Broker-Dealer, or any officer, director, employee of the
Broker-Dealer or any of its Registered Representatives, including but not
limited to, any fines, penalties, attorney's fees, costs of settlement,
damages or financial loss. The Broker-Dealer expressly authorizes Allmerica
and the Insurance Companies, without precluding them from exercising any
other remedy they may have, to charge against all compensation due or to
become due to the Broker-Dealer under this Agreement, any monies paid on any
liability incurred by Allmerica or the Insurance Companies by reason of any
such act or omission of the Broker-Dealer, or any affiliate of the
Broker-Dealer, or of any officer, director, employee of the Broker-Dealer or
of its Registered Representatives.
Allmerica shall indemnify and hold the Broker-Dealer, its affiliates and
their officers, directors and employees harmless from any liability arising
from any act or omission of Allmerica, the Insurance Companies or any
affiliate of Allmerica or any of the Insurance Companies (collectively the
"Allmerica Companies"), or any officer, director or employee of the Allmerica
Companies, including but not limited to, any fines, penalties, reasonable
attorney's fees, costs of settlement, damages or financial loss.
The indemnifications provided by this Section shall survive termination of this
Agreement.
If a Contract is not delivered to the Contract owner within 10 days of its
receipt by the Broker-Dealer and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was
due to the inaction or negligence of the Broker-Dealer or a Registered
Representative, the difference between the payments refunded and the cash
value of the Contract on the date the Contract is received by the Insurance
Company at its Principal Office shall be reimbursed to the Insurance Company
by the Broker-Dealer in any case where the cash value is less than the
payments refunded. Any such reimbursement shall be paid to the affected
Insurance Company within 30 days of receipt of a written request for payment.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises a right to
surrender a Contract for return of all payments made, the Broker-Dealer will
repay the appropriate Insurance Company the amount of any commissions
received on the payments returned within 10 days of a receipt of a written
request for repayment.
5
<PAGE>
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay the Broker-Dealer commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts the
Broker-Dealer agrees to pay its Registered Representatives. Commission
payments will be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon the Broker-Dealer's or Allmerica's ceasing to comply with
any of the terms and conditions of this Agreement or upon the dissolution,
bankruptcy or insolvency of the Broker-Dealer.
Whether or not there is a breach of this Agreement, the Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT TO SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica to
enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will immediately
make this Agreement void and be a release to Allmerica and to the Insurance
Companies in full of any and all of their obligations hereunder.
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<PAGE>
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 10 days after the
notice is given to the Broker-Dealer. However, the requirement to give
advance notice shall not apply if the change becomes necessary or expedient
by reason of legislation or the requirements of any governmental body and, in
the opinion of Allmerica, it is not reasonably possible to meet the 10 day
requirement. Changes will not be retroactive and will apply only to life
insurance coverage solicited or annuity payments made on or after the
effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. The Broker-Dealer and Allmerica agree to cooperate fully in any
customer complaint, insurance or securities regulatory proceeding or judicial
proceeding with respect to the Broker-Dealer, Allmerica, the Insurance
Companies, their affiliates or a Registered Representative to the extent that
such customer complaint or proceeding is in connection with Contracts
marketed under this Agreement. To the extent required, Allmerica will
arrange for the Insurance Companies to cooperate in any such complaint or
proceeding. Without limiting the foregoing:
(a) The Broker-Dealer will be notified promptly by Allmerica or the Insurance
Companies of any written customer complaint or notice of any regulatory
proceeding or judicial proceeding of which they become aware including the
Broker-Dealer or any Registered Representative of the Broker-Dealer which
may be related to the issuance of any Contract marketed under this
Agreement. The Broker-Dealer will promptly notify Allmerica of any written
customer complaint, or notice of any regulatory proceeding or judicial
proceeding received by the Broker-Dealer including the Broker-Dealer or any
of its Registered Representatives which may be related to the issuance of
any Contract marketed under this Agreement or any activity in connection
with any such Contract(s).
(b) In the case of a customer complaint specified above, the Broker-Dealer,
Allmerica and the Insurance Companies will cooperate in investigating such
complaint and any proposed response to such complaint will be sent to the
other parties to this Agreement for approval not less than five business
days prior to its being sent to the customer or regulatory authority,
except that if a more prompt response is required, the proposed response
shall be communicated by telephone or facsimile transmission.
CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of the Broker-Dealer and of any company or person
affiliated with Broker-Dealer, and the names and addresses of any Registered
Representatives of the Broker-Dealer which may come to the attention of
Allmerica exclusively as a
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<PAGE>
result of its relationship with the Broker-Dealer or any affiliated company
and not from any independent source, are confidential and shall not be used
by Allmerica, the Insurance Companies, or any company or person affiliated
with Allmerica or the Insurance Companies, nor divulged to any party for any
purpose whatsoever, except as may be necessary in connection with the
administration and marketing of the Contracts sold by or through the
Broker-Dealer, including responses to specified requests to the Insurance
Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of the Broker-Dealer, any company
affiliated with Allmerica or any manager, agency, or broker of such company,
or any securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of the Broker-Dealer or of any
affiliated companies which is derived exclusively as a result of the
relationships created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of the Broker-Dealer if the names of said
Registered Representatives were obtained from independent sources and not
exclusively as a result of Allmerica's relationship with the Broker-Dealer;
(ii) from entering into separate sales agreements with Registered
Representatives of the Broker-Dealer upon the request and at the initiation
of said Registered Representatives; or (iii) divulging the names and
addresses of any such customers, prospective customers, Registered
Representatives, or other companies or persons described in the preceding
paragraph in connection with any customer complaint or insurance or
securities regulatory proceeding described in Section 18.
BONDING
SECTION 20. The Broker-Dealer agrees to furnish such bond or bonds as Allmerica
may require. Upon failure or inability of the Broker-Dealer to obtain or renew
any such bonds, this Agreement shall terminate at Allmerica's discretion upon
notice by Allmerica.
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid to
the address specified on page 1 of this Agreement and, in the case of notice to
the Broker-Dealer, if delivered or mailed postage prepaid to the intended
recipient's principal place of business.
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CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between the
Broker-Dealer and Allmerica and the Insurance Companies, or any of them,
relating to the solicitation of Contracts. It is hereby understood and
agreed that any other agreement or representation, commitment, promise or
statement of any nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby rendered null and
void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
For: _________________________________ For: Allmerica Investments, Inc.
Name of Broker-Dealer
By:_________________________________ By:________________________________
Name:_______________________________ Name:______________________________
Title:______________________________ Title:_____________________________
Date:_______________________________ Date:______________________________
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SALES
AGREEMENT ALLMERICA SELECT
ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica"), _________
__________________________________________________________________________, a
_____________________________ corporation (herein the "Broker-Dealer") and
the affiliates of Broker-Dealer listed on Exhibit "A" attached hereto, each
affiliate being referred to herein as a "General Agent".
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints each General Agent to solicit applications for the
sale of Contracts. Each General Agent accepts this appointment and each
General Agent and the Broker-Dealer agree to the terms and conditions set
forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with each General Agent
and the Broker-Dealer who are licensed as life insurance agents in those
jurisdictions in which applications for the sale of Contracts are to be
solicited and who are also duly registered with the National Association of
Securities Dealers, Inc. (herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
INDEPENDENT CONTRACATOR STATUS
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any General Agent, the Broker-Dealer or any Registered
Representative. General Agents and Registered Representatives will be free
to exercise their independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the Insurance
Companies. However, General Agents, the Broker-Dealer and
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Registered Representatives shall have no authority to act on behalf of
Allmerica or the Insurance Companies in a manner which does not conform to
applicable statutes, ordinances, or governmental regulations or to reasonable
rules adopted from time to time by Allmerica or the Insurance Companies.
LIMITATIONS ON AUTHORITY
SECTION 2. General Agents, the Broker-Dealer and Registered Representatives
will have no authority to accept risks of any kind; to make, alter or
discharge Contracts; to waive forfeitures or exclusions; to alter or amend
any papers received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement changing the
amount of insurance coverage if the General Agent, the Broker-Dealer or the
soliciting Registered Representative know or have reason to believe that the
insured is uninsurable; or to accept any payment unless the payment meets the
minimum payment requirement for the Contract established by the Insurance
Company.
LICENSING AND REGISTRATION
SECTION 3. Each General Agent is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by a General Agent shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives. Until
Contracts of First Allmerica are offered for sale, applications for
appointments shall only be made on behalf of Allmerica Financial Life.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative who has been appointed by the
Insurance Companies.
AGREEMENTS BY GENERAL AGENT AND BROKER-DEALER
SECTION 4. The Broker-Dealer agrees that at all times when performing its
duties under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Each General Agent agrees that at all times when performing its duties under
this Agreement it shall be duly licensed to sell Contracts in each
jurisdiction in which General Agent intends to perform hereunder.
Each General Agent and the Broker-Dealer shall be responsible for carrying
out their sales and administrative obligations under this Agreement in
continued compliance with the NASD Rules of Fair Practice, federal and state
securities laws and regulations, and state insurance laws and regulations.
Each General Agent and the Broker-Dealer agree to offer the Contracts for
sale through their Registered Representatives and to offer such Contracts
only in accordance with the prospectus. General Agents, the Broker-Dealer
and Registered Representatives are not authorized
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to give any information or make any representations concerning such Contracts
other than those contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
Each General Agent and the Broker-Dealer agree that they shall be fully
responsible for ensuring that no person shall offer or sell Contracts on
their behalf until such person is appropriately licensed, registered or
otherwise qualified to offer and sell such Contracts under the state and
federal securities laws and the insurance laws of each jurisdiction in which
such person intends to solicit.
Each General Agent and the Broker-Dealer agree to train, supervise and be
solely responsible for the conduct of their Registered Representatives in the
solicitation and sale of the Contracts and for the supervision as to their
strict compliance with Allmerica's rules and procedures, the NASD rules of
Fair Practice, and applicable rules and regulations of any other governmental
or other agency that has jurisdiction over the offering for sale of the
Contracts.
Each General Agent and the Broker-Dealer shall take reasonable steps to
ensure that their Registered Representatives shall not make recommendations
to an applicant to purchase a Contract in the absence of reasonable grounds
to believe that the purchase of such Contract is suitable for such applicant.
Such determination will be based upon, but will not be limited to,
information furnished to a Registered Representative after reasonable inquiry
of such applicant concerning the applicant's insurance and investment
objectives, financial situation and needs.
Each General Agent and the Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to the Contracts at
all times in compliance with all applicable federal and state laws and
regulations and shall be subject to a standard of conduct including, but not
limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit for the sale of Contracts
without delivering the then currently effective prospectus for such
Contracts and any then applicable amendments or supplements thereto,
including the current prospectus(es) for any fund(s) in which Contract
separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered broker-dealer under the '34 Act and be
a member in good standing of the NASD.
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During the term of this Agreement, Allmerica will provide to, or cause to be
provided to, each General Agent and the Broker-Dealer, without charge, as
many copies of the prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any underlying fund(s)
and applications for the Contracts as each General Agent and the
Broker-Dealer may reasonably request. Upon termination of the Agreement, any
prospectuses, applications, and other materials and supplies furnished by
Allmerica to General Agents and the Broker-Dealer shall be promptly returned
to Allmerica.
Allmerica agrees to promptly notify each General Agent and the Broker-Dealer
of newly declared effective prospectus(es) for the Contracts and any
amendments or supplements thereto.
Allmerica agrees to keep each General Agent and the Broker-Dealer informed of
all jurisdictions in which the Insurance Companies are licensed to sell the
Contracts and in which the Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Each General Agent or the Broker-Dealer will submit, or cause to
be submitted, directly to the Principal Office of the Insurance Companies all
Contract applications solicited by their Registered Representatives. Each
General Agent or the Broker-Dealer will deliver, or cause to be delivered,
within 10 days of the date of issue all Contracts issued on applications
submitted by the General Agent, the Broker-Dealer or their Registered
Representatives. Each General Agent or the Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. General Agents, the Broker-Dealer and Registered Representatives
will not furnish any prospective Contract owner with an illustration of the
financial or other aspects of a Contract or a proposal for a Contract unless
the same has been either furnished by the Insurance Companies or prepared
from computer software or other material furnished or approved by the
Insurance Companies. Any illustration or proposal will conform to standards
of completeness and accuracy established by the Insurance Companies. If the
proposal or illustration was not furnished by the Insurance Companies, each
General Agent or the Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies, each
General Agent and the Broker-Dealer will account for and remit immediately to
the Principal Office of the Insurance Companies all funds received or
collected for or on behalf of either Insurance Company without deduction for
any commissions, or other claim the General Agent, the Broker-Dealer or any
Registered Representative may have against either Insurance Company or
Allmerica and will make such reports and file such
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substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Each General Agent and the Broker-Dealer, jointly and severally,
shall indemnify and hold Allmerica and the Insurance Companies and their
officers, directors and employees harmless from any liability arising from
any act or omission of the General Agent, the Broker-Dealer or of any
affiliate of the Broker-Dealer, or any officer, director, employee of the
General Agent or the Broker-Dealer or of their Registered Representatives,
including but not limited to, any fines, penalties, attorney's fees, costs of
settlement, damages or financial loss. Each General Agent and the
Broker-Dealer expressly authorize Allmerica and the Insurance Companies,
without precluding them from exercising any other remedy they may have, to
charge against all compensation due or to become due to the General Agent or
the Broker-Dealer under this Agreement, any monies paid on any liability
incurred by Allmerica or the Insurance Companies by reason of any such act or
omission of any General Agent, the Broker-Dealer, any affiliate of the
Broker-Dealer, or of any officer, director, employee of a General Agent or
the Broker-Dealer or of their Registered Representatives.
Allmerica shall indemnify and hold each General Agent and the Broker-Dealer
and their officers, directors, employees and registered representatives
harmless from any liability arising from any act or omission of Allmerica,
the Insurance Companies or any affiliate of Allmerica or any of the Insurance
Companies (collectively the "Allmerica Companies"), or any officer, director
or employee of the Allmerica Companies, including but not limited to, any
fines, penalties, reasonable attorney's fees, costs of settlement, damages or
financial loss.
The indemnifications provided by this Section shall survive termination of
this Agreement.
If a Contract is not delivered to the Contract owner within 10 days of the
date of issue of the Contract and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was
due to the inaction or negligence of a General Agent, the Broker-Dealer or a
Registered Representative, the difference between the payments refunded and
the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the
Insurance Company by the offending General Agent or the Broker-Dealer in any
case where the cash value is less than the payments refunded. Any such
reimbursement shall be paid to the affected Insurance Company within 30 days
of receipt of a written request for payment.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises a right to
surrender a Contract for return of all payments made, the soliciting General
Agent or the Broker-Dealer will repay the appropriate Insurance Company the
amount of any
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commissions received on the payments returned within 10 days of receipt of a
written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay each General Agent commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts the
General Agent agrees to pay its Registered Representatives. Commission
payments will be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon any General Agent's or the Broker-Dealer's ceasing to
comply with any of the terms and conditions of this Agreement or upon the
dissolution, bankruptcy or insolvency of a General Agent or the Broker-Dealer.
Whether or not there is a breach of this Agreement, the Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT OF SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica to
enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will immediately
make this Agreement
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void and be a release to Allmerica and to the Insurance Companies in full of
any and all of their obligations hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 10 days after the
notice is given to each General Agent and the Broker-Dealer. However, the
requirement to give advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the requirements of any
governmental body and, in the opinion of Allmerica, it is not reasonably
possible to meet the 10 day requirement. Changes will not be retroactive and
will apply only to life insurance coverage solicited or annuity payments made
on or after the effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Each General Agent, the Broker-Dealer and Allmerica agree to
cooperate fully in any customer complaint, insurance or securities regulatory
proceeding or judicial proceeding with respect to the General Agent, the
Broker-Dealer, Allmerica, the Insurance Companies, their affiliates or their
Registered Representatives to the extent that such customer complaint or
proceeding is in connection with Contracts marketed under this Agreement. To
the extent required, Allmerica will arrange for the Insurance Companies to
cooperate in any such complaint or proceeding. Without limiting the
foregoing:
(a) General Agents and the Broker-Dealer will be notified promptly by
Allmerica or the Insurance Companies of any written customer complaint or
notice of any regulatory proceeding or judicial proceeding of which they
become aware including the General Agent, the Broker-Dealer or any
Registered Representative which may be related to the issuance of any
Contract marketed under this Agreement. Each General Agent or the
Broker-Dealer will promptly notify Allmerica of any written customer
complaint or notice of any regulatory proceeding or judicial proceeding
received by the General Agent or the Broker-Dealer including the General
Agent, the Broker-Dealer or any of their Registered Representatives which
may be related to the issuance of any Contract marketed under this
Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint, each General Agent, the
Broker-Dealer, Allmerica and the Insurance Companies will cooperate in
investigating such complaint and any proposed response to such complaint
will be sent to the other parties to this Agreement for approval not less
than five business days prior to its being sent to the customer or
regulatory authority, except that if a more prompt response is required,
the proposed response shall be communicated by telephone or facsimile
transmission.
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CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all
customers and prospective customers of each General Agent and the
Broker-Dealer and of any company or person affiliated with a General
Agent or the Broker-Dealer, and the names and addresses of any Registered
Representatives of the Broker-Dealer which may come to the attention of
Allmerica exclusively as a result of its relationship with a General
Agent and the Broker-Dealer or any affiliated company and not from any
independent source, are confidential and shall not be used by Allmerica,
the Insurance Companies, or any company or person affiliated with
Allmerica or the Insurance Companies, nor divulged to any party for any
purpose whatsoever, except as may be necessary in connection with the
administration and marketing of the Contracts sold by or through General
Agents, including responses to specified requests to the Insurance
Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options
under the terms of the Contracts. In no event shall the names and
addresses of such customers, prospective customers and Registered
Representatives be furnished by Allmerica to any other company or person,
including but not limited to, any of their managers, registered
representatives, or brokers who are not Registered Representatives of the
Broker-Dealer, any company affiliated with Allmerica or any manager,
agency, or broker of such company, or any securities broker-dealer or any
insurance agent affiliated with such broker-dealer. The intent of this
section is that Allmerica, the Insurance Companies or companies or
persons affiliated with them shall not utilize, or permit to be utilized,
their knowledge of each General Agent, the Broker-Dealer or of any
affiliated companies which is derived exclusively as a result of the
relationships created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing
herein shall prohibit Allmerica, the Insurance Companies or any company
or person affiliated with Allmerica or the Insurance Companies from (i)
seeking business relationships and entering into separate sales
agreements with Registered Representatives of the Broker-Dealer if the
names of said Registered Representatives were obtained from independent
sources and not exclusively as a result of Allmerica's relationship with
a General Agent and the Broker-Dealer; (ii) from entering into separate
sales agreements with Registered Representatives of the Broker-Dealer
upon the request and at the initiation of said Registered
Representatives; or (iii) divulging the names and addresses of any such
customers, prospective customers, Registered Representatives, or other
companies or persons described in the preceding paragraph in connection
with any customer complaint or insurance or securities regulatory
proceeding described in Section 18.
BONDING
SECTION 20. Each General Agent and the Broker-Dealer agree to furnish
such bond or bonds as Allmerica may require. Upon failure or inability
of a General Agent or the Broker-Dealer to obtain or renew any such
bonds, this Agreement shall terminate at Allmerica's discretion upon
notice by Allmerica.
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NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to
the Insurance Companies or to Allmerica, if delivered or mailed postage
prepaid to the address specified on page 1 of this Agreement and, in the
case of notice to a General Agent or the Broker-Dealer, if delivered or
mailed postage prepaid to the intended recipient's principal place of
business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no
caption shall be construed to affect the substance of any provision of
this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the
parties. Upon execution it will replace all previous agreements between
each General Agent or the Broker-Dealer and Allmerica and the Insurance
Companies, or any of them, relating to the solicitation of Contracts. It
is hereby understood and agreed that any other agreement or
representation, commitment, promise or statement of any nature, whether
oral or written, relating to or purporting to relate to the relationship
of the parties is hereby rendered null and void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate
to take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of General Agent
By:_________________________________ By:________________________________
Name:_______________________________ Name:______________________________
Title:______________________________ Title:_____________________________
Date:_______________________________ Date:______________________________
For: _______________________________
Name of Broker-Dealer
By:_________________________________
Name:_______________________________
Title:______________________________
Date:_______________________________
* A separate signature line is required for each General Agent affiliate
of the Broker-Dealer.
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SALES
AGREEMENT ALLMERICA INVESTMENTS, INC.
440 Lincoln Street
Worcester, Massachusetts 01653
- ------------------------------------------------------------------------------
Agreement, effective as of _________________, 19___, by and between Allmerica
Investments, Inc., a Massachusetts corporation (herein "Allmerica"), ________
__________________________________________________________________________, a
_____________________________ corporation (herein the "Broker-Dealer") and the
affiliates of Broker-Dealer listed on Exhibit "A" attached hereto, each
affiliate being referred to herein as a "General Agent".
Allmerica, subject to the terms and conditions set forth in this Agreement,
authorizes and appoints each General Agent to solicit applications for the
sale of Contracts. Each General Agent accepts this appointment and each
General Agent and the Broker-Dealer agree to the terms and conditions set
forth below.
DEFINITIONS
INSURANCE COMPANIES - All Contracts will be issued by First Allmerica
Financial Life Insurance Company (herein "First Allmerica") or by Allmerica
Financial Life Insurance and Annuity Company (herein "Allmerica Financial
Life"), a subsidiary of First Allmerica. The Principal Office of First
Allmerica and Allmerica Financial Life (herein collectively referred to as
"the Insurance Companies") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653.
CONTRACTS - The variable annuity and variable life insurance contracts of the
Insurance Companies listed on the attached Commission Schedule(s), for which
Allmerica Investments, Inc., an affiliate of First Allmerica, has been
appointed the exclusive distributor and principal underwriter.
REGISTERED REPRESENTATIVES - Individuals affiliated with each General Agent
and the Broker-Dealer who are licensed as life insurance agents in those
jurisdictions in which applications for the sale of Contracts are to be
solicited and who are also duly registered with the National Association of
Securities Dealers, Inc. (herein "NASD") in compliance with the '34 Act.
'33 ACT - The Securities Act of 1933, as amended.
'34 ACT - The Securities Exchange Act of 1934, as amended.
RELATIONSHIP OF PARTIES
SECTION 1. Nothing in this Agreement will be construed to create the
relationship of employer and employee between Allmerica or either Insurance
Company and any General Agent, the Broker-Dealer or any Registered
Representative. General Agents and Registered Representatives will be free
to exercise their independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the Insurance
Companies. However, General Agents, the Broker-Dealer and Registered
Representatives shall have no authority to act on behalf of Allmerica or the
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Insurance Companies in a manner which does not conform to applicable
statutes, ordinances, or governmental regulations or to reasonable rules
adopted from time to time by Allmerica or the Insurance Companies.
LIMITATIONS ON AUTHORITY
SECTION 2. General Agents, the Broker-Dealer and Registered Representatives
will have no authority to accept risks of any kind; to make, alter or
discharge Contracts; to waive forfeitures or exclusions; to alter or amend
any papers received from either Insurance Company; to deliver any life
insurance Contract or any document, agreement or endorsement changing the
amount of insurance coverage if the General Agent, the Broker-Dealer or the
soliciting Registered Representative know or have reason to believe that the
insured is uninsurable; or to accept any payment unless the payment meets the
minimum payment requirement for the Contract established by the Insurance
Company.
LICENSING AND REGISTRATION
SECTION 3. Each General Agent is hereby authorized to recommend Registered
Representatives for appointment by the Insurance Companies and only
individuals so recommended by a General Agent shall become Registered
Representatives hereunder. Allmerica shall arrange for the Insurance
Companies to apply for life insurance agent appointments in the appropriate
jurisdictions for such recommended Registered Representatives. Until
Contracts of First Allmerica are offered for sale, applications for
appointments shall only be made on behalf of Allmerica Financial Life.
Notwithstanding the foregoing, the Insurance Companies and Allmerica reserve
the right to refuse to appoint any proposed Registered Representative and/or
to terminate any Registered Representative who has been appointed by the
Insurance Companies.
AGREEMENTS BY GENERAL AGENT AND BROKER-DEALER
SECTION 4. The Broker-Dealer agrees that at all times when performing its
duties under this Agreement it shall be duly registered as a securities
broker-dealer under the '34 Act, be a member in good standing of the NASD,
and be duly licensed or registered as a securities broker-dealer in each
jurisdiction where such licensing or registration is required in connection
with the sale of the Contracts or the supervision of Registered
Representatives who solicit applications for the Contracts.
Each General Agent agrees that at all times when performing its duties under
this Agreement it shall be duly licensed to sell Contracts in each
jurisdiction in which General Agent intends to perform hereunder.
Each General Agent and the Broker-Dealer shall be responsible for carrying
out their sales and administrative obligations under this Agreement in
continued compliance with the NASD Rules of Fair Practice, federal and state
securities laws and regulations, and state insurance laws and regulations.
Each General Agent and the Broker-Dealer agree to offer the Contracts for
sale through their Registered Representatives and to offer such Contracts
only in accordance with the prospectus. General Agents, the Broker-Dealer
and Registered Representatives are not authorized to give any information or
make any representations concerning such Contracts other
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than those contained in the prospectus or in such sales literature or
advertising as may be authorized by Allmerica.
Each General Agent and the Broker-Dealer agree that they shall be fully
responsible for ensuring that no person shall offer or sell Contracts on
their behalf until such person is appropriately licensed, registered or
otherwise qualified to offer and sell such Contracts under the state and
federal securities laws and the insurance laws of each jurisdiction in which
such person intends to solicit.
Each General Agent and the Broker-Dealer agree to train, supervise and be
solely responsible for the conduct of their Registered Representatives in the
solicitation and sale of the Contracts and for the supervision as to their
strict compliance with Allmerica's rules and procedures, the NASD rules of
Fair Practice, and applicable rules and regulations of any other governmental
or other agency that has jurisdiction over the offering for sale of the
Contracts.
Each General Agent and the Broker-Dealer shall take reasonable steps to
ensure that their Registered Representatives shall not make recommendations
to an applicant to purchase a Contract in the absence of reasonable grounds
to believe that the purchase of such Contract is suitable for such applicant.
Such determination will be based upon, but will not be limited to,
information furnished to a Registered Representative after reasonable inquiry
of such applicant concerning the applicant's insurance and investment
objectives, financial situation and needs.
Each General Agent and the Broker-Dealer agree that Registered
Representatives shall conduct their business with respect to the Contracts at
all times in compliance with all applicable federal and state laws and
regulations and shall be subject to a standard of conduct including, but not
limited to, the following:
(a) A Registered Representative shall not solicit or participate in the sale
of the Contracts in any jurisdiction until such Registered Representative
is trained and licensed.
(b) A Registered Representative shall not solicit for the sale of Contracts
without delivering the then currently effective prospectus for such
Contracts and any then applicable amendments or supplements thereto,
including the current prospectus(es) for any fund(s) in which Contract
separate account(s) invest.
(c) A Registered Representative shall have no authority to advertise for or
on behalf of the Insurance Companies or Allmerica without express written
authorization from Allmerica.
AGREEMENTS BY ALLMERICA
SECTION 5. Allmerica agrees that at all times while this Agreement remains
in force that it shall be a registered broker-dealer under the '34 Act and be
a member in good standing of the NASD.
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During the term of this Agreement, Allmerica will provide to, or cause to be
provided to, each General Agent and the Broker-Dealer, without charge, as
many copies of the prospectus(es) for the Contracts (and any amendments, or
supplements thereto), the current prospectus(es) for any underlying fund(s)
and applications for the Contracts as each General Agent and the
Broker-Dealer may reasonably request. Upon termination of the Agreement, any
prospectuses, applications, and other materials and supplies furnished by
Allmerica to General Agents and the Broker-Dealer shall be promptly returned
to Allmerica.
Allmerica agrees to promptly notify each General Agent and the Broker-Dealer
of newly declared effective prospectus(es) for the Contracts and any
amendments or supplements thereto.
Allmerica agrees to keep each General Agent and the Broker-Dealer informed of
all jurisdictions in which the Insurance Companies are licensed to sell the
Contracts and in which the Contracts may be offered for sale.
SUBMISSION OF APPLICATIONS; DELIVERY OF CONTRACTS; REJECTED BUSINESS
SECTION 6. Each General Agent or the Broker-Dealer will submit, or cause to
be submitted, directly to the Principal Office of the Insurance Companies all
Contract applications solicited by their Registered Representatives. Each
General Agent or the Broker-Dealer will deliver, or cause to be delivered,
within 10 days of the date of issue all Contracts issued on applications
submitted by the General Agent, the Broker-Dealer or their Registered
Representatives. Each General Agent or the Broker-Dealer will promptly
return, or cause to be returned, to the Insurance Companies any Contract
which is declined by the applicant or which cannot be delivered within the
time permitted by the Insurance Company's rules.
ILLUSTRATIONS AND PROPOSALS
SECTION 7. General Agents, the Broker-Dealer and Registered Representatives
will not furnish any prospective Contract owner with an illustration of the
financial or other aspects of a Contract or a proposal for a Contract unless
the same has been either furnished by the Insurance Companies or prepared
from computer software or other material furnished or approved by the
Insurance Companies. Any illustration or proposal will conform to standards
of completeness and accuracy established by the Insurance Companies. If the
proposal or illustration was not furnished by the Insurance Companies, each
General Agent or the Broker-Dealer will retain in its records for
availability to the Insurance Companies a copy thereof or the means to
duplicate the same. Any computer software or materials furnished by either
Insurance Company will be and remain its property.
ACCOUNTING FOR FUNDS COLLECTED
SECTION 8. In accordance with the rules of the Insurance Companies, each
General Agent and the Broker-Dealer will account for and remit immediately to
the Principal Office of the Insurance Companies all funds received or
collected for or on behalf of either Insurance Company without deduction for
any commissions, or other claim the General Agent, the Broker-Dealer or any
Registered Representative may have against either Insurance Company or
Allmerica and will make such reports and file such
4
<PAGE>
substantiating documents and records as the Insurance Companies may
reasonably require.
INDEMNIFICATION
SECTION 9. Each General Agent and the Broker-Dealer, jointly and severally,
shall indemnify and hold Allmerica and the Insurance Companies and their
officers, directors and employees harmless from any liability arising from
any act or omission of the General Agent, the Broker-Dealer or of any
affiliate of the Broker-Dealer, or any officer, director, employee of the
General Agent or the Broker-Dealer or of their Registered Representatives,
including but not limited to, any fines, penalties, attorney's fees, costs of
settlement, damages or financial loss. Each General Agent and the
Broker-Dealer expressly authorize Allmerica and the Insurance Companies,
without precluding them from exercising any other remedy they may have, to
charge against all compensation due or to become due to the General Agent or
the Broker-Dealer under this Agreement, any monies paid on any liability
incurred by Allmerica or the Insurance Companies by reason of any such act or
omission of any General Agent, the Broker-Dealer, any affiliate of the
Broker-Dealer, or of any officer, director, employee of a General Agent or
the Broker-Dealer or of their Registered Representatives.
Allmerica shall indemnify and hold each General Agent and the Broker-Dealer
and their officers, directors, employees and registered representatives
harmless from any liability arising from any act or omission of Allmerica,
the Insurance Companies or any affiliate of Allmerica or any of the Insurance
Companies (collectively the "Allmerica Companies"), or any officer, director
or employee of the Allmerica Companies, including but not limited to, any
fines, penalties, reasonable attorney's fees, costs of settlement, damages or
financial loss.
The indemnifications provided by this Section shall survive termination of
this Agreement.
If a Contract is not delivered to the Contract owner within 10 days of the
date of issue of the Contract and if after delivery the owner returns the
Contract to the Insurance Company and receives a full refund of all payments
made, in any situation where the failure to deliver in a timely manner was
due to the inaction or negligence of a General Agent, the Broker-Dealer or a
Registered Representative, the difference between the payments refunded and
the cash value of the Contract on the date the Contract is received by the
Insurance Company at its Principal Office shall be reimbursed to the
Insurance Company by the offending General Agent or the Broker-Dealer in any
case where the cash value is less than the payments refunded. Any such
reimbursement shall be paid to the affected Insurance Company within 30 days
of receipt of a written request for payment.
COMMISSION REFUNDS
SECTION 10. If a Contract owner rescinds a Contract or exercises a right to
surrender a Contract for return of all payments made, the soliciting General
Agent or the Broker-Dealer will repay the appropriate Insurance Company the
amount of any
5
<PAGE>
commissions received on the payments returned within 10 days of receipt of a
written request for repayment.
BASIS OF COMPENSATION
SECTION 11. While this Agreement remains in force, the Insurance Companies
agree to pay each General Agent commissions in accordance with the Commission
Schedule(s) attached hereto and incorporated herein, from which amounts the
General Agent agrees to pay its Registered Representatives. Commission
payments will be made for each Contract issued pursuant to an application
solicited by duly appointed Registered Representatives.
TIME OF PAYMENT OF COMMISSIONS
SECTION 12. A payment will not be considered made until it has been received
by the Insurance Company at its Principal Office. On payments made,
commissions will be paid at regular intervals in accordance with the rules of
the Insurance Companies.
TERMINATION
SECTION 13. This Agreement shall automatically terminate immediately and
without notice upon any General Agent's or the Broker-Dealer's ceasing to
comply with any of the terms and conditions of this Agreement or upon the
dissolution, bankruptcy or insolvency of a General Agent or the Broker-Dealer.
Whether or not there is a breach of this Agreement, the Broker-Dealer or
Allmerica may terminate this Agreement by giving ten (10) days' written
notice to the other party at any time during the first year hereof, and by
giving thirty (30) days' written notice after the expiration of the first
year hereof.
Upon termination of this Agreement all authorizations, rights and obligations
shall cease except the obligation to pay commissions due on payments received
prior to termination for Contracts in effect on the date of termination, or
for Contracts to be issued pursuant to applications received by the Insurance
Companies prior to termination. Except as provided in the preceding
sentence, no further commissions shall be paid after termination of this
Agreement.
RIGHT OF SET-OFF
SECTION 14. Allmerica and the Insurance Companies will have a lien on any
commissions payable under this Agreement, whether or not such payments are
now due or hereafter become due, and may apply any such monies to the
satisfaction of indebtedness to Allmerica or to either Insurance Company to
the extent permitted by law.
NON-WAIVER OF BREACH
SECTION 15. Waiver of any breach of any provision of this Agreement will not
be construed as a waiver of the provision or of the right of Allmerica to
enforce said provision thereafter.
ASSIGNABILITY
SECTION 16. This Agreement is not transferable. Without the written consent
of Allmerica and the Insurance Companies, no rights or interest in or to
commissions will be subject to assignment, and any attempted assignment, sale
or transfer of any commissions without such written consents will immediately
make this Agreement
6
<PAGE>
void and be a release to Allmerica and to the Insurance Companies in full of
any and all of their obligations hereunder.
RESERVATION OF RIGHT TO CHANGE
SECTION 17. Allmerica reserves the right at any time, and from time to time,
to change prospectively the terms and conditions of this Agreement, including
but not limited to, the rates of commissions. Any change will become
effective on the date specified in a notice or, if later, 10 days after the
notice is given to each General Agent and the Broker-Dealer. However, the
requirement to give advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the requirements of any
governmental body and, in the opinion of Allmerica, it is not reasonably
possible to meet the 10 day requirement. Changes will not be retroactive and
will apply only to life insurance coverage solicited or annuity payments made
on or after the effective date of the change.
COMPLAINTS AND INVESTIGATIONS
SECTION 18. Each General Agent, the Broker-Dealer and Allmerica agree to
cooperate fully in any customer complaint, insurance or securities regulatory
proceeding or judicial proceeding with respect to the General Agent, the
Broker-Dealer, Allmerica, the Insurance Companies, their affiliates or their
Registered Representatives to the extent that such customer complaint or
proceeding is in connection with Contracts marketed under this Agreement. To
the extent required, Allmerica will arrange for the Insurance Companies to
cooperate in any such complaint or proceeding. Without limiting the
foregoing:
(a) General Agents and the Broker-Dealer will be notified promptly by
Allmerica or the Insurance Companies of any written customer complaint or
notice of any regulatory proceeding or judicial proceeding of which they
become aware including the General Agent, the Broker-Dealer or any
Registered Representative which may be related to the issuance of any
Contract marketed under this Agreement. Each General Agent or the
Broker-Dealer will promptly notify Allmerica of any written customer
complaint or notice of any regulatory proceeding or judicial proceeding
received by the General Agent or the Broker-Dealer including the General
Agent, the Broker-Dealer or any of their Registered Representatives which
may be related to the issuance of any Contract marketed under this
Agreement or any activity in connection with any such Contract(s).
(b) In the case of a customer complaint, each General Agent, the
Broker-Dealer, Allmerica and the Insurance Companies will cooperate in
investigating such complaint and any proposed response to such complaint
will be sent to the other parties to this Agreement for approval not less
than five business days prior to its being sent to the customer or
regulatory authority, except that if a more prompt response is required,
the proposed response shall be communicated by telephone or facsimile
transmission.
7
<PAGE>
CONFIDENTIALITY
SECTION 19. Allmerica agrees that the names and addresses of all customers
and prospective customers of each General Agent and the Broker-Dealer and of
any company or person affiliated with a General Agent or the Broker-Dealer,
and the names and addresses of any Registered Representatives of the
Broker-Dealer which may come to the attention of Allmerica exclusively as a
result of its relationship with a General Agent and the Broker-Dealer or any
affiliated company and not from any independent source, are confidential and
shall not be used by Allmerica, the Insurance Companies, or any company or
person affiliated with Allmerica or the Insurance Companies, nor divulged to
any party for any purpose whatsoever, except as may be necessary in
connection with the administration and marketing of the Contracts sold by or
through General Agents, including responses to specified requests to the
Insurance Companies for service by Contract owners or efforts to prevent the
replacement of such Contracts or to encourage the exercise of options under
the terms of the Contracts. In no event shall the names and addresses of
such customers, prospective customers and Registered Representatives be
furnished by Allmerica to any other company or person, including but not
limited to, any of their managers, registered representatives, or brokers who
are not Registered Representatives of the Broker-Dealer, any company
affiliated with Allmerica or any manager, agency, or broker of such company,
or any securities broker-dealer or any insurance agent affiliated with such
broker-dealer. The intent of this section is that Allmerica, the Insurance
Companies or companies or persons affiliated with them shall not utilize, or
permit to be utilized, their knowledge of each General Agent, the
Broker-Dealer or of any affiliated companies which is derived exclusively as
a result of the relationships created through the sale of the Contracts.
Notwithstanding the foregoing provisions of this Section 19, nothing herein
shall prohibit Allmerica, the Insurance Companies or any company or person
affiliated with Allmerica or the Insurance Companies from (i) seeking
business relationships and entering into separate sales agreements with
Registered Representatives of the Broker-Dealer if the names of said
Registered Representatives were obtained from independent sources and not
exclusively as a result of Allmerica's relationship with a General Agent and
the Broker-Dealer; (ii) from entering into separate sales agreements with
Registered Representatives of the Broker-Dealer upon the request and at the
initiation of said Registered Representatives; or (iii) divulging the names
and addresses of any such customers, prospective customers, Registered
Representatives, or other companies or persons described in the preceding
paragraph in connection with any customer complaint or insurance or
securities regulatory proceeding described in Section 18.
BONDING
SECTION 20. Each General Agent and the Broker-Dealer agree to furnish such
bond or bonds as Allmerica may require. Upon failure or inability of a
General Agent or the Broker-Dealer to obtain or renew any such bonds, this
Agreement shall terminate at Allmerica's discretion upon notice by Allmerica.
8
<PAGE>
NOTICE
SECTION 21. Whenever this Agreement requires a notice to be given, the
requirement will be considered to have been met, in the case of notice to the
Insurance Companies or to Allmerica, if delivered or mailed postage prepaid
to the address specified on page 1 of this Agreement and, in the case of
notice to a General Agent or the Broker-Dealer, if delivered or mailed
postage prepaid to the intended recipient's principal place of business.
CAPTIONS
SECTION 22. Captions are used for informational purposes only and no caption
shall be construed to affect the substance of any provision of this Agreement.
EFFECTIVENESS; ENTIRE CONTRACT; PRIOR AGREEMENTS
SECTION 23. This Agreement contains the entire contract between the parties.
Upon execution it will replace all previous agreements between each General
Agent or the Broker-Dealer and Allmerica and the Insurance Companies, or any
of them, relating to the solicitation of Contracts. It is hereby understood
and agreed that any other agreement or representation, commitment, promise or
statement of any nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby rendered null and
void.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate to
take effect on its effective date.
*For: _________________________________ For: Allmerica Investments, Inc.
Name of General Agent
By:__________________________________ By:________________________________
Name:________________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date:________________________________ Date:______________________________
For: __________________________________
Name of Broker-Dealer
By:__________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
* A separate signature line is required for each General Agent affiliate of the
Broker-Dealer.
9
<PAGE>
ALLMERICA 440 Lincoln Street COMMISSION SCHEDULE
INVESTMENTS INC. Worcester, MA 01653 (Percent of Premium Payments)
- -------------------------------------------------------------------------------
FIRST ALLMERICA FINANCIAL LIFE PRINCIPAL UNDERWRITER
INSURANCE COMPANY AND EXCLUSIVE DISTRIBUTOR --
ALLMERICA FINANCIAL LIFE ALLMERICA INVESTMENTS, INC.
INSURANCE AND ANNUITY COMPANY
COMMISSION SCHEDULE AM-2*
(Effective May 15, 1995)
ALLMERICA SELECT
Variable Universal Life Policies
A. ISSUED BY ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Year One: 90% of payments up to target payment (See attached)
4% of payments on excess above target
Renewal: 2% of Payments
Trail: .25% annual trail commission of unloaded account value.
Payable each calendar quarter at 25% the annual rate (.0625%)
on policies in the second and subsequent years.
B. ISSUED BY FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Year One: 50% of payments plus 40% expense reimbursement up to
target payment
4% of payments on excess above target
Renewal: 4% of Payments
Trail: None
* This schedule sets forth the commissions applicable to Allmerica Select
Life policies issued on or after March 15, 1995 which do not replace
existing Allmerica policies. Commissions applicable to replacements,
increases in the face amount, conversions and exchanges will be in
accordance with Allmerica rules.
<PAGE>
ALLMERICA 440 Lincoln Street COMMISSION SCHEDULE
INVESTMENTS INC. Worcester, MA 01653 (Percent of Premium Payments)
- -------------------------------------------------------------------------------
FIRST ALLMERICA FINANCIAL LIFE PRINCIPAL UNDERWRITER
INSURANCE COMPANY AND EXCLUSIVE DISTRIBUTOR --
ALLMERICA FINANCIAL LIFE ALLMERICA INVESTMENTS, INC.
INSURANCE AND ANNUITY COMPANY
COMMISSION SCHEDULE AM-3*
(Effective May 1, 1996)
ALLMERICA SELECT
Variable Survivorship Universal Life Policies
A. ISSUED BY ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Year One: 90% of payments up to target payment
4% of payments on excess above target
Renewal: 2% of Payments
Trail: .25% annual trail commission of unloaded account value.
Payable each calendar quarter at 25% the annual rate (.0625%)
on policies in the second and subsequent years.
B. ISSUED BY FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Year One: 50% of payments plus 40% expense reimbursement up to
target payment
4% of payments on excess above target
Renewal: 4% of Payments
Trail: None
* This schedule sets forth the commissions applicable to Allmerica Select
Life policies issued on or after May 1, 1996 which do not replace
existing Allmerica policies. Commissions applicable to replacements,
increases in the face amount, conversions and exchanges will be in
accordance with rules of the issuing insurer.
<PAGE>
ALLMERICA ALLMERICA 440 Lincoln Street GENERAL AGENT'S
FINANCIAL INVESTMENTS, INC. Worcester, MA 01653 AGREEMENT
- --------------------------------------------------------------------------------
Allmerica Investments, Inc. ("Company") hereby appoints
__________________________________________________
("General Agent") as local supervisor for the purpose of training and
supervising all associated persons and registered representatives of Company
assigned to _________________________________________________________
("Agency") engaged in the solicitation, sale or service of variable life
insurance and variable annuity contracts offered by Allmerica Financial Life
Insurance and Annuity Company and/or First Allmerica Financial Life Insurance
Company, mutual funds, limited partnerships and general securities (collectively
"Investment Products and Services") offered and/or distributed by Company. This
appointment is effective as of the date accepted by General Agent and
acknowledged by Company.
1. SUPERVISION: General Agent agrees to supervise all registered
representatives assigned to Agency, both those operating from Agency and
those operating from detached locations, consistent with the standards of
conduct outlined in Company's Business Conduct Guide, Company's Statement
of Compliance for the Office of Supervisory Jurisdiction and Branch
Offices, the Program for Allmerica Financial Life/Allmerica Investments
Office Examinations, and the procedures and requirements outlined in other
Company manuals, memoranda and other publications, as may be amended from
time to time.
General Agent agrees to be responsible for Investment Products and Services
activity conducted through Agency by monitoring Investment Products and
Services activity in order to ensure that the business is processed in
accordance with regulatory and Company standards and to notify Company of
any irregularities and/or deficiencies.
General Agent agrees to be responsible for the maintenance and periodic
review of the books and records of Agency, as required by Company.
On at least an annual basis, General Agent agrees to conduct and/or
participate, in coordination with Company's compliance personnel, an agency
compliance meeting which all registered representatives assigned to Agency
shall attend. If for any reason a registered representative does not
attend agency compliance meeting, General Agent will schedule a personal
interview, on at least an annual basis, for the purpose of reviewing
activity of registered representative with respect to Investment Products
and Services and to discuss the compliance topics reviewed at agency
compliance meeting.
General Agent agrees to acquire and/or comply with all of the applicable
laws, rules and regulations (General Securities Principal Registration) of
the Securities and Exchange Commission (SEC), National Association of
Securities Dealers, Inc. (NASD) and all other federal and state laws and
regulations.
General Agent agrees to maintain all NASD registrations required to
supervise the solicitation and sale of Investment Products and Services
offered through Agency. General Agent will maintain all state securities
licenses and state insurance licenses as may be required to offer and
solicit Investment Products and Services.
2. LIMITATIONS OF AUTHORITY: General Agent has no authority to accept any
risk on Company's behalf, to issue, make, alter or discharge any contract,
to extend the time of payments, to waive or extend any contract obligation
or condition, or to alter or amend any communication sent by Company
without express authority in writing from an officer of Company.
3. ASSIGNABILITY: No assignment, sale or transfer of this Agreement or any
of the rights, claims or interests under it may be made by General Agent
without the prior written consent of Company. An assignment, sale or
transfer by General Agent without written consent of Company will
immediately make this Agreement void and shall be a release in full to
Company of any and all of its obligations under this Agreement.
4. AGENCY STAFFING: General Agent agrees to recruit, train and supervise
registered representatives to solicit Investment Products and Services
offered through Company. General Agent agrees to develop a sales force of
sufficient size and quality to adequately penetrate the market with
Investment Products and Services of Company.
<PAGE>
5. BUSINESS AUTHORIZED: General Agent agrees to act for Company in the
solicitation of orders only for those Investment Products and Services for
which Company has executed sales agreements. General Agent shall monitor
his/her registered representatives on a continuing basis to prevent the
offering or the selling of Investment Products and Services not offered by
Company and to prevent registered representatives of Company from
exercising discretionary authority on behalf of any of their clients.
6. SUBMISSION OF APPLICATIONS/ACCOUNTING FOR FUNDS COLLECTED: General Agent
agrees to establish and maintain at Agency procedures, as outlined in
Company manuals, concerning the collection, recording and transmittal of
all applications and/or payments collected on behalf of Company, any
issuer, or any sponsor.
General Agent agrees to be responsible to Company for monies collected by
registered representatives and for any securities, certificates, payments,
receipts and other Company papers in the possession of registered
representatives and employees of Agency.
Purchase checks for Investment Products and Services are to be client
personal checks, cashier's checks or money orders made payable to either
the Company, appropriate issuer, sponsor or other designated agent.
Purchase checks may not be made payable to registered representative,
General Agent or any personal or Agency Accounts.
7. REVIEW OF INVESTMENT PRODUCT BUSINESS: General Agent agrees, in accordance
with Company procedures, to conduct periodic reviews of Investment Product
and Services business of each registered representative. Such review of
Investment Product and Services business shall include, but not be limited
to, reviews for adequate NASD registrations and state securities and/or
insurance licensing of registered representative, prompt transmittal of
applications, checks and other pertinent items to Agency and subsequently
to Home Office, the correct use of applications and proper mode of payment
and the suitability of Investment Products and Service based on client's
financial profile and objectives.
8. BOOKS AND RECORDS: General Agent agrees to maintain a regular and
accurate record of all Investment Products and Services transactions of
Agency, including any journal, account books, records, papers, customer
account files or any other material, as required by Company. General Agent
agrees, at such times that Company may request, to make detailed report to
Company, on forms furnished for that purpose, showing an accurate
accounting of all monies and other items received for, or on behalf of
Company.
General Agent agrees that all records, files and papers are, and remain,
property of Company and will at all times be freely exhibited for the
purpose of examinations and inspection by duly authorized personnel of
Company.
Upon termination, all records revert to Company and should be turned over
to a Company representative.
9. DISTRIBUTION AND USE OF ADVERTISING MATERIAL, CORRESPONDENCE: General
Agent agrees not to directly or indirectly recommend or distribute any
advertising and/or sales literature to registered representatives
(including but not limited to prospectuses, illustrations, circulars, form
letters or postal cards, business cards, stationary, booklets, schedules,
broadcasting and other sales material of any kind) concerning Company
and/or the offering of Investment Products and Services until the material
has been approved in writing by a registered principal in the Company's
Compliance Department.
General Agent also agrees to obtain from his/her registered
representatives, at the time of development, copies of all correspondence
pertaining to the solicitations and/or sale of any Investment Products and
Services or to any other aspect of their Investment Products and Services
business, and to forward the correspondence to Home Office to allow for the
review and endorsement of correspondence in writing, on an official record
of Company, by a registered principal in the Company's Compliance
Department. General Agent shall periodically inspect Registered
Representatives' materials, sales literature and correspondence to ensure
compliance with Company requirements.
10. COMPENSATION: General Agent, subject to the provisions of this Agreement,
will be allowed expense reimbursement or allowances and overriding
commissions on payments collected on all Investment Product sales solicited
by Registered Representatives assigned to General Agent and effected
through Agency at rates established and published by Company, as may be
amended from time to time.
<PAGE>
11. COMMISSIONS: Company will pay commissions to General Agent, after
concession payments are made to Company by an issuer or sponsor, in
connection with sales of Investment Products and Services effected through
General Agent's personal solicitation. Such commissions will be paid on
the same basis and terms as specified in Company's Registered
Representative Agreement, which is incorporated herein by reference and as
may be amended from time to time.
12. TERMINATION WITHOUT CAUSE: General Agent and Company may terminate this
Agreement at any time without cause.
13. RELATIONSHIP OF PARTIES: Nothing contained in this Agreement is to be
construed to create the relationship of employer and employee between
Company and General Agent. General Agent, however, is to always comply
with all of the applicable laws, rules and regulations of the SEC, NASD,
federal and state authorities as well as Company's rules, regulations and
procedures concerning methods of conducting Investment Products and
Services business, as may be amended from time to time.
14. EFFECTIVENESS OF CONTRACT: This Agreement between General Agent and
Company is not binding until Agreement has been duly executed by both
parties. This Agreement supersedes all previous agreements, whether oral
or written. This Agreement shall not cancel or affect any right, claim or
interest General Agent may have concerning commissions now due or hereafter
to become due under preceding agreements between General Agent and Company.
Neither shall Agreement cancel, terminate or affect in any way any lien,
right or interest which Company may have, or may hereafter acquire, with
respect to commissions or equities to General Agent under any other
agreement with Company, any provision of any such agreement which, by its
terms or by implications, continues beyond termination of such agreement.
IN WITNESS THEREOF, this Agreement has been executed by the undersigned on the
dates indicated below.
Allmerica Investments, Inc.
By: By:
---------------------------------- ----------------------------------
General Agent Signature Home Office Principal
Date: Date:
-------------------------------- --------------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE 440 Lincoln Street
INSURANCE COMPANY Worcester, MA 01653 CAREER AGENT AGREEMENT
- --------------------------------------------------------------------------------
First Allmerica Financial Life Insurance Company (the "Company") does hereby
appoint_____________________________ of _________________________________
("Career Agent") its Agent to solicit applications for insurance and annuities
and to submit such applications through the office of
__________________________________________ ("General Agent"), this appointment
to be effective on _____________________________.
Career Agent accepts this appointment, subject to the terms and provisions set
forth in this Agreement.
WITNESSETH:
Career Agent will solicit applications for coverages offered by the Company and
for which he/she is duly licensed. Career Agent is authorized to collect and
pay over to General Agent premiums on coverages solicited by him/her. Career
Agent shall not delegate any authority granted under this Agreement and shall
not appoint any solicitors or subagents to act on his/her behalf.
TERRITORY AND CLASSES OF BUSINESS
Territory SECTION 1. The district within which Career Agent may
solicit insurance and annuity applications for the Company
is the district assigned to General Agent.
Permissible SECTION 2. Career Agent agrees that in the sale and service
Activity of insurance and annuities he/she will act only on behalf of
the Company and such of its affiliates as he/she is
authorized to represent; and he/she will not engage in any
other activity for remuneration or profit which requires
his/her personal services without first obtaining the
consent of the Company. If the Company makes arrangements
with another business entity to make any of its products
available to Career Agents, this will constitute consent to
Career Agent to enter into an arrangement with such entity
to sell and service such products on its behalf. If, with
the consent of the Company, Career Agent engages in any
personal service activities for remuneration or profit,
he/she will, upon request of the Company, disclose the
amount of time expended and the amount of income derived
from such other activities.
STATUS, DUTIES AND AUTHORITY
Relationship SECTION 3. Nothing in this Agreement will be construed to
of Parties create the relationship of employer and employee between the
Company and Career Agent. Within the scope of his/her
authority, Career Agent will be free to exercise his/her
independent judgment as to the time, place and manner of
solicitation and servicing of business underwritten by the
Company. However, he/she will have no authority to act in a
manner which does not conform to applicable statutes,
ordinances or governmental regulations pertaining to the
conduct of the business or to reasonable rules adopted, from
time to time, by the Company.
-1-
<PAGE>
Limitations SECTION 4. Career Agent will have no authority to accept
on Authority risks of any kind; to make, alter or discharge contracts of
insurance or annuities; to waive forfeitures or exclusions;
to fix any premium for hazardous or substandard risks; to
alter or amend any papers received by him/her from the
Company; to deliver any policy of insurance or any document,
agreement or endorsement changing the amount of insurance
coverage if Career Agent knows or has reason to believe that
the insured is uninsurable; to collect any premium after the
expiration of the policy grace period except in connection
with a policy reinstatement; to accept payment of any
premium unless the premium meets the minimum premium
requirement for the policy established by the Company; or to
contract any debt rendering or purporting to render the
Company liable therefor, without express authority in
writing from an authorized officer of the Company.
Implied SECTION 5. Career Agent will have no power or authority
Authority other than as expressly provided in this Agreement and no
other power or authority shall be implied from the grant or
denial of power specifically mentioned in this Agreement.
Duty of SECTION 6. Career Agent agrees that he/she will not
Compliance; intentionally violate any applicable state or Federal law,
Negative ruling or regulation pertaining to the insurance business or
Obligations any rule or regulation of the Company. Career Agent will
not knowingly engage in any activity which is detrimental to
the best interests of the Company or any of its affiliates.
Neither while this Career Agent Agreement is in force nor
for a period of two years following the termination of this
Agreement will Career Agent directly or indirectly interfere
with the relationship of the Company or any of its
affiliates with any agent or broker.
Policy While this Agreement remains in force, Career Agent agrees
Termination that he/she will not, directly or indirectly, replace or
and Replacement induce or attempt to induce any policyholder to terminate or
replace any policy issued by the Company or any of its
affiliates except when permitted by the rules of the issuing
insurer. For a period of two years following termination of
this Agreement, Career Agent agrees that he/she will not,
directly or indirectly, replace or induce or attempt to
induce any policyholder serviced through the office of the
General Agent to terminate or replace any policy issued by
the Company or any of its affiliates.
SOLICITATION OF INSURANCE AND ANNUITIES
Submission of SECTION 7. Career Agent will submit through General Agent
Applications; all Company policy applications solicited by him/her,
Delivery of whether or not it appears the proposed insured is an
Policies; acceptable risk under the rules of the Company. Career
Rejected Agent will deliver, or cause to be delivered, in accordance
Business with the rules of the Company all policies issued on
applications submitted by him/her and will return to General
Agent any policy which is declined by the applicant or which
cannot be delivered within the time permitted by the
Company's rules. If an application is declined by the
Company or is accepted at a rate higher than standard which
is not acceptable to the applicant, with the Company's
permission Career Agent may place the coverage with another
insurance company.
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<PAGE>
Limitation on SECTION 8. Career Agent will not solicit any insurance or
Solicitation annuities in any jurisdiction in which he/she is not
licensed nor will he/she solicit by mail or otherwise any
insurance or annuities outside the district assigned to
General Agent without first receiving consent of the Company
and ascertaining that he/she is properly licensed to solicit
such insurance or annuities.
Advertising SECTION 9. The Company, through General Agent, will make
Material, Rate available to Career Agent a supply of canvassing and
Books, Forms, advertising materials, stationery, books, records and forms
etc. necessary or suitable to properly solicit insurance and
annuities. Career Agent will not print, publish or
distribute any advertisement, circular, statement or
document relating to the business of the Company or any of
its affiliates or use any title or language descriptive of
his/her status without the prior approval of the Company.
Policyowner Solely to assist Career Agent in rendering service to
Service Aids policyowners, Career Agent may use whatever aids, such as
data cards, computer printouts, etc. as may be available.
All such aids, whether furnished by the Company or otherwise
- including any copies thereof - shall be the property of
the Company.
Illustrations Career Agent will not furnish any prospective insured or
and Proposals policyowner an illustration of the financial or other
aspects of a policy or a proposal for a policy of the
Company unless the same has been either furnished by the
Company or prepared from computer software or other material
furnished or approved by the Company. Any illustration or
proposal delivered by Career Agent will conform to standards
of completeness and accuracy established by the Company. If
the proposal or illustration was not furnished by the
Company, Career Agent will retain in his/her records for
availability to the Company a copy thereof or the means to
duplicate the same. Any computer software or materials
furnished by the Company will be and remain its property.
Return of Upon termination of this Agreement, Career Agent will return
Materials, etc. to the Company all manuals, computer software, policyholder
data cards, policyholder files, stationery and business
cards and other material which, by the terms of this Section
or otherwise, is the property of the Company.
Accounting for SECTION 10. In accordance with the rules of the Company,
Funds Collected Career Agent will account for and remit immediately through
General Agent all funds received or collected by him/her for
or on behalf of the Company without deduction for any
commissions, fees, or other claim he/she may have against
the Company and will make such reports and file such
substantiating documents and records as the Company or
General Agent may require.
Liability for SECTION 11. If the Company pays Career Agent commissions or
Refund of fees in advance of receipt of the premium on which the
Commissions payment is based, the amount by which the payment to Career
and Fees Agent exceeds, at any time, the amount attributable to the
premiums paid will constitute a personal debt of Career
Agent payable on demand. If the Company returns premiums on
a policy for any reason whatsoever (other than as a part of
claim settlement) or rescinds or cancels a policy for any
reason whatsoever or if a policyholder exercises a right to
surrender
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<PAGE>
the policy for return of all premiums paid, Career Agent
will pay on demand the amount of any commissions received on
the premiums returned.
Notwithstanding the foregoing, after this Agreement has been
in force for 10 complete years and prior to the date the
Agreement is terminated for cause, unearned commissions paid
in advance on policies the premiums for which are being paid
under the Company's Monthly Automatic Premium (MAP) Plan or
other annualized commission arrangement that are repayable
because of a lapse or surrender of the policy may only be
recovered by set-off from first year and renewal commissions
and fees otherwise payable by the Company or its affiliates
to Career Agents.
COMPENSATION
Basis of SECTION 12. Career Agent's compensation will be a
Compensation combination of commissions and fees payable on premiums for
individual and group life, health and annuity policies
placed with the Company. The amount of commissions and fees
payable for individual insurance and annuity policies will
be determined by the further provisions of this Agreement
and the published rules of the Company. The amount of
commissions and fees payable on group life and health
insurance and group annuity policies solicited by Career
Agent will be specified in separate agreements related
solely to that class of business.
Commissions payable on premiums on a policy resulting from
conversion, exchange, replacement or the exercise of an
option to purchase additional insurance will be determined
by Company rules in effect at the time of the conversion,
exchange, replacement or exercise of the option.
Published Rules The Company may, by published rule, limit the amount of
Affecting premium on which commissions or fees are payable and limit,
Compensation defer, or exclude commissions or fees because of the nature
of the transaction, discretionary nature of the premium or
other circumstances.
Payor All compensation due Career Agent under this Agreement will
be paid by First Allmerica Financial Life Insurance Company
(First Allmerica), an affiliate of the Company, as the
common paymaster.
Time of Payment SECTION 13. A premium will not be considered paid until it
of Commissions has been received by the Company at its Principal Office.
On premiums paid or allocated prior to the 15th day of the
month, commissions and fees will be paid on the last
business day of the month. On premiums paid or allocated
subsequent to the 15th day of the month, commissions and
fees will be paid on the 15th day of the following month, or
on the last business day preceding such pay date, if such
pay date is not a business day.
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<PAGE>
TERMINATION AND ITS EFFECT ON COMMISSIONS AND FEES
Termination SECTION 14. This Agreement may be terminated for cause and
for Cause without notice if Career Agent:
(a) misappropriates any funds belonging to or received on
behalf of the Company or any of its affiliates; or
(b) withholds any funds or other property belonging to the
Company or any of its affiliates after the same should
have been reported and transmitted to the Company or
its affiliate or after a demand has been made for the
same; or
(c) commits any willful or dishonest act which injures the
Company or any of its affiliates; or
(d) commits any intentional act which violates any
applicable Fair Trade Practices Act and thereby injures
the Company or any of its affiliates; or
(e) intentionally performs any act prohibited by law or
intentionally omits any act required by law with the
result that the Company or any of its affiliates is
subject to disciplinary action; or
(f) willfully violates any of the provisions of this
Agreement.
Forfeiture of SECTION 15. No commissions or fees will be paid following
Commissions termination of this Agreement, if it is terminated for
and Fees cause, nor will commissions or fees continue to be paid
after termination of this Agreement if Career Agent breaches
any of its terms or conditions by the commission of an act
prohibited by its terms.
Termination SECTION 16. Notwithstanding the foregoing, and whether or
Without Cause not there is a breach of this Agreement, either party may
terminate this Agreement during its first year by giving 10
days' notice in writing to the other party of the intention
to do so and thereafter by giving 30 days' notice in writing
to the other party of the intention to do so.
Effect of Certain SECTION 17. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent:
(a) by reason of the death of Career Agent; or
(b) by reason of the permanent Total Disability of Career
Agent; or
(c) by reason of retirement of Career Agent under the
Career Agents' Retirement Plan established and
maintained by the Company; or
(d) by reason of employment of Career Agent by the Company
or any of its affiliates in some capacity other than as
a Career Agent;
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<PAGE>
commissions will continue to be paid to Career Agent only as
provided in the Exhibits attached hereto.
After termination of this Agreement by reason of the
permanent Total Disability of Career Agent, if Career Agent
recovers from said disability, this Agreement may be
reinstated. If Career Agent recovers from disability and
this Agreement is not reinstated, commissions will be
payable on premiums paid thereafter only if they would have
been payable if Section 18 had applied on termination.
Effect of Other SECTION 18. If this Agreement terminates without breach of
Terminations any of its provisions by Career Agent for any reason other
Without Cause than asset forth in Section 17, commissions will continue to
be paid to Career Agent only as provided in the Exhibits
attached hereto.
GENERAL PROVISIONS
Right of SECTION 19. The Company, for its own benefit, for the
Set-Off benefit of its affiliates and for the benefit of the General
Agent, will have a lien on any commissions and fees payable
under this Agreement, whether or not the commissions are now
due or hereafter become due, and may apply any such monies
to the satisfaction of indebtedness to any of said persons
to the extent permitted by law.
Non-waiver SECTION 20. Waiver of any breach of any provision of this
of Breach Agreement will not be construed as a waiver of the provision
or of the right of the Company to enforce said provision
thereafter.
Assignability SECTION 21. This Agreement is not transferable. Without
the consent of the Company, no rights or interest in or to
commissions or fees will be subject to assignment, other
than a collateral assignment of commissions and fees, and
any attempted absolute assignment, sale or transfer of this
Agreement or of any commissions or fees without the written
consent of the Company will immediately make this Agreement
void and be a release to the Company in full of any and all
of its obligations hereunder.
Errors and SECTION 22. Career Agent agrees to maintain errors and
Omissions omissions insurance coverage meeting the Company's minimum
Coverage coverage requirements and to furnish the Company proof of
such coverage upon request. If any lawsuit is brought
against the Company as a result of any alleged action, error
or omission of Career Agent and if (1) Career Agent has
maintained errors and omissions coverage which complies with
the Company's minimum requirements, and (2) the alleged
action, error or omission of Career Agent was not committed
intentionally or with dishonest, fraudulent or criminal
intent, Career Agent agrees to reimburse the Company and its
affiliates for all costs of the lawsuit, including
attorney's fees, and all damages resulting therefrom up to
the Company's Career Agent liability limit. The minimum
coverage requirements and Career Agent liability limit will
be set forth in a bulletin or announcement published by the
Company and are subject to change at any time. Distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent. If any lawsuit is
brought against the Company as a result of any alleged
Career Agent action, error or omission and if Career Agent
(1) did not maintain at least the
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<PAGE>
required minimum errors and omissions coverage, or (2) did
maintain such coverage but Career Agent's action, error or
omission was committed intentionally or with dishonest,
fraudulent or criminal intent, Career Agent agrees to
reimburse the Company and its affiliates for all costs of
the lawsuit, including attorney's fees, and all damages
resulting therefrom unless the court determines the suit to
be groundless and without merit.
Reservation of SECTION 23. The Company reserves the right at any time to
Right to Change change the terms and conditions of this Agreement,
including but not limited to, the rates of commissions and
fees, or to discontinue the payment of any commissions and
fees described in the Exhibits attached hereto.
Effective Date SECTION 24. Any change will become effective on the date
of Change specified in a notice or, if later, 30 days after the notice
is given to Career Agent. However, the requirement to give
advance notice shall not apply if the change becomes
necessary or expedient by reason of legislation or the
requirements of any governmental body and, in the opinion of
the Company, it is not reasonably possible to meet the 30
day requirement. Changes will not be retroactive and will
apply only to units of coverage solicited on or after the
effective date of the change. Notice of any change may be
given by a Company bulletin or announcement and distribution
of the bulletin or announcement in the usual manner will
constitute notice to Career Agent.
Arbitration SECTION 25. By his/her execution of this Agreement, Career
Agent agrees to settle any dispute, claim or controversy
arising between Career Agent and the Company by arbitration
pursuant to the then current rules of the American
Arbitration Association. Judgment upon any award rendered
in the arbitration may be entered in any court of competent
jurisdiction.
All applicable disputes shall be referred to three
arbitrators, one to be chosen by each party, and the third
by the two so chosen. If either party refuses or neglects
to appoint an arbitrator within thirty days after the
receipt of written notice from the other party requesting it
to do so, the requesting party may nominate two arbitrators
who shall choose the third. In the event the two
arbitrators do not agree on the selection of the third
arbitrator within thirty days after both arbitrators have
been named, then the third arbitrator shall be selected
pursuant to the then current rules of the American
Arbitration Association. The decision of the majority of
the arbitrators shall be final and binding upon all parties.
The expenses of the arbitrators and of the arbitration shall
be equally divided between all parties. Arbitration is the
sole remedy for disputes arising under this Career Agent
Agreement.
General Agent SECTION 26. General Agent means the General Agent
identified on the face page or any other General Agent in
charge from time to time of a general agency office to which
Career Agent is assigned.
Definitions SECTION 27. As used in this Agreement, including the
Exhibits attached hereto:
"Replacement" means a transaction in which a new life or
disability insurance policy or a new annuity contract is to
be purchased, and by reason of the transaction, all or a
portion of
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<PAGE>
any existing life or disability insurance policy or any
existing annuity contract has been or is to be lapsed,
forfeited, reduced in face amount, surrendered, assigned to
the replacing insurer, placed on a reduced paid-up basis or
under another nonforfeiture provision or terminated, or
subjected to borrowing or withdrawals, whether in a single
sum or under a schedule of borrowing or withdrawals over a
period of time.
"Total Disability" means the inability of the Career Agent,
because of injury or sickness, to perform the duties of any
occupation for which he/she is reasonably fitted by
training, education or experience. During the first 24
months of total disability, Career Agent will be considered
to have met the foregoing requirement if he/she is unable to
perform the duties of his/her regular occupation and is not
performing the duties of any other occupation. Total
disability will be considered permanent after it has existed
6 months and thereafter while it continues.
"Flexible premium policy" means an individual insurance or
annuity policy under which the policyowner may unilaterally
vary the amount and timing of premium payments.
"Unit of Coverage" means all benefits of a policy which have
the same date of issue, except as modified by Company
published rules. Usually all the benefits specified in the
policy Schedule of Benefits and in each Supplementary
Schedule of Benefits constitute a unit of coverage.
"Policy Year," as to each unit of coverage, means a period
of 1 year commencing on its date of issue and each
anniversary thereof.
"Monthaversary," as to each unit of coverage, means its date
of issue and the corresponding day of each month thereafter.
"Basic premium," for each unit of coverage, means the sum of
the basic or target premiums for each benefit in the unit,
as determined from the Company's Rate Manual.
"Excess premium" means premium paid in any policy year in
excess of basic or target premium.
"Agreement" means this entire agreement, including all
Exhibits and commission and fee schedules attached thereto.
Other Exhibits issued hereafter will become a part of this
Agreement on their effective date.
Notice SECTION 28. Whenever this Agreement requires a notice to be
given, the requirement will be considered to have been met,
in the case of notice to the Company, if delivered or mailed
postage prepaid to General Agent at the agency office or to
a Vice President in the Company's Allmerica Financial
Services Operation and, in the case of notice to Career
Agent, if left at the usual place for him/her to pick up
mail within the agency office, or by mailing postage
prepaid, to Career Agent's last home address known to the
Company or to such other address as may be designated by
Career Agent.
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<PAGE>
Captions SECTION 29. Captions are used for informational purposes
only and no caption shall be construed to affect the
substance of any provision of this Agreement.
Effectiveness; SECTION 30. This Agreement contains the entire contract
Entire Contract; between the parties. Upon execution it will replace all
Prior Agreements previous agreements between Career Agent and the Company
relating to the solicitation of insurance and annuity
policies except as the previous agreement relates to the
payment of commissions and fees on policies solicited prior
to the effective date of this Agreement. For purposes of
determining vestings on termination, the date of the
earliest prior Career Agent Agreement executed by Career
Agent during his current period of continuous service with
the Company and its life insurance affiliate, Allmerica
Financial Life Insurance and Annuity Company, will be
considered the date of this Agreement. It is hereby
understood and agreed that any other agreement or
representation, commitment, promise or statement of any
nature, whether oral or written, relating to or purporting
to relate to the relationship of the parties is hereby
rendered null and void.
IT IS UNDERSTOOD THAT THIS IS AN "AT WILL" RELATIONSHIP WHICH MAY BE TERMINATED
BY EITHER PARTY WITHOUT CAUSE OR REASON AS PROVIDED FOR IN SECTION 16.
IN WITNESS WHEREOF, the parties have executed this Agreement in triplicate to
take effect on its effective date.
First Allmerica Financial Life Insurance Company
By:
--------------------------------------------------
Vice President
--------------------------------------------------
Career Agent
Approved:
--------------------------------------------------
General Agent
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<PAGE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Allmerica 440 Lincoln Street Commission Schedule
Investments, Inc. Worcester, MA 01653 (Percent of Premium Payments)
- ---------------------------------------------------------------------------------------------------------
First Allmerica Financial Life Insurance Company Principal Underwriter and Exclusive Distibutor -
Allmerica Financial Life Insurance and Annuity Company Allmerica Investments, Inc.
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
COMMISSION SCHEDULE AM-3-
(Effective May 1, 1996)
ALLMERICA SELECT
Variable Survivorship Universal Life Policies
A. Issued by Allmerica Financial Life Insurance and Annuity Company
Year One: 90% of payments up to target payment
---------
4% of payments on excess above target
Renewal: 2% of Payments
-------
Trail: .25% annual trail commission of unloaned account value.
------ Payable each calendar quarter at 25% the annual rate (.0625%) on policies in
the second and subsequent years.
B. Issued by First Allmerica Life Insurance Company
Year One: 50% of payments plus 40% expense reimbursement up to target payment
---------
4% of payments on excess above target
Renewal: 4% of Payments
--------
Trail: None
------
* This schedule sets forth the commissions applicable to Allmerica Select Life policies issued on or after
May 1, 1996, which do not replace existing Allmerica policies. Commissions applicable to replacements,
increases in the face amount, conversions and exchanges will be in accordance with rules of the issuing
insurer.
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
================================= Definitions ==================================
Age means the ages of the insureds as of the nearest birthday measured from a
policy anniversary.
Amount at risk is the sum insured less the policy value.
Company means First Allmerica Financial Life Insurance Company.
Date of issue is stated on page 3. Policy months, years and anniversaries are
measured from this date.
Debt means all unpaid policy loans plus interest due or accrued on such loans.
Evidence of insurability is information, including medical information,
satisfactory to the Company that is used to determine an insured's class of
risk.
Insureds means the First Insured and the Second Insured, as named on page 3.
Final premium payment date is the policy anniversary nearest the younger
insured's 95th birthday. No premiums may be paid after this date. The death
proceeds after the final premium payment date will be the policy value less
debt.
Minimum monthly factor is used to determine if the policy will lapse within four
years of the date of issue of the policy or an increase in the face amount. See
the Grace Period and Policy Lapse provision on pages 13-14.
Monthly payment date is the date on which the insurance charge and
administrative charge are deducted from the policy value. This date is shown on
page 3.
Net premium means the premium less tax expense charge and the premium expense
charge shown on page 4.
Owner, you, or your means the owner or owners as shown in the application or the
latest change filed with the Company.
Policy change means any change in the face amount, the addition or deletion of a
rider, or a change in the sum insured option.
Policy value is the sum of the General Account policy value and the Variable
Account policy value.
Principal Office means the Company's office located at 440 Lincoln Street,
Worcester, Massachusetts 01653(1-800-533-7881).
Second to die means the last of the insureds to die.
Written request is a request in writing satisfactory to the Company and filed at
its Principal Office.
Form 1026.1-94 9
<PAGE>
============================== General Provisions ==============================
Entire Contract--This policy is a contract between the owner and the Company.
This policy, with a copy of the application, and endorsements, if any, attached
to it, is the entire contract. The entire contract also includes a copy of any
application for an increase in the face amount and supplemental pages issued as
provided in the Benefit Change Provision.
All statements in the application are considered representations and not
warranties. The Company will not use any statement to contest this policy or
defend a claim unless the statement is in an application. Agents are not
permitted to change this contract or extend the time for paying premiums. Only
the President, a Vice President or the Secretary of the Company may modify the
provisions of this policy, and then only in writing.
Any statement made for the purpose of changing the premium class of this policy
to non-smoker may be used to contest this policy. A copy of such non-smoking
statement will be issued with supplemental schedule pages when the change is
approved by the Company.
Incontestability--Except for failure to pay premiums, this policy cannot be
contested after the expiration of the following time periods:
o the initial sum insured cannot be contested after the policy has been in
force during the lifetime of either insured for two years from the date of
issue; and
o an increase in the face amount as a result of a request by the owner which
includes evidence of insurability cannot be contested after the increased
amount has been in force during the lifetime of either insured for two
years from its effective date; and
o a change in the premium class from smoker to non-smoker as a result of a
request by the owner and insureds cannot be contested after the change has
been in effect during the lifetime of either insured for two years from
its effective date.
Non-Participating--This policy is non-participating.
Adjustment of Cost Factors--Monthly insurance charges and interest rates used to
calculate the policy value are set by the Company, subject to the guarantees set
forth in this policy. Any changes in these factors will be by class of risk and
will be based on changes in future expectations for such elements as: investment
earnings, mortality, persistency and expenses.
Suicide Exclusion--The risk of suicide of either insured within two years of the
date of issue of this policy is not assumed. In such event, the policy will be
exchanged as of the original date of issue for a flexible premium adjustable
life insurance policy without evidence of insurability on the life of the
surviving insured. The face amount of the new policy will be the face amount of
this policy on the date of exchange. The time periods in the suicide and
incontestability provisions of the new policy will expire on the same date as
such provisions in this policy would have expired. In the alternative, upon
written request of the owner, the Company will pay to the owner the sum of the
premiums paid less the sum of any outstanding debt and partial withdrawal
amounts, and the policy will cease and become void.
The risk of suicide of either insured within two years of the effective date of
any increase in the face amount as a result of a request by the owner which
includes evidence of insurability also is not assumed to the extent of such
increase. In such event, the Company will issue, as of the date of issue of the
increase in the face amount, a flexible premium adjustable life insurance policy
without evidence of insurability on the life of the surviving insured. The face
amount of the new policy will be equal to the face amount of the increase
reduced by the amount of any partial withdrawals and any subsequent decreases in
the face amount. The time periods in the suicide and incontestability provisions
of the new policy will expire on the same date as such provisions in this policy
would have expired for such increase. In the alternative, upon written request
by the owner, the Company will pay to the owner an amount equal to the
administrative charge and the insurance charges paid for such increase.
Notice of First to Die--Upon the death of the insured who dies first, the owner
agrees to mail to the Principal Office, within 90 days of such death, or as soon
thereafter as is reasonably possible, due proof of such death.
Misstatement of Age or Sex--If the age or sex of either or both insureds has
been misstated, and the death proceeds become payable prior to the final premium
payment date, such proceeds will be adjusted. The adjusted death proceeds will
be equal to the policy value plus the benefit which the insurance charges for
the amount at risk on the monthly payment date immediately prior to the date of
death of the second to die would have purchased at the correct age and sex. In
no event will the sum insured be reduced to less than the guideline minimum sum
insured.
Form 1026.1-94 10
<PAGE>
General Provisions (Continued from page 10)
Ownership of Assets--The Company shall have exclusive and absolute ownership and
control of its assets, including assets of the Variable Account.
Protection of Proceeds--To the extent allowed by law, the proceeds of this
policy and any payments made under it will be exempt from attachment by the
claims of creditors of the payee. No beneficiary may assign, transfer,
anticipate or encumber the proceeds or payments unless you give them this right.
Annual Report--An annual report will be mailed to you at your last known
address. This report will show the following information as of the policy
anniversary:
o the sum insured;
o the policy value in the General Account and in each sub-account of the
Variable Account;
o the surrender value;
o premiums paid and monthly deductions made during the policy year;
o partial withdrawals and policy loans, including accrued interest;
o increases and decreases in the face amount;
o changes in the guideline premiums; and
o any information required by law.
============================= Owner and Beneficiary ============================
Owner--The first insured is the owner of this policy unless another is named as
owner in the application. The owner may change the ownership of this policy
without the consent of any beneficiary. The consent of the insureds is required
whenever the face amount of insurance is increased. You may exercise all other
rights and options granted by this policy, subject to the consent of any
irrevocable beneficiary. The consent of any revocable beneficiary is not
required.
Assignment--This policy may be assigned by written request. An absolute
assignment will transfer ownership of the policy from you to the assignee. The
policy also may be collaterally assigned as security. The limitations on your
ownership rights while a collateral assignment is in force are set forth in the
assignment. An assignment will take effect only when 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 change is
recorded.
The Company will not be responsible for the validity of any assignment or the
extent of any assignee's interest. If you assign this policy as collateral, any
excess of the amount due the assignee will accrue to those otherwise entitled to
it.
Beneficiary--The beneficiary is named by you to receive the death proceeds. The
interest of the beneficiary will be subject to any assignment. You may declare
your choice of any beneficiary to be revocable or irrevocable. A revocable
beneficiary may be changed by you at a later time. An irrevocable beneficiary
must consent in writing to any change. Unless otherwise indicated, the
beneficiary will be revocable.
A change of beneficiary may be made by written request while either of the
insureds is living. The change will take effect as of the date the request is
signed even if neither insured is living on the day the request is received. Any
rights created by the change will be subject to any payments made or actions
taken by the Company before the written request is received.
The interest of a beneficiary who dies before the second to die will pass to the
surviving beneficiaries in proportion to their share in the proceeds unless
otherwise provided, If all beneficiaries die before the second to die, the death
proceeds will pass to the owner.
Form 1026.1-94 11
<PAGE>
=================================== Premiums ===================================
Premiums--Premiums are payable to the Company. Premiums may be paid at any time
prior to the final premium payment date or the date the paid-up insurance option
is elected. Premiums may be paid to the Principal Office or to an agent of the
Company. On written request a premium receipt signed by a Company officer will
be given after payment.
This policy will not be in force until the first premium is paid. No premium
payment may be less than $100 without the Company's consent. The amount of
premium which must be paid to keep the policy in force is described in the Grace
Period and Policy Lapse provision.
Maximum Premium--The Company may limit the maximum premium received in any
policy year to an amount not less than the guideline level premium. In addition,
the sum of the premiums paid, less any partial withdrawals, may not exceed the
greater of:
o the guideline single premium; or
o the sum of the guideline level premiums to the date of payment.
The amounts of the guideline premiums are shown on page 4. The guideline
premiums will change whenever there is a policy change. The new guideline
premiums will be shown in the new specification pages. These premium limitations
do not apply to the extent necessary to prevent lapse of the policy during the
policy year.
The guideline premiums are determined according to the rules set forth in the
federal tax law. The guideline premiums will be adjusted to conform to any
changes in the federal tax law.
In the event the maximum premium limit applies, the Company will refund the
excess payment, with interest, to the owner within 60 days after the policy
anniversary. The Company will pay interest on each premium refund at the General
Account interest rate in effect on the date such premium was paid.
Net Premium and Allocation of Net Premiums--The net premium is equal to the
premium less the tax expense charge and premium expense charge which are shown
on page 4. The tax expense charge includes all applicable state and local
premium taxes and the federal deferred acquisition charge. The Company reserves
the right to change the tax expense charge to reflect changes in the Company's
tax expenses. You may allocate the net premiums to one or more of the
sub-accounts of the Variable Account, to the General Account, or to any
combination of these accounts.
You may not allocate net premiums to more than seven sub-accounts of the
Variable Account at any one time without the consent of the Company. The minimum
percentage that you may allocate to any one of these accounts is 1% of the net
premium paid. All percentage allocations must be in whole numbers. The total
allocation to all selected accounts must equal 100%.
The sub-accounts that you chose for your initial allocations are shown on the
applications for this policy, a copy of which is attached to this policy. You
may change the allocation of future net premiums at any time on written request.
Insurance Charge--Beginning on the date of issue and monthly thereafter prior to
the final premium payment date, an insurance charge will be deducted from the
policy value. You may specify from which sub-account of the Variable Account
this charge will be deducted if the paid-up insurance option has not been
elected. If you do not, the Company will allocate the charge among the General
Account and the sub-accounts of the Variable Account in the same proportion that
the policy value in the General Account, less debt, and the policy value in each
sub-account bear to the total policy value, less debt. To the extent this charge
is allocated to the General Account, it will be deducted on a last-in, first-out
basis. If the sub-account you specify does not have funds sufficient to cover
the charge, the Company will deduct the charge as if no specification were made.
All charges are deducted from the General Account when the policy is paid-up.
The charge equals the sum of the insurance charges applicable to the following:
o the initial face amount; plus
o each increase in the face amount; plus
o any rider benefits.
Form 1026.1-94 12 (Continued on page 13)
<PAGE>
Premiums (Continued from page 12)
The insurance charge will be determined each month by the Company. Any change in
the insurance charge will be uniform by premium class. The monthly insurance
charge will be adjusted for any decreases in the face amount according to the
Benefit Change Provision.
The monthly insurance charge for the initial face amount will not exceed (1)
multiplied by (2) where:
(1) is the cost of insurance rate shown in the Insurance Charge Table
for the policy year; and
(2) is the initial face amount divided by 1,000. For the purpose of this
calculation, the initial face amount will be reduced by the policy
value minus charges for rider benefits at the beginning of the month
if Sum Insured Option 1 is in effect to the extent such policy value
does not exceed the initial face amount; however, if the policy
value exceeds the initial face amount while Sum Insured Option 1 is
in effect, the excess policy value will be applied to reduce any
increases in the face amount in the order in which the increases
were issued.
The monthly insurance charge for each increase in the face amount issued at the
owner's request will not exceed (1) multiplied by (2) where:
(1) is the cost of insurance rate shown in the Supplemental Insurance
Charge Table for the policy year; and
(2) is the amount of the increase in the face amount divided by 1,000.
For the purpose of this calculation, the increase in the face amount
will be reduced by the excess policy value minus charges for rider
benefits (as described in the monthly insurance charge for the
initial face amount, above) at the beginning of the month if Sum
Insured Option 1 is in effect.
If the sum insured is the guideline minimum sum insured as defined on page 16,
the monthly insurance charge for that portion of the sum insured which exceeds
the face amount will not exceed (1) multiplied by the quotient of (2) divided by
1,000 where:
(1) is the cost of insurance rate applicable to the initial face
amount; and
(2) is the sum insured less:
(a) the greater of the face amount or the policy value if Sum
Insured Option 1 is in effect; or
(b) the face amount plus the policy value if Sum Insured Option 2
is in effect.
The maximum rates shown in the Supplemental Insurance Charge Table will be the
same as the rates shown on page 5 if each insured's premium class remains the
same.
Cost of Insurance Rate--The cost of insurance is based on the age and premium
class of each insured. The guaranteed rates are based on the 1980 CSO Mortality
Table (or appropriate increases in such tables for rated risks); however if
either insured is over age 17, the guaranteed rates are based on the smoker or
non-smoker versions of such Tables. The non-guaranteed monthly cost of insurance
rate will be reviewed by the Company when rates for new flexible premium
variable life insurance policies change. Rates will be reviewed not more than
once each year nor less than once in a five-year period. The cost will not
exceed the guaranteed amounts shown in the Insurance Charge Table and any
supplements to it.
Grace Period and Policy Lapse--Beginning on the date of issue of this policy and
the effective date of any increase in the face amount, and continuing for the
next 47 monthly payment dates on which monthly deductions are made, the grace
period will begin if both of the following conditions are met:
o the surrender value is less than the amount needed to pay the next monthly
insurance charge, the monthly administrative charge, and any loan interest
accrued; and
o the sum of the premiums paid less any debt, partial withdrawals and
withdrawal charges since the later of:
the date of issue of this policy;
the effective date of any increase in the face amount; or
the date of a policy change which causes a change in the minimum
monthly factor;
is less than the minimum monthly factor multiplied by the number of months
which have elapsed since that date.
After 48 monthly deductions have been made since the date of issue of this
policy and the effective date of any increase, the grace period will begin if
the surrender value is less than the amount needed to pay the next monthly
deduction plus any loan interest accrued.
The minimum monthly factor as of the date of issue is shown on page 5. The
factor will change if there is a policy change. The new factor will be shown in
the new specification pages.
Form 1026.1-94 13 (Continued on page 14)
<PAGE>
Premiums (Continued from page 13)
The first day of the grace period is called the date of default. The Company
will send a notice to your last known address, or to the person named by you to
receive this notice, not later than the date of default. The notice will state
the due date and the amount of premium payable to keep the policy in force. The
grace period continues for 62 days. The policy is in force during the grace
period. A lapse occurs if the amount shown in the notice remains unpaid at the
end of the grace period. The policy terminates on the date of lapse. The death
benefit payable during the grace period will be reduced by any overdue charges.
The Company also will send a notice to your last known address at least 15 and
not more than 45 days prior to the end of the grace period if the surrender
value is not adequate to prevent lapse.
Reinstatement--Except as otherwise provided in the Reinstatement of Paid-Up
Insurance provisions below, this policy may be reinstated before the death of
the second to die if this policy has lapsed or foreclosed and has not been
surrendered. You may not reinstate if one of the insureds dies after the date of
lapse or foreclosure. You may not reinstate more than three years after the date
of default or foreclosure. The policy will be reinstated effective on the
monthly payment date following the date you provide the Company with the
following:
o a written application for reinstatement;
o evidence of insurability showing the insureds are insurable according to
the Company's underwriting rules; and
o payment of the reinstatement premium.
If fewer than 48 monthly deductions have been made since the date of issue of
the policy and an increase in the face amount, the reinstatement premium is 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:
o the amount by which the surrender charge, as of the date of
reinstatement, exceeds the policy value on the date of default; plus
o three monthly administrative fees; and
o insurance charges for the three-month period beginning on the date of
reinstatement.
If 48 monthly deductions have been made since the date of issue of this policy
and the effective date of any increase in the face amount, the reinstatement
premium is the amount shown in B above. You may not repay or reinstate any debt
outstanding on the date of default or foreclosure.
The premium paid on reinstatement will be allocated to the General Account and
the sub-accounts of the Variable Account in accordance with your most recent
premium allocation notice.
The policy value on the date of reinstatement is:
o the net premium paid to reinstate the policy increased by interest from
the date the payment was received at the Principal Office; plus
o 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
o the monthly deduction due on the date of reinstatement.
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the policy remained in force from the date of
issue. The policy value less debt on the date of default will be restored to the
policy to the extent it does not exceed the surrender charge on the date of
reinstatement. Any policy value less debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will be forfeited to
the Company.
Reinstatement of Paid-Up Insurance--If this policy is in force as paid-up
insurance and later terminates for failure to pay policy loan interest, the
paid-up insurance may be reinstated during the insureds' lifetimes, but not more
than five years after the date of foreclosure, by providing the Company with the
following:
o evidence of insurability showing the insureds are insurable according to
the Company's underwriting rules; and
o payment or reinstatement of the debt outstanding on the date of default.
Interest is payable on this debt from the date of termination to the date
of reinstatement at the interest rate of 8% per annum.
Paid-up insurance may be reinstated only if both insureds are alive on the date
of reinstatement. The date of reinstatement is the later of the date the Company
approves the reinstatement application or the date the payment required to
reinstate this policy is received by the Company. The sum insured of the
reinstated paid-up insurance will be the same as the sum insured on the date of
termination.
Form 1026.1-94 14
<PAGE>
=========================== Paid-Up Insurance Option ===========================
Benefit--This is second-to-die insurance for the lifetime of the insureds with
no further premiums due. The amount of paid-up second-to-die insurance is the
amount that the surrender value can purchase for a net single premium at the
insureds' ages and classes of risk on the date this option is elected. The
amount of paid-up insurance may not exceed the sum insured in effect on the date
this option is elected. In the event that the surrender value exceeds the net
single premium for the sum insured on the date this option is elected, the
excess will be paid to you.
Basis of Values--The net single premium is based on the 1980 CSO Mortality
Table, Male or Female, Smoker or Non-Smoker (or appropriate increases in such
tables for non-standard risks). Interest will not be less than 4 1/2%. See page
8 for the table showing the guaranteed net single premiums per $1,000 of
insurance.
Exercise of Option--This option may be elected by you on written request. Policy
value in the Variable Account shall be transferred to the General Account on the
date your written request to exercise this option is received in the Principal
Office. The Company shall issue supplemental specification pages and endorse the
policy as "paid up" effective as of the monthly payment date following receipt
of the written request. The supplemental specification pages will show:
o the effective date;
o the sum insured;
o guaranteed cash values; and
o riders.
If both insureds die prior to the effective date, the Company will pay the death
proceeds in effect under this policy on the date of death of the second to die.
Effect on the Policy--After the policy is endorsed as paid-up, no further
premiums may be paid. The sum insured option will be changed to Option 1. You
may not change the sum insured option to Option 2. You may not increase or
decrease the face amount. You may not make partial withdrawals or transfer funds
to the Variable Account; however, you may make policy loans or surrender the
policy for its net cash value. Riders will continue only with the consent of the
Company.
The guaranteed cash value of the paid-up insurance equals the net single premium
for the paid-up insurance. The net single premium is determined on the same
basis as is used for the purchase price of the paid-up insurance. The net cash
value is the cash value less any debt. The loan value of paid-up insurance is
the amount that, with interest at 8% per annum, equals the cash value of the
paid-up policy as of the next policy anniversary.
Form 1026.1-94 15
<PAGE>
=================================== Benefit ====================================
Death Proceeds--Except as otherwise provided in the paid-up insurance option,
the amount payable on the death of the second to die prior to the final premium
payment date will be the sum insured under either Option 1 or Option 2. Options
1 and 2 are described later. Any debt, rider charges, administrative charges and
insurance charges due and unpaid through the policy month in which the second
death occurs will be deducted from the death proceeds. Partial withdrawals and
withdrawal charges also will be deducted from the death proceeds. The amount
payable on the death of the second to die after the final premium payment date
will be the policy value less debt.
Interest will be paid on lump sum death proceeds at a rate not less than 3 1/2%
per year or the minimum rate set by law, if greater. Interest will be paid from
the date of death to the payment date except, when Sum Insured Option 2 is
elected, interest will be calculated on the policy value portion of the death
proceeds from the date the Company receives due proof of death to the payment
date.
Guideline Minimum Sum Insured--This policy must provide a minimum amount at risk
to qualify as "life insurance" under the federal tax law. It does so by
providing a minimum sum insured which is obtained by multiplying the policy
value by the percentage shown in the Minimum Sum Insured Table for the younger
insured's attained age. The guideline minimum sum insured varies by age.
- ------------------------------------------
Minimum Sum Insured Table
Age Percentage Age Percentage
- ------------------------------------------
thru 40 250% 60 130%
41 243% 61 128%
42 236% 62 126%
43 229% 63 124%
44 222% 64 122%
45 215% 65 120%
46 209% 66 119%
47 203% 67 118%
48 197% 68 117%
49 191% 69 116%
50 185% 70 115%
51 178% 71 113%
52 171% 72 111%
53 164% 73 109%
54 157% 74 107%
55 150% 75 thru 9O 105%
56 146% 91 104%
57 142% 92 103%
58 138% 93 102%
59 134% 94 101%
95 100%
- ------------------------------------------
The guideline minimum sum insured is determined according to the rules set forth
in the federal tax law. The guideline minimum sum insured will be adjusted to
conform to any changes in the law.
Sum Insured Options--There are two options in this policy. The option is elected
in the application. The options are:
Option 1 -- The sum insured is the greater of:
o the face amount; or
o the guideline minimum sum insured.
Option 2 -- The sum insured is the greater of:
o the face amount plus the policy value on the date due proof of death is
received by the Company increased by any monthly deductions made by the
Company after the date of death; or
o the guideline minimum sum insured.
Option 2 is not available under the paid-up insurance option; otherwise, the
option may be changed on written request. The effective date of the change is
the monthly payment date following the date the request is received at the
Principal Office. If the change is from Option 1 to Option 2, the face amount
under Option 2 will be equal to the sum insured less the policy value under
Option 1 on the effective date of the change. If the change is from Option 2 to
Option 1, the face amount will be equal to the sum insured under Option 2 on the
effective date of the change. The sum insured option may not be changed more
than once in any policy year. You may not change the option if it reduces the
face amount to less than $100,000.
Change Provision--You may change the face amount of insurance according to the
Increase and Decrease provisions if such request is made:
o during the lifetime of both insureds;
o on written request while this policy is in force; and
o the paid-up insurance option has not been elected.
No change in the face amount may be made which disqualifies the policy as "life
insurance" under the federal tax law.
Form 1026.1-94 16 (Continued on page 17)
<PAGE>
Benefit (Continued from page 16)
Increase--All of the following must occur before the effective date of any
increase in the face amount:
o evidence of insurability must be provided to the Company;
o each of the insureds must be under the Company's maximum issue age for
new insurance and be insurable according to its underwriting rules; and
o payment to the Company of a $50 transaction charge plus two times the new
minimum monthly factor if the surrender value is less than this sum.
The Company will deduct the $50 transaction charge from the surrender value on
the effective date of the increase.
The effective date of the increased face amount will be the first monthly
payment date on or following the date all the conditions are met. New
specification pages, including a Supplemental Insurance Charge Table, will be
issued. These pages will include the following information for the additional
face amount of insurance:
o the effective date of the increase;
o the amount of the increase; and
o the premium class.
These pages also will show the new minimum monthly factor, the new guideline
premiums and surrender charges applicable to the entire policy. No increase
shall be less than the Company's minimum limit in effect on the date of the
request.
You may return the new specification pages by mailing or delivering them to the
Principal Office or to an agent of the Company within ten days after receiving
them, 45 days after you complete the Part 1 of the application for the increase,
or ten days after the Company mails you the Notice of Withdrawal Right. If the
specification pages are returned, the increase will be considered void from the
beginning, and the Company will refund the charges deducted from the policy
value which would not have been deducted but for the increase. The refunded
amount will be added to your policy value unless you otherwise request. The
Company also will waive any surrender charge for the increase.
Decrease--A request to decrease the face amount will be effective on the monthly
payment date following the date of the written request. Existing insurance will
be decreased or eliminated in the following order:
o first, the most recent increase;
o second, the next most recent increases successively; and
o last, the initial face amount.
A surrender charge will be deducted from the policy value on the date of the
decrease. Such charge will be:
o the surrender charge for any increased amount which is eliminated in the
order set forth above; plus
o a pro rata share of the surrender charge for a partial reduction in an
increase or in the initial face amount.
You may specify from which sub-account this charge will be deducted. If you do
not, the Company will allocate the charge among the General Account and the
sub-accounts of the Variable Account in the same proportion that the policy
value in the General Account, less debt, and the policy value in each
sub-account bear to the total policy value, less debt.
New specification pages will be issued. These pages will include the following
information:
o the effective date of the decrease;
o the amount of the decrease and the benefit remaining in force;
o the revised minimum monthly factor, if any;
o the revised surrender charge as of the effective date of the decrease;
and
o the new guideline premiums.
The face amount of this policy may not be reduced to less than the Company's
minimum issue limits for this type of policy.
The Company reserves the right to change the minimum limit on the amount of any
decrease.
Form 1026-94 17
<PAGE>
================================= Policy Value =================================
Monthly Deduction--The monthly deduction is:
o the monthly insurance charge; plus
o a $6 monthly administrative charge.
Monthly deductions are made on the date of issue and on each monthly payment
date.
You may specify from which sub-account of the Variable Account this deduction
will be taken. If you do not, the Company will allocate the charge among the
General Account and the sub-accounts of the Variable Account in the same
proportion that the policy value in the General Account, less debt, and the
policy value in each sub-account bear to the total policy value, less debt.
General Account--The General Account consists of all assets owned by the Company
other than those in the Variable Account and other separate accounts. Subject to
applicable law, the Company has sole discretion over the investment of the
assets in the General Account. The allocation or transfer of funds to the
General Account does not entitle the owner to share in the investment experience
of the General Account. The guaranteed minimum interest rate used to calculate
the policy value in the General Account is 4% annually. The actual interest rate
will be determined by the Company at least annually; however, the interest rate
applicable to that portion of the policy value equal to existing debt will be
not less than 6% annually.
The interest rate in effect on the date a premium is received at the Principal
Office is guaranteed for one year unless the policy value associated with the
premium becomes subject to a policy loan. The interest rate on policy value
transferred from a sub-account of the Variable Account to the General Account is
not guaranteed. Policy value which is within the first-year guarantee period
will be used for payment of fees, charges, loans and partial withdrawals on a
last-in, first-out basis.
Basis of Value of General Account--Minimum surrender value in the General
Account is based on the 1980 CSO Mortality Tables, Male or Female (or
appropriate increases in such tables for rated risks) with interest at 4% per
year, compounded annually; however, if an insured is over age 17, the minimum
surrender value in the General Account is based on the smoker or nonsmoker
versions of such tables. Policy values are based on interest rates set by the
Company. A detailed statement of the way this value is determined has been filed
with the State Insurance Department. All value is not less than the minimums
required by the law in the state in which this policy is delivered.
General Account Policy Value--If premium is paid with the application or at any
time prior to the delivery of the policy, the net premium will be placed in the
General Account on the date it is received at the Principal Office.
The General Account policy value on the date of issue is the net premium
allocated to the General Account minus the first insurance charge and
administrative charge allocated to the General Account.
The policy value in the General Account on each monthly payment date is:
o the policy value in the General Account on the preceding monthly payment
date increased by one month's interest; plus
o net premiums received since the last monthly payment date which are
allocated to the General Account increased by interest from the date the
payment is received by the Company; plus
o Variable Account policy value transferred to the General Account from any
sub-account of the Variable Account since the preceding monthly payment
date increased by interest from the date the policy value is transferred;
less
o policy value transferred from the General Account to a sub-account of the
Variable Account since the preceding monthly payment date and interest on
said transfers from the date of transfer to the monthly payment date; less
o partial withdrawals from the General Account, partial withdrawal charges
and partial withdrawal transaction charges since the last monthly payment
date and interest on such withdrawals and charges from the date of
withdrawal to the monthly payment date; less
Form 1026.1-94 18 (Continued on page 19)
<PAGE>
Policy Value (Continued from page 18)
o any transaction charges for any increases in face amount since the last
monthly payment date and interest on such charges to the monthly payment
date; less
o any surrender charges incurred since the last monthly payment date and
interest on such charges to the monthly payment date; and less
o the portion of the monthly deduction allocated to the policy value in
the General Account.
In no event will the General Account policy value be less than the guaranteed
cash value shown in the Paid-Up Insurance Table after the paid-up option has
been elected.
During any policy month the policy value will be calculated on a consistent
basis.
Variable Account--The policy value may vary if funded through investments in the
sub-accounts of the Variable Account. The Variable Account is separate from the
Company's General Account. That portion of the assets of the Variable Account
equal to the reserves and other liabilities of the policies which are supported
by the Variable Account will not be charged with liabilities that arise from any
other business the Company conducts.
The Company established the Variable Account to support variable life insurance
contracts. The Variable Account is registered with the Securities and Exchange
Commission (SEC) as a unit investment trust under the Investment Company Act of
1940. It also is governed by the laws of the State of Delaware and the State of
New York. The laws of the state in which the policy is delivered will apply. The
Variable Account has several sub-accounts. The Company reserves the right,
subject to compliance with applicable law, to change the names of the Variable
Account or its sub-accounts. The sub-accounts in which you initially chose to
invest are shown in your application for this policy, a copy of which is
attached to this policy.
Each sub-account invests its assets in a separate registered investment company
or a separate series of a registered investment company ("Fund").
Income and realized and unrealized gains or losses from the assets of each
sub-account of the Variable Account are credited to or charged against that
sub-account without regard to income, gains, or losses in the other sub-accounts
of the Variable Account, the General Account or any other separate accounts.
Variable Account Policy Value--Policy value in the General Account prior to the
date of issue will be allocated to purchase units of the sub-accounts of the
Variable Account in accordance with your premium allocation no later than the
expiration of the period during which you may exercise your right to examine the
policy. Net premiums paid thereafter which are allocated to the sub-accounts of
the Variable Account will purchase additional units of the sub-accounts.
The number of units purchased in each sub-account of the Variable Account is
equal to the portion of the net premium allocated to the sub-account, divided by
the value of the applicable unit as of the valuation date the payment is
received at the Principal Office or on the date value is transferred to the
sub-account from another sub-account of the Variable Account or the General
Account.
The number of units will remain fixed unless (1) changed by a subsequent split
of unit value or (2) reduced because of a transfer, policy loan, partial
withdrawal, partial withdrawal charge, transaction charge, monthly deduction,
surrender or surrender charge allocated to the sub-account. Any transaction
described in (2) will result in the cancellation of a number of units which are
equal in value.
On each valuation date the Company will value the assets of each sub-account of
the Variable Account in which there has been activity. The policy value in a
sub-account of the Variable Account at any time is equal to the number of units
this policy then has in that sub-account multiplied by the sub-account's unit
value.
The value of a unit for any sub-account of the Variable Account for any
valuation period is determined by multiplying that sub-account's unit value for
the immediately preceding valuation period by the net investment factor for the
valuation period for which the unit value is being calculated.
Net Investment Factor--The net investment factor measures the investment
performance of a sub-account of the Variable 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;
Form 1026.1-94 19 (Continued on page 20)
<PAGE>
Policy Value (Continued from page 19)
(c) is a charge for mortality and expense risks in the valuation period
equal to .90%, on an annual basis, of the sub-account's assets. This
charge may be increased or decreased by the Company, but may not
exceed 1.275%; and
(d) is an administrative charge equal to .25% on an annual basis, of the
sub-accounts' assets. This charge is applicable only during the
first fifteen policy years.
The net investment factor may be greater or less than one; therefore, the unit
value may increase or decrease. You bear the investment risk. Subject to any
required regulatory approvals, the Company reserves the right to change the
method for determining the net investment factor.
Valuation Dates and Periods--A valuation date is each day that the New York
Stock Exchange is open for business and any other day in which there is a
sufficient degree of trading in the Variable Account's portfolio securities to
materially affect the value of the Variable Account. A valuation period is the
period between valuation dates.
Addition, Deletion, or Substitution of Investments--The investment policy of the
Variable Account shall not be changed without the approval of the Superintendent
of New York. The approval process is on file with the Commissioner of the state
in which this policy is issued.
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares of a Fund
that are held by the Variable Account or that the Variable Account may purchase.
The Company reserves the right to eliminate the shares of any Fund if the shares
of a Fund are no longer available for investment or if, in the Company's
judgment, further investment in any eligible Fund should become inappropriate in
view of the purposes of the Variable Account.
The Company will not substitute any shares attributable to your interest in a
sub-account of the Variable Account without notice to you and any prior approval
of the SEC required by the Investment Company Act of 1940. This shall not
prevent the Variable Account from purchasing other securities for other series
or classes of policies, or from permitting a conversion between series or
classes of policies or contracts on the basis of requests made by owners.
The Company reserves the right to establish additional sub-accounts of the
Variable Account, and to make such sub-accounts available to any class or series
of policies as the Company deems appropriate. Each new sub-account would invest
in a new investment company or in shares of another open-end investment company.
Subject to obtaining any required approvals or any consents required by
applicable law, the Company also reserves the right to eliminate or combine
existing sub-accounts of the Variable Account and to transfer the assets of one
or more sub-accounts to any other sub-accounts.
In the event of any substitution or change, the Company may, by appropriate
endorsement, make such changes in this and other policies as may be necessary or
appropriate to reflect the substitution or change. If the Company considers it
to be in the best interests of policyholders, the Variable Account may be
operated as a management company under the Investment Company Act of 1940, or it
may be deregistered under that Act in the event registration is no longer
required, or it may be combined with other separate accounts.
No material change in the underlying investment policy of a sub-account of the
Variable Account shall be made until 60 days have elapsed from the date such
change has been filed with the Superintendent of Insurance or such shorter
period as the Superintendent may permit. In the event of a material change in
the underlying investment policy of a sub-account of the Variable Account, 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 by you to another
sub-account of the Variable Account or to the General Account. The Company must
receive your written request within sixty (60) days of the later of (1) the
effective date of such change in the investment policy or (2) the receipt of the
notice of your right to transfer. You may then change your premium and deduction
allocation percentages.
Federal Tax Considerations--The Company intends to make a charge for any effect
which the income, assets or existence of the Variable Account may have upon its
tax. The Variable Account presently is not subject to tax, but the Company
reserves the right to assess a charge for taxes if the Variable Account at any
time becomes subject to tax.
Form 1026.1-94 20
<PAGE>
Surrender and Partial Withdrawal of Value
Surrender--Upon written request while either insured is living you may surrender
this policy for its surrender value as of the date your request is received in
the Principal Office. This policy will terminate on that date. You may elect to
receive the surrender value paid in a lump sum or under a settlement option.
Surrender Value--Except as otherwise provided in the paid-up insurance option,
the surrender value is the policy value less the sum of any debt and the
applicable surrender charge.
Surrender Charge--There is a separate surrender charge for the initial face
amount and each increase in the face amount. Surrender charges begin on the date
of issue of the policy and on the effective date of each increase in the face
amount.
The maximum surrender charge for the initial face amount is shown on page 4. The
changes in the surrender charge when the face amount is increased or decreased
are shown in the new specification pages.
Partial Withdrawals--You may withdraw a portion of the surrender value on
written request if this policy is in force other than as paid-up insurance.
Partial withdrawals may not be made during the first policy year. The amount of
a partial withdrawal shall not be less than $500. A partial withdrawal
transaction charge of 2% of the amount withdrawn, not to exceed $25, will be
deducted from the policy value with each partial withdrawal. A withdrawal charge
also may be deducted from the policy value.
A portion of the partial withdrawal will not be subject to the withdrawal
charge. This amount is (a) less (b) where:
(a) is 10% of the policy value on the date the written request is
received at the Principal Office; and
(b) is the sum of the withdrawals (or portions thereof) made in the same
policy year which were not subject to the withdrawal charge.
A charge will be made on the balance of the withdrawal (called "excess
withdrawal"). The charge is obtained by multiplying the excess withdrawal by 5%;
however, in no event will the withdrawal charge exceed the surrender charge in
effect on the date of the withdrawal. The policy's surrender charge will be
reduced by the withdrawal charge, if any. There will be no withdrawal charge if
there is no surrender charge applicable to the policy on the date of the
withdrawal. The partial withdrawal charge made will decrease existing surrender
charges in the following order:
o first, the most recent increase's surrender charge;
o second, the next most recent increases' surrender charges successively;
and
o last, the initial face amount's surrender charge.
Under Sum Insured Option 1, the face amount and policy value will be reduced by
the amount of the partial withdrawal, and the policy value will be further
reduced by the partial withdrawal transaction charge and withdrawal charge. No
partial withdrawal may reduce the face amount to less than $100,000. The face
amount will be decreased in the following order:
o first, the most recent increase;
o second, the next most recent increases successively; and
o last, the initial face amount.
Under Sum Insured Option 2, the policy value will be reduced by the amount of
the partial withdrawal, the partial withdrawal transaction charge and the
withdrawal charge.
Postponement of Payment--The Company may defer any transfer from the Variable
Account or payment of any amount payable on surrender, partial withdrawal,
transfer, policy loan, or death of the last insured allocated to the Variable
Account during any period when (a) the New York Stock Exchange is closed for
other than weekends and holidays or, (b) when the SEC has determined that a
state of emergency exists which may make such payment impractical.
Except as provided above, the Company may defer any transfer for not more than
six months from the day the written request and the policy, if required, are
received by the Company. If such transfer is deferred for 10 days or more, the
amount deferred will earn interest during the period of deferment at not less
than the rate applied to proceeds held by the Company under Payment Option C.
Also, except as otherwise provided in the first paragraph of this section, the
Company may delay the payment of any loan, partial withdrawal or surrender
(other than for the payment of any premium to the Company) for up to six months.
The Company will pay interest if payment is not mailed or delivered within ten
days of the date a valid request is made; however, no interest shall be paid if
such interest is less than $25 or the delay in payment is pursuant to New York
law. A "valid request" is made when all documentation necessary to complete the
transaction is received at
Form 1026.1-94 21 (Continued on page 22)
<PAGE>
Policy Value (Continued from page 21)
the Principal Office. The interest rate credited will be the same rate applied
to proceeds held by the Company under Payment Option C.
No payment to pay premiums on policies with the Company will be deferred.
============================== Transfers of Value ==============================
If this policy is in force, other than as paid-up insurance, you may transfer
amounts between the General Account and the sub-accounts of the Variable Account
or among the sub-accounts of the Variable Account by sending the Company a
written request. Once during the first 24 months after the date of issue and
during the first 24 months after an increase in the face amount, you may
transfer, without charge, all or part of the policy value in the Variable
Account to the General Account of this policy. If you do so, future payments
will be allocated to the General Account unless you specify otherwise. All other
transfers are subject to the following rules and will be permitted only with the
consent of the Company.
If the Company consents to a transfer, the minimum and maximum amounts that may
be transferred shall be determined by the Company according to its then current
rules. In no event will the Company's rules provide for a minimum transfer of
more than $500. The maximum transfer amount will not be less than the lesser of
$1 00,000 or 1 0% of the policy value.
Transfers to any sub-account of the Variable Account from the General Account
are permitted only if there has been at least a 180-day period since the last
transfer from the General Account. There is no limit on the number of transfers
between the sub-accounts of the Variable Account, and there is no limit on the
number of transfers between the sub-accounts of the Variable Account to the
General Account.
If a transfer would reduce the policy value in the sub-account from which the
transfer is to be made to less than the then current minimum balance required by
the Company for such sub-account, the Company reserves the right to include such
remaining value in the amount transferred.
There will be no charge for the first six transfers per policy year. A transfer
charge of up to $25 will be imposed on each additional transfer and deducted
from the amount that is transferred. Transfers as a result of a policy loan or
repayment thereof are not subject to these rules.
================================= Policy Loans =================================
Policy Loans--Loans may be obtained by request to the Company on the sole
security of this policy.
Amount Available--The total amount you may borrow is an amount equal to the loan
value. Except as otherwise provided in the paid-up insurance option, the maximum
loan values are as follows:
o in the first policy year, 75% of (a) less (b) where:
(a) is the policy value reduced by the surrender charge; and
(b) is the monthly deductions and interest on debt to the end of the
policy year.
o in the second policy year and thereafter 90% of the result obtained when
the policy value is reduced by the surrender charge.
While this policy is in force, other than as paid-up insurance, you may allocate
a policy loan among the General Account and the sub-accounts of the Variable
Account. If you do not, the Company will allocate the loan among those accounts
in the same proportion that the policy value in the General Account, less debt,
and the policy value in each sub-account bear to the total policy value, less
debt, on the date the Company receives your request. Policy value in each
sub-account of the Variable Account equal to the policy loan allocated to each
sub-account will be transferred to the General Account to secure the debt.
Loan Interest--Interest accrues daily and is payable in arrears at the annual
rate of 8%. Interest is 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 principal and bear interest at the same rate of
interest. If the resulting loan principal exceeds the policy value in the
General Account, the Company will transfer policy value equal to that excess
debt from the policy value in each sub-account of the Variable Account to the
General Account as security for the excess debt. 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.
Form 1026.1-94 22 (Continued on page 23)
<PAGE>
Policy Loans (Continued from page 22)
Repayment of Debt--Loans may be repaid at any time prior to the lapse of this
policy. Upon repayment of debt, the portion of the policy value that is in the
General Account securing debt will be transferred to the various accounts and
increase the policy value in these accounts. You may tell the Company how to
allocate repayments to the policy value among the General Account and the
sub-accounts of the Variable Account. If you do not, the Company will allocate
the loan repayment in accordance with the most recent premium allocation notice.
Loan repayments will be allocated to the General Account when this policy is in
force as paid-up insurance. Loan repayments allocated to the Variable Account
cannot exceed policy value previously transferred from the Variable Account to
secure the debt.
Foreclosure--If the debt exceeds the policy value less the surrender charge (or
the net cash value if this policy is in force as paid-up insurance), the policy
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If the excess debt is not paid within 62
days after this notice is mailed, the policy will terminate with no value. You
may reinstate this policy according to the Reinstatement provision.
============================== Payment of Proceeds =============================
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 make no election, the Company
will pay the benefits in a lump sum. A certificate will be provided to the payee
describing the payment option selected.
If a payment option is elected, the beneficiary, when filing proof of claim, may
pay to the Company any amount that otherwise would be deducted from the
proceeds.
The amounts payable under a payment option for each $1,000 of value applied will
be the greater of:
(a) the rate per $1,000 of value applied based on the Company's
non-guaranteed current payment option rates for this class of
policies; or
(b) the rate in this policy for the applicable payment option.
You may choose one of the following payment options. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Variable Account.
Option A: Payments for a Specified Number of Years (Table A). 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 (Table B). Payments are based on the
payees 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. The rate 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; however, payments will not continue after the death
of the payee. Any unpaid balance plus accrued interest will be paid
in a lump sum.
Option D: Payments for a Specified Amount. Payments will be made until the
unpaid balance is exhausted. Interest will be credited to the unpaid
balance. The rate of interest will be determined by the Company each
year but will not be less than 3 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.
Form 1026.1-94 23 (Continued on page 24)
<PAGE>
Payment of Proceeds (Continued from page 23)
Option E: Lifetime Monthly Payments for Two Payees (Table E). 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.
Selection of Payment Options--The amount applied under any one option for any
one payee must be at least $5,000. The periodic payment for any one payee must
be at least $50.
Subject to the Owner and Beneficiary provision, you may change any option
selection before the proceeds become payable. If you make no selection, the
beneficiary may select an option when the proceeds become payable.
If the amount of monthly income payments under Option B(3) for the attained age
of the payee is 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 this policy becomes
a claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.
Additional Deposits--An additional deposit may be added 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 corporate or fiduciary payee may select only Option A, C or D. Such selection
will be subject to the consent of the Company.
Payment Dates--The first payment under any option, except Option C, will be due
on the date this policy matures by death or otherwise, unless another date is
designated. Payments under Option C begin at the end of the first payment
period.
The last payment under any option will be made as stated in the description of
that option. 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. Such
payment will be made to the surviving payee under Option E or the succeeding
payee under Option B.
Payment Rates--The Payment Options Tables show payment rates for Options A, B
and E. For policy proceeds placed under these options within five years after
the date of surrender or the date the proceeds are otherwise payable, the more
favorable of the rates contained in this policy or the rates in use by the
Company as of the date the proceeds are applied will be the basis for the
periodic payments. Payments which commence more than five years after such date
or as a result of additional deposits will be based on the rates in use by the
Company as of the date the first payment is due.
Form 1026.1-94 24
<PAGE>
================================ Payment Options ===============================
TABLE A
Payments for Specified Number of Years
Payments Per $1,000 Applied
Based on Interest at 3 1/2% Per Year.
- ---------------------------------------
SEMI- QUAR-
YEARS ANNUAL ANNUAL TERLY MONTHLY
- ---------------------------------------
1 1000.00 504.30 253.23 84.65
2 508.60 256.49 128.79 43.05
3 344.86 173.91 87.33 29.19
4 263.04 132.65 66.61 22.27
5 213.99 107.92 54.19 18.12
6 181.32 91.44 45.92 15.35
7 158.01 79.69 40.01 13.38
8 140.56 70.88 35.59 11.90
9 127.00 64.05 32.16 10.75
10 116.18 58.59 29.42 9.83
11 107.34 54.13 27.18 9.09
12 99.98 50.42 25.32 8.46
13 93.78 47.29 23.75 7.94
14 88.47 44.62 22.40 7.49
15 83.89 42.31 21.24 7.10
16 79.89 40.29 20.23 6.76
17 76.37 38.51 19.34 6.47
18 73.25 36.94 18.55 6.20
19 70.47 35.54 17.85 5.97
20 67.98 34.28 17.22 5.75
21 65.74 33.15 16.65 5.56
22 63.70 32.13 16.13 5.39
23 61.85 31.19 15.66 5.24
24 60.17 30.34 15.24 5.09
25 58.62 29.56 14.85 4.96
26 57.20 28.85 14.49 4.84
27 55.90 28.19 14.15 4.73
28 54.69 27.58 13.85 4.63
29 53.57 27.02 13.57 4.53
30 52.53 26.49 13.30 4.45
- ---------------------------------------
Form 1026-94 25
<PAGE>
================================ Payment Options ===============================
TABLE B MALE PAYEE
Monthly Payments Per $1,000 Applied
Based on Interest at 31/2% Per Year
- ------------------------------------------------
OPTION B OPTION B OPTION B
(1) (2) (3)
- ------------------------------------------------
Life Annuity With
-------------------------
Instal.
Age Life Refund 5 Years 10 Years 20 Years
Annuity Annuity Certain Certain Certain
- ------------------------------------------------
0-5 3.13 3.12 3.13 3.13 3.13
6 3.14 3.13 3.14 3.14 3.14
7 3.15 3.14 3.15 3.15 3.15
8 3.16 3.15 3.16 3.16 3.15
9 3.17 3.16 3.17 3.17 3.17
10 3.18 3.17 3.18 3.18 3.16
11 3.19 3.18 3.19 3.19 3.19
12 3.21 3.19 3.21 3.20 3.20
13 3.22 3.21 3.22 3.22 3.21
14 3.23 3.22 3.23 3.23 3.22
15 3.24 3.23 3.24 3.24 3.24
16 3.26 3.25 3.26 3.26 3.25
17 3.27 3.26 3.27 3.27 3.26
18 3.29 3.27 3.29 3.28 3.28
19 3.30 3.29 3.30 3.30 3.29
20 3.32 3.30 3.32 3.32 3.31
21 3.34 3.32 3.34 3.33 3.33
22 3.35 3.34 3.35 3.35 3.34
23 3.37 3.36 3.37 3.37 3.36
24 3.39 3.37 3.39 3.39 3.38
25 3.41 3.39 3.41 3.41 3.40
26 3.43 3.41 3.43 3.43 3.42
27 3.46 3.43 3.45 3.45 3.44
28 3.48 3.46 3.48 3.47 3.46
29 3.50 3.48 3.50 3.50 3.49
30 3.53 3.50 3.53 3.52 3.51
31 3.55 3.53 3.55 3.55 3.54
32 3.58 3.55 3.58 3.58 3.56
33 3.61 3.58 3.61 3.61 3.59
34 4.64 3.61 4.64 4.64 3.62
35 3.67 3.64 3.67 3.67 3.65
36 3.71 3.67 3.71 3.70 3.68
37 3.74 3.70 3.74 3.74 3.71
38 3.78 3.73 3.78 3.77 3.74
39 3.82 3.77 3.82 3.81 3.78
40 3.86 3.80 3.86 3.85 3.81
41 3.91 3.84 3.90 3.89 3.85
42 3.95 3.88 3.95 3.94 3.89
43 4.00 3.92 4.00 3.98 3.93
44 4.05 3.96 4.05 4.03 3.97
45 4.10 4.01 4.10 4.08 4.01
46 4.16 4.05 4.15 4.13 4.06
47 4.22 4.10 4.21 4.19 4.11
48 4.28 4.15 4.27 4.25 4.15
49 4.34 4.21 4.33 4.31 4.20
50 4.41 4.26 4.40 4.37 4.25
51 4.48 4.32 4.47 4.43 4.31
52 4.55 4.38 4.54 4.50 4.36
53 4.63 4.45 4.61 4.58 4.42
54 4.71 4.51 4.69 4.65 4.48
55 4.80 4.58 4.78 4.73 4.54
56 4.89 4.66 4.87 4.82 4.60
57 4.98 4.74 4.96 4.91 4.66
58 5.09 4.82 5.07 5.00 4.72
59 5.20 4.90 5.17 5.10 4.78
60 5.32 4.99 5.29 5.20 4.85
61 5.44 5.09 5.41 5.31 4.91
62 5.58 5.19 5.54 5.43 4.97
63 5.72 5.29 5.68 5.55 5.04
64 5.87 5.40 5.83 5.67 5.10
65 6.04 5.52 5.98 5.81 5.16
66 6.22 5.64 6.15 5.94 5.22
67 6.40 5.77 6.32 6.09 5.27
68 6.60 5.91 6.51 6.24 5.33
69 6.82 6.05 6.71 6.39 5.38
70 7.05 6.20 6.92 6.55 5.42
71 7.29 6.36 7.14 6.71 5.47
72 7.55 6.52 7.37 6.87 5.50
73 7.82 6.70 7.61 7.04 5.54
74 8.12 6.88 7.87 7.21 5.57
75 8.43 7.07 8.14 7.38 5.60
76 8.77 7.27 8.42 7.56 5.63
77 9.13 7.49 8.72 7.73 5.65
78 9.52 7.71 9.03 7.89 5.67
79 9.94 7.94 9.36 8.06 5.68
80 10.38 8.19 9.69 8.22 5.70
- ------------------------------------------------
Rates for ages 81 and over are
the same as those for age 80
- ------------------------------------------------
Form 1026.1-94 26
<PAGE>
================================ Payment Options ===============================
TABLE B FEMALE PAYEE
Monthly Payments Per $1,000 Applied
Based on Interest at 3 1/2% Per Year
- ------------------------------------------------
OPTION B OPTION B OPTION B
(1) (2) (3)
- ------------------------------------------------
Life Annuity With
-------------------------
Instal.
Age Life Refund 5 Years 10 Years 20 Years
Annuity Annuity Certain Certain Certain
- ------------------------------------------------
0-5 3.07 3.07 3.07 3.07 3.07
6 3.08 3.07 3.08 3.08 3.08
7 3.09 3.08 3.09 3.09 3.08
8 3.09 3.09 3.09 3.09 3.09
9 3.10 3.10 3.10 3.10 3.10
10 3.11 3.11 3.11 3.11 3.11
11 3.12 3.12 3.12 3.12 3.12
12 3.13 3.12 3.13 3.13 3.13
13 3.14 3.13 3.14 3.14 3.14
14 3.15 3.14 3.15 3.15 3.15
15 3.16 3.15 3.16 3.16 3.16
16 3.17 3.17 3.17 3.17 3.17
17 3.18 3.18 3.18 3.18 3.18
18 3.20 3.19 3.19 3.19 3.19
19 3.21 3.20 3.21 3.21 3.20
20 3.22 3.21 3.22 3.22 3.22
21 3.23 3.23 3.23 3.23 3.23
22 3.25 3.24 3.25 3.25 3.24
23 3.26 3.25 3.26 3.26 3.26
24 3.28 3.27 3.28 3.28 3.27
25 3.29 3.28 3.29 3.29 3.29
26 3.31 3.30 3.31 3.31 3.30
27 3.33 3.32 3.33 3.32 3.32
28 3.34 3.33 3.34 3.34 3.34
29 3.36 3.35 3.36 3.36 3.36
30 3.38 3.37 3.38 3.38 3.37
31 3.40 3.39 3.40 3.40 3.39
32 3.42 3.41 3.42 3.42 3.42
33 3.45 3.43 3.45 3.44 3.44
34 3.47 3.45 3.47 3.47 3.46
35 3.50 3.48 3.49 3.49 3.48
36 3.52 3.50 3.52 3.52 3.51
37 3.55 3.53 3.55 3.54 3.53
38 3.58 3.55 3.58 3.57 3.56
39 3.61 3.58 3.61 3.60 3.59
40 3.64 3.61 3.64 3.63 3.62
41 3.67 3.64 3.67 3.67 3.65
42 3.70 3.67 3.70 3.70 3.68
43 3.74 3.70 3.74 3.73 3.71
44 3.78 3.74 3.78 3.77 3.75
45 3.82 3.78 3.82 3.81 3.78
46 3.86 3.81 3.86 3.85 3.82
47 3.90 3.85 3.90 3.90 3.86
48 3.95 3.89 3.95 3.94 3.90
49 4.00 3.94 4.00 3.99 3.94
50 4.05 3.98 4.05 4.04 3.99
51 4.11 4.03 4.10 4.09 4.04
52 4.16 4.08 4.16 4.14 4.08
53 4.22 4.13 4.22 4.20 4.13
54 4.29 4.19 4.28 4.26 4.19
55 4.35 4.25 4.35 4.33 4.24
56 4.42 4.31 4.42 4.40 4.30
57 4.50 4.37 4.39 4.47 4.36
58 4.58 4.44 4.57 4.54 4.42
59 4.66 4.51 4.65 4.62 4.48
60 4.75 4.58 4.74 4.71 4.54
61 4.85 4.66 4.84 4.79 4.61
62 4.95 4.75 4.94 4.89 4.67
63 5.06 4.83 5.04 4.99 4.74
64 5.18 4.93 5.16 5.09 4.81
65 5.30 5.02 5.28 5.20 4.88
66 5.43 5.13 5.40 5.32 4.95
67 5.57 5.23 5.54 5.44 5.02
68 5.72 5.35 5.69 5.57 5.09
69 5.88 5.47 5.84 5.71 5.15
70 6.06 5.60 6.01 5.86 5.22
71 6.25 5.74 6.19 6.01 5.28
72 6.45 5.88 6.38 6.17 5.34
73 6.67 6.03 6.59 6.33 5.39
74 6.91 6.20 6.81 6.51 5.44
75 7.17 6.37 7.05 6.69 5.49
76 7.45 6.55 7.30 6.87 5.53
77 7.74 6.74 7.57 7.06 5.86
78 8.07 6.95 7.85 7.25 5.60
79 8.41 7.16 8.15 7.44 5.62
80 8.79 7.39 8.47 7.64 5.65
- ------------------------------------------------
Rates for ages 81 and over are
the same as those for age 80
- ------------------------------------------------
Form 1026.1-94 27
<PAGE>
================================ Payment Options ===============================
TABLE E(1)
Monthly Payments Per $1,000 Applied
Joint & Survivor
Based on Interest at 3 1/2% Per Year
MALE AGE
----------------------------------------------------------
50 55 60 65 70 75 80
-------------------------------------------------
50 3.70 3.77 3.82 3.86 3.89 3.91 3.93
F 55 3.82 3.92 4.01 4.08 4.14 4.17 4.20
E
M 60 3.93 4.08 4.22 4.34 4.43 4.50 4.54
A
L 65 4.03 4.23 4.43 4.61 4.77 4.90 4.98
E
70 4.11 4.35 4.62 4.90 5.16 5.38 5.54
A
G 75 4.17 4.45 4.79 5.17 5.56 5.92 6.23
E
80 4.21 4.53 4.92 5.39 5.92 6.48 7.00
==========================================================
TABLE E(2)
Initial Monthly Payments Per $1,000 Applied
Joint & 2/3 Survivor
Based on Interest at 3 1/2% Per Year
MALE AGE
----------------------------------------------------------
50 55 60 65 70 75 80
-------------------------------------------------
50 4.03 4.16 4.31 4.47 4.65 4.83 5.02
F 55 4.18 4.33 4.50 4.69 4.89 5.10 5.32
E
M 60 4.34 4.52 4.72 4.95 5.19 5.44 5.69
A
L 65 4.52 4.73 4.98 5.25 5.55 5.87 6.18
E
70 4.72 4.97 5.27 5.61 5.99 6.39 6.79
A
G 75 4.95 5.24 5.59 6.02 6.50 7.03 7.57
E
80 5.19 5.52 5.94 6.45 7.07 7.76 8.50
==========================================================
TABLE E(3)
Initial Monthly Payments Per $1,000 Applied
Joint & 1/2 Survivor
Based on Interest at 3 1/2% Per Year
MALE AGE
----------------------------------------------------------
50 55 60 65 70 75 80
-------------------------------------------------
50 4.22 4.39 4.60 4.85 5.14 5.47 5.83
F 55 4.38 4.56 4.79 5.06 5.38 5.74 6.13
E
M 60 4.57 4.77 5.02 5.32 5.68 6.08 6.52
A
L 65 4.81 5.03 5.31 5.65 6.05 6.51 7.02
E
70 5.10 5.35 5.66 6.05 6.52 7.05 7.65
A
G 75 5.46 5.75 6.10 6.56 7.11 7.75 8.48
E
80 5.87 6.21 6.63 7.16 7.82 8.61 9.52
==========================================================
Payment rates for combinations of ages not shown may be
obtained from the Company upon request.
Form 1026.1-94 28
<PAGE>
Second to Die Flexible Premium Variable Life Insurance Policy. Adjustable Sum
Insured. Death Proceeds Payable at Death of Second to Die Prior to the Final
Premium Payment Date. Flexible Premiums Payable to the Final Premium Payment
Date. Coverage to Final Premium Payment Date and Amount of Policy Value Not
Guaranteed. Some Benefits Reflect Investment Results. Paid-Up Insurance
Option. Non-Participating.
Form 1026.1-94
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GUARANTEED DEATH BENEFIT RIDER
This rider is a part of the policy to which it is attached if it is listed in
the specifications page. The rider is issued in consideration of the payment of
the amount shown in the specifications page.
While this rider is in effect, the policy will not lapse if the following tests
are met:
1. Within 48 months following the date this policy is issued and the
effective date of issue of any increase in the face amount, the sum of
your payments less any outstanding loans, partial withdrawals and
withdrawal charges is greater than the minimum monthly payment multiplied
by the number of months which have elapsed since that date; and
2. On each policy anniversary, (a) must exceed (b) where, since the date this
policy was issued:
(a) is the sum of your payments less any partial withdrawals, partial
withdrawal charges and outstanding loan which is classified as a
preferred loan; and
(b) is the sum of the minimum guaranteed death benefit payments. The
minimum guaranteed death benefit payment amount is shown on the
specifications page or on a new specifications page in the event of
a policy change. The minimum guaranteed death benefit payment will
be prorated in any year in which there is a policy change.
If the policy values is less than the surrender charge on a monthly processing
date, the monthly insurance protection charge will be deducted from the policy
value. If the policy value is less than the monthly insurance protection charge,
the entire policy value will be applied to this charge.
If this rider is in effect on the final payment date, a death benefit will be
provided while this rider remains in force. The death benefit will be the face
amount as of the final payment date or the policy value as of the date due proof
of death is received by the Company, whichever is greater. Monthly insurance
protection charges will not be deducted after the final payment date if the
policy qualifies for the Guaranteed Death Benefit.
The Guaranteed Death Benefit will end and may not be reinstated on the first to
occur of the following:
1. Foreclosure of an outstanding loan; or
2. The date on which the sum of your payments does not meet or exceed
the applicable Guaranteed Death Benefit test; or
3. Any policy change that results in a negative guideline level
premium; or
4. The effective date of a change from the Adjustable Death Benefit
Option to the Level Death Benefit Option if such change occurs
within 5 policy years of the final payment date; or
5. A request for a partial withdrawal or preferred loan is made after
the final payment date.
Form 1099-97
<PAGE>
It is possible that the policy value will not be sufficient to keep the policy
in force on the first monthly processing date following the date this rider
terminates. The net amount payble to keep the policy in force will never exceed
the surrender charge plus three monthly deductions.
IN WITNESS WHEREOF, the Company has, by its President and Secretary, execeuted
this rider at Worcester, Massachusetts on the date of issue of this rider.
/s/ Richard M. Reilly /s/ [Illegible]
President Secretary
Form 1099-97
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
====================== Other Insured Term Insurance Rider ======================
This rider is a part of the policy to which it is attached if it is shown in the
specifications pages of the policy. The insured under the policy is the person
referred to as the insured under this rider. "Other insured" refers to each
person other than the insured who is insured under this rider.
=================================== Benefit ====================================
Benefit--We will provide term insurance on the life of each "other insured" for
whom an "other insured" Specification Page is issued. We will pay the term
insurance benefit upon receipt of due proof that an "other insured" died prior
to his or her term insurance expiry date while this rider is in force. Unless
otherwise requested, the term insurance benefit will be paid to you.
An Other Insured Schedule Page shows for each "other insured":
o the name and age;
o the adminstrative charge, if any;
o the term insurance benefit;
o the effective date of the term insurance; and
o the term expiry date.
========================== Benefit Change Provisions ===========================
Change Provisions--You may change the amount of term insurance with respect to
each "other insured" if such request is made:
o during the lifetime of the "other insured"; and
o on written request while this policy is in force.
Increase--To increase the amoount of term insurance, you and the "other insured"
must complete the application and provide us with the following:
o evidence of insurability;
o the "other insured" must be under age 81; and
o the "other insured" must be approved by us according to our underwriting
rules; and
o you must pay us a $50 transaction charge, plus the amount needed to keep
the policy in force if the surrender value is less than this amount.
The increased amount of term insurance will become effective on the first
monthly processing date on, or following, the date all the conditions are met. A
supplemental Other Insured specifications page will be issued. This page will
include the following information:
o the name of the "other insured";
o the effective date of the increased term insurance;
o the amount of the increase in the term insurance; and
o minimum monthly payment, guideline premiums and charges.
No increase may be less than the Company's minimum limit in effect on the date
of the request.
Decrease--You may decrease the amount of term insurance on an "other insured" at
any time. It will be effective on the monthly processing date after we receive
your written reqest. Such term insurance will be decreased or eliminated in the
following order:
o first, the most recent increase;
Form 1088-95 (Over)
<PAGE>
o second, the next most recent increases successively; and
o last, the original amount of term insurance.
A supplemental Other Insured Specifications Page issued will include the
following information:
o the name of the "other insured";
o the effective date of the decrease; and
o the amount of the decrease and the benefit remaining in force.
Term insurance on an "other insured" may not be reduced to less than our minimum
issue limit.
We reserve the right to establish a minimum limit for the amount of any
decrease.
================================== Conversion ==================================
Conversion--You may convert the term insurance on the life of an "other insured"
if such request is made:
o prior to the "other insured's" age 71;
o while the "other insured" is alive; and
o while this rider is in force.
Evidence of insurability will not be required.
New Policy Description--The new policy will be a flexible premium variable life
insurance policy. The new policy will be issued:
o on the life of an "other insured" only;
o for the same underwriting class which applies to the "other insured" under
this rider; and
o at the "other insured's" age and for the insurance protection rates in use
on the date of issue of the new policy.
The date of issue of the new policy will be the monthly processing date
following the date conversion is requested and the first premium is paid. Term
insurance for the "other insured" ends when coverage under the new policy
begins.
The net death benefit may not be less than our minimum issue limit. The net
death benefit may not exceed the term insurance benefit in effect on the date
conversion is requested.
Riders will be available on the new policy subject to evidence of insurability
and our consent. The time periods of the suicide and incontestability provisions
of the new policy will expire on the same date as such provisions in this rider
would have expired. The new policy will be subject to any assignments
outstanding against this rider.
=================================== General ====================================
Owner--You are the owner of this rider. However, if you are the insured and at
the time of your death there is no contingent owner named, each "other insured"
will become the owner of the term insurance on his or her life.
Conversion Following Insured's Death--If the insured dies while the policy and
rider are in force, the owner may convert any "other insured" insurance within
90 days after the insured's death.
Conversion is subject to the conversion provisions. Term insurance will continue
on the life of each covered "other insured" during the conversion period. This
term insurance will begin on the date of the insured's death and will end on the
first to occur of:
o the expiration of the conversion period; or
o the date of issue of the conversion policy.
Form 1088-95
<PAGE>
Our Right to Contest the Rider is Limited--We cannot contest the initial term
insurance benefit if this rider has been in force for two years from the date it
is issued, and the "other insured" is alive at the end of this two-year period.
If the term insurance benefit is increased or the underwriting class is changed
at your request, we cannot contest the increase or change after it has been in
force for two years from its effective date and the "other insured" is alive.
Suicide Exclusion--If an "other insured", while sane or insane, commits suicide
within two years of the date this rider is issued, we will not pay a death
benefit. The beneficiary will receive only the total amount of payments made to
us for the term insurance on the life of the "other insured" who committed
suicide. If the term insurance benefit is increased at your request, and then an
"other insured" commits suicide within two years, while sane or insane, we will
not pay the increased amount. Instead the beneficiary will receive the
administrative charge and charges paid for this increase, plus any net death
benefit otherwise payable.
Misstatement of Age--If the age of an "other insured" is not correctly stated,
we will adjust the amount we will pay under this rider. The amount will be the
term insurance benefit that would have been purchased by the last monthly
payment charge for this rider using the correct age.
Charges--Charges for this rider are paid as a part of the monthly insurance
protection charge due under the policy.
The maximum charges for each "other insured" are shown in each "Other Insured's"
Specification Page or pages. There may be no more than five "other insureds"
under this rider.
Termination--This rider will terminate on the first to occur of:
o the end of the grace period of a premium in default; or
o the termination or maturity of the policy; or
o the monthly processing date following a request for termination.
Term insurance for each "other insured" will terminate on that "other insured's"
term expiry date.
General--The specifications pages (page 3 or 3.1 of the policy) will show the
date of issue of this rider.
Except as otherwise provided, all conditions and provisions of the policy apply
to this rider.
Signed for the Company at Dover, Delaware
/s/ [Illegible] /s/ Richard M. Reilly
Secretary President
Form 1088-95
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
================ OPTION TO ACCELERATE DEATH BENEFITS ENDORSEMENT ===============
This rider is a part of the policy to which it is attached. The insured under
this rider is the insured under the policy. This rider does not apply to any
benefits provided by rider.
Benefit--While this rider is in force, you may elect to receive a portion of the
net death benefit, called the "living benefit," prior to the insured's death
under either the terminal illness option or the nursing home option, subject to
the definitions, conditions and limitations in this endorsement. This option may
only be exercised once.
Definitions--"Option amount" means that portion of the death benefit which you
elect to apply under this option. The option amount must be at least $25,000 and
may not exceed the lesser of:
o one-half of the death benefit on the date the option is elected; or
o the amount that would reduce the face amount to our minimum issue limit
for this policy; or
o $250,000.
"Option percentage" is the option amount divided by the death benefit.
"Living benefit" is the option amount which has been reduced for interest and
other factors. It is equal to the lump sum benefit under this rider, and is the
amount used to determine the monthly benefit. The living benefit will not be
less than the surrender value of the policy multiplied by the option percentage.
The following factors will be used to calculate the living benefit:
o age;
o sex, unless the policy is issued on a unisex basis;
o life expectancy;
o policy value;
o outstanding loan;
o rate of interest currently being credited to the Fixed Account including
those values which are subject to outstanding loan;
o face amount;
o death benefit option;
o current insurance protection charges;
o administrative charges; and
o an expense charge of $150.
An amount equal to the outstanding loan multiplied by the option percentage will
be deducted from the living benefit. The remaining outstanding loan will
continue in force.
The assumptions we use to calculate the living benefit may change from time to
time. The factors used to compute the living benefit will be set and changed
only prospectively; that is, based on changes in future expectations. We will
not change these factors to recoup any prior losses or distribute past gains
under the rider.
"Eligible nursing home" means an institution or special nursing unit of a
hospital which meets at least one of the following requirements:
1. it is Medicare - approved as a provider of skilled nursing care services;
or
2. it is licensed as a skilled nursing home or as an intermediate care
facility by the state in which it is located;
3. it meets all the requirements listed below:
o it is licensed as a nursing home by the state in which it is
located;
o its main function is to provide skilled, intermediate or custodial
nursing care;
o it is engaged in providing continuous room and board accommodations
to 3 or more persons;
o it is under the supervision of a registered nurse (RN) or licensed
practical nurse (LPN);
o it maintains a daily medical record of each patient; and
o it maintains control and records for all medications dispensed.
Institutions which primarily provide residential facilities are not eligible
nursing homes.
"Proof of claim satisfactory to us" shall include:
o a request signed by the insured to disclose all facts concerning the
insured's health;
Form 1089-95 1
<PAGE>
o records of the attending physician, including a prognosis of the insured;
and
o if we request, a medical examination of the insured at our expense
conducted by a physician we choose.
Conditions--Upon written request you may elect to receive payment under one of
the accelerated death benefit options subject to the following conditions:
o the policy is in force;
o a written consent has been given by any collateral assignee, irrevocable
beneficiary and the insured if you are not the insured; and
o the insured qualifies for the option you elect.
Terminal Illness Option--If you provide proof of claim satisfactory to us that
the insured's life expectancy is 12 months or less, you may elect to receive
equal monthly payments for 12 months. For each $1,000 of living benefit, each
payment will be at least $85.21. This assumes an annual interest rate of 5%.
If the insured dies before all the payments have been made, we will pay the
beneficiary in one sum the present value of the remaining payments due under
this rider calculated at the interest rate we use to determine those payments.
If you do not wish to receive monthly payments, you may elect to receive an
amount equal to the living benefit in a lump sum.
Nursing Home Option--If (1) the insured is confined to an eligible nursing home
and has been confined there continuously for the preceding six months; and (2)
you provide proof of claim satisfactory to the us that the insured is expected
to remain in the nursing home until death, you may elect level monthly payments
for the number of years shown in the table that follows. For each $1,000 of
living benefit, each payment will be at least the minimum amount shown in that
table. The table assumes an annual interest rate of 5%.
If the insured dies before all the payments have been made, we will pay the
beneficiary in one sum the present value of the remaining payments due under
this rider calculated at the interest rate we use to determine those payments.
You may elect a longer payment period than that shown in the table. If you do,
monthly payments will be reduced so that the present value of the monthly
payments for the longer payment period is equal to the present value of the
payments for the period shown in the table, calculated at an interest rate of at
least 5%.
MINIMUM MONTHLY
PAYMENT PAYMENT FOR
PERIOD EACH $1,000
IN YEARS OF LIVING BENEFIT
1 $85.21
2 $43.64
3 $29.80
4 $22.89
5 $18.74
6 $15.99
7 $14.02
8 $12.56
9 $11.42
10 $10.51
11 $ 9.77
12 $ 9.16
13 $ 8.64
14 $ 8.20
15 $ 7.82
16 $ 7.49
17 $ 7.20
18 $ 6.94
19 $ 6.71
20 $ 6.51
21 $ 6.33
22 $ 6.17
23 $ 6.02
24 $ 5.88
25 $ 5.76
26 $ 5.65
27 $ 5.54
28 $ 5.45
29 $ 5.36
30 $ 5.28
We reserve the right to set a maximum monthly benefit, which will not be less
than $5,000.
If you do not wish to receive monthly payments, you may elect to receive a
single sum equal to the living benefit.
Form 1089-95 2 (Continued on page 3)
<PAGE>
Effect on Policy--The policy's death benefit will be decreased by the option
amount. Such decrease will be effective on the monthly payment processing date
following the date of the written request. Existing insurance will be decreased
or eliminated in the following order:
o first, the most recent increase;
o second, the next most recent increases successively; and
o last, the initial face amount.
A surrender charge applicable to the decrease in the face amount will be waived.
The amount of the charge which is waived will be:
o the surrender charge applicable to any increased face amount which is
eliminated in the order set forth above; plus
o a pro rata share of the surrender charge applicable to a partial reduction
in an increase or in the original face amount.
New specification pages will be issued. These pages will include the following
information:
o the effective date of the decrease;
o the amount of the decrease and the benefit remaining in force;
o the revised surrender charge;
o the revised minimum monthly factor, if any; and
o the new guideline premiums.
The policy value will be reduced in the same proportion as the reduction in the
death benefit. Riders will continue in force.
First to Die Policy--The following provisions apply if this rider is attached to
a First to Die Flexible Premium Adjustable Life Insurance Policy: The "insured"
shall mean the first insured to qualify for benefits under this rider. No
additional living benefits will be provided if other insureds qualify prior to
the death of the first insured to die. If the first to die under the policy is
not the first insured to qualify under this rider. The net death benefit as
adjusted by this rider will be paid to the beneficiary of the policy and payment
of the living benefit will continue as provided in this rider.
Exclusion--No benefit will be paid under this rider if a claim results, directly
or indirectly, from a suicide attempt or a self-inflicted injury (while sane or
insane) for any period during which a suicide exclusion is applicable.
Termination--This endorsement will terminate on the first to occur of:
o the end of the grace period of a premium in default; or
o the termination or maturity of the policy while the insured is alive; or
o at any time on your written request.
General--The specification pages (page 3 or 3.1 of the policy) will show the
date of issue of this rider.
The living benefit will be made available to you on a voluntary basis only.
Accordingly:
(a) If you are required by law to exercise this option to satisfy the claim of
creditors, whether in bankruptcy or otherwise, you are not eligible for
this benefit.
(b) If you are required by a government agency to exercise this option in
order to apply for, obtain, or retain a government benefit or entitlement,
you are not eligible for this benefit.
Except as otherwise provided, all conditions and provisions of the policy apply
to this endorsement.
Signed for the Company at Dover, Delaware
/s/ [Illegible] /s/ Richard M. Reilly
Secretary President
Form 1089-95 3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
============================ Waiver Of Payment Rider ===========================
This rider is a part of the policy to which it is attached if it is shown in the
specification pages of the policy. The insured under the policy is the insured
under this rider.
Benefit--While the insured is totally disabled, we will add to the policy value
the waiver of payment benefit. This benefit is the larger of:
o the amount shown in the specifications page; or
o the minimum monthly payment for the face amount covered by this rider
during a period when the minimum monthly payment applies; or
o the monthly insurance protection charges applicable to the face amounts
and other riders covered by this rider.
The waiver of payment benefit is subject to:
o our receipt of due proof of such total disability; and
o evidence the total disability:
o began while this rider was in force; and
o began before the policy anniversary nearest age 65; and
o has continued for at least 4 months; and
o the other terms and conditions of this rider.
The benefit will begin with the policy month following the date total disability
begins or the policy anniversary nearest age 5, if later. The benefit will not
be provided for any period more than one year prior to the date we receive
written notice of claim. We will credit the policy value with any benefit which
applies to the time during which benefits are payable.
Each monthly benefit will be allocated in accordance with the payment allocation
in effect on the date each benefit is credited to the policy value.
If the insured's total disability occurs before the policy anniversary nearest
age 60, the benefit will end when total disability ends. If the total disability
occurs on or after the policy anniversary nearest age 60, the benefit will
continue during such total disability but not beyond the policy anniversary
nearest age 65 or two years, whichever is longer. Benefits will cease on the
next monthly processing date following the end of a period of total disability.
Definitions of Total Disability--Total disability means the insured is unable to
engage in an occupation as a result of disease or bodily injury. "Occupation"
means attendance at school if the insured is not old enough to legally end his
or her formal education. Otherwise "occupation" means:
o during the first 60 months of disability, the occupation of the insured
when such disability began; and
o thereafter, any occupation for which the insured is or becomes reasonably
fitted by training, education or experience.
Total loss of the following as a result of disease or bodily injury shall be
deemed total disability:
o speech;
o hearing in both ears; or
o the sight of both eyes; or
o the use of both hands; or
o the use of both feet; or
o the use of one hand and one foot.
Risks Not Covered--No benefit will be provided if total disability results,
directly or indirectly, from:
o an act of war, whether such war is declared or undeclared, and the insured
is a member of the armed forces of a country or combination of countries;
or
o any bodily injury occurring or disease first manifesting itself prior to
the date of issue of this rider. However, no claim for total disability
commencing after two years from the date of issue will be denied on the
ground that the disease or impairment not excluded from coverage by name
or specific description existed prior to the date of issue of this rider.
Form 1086-94 (over)
<PAGE>
Notice and Proof of Claim--Written notice of claim must be sent to our Principal
Office:
o during the lifetime of the insured; and
o while the insured is totally disabled; and
o not later than 12 months after this rider terminates.
Proof of claim must be sent to our Principal Office within 6 months of the
notice of claim. Failure to give notice and proof within the time required will
not void or reduce any claim if it can be shown that notice and proof were given
as soon as was reasonably possible.
Proof of continued total disability must be furnished at our request. Failure to
do so will end the benefit. Such proof will include an authorization to disclose
facts concerning the insured's health, and may include medical exams of the
insured conducted by physicians chosen by us. Such medical exams will be at our
expense. After total disability has continued for 24 months, proof will not be
required more than once a year, nor after the policy anniversary nearest age 65.
Benefit Changes--The benefit may be changed on written request. Any increase is
subject to:
o evidence of insurability;
o the insured must be under age 60 and insurable according to our
underwriting rules; and
o payment to us of the amount needed to keep the policy in force if the
surrender value is less than all charges due on the policy.
No increases, when added to the existing benefit, shall exceed the following
limits:
- ---------------------------------------------------
Maximum Benefit Table
- ---------------------------------------------------
Monthly Benefit
Attained Per $1,000
Age Face Amount
- ---------------------------------------------------
0-19 $1.00
20-29 1.25
30-39 2.00
40-49 3.00
50-54 4.00
55 and above 5.50
- ---------------------------------------------------
The waiver of premium benefit will be reduced if it exceeds the maximum benefit
after the face amount of the policy is reduced. The monthly benefit may not
exceed the amount shown in the Maximum Benefit Table.
The effective date of the changed benefit will be the first monthly processing
date on or after the date all conditions are met. The changed benefit will be
shown in a supplementary specifications page. The charges for an increased
benefit will be shown in a Supplemental Insurance Protection Charge Table if the
insured's underwriting class changes.
Incontestability--Except for failure to pay the monthly insurance protection
charges, this rider cannot be contested after the end of the following time
periods:
o the initial benefit cannot be contested after the rider has been in force
during the insured's lifetime and without the occurrence of the total
disability of the insured for two years from the date of issue; and
o an increase in the benefit cannot be contested after the increased benefit
has been in force during the insured's lifetime and without the occurrence
of the total disability of the insured for two years from its effective
date.
Termination--This rider will terminate on the first to occur of:
o the end of the grace period of a premium in default; or
o the termination or maturity of the policy; or
o the day before the policy anniversary nearest age 65, except as provided
in the Benefit provision; or
o the end of the policy month following a request for termination.
Rider Charge--Charges for this rider are paid as a part of the monthly insurance
protection charges due under the policy.
The monthly charge is the waiver charge shown in the Insurance Protection Charge
Table multiplied by the greater of:
o the monthly insurance protection charges applicable to the face amount and
other riders covered by this rider; or
o one-half of the waiver of payment benefit shown in specifications page.
Form 1086-94
<PAGE>
General--The specifications page (page 3 of the policy) will show the date of
issue of this rider.
When an increase in face amount or an additional rider is applied for, waiver of
payment coverage must also be requested. We reserve the right to decline
issuance of the waiver of payment coverage for the increased face amount or
additional rider benefit.
If total disability begins during the grace period of a past due premium, such a
premium will be payable.
The waiver of payment benefit will not reduce any amount payable under the
policy.
Except as otherwise provided, all conditions and provisions of the policy apply
to this rider.
Signed for the Company at Dover, Delaware.
/s/ [Illegible] /s/ Richard M. Reilly
Secretary President
Form 1086-94
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
========================= Guaranteed Insurability Rider ========================
This rider is a part of the policy to which it is attached if it is shown in the
specifications pages of the policy. The insured under the policy is the insured
under this rider.
Benefit--On each option date you may increase the face amount of insurance
without evidence of insurability if written request is made:
o during the lifetime of the insured;
o while this rider and policy are in force; and
o subject to the terms of this rider.
Option Dates--The first option date for this rider is shown in the
specifications pages of the policy. Option dates will then occur on every second
anniversary of the first option date until the policy anniversary nearest age 40
or until the fifth option date, whichever is later.
Exercise of Increase Option--Options may be exercised on the life of the insured
not earlier than 60 days prior to, nor later than 31 days after an option date.
The specifications page of the policy shows the "option amount" and the "total
option amount". The total option amount is the maximum aggregate face amount of
insurance which may be purchased through this rider. Each time the option to
increase the face amount of insurance is exercised, the total option amount is
reduced by the amount of the insurance purchased. The face amount which may be
purchased at one time may not exceed the option amount or the total amount
remaining, if less. The increased face amount may not be less than $10,000.
The insurance protection charges for the increased face amount will be
calculated in the same manner as these charges for other increases in the face
amount. The guaranteed insurance protection charges will not exceed the
guaranteed charges in effect on the date of issue of this rider.
Supplemental specifications pages will be issued. They will include the
following information:
o the effective date of the increased face amount;
o the amount of the increase; and
o the surrender charge.
The supplemental specifications pages will also show a new minimum monthly
payment and new guideline premiums which will apply to the entire policy. There
is no administrative charge for the exercise of this option.
If the surrender value on the date of issue of an increase is less than the
insurance protection charges due on the policy you must pay the grace period
premium to us.
The effective date of the increased face amount will be the monthly processing
date following the date of the written request. If the insured dies after the
date of the written request and before the increased face amount takes effect,
we will refund any premium paid to exercise this option.
The time periods in the suicide and incontestable clauses for the increased face
amount will be measured from the date of issue of this rider.
Waiver of Payments--If this policy contains a waiver of payment rider on the
effective date of the increased face amount, the waiver of payment benefit may
be increased without evidence of insurability. If waiver of payment benefits are
being paid on the increase date, the increased benefit will become payable on
the increase date.
If on the effective date of an increase the waiver or payment benefit is
designated in the specification pages as the monthly insurance protection
charges, this benefit will be increased by the insurance protection charges for
the increased face amount.
If the waiver of payment benefit on an increase date is shown in the
specification page as dollar amount, this benefit will be increased by the
smaller of:
o the waiver of payment benefit on the option date minus 1/12 of the sum of
the payments made by you over the last 12 policy months.
o the amount shown in the waiver of payment benefit table.
- ---------------------------------------------------
Waiver of Premium Benefit Table
- ---------------------------------------------------
Monthly Benefit
Attained Increase Per $1,000
Ages Face Amount Increased:*
- ---------------------------------------------------
18-19 $ .50
20-29 .63
30-39 1.00
40-49 1.50
50-54 2.00
55-59 2.75
- ---------------------------------------------------
* In no event may the waiver of payment
benefit be increased to exceed the
monthly equivalent of the periodic payment.
- ---------------------------------------------------
Form 1087-95 (Over)
<PAGE>
Incontestability--Except for failure to pay the monthly insurance protection
charge, this rider cannot be contested after it has been in force for two years
from its date of issue and the insured is alive.
Termination--This rider will terminate on the first to occur of:
o the end of the grace period of a premium in default; or
o the end of the policy month following a request for termination; or
o the last option date; or
o the date of issue of an increase which, when added to the sum of all prior
increases under this rider, reduces the total option amount remaining to
less than $10,000.
General--The specification pages (page 3 or 3.1 of the policy) will show for
this rider:
o the date of issue;
o the first option date;
o the option amount; and
o the total option amount.
Except as otherwise provided, any additional benefits or riders will not be
added or increased without the our prior consent.
Reinstatement of this rider will not revive any option date which occurred
during the period of lapse.
Charges for this rider are payable as a part of the monthly insurance protection
charges due under this policy, The monthly insurance protection charge for this
rider is shown on page 5 or 5.1 of the policy.
Except as otherwise provided, all conditions and provisions of the policy apply
to this rider.
Signed for the Company at Dover, Delaware.
/s/ [Illegible] /s/ Richard M. Reilly
Secretary President
Form 1087-95
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
===================== Life Insurance Exchange Option Rider =====================
This rider is a part of the policy to which it is attached if it is listed in
the specifications pages of the policy. The consideration for this rider is the
premium shown in the specification pages. The insured under this policy is the
insured under this rider. The successor insured will be the person named in the
application when the exchange option is exercised.
Exchange Option Benefit--While this rider is in force, you may exchange the
existing policy for a new policy of life insurance on the life of the successor
insured subject to the provisions and conditions of this rider.
Definitions--"Existing policy" means the policy to which this rider is attached
insuring the life of the insured.
"New policy" means the policy insuring the life of the successor insured.
Exercise of the Option--To exercise the exchange option you and the successor
insured must complete the application and provide us with the following:
o evidence of insurability;
o the successor insured must be under age 76;
o the successor insured must be approved by us according to our underwriting
rules;
o proof you have an insurable interest in the successor insured;
o written consent of the exchange by all assignees and irrevocable
beneficiaries, if any, of this policy;
o payment of the amount required, if any, by this rider, and
o surrender of the existing policy.
If the successor insured is not approved, we will return to you any amounts paid
and the existing policy and this rider will remain in force.
Exchange Date--The exchange date will be the monthly processing date following
the later of:
(a) the date we receive your payment of any amount due for the exchange; and
(b) the date we approve the successor insured for the new policy.
Insurance provided by the existing policy shall terminate at the end of the day
preceding the exchange date. Insurance on the life of the successor insured will
begin on the exchange date. No death benefit will be paid if the successor
insured dies on or after the date of the application for the new policy and
before the exchange date. Instead, we will refund the amount paid on the new
policy.
Required Payment or Adjustment--If the exchange date is within one year of the
date of issue of the existing policy or any increase in the face amount, a
premium adjustment may be made. If the minimum monthly payment for the new
policy exceeds the minimum monthly payment for the existing policy, you must pay
the excess.
You must also pay the insurance protection charges for two months if the
surrender value is not large enough to pay such charges on the exchange date for
the successor insured.
After the first anniversary, the surrender value of the new policy on its date
of issue may not exceed the surrender value of this policy on the date of
exchange.
Any outstanding debt under the existing policy will be transferred to the new
policy; however, if the outstanding debt is greater than the loan value of the
new policy, the excess must be repaid to the Company before the exchange date.
New Policy Description--The date of issue of the new policy will be the later of
the date of issue of the existing policy and the policy anniversary following
the successor insured's date of birth. The time periods in the suicide and
incontestability provisions will be measured from the exchange date.
Form 1090-95 (Over)
<PAGE>
The new policy will be a flexible premium adjustable life insurance policy. The
insurance protection charges will be based on the rates in use on the date of
issue of the new policy for the successor insured's underwriting class on the
exchange date.
The face amount of the new policy may not be less than the our published minimum
issue limits nor greater than the face amount of the existing policy.
We may decline to include in the new policy any riders. Charges for riders
included in the new policy will be at the rates in use on the exchange date for
the successor insured's underwriting class.
Termination--This rider will terminate on the first to occur of:
o the expiration of the grace period of any premium in default under the
existing policy, or
o termination or maturity of this policy, or
o upon written your request, or
o the date before the policy anniversary nearest the insured's 70th
birthday, or
o exercise of this exchange option.
General--Except as otherwise provided, all of the provisions and conditions of
the existing policy apply to this rider.
IN WITNESS WHEREOF, we have, by our President and Secretary, executed this rider
at Worcester, Massachusetts, on the date of issue of this rider.
/s/ [Illegible] /s/ Richard M. Reilly
Secretary President
Form 1090-95
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA INVESTMENT TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
AND
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DATED AS OF
FEBRUARY 25, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 17
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of Allmerica Investment Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 25th day of February, 1998 by
and among: FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); ALLMERICA INVESTMENT TRUST, an unincorporated Massachusetts business
trust (hereinafter the "Fund"), and ALLMERICA INVESTMENT MANAGEMENT COMPANY,
INC. (hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets (each such series hereinafter referred to as a "Portfolio"), any
one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has applied for an order from the Securities and Exchange
Commission, granting Participating Insurance Companies and Variable Insurance
Product separate accounts exemptions from the provisions of Sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, Allmerica Investments, Inc. (the "Distributor") is registered as a
broker/dealer under the Securities Exchange Act of 1934, as amended (hereinafter
the "1934 Act"), is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
3
<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee of a
request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption on the next following Business Day.
4
<PAGE>
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products are or
will be registered under the 1933 Act; that the Variable Products will be issued
and sold in compliance in all material respects with all applicable federal and
state laws, and that the sale of the Variable Products shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established each Account as a segregated asset account under Section 2932 of the
Delaware Insurance Code, and that it has registered or, prior to any issuance
or sale of the Variable Products, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act.
The Fund shall amend the registration statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision)
5
<PAGE>
and that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Variable Products have ceased to be so treated or
that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid,
which includes coverage for larceny and embezzlement, shall be issued by a
reputable bonding company. The Company agrees to make all reasonable efforts to
see that this bond or another bond containing these provisions is always in
effect, and agrees to notify the Fund and the Distributor promptly in writing in
the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
6
<PAGE>
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus printed
together in one document, and to have the statement of additional information
for the Fund and the statement of additional information for the Variable
Products printed together in one document. Alternatively, the Company may print
the Fund's prospectus and/or its statement of additional information in
combination with other fund companies' prospectuses and statements of additional
information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to
the Fund's statement of additional information. The Company agrees to provide
the Fund or its designee with such information as may be reasonably requested by
the Fund to assure that the Fund's expenses do not include the cost of printing
any prospectuses or statements of additional information other than those
actually distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall
bear the cost of printing, duplicating, and mailing of these documents to
current contract owners, and the Company shall bear the cost for such documents
used for purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding
7
<PAGE>
responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and
Exchange Commission's interpretation of the requirements of Section 16(a) with
respect to periodic elections of trustees and with whatever rules the Commission
may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement or prospectus for the Variable Products,
as such registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature
8
<PAGE>
and other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to the
Fund or its shares, which are relevant to the Company or the Variable Products.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Distributor may make payments to the Company or to the distributor for the
Variable Products if and in amounts agreed to by the Distributor in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund and the Adviser or by another party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products
in such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Fund will at all times
comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach
and (b) to adequately diversify the Fund so as to achieve compliance within
the grace period afforded by Regulation 1.817-5.
9
<PAGE>
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of its
members, who are not "interested persons" of the Fund, the Adviser or the
Company as that term is defined in the 1940 Act (hereinafter "disinterested
members"), that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the
10
<PAGE>
Company will withdraw the affected Account's investment in the Fund and
terminate this Agreement with respect to such Account within six months after
the Board informs the Company in writing that it has determined that such
decision has created an irreconcilable material conflict; provided, however,
that such withdrawal and termination shall be limited to the extent required by
the foregoing material irreconcilable conflict as determined by a majority of
the disinterested members of the Board. Until the end of the foregoing six
month period, the Distributor and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Variable Products. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Variable Products if an offer to do so
has been declined by vote of a majority of contract owners materially adversely
affected by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use in
the registration statement or prospectus for the Variable Products or in
the Variable Products or sales literature (or any amendment or
11
<PAGE>
supplement) or otherwise for use in connection with the sale of the
Variable Products or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature of the Fund not supplied by the Company, or
persons under its control and other than statements or representations
authorized by the Fund or an Adviser) or unlawful conduct of the Company or
persons under its control, with respect to the sale or distribution of the
Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was made
in reliance upon and in conformity with information furnished to the Fund
by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
12
<PAGE>
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it manages,
to indemnify and hold harmless the Company, each of its directors, officers, and
employees, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and
individually, "Indemnified Party," for purposes of this Section 8.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of shares of the Portfolio
that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature for the Variable Products not supplied by
the Fund or persons under its control and other than statements or
representations authorized by the Company) or unlawful conduct of the Fund,
Adviser(s) or Distributor or persons under their control, with respect to
the sale or distribution of the Variable Products or Portfolio shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
13
<PAGE>
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election
to assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
14
<PAGE>
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
15
<PAGE>
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
16
<PAGE>
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
Allmerica Investment Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
17
<PAGE>
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Joseph W. MacDougall, Jr.
---------------------------------------
NAME: Joseph W. MacDougall, Jr.
TITLE: Vice President
ALLMERICA INVESTMENT TRUST
By: /s/ Thomas P. Cunningham
---------------------------------------
NAME: Thomas P. Cunningham
TITLE: Vice President & Treasurer
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By: /s/ Richard F. Betzler, Jr.
---------------------------------------
NAME: Richard F. Betzler, Jr.
TITLE: Vice President
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VEL II VEL ('93) 33-71056 811-8130
Inheiritage Inheiritage 33-74184 811-8304
Select Inheiritage
Group VEL Group VEL 33-06383 811-7663
<CAPTION>
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VA-K ExecAnnuity Plus 93 33-71052 811-8814
Allmerica Advantage
Allmerica Select Separate Account Allmerica Select Resource I 33-71058 811-8116
Allmerica Select Resource II
Separate Account I Variable Annuities 33-47858 811-6666
- ----------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF
ALLMERICA INVESTMENT TRUST
Select Emerging Markets Fund
Select International Equity Fund
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Select Growth Fund
Growth Fund
Equity Index Fund
Select Growth and Income Fund
Select Income Fund
Investment Grade Income Fund
Government Bond Fund
Money Market Fund
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting instruction
solicitation material. The Fund will provide the last Annual Report to the
Company pursuant to the terms of Section 3.43 of the Agreement to which
this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
- name (legal name as found on account registration)
- address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
C-1
<PAGE>
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
- cover letter - optional, supplied by Company and reviewed and approved
in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but NOT including,) the
meeting, counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
C-2
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- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
- - The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
C-3
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PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of the 18th day of February,
1994 by and among STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, (hereinafter
the "Company"), a Massachusetts corporation, on its own behalf and on behalf of
each segregated asset account of the Company set forth on Schedule A hereto as
may be amended from time to time (each such account hereinafter referred to as
the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
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<PAGE>
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
2
<PAGE>
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule A attached hereto and incorporated herein by this reference,
as such Schedule A may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement (a list
of such funds appearing on Schedule C to this Agreement); or (d) the Fund or
Underwriter consents to the use of such other investment company.
3
<PAGE>
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 132G of Chapter 175 of the Insurance Code of the
Commonwealth of Massachusetts and has registered or, prior to any issuance or
sale of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws and that the
Fund is and shall remain registered under the 1940 Act. The Fund shall amend
the Registration Statement for its shares under the 1933 Act and the 1940 Act
4
<PAGE>
from time to time as required in order to effect the continuous offering of its
shares. The Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated
as life insurance or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund and the Underwriter immediately upon having a reasonable basis
for believing that the Contracts have ceased to be so treated or that they might
not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
Commonwealth of Massachusetts and the Fund and the Underwriter represent that
their respective operations are and shall at all times remain in material
compliance with the laws of the Commonwealth of Massachusetts to the extent
required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the Commonwealth of Massachusetts and all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and
5
<PAGE>
that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the Commonwealth of Massachusetts and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, in an amount not less $5
million. The aforesaid includes coverage for larceny and embezzlement is issued
by a reputable bonding company. The Company agrees to make all reasonable
efforts to see that this bond or another bond containing these provisions is
always in effect, and agrees to notify the Fund and the Underwriter in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or in the
Fund's discretion, the Prospectus shall state that such Statement is available
from the Fund), and the Underwriter (or the Fund), at its expense, shall print
and provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3. The Fund, at its expense, shall provide the Company with copies
of its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
6
<PAGE>
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
7
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the
8
<PAGE>
Underwriter. No such payments shall be made directly by the Fund. Currently,
no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report) and, the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall
9
<PAGE>
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
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7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each trustee of the Board and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts
or sales literature for the Contracts (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
11
<PAGE>
fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied by
the Company, or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus,
or sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Company in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to
12
<PAGE>
notify the Company of any such claim shall not relieve the Company
from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also
shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Company to such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be liable
to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the
Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement,
13
<PAGE>
prospectus or sales literature for the Contracts not
supplied by the Underwriter or persons under its control)
or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses
14
<PAGE>
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of
this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the
15
<PAGE>
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party for any reason by 180 (six months) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the
use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
16
<PAGE>
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund may
fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements specified
in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written notice
to the Company, if either one or both of the Fund or the Underwriter
respectively, shall determine, in their sole judgment exercised in
good faith, that the Company and/or its affiliated companies has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to the
Company, if the Company gives the Fund and the Underwriter the
written notice specified in Section 1.6(b) hereof and at the time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be effective forty five
(45) days after the notice specified in Section 1.6(b) was given.
10.2. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"). Upon request, the
Company will promptly furnish to the Fund and the
17
<PAGE>
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, MA 01653
Attention: Rod Vessels
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
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<PAGE>
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP")), as soon as
practical and in any event within 90 days after the end of each
fiscal year;
(b) the Company's quarterly statements (statutory and GAAP), as
soon as practical and in any event within 45 days after the end
of each quarterly period:
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<PAGE>
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders and/or policyholders, as soon
as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
By its authorized officer,
By: /s/ Richard M. Reilly
-----------------------------
Title: Vice President
-----------------------------
Date: 2/18/94
-----------------------------
VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
By: /s/ J. Gary Burkhead
-----------------------------
Title: Senior Vice President
-----------------------------
Date: 3/2/94
-----------------------------
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By: /s/ Kurt A. Lange
-----------------------------
Title: President
-----------------------------
Date: 2/28/94
-----------------------------
20
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<S> <C>
Name of Separate Account and Contracts Funded
DATE ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT
Inheiritage Account, August 20, 1991 Variable Inheiritage Form Number 1026.1-94
VEL II - August 20, 1991 VEL '94 - Form Number 1018.1-94
VA-K - August 20, 1991 Exec-Annuity Plus - Form Number A3018.44-94
</TABLE>
21
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run" or
other activity, which will generate the names, addresses and number of units
which are attributed to each contractowner/policyholder (the "Customer") as
of the Record Date. Allowance should be made for account adjustments made
after this date that could affect the status of the Customers' accounts as
of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company either
before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card
before it is printed. Allow approximately 2-4 business days for printing
information on the Cards. Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
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<PAGE>
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided
and paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One
copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
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<PAGE>
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be calculated.
If the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
24
<PAGE>
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Allmerica Investment Trust
Delaware Group Premium Fund, Inc.
25
<PAGE>
Amendment to Schedule A to the Participation Agreement
among
Variable Insurance Products Fund
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
Whereas, First Allmerica Financial Life Insurance Company (the "Company";
formerly State Mutual Life Assurance Insurance Company of America), Variable
Insurance Products Fund, and Fidelity Distributors Corporation have previously
entered into a Participation Agreement dated February 18, 1994 ("Participation
Agreement"); and
Whereas, the Participation Agreement provides for the amendment of Schedule A
thereto by mutual written consent, the parties from time-to-time have so amended
Schedule A, and the parties now wish to consolidate said prior amendments to
Schedule A into a single document and to update Schedule A;
Now, therefore, the parties do hereby agree:
1. To amend and update Schedule A to the Participation Agreement by adopting the
attached Schedule A, dated July 15, 1997, and by substituting the attached
Schedule A for and any all prior amendments to Schedule A, as may have been
adopted from time-to-time.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
-------------------------
Name: Richard M. Reilly
-------------------------
Title: President
-------------------------
Date: July 16, 1997
-------------------------
VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION
By: /s/ By: /s/
------------------------- ------------------------
Name: Name:
------------------------- ------------------------
Title: Title:
------------------------- ------------------------
Date: Date:
------------------------- ------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Schedule A, as amended, to Participation Agreement dated February 18, 1994
(Dated 7/15/97)
Separate Account* Product Name Registration.
- ---------------- ------------ ------------
VEL II VEL '93 33-71056
(Variable Life) Policy Form 1018.1-94 811-8130
Inheiritage Inheiritage 33-74184
(Variable Life) Policy Form 1026.1-94 811-8304
Group VEL Group VEL 333-06383
(Variable Life) Policy Form 1029.1-94 811-7663
VA-K ExecAnnuity Plus 33-71052
(Annuity) Policy Form A3018-94 811-8814
Separate Account I Group IRA 33-47858
(Annuity) Policy Forms 811-8814
GA-IRA-2.00-92
GAC-IRA-2.00-92
Allmerica Select Select Resource 33-71058
(Annuity) Policy Form 811-8116
A3020-94 GRC
* The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991.
<PAGE>
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of the 1st day of March, 1994
by and among STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA, (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may be
amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
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<PAGE>
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
2
<PAGE>
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable annuity contracts with the form number(s) which are
listed on Schedule A attached hereto and incorporated herein by this reference,
as such Schedule A may be amended from time to time hereafter by mutual written
agreement of all the parties hereto, (the "Contracts") shall be invested in the
Fund, in such other Funds advised by the Adviser as may be mutually agreed to in
writing by the parties hereto, or in the Company's general account, provided
that such amounts may also be invested in an investment company other than the
Fund if (a) such other investment company, or series thereof, has investment
objectives or policies that are substantially different from the investment
objectives and policies of all the Portfolios of the Fund; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company so
informs the Fund and Underwriter prior to their signing this Agreement (a list
of such funds appearing on Schedule C to this Agreement); or (d) the Fund or
Underwriter consents to the use of such other investment company.
3
<PAGE>
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 132G of Chapter 175 of the Insurance Code of the
Commonwealth of Massachusetts and has registered or, prior to any issuance or
sale of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws and that the
Fund is and shall remain registered under the 1940 Act. The Fund shall amend
the Registration Statement for its shares under the 1933 Act and the 1940 Act
4
<PAGE>
from time to time as required in order to effect the continuous offering of its
shares. The Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated
as life insurance or annuity contracts, under applicable provisions of the Code
and that it will make every effort to maintain such treatment and that it will
notify the Fund and the Underwriter immediately upon having a reasonable basis
for believing that the Contracts have ceased to be so treated or that they might
not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
Commonwealth of Massachusetts and the Fund and the Underwriter represent that
their respective operations are and shall at all times remain in material
compliance with the laws of the Commonwealth of Massachusetts to the extent
required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the Commonwealth of Massachusetts and all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and
5
<PAGE>
that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the Commonwealth of Massachusetts and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, in an amount not less $5
million. The aforesaid includes coverage for larceny and embezzlement is issued
by a reputable bonding company. The Company agrees to make all reasonable
efforts to see that this bond or another bond containing these provisions is
always in effect, and agrees to notify the Fund and the Underwriter in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or in the
Fund's discretion, the Prospectus shall state that such Statement is available
from the Fund), and the Underwriter (or the Fund), at its expense, shall print
and provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3. The Fund, at its expense, shall provide the Company with copies
of its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
6
<PAGE>
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
7
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the
8
<PAGE>
Underwriter. No such payments shall be made directly by the Fund.
Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report) and, the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall
9
<PAGE>
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
10
<PAGE>
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each trustee of the Board and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts
or sales literature for the Contracts (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
11
<PAGE>
fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied by
the Company, or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus,
or sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Company in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to
12
<PAGE>
notify the Company of any such claim shall not relieve the Company
from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The
Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Company will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the
Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement,
13
<PAGE>
prospectus or sales literature for the Contracts not
supplied by the Underwriter or persons under its control)
or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses
14
<PAGE>
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of
this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the
15
<PAGE>
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party for any reason by 180 (six months) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the
use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
16
<PAGE>
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund may
fail to so qualify; or
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements specified
in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written notice
to the Company, if either one or both of the Fund or the Underwriter
respectively, shall determine, in their sole judgment exercised in
good faith, that the Company and/or its affiliated companies has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to the
Company, if the Company gives the Fund and the Underwriter the
written notice specified in Section 1.6(b) hereof and at the time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be effective forty five
(45) days after the notice specified in Section 1.6(b) was given.
10.2. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"). Upon request, the
Company will promptly furnish to the Fund and the
17
<PAGE>
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, MA 01653
Attention: Rod Vessels
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
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<PAGE>
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP")), as soon as
practical and in any event within 90 days after the end of each
fiscal year;
(b) the Company's quarterly statements (statutory and GAAP), as
soon as practical and in any event within 45 days after the end
of each quarterly period:
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<PAGE>
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders and/or policyholders, as soon
as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
By its authorized officer,
By: /s/ Richard M. Reilly
------------------------------
Title: Vice President
------------------------------
Date: 3/14/94
------------------------------
VARIABLE INSURANCE PRODUCTS FUND II
By its authorized officer,
By: /s/ J. Gary Burkhead
------------------------------
Title: Senior Vice President
------------------------------
Date: 3/18/94
------------------------------
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By: /s/ Kurt A. Lange
------------------------------
Title: President
------------------------------
Date: 3/24/94
------------------------------
20
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<S> <C>
Name of Separate Account and Contracts Funded
DATE ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT
Inheiritage Account, August 20, 1991 Variable Inheiritage Form Number 1026.1-94
VEL II - August 20, 1991 VEL '94 - Form Number 1018.1-94
VA-K - August 20, 1991 Exec-Annuity Plus - Form Number A3018.44-94
</TABLE>
21
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of units
which are attributed to each contractowner/policyholder (the "Customer") as
of the Record Date. Allowance should be made for account adjustments made
after this date that could affect the status of the Customers' accounts as
of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company either
before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card
before it is printed. Allow approximately 2-4 business days for printing
information on the Cards. Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
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<PAGE>
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided
and paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One
copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
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<PAGE>
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be calculated.
If the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
24
<PAGE>
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Allmerica Investment Trust
Delaware Group Premium Fund, Inc.
25
<PAGE>
Amendment to Schedule A to Participation Agreement
among
Variable Insurance Products Fund II
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
Whereas, First Allmerica Financial Life Insurance Company (the "Company";
formerly State Mutual Life Assurance Insurance Company of America), Variable
Insurance Products Fund II, and Fidelity Distributors Corporation have
previously entered into a Participation Agreement dated March 1, 1994
("Participation Agreement"); and
Whereas, the Participation Agreement provides for the amendment of Schedule A
thereto by mutual written consent, the parties from time-to-time have so amended
Schedule A, and the parties now wish to consolidate said prior amendments to
Schedule A into a single document and to update Schedule A;
Now, therefore, the parties do hereby agree:
1. To amend and update Schedule A to the Participation Agreement by adopting the
attached Schedule A, dated July 15, 1997, and by substituting the attached
Schedule A for and any all prior amendments to Schedule A, as may have been
adopted from time-to-time.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
-------------------------
Name: Richard M. Reilly
-------------------------
Title: President
-------------------------
Date: July 16, 1997
-------------------------
VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION
By: /s/ By: /s/
------------------------- ------------------------
Name: Name:
------------------------- ------------------------
Title: Title:
------------------------- ------------------------
Date: Date:
------------------------- ------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Schedule A, as amended, to Participation Agreement Dated March 1, 1994
(Dated 7/15/97)
Separate Account* Product Name Registration.
- ---------------- ------------ ------------
VEL II VEL '93 33-71056
(Variable Life) Policy Form 1018.1-94 811-8130
Inheiritage Inheiritage 33-74184
(Variable Life) Policy Form 1026.1-94 811-8304
Group VEL Group VEL 333-06383
(Variable Life) Policy Form 1029.1-94 811-7663
VA-K ExecAnnuity Plus 33-71052
(Annuity) Policy Form A3018-94 811-8814
* The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991.
<PAGE>
Form of
PARTICIPATION AGREEMENT
Among
DELAWARE GROUP PREMIUM FUND, INC.
And
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
And
DELAWARE DISTRIBUTORS, INC.
THIS AGREEMENT, made and entered into this ____ day of ___________, 1996
by and among DELAWARE GROUP PREMIUM FUND, INC., a corporation organized under
the laws of Maryland (the "Fund"), FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, a Massachusetts corporation (the "Company"), on its own behalf and
on behalf of each separate account of the Company named in Schedule 1 to this
Agreement as in effect at the time this Agreement is executed and such other
separate accounts that may be added to Schedule 1 from time to time in
accordance with the provisions of Article XI of this Agreement (each such
account referred to as the "Account"), and DELAWARE DISTRIBUTORS, INC., a
Delaware corporation (the "Distributor").
WHEREAS, the Fund is engaged in business as an open-end management
investment company and was established for the purpose of serving as the
investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts (collectively referred to
as "Variable Insurance Products," the owners of such products being referred
<PAGE>
to as "Product owners") to be offered by insurance companies which have
entered into participation agreements with the Fund ("Participating Insurance
Companies"); and
WHEREAS, the common stock of the Fund (the "Fund shares") consists of
separate series ("Series") issuing separate classes of shares ("Series
shares"), each such class representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, the Fund filed with the Securities and Exchange Commission (the
"SEC") and the SEC has declared effective a registration statement (referred
to herein as the "Fund Registration Statement" and the prospectus contained
therein, or filed pursuant to Rule 497 under the 1933 Act, referred to herein
as the "Fund Prospectus") on Form N-1A to register itself as an open-end
management investment company (File No. 811-5162) under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Fund shares
(File No. 33-14363) under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Company has filed or will file a registration statement
with the SEC to register under the 1933 Act certain variable annuity
contracts described in Schedule 2 to this Agreement as in effect at the time
this Agreement is executed and such other variable annuity contracts and
variable life insurance policies which may be added to Schedule 2 from time
to time in accordance with Article XI of this Agreement
- 2 -
<PAGE>
(such policies and contracts shall be referred to herein collectively as the
"Contracts," each such registration statement for a class or classes of
contracts listed on Schedule 2 being referred to as the "Contracts
Registration Statement" and the prospectus for each such class or classes
being referred to herein as the "Contracts Prospectus," and the owners of the
such contracts, as distinguished from all Product Owners, being referred to
as "Contract Owners"); and
WHEREAS, the Account, a validly existing separate account, duly
authorized by resolution of the Board of Directors of the Company on the date
set forth on Schedule 1, sets aside and invests assets attributable to the
Contracts; and
WHEREAS, the Company has registered or will have registered the Account
with the SEC as a unit investment trust under the 1940 Act before any
Contracts are issued by the Account; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
is a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD"); and
WHEREAS, the Distributor and the Fund have entered into an agreement
(the "Fund Distribution Agreement") pursuant to which the Distributor will
distribute Fund shares; and
WHEREAS, Delaware Management Company, Inc. (the "Investment Manager") is
registered as an investment adviser
- 3 -
<PAGE>
under the 1940 Act and any applicable state securities laws and serves as an
investment manager to the Fund pursuant to an agreement; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Series shares on behalf of the
Account to fund the Contracts and the Distributor is authorized to sell such
Series shares to unit investment trusts such as the Account at net asset
value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Distributor agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Distributor agrees to sell to the Company those Series shares
which the Company orders on behalf of the Account, executing such orders on a
daily basis in accordance with Section 1.4 of this Agreement.
1.2. The Fund agrees to make the shares of its Series available for
purchase by the Company on behalf of the Account at the then applicable net
asset value per share on Business Days as defined in Section 1.4 of this
Agreement, and the Fund shall use reasonable efforts to calculate such net
asset value on each such Business Day. Notwithstanding any other provision in
this Agreement to the contrary, the Board of Directors of the Fund (the "Fund
Board") may suspend or terminate the offering of Fund shares of any Series,
if such action is required by law or by
- 4 -
<PAGE>
regulatory authorities having jurisdiction or if, in the sole discretion of
the Fund Board acting in good faith and in light of its fiduciary duties
under Federal and any applicable state laws, suspension or termination is
necessary and in the best interests of the shareholders of any Series (it
being understood that "shareholders" for this purpose shall mean Product
owners).
1.3. The Fund agrees to redeem, at the Company's request, any full or
fractional shares of the Fund held by the Account or the Company, executing
such requests at the net asset value on a daily basis in accordance with
Section 1.4 of this Agreement, the applicable provisions of the 1940 Act and
the then currently effective Fund Prospectus. Notwithstanding the foregoing,
the Fund may delay redemption of Fund shares of any Series to the extent
permitted by the 1940 Act, any rules, regulations or orders thereunder, or
the then currently effective Fund Prospectus.
1.4.
(a) For purposes of Sections 1.1, 1.2 and 1.3, the Company shall
be the agent of the Fund for the limited purpose of receiving redemption and
purchase requests from the Account (but not from the general account of the
Company), and receipt on any Business Day by the Company as such limited
agent of the Fund prior to the time prescribed in the current Fund Prospectus
(which as of the date of execution of this Agreement is 4 p.m.) shall
constitute receipt by the Fund on that same Business Day, provided that the
Fund receives notice of such
- 5 -
<PAGE>
redemption or purchase request by 11:00 a.m. Eastern Time on the next
following Business Day. For purposes of this Agreement, "Business Day" shall
mean any day on which the New York Stock exchange is open for trading or as
otherwise provided in the Fund's then currently effective Fund Prospectus.
(b) The Company shall pay for shares of each Series on the same
day that it places an order with the Fund to purchase those Series shares.
Payment for Series shares will be made by the Account or the Company in
Federal Funds transmitted to the Fund by wire to be received by 11:00 a.m. on
the day the Fund is properly notified of the purchase order for Series shares
(unless sufficient proceeds are available from redemption of shares of other
Series). If Federal Funds are not received on time, such funds will be
invested, and Series shares purchased thereby will be issued, as soon as
practicable.
(c) Payment for Series shares redeemed by the Account or the
Company will be made in Federal Funds transmitted to the Company by wire on
the day the Fund is notified of the redemption order of Series shares (unless
redemption proceeds are applied to the purchase of shares of other Series),
except that the Fund reserves the right to delay payment of redemption
proceeds, but in no event may such payment be delayed longer than the period
permitted under Section 22(e) of the 1940 Act. Neither the Fund nor the
Distributor shall bear any responsibility whatsoever for the proper
disbursement or
- 6 -
<PAGE>
crediting of redemption proceeds; the Company alone shall be responsible for
such action.
1.5. Issuance and transfer of Fund shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate
ledger for the Account or the appropriate subaccount of the Account.
1.6. The Fund shall furnish notice as soon as reasonably practicable to
the Company of any income dividends or capital gain distributions payable on
any Series shares. The Company, on its behalf and on behalf of the Account,
hereby elects to receive all such dividends and distributions as are payable
on any Series shares in the form of additional shares of that Series. The
Company reserves the right, on its behalf and on behalf of the Account, to
revoke this election and to receive all such dividends in cash. The Fund
shall notify the Company of the number of Series shares so issued as payment
of such dividends and distributions.
1.7. The Fund shall use its best efforts to make the net asset value
per share for each Series available to the Company by 7 p.m. Eastern Time
each Business Day, and in any event, as soon as reasonably practicable after
the net asset value per share for such Series is calculated, and shall
calculate such net asset value in accordance with the then currently
effective Fund Prospectus. Neither the Fund, any Series, the Distributor, nor
the Investment Manager nor any of
- 7 -
<PAGE>
their affiliates shall be liable for any information provided to the Company
pursuant to this Agreement which information is based on incorrect
information supplied by the Company to the Fund, the Distributor or the
Investment Manager.
1.8. While this Agreement is in effect, the Company agrees that all
amounts available for investment under the Contracts (other than those listed
on Schedule 3) shall be invested only in the Fund and/or allocated to the
Company's general account, provided that such amounts may also be invested in
an investment company other than the Fund if: (a) such other investment
company is advised by the Fund's investment adviser; (b) the Fund and/or the
Distributor, in their sole discretion, consents to the use of such other
investment company; (c) there is a substitution of the Fund made in
accordance with Section 10.1(e) of this Agreement; or (d) this Agreement is
terminated pursuant to Article X of this Agreement. The Company also agrees
that it will not take any action to operate the Account as a management
investment company under the 1940 Act without the Fund's and Distributor's
prior written consent.
1.9. The Fund and the Distributor agree that Fund shares will be sold
only to Participating Insurance Companies and their separate accounts. The
Fund and the Distributor will not sell Fund shares to any insurance company
or separate account unless an agreement complying with Article VII of this
Agreement is in effect to govern such sales. No Fund shares of any Series
will be sold to the general public.
- 8 -
<PAGE>
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants (a) that the Contracts are
registered under the 1933 Act or will be so registered before the issuance
thereof, (b) that the Contracts will be issued in compliance in all material
respects with all applicable Federal and state laws and (c) that the Company
will require of every person distributing the Contracts (i) that the
Contracts be offered and sold in compliance in all material respects with all
applicable Federal and state laws and (ii) that at the time it is issued each
Contract is a suitable purchase for the applicant therefor under applicable
state insurance laws. The Company further represents and warrants that it is
an insurance company duly organized and in good standing under applicable law
and that it has legally and validly authorized the Account as a separate
account under Title 18, Section 2932 of the Massachusetts Insurance Code, and
has registered or, prior to the issuance of any Contracts, will register the
Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a separate account for the Contracts, and that it will
maintain such registration for so long as any Contracts are outstanding.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act and duly authorized for
issuance in accordance with applicable law and that the Fund is and shall
remain registered under the 1940 Act for so long as the Fund shares are sold.
The
- 9 -
<PAGE>
Fund further represents and warrants that it is a corporation duly organized
and in good standing under the laws of Maryland.
2.3. The Fund represents that it currently qualifies and will make
every effort to continue to qualify as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and
to maintain such qualification (under Subchapter M or any successor or
similar provision), and that it will notify the Company immediately upon
having a reasonable basis for believing that it has ceased to so qualify or
that it might not so qualify in the future.
2.4. The Fund represents that it will comply with Section 817(h) of the
Code, and all regulations issued thereunder.
2.5. The Company represents that the Contracts are currently and at the
time of issuance will be treated as annuity contracts or life insurance
policies, whichever is appropriate, under applicable provisions of the Code.
The Company shall make every effort to maintain such treatment and shall
notify the Fund and the Distributor immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that
they might not be so treated in the future.
2.6. The Fund represents that the Fund's investment policies, fees and
expenses, and operations are and shall at all times remain in material
compliance with the laws of the state of Delaware, to the extent required to
perform this Agreement and with any investment restrictions set forth on
Schedule 4, as
- 10 -
<PAGE>
amended from time to time by the Company in accordance with Section 6.6. The
Fund, however, makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) otherwise complies with the insurance laws or regulations of any
state. The Company alone shall be responsible for informing the Fund of any
investment restrictions imposed by state insurance law and applicable to the
Fund.
2.7. The Distributor represents and warrants that the Distributor is
duly registered as a broker-dealer under the 1934 Act, a member in good
standing with the NASD, and duly registered as a broker-dealer under
applicable state securities laws; its operations are in compliance with
applicable law, and it will distribute the Fund shares according to
applicable law.
2.8. The Distributor, on behalf of the Investment Manager, represents
and warrants that the Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940 and is in compliance with
applicable federal and state securities laws.
2.9. The Fund represents and warrants that it has and maintains a
fidelity bond in accordance with Rule 17g-1 under the 1940 Act.
- 11 -
<PAGE>
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; SALES MATERIAL AND OTHER
INFORMATION
3.1. The Distributor shall provide the Company (at its expense) with as
many copies of the current Fund Prospectus as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
the Fund Prospectus (including a final copy of the new prospectus as set in
type at the Distributor's expense) and other assistance as is reasonably
necessary in order for the Company to have a new Contracts Prospectus printed
together with the Fund Prospectus in one document (the cost of such printing
to be shared equally by the Company and the Distributor).
3.2. The Fund Prospectus shall state that the Statement of Additional
Information for the Fund is available from the Distributor (or, in the Fund's
discretion, the Fund Prospectus shall state that such Statement is available
from the Fund), and the Distributor (or the Fund) shall provide such
Statement free of charge to the Company and to any outstanding or prospective
Contract owner who requests such Statement.
3.3. The Fund (at its cost) shall provide the Company with copies of
its proxy material, shareholder reports and other communications to the
Company.
3.4. The Company shall not, without the prior written consent of the
Distributor (unless otherwise required by applicable law), solicit, induce or
encourage Contract owners to (a) charge the Fund's investment adviser or
contract with any
- 12 -
<PAGE>
sub-investment adviser, or (b) change, modify, substitute, add or delete the
Fund or other investment media.
3.5. The Company shall furnish each piece of sales literature or other
promotional material in which the Fund or the Investment Manager or the
Distributor is named to the Fund or the Distributor prior to its use. No such
material shall be used, except with the prior written permission of the Fund
or the Distributor. The Fund and the Distributor agree to respond to any
request for approval on a prompt and timely basis. Failure to respond shall
not relieve the Company of the obligation to obtain the prior written
permission of the Fund or the Distributor.
3.6. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund
other than the information or representations contained in the Fund
Registration Statement or Fund Prospectus, as such Registration Statement and
Prospectus may be amended or supplemented from time to time, or in reports or
proxy statements for the Fund, or in sales literature or other promotional
material approved by the Fund or by the Distributor, except with the prior
written permission of the Fund or the Distributor. The Fund and the
Distributor agree to respond to any request for permission on a prompt and
timely basis. Failure to respond shall not relieve the Company of the
obligation to obtain the prior written permission of the Fund or the
Distributor.
- 13 -
<PAGE>
3.7. The Fund and the Distributor shall not give any information or
make any representations on behalf of the Company or concerning the Company,
the Account or the Contracts other than the information or representations
contained in the Contracts Registration Statement or Contracts Prospectus, as
such Registration Statement and Prospectus may be amended or supplemented
from time to time, or in published reports of the Account which are in the
public domain or approved in writing by the Company for distribution to
Contract owners, or in sales literature or other promotional material
approved in writing by the Company, except with the prior written permission
of the Company. The Company agrees to respond to any request for permission
on a prompt and timely basis. Failure to respond shall not relieve the Fund
or the Distributor of the obligation to obtain the prior written permission
of the Company.
3.8. The Fund will provide to the Company at least one complete copy of
all Fund Registration Statements, Fund Prospectuses, Statements of Additional
Information, annual and semi-annual reports and other reports, proxy
statements, sales literature and other promotional materials, applications
for exemptions, requests for no-action letters, and all amendments or
supplements to any of the above, that relate to the Fund or Fund shares,
promptly after the filing of such document with the SEC or other regulatory
authorities.
3.9. The Company will provide to the Fund at least one complete copy of
all Contracts Registration Statements, Contracts
- 14 -
<PAGE>
Prospectuses, Statements of Additional Information, reports, solicitations
for voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
amendments or supplements to any of the above, that relate to the Contracts
or those Sub-Accounts of the Account to which Contract purchase payments and
value are allocable, promptly after the filing of such document with the SEC
or other regulatory authorities.
3.10. Each party will provide to the other party copies of draft
versions of any registration statements, prospectuses, statements of
additional information, reports, proxy statements, solicitations for voting
instructions, sales literature and other promotional materials, applications
for exemptions, requests for no-action letters, and all amendments or
supplements to any of the above, to the extent that the other party
reasonably needs such information for purposes of preparing a report or other
filing to be filed with or submitted to a regulatory agency. If a party
requests any such information before it has been filed, the other party
will provide the requested information if then available and in the version
then available at the time of such request.
3.11. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine or
other periodical, radio, television, telephone or tape recording, videotape dis-
- 15 -
<PAGE>
play, signs or billboards, motion pictures or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration
statements, prospectuses, Statements of Additional Information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under NASD rules, the 1940 Act or the 1933 Act.
ARTICLE IV. VOTING
Subject to applicable law, the Company shall:
(a) solicit voting instructions from Contract owners;
(b) vote Fund shares of each Series attributable to Contract
owners in accordance with instructions or proxies timely
received from such Contract owners;
(c) vote Fund shares of each Series attributable to Contract
owners for which no instructions have been received in the
same proportion as Fund shares of such Series for which
instructions have been timely received; and
(d) vote Fund shares of each Series held by the Company on its own
behalf or on behalf of the Account that are not attributable
to Contract owners in the same proportion as Fund shares of
such Series for which instructions have been timely received.
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<PAGE>
The Company shall be responsible for assuring that voting privileges for the
Account are calculated in a manner consistent with the provisions set forth
above and with other Participating Insurance Companies.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Distributor shall pay no fee or other compensation to
the Company under this Agreement, except that if the Fund or any Series
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses, then the Distributor may make payments to the
Company in amounts agreed to by the Company and the Distributor in writing.
Currently, no such payments are contemplated. The Fund currently does
not intend to make any payments to finance distribution expenses pursuant to
Rule 12b-1 under the 1940 Act or in contravention of such rule, although it
may make payments pursuant to Rule 12b-1 in the future.
5.2. All expenses incident to performance by the Fund under this
Agreement (including expenses expressly assumed by the Fund pursuant to this
Agreement) shall be paid by the Fund to the extent permitted by law. Except
as may otherwise be provided in Sections 1.4 and 3.1 of this Agreement (or
Article VII, as it may be amended), the Company shall not bear any of the
expenses for the cost of registration and qualification of the Fund shares
under Federal and any state securities law, preparation and filing of the
Fund Prospectus and Fund Registration Statement,
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<PAGE>
Fund proxy materials and reports, setting the Prospectus in type, setting in
type and printing and distributing the Fund proxy materials and reports to
shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by
any Federal or state securities law, all taxes on the issuance or transfer of
Fund shares, and any expenses permitted to be paid or assumed by the Fund
pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
ARTICLE VI. COMPLIANCE UNDERTAKINGS
6.1. The Fund undertakes to comply with Subchapter M and Section 817(h)
of the Code, and all regulations issued thereunder.
6.2. The Company shall amend the Contracts Registration Statement under
the 1933 Act and the Account's Registration Statement under the 1940 Act from
time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws of the various states.
6.3. The Fund shall amend the Fund Registration Statement under the
1933 Act and the 1940 Act from time to time as required in order to effect
for so long as Fund shares are sold the continuous offering of Fund shares as
described in the
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<PAGE>
the currently effective Fund Prospectus. The Fund shall register and qualify
Fund shares for sale to the extent required by applicable securities laws of
the various states.
6.4. The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Code, will identify such Contract as
a modified endowment contract (or policy).
6.5. To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the Fund undertakes to have a Fund Board of
Directors, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
6.6. The Company shall amend Schedule 4 when appropriate in order to
inform the Fund of any applicable investment restrictions with which the Fund
must comply.
ARTICLE VII. POTENTIAL CONFLICTS
The parties to this Agreement acknowledge that the Fund intends to file
an application with the SEC to request an order granting relief from various
provisions of the 1940 Act and the rules thereunder to the extent necessary
to permit Fund shares to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated
Participating Insurance Companies. The parties to this Agreement
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<PAGE>
agree than any conditions or undertakings that may be imposed on the Company,
the Fund and/or the Distributor by virtue of such order shall be incorporated
herein by this reference, as of the date such order is granted, as though set
forth herein in full, and such parties agree to comply with such conditions
and undertakings to the extent applicable to each such party. The Fund and
the Distributor will not enter into a participation agreement with any other
Participating Insurance Company unless it imposes the same conditions and
undertakings incorporated by reference herein on the parties to such
agreement.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification by the Company
The Company agrees to indemnify and hold harmless the Fund, the
Distributor and each person who controls or is associated with the Fund or
the Distributor within the meaning of such terms under the federal securities
laws and any officer, trustee, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar
as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any
- 20 -
<PAGE>
material fact contained in the Contracts Registration
Statement, Contracts Prospectus, sales literature
or other promotional material for the Contracts
or the Contracts themselves (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in
light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission or such alleged statement or alleged
omission was made in reliance upon and in conformity with
information furnished in writing to the Company by the Fund
or the Distributor (or a person authorized in writing to do
so on behalf of the Fund or the Distributor) for use in the
Contracts Registration Statement, Contracts Prospectus or in
the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact by or on behalf
of the Company (other than statements or representations
contained in the Fund Registration Statement, Fund Prospectus
or sales literature or other promotional material of the Fund
not supplied by the Company or persons under its control) or
wrongful conduct of the Company or persons under its control
with respect to the sale or distribution of the Contracts or
Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Fund Registration
Statement, Fund Prospectus or sales literature or other
promotional material of the Fund or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances in which they were made, if such
statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company; or
(d) arise as a result of any failure by the Company to provide
the services and furnish the materials or
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<PAGE>
to make any payments under the terms of this Agreement; or
(e) arise out of any material breach by the Company of this
Agreement, including but not limited to any failure to
transmit a request for redemption or purchase of Fund shares
on a timely basis in accordance with the procedures set forth
in Article I.
This indemnification will be in addition to any liability which the Company
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.2. Indemnification by the Distributor
The Distributor agrees to indemnify and hold harmless the Company and
each person who controls or is associated with the Company within the meaning
of such terms under the federal securities laws and any officer, director,
employee or agent of the foregoing, against any and all losses, claims,
damages or liabilities, joint or several (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim asserted),
to which they or any of them may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Fund Registration Statement, Fund Prospectus (or any
amendment or
- 22 -
<PAGE>
supplement thereto) or sales literature or other promotional
material of the Fund, or arise out of or are based
upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in
light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission or alleged statement or alleged
omission was made in reliance upon and in conformity with
information furnished in writing by the Company to the Fund
or the Distributor for use in the Fund Registration
Statement, Fund Prospectus (or any amendment or supplement
thereto) or sales literature for the Fund or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact by the
Distributor or the Fund (other than statements or
representations contained in the Fund Registration Statement,
Fund Prospectus or sales literature or other promotional
material of the Fund not supplied by the Distributor or the
Fund or persons under their control) or wrongful conduct of
the Distributor or persons under its control with respect to
the sale or distribution of the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Contract's Registration
Statement, Contracts Prospectus or sales literature or other
promotional material for the Contracts (or any amendment or
supplement thereto), or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information
furnished in writing by the Distributor or the Fund to the
Company (or a person authorized in writing to do so on behalf
of the Fund or the Distributor); or
(d) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
- 23 -
<PAGE>
requirements specified in Article VI of this Agreement); or
(e) arise out of any material breach by the Distributor or the
Fund of this Agreement.
This indemnification will be in addition to any liability which the
Distributor may otherwise have; provided, however, that no party shall be
entitled to indemnification if such loss, claim, damage or liability is due
to the wilful misfeasance, bad faith, gross negligence or reckless disregard
of duty by the party seeking indemnification.
8.3. Indemnification Procedures
After receipt by a party entitled to indemnification ("indemnified
party") under this Article VIII of notice of the commencement of any action,
if a claim in respect thereof is to be made by the indemnified party against
any person obligated to provide indemnification under this Article VIII
("indemnifying party"), such indemnified party will notify the indemnifying
party in writing of the commencement thereof as soon as practicable
thereafter, provided that the omission to so notify the indemnifying party
will not relieve it from any liability under this Article VIII, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result
of the failure to give such notice. The indemnifying party, upon the request
of the indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others
the indemnifying party may
- 24 -
<PAGE>
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of
- 25 -
<PAGE>
the state of Delaware, without giving effect to the principles of conflicts
of laws.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant, and the terms hereof shall be limited, interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon six months advance written
notice to the other parties, such termination to be effective no earlier than
one year following the date on which the first Contract is issued to the
public; or
(b) at the option of the Company if shares of any Series are not
reasonably available to meet the requirements of the Contracts as determined
by the Company. Prompt notice of the election to terminate for such cause
shall be furnished by the Company, said termination to be effective ten days
after receipt of notice unless the Fund makes available a sufficient number
of Fund shares to meet the requirements of the Contracts within said ten-day
period; or
(c) at the option of the Fund upon institution of formal
proceedings against the Company by the NASD, the SEC, the insurance
commission of any state or any other regulatory body
- 26 -
<PAGE>
regarding the Company's duties under this Agreement or related to the sale of
the Contracts, the operation of the Account, the administration of the
Contracts or the purchase of Fund shares, or an expected or anticipated
ruling, judgment or outcome which would, in the Fund's reasonable judgment,
materially impair the Company's ability to meet and perform the Company's
obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund by the NASD, the SEC, or any state securities or
insurance commission or any other regulatory body; or
(e) upon requisite vote of the Contract owners having an interest
in the affected Series and the written approval of the Distributor (unless
otherwise required by applicable law), to substitute the shares of another
investment company for the corresponding Series shares of the Fund in
accordance with the terms of the Contracts; or
(f) at the option of the Fund in the event any of the Contracts
are not registered, issued or sold in accordance with applicable Federal
and/or state law; or
(g) by either the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of disinterested Fund Board
members, that an irreconcilable material conflict exists among the interests
of (i) all Product owners or (ii) the interests of the Participating
Insurance Companies investing in the Fund; or
- 27 -
<PAGE>
(h) at the option of the Company if the Fund ceases to qualify as
a Regulated Investment Company under Sub-chapter M of the Code, or under any
successor or similar provision, or if the Company reasonably believes based
on an opinion of counsel satisfactory to the Fund that the Fund may fail to
so qualify; or
(i) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Section 817(h) of the Code and any
regulations thereunder; or
(j) at the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable, under the Code,
or if the Fund reasonably believes that the Contracts may fail to so qualify;
or
(k) at the option of either the Fund or the Distributor if the
Fund or the Distributor, respectively, shall determine, in their sole
judgment exercised in good faith, that either (1) the Company shall have
suffered a material adverse change, in its business or financial condition or
(2) the Company shall have been the subject of material adverse publicity
which is likely to have a material adverse impact upon the business and
operations or either the Fund or the Distributor; or
(l) at the option of the Company, if the Company shall determine,
in its sole judgment exercised in good faith, that the Fund or the
Distributor shall have been the subject of material adverse publicity which
is likely to have a material
- 28 -
<PAGE>
adverse impact upon the business and operations of the Company; or
(m) upon the assignment of this Agreement (including, without
limitation, any transfer of the Contracts or the Account to another insurance
company pursuant to an assumption reinsurance agreement) unless the
non-assigning party consents thereto or unless this Agreement is assigned to
an affiliate of the Distributor.
10.2. NOTICE REQUIREMENT. Except as otherwise provided in Section
10.1, no termination of this Agreement shall be effective unless and until
the party terminating this Agreement gives prior written notice to all other
parties to this Agreement of its intent to terminate which notice shall set
forth the basis for such termination. Furthermore:
(a) In the event that any termination is based upon the provisions
of Article VII or the provisions of Section 10.1(a) of this Agreement, such
prior written notice shall be given in advance of the effective date of
termination as required by such provisions; and
(b) in the event that any termination is based upon the
provisions of Section 10.1(c) or 10.1(d) of this Agreement, such prior
written notice shall be given at least ninety (90) days before the effective
date of termination.
(c) in the event that any termination is based upon the provisions
of Section 10.1(e) of this Agreement, such prior written notice shall be
given at least sixty (60) days
- 29 -
<PAGE>
before the date of any proposed vote to replace the Fund's shares.
10.3. Except as necessary to implement Contract owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem Fund shares attributable to the Contracts (as
opposed to Fund shares attributable to the Company's assets held in the
Account).
10.4. EFFECT OF TERMINATION
(a) Notwithstanding any termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor may, at the
option of the Fund, continue to make available additional Fund shares for so
long after the termination of this Agreement as the Fund desires pursuant to
the terms and conditions of this Agreement as provided in paragraph (b)
below, for all Contracts in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, if the Fund or Distributor so elects to
made additional Fund shares available, the owners of the Existing Contracts
or the Company, whichever shall have legal authority to do so, shall be
permitted to reallocate investments in the Fund, redeem investments in the
Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts.
(b) In the event of a termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor shall promptly
notify the Company whether the
- 30 -
<PAGE>
Distributor and the Fund will continue to make Fund shares available after
such termination. If Fund shares continue to be made available after such
termination, the provisions of this Agreement shall remain in effect except
for Section 10.1(a) and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 10.4, upon
prior written notice to the other party, such notice to be for a period that
is reasonable under the circumstances but, if given by the Fund, need not be
for more than six months.
(c) The parties agree that this Section 10.4 shall not apply to
any termination made pursuant to Article VII or any conditions or
undertakings incorporated by reference in Article VII, and the effect of such
Article VII termination shall be governed by the provisions set forth or
incorporated by reference therein.
ARTICLE XI. APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect changes in or relating to the Contracts and to
add new classes or variable annuity contracts and variable life insurance
policies to be issued by the Company through a Separate Account investing in
the Fund. The provisions of this Agreement shall be equally applicable to
each such class of contracts or policies, unless the context otherwise
requires.
- 31 -
<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
Delaware Group Premium Fund, Inc.
Ten Penn Center Plaza
Philadelphia, PA 19103
Attn: Daniel J. O'Brien
If to the Company:
Abigail M. Armstrong
Secretary and Counsel
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01605
If to the Distributor:
Mr. Michael P. Drennan
Vice President
Delaware Distributors, Inc.
Ten Penn Center Plaza
Philadelphia, PA 19103
ARTICLE XIII. MISCELLANEOUS
13.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
13.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
- 32 -
<PAGE>
13.3. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.4. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
13.5. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate or trust action, as
applicable, by such party, and when so executed and delivered this Agreement
will be the valid and binding obligation of such party enforceable in
accordance with its terms.
- 33 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized officer on the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
(Company)
Date: , 1996 By:
------------ ----------------------------
Name:
Title:
DELAWARE GROUP PREMIUM FUND, INC.
(Fund)
Date: , 1996 By:
------------ ----------------------------
Name:
Title:
DELAWARE DISTRIBUTORS, INC.
(Distributor)
Date: , 1996 By:
------------ ----------------------------
Name:
Title:
<PAGE>
SCHEDULE 1
Separate Accounts of First Allmerica Financial Life Insurance Company
Investing in the Fund
As of December ___, 1996
NAME OF ACCOUNT DATE ESTABLISHED
- --------------- ----------------
Separate Account VA-K November 1, 1990
of First Allmerica Financial Life
Insurance Company
<PAGE>
SCHEDULE 2
Variable Annuity Contracts
and Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of ____________, 1991
Individual Variable Annuity Policies
funded by sub-accounts of Separate Account VA-K
and investing in shares of
Delaware Group Premium Fund, Inc.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of December 23, 1991
Individual Variable Annuity Policies Marketed
under the name "ExecAnnuity Plus"
<PAGE>
SCHEDULE 4
Investment Restrictions
Applicable to the Fund
As of ___________, 1996
<PAGE>
FIRST AMENDMENT TO
PARTICIPATION AGREEMENT
THIS FIRST AMENDMENT (the "Amendment Agreement") to the Participation
Agreement dated December 23, 1991 (the "Participation Agreement") by and among
DELAWARE GROUP PREMIUM FUND, INC. (the "FUND"), SMA LIFE ASSURANCE COMPANY
("SMA"), on its own behalf and on behalf of each separate account of SMA, and
DELAWARE DISTRIBUTORS, INC. (the "DISTRIBUTOR") is made as of the first day of
April, 1994 by and among the FUND, the DISTRIBUTOR, SMA, on its own behalf and
on behalf of each separate account of SMA named in Schedule 1 to this Amendment
Agreement as in effect as of the time this Amendment Agreement is executed and
such other separate accounts of SMA that may be added to Schedule 1 from time to
time in accordance with the provisions of Article XI of the Participation
Agreement (each such account referred to as the "SMA Account"), and STATE MUTUAL
LIFE ASSURANCE COMPANY OF AMERICA ("STATE MUTUAL"), on its own behalf and on
behalf of each separate account of STATE MUTUAL named in Schedule 1 to this
Amendment Agreement as in effect as of the time this Amendment Agreement is
executed and such other separate accounts of STATE MUTUAL that may be added to
Schedule 1 from time to time in accordance with the provisions of Article XI of
the Participation Agreement (each such account referred to as the "STATE MUTUAL
Account").
WHEREAS, the FUND, SMA, and the DISTRIBUTOR previously entered into the
Participation Agreement; and
<PAGE>
WHEREAS, the FUND, SMA, and the DISTRIBUTOR wish to add STATE MUTUAL as a
party to the Participation Agreement to enable STATE MUTUAL to purchase shares
of common stock issued by the various series of the FUND on behalf of the STATE
MUTUAL Account;
NOW THEREFORE, for consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound, the FUND, the
DISTRIBUTOR, SMA, and STATE MUTUAL agree as follows:
1. Effective as of the date hereof, STATE MUTUAL shall be a party to the
Participation Agreement and shall independently be entitled to the same rights
and subject to the same obligations, covenants, conditions, undertakings and
liabilities under the Participation Agreement as SMA.
2. Effective as of the date hereof, STATE MUTUAL hereby makes, on its own
behalf and in respect of the STATE MUTUAL Account and Contracts (as defined in
the Participation Agreement) issued by STATE MUTUAL and not on behalf of SMA nor
in respect of the SMA Account or Contracts issued by SMA, the representations
and warranties set forth in Sections 2.1 and 2.5 of the Participation Agreement.
3. Effective as of the date hereof, all references in the Participation
Agreement to "the Company" shall hereafter be references to "SMA and/or STATE
MUTUAL, as the case may be."
2
<PAGE>
4. Effective as of the date hereof, the term "the Account" in the
Participation Agreement shall hereafter be read to include the SMA Account
and/or the STATE MUTUAL Account, as the case may be.
5. Effective as of the date hereof, except as otherwise set forth herein,
the term "Contracts" in the Participation Agreement shall hereafter be read to
include Contracts issued by SMA and/or Contracts issued by STATE MUTUAL, as the
case may be.
6. Schedules 1, 2, and 3 to the Participation Agreement are hereby amended
and restated in their entirety as set forth on Schedules 1, 2, and 3,
respectively, to this Amendment Agreement.
7. All references in the Participation Agreement to the "Investment
Manager" shall hereafter be references to Delaware Management Company, Inc. or
Delaware International Advisers Ltd., as appropriate.
8. With respect to the termination provisions set forth in Article X of
the Participation Agreement, (i) any notice provided by or option exercised by
SMA shall be operative solely with respect to SMA, and (ii) any notice provided
by or option exercised by STATE MUTUAL shall be operative solely with respect to
STATE MUTUAL.
9. All notices to be provided to any party to the Participation Agreement,
as amended, shall be sent in accordance with Article XII of the Participation
Agreement at the address of such party set forth below or at such other address
as such party may from time to time specify in writing to the other parties:
3
<PAGE>
If to the FUND:
Delaware Group Premium Fund, Inc.
1818 Market Street
Philadelphia, PA 19103
Attn: Daniel J. O'Brien
If to SMA:
Lila M. Weihs
Director, Annuity Products
SMA Life Assurance Company
440 Lincoln Street
Worcester, MA 01653
If to the DISTRIBUTOR:
Delaware Distributors, Inc.
1818 Market Street
Philadelphia, PA 19103
Attn: Michael P. Drennan, Vice President
If to STATE MUTUAL:
Lila M. Weihs
Director, Annuity Products
State Mutual Life Assurance Company of the America
440 Lincoln Street
Worcester, MA 01653
10. All other provisions of the Participation Agreement not amended by
this Amendment Agreement shall remain in full force and effect as set forth in
the Participation Agreement.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
Agreement to be executed in its name and on its behalf by its duly authorized
officer as of the date first set forth above.
STATE MUTUAL LIFE ASSURANCE SMA LIFE ASSURANCE COMPANY
COMPANY OF AMERICA
By: /s/ Richard M. Reilly By: /s/ Richard M. Reilly
--------------------------- ---------------------------
Name: Richard M. Reilly Name: Richard M. Reilly
Title: Vice President Title: Vice President
DELAWARE GROUP PREMIUM DELAWARE DISTRIBUTORS, INC.
FUND, INC.
By: /s/ By: /s/
--------------------------- ---------------------------
Name: Name:
Title: Title:
5
<PAGE>
SCHEDULE 1
Separate Accounts of SMA Life Assurance Company
and State Mutual Life Assurance Company of America
Investing in the Fund
As of April 1, 1994
Name of Account Date Established
- --------------- ----------------
Separate Account VA-K November 1, 1990
of SMA Life Assurance Company
Separate Account VEL June 3, 1987
of SMA Life Assurance Company
Separate Account VEL II January 21, 1993
of SMA Life Assurance Company
Separate Account Inheiritage* September 15, 1993
of SMA Life Assurance Company
Separate Account VA-K of August 20, 1991
State Mutual Life Assurance
Company of America
Separate Account VEL-II August 20, 1991
of State Mutual Life Assurance
Company of America
Separate Account Inheiritage* August 20, 1991
of State Mutual Life Assurance
Company of America
* Regulatory approvals are pending for the Inheiritage products.
<PAGE>
SCHEDULE 2
(continued)
Variable Annuity Contracts
and Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of April 1, 1994
State Mutual Life Assurance Company of America
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund,
Inc.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-K and investing in shares of the International Equity Series
of Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity.
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage* Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund, Inc.
* Regulatory approvals are currently pending for the Inheiritage product.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of April 1, 1994
SMA Life Assurance Company
Individual Variable Annuity Policies Marketed under the name "ExecAnnuity Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL"
Individual Variable Life Insurance Policies Marketed under the name "VEL Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies to be Marketed under the name
"Inheiritage" *
State Mutual Life Assurance Company of America
Individual Variable Annuity Policies Marketed under the name "ExecAnnuity Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies to be Marketed under the name
"Inheiritage"*
*Regulatory approvals are currently pending for the Inheiritage product.
<PAGE>
PARTICIPATION AGREEMENT
AMONG
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.
AND
STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of this 1st day of May, 1995 by
and among STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA (hereinafter, the
"Company"), a Massachusetts insurance company, on its own behalf and on behalf
of each segregated asset account of the Company set forth on Schedule A hereto
as may be amended from time to time (each account hereinafter referred to as
the "Account"), and T. ROWE PRICE INTERNATIONAL SERIES, INC., a corporation
organized under the laws of Maryland (hereinafter referred to as the "Fund")
and T. ROWE PRICE INVESTMENT SERVICES, INC. (hereinafter the "Underwriter"),
a Maryland corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is or will be available to act as the investment
vehicle for separate accounts established for variable life insurance and
variable annuity contracts (the "Variable Insurance Products") to be offered
by insurance companies which have entered into participation agreements with
the Fund and Underwriter (hereinafter "Participating Insurance Companies");
and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest
in a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has filed an application to obtain an order from the
Securities and Exchange Commission ("SEC") granting Participating Insurance
Companies and variable annuity and variable life insurance separate accounts
exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of
the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act")
and Rules 6e-2(b)(15) and 6e-3(T) (b)(15) thereunder, if and to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under
the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
-2-
WHEREAS, Rowe Price-Fleming International, Inc. (hereinafter referred to
as the "Adviser") is duly registered as an investment adviser under the
federal Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts supported wholly or partially
by the Account (the "Contracts") under the 1933 Act, and said Contracts are
listed in Schedule A hereto, as it may be amended from time to time by mutual
written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set
aside and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed
in Schedule A hereto, as it may be amended from time to time by mutual
written agreement (the "Designated Portfolios") on behalf of the Account to
fund the aforesaid Contracts, and the Underwriter is authorized to sell such
shares to unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios
available for purchase at the applicable net asset value per share by the
Company and the Account on those days on which the Fund calculates its net
asset value pursuant to rules of the SEC, and the Fund shall use reasonable
efforts to calculate such net asset value on each day which the New York
Stock Exchange is open for trading. Notwithstanding the foregoing, the Board
of Directors of the Fund (hereinafter the "Board") may refuse to sell shares
of any Designated Portfolio to any person, or suspend or terminate the
offering of shares of any Designated Portfolio if such action is required by
law or by regulatory authorities having jurisdiction, or is, in the sole
discretion of the Board acting in good faith and in light of their fiduciary
duties under federal and any applicable state laws, necessary in the best
interests of the shareholders of such Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts.
No shares of any Designated
<PAGE>
-3-
Portfolios will be sold to the general public. The Fund and the Underwriter
will not sell Fund shares to any insurance company or separate account unless
an agreement containing provisions substantially the same as Articles I and
VII of this Agreement is in effect to govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except
that the Fund reserves the right to suspend the right of redemption or
postpone the date of payment or satisfaction upon redemption consistent with
Section 22(e) of the 1940 Act and any sales thereunder, and in accordance
with the procedures and policies of the Fund as described in the then current
prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Account, and receipt by such designee shall constitute receipt by the Fund;
provided that the Company receives the order by 4:00 p.m. Baltimore time and
the Fund receives notice of such order by 9:30 a.m. Baltimore time on the
next following Business Day. "Business Day" shall mean any day on which the
New York Stock Exchange is open for trading and on which the Fund calculates
its net asset value pursuant to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the then current prospectus of the Fund and
in accordance with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares on the next Business Day
after receipt of an order to purchase Fund shares. Payment shall be in
federal funds transmitted by wire by 3:00 p.m. Baltimore time. If payment in
Federal Funds for any purchase is not received or is received by the Fund
after 3:00 p.m. Baltimore time on such Business Day, the Company shall
promptly, upon the Fund's request, reimburse the Fund for any charges, costs,
fees, interest or other expenses incurred by the Fund in connection with any
advances to, or borrowings or overdrafts by, the Fund, or any similar
expenses incurred by the Fund, as a result of portfolio transactions effected
by the Fund based upon such purchase request. For purposes of Section 2.8 and
2.9 hereof, upon receipt by the Fund of the federal funds so wired, such
funds shall cease to be the responsibility of the Company and shall become
the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for
each Account or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Designated Portfolio's shares. The
Company hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on Designated Portfolio shares in additional
shares of that Portfolio. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions. The Fund
shall use its best efforts to furnish advance notice of the day such
dividends and distributions are expected to be paid.
<PAGE>
-4-
1.10 The Fund shall make the net asset value per share for each
Designated Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated
(normally by 6:30 p.m. Baltimore time) and shall use its best efforts to make
such net asset value per share available by 7 p.m. Baltimore time.
1.11 The Parties hereto acknowledge that the arrangement contemplated
by this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the
cash value of the Contracts may be invested in other investment companies,
provided, however, that (a) such other investment company, or series thereof,
has investment objectives or policies that are substantially different from
the investment objectives and policies of the Fund; or (b) the Company gives
the Fund and the Underwriter 45 days written notice of its intention to make
such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company
so informs the Fund and Underwriter prior to their signing this Agreement; or
(d) the Fund or Underwriter consents to the use of such other investment
company, such consent not to be unreasonably withheld.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold
in compliance in all material respects with all applicable federal and state
laws and that the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements. The Company further represents
and warrants that it is an insurance company duly organized and in good
standing under applicable law and that it has legally and validly established
the Account prior to any issuance or sale thereof as a segregated asset
account under the Massachusetts insurance laws and has registered or, prior
to any issuance or sale of the Contracts, will register the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2 The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws and that
the Fund is and shall remain registered under the 1940 Act. The Fund shall
amend the Registration Statement for its shares under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states only if and to the
extent deemed advisable by the Fund or the Underwriter.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
may make such payments in the future. To the extent that it decides to
finance distribution expenses pursuant to Rule 12b-1, the Fund will undertake
to have a Board, a majority of whom are not interested persons of the Fund,
formulate and approve any plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the
various states, except that the Fund represents that the Fund's investment
policies, fees and expenses are and shall at all times remain in compliance
with the laws of the Commonwealth of Massachusetts to the extent required to
perform this Agreement.
<PAGE>
-5-
2.5 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the Commonwealth of Massachusetts and
any applicable state and federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state
securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the Commonwealth
of Massachusetts and any applicable state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Fund
are and shall continue to be at all times covered by a blanket fidelity bond
or similar coverage for the benefit of the Fund in an amount not less than
the minimum coverage as required currently by Rule 17g-1 of the 1940 Act
or related provisions as may be promulgated from time to time. The aforesaid
bond shall include coverage for larceny and embezzlement and shall be issued
by a reputable bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
employed or controlled by the Company dealing with the money and/or
securities of the Fund are covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund, in an amount not less than $5 million.
The aforesaid bond includes coverage for larceny and embezzlement and is
issued by a reputable bonding company. The Company agrees to make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION, AND PROXY
STATEMENTS; VOTING
3.1 The Underwriter shall provide the Company with as many copies of
the Fund's current prospectus as the Company may reasonably request. If
requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the new prospectus as set in type at
the Fund's expense) and other assistance as is reasonably necessary in order
for the Company once each year (or more frequently if the prospectus for the
Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document.
The Underwriter shall bear the expense of printing copies of its
current prospectus that will be distributed to existing Contract owners and
the Company shall bear the expense of printing copies of the Fund's
prospectus that are used in connection with offering the Contracts issued by
the Company.
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company
(or, in the Fund's discretion, from the Fund), and the Underwriter (or the
Fund), at its expense, shall print, or otherwise reproduce, and provide a
copy of such SAI free of charge to the Company for itself and for any owner
of a Contract who requests such SAI.
<PAGE>
-6-
3.3 The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. The Underwriter, at the Company's expense,
shall provide the Company with copies of the Fund's annual and semi-annual
reports to shareholders in such quantity as the Company shall reasonably
request for use in connection with offering the Variable Contracts issued by
the Company. If requested by the Company in lieu thereof, the Underwriter
shall provide such documentation (which may include a final copy of the
Fund's annual and semi-annual reports as set in type or in camera-ready copy)
and other assistance as is reasonably necessary in order for the Company (at
the Company's expense) to print such shareholder communications for
distribution to Contract Owners.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Designated Portfolio for which instructions have been
received.
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract owners or to
the extent otherwise required by law. The Company reserves the right to vote
Fund shares held in any segregated asset account in its own right, to the
extent permitted by law.
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive
Order and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well
as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund
will act in accordance with the SEC's interpretation of the requirements of
Section 16(a) with respect to periodic elections of directors or trustees and
with whatever rules the SEC may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material that the Company develops or uses and in which the Fund (or a
Portfolio thereof) or the Adviser or the Underwriter is named, at least
fifteen calendar days prior to its use. No such material shall be used if the
Fund or its designee reasonably object to such use within fifteen calendar
days after receipt of such material. The Fund or its designee reserves the
right to reasonably object to the continued use of such material, and no such
material shall be used if the Fund or its designee so object.
<PAGE>
-7-
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus or SAI
for the Fund shares, as such registration statement and prospectus or SAI may
be amended or supplemented from time to time, or in reports or proxy
statements for the Fund, or in sales literature or other promotional material
approved by the Fund or its designee or by the Underwriter, except with the
permission of the Fund or the Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company, each piece of sales literature or
other promotional material in which the Company, and/or its Account, is named
at least fifteen calendar days prior to its use. No such material shall be
used if the Company reasonably objects to such use within fifteen calendar
days after receipt of such material. The Company reserves the right to
reasonably object to the continued use of such material and no such material
shall be used if the Company so objects.
4.4 The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
the Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts,
as such registration statement, prospectus or SAI may be amended or
supplemented from time to time, or in published reports for the Account which
are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material
approved by the Company or its designee, except with the permission of the
Company.
4.5 The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, SAIs, reports, proxy statements,
sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Fund or its shares, contemporaneously with the
filing of such document(s) with the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, SAIs, reports, solicitations for
voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Contracts or the Account,
contemporaneously with the filling of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and
other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine,
or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, including brochures,
circulars, reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, and registration
statements, prospectuses, SAIs, shareholder reports, proxy materials, and any
other communications distributed or made generally available with regard to
the Funds.
<PAGE>
-8-
ARTICLE V. FEES AND EXPENSES
5.1 The Fund and the Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Fund or
any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Underwriter may make payments to the Company
or to the underwriter for the Contracts if and in amounts agreed to by the
Underwriter in writing, and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or
other resources available to the Underwriter. No such payments shall be made
directly by the Fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund, except as otherwise provided herein. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior
to their sale. The Fund shall bear the expenses for the cost of registration
and qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting
the prospectus in type, setting in type and printing the proxy materials and
reports to shareholders (including the costs of printing a prospectus that
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or
transfer of the Fund's shares.
5.3 The Company shall bear the expenses of printing (in accordance
with Section 3.1) and distributing the Fund's prospectus to owners of
Contracts issued by the Company and of distributing the Fund's proxy
materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION AND QUALIFICATION.
6.1 The Fund will invest its assets in such a manner as to ensure that
the Contracts will be treated as annuity or life insurance contracts,
whichever is appropriate, under the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations issued thereunder (or any successor
provisions). Without limiting the scope of the foregoing, the Fund will
comply with Section 817(h) of the Code and Treasury Regulation Section
1.817-5, and any Treasury interpretations thereof, relating to the
diversification requirements for variable annuity, endowment, or life
insurance contracts, and any amendments or other modifications or successor
provisions to such Section or Regulations. In the event of a breach of this
Article VI by the Fund, it will take all reasonable steps (a) to notify the
Company of such breach and (b) to adequately diversify the Fund so as to
achieve compliance within the grace period afforded by Regulation 817.5.
6.2 The Fund represents that it is or will be qualified as a Regulated
Investment Company under Subchapter M of the Code, and that it will make
every effort to maintain such qualification (under Subchapter M or any
successor or similar provisions) and that it will notify the Company
immediately upon having a reasonable basis for believing that it has ceased
to so qualify or that it might not so qualify in the future.
6.3 The Company represents that the Contracts are currently, and at
the time of issuance shall be, treated as life insurance or annuity insurance
contracts, under applicable provisions of the Code, and that it will make
every effort to maintain such treatment, and that it will notify the Fund and
the Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees
<PAGE>
-9-
that any prospectus offering a contract that is a "modified endowment
contract" as that term is defined in Section 7702A of the Code (or any
successor or similar provision), shall identify such contract as a modified
endowment contract.
ARTICLE VII. POTENTIAL CONFLICTS. The following provisions apply effective
upon (a) the issuance of the Shared Funding Exemptive Order, and (b)
investment in the Fund by a separate account of a Participating Insurance
Company supporting variable life insurance contracts.
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by variable annuity contract and
variable life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Board shall
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2 The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by
providing the Board with all information reasonably necessary for the Board
to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever Contract owner voting
instructions are disregarded.
7.3 If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested Board members), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up to and
including: (1), withdrawing the assets allocable to some or all of the
separate accounts from the Fund or any Portfolio and reinvesting such assets
in a different investment medium, including (but not limited to) another
Portfolio of the Fund, or submitting the question whether such segregation
should be implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (I.E., annuity
contract owners, life insurance contract owners, or variable contract owners
of one or more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (2), establishing a new registered management investment
company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the
Board. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented, and until the end of that six month period the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
<PAGE>
-10-
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts
with the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Fund and terminate this Agreement
with respect to such Account within six months after the Board informs the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six month period, the
Fund shall continue to accept and implement orders by the company for the
purchase (and redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether
any proposed action adequately remedies any irreconcilable material conflict,
but in no event will the Fund be required to establish a new funding medium
for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contract if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely
affected by the irreconcilable material conflict. In the event that the Board
determines that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Fund and terminate this Agreement within six (6)
months after the Board informs the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall
be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested members of the
Board.
7.7 If and to the extent the Shared Funding Order contains terms and
conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5
of this Agreement, then the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with the Shared Funding Exemptive Order, and Sections 3.4, 3.5, 3.6,
7.1, 7.2, 7.3, 7.4 and 7.5 of the Agreement shall continue in effect only to
the extent that terms and conditions substantially identical to such Sections
are contained in the Shared Funding Exemptive Order or any amendment thereto.
If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to
the extent such rules are applicable; and (b) Sections 3.4, 3.5, 3.6, 7.1.,
7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the
extent that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the
Fund and the Underwriter and each of their officers and directors and each
person, if any, who controls the Fund or the Underwriter within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for
purposes of this Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation
<PAGE>
-11-
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the Registration Statement, prospectus, or statement
of additional information for the Contracts or contained
in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing),
or arise out of or are based upon the omission or the
alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished to the
Company by or on behalf of the Fund for use in the
Registration Statement, prospectus or statement of
additional information for the Contracts or in the
Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or
sales literature of the Fund not supplied by the Company
or persons under its control) or wrongful conduct of the
Company or persons under its authorization or control,
with respect to the sale or distribution of the Contracts
or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature of the Fund or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any material failure by the Company
to provide the services and furnish the materials under
the terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply
with the qualification requirements specified in Article
VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Company,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would
<PAGE>
-12-
otherwise be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Company in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify the Company of any such claim shall not relieve the Company from any
liability which it may have to the Indemnified Party against whom such action
is brought otherwise than on account of this indemnification provision. In
case any such action is brought against an Indemnified Party, the Company
shall be entitled to participate, at its own expense, in the defense of such
action. The Company also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action and to settle the
claim at its own expense; provided, however, that no such settlement shall,
without the Indemnified Parties' written consent, include any factual
stipulation referring to the Indemnified Parties or their conduct. After
notice from the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the Company will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the Contracts or
the operation of the Fund.
8.2 INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of it directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements are related to the sale or acquisition of
the Fund's shares or the Contracts; and
(i) arise out of or are based upon any untrue statement or
alleged untrue statement or any material fact contained
in the Registration Statement or prospectus or SAI or
sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on
behalf of the
<PAGE>
-13-
Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or
sales literature for the Contracts not supplied by the
Underwriter or persons under its control) or wrongful
conduct of the Fund or Underwriter or persons under their
control, with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or
on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the terms of
this Agreement (including a failure whether unintentional
or in good faith or otherwise, to comply with the
diversification and other qualification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance or such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to the Company or the Account, whichever is
applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent), but
failure to notify the Underwriter of any such claim shall not relieve the
Underwriter from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
<PAGE>
-14-
against the Indemnified Party, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Underwriter to
such party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officer or directors in connection with the issuance or sale of the Contracts
or the operation of the Account.
8.3 INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or
litigation (including legal and other expenses) to which the Indemnified
Parties may be required to pay or may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims,
expenses, damages, liabilities or expenses (or actions in respect thereof) or
settlements, are related to the operations of the Fund and:
(v) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company, the Fund, the Underwriter or the
Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
<PAGE>
-15-
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of
any such claim shall not relieve the Fund from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall
be entitled to assume the expense thereof, with counsel satisfactory to the
party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Fund to such
party of the Fund's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Fund will not be liable to such party under this Agreement for
any legal or other expenses subsequently involved by such party independently
in connection with the defense thereof other than reasonable costs of
investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant (including, but not limited to, any Shared Funding Exemptive
Order) and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to
some or all Designated Portfolios, by six (6) months' advance
written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Designated Portfolio
based upon the Company's determination that shares of the
Fund are not reasonably available to meet the requirements
of the Contracts; provided that such termination shall apply
only to the Designated Portfolio not reasonably available; or
(c) termination by the Company by written notice to the Fund
and the Underwriter in the event any of the Designated
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying
<PAGE>
-16-
investment media of the Contracts issued or to be issued
by the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the
Company by the NASD, the SEC, the Insurance Commissioner or
like official of any state or any other regulatory body
regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any
Account, or the purchase of the Fund shares, provided,
however, that the Fund or Underwriter determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its
obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund
or Underwriter by the NASD, the SEC, or any state
securities or insurance department or any other regulatory
body, provided, however, that the Company determines in
its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Designated
Portfolio in the event that such Designated Portfolio
ceases to qualify as a Regulated Investment Company under
Subchapter M or fails to comply with the Section 817(h)
diversification requirements specified in Article VI
hereof, or if the Company reasonably believes that such
Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund or Underwriter by written notice
to the Company in the event that the Contracts fail to
meet the qualifications specified in Article VI hereof; or
(h) termination by either the Fund or the Underwriter by
written notice to the Company, if either one or both of
the Fund or the Underwriter respectively, shall determine,
in their sole judgement exercised in good faith, that the
Company has suffered a material adverse change in its
business, operations, financial condition, or prospects
since the date of this Agreement or is the subject of
material adverse publicity; or
(i) termination by the Company by written notice to the Fund
and the Underwriter, if the Company shall determine, in
its sole judgment exercised in good faith, that the Fund
or the Underwriter has suffered a material adverse change
in its business, operations, financial condition or
prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(j) termination by the Fund or the Underwriter by written
notice to the Company, if the Company gives the Fund and
the Underwriter the written notice specified in Section
1.11 hereof and at the time such notice was given
<PAGE>
-17-
there was no notice of termination outstanding under any
other provision of this Agreement; provided, however, any
termination under this Section 10.1(j) shall be effective
forty-five days after the notice specified in Section 1.11
was given.
10.2 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the
terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, the owners of the Existing Contracts may
be permitted to reallocate investments in the Fund, redeem investments in the
Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts. The parties agree that this Section
10.2 shall not apply to any termination under Article VII and the effect of
such Article VII termination shall be governed by Article VII of this
Agreement. The parties further agree that this Section 10.2 shall not apply
to any termination under Section 10.1(g) of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general
application (hereinafter referred to as a "Legally Required Redemption"), or
(iii) as permitted by an order of the SEC pursuant to Section 26(b) of the
1940 Act. Upon request, the Company will promptly furnish to the Fund and the
Underwriter the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund and the Underwriter) to the effect that
any redemption pursuant to clause (ii) above is a Legally Required
Redemption. Furthermore, except in cases where permitted under the terms of
the Contracts, the Company shall not prevent Contract Owners from allocating
payments to a Portfolio that was otherwise available under the Contracts
without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
T. Rowe Price International Series, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
State Mutual Life Assurance Company of America
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Eric S. Levy
<PAGE>
-18-
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Terrie Westren
Copy to: Henry H. Hopkins, Esq.
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property
of such Fund, and in the case of a series company, the respective Designated
Portfolio listed on Schedule A hereto as though such Designated Portfolio had
separately contracted with the Company and the Underwriter for the
enforcement of any claims against the Fund. The parties agree that neither
the Board, officers, agents or shareholders assume any personal liability or
responsibility for obligations entered into by or on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement, shall not disclose, disseminate or utilize
such names and addresses and other confidential information without the
express written consent of the affected party until such time as such
information may come into the public domain.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provisions of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Massachusetts Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain whether the variable annuity operations of the Company are being
conducted in a manner consistent with the Massachusetts variable annuity laws
and regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies, and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
<PAGE>
12.8 This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
COMPANY: STATE MUTUAL LIFE ASSURANCE COMPANY OF
AMERICA
By its authorized officer
By: /s/ Ruben P. Moreno
-----------------------------------
Title: Vice President
--------------------------------
Date: 5/2/95
---------------------------------
FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By: /s/
-----------------------------------
Title: Vice President
--------------------------------
Date: April 26, 1995
---------------------------------
UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By: /s/
-----------------------------------
Title: Vice President
--------------------------------
Date: April 26, 1995
---------------------------------
<PAGE>
SCHEDULE A
Pending issuance of the Shared Funding Order, the Underwriter shall not
sell to the Company, and the Fund shall not make available for purchase to
the Company, shares of the Designated Portfolio for variable life insurance
Contracts supported wholly or partially by the Accounts.
<TABLE>
<CAPTION>
Name of Separate Account and Contracts Funded by
Date Established by Board of Directors Separate Account Designated Portfolios
- -------------------------------------- ------------------- -------------------------
<S> <C> <C>
Separate Account VA-K of State Mutual ExecAnnuity Plus T. Rowe Price International Series, Inc.
Life Assurance Company of America, 33-71052 ----------------------------------------
August 20, 1991 811-8814 - T. Rowe Price International
Stock Portfolio
Allmerica Select Separate Account of Allmerica Select T. Rowe Price International Series, Inc.
State Mutual Life Assurance Company 33-71058 ----------------------------------------
of America, August 20, 1991 811-8116 - T. Rowe Price International
Stock Portfolio
VEL II Account of State Mutual Life VEL '93 T. Rowe Price International Seres, Inc.
Assurance Company of America, 33-71056 ----------------------------------------
August 20, 1991 811-8130 - T. Rowe Price International
Stock Portfolio
Inheiritage Account of State Mutual Variable Inheiritage T. Rowe Price International Series, Inc.
Life Assurance Company of America, 33-74184 ------------------------------------------
August 20, 1991 811-8304 - T. Rowe Price International
Stock Portfolio
CONTRACTS TO BE ADDED LATER THIS MONTH
(INITIAL REGISTRATIONS HAVE NOT BEEN FILED YET):
Group VEL Account of State Mutual Group VEL T. Rowe Price International Series, Inc.
Life Assurance ------------------------------------------
- T. Rowe Price International
Stock Portfolio
Allmerica Select Separate Account II of Select VEL T. Rowe Price International Series, Inc.
State Mutual Life Assurance Company ------------------------------------------
of America - T. Rowe Price International
Stock Portfolio
</TABLE>
<PAGE>
LETTER AGREEMENT
June 4, 1997
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
Ladies and Gentlemen:
Effective as of October 1, 1996, this letter sets forth the agreement
("Agreement") between Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company) ("Company A") and First Allmerica
Financial Life Insurance Company (formerly known as State Mutual Life Assurance
Company of America) ("Company B") (each a "Company" and collectively "you,"
"your" or the "Companies"), on the one hand, and Rowe Price-Fleming
International, Inc. ("RPFI") (referred to as "we," or "RPFI") on the other ,
concerning certain administrative services to be provided by each of you, with
respect to the T. Rowe Price International Series, Inc. (the "Fund").
1. THE FUND. The Fund is a Maryland Corporation registered with the
Securities and Exchange Commission (the "SEC") under the Investment Company
Act of 1940, as amended (the "Act") as an open-end diversified management
investment company. The Fund serves as a funding vehicle for variable
annuity contracts and variable life insurance contracts and, as such,
sells its shares to insurance companies and their separate accounts. With
respect to various provisions of the Act, the SEC requires that owners of
variable annuity contracts and variable life insurance contracts be
provided with materials and rights afforded to shareholders of a
publicly-available SEC-registered mutual fund.
2. THE COMPANIES. Company A is a Delaware life insurance company, and Company
B is a Massachusetts life insurance company. Each Company issues
variable annuity contracts (the "Contracts") supported by one or more
separate accounts (individually a "Separate Account" and collectively the
"Separate Accounts") which are registered with the SEC as unit investment
trusts, or which are properly exempt from registration. Each of the
Companies has entered into a participation agreement with the Fund
(individually a "Participation Agreement" and collectively the
"Participation Agreements") pursuant to which each Company purchases shares
of the T. Rowe Price International Stock Portfolio of the Fund for the
Separate Accounts supporting the Company's Contracts.
<PAGE>
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
June 4, 1997
Page 2
3. RPFI. RPFI serves as the investment adviser to the T. Rowe Price
International Series, Inc. RPFI supervises and assists in the overall
management of the Fund's affairs under an investment management agreement
with the Fund (the "Management Agreement"), subject to the overall
authority of the Fund's Board of Directors in accordance with Maryland law.
Under the Management Agreement, RPFI is compensated for providing
investment advisory and certain administrative services (either directly or
through affiliates).
4. ADMINISTRATIVE SERVICES. You have agreed to assist us, as we may request
from time to time, with the provision of administrative services to the
Fund, as they may relate to the investment in a Fund by the Separate
Accounts. It is anticipated that such services may include (but shall not
be limited to): the mailing of Fund reports, notices, proxies and proxy
statements and other informational materials to holder of the Contracts
supported by the Separate Accounts; the maintenance of separate records for
each holder of the Contracts reflecting shares purchased and redeemed and
share balances; the preparation of various reports for submission to Fund
directors; the provision of advice and recommendations concerning the
operation of the series of the Funds as funding vehicles for the Contracts;
the provision of shareholder support services with respect to the Separate
Account portfolios serving as funding vehicles for the Contracts; telephone
support for holders of Contracts with respect to inquiries about the Fund;
and the provision of other administrative services as shall be mutually
agreed upon from time to time.
5. PAYMENT FOR ADMINISTRATIVE SERVICES. In consideration of the
administrative services to be provided by each of the Companies, we
shall make payments to each of the Companies on a quarterly basis
("Payments") from our assets, including our bona fide profits as investment
adviser to the Fund, an amount equal to 15 basis points (0.15%) per annum
of the average aggregate net asset value of shares of the Fund held by
the Separate Accounts under the Participation Agreements, PROVIDED,
HOWEVER, that such payments shall only be payable with respect to the Fund
for each calendar quarter during which the aggregate dollar value of shares
of the Fund purchased pursuant to a Participation Agreement by the
insurance companies in the aggregate exceeds $50,000,000. Subject to the
terms of paragraph 6 hereof, RPFI shall be responsible for payments due
pursuant to this Paragraph 5 with respect to the purchase of shares of the
Fund managed by RPFI. For purposes of computing the payment to each
Company contemplated under this Paragraph 5, the average aggregate net
asset value of shares of the Fund held by the Separate Accounts over a
quarterly period shall be computed by totaling each Separate Account's
aggregate investment (share net asset value multiplied by total number of
shares held by the Separate Account) on each business day during the
calendar quarter, and dividing by the total number of business days during
such quarter. The Payments contemplated by this Paragraph 5 shall be
calculated by RPFI at the end of each calendar quarter and will be paid to
each Company within 30 business days thereafter.
<PAGE>
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
June 4, 1997
Page 3
6. UNIFIED PAYMENT PROCEDURE. You have agreed that in order to simplify the
procedure by which Payments required to be made by RPFI pursuant to
Paragraph 5 hereof are made to the Companies, the obligations of RPFI to
make such Payments to each Company can be fulfilled by the remittance of a
single, unified Payment (the "Unified Payment"). The Unified Payment shall
be made by RPFI to Company A, accompanied by a written statement setting
forth the respective amounts due to each of the Companies. Company A in
turn, agrees that it will remit Company B's portion of each Unified Payment
to Company B as soon as practicable after Company A's receipt of such
Unified Payment, unless a different arrangement is agreed to between
Company A and Company B. Company B agrees that the obligation of RPFI to
make payments to it pursuant to paragraph 5 hereof shall be satisfied upon
receipt of the applicable Unified Payment by Company A.
7. NATURE OF PAYMENTS. The parties to this Agreement recognize and agree that
RPFI's payments to the Companies relate to administrative services only and
do not constitute payment in any manner for investment advisory services or
for costs of distribution of the Contracts or of Fund shares; and further,
that these payments are not otherwise related to investment advisory or
distribution services or expenses, or administrative services which RPFI is
required to provide to owners of the Contracts pursuant to the terms
thereof. You represent that you may legally receive the payments
contemplated by the Agreement.
8. TERM. This Agreement shall remain in full force and effect for an initial
term of two years, and shall automatically renew for successive one-year
periods unless any party informs each of the other parties upon 60-days
written notice of its intent not to continue this Agreement. This
Agreement and all obligations hereunder shall terminate automatically with
respect to a Company and its relationship with a Fund upon the redemption
of the Company's and its Separate Accounts investment in the Fund, or upon
termination of the Company's Participation Agreement with the Fund.
9. AMENDMENT. This Agreement may be amended only upon mutual agreement
of all of the parties hereto in writing.
10. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which shall together
constitute one and the same instrument.
<PAGE>
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
June 4, 1997
Page 4
If this Agreement is consistent with your understanding of the matters we
discussed concerning your administrative services, kindly sign below and return
a signed copy to us.
Very truly yours,
ROWE PRICE-FLEMING
INTERNATIONAL, INC.
By: /s/ Nancy M. Morris
------------------------------------------
Name: Nancy M. Morris
----------------------------------------
Title: Vice President
----------------------------------------
Acknowledged and Agreed to:
ALL MERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
------------------------------
Name: Richard M. Reilly
------------------------------
Title: President
------------------------------
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
By: /s/ Richard M. Reilly
------------------------------
Name: Richard M. Reilly
------------------------------
Title: Vice President
------------------------------
<PAGE>
AGREEMENT FOR LOCKBOX SERVICES
This Agreement is entered into as of July 1, 1997, by and between Boston
Financial Data Services Inc. ("BFDS") and First Allmerica Financial Life
Insurance Company, its subsidiaries and affiliates ("Customer") for the
lockbox services provided in the Exhibit(s) attached hereto and hereby made a
part of this Agreement.
WHEREFORE the parties hereto in consideration of the mutual covenants
contained herein and intending to be legally bound, agree as follows:
A. SERVICES:
Upon Customer's authorization of the postmaster in Boston to permit employees
of BFDS to access the P.O. Box specified and subject to the terms and
conditions of this Agreement, BFDS hereby agrees to provide Customer with the
services described in the Exhibit(s) attached hereto.
B. INVOICES:
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit _A_. These fees will
remain in effect for a period of three years with an allowable increase in
year two and three no greater than the calculated Northeast CPI for the
previous period. In addition, BFDS will charge such account for all
reasonable out-of-pocket expenses, such as courier fees, incurred by BFDS in
connection with any rent paid by BFDS for the P.O. Box. Payment on all
invoices submitted by BFDS shall be due net thirty (30) days from receipt of
invoice.
C. TERMINATION:
This Agreement may be terminated by either party with material cause at any
time by 30 days prior written notice to the other, and without cause at any
time by 90 days prior written notice to the other. Either party may
terminate this Agreement at any time on notice to the other in the event of
dissolution or insolvency or the commencement of any proceedings under any
bankruptcy or insolvency law by or against the other.
D. LIABILITY AND INDEMNIFICATION:
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000.00 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurer(s) licensed to do business in the Commonwealth of
Massachusetts and having an A. M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
E. FORCE MAJEURE:
Neither party shall be responsible for delays or failure in performance
resulting from causes beyond its control, including, without limitation, acts
of God, riots, acts of war, governmental regulations, fire, communication
line failures, power failures, earthquakes, or other disasters.
F. NO ADVERTISEMENT:
BFDS shall not (a) make any mention of this Agreement in any advertisement or
promotional material; or (b) issue or release any publicity statement or
release concerning this Agreement or the services provided, or to be
provided,
<PAGE>
hereunder, without the written consent of Customer being first obtained.
G. SOLICITATION:
BFDS shall not solicit any of Customer's employees while said employees are
employed by Customer, and for one (1) year following the date that Customer's
employee has terminated employment with Customer, unless otherwise expressly
agreed in writing by Customer.
H. CONFIDENTIALITY:
As used herein, the term "confidential information" shall mean non-public
information that either party designates as confidential, or which, under the
circumstances, ought to be treated as confidential. Confidential information
may be in any tangible form, including without limitation written or printed
text or documents, audio or video tapes, CD's or disks and computer disks or
tapes, whether in machine readable or user readable form. Confidential
information shall include without limitation information relating directly or
indirectly to the marketing or promotion of either party's products, released
or unreleased software or other programs, trade secrets, business policies
and/or practices, and any information received by or about third parties,
including claimants, that either party is obligated to treat as confidential.
Customer and BFDS hereby acknowledge and agree that, in providing sufficient
information or access to BFDS to allow BFDS to perform in accordance with
this Agreement, or otherwise allowing BFDS to perform as required hereunder,
Customer and/or its agents, servants, customers or employees may disclose to
BFDS, or BFDS may otherwise obtain, certain information that is confidential
and/or proprietary to Customer and/or its agents, servants, employees,
customers or the dependents thereof. Customer and BFDS hereby also
acknowledge and agree that, in providing sufficient information or access to
Customer to allow Customer to perform in accordance with this Agreement, or
otherwise allowing Customer to perform as required hereunder, BFDS and/or its
agents, servants, customers or employees may disclose to Customer, or
Customer may otherwise obtain, certain information that is confidential
and/or proprietary to BFDS and/or its agents, servants, employees, customers
or the dependents thereof. Accordingly, the parties hereby agree to keep
such information confidential and prevent its unauthorized disclosure. Each
party shall: (a) not make any copies of the other's (and/or its agents'
servants' or employees', or customers') confidential information without
first obtaining the written consent of such other and/or the appropriate
individual(s) therefor; (b) not utilize any confidential information of the
other (and/or any confidential information of its agents, servants,
employees, or customers) except in the furtherance of the obligations and
responsibilities specified hereunder, and for no other purpose(s) whatsoever;
and (c) return any such confidential information in its possession to the
other immediately upon (i) the other's demand therefor, (ii) the
accomplishment of the purpose for which such confidential information is or
was held or obtained, or (iii) the expiration or other termination of this
Agreement. In the event of any breach or threatened breach by either party
(or any of either party's agents, servants, vendors, principles, owners,
affiliated persons or employees) of the covenants, agreements and/or
conditions contained in this section, the other party and/or the appropriate
agents, servants, employees, claimants, or customers shall be entitled to an
injunction prohibiting such breach in addition to any other legal and/or
equitable remedies available to them and/or the appropriate individual(s) in
connection with such breach. The parties acknowledge that any confidential
information disclosed to it is valuable, proprietary and unique and that any
disclosure thereof in breach of this Agreement shall result in irreparable
harm. The agreements, covenants and conditions contained in this section
shall survive the expiration or any earlier termination of this Agreement.
I. ASSIGNMENT:
II.
Notwithstanding the foregoing, Customer may, without the consent of BFDS,
assign or transfer this Agreement to any present or future affiliate or
<PAGE>
subsidiary of First Allmerica Financial Life Insurance Company. BFDS agrees
to release Customer from all obligations under this Agreement in the event
that such obligations are assumed under the preceding sentence by a
corporation or entity whose financial responsibility is equivalent to or
greater than that of Customer. As used herein, the term "Customer" shall
include First Allmerica Financial Life Insurance Company and all of its
present or future affiliates or subsidiaries, including without limitation
all corporate successors of any of the foregoing that may result from merger,
consolidation, reorganization, demutualization or conversion. As used
herein, the term "affiliate" shall include any entity controlling, controlled
by or under common control with, First Allmerica Financial Life Insurance
Company, or which following a merger, consolidation, demutualization or
reorganization involving First Allmerica Financial Life Insurance Company is
controlled by an entity that controlled First Allmerica Financial Life
Insurance Company or that First Allmerica Financial Life Insurance Company
controlled or that was under common control with First Allmerica Financial
Life Insurance Company, in each case, prior to such merger, consolidation,
demutualization or reorganization. BFDS may not, without the consent of
Customer, assign or transfer this Agreement to any present or future
affiliate or subsidiary of Boston Financial Data Services, Inc.
J. NOTICE:
Any notice under this Agreement shall be deemed to have been given if sent by
mail, postage prepaid, to the following addresses: if to Customer - First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester, MA
01653, Attn: Manager, Cash Management, N479; or such other address as
Customer may designate by written notice to BFDS; if to BFDS - Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
K. SEVERABILITY:
Each and every covenant, provision, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term or clause.
L. ENTIRE AGREEMENT:
This Agreement constitutes the entire Agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof,
whether written or oral, and may not be changed or otherwise terminated,
orally or otherwise, except as expressly provided herein or by an instrument
in writing signed by a duly authorized representative of Customer and BFDS.
M. GOVERNING LAW:
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
The Exhibits attached hereto are hereby made a part of this Agreement.
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by a duly authorized representative of both parties. If any terms are
inconsistent between this Agreement and any Exhibits attached hereto, the
terms of this Agreement shall prevail.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Agreement effective as of the date first
written above.
BOSTON FINANCIAL DATA SERVICES, INC.
BY: /s/ STEPHEN HILL
<PAGE>
TITLE: VICE PRESIDENT
DATE:
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
BY: /s/ EDWARD A. OSTROUT
TITLE: ASSISTANT TREASURER
DATE: JULY 24, 1997
<PAGE>
EXHIBIT A
(ALLMERICA FINANCIAL FEE PROPOSAL BOSTON FINANCIAL DATA SERVICES MAY 1997)
(REV. 7-14-97)
<PAGE>
Allmerica Financial
440 Lincoln Street
Worcester, MA 01653
Re: Retail Lockbox Agreement (Page 1 of 3)
Boston Financial Data Services Inc, ("BFDS") is pleased to establish a
lockbox service for your organization. The lockbox will be operated in
conjunction with Post Office Box No (the "P.O. Box") (See Attached) Boston,
MA, our unique zip code of 02266, and your deposit account(s) at Bank of
Boston entitled (the "Account").
We understand that you have authorized the postmaster in Boston to
permit employees of BFDS to access the P.O. Box. Subject to the terms of
this Agreement, BFDS hereby agrees to provide the following services:
1. BFDS will collect all mail received at the P.O. Box at
various times each day.
2. All checks removed by BFDS from the P.O. Box will be deposited
into the Account as instructed within the client's operating
procedures.
3. BFDS shall not have any responsibilities to read any letter
or other communication received in the P.O. Box, although
checks received with any letter or other communication will
be deposited in the Account. Likewise, any post-dated check
which BFDS determines will be received by the drawee bank by
the date of such check will be deposited in the Account.
BFDS is authorized to endorse checks deposited in the Account
with the endorsement "absence of endorsement guaranteed" or
other similar endorsements and you agree to indemnify BFDS
against any loss, cost or expense resulting from such
endorsement.
4. All processing, depositing and collection of checks shall be
subject to the established procedures followed from time to
time by BFDS in connection with any regular deposit received
by BFDS.
5. Checks returned unpaid because of insufficient funds will be
automatically forwarded for collection a second time; if
unpaid after the second presentation, such checks, together
with advice of debit, will be sent to you.
6. As compensation for services hereunder, you shall pay BFDS mutually
agreed upon fees and expenses.
These fees are to be applied to your account and will remain in effect
for a period of three years with an allowable increase in year two and
three no greater than the calculated Northeast CPI for the previous
period. In addition, BFDS will charge the Account for all out-of-pocket
expenses, such as courier fees, incurred by BFDS in connection with any
rent paid by BFDS for the P.O. Box.
7. This Agreement may be terminated by either party at any time by 90- days
prior written notice to the other, provided that BFDS may terminate this
Agreement at any time on notice to you in the event of your dissolution
or
<PAGE>
insolvency or the commencement of any proceedings under any bankruptcy or
insolvency law or by or against you.
8. BFDS, in performing its duties under this Agreement, shall not be liable
to you except for gross negligence or willful misconduct. BFDS shall
not be responsible for delays or failure in performance resulting from
causes beyond its control including, without limitation, acts of God,
strikes, lockouts, riots, acts of war, governmental regulations, fire,
communication line failures, power failures, earthquakes or other
disasters. BFDS shall also not be liable for special or consequential
damages.
9. Any notice under this Agreement shall be deemed to have been given if
sent by mail, postage prepaid, to the following addresses: If to you,
the address set forth on page one hereof, or to such other address as
you may designate by written notice to BFDS; if to BFDS, Boston
Financial Data Service, Inc., 2 Heritage Drive, No. Quincy, MA 02171,
Attention: Cash Management Services, 1st Floor.
10. This Agreement constitutes the entire Agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof, whether written or oral.
11. BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However,
BFDS has the right to make copies of such records, in its discretion.
To the extent that any records maintained on behalf of Allmerica are
subject to section 31a-1 under the Investment Company Act of 1940 ("1940
Act"), BFDS agrees to preserve such records for the periods prescribed
by rule 31a-2 under the 1940 Act.
12. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
SEC, the NASD, and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in conjunction
with any investigation or inquiry relating to the services to be
provided by BFDS. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the Insurance Commissioner of any
state with any information or reports in connection with services
provided under this Agreement which such Commissioner may reasonably
request in order to ascertain whether the variable contracts operations
of Allmerica are being conducted in a manner consistent with the state's
regulations concerning variable contracts and any other applicable law
or regulation.
13. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
BOSTON FINANCIAL DATA SERVICES INC.
BY: /s/ Stephen Hill
TITLE: Vice President
DATE: 11/4/97
ALLMERICA FINANCIAL
BY: /s/ Edward A. Ostrout
TITLE: Assistant Treasurer
DATE: 11/5/97
<PAGE>
Service Level Agreement
Boston Financial Data Services
First Allmerica Financial Life Insurance Company
and
Allmerica Financial Life Insurance and Annuity Company
THIS AGREEMENT is entered into as of this _____ day of January, 1998 by and
among First Allmerica Financial Life Company and Allmerica Financial Life
Insurance and Annuity Company (collectively, "Allmerica") and Boston Financial
Data Services, Inc., ("BFDS").
WHEREAS, Allmerica and BFDS have entered into a Retail Lockbox Agreement and
Allmerica wishes to obtain from BFDS additional mailroom services in connection
with said Retail Lockbox Agreement,
NOW, THEREFORE, in consideration of their mutual promises, Allmerica and BFDS
hereby agree as follows:
1. SERVICES
BFDS hereby agrees to provide Customer with Services ("Services")
according to the specifications ("Service Levels") described in the
following Exhibits(s), which are attached hereto and made a part of this
Agreement:
1. Exhibit B "Boston Financial Data Services--Operations Support Services--
Service
Level Agreement--Allmerica Financial"
2. Exhibit C "Allmerica Financial--Notes for BFDS on Allmerica's intended
Procedures"
Additional Exhibits may be added to this Agreement if set forth in a writing
signed by duly authorized representatives of both parties. If any terms are
inconsistent between this Agreement and any exhibits attached hereto, the
terms of this Agreement shall prevail.
Material failure to provide the Services and Service Levels set forth in the
Exhibits shall be considered a Default for the purposes of section 4.
TERMINATION.
2. COMPENSATION
As compensation for services hereunder, Customer shall pay BFDS mutually
agreed upon fees and expenses as specified in Exhibit A.
<PAGE>
3. LIMITATION OF LIABILITY
Notwithstanding anything to the contrary contained herein, neither party, in
performing its duties under this Agreement, shall be liable to the other
except for gross negligence or willful misconduct. Neither party shall be
liable for special or consequential damages. BFDS shall maintain fidelity
bonding of at least $1,000,000 for claims arising from fraudulent or
dishonest acts on the part of any BFDS employee, which shall be underwritten
by reputable insurers(s) licensed to do business in the Commonwealth of
Massachusetts and having an A.M. Best rating of "A" or better. Within ten
(10) days from Customer's request therefor, BFDS shall provide to Customer
either (a) copies of all relevant insurance Policies, or (b) Certificates of
Insurance reasonably specifying the policies required hereunder.
Neither party shall not responsible for delays or failure in performance
resulting from causes beyond its control including, without limitation,
acts, of God, strikes, lockouts, rots, acts of war, governmental
regulations, fire, communication line failures, power failures, earthquakes
or other disasters.
4. TERMINATION
This Agreement may be terminated: (a) by either party at any time by 90 days
prior written notice to the other; (b) at any time by mutual written consent
of the parties; or (c) by either party immediately, upon notice to the other
party that the other party is in Default. The occurrence of any one or more
of the following events shall constitute a Default under the Agreement by
the party to whom the event relates:
(a) Any failure or refusal by a party to substantially perform or satisfy
any material term or condition of the Agreement, if such failure or
refusal continues for more than 30 days after the earlier of (i) notice
thereof to such defaulting party by the other party, or (ii) actual
knowledge by the failing party that it is failing to perform or satisfy a
material term or condition of the Agreement.
(b) The voluntary or involuntary bankruptcy or insolvency of a party, the
voluntary or involuntary dissolution or liquidation of a party, the
admission in writing by a party of its inability to pay its debts as
they mature, or the assignment by a party for the benefit of creditors.
- 2 -
<PAGE>
5. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at
such other address as such party may from time to time specify in writing to
the other party.
If to the Fund:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
If to Allmerica:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attention: William Hayward, Vice President
6. RECORDS
BFDS hereby agrees that all records which it maintains on behalf of
Allmerica are the property of Allmerica, and further agrees to surrender
promptly to Allmerica such records upon Allmerica's request. However, BFDS
has the right to make copies of such records, in its discretion. To the
extent that any records maintained on behalf of Allmerica are subject to
section 312a-1 under the Investment Company Act of 1940 ("1940 Act") BFDS
agrees to preserve such records for the periods prescribed by Rule 31a-2
under the 1940 Act.
7. COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
8. SEVERABILITY
Each and every covenant, profession, term and clause contained in this
Agreement is severable from the others, and each such covenant, provision,
term and clause shall be valid and effective notwithstanding the invalidity
or unenforceability of any other such covenant, provision, term, or clause.
If any provision of the Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
- 3 -
<PAGE>
9. ASSIGNMENT
Customer may, without the consent of BFDS, assign or transfer this Agreement
to any present or future affiliate or subsidiary of First Allmerica
Financial Life Insurance Company. As used herein, the term "affiliate"
shall include any entity controlling, controlled by or under common control
with, First Allmerica Financial Life Insurance Company. BFDS may not,
without the consent of Customer, assign or transfer this Agreement to any
present or future affiliate or subsidiary of BFDS. This Agreement or any of
the rights and obligations hereunder may not be assigned by any party
without the prior written consent of all parties hereto.
10. REGULATORY AUTHORITIES
Each party hereto shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD,
and state insurance regulators) and shall permit such authorities reasonable
access to its books and records in connection with any investigation or
inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Insurance Commissioner of any state with any
information or reports in connection with services provided under this
Agreement which such Commissioner may request in order to ascertain whether
the insurance operations of the Company are being conducted in a manner
consistent with applicable laws and regulations.
11. CAPTIONS
The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12. CONTROLLING LAW
This Agreement shall be governed by and its provisions shall be construed in
accordance with the laws of the Commonwealth of Massachusetts.
- 4 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ William Hayward
-----------------------------------------------------
Title: Vice President & Managing Director
-----------------------------------------------------
Date: 2/6/98
-----------------------------------------------------
BOSTON FINANCIAL DATA SERVICES, INC.
By: /s/ John E. Ciardi
-----------------------------------------------------
Title: Vice President - Operations Support Services
-----------------------------------------------------
Date: 2/4/98
-----------------------------------------------------
- 5 -
<PAGE>
First Allmerica Financial Life Information on
Insurance Company Second Insured
================================================================================
- --------------------------------------------------------------------------------
1 SECOND INSURED
- --------------------------------------------------------------------------------
________________________________________________________________________________
First Name Middle Last
________________________________________________________________________________
Street Address Years at this Address
________________________________________________________________________________
City State Zip
( ) M/____D/____Y/____
________________________________________________________________________________
Daytime Telephone Number Date of Birth
|_| M |_| F
________________________________________________________________________________
Sex Social Security Number
- --------------------------------------------------------------------------------
2 INFORMATION ABOUT THE INSURED
- --------------------------------------------------------------------------------
2a Current Employment.
Name of Employer __________________________________________________ Yrs. _______
Occupation and Responsibilities ________________________________________________
________________________________________________________________________________
Any change contemplated? _______________________________________________________
2b Income.
My annual earned income is $ ________________
My annual unearned income is $ ________________
My net worth is $ ________________
2c I had an illness or injury during the past six months that has prevented me
from engaging in the usual duties of my occupation for more than seven days.
|_| Yes |_| No If Yes, please explain:
________________________________________________________________________________
________________________________________________________________________________
2d During the past three years I had a motor vehicle license suspended or
revoked or been convicted of driving under the influence of drugs or alcohol or
of more than one moving violation.
|_| Yes |_| No If Yes, please explain:
________________________________________________________________________________
________________________________________________________________________________
2e During the past three years I have participated in or I intend to participate
in:
|_| Scuba diving |_| Skydiving |_| Motor racing
|_| Hang gliding or similar flying activity
2f During the past three years I have flown as or I intend to fly as a trainee,
pilot or crew member.
|_| Yes |_| No
2g During the past year, I have smoked one or more cigarettes. |_| Yes |_| No
* An additional sheet of paper may be attached, if necessary, to provide full
answers to the questions in this application.
2h I currently use:
|_| Cigars |_| Pipe |_| Chewing tobacco
|_| Other tobacco products (Please specify)
2i I will be traveling outside of the United States or Canada in the next six
months:
|_| Yes |_| No If yes, please indicate country:
________________________________________________________________________________
If 2e or 2f is "yes" - Complete Appropriate Questionnaire.
- --------------------------------------------------------------------------------
3 OWNER AND BENEFICIARY
- --------------------------------------------------------------------------------
The owner and beneficiary are as indicated in Sections 3A and 6 of the
accompanying Variable Life Application. If Section 3A is left blank, the owner
will be the insured listed in Section 1 of the Variable Life Application.
- --------------------------------------------------------------------------------
4 REPLACEMENT OF OTHER CONTRACTS
- --------------------------------------------------------------------------------
Will the proposed policy replace any existing annuity or life insurance
contract?
|_| Yes |_| No
If yes, list company name and policy number and attach Replacement Forms.
________________________________________________________________________________
I have not applied for any life or disability insurance with another company in
the last six months.
|_| Yes |_| No If yes, please explain:
________________________________________________________________________________
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
It is agreed that: (1) The application consists of the application form, the
medical questionnaire and this supplemental application for the second insured;
(2) The representations are true and complete to the best of my knowledge and
belief; (3) No liability exists and the insurance applied for will not take
effect until the policy is delivered and the premium is paid during the lifetime
of the proposed insured(s) and then only if the proposed insured(s) has (have)
not consulted or been treated by any physician or practitioner of any healing
art nor had any tests listed in the application since its completion; but, if
the premium is paid prior to delivery of the policy and a conditional receipt is
delivered by the registered representative/agent, insurance will be effective
subject to terms of the conditional receipt; and (4) No registered
representative/agent is authorized to amend, alter, or modify the terms of this
agreement.
________________________________________________________________________________
Signed at City State
________________________________________________________________________________
Signature of Second Insured Date
________________________________________________________________________________
Signature of Owners (if other than Insured) Date
________________________________________________________________________________
Signed at City State
AS-194 NY REV. 11/95
<PAGE>
================================================================================
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS 01653
APPLICATION FOR
INDIVIDUAL ADULT LIFE BASIC PACKAGE
AND/OR HEALTH INSURANCE
INSURANCE INFORMATION PRACTICES
Name of Proposed Insured________________________________________________________
Personal information about you may be obtained from persons other than you. You
have a right of access and correction with respect to personal information
obtained about you. The Company may in some cases also disclose personal or
privileged information it has about you to other third parties without your
authorization. A detailed description of the Company's information practices
will be furnished on your request.
Any request for information should be directed to Individual Insurance
Underwriting at the Home Office.
Medical Information Bureau Pre-Notice
Information regarding your insurability and/or any past or future claims will be
treated as confidential. The Company, or its reinsurers, may, however, make a
brief report thereon to the Medical Information Bureau, a nonprofit membership
organization of life insurance companies which operates an information exchange
on behalf of its members. If you apply to another Bureau member company for life
or health insurance coverage, or a claim for benefits is submitted to such a
company, the Bureau, upon request, will supply such company with the information
in its file.
Upon receipt of your request, the Medical Information Bureau, will arrange for
disclosure of the information about you contained in its file. If you question
the accuracy of the information in the Bureau's file, you may contact the Bureau
to seek a correction in accordance with the procedure established in the Federal
Fair Credit Reporting Act. The address of the Bureau's Information office is
P.O. Box 105, Essex Station, Boston, Massachusetts 02112: the Bureau's telephone
number is (617) 426-3660.
The Company, or its reinsurers, may also release information in its file to
other life insurance companies to whom you may apply for life or health
insurance, or to whom a claim for benefits may be submitted.
Fair Credit Reporting Act Pre-Notice
In making this application for insurance it is understood that an investigative
consumer report may be made. Information will be obtained through personal
interviews with third parties such as family members, business associates,
financial sources, friends, neighbors or others with whom you are acquainted.
This inquiry includes information as to your character, general reputation,
personal characteristics and mode of living, whichever may be applicable. Upon
written request, you will be told if an investigative consumer report has been
ordered. If so, you may ask to be interviewed in connection with its
preparation. You have the right to make a written request within a reasonable
period of time for a complete and accurate disclosure of additional information
concerning the nature and scope of the investigative consumer report. You also
have the right to inspect and obtain a copy of the investigative consumer report
from the investigating consumer reporting agency.
Personal Information Telephone Interview
Thank you for your application for insurance. While an underwriter is evaluating
your application, we may ask one of our Home Office Interviewers to contact you
for additional information. Whenever possible, calls will be made at your
convenience and to the telephone number you have provided. Your agent will
review with you the information we need to initiate the call and will record it
on a separate form.
FORM 05207-90 (9/95) ADULT
<PAGE>
CONDITIONAL RECEIPT FOR
ADVANCE PAYMENT OF PREMIUM Worcester, Massachusetts 01653
No. 315076
|_| FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (THE "COMPANY")
|_| ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (THE "COMPANY")
(check one)
- --------------------------------------------------------------------------------
Advance payment of $ _______(Life) $ _______ (Health) on _______ (date) with the
application for insurance has been received on the life of ____________________,
the proposed insured. This receipt bears the same serial numbers as the
application.
Received for the Company by ___________________
CONDITIONAL INSURANCE AGREEMENT
THERE IS NO INSURANCE UNDER THIS AGREEMENT UNTIL ALL THE CONDITIONS
HAVE BEEN MET.
GENERAL
Definitions
"Underwriting Date" means the date of Part I, Part II, the Conditional Receipt
or the Medical Exam, whichever date is later. If an Other Insured Rider is
applied for, the "Underwriting Date" for coverage on the Other Insured is the
later of the date of the Conditional Receipt, the Part IA or the Medical Exam if
required.
"Insurable on a standard basis" means acceptable under the Company's
underwriting rules for the plan and amount of insurance applied for without any
additional premium charge or restrictive rider.
"Insurable on a non-standard basis" means acceptable for the type of insurance
applied for under the Company's underwriting rules but not on a standard basis.
General
Any check or draft is accepted subject to collection. No agent or broker is
authorized to amend, alter, or modify the terms of this agreement. All
statements in the application are representations, not warranties. If you do not
hear from us within 60 days of the date of this agreement, please write to us
without delay, stating the facts concerning the application. Our address is 440
Lincoln Street, Worcester, MA 01653.
CONDITIONS TO BE MET
Conditions Precedent
The following conditions precedent must be met before we have any liability
under this agreement other than the return of the premium received:
1. The application must be completed and signed by the proposed
insured(s) and the owner, if not the insured.
2. The proposed insured(s) must be insurable on either a standard or
non-standard basis on the underwriting date if life insurance only
is applied for. The proposed insured(s) must be insurable on a
standard basis on the underwriting date for any health insurance.
3. The proposed insured(s) must be under the age of 71 for life
insurance and under the age of 61 for health insurance.
4. The proposed insured(s) must have undergone a medical exam if
required by us.
5. If the date of the Conditional Receipt is later than the date of
Part II and Part IA (if applicable), the proposed insured must not
have consulted or been treated by any physician or practitioner of
any healing art nor had any tests listed in the application since
the completion of Part II and Part IA.
If all of the conditions have been met, some insurance will be provided under
this agreement. However, the insurance will be subject to all of the further
provisions of this agreement.
Insurance Not in Force. If application is made for both health and life
insurance, no health insurance will be in force on any proposed insured who is
insurable on a non-standard basis.
If a person proposed for life insurance is not insurable on either a standard or
a non-standard basis, no life or health insurance will be in force.
- --------------------------------------------------------------------------------
Form 1CR-87 Rev. 9/95
<PAGE>
- --------------------------------------------------------------------------------
BENEFITS
Amount of Insurance - Life. If a proposed insured is insurable on a standard
basis, the death benefit provided under this agreement will be the lesser of the
amount applied for or the limit described below.
If a proposed insured is insurable on a non-standard basis which requires a
higher premium than the premium on the policy applied for, the amount of the
death benefit will be reduced. The reduced benefit will be in the same ratio to
the amount applied for as the premium paid with this receipt is to the total
premium that would be required on the plan the Company is willing to issue; but
in no event more than the maximum limit set forth below.
If the proposed insured is insurable on a non-standard basis which does not
require a higher premium, the death benefit provided under this agreement will
be the lesser of the following:
(a) the amount applied for;
(b) the maximum limit applicable to the proposed insured; and
(c) the premium paid if the proposed insured's death comes within the
terms of the restrictive rider which would have been attached to the
policy when used.
Maximum Limit - Life Insurance. The maximum limit under this agreement for life
insurance, including accidental death benefit, is an amount which when added to
any death benefit provided under any life insurance policy or conditional
insurance agreement having a date of issue or underwriting date respectively
within 90 days prior to the underwriting date of this agreement does not exceed
the following applicable amounts:
(a) If insurable on a standard basis, for issue ages 0 through 15,
$50,000; 16 through 60, $500,000; 61 through 65, $250,000; 66
through 70, $100,000; 71 and over, none.
(b) If insurable on a non-standard basis, for issue ages 0 through 15,
$25,000; 16 through 60, $250,000; 61 through 65, $125,000; 66
through 70, $50,000; 71 and over, none.
The maximum limit will not be increased because payment has been made to the
Company which is larger than the premium required for such reduced insurance.
Upon due proof of the death of the proposed insured that portion of the premium
paid for any excess insurance shall be paid to the beneficiary named in this
application.
Suicide Exclusion. If the proposed insured commits suicide while this agreement
is in force, the Company's liability will be limited to the return of the
premium paid.
Amount of Insurance - Health. If the proposed insured becomes totally disabled
as defined in the policy, the maximum monthly benefit will be the lesser of the
amount applied for and the maximum limit set forth below.
Maximum Limit - Health Insurance. The maximum limit under this agreement for
monthly indemnity is an amount which, when added to any monthly indemnity
provided by the Company under any health insurance policy or conditional
insurance agreement having a date of issue or underwriting date respectively
within 90 days prior to this agreement, does not exceed the lesser of:
(a) $2,000; and
(b) the published limit of the Company in effect on the underwriting
date.
Such health insurance will be subject to the elimination period elected in the
application, if any. Benefits will be payable for no more than 24 months or the
benefit period applied for, if less. Any such insurance in excess of the maximum
limit shall be void and all premiums paid for such excess shall be returned.
The maximum limit under this agreement for any health insurance other than
monthly indemnity will be the lesser of the amount applied for and the
applicable published limit of the Company in effect on the underwriting date of
this agreement.
TERMINATION
Termination - This agreement may be terminated at any time prior to incurrence
of a claim. The Company's sole liability shall be limited to the refund of the
premium paid. Such termination will occur on the earliest of the following:
1. The delivery of the insurance issued on this application.
2. The date the Company mails a termination notice with a refund of
your payment to you.
3. Ninety days after the underwriting date.
- --------------------------------------------------------------------------------
Form 1CR-87 Rev. 9/95
<PAGE>
First Allmerica Financial Life Insurance Company (The "Company")
Allmerica Financial Life Insurance and Annuity Company (The "Company")
Name of Proposed Insured _______________________________________________________
AUTHORIZATION TO OBTAIN INFORMATION
- --------------------------------------------------------------------------------
To all physicians; medical professionals; hospitals; clinics; other health care
providers; employers; Medical Information Bureau, Inc. (MIB); consumer reporting
agencies; other insurance support organizations; and other persons who
have the types of information described below about the proposed insured:
I authorize you to give the Company, its reinsurers, or its agent: (a) all
information you have as to illness, injury, medical history, diagnosis,
treatment, and prognosis (including any drug or alcohol abuse condition or
treatment) with respect to any physical or mental condition of the proposed
insured; and (b) any non-medical information, including an investigative
consumer report, which the Company believes it needs to perform the business
functions described below. I also authorize the Company to give MIB health or
non-medical information it has about me and that of any minor member of my
family applying for insurance.
The information obtained will be used to determine if the proposed insured is
eligible for: (a) the insurance requested; or (b) benefits under a policy which
is in force. It will also be used for any other business purpose which relates
to the insurance requested or the policy which is in force.
This authorization will be valid for 30 months. I know that under Federal
Regulations, I may revoke this authorization as it applies to drug and alcohol
abuse treatment information at any time; but my revocation will not affect any
information that has been released prior thereto. I know that I may request a
copy of this form. I agree that a photocopy is as valid as the original. I have
received the Insurance Information Practices notice.
_________________ _______________________________________________________
Date Signature of proposed insured (if proposed insured is a
minor, signature of legal guardian)
_______________________________________________________
Signature of spouse (if proposed for insurance)
Form 4826-90 Rev. 3/95
- --------------------------------------------------------------------------------
|_| First Allmerica Financial Life Insurance Company
|_| Allmerica Financial Life Insurance And Annuity Company
PERSONAL HISTORY INTERVIEW INFORMATION
- --------------------------------------------------------------------------------
Proposed Insured's Name (Professional Title)
|_| Adult Application for
|_| Life - Amount $_______
|_| Juvenile |_| Disability - Amount $_______
- --------------------------------------------------------------------------------
Home Telephone No. (Area Code) and No.
Business Telephone No. (Area Code) and No.
( ) ( )
- --------------------------------------------------------------------------------
Driver's License Information
No. State
- --------------------------------------------------------------------------------
The best time for us to call you is 1st Choice ____________ Eastern
at |_| Home |_| Business 2nd Choice ____________ Time
- --------------------------------------------------------------------------------
Agency Agent Date Received in P.H.I. Unit
- --------------------------------------------------------------------------------
Attempts to Call Attempts to Call
Date/Time ________________________ Date/Time ________________________
Date/Time ________________________ Date/Time ________________________
Date/Time ________________________ Date/Time ________________________
- --------------------------------------------------------------------------------
Date call completed Time ____________ Remarks
|_|AM |_|PM
- --------------------------------------------------------------------------------
<PAGE>
No. 315076
APPLICATION FOR INDIVIDUAL
ADULT LIFE AND/OR HEALTH
INSURANCE - PART I |_| First Allmerica Financial Life
Insurance Company
|_| Allmerica Financial Life
Insurance and Annuity Company
|_| Life |_| Disability
Check applicable box(es)
All Answers Must Be Handwritten Worcester, Massachusetts 01653
- --------------------------------------------------------------------------------
COMPLETE FOR ALL APPLICATIONS
- --------------------------------------------------------------------------------
1.a) PROPOSED INSURED First - Middle Initial - Last
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
b) Sex c) BIRTH d) Owner's Soc. Sec. or I.D.
-----------------------
|_| M |_| F Mo. Day Yr. State
|____|____|____||___|___| - -
- --------------------------------------------------------------------------------
2. a) RESIDENCE
No. Street Apt. Yrs.
- --------------------------------------------------------------------------------
City State Zip
|___|___||___|___|___|___|___|
- --------------------------------------------------------------------------------
b) BUSINESS ADDRESS
No. Street Apt. Yrs.
- --------------------------------------------------------------------------------
City State Zip
|___|___||___|___|___|___|___|
- --------------------------------------------------------------------------------
3. PREMIUM PAYABLE
|_| Annual |_| Semi-Annual |_| Quarterly
|_| M.A.P. |_| Other ___________________________________________________
Existing M.A.P. or List Bill No._____________________________________________
- --------------------------------------------------------------------------------
4. Periodic Premium (Exceptional Life Only)
$
- --------------------------------------------------------------------------------
5. a) Premium Notices To
|_| Insured |_| Owner at |_| Residence |_| Business
|_| Other (Name)_____________________________________________________________
b) No._____ Str.___________________________________ Apt._____________________
__________________________________|___|___||___|___|___|___|___|
City State Zip
- --------------------------------------------------------------------------------
6. Has the initial premium been paid and the Yes No
Company's Conditional Receipt been given? |_| |_|
Life $______________ Disability $______________________
- --------------------------------------------------------------------------------
7. a) Have you smoked one or more Yes No
cigarettes in the last 12 months? |_| |_|
b) Do you currently use any other form of tobacco? |_| |_|
|_| Cigars |_| Pipe |_| Chew |_| Other________________________________
- --------------------------------------------------------------------------------
8. a) Employer, Occupation and Duties b) Yrs.________________________________
Yes No
c) Any change contemplated? |_| |_|
d) During the past 6 months has an illness or injury
prevented you from engaging in the usual duties
of your occupation for more than 7 days? |_| |_|
- --------------------------------------------------------------------------------
9. Will the insurance applied for replace or change
any existing insurance or annuities in any company? |_| |_|
- --------------------------------------------------------------------------------
10. Have you applied for any life or disability insurance
with another company in the last six months? |_| |_|
- --------------------------------------------------------------------------------
11. Do you intend to travel outside the United States
and Canada? |_| |_|
- --------------------------------------------------------------------------------
12. In the last 3 years have you
a) Had your motor vehicle license suspended
or revoked or have you been convicted
of driving under the influence of drugs
or alcohol or been convicted of more
than one moving violation? |_| |_|
b) Participated in or do you intend to
participate in |_| |_|
|_| Motor Racing |_| Scuba Diving
|_| Hang Gliding or |_| Parachuting
similar flying activities
c) Flown or intend to fly as a trainee,
pilot or crewmember? |_| |_|
If 12b or c "yes" - Complete Appropriate Questionnaire
================================================================================
Explain "yes" answers 8-12
- --------------------------------------------------------------------------------
COMPLETE FOR LIFE INSURANCE
- --------------------------------------------------------------------------------
13. LIFE INSURANCE APPLIED FOR
Amount Plan
$______________________________________|___________________________________
- --------------------------------------------------------------------------------
14. Flex Term Plans |_| Decreasing Term
|_| Level term Int. Rate ____________________%
|_| Level Prem. Red. Term. No. of Yrs. __________________
- --------------------------------------------------------------------------------
15. Death Benefit Option (Exceptional Life only)
|_| Option 1 |_| Option 2
- --------------------------------------------------------------------------------
16. RIDERS |_| Exchange Option Rider
|_| GIR $_________________ |_| Flex Term Rider $______________
|_| OIR (Complete Part 1a) |_| Level Term
|_| CIR (Complete Part 1a) |_| Level Prem. Red. Term
|_| AIR __________________ |_| Decreasing Term
|_| Paid up Additions Rider Int. Rate ___________________%
|_| Annual Premium $___________________ No. of Yrs.__________________
|_| Single Premium $___________________ |_| LBR
- --------------------------------------------------------------------------------
17. OPTIONAL BENEFITS
a) |_| Waiver of Premium c) |_| ADB $__________________________________
b) |_| Waiver of Charges d) |_| APL
================================================================================
18. DIVIDEND OPTION (First Allmerica Financial Only)
a) |_| Paid in Cash d) |_| Paid up Adds
b) |_| Reduced Prem. e) |_| Accumulate at Interest
c) |_| Other ______________________________________________________________
================================================================================
19. a) PRIMARY BENEFICIARY Relationship
|_| _________________ day Common Disaster Clause
----------------------------------------------------------------------------
b) CONTINGENT BENEFICIARY
================================================================================
20. OWNER (if other than insured)
- --------------------------------------------------------------------------------
Form 1A-90 Page 1 Rev. 9/95
<PAGE>
- --------------------------------------------------------------------------------
COMPLETE FOR DISABILITY INSURANCE
- --------------------------------------------------------------------------------
21. DISABILITY INSURANCE APPLIED FOR
a) |_| INCOME REPLACEMENT Elim. Ben.
Mo. Ben. $ __________ Per. __________ Per. ____________
RIDERS
|_| Regular Occupation |_| Residual Disability
|_| Lifetime Accident |_| Partial Disability
|_| Life Sick/Acc |_| Hosp. Conf. $__________________________
Elim. Ben.
|_| AIB: Mo. Ben. $ __________ Per. __________ Per. __________
Elim. Ben.
|_| SIS: Mo. Ben. $ __________ Per. __________ Per. __________
|_| AIO PLUS ______
|_| COLA
|_| Key Person $________________________________________________________
|_| Other________________________________________________________________
b) |_| DISABILITY BUY-OUT Amt. $_____________ Elim. Per.________________
|_| Additional Ins. Option $_________________________________________
c) |_| OVERHEAD EXPENSE
Elim. Ben.
Amt. $_________________ Per. __________ Per. __________
|_| Residual Rider
|_| Additional Insurance Benefit _______________________________%
|_| Additional Insurance Option Rider $__________________________
- --------------------------------------------------------------------------------
22. OVERHEAD EXPENSE DATA
a) Your share of the average monthly overhead expenses
for the last six months.
Rent $____________________ Laundry $____________________
Electricity $____________________ Janitorial Svs. $____________________
Telephone $____________________ Depreciation $____________________
Heat & Water $____________________ (office furniture & equipment only)
Taxes $____________________ ____________________
Salaries $____________________ ____________________
Mortgage Int. $____________________ TOTAL $____________________
b) Are you sole owner of the business? |_| Yes |_| No
c) If not, your share ___________________________________%
How many other owners _____________________________________
- --------------------------------------------------------------------------------
23. ANNUAL EARNED INCOME*
a) Last Tax Year $_________________________________________________
Prior Tax Year $_________________________________________________
Two Years Ago $_________________________________________________
b) Unearned Income (indicate source) $____________________________________
c) Net Worth Personal $________________________________________________
Business $________________________________________________
*Earned income is the total of your annual salaries, wages, bonuses,
commissions and fees less ordinary business expenses.
- --------------------------------------------------------------------------------
24. Record all disability income and overhead expense coverage in force
(include fringe, individual, group, salary continuation, association, union
benefits or state disability benefits). If none, write "NONE".
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Company or Source Year Disability Overhead Monthly Elim. Benefit Offset By
Issued Income Expense Indemnity Period Period Social Security
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ $
- ---------------------------------------------------------------------------------------------------------
$ $
- ---------------------------------------------------------------------------------------------------------
$ $
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMPLETE FOR ALL APPLICATIONS
- --------------------------------------------------------------------------------
Special Request Home Office Amendments and Corrections/Administrative Purpose
- --------------------------------------------------------------------------------
It is agreed that: (1) The application consists of Parts I, II and IA, if IA
applies. (2) The representations are true and complete to the best of my
knowledge and belief, (3) No liability exists and the insurance applied for will
not take effect unless the policy is delivered and the premium is paid during
the lifetime of the proposed insured(s) and then only if the proposed insured(s)
has (have) not consulted or been treated by any physician or practitioner of any
healing art nor had any tests listed in the application since its completion;
but, if the premium is paid prior to delivery of the policy and a conditional
receipt is delivered by the agent, insurance shall be effective subject to terms
of the conditional receipt. (4) No agent or broker is authorized to amend,
alter, or modify the terms of this agreement.
- --------------------------------------------------------------------------------
Signed at (City and State) Date Full signature of proposed insured
- --------------------------------------------------------------------------------
This application is made at the request of the undersigned who hereby ratifies
each statement, representation and agreement herein and agrees that any contract
of insurance issued in connection with this application shall be issued on the
condition that each statement, representation and agreement shall be binding
upon the above named owner(s) to the same extent and degree as if made by the
owner(s).
- --------------------------------------------------------------------------------
Signed at (City and State) Date Full signature(s) of owner(s)
(other than insured)
- --------------------------------------------------------------------------------
Soliciting Agent's Signature Date If Business, name of establishment
and title/capacity
- --------------------------------------------------------------------------------
Form 1A-90 Page 2 Rev. 9/95
<PAGE>
First Allmerica Financial Life Insurance Company
Allmerica Financial Life Insurance
AGENT'S REPORT and Annuity Company
- --------------------------------------------------------------------------------
SECTION A COMPLETE FOR ALL APPLICATIONS
- --------------------------------------------------------------------------------
1. Name First - Middle Initial - Last
- --------------------------------------------------------------------------------
2. Proposed Insured
a) Years Known ______________ b) Marital Status _______________
c) |_| Relative |_| Friend |_| Client |_| Stranger
- --------------------------------------------------------------------------------
3. Home Telephone No. (Area Code) and No.
( )
- --------------------------------------------------------------------------------
4. Driver's License Number and State
|
- --------------------------------------------------------------------------------
5. What is the proposed insured's annual
income? (Life only)
Earned $ _____________________________ Unearned $_____________________________
Financial Worth $
- --------------------------------------------------------------------------------
6. Quick Pay years (NOT GUARANTEED)
- --------------------------------------------------------------------------------
7. Occupational Class (Disability only)
|_|4AS |_|4A |_|3A |_|2A |_|A
- --------------------------------------------------------------------------------
8. a) Is the insurance being applied for considered a
replacement according to its definition in the
replacement regulations (if any) in the state the
business was written? |_| Yes |_| No
(Send Replacement forms or 1035 Exchange where applicable)
b) If the answer to a above is "yes", list below
all existing life, disability or annuity contracts
proposed to be replaced.
Policy Number Name of Issuing Company
------------- -----------------------
- --------------------------------------------------------------------------------
9. List all life insurance in force
- --------------------------------------------------------------------------------
Company Year Insurance Amount ADB Waiver
------------------------------
Personal Business
- --------------------------------------------------------------------------------
$ $ $ |_| Yes |_| No
- --------------------------------------------------------------------------------
|_| Yes |_| No
- --------------------------------------------------------------------------------
|_| Yes |_| No
- --------------------------------------------------------------------------------
|_| Yes |_| No
- --------------------------------------------------------------------------------
TOTAL $ $ $
- --------------------------------------------------------------------------------
SECTION B COMPLETE FOR ALL APPLICATIONS WHEN BUSINESS INSURANCE APPLIED FOR
- --------------------------------------------------------------------------------
10. a) Type of Business
|_| Corporation |_| S-Corporation
|_| Partnership |_| Sole Proprietorship
b) Date Incorporated or organized __________________________________
c) Number of employees______________________________________________
d) If Corporation, State of incorporation___________________________
Have directors authorized this application? |_| Yes |_| No
- --------------------------------------------------------------------------------
11. a) How long has proposed
insured been with owner?________________________________________
b) Percentage of business
owned by proposed insured?______________________________________%
- --------------------------------------------------------------------------------
12. Net Earnings (after tax) of business for
Last Year $ Previous Year $
- --------------------------------------------------------------------------------
13. Purpose of Insurance
|_| Stock Purchase |_| Business Keyperson
|_| Split Dollar |_| Executive Bonus
|_| Stock Redemption |_| Executive Income Plan
|_| Deferred Compensation
|_| Other_______________________________
- --------------------------------------------------------------------------------
14. Salary of proposed insured for
Last year $ Previous year $
- --------------------------------------------------------------------------------
15. a) What is aggregate business insurance (existing and
new) authorized on this life in all companies?
Existing $______________________ New $__________________________________
b) Are any other partners or associates insured or
proposed for business coverage? |_| Yes |_| No
Give names, titles, amounts and companies.
c) If partnership, give full name of all partners.
- --------------------------------------------------------------------------------
16. Home Office Assistance
|_| B.I. Handbook |_| Financial Topics
|_| Sales Proposals |_| Technical Release
|_| Inquiry |_| Other ______________________________
|_| What's New
Was this case a result of any previous assistance either
direct or indirect? |_| Yes |_| No
- --------------------------------------------------------------------------------
SECTION C COMPLETE WHEN OIR AND/OR CIR IS APPLIED FOR
- --------------------------------------------------------------------------------
17. For CIR
Are all children who have not reached their
18th birthday included? |_| Yes |_| No
If "no", explain
- --------------------------------------------------------------------------------
18. For CIR and OIR (child) How long have you
known the parent or person with whom the
child (children) is (are) living? (If other than the
applicant, give name and explain)
- --------------------------------------------------------------------------------
19. For CIR and OIR
a) To the best of your knowledge, will the life
insurance being applied for replace life
insurance or annuities in any company? |_| Yes |_| No
(Send replacement forms where applicable.)
b) If the answer to a above is "yes", list all existing life
insurance or annuity contracts proposed to be replaced.
Policy Number Name of Issuing Company
- --------------------------------------------------------------------------------
Form 1AR-90 Page 1 Rev. 3/95
<PAGE>
- --------------------------------------------------------------------------------
SECTION D COMPLETE FOR LIFE APPLICATION WHEN APPLICANT IS DEPENDENT SPOUSE OR
DEPENDENT CHILD
- --------------------------------------------------------------------------------
20. a) What is the need for proposed insurance?
b) If supporting spouse or parent is insured for benefit
of family, give amount. If not insured, give reasons.
c) Regarding supporting spouse or parent
Full Name____________________________________
Birthdate____________________________________
Income_______________________________________
- --------------------------------------------------------------------------------
SECTION E COMPLETE FOR LIFE APPLICATION WHEN INSURANCE IS FOR ESTATE PLANNING
PURPOSES
- --------------------------------------------------------------------------------
21. a) Home Office Assistance
|_| What's New |_| Inquiry
|_| Technical Release
|_| Financial Topics |_| Other_______________________
b) Was this case a result of any previous assistance
either direct or indirect? |_| Yes |_| No
- --------------------------------------------------------------------------------
22. a) Was an Estate Analysis prepared? |_| Yes |_| No
b) Was a Liquidity Analysis prepared? |_| Yes |_| No
- --------------------------------------------------------------------------------
SECTION F COMPLETE FOR LIFE APPLICATION WHEN INSURANCE IS FOR FINANCIAL
PLANNING PURPOSES
- --------------------------------------------------------------------------------
23. a) Home Office Assistance
|_| Financial Topics |_| Plan Prep./Review
|_| Inquiry |_| Other__________________________
b) Was this case a result of any previous assistance
either direct or indirect? |_| Yes |_| No
- --------------------------------------------------------------------------------
24. a) Was a financial plan prepared? |_| Yes |_| No
b) If "yes", type of plan |_| Basic
|_| Comprehensive
|_| Focus
c) Was a fee charged? |_| Yes |_| No
- --------------------------------------------------------------------------------
SECTION G COMPLETE FOR ALL APPLICATIONS FOR MARKET RESEARCH
- --------------------------------------------------------------------------------
25. Need
|_| Personal |_| Business |_| Estate
- --------------------------------------------------------------------------------
26. Occupation
|_| Business owner |_| Manager/Exec.
|_| Professional |_| Self-Employed
|_| Other white collar |_| Blue collar
- --------------------------------------------------------------------------------
27. Industry
|_| Medical |_| Retail Trade
|_| Construction |_| Finances, Ins., Real Estate
|_| Manufacturing |_| Professional Service
|_| Trans./Public Util. |_| Public Administration
|_| Wholesale Trade |_| Education
|_| Agriculture, Forestry |_| Other
- --------------------------------------------------------------------------------
28. a) Was this a competitive situation? |_| Yes |_| No
b) Competing Company_____________________________________________________
c) Home Office Assistance |_| Yes |_| No
- --------------------------------------------------------------------------------
29. Reason for Insurance
|_| Death Taxes |_| Family Income
|_| Gift |_| Retirement Income
|_| Estate Protection |_| Fund Bus. Agreement
|_| Cash Accumulation |_| Other
- --------------------------------------------------------------------------------
30. Source |_| Observation
|_| Personal |_| Seminar
|_| Direct Mail |_| Referred Lead
|_| Cold Call |_| Policyholder
|_| Orphan |_| Telemarketing Lead
- --------------------------------------------------------------------------------
31. Other Investments |_| Money Market
|_| Stocks & Bonds |_| Commodities
|_| Investment Property |_| Savings Account
|_| Group Benefit Plan |_| Pension Plan
- --------------------------------------------------------------------------------
32. Planning Tools Used |_| Ledger Proposal
|_| FSA |_| Next $
|_| Ins Mark |_| Other
- --------------------------------------------------------------------------------
It is hereby stated that (we) (I) personally solicited this application and,
except as specified below, no other agent or broker has any commission interest
in this sale. It is certified that the information supplied by the proposed
insured has been truly and accurately recorded. (If more than one agent indicate
split otherwise the Company assumes that any division of commission is in equal
shares.)
- --------------------------------------------------------------------------------
Signature of Agent Print Full Name Code Agency
%
- --------------------------------------------------------------------------------
Signature of Agent Print Full Name Code Agency
%
- --------------------------------------------------------------------------------
Signature of Agent Print Full Name Code Agency
%
- --------------------------------------------------------------------------------
Signature of Agent Print Full Name Code Agency
%
- --------------------------------------------------------------------------------
Form 1AR-90, Page 2 Rev. 3/95
<PAGE>
APPLICATION FOR INDIVIDUAL
ADULT LIFE AND/OR DISABILITY
INSURANCE - PART II |_| First Allmerica Financial Life
Insurance Company
|_| Allmerica Financial Life
Insurance and Annuity Company
|_| Life |_| Disability
Check applicable box(es)
All Answers Must Be Handwritten Worcester, Massachusetts 01653
- --------------------------------------------------------------------------------
1. Proposed Insured Birth Date
First M.I. Last Mo. Day Yr.
| |
- --------------------------------------------------------------------------------
2. Personal Physician
a) |_| Name and Address b) |_| None
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Reason Last Consulted Date
c) |_| Routine Exam Were all findings normal? |_| Yes |_| No
d) |_| As indicated in #27 on page 2
e) |_| Other - Give Details
Date Reason Result
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
- --------------------------------------------------------------------------------
3. In the past 10 years have you been told you had or been
treated for immune system disorder including acquired
immune deficiency syndrome (AIDS) or AIDS related
complex (ARC)? |_| Yes |_| No
- --------------------------------------------------------------------------------
4. During the past 5 years have you used marijuana, cocaine,
barbiturates, narcotics, excitants, or hallucinogens, except
as prescribed medication? |_| Yes |_| No
- --------------------------------------------------------------------------------
5. Do you engage in a scheduled exercise program?
(If "yes", give details = type, duration, frequency)
|_| Yes |_| No
- --------------------------------------------------------------------------------
6. Are you now pregnant? |_| Yes |_| No
If yes, expected date of delivery
- --------------------------------------------------------------------------------
Explain "yes" answers to #3-5.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
During the Past 10 years have you had, been told you had, or been treated for
<TABLE>
<S> <C> <C> <C> <C> <C>
7. a) |_| Chest pain or Angina c) |_| Heart Murmur e) |_| Heart Attack g) |_| Palpitations i) |_| None of These
b) |_| Rheumatic fever d) |_| High Blood Pressure f) |_| Blood Vessel h) |_| Heart
Disorder Disorder
8. a) |_| Pneumonia d) |_| Persistent Cough g) |_| Coughing of j) |_| Asthma m) |_| None of These
b) |_| Bronchitis e) |_| Persistent Hoarseness Blood k) |_| Pleurisy
c) |_| Tuberculosis f) |_| Allergies h) |_| Emphysema l) |_| Chronic
i) |_| Respiratory Shortness
Disorder of Breath
9. a) |_| Recurrent Headache c) |_| Dizziness or Fainting e) |_| Brain Disorder g) |_| Seizures i) |_| None of These
b) |_| Paralysis d) |_| Stroke f) |_| Speech Loss h) |_| Memory Loss
10. a) |_| Nervous Disorder b) |_| Mental Disorder c) |_| Depression d) |_| Suicide e) |_| None of These
Attempt
11. a) |_| Ulcer b) |_| Recurring Indigestion c) |_| Vomiting Blood d) |_| Difficulty e) |_| None of These
Swallowing
12. a) |_| Colon Polyp b) |_| Ileitis or Colitis c) |_| Persistent d) |_| Bloody Stools e) |_| None of These
Diarrhea
13. a) |_| Hepatitis c) |_| Cirrhosis e) |_| Jaundice g) |_| Gall Bladder i) |_| None of These
b) |_| Stomach Disorder d) |_| Liver Disorder f) |_| Intestinal Disorder
Disorder h) |_| Pancreas
Disorder
14. a) |_| Cancer c) |_| Skin Cancer e) |_| Tumor g) |_| Cyst h) |_| None of These
b) |_| Fibroids d) |_| Skin Disorder f) |_| Lymph Gland
Disorder
15. a) |_| Diabetes b) |_| Thyroid Disorder c) |_| Disease of d) |_| Glandular e) |_| None of These
Breast Disorder
16. a) |_| Sugar in Urine d) |_| Pus in Urine g) |_| Kidney Disorder i) |_| Urinary k) |_| None of These
b) |_| Albumin in Urine e) |_| Prostate Disorder h) |_| Reproductive Disorder
c) |_| Blood in Urine f) |_| Bladder Disorder System Disorder j) |_| Sexually
Transmitted
Disease
17. a) |_| Anemia b) |_| Leukemia c) |_| Blood Disorder d) |_| Recurrent e) |_| None of These
Infections
18. a) |_| Hernia b) |_| Hemorrhoids c) |_| Varicose Veins d) |_| Rectal e) |_| None of These
Disorder
19. a) |_| Deformity c) |_| Back Pain e) |_| Amputation g) |_| Arthritis i) |_| None of These
b) |_| Rheumatism d) |_| Gout f) |_| Bone or Muscle h) |_| Back, Spine,
Disorder Joint
Disorders
20. a) |_| Eye Disorder b) |_| Ear Disorder c) |_| Nose Disorder d) |_| Throat e) |_| None of These
Disorder
</TABLE>
Form 1AM-90 Page 1 Rev. 9/95
<PAGE>
All Answers Must Be Handwritten
- --------------------------------------------------------------------------------
21. Height in shoes __________________ Weight in clothing ______________________
Have you had any change in weight in the past year?
|_| Yes |_| No |_| Gain |_| Loss Amount_______________________________
Reason
- --------------------------------------------------------------------------------
22. Other than as indicated in 7-20, during the
past 5 years have you
a) Been or are you now under observation,
treatment, therapy, counseling, or medi- Yes No
cations or have you had any check up,
illness or surgery? |_| |_|
b) Had electrocardiogram, x-ray or blood studies? |_| |_|
c) Been advised to have a test or surgery
which was not done? |_| |_|
d) Been treated or received counseling for
alcohol or drug use? |_| |_|
e) Been a patient in a hospital, clinic,
sanitarium or other medical facility? |_| |_|
f) Consulted any other physician or chiropractor? |_| |_|
- --------------------------------------------------------------------------------
23. Have you ever requested or received a pension Yes No
benefit or payments because of an injury,
sickness or disability? |_| |_|
- --------------------------------------------------------------------------------
24. Have you ever changed occupation or residence
because of health? |_| |_|
- --------------------------------------------------------------------------------
25. Has any member of your family ever had high
blood pressure, diabetes, cancer, mental illness
or hereditary disease? |_| |_|
- --------------------------------------------------------------------------------
26. Family Age if Present State of Health Age at
Record Living or Cause of Death Death
----------------------------------------------------------------------------
Father
----------------------------------------------------------------------------
Mother
----------------------------------------------------------------------------
Brothers
& Sisters
- --------------------------------------------------------------------------------
27. COMPLETE FOR EACH APPROPRIATE ITEM CHECKED IN 7-25
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
No. Diagnosis Medication/Treatment Date Still Under Physician/Medical Facility Name
Treatment? (Include Address if not in 2 above)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
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</TABLE>
I understand and agree that the foregoing statements and answers are
complete, true and correctly recorded to the best of my knowledge and
belief, and that they shall be part of the contract if issued.
Date ______________ Witness _______________________ __________________________
Examiner or Agent Signature
of Proposed Insured
Form 1AM-90 Page 2 Rev. 9/95
<PAGE>
First Allmerica Financial
Life Insurance Company Variable Life Application
- --------------------------------------------------------------------------------
1 INSURED The person upon whose life this insurance
coverage is proposed.
- --------------------------------------------------------------------------------
________________________________________________________________________________
First Name Middle Last
________________________________________________________________________________
Street Address Years at this Address
________________________________________________________________________________
City State Zip
( )
- --------------------------------------------------------------------------------
Daytime Telephone Number
M/___ D/___ Y/___ M |_| F |_|
Date of Birth Sex
- -
- ---------------------------------------
Social Security Number
- --------------------------------------------------------------------------------
2 PAYMENT The monetary contribution to the policy.
- --------------------------------------------------------------------------------
Check one:
|_| I have enclosed a check for my initial payment of $_________
($100 minimum) and have received a conditional receipt.
(Please make check payable to First Allmerica Financial Life
Insurance Company)
|_| My initial payment will be transferred from another insurance company.
Approximate amount $______________________
Name of transferring company____________________
My Transfer of Assets form is attached. Yes |_|
My Transfer of Assets form has been sent to the
transferring company. Yes |_|
2a I want to make future payments of $__________:
|_| Annually |_| Semi-Annually |_| Quarterly
|_| Monthly (I have included a voided check and Bank
Drafting Form.)
- --------------------------------------------------------------------------------
3 POLICYOWNER The person or entity exercising the policy's
contractual rights.
- --------------------------------------------------------------------------------
3a The policyowner will be the insured unless specified here:
________________________________________________________________________________
Name
________________________________________________________________________________
Street Address
________________________________________________________________________________
City State Zip
Social Security or Tax I.D. Number ______________________
3b Payment reminder notices will be sent to the policyowner unless specified
otherwise here:
________________________________________________________________________________
Name
________________________________________________________________________________
Street Address
________________________________________________________________________________
City State Zip
- --------------------------------------------------------------------------------
4 ALLOCATION How I want my payments allocated.
- --------------------------------------------------------------------------------
Complete Section 4a and Section 4b. Future payments will be allocated according
to this selection unless changed by me.
4a |_| Allocate my payment as follows: Use whole percentages. If dollar cost
averaging is used, please complete a Dollar Cost Averaging form. You may
allocate your payments to no more than 7 of the 14 variable accounts
listed below and the Fixed Account.
YOUR TOTAL ALLOCATION MUST EQUAL 100%.
______________% Select Emerging Markets
______________% Select International Equity
______________% T. Rowe Price International Stock
______________% Select Aggressive Growth
______________% Select Capital Appreciation
______________% Select Value Opportunity
______________% Select Growth
______________% Select Strategic Growth
______________% Fidelity Growth Portfolio
______________% Select Growth and Income
______________% Fidelity Equity Income Portfolio
______________% Fidelity High Income Portfolio
______________% Select Income
______________% Allmerica Money Market
______________% Fixed Account
______________%
100 % Total
4b |_| Deductions of all charges will be made pro rata according to the value of
each account and the Fixed Account.
OR
|_| Deduct all charges from ___________________________
(Enter any single account, except the Fixed Account)
AS-158-95NY PAGE 1
Rev 2/98
<PAGE>
- --------------------------------------------------------------------------------
5 INSURANCE How much life insurance I want.
- --------------------------------------------------------------------------------
5a I want $_____________ in life insurance coverage.
5b I want insurance coverage to be: (Choose one)
|_| Level - Insurance coverage remains constant.
|_| Adjustable - Insurance coverage changes with the value of your
investment.
5c I want the following additional insurance benefits:
|_| Waiver of payment upon disability
|_| Waiver of charges upon disability
|_| Living benefits
|_| Other Insured Rider (Complete Supplementary Application)
|_| Guaranteed Insurability Rider $_____________________
|_| Exchange Option Rider
|_| ____________________________________________________
- --------------------------------------------------------------------------------
6 BENEFICIARY
- --------------------------------------------------------------------------------
The Primary Beneficiary is the person or entity who will receive the policy
proceeds. The Contingent Beneficiary is the person or entity who will receive
the policy proceeds should the Primary Beneficiary not survive the insured.
________________________________________________________________________________
Name of Primary Beneficiary Relationship to Insured
________________________________________________________________________________
Name of Contingent Beneficiary Relationship to Insured
|_| 10-day Common Disaster Clause*
|_| ______________-day Common Disaster Clause*
* A Common Disaster Clause requires that the beneficiary survive the insured for
a specified length of time before becoming entitled to the policy proceeds.
This assures that the contingent beneficiary will receive the policy proceeds
rather than the estate of the primary beneficiary.
- --------------------------------------------------------------------------------
7 REPLACEMENT OF OTHER CONTRACTS
- --------------------------------------------------------------------------------
Will the proposed policy replace any existing annuity or life insurance
contract?
|_|Yes |_|No
If yes, list company name and policy number.
________________________________________________________________________________
I have not applied for any life or disability insurance with another company
in the last six months.
|_|Yes |_|No
If yes, please explain:
________________________________________________________________________________
- --------------------------------------------------------------------------------
8 INFORMATION ABOUT THE INSURED
- --------------------------------------------------------------------------------
An additional sheet of paper may be attached, if necessary, to provide full
answers to the questions in this application.
8a Current Employment.
Name of Employer _______________________________________________Yrs._______
Occupation and Responsibilities ___________________________________________
________________________________________________________________________________
Any change contemplated?___________________________________________________
8b Income.
My annual earned income is $________________________________________
My annual unearned income is $________________________________________
My net worth is $________________________________________
8c I had an illness or injury during the past six months that has prevented me
from engaging in the usual duties of my occupation for more than seven
days.
|_| Yes |_| No If yes, please explain:
________________________________________________________________________________
________________________________________________________________________________
8d During the past three years I had a motor vehicle license suspended or
revoked or been convicted of driving under the influence of drugs or
alcohol or of more than one moving violation.
|_| Yes |_| No If yes, please explain:
________________________________________________________________________________
________________________________________________________________________________
8e During the past three years I have participated in or I intend to
participate in:
|_| Scuba diving |_| Skydiving |_| Motor racing
|_| Hang gliding or similar flying activity
8f During the past three years I have flown as or I intend to fly as a
trainee, pilot or crew member.
|_|Yes |_|No
8g During the past year, I have smoked one or more cigarettes.
|_|Yes |_|No
8h I currently use:
|_| Cigars |_| Pipe |_| Chewing tobacco
|_| Other tobacco product
(Please specify)_________________________________________________
8i I will be traveling outside of the United States or Canada in the next six
months:
|_| Yes |_| No, If yes, please indicate country:
___________________________________________________________________________
If 8e or 8f is "yes" - Complete Appropriate Questionnaire.
AS-158-95NY PAGE 2
<PAGE>
- --------------------------------------------------------------------------------
ACKNOWLEDGMENTS AND SIGNATURES
- --------------------------------------------------------------------------------
I acknowledge receipt of the Prospectuses for the First Allmerica Financial Life
Insurance Company Flexible Premium Variable Life Insurance Policy, the Allmerica
Investment Trust, the Variable Insurance Products Fund, and T. Rowe Price
International Series. Upon request, the Company will provide you with
illustrations of benefits including death benefits, policy values and cash
surrender values in a form satisfactory to the New York Superintendent of
Insurance.
I understand that the death benefit and duration of coverage for the flexible
premium variable life insurance policy applied for may increase or decrease to
reflect the investment experience of the sub-accounts of the variable account.
I understand that the policy value for the flexible premium variable life
insurance policy applied for may increase or decrease to reflect the investment
experience of the sub-accounts of the variable account, and are not guaranteed
as to dollar amount. There is no guaranteed minimum policy value.
I believe that a Flexible Premium Variable Life Insurance Policy is consistent
with my investment objectives and financial needs.
It is agreed that: (1) The application consists of this application form, the
medical questionnaires and any supplemental applications to apply for insurance
on family members or a second insured, if applicable. (2) The representations
are true and complete to the best of my knowledge and belief; (3) No liability
exists and the insurance applied for will not take effect until the policy is
delivered and the premium is paid during the lifetime of the proposed insured(s)
and then only if the proposed insured(s) has (have) not consulted or been
treated by any physician or practitioner of any healing art nor had any tests
listed in the application since its completion; but, if the premium is paid
prior to delivery of the policy and a conditional receipt is delivered by the
registered representative/agent, insurance will be effective subject to terms of
the conditional receipt; and (4) No registered representative/agent is
authorized to amend, alter, or modify the terms of this agreement.
________________________________________________________________________________
Signed at City State
________________________________________________________________________________
Signature of Insured Date
________________________________________________________________________________
Signature of Owners (if other than Insured) Date
________________________________________________________________________________
Signed at City State
- --------------------------------------------------------------------------------
FOR R.R./A. USE ONLY
- --------------------------------------------------------------------------------
Does the policy applied for replace an existing annuity or life insurance
policy?
|_|Yes |_|No
If yes, attach replacement forms as required.
As Registered Representative/Agent, I certify witnessing the signature of the
applicant and that the information in this application has been accurately
recorded, to the best of my knowledge and belief.
Based on the information furnished by the Owner or Insured in this application,
I certify that I have reasonable grounds for believing the purchase of the
policy applied for is suitable for the Owner. I further certify that the
Prospectuses were delivered and that no written sales materials other than those
furnished or approved by the Company were used.
________________________________________________________________________________
Signature of Registered Representative/Agent Date
________________________________________________________________________________
Print Name of Registered Representative/Agent Reg Rep #
( ) ( )
- --------------------------------------------------------------------------------
Telephone FAX
- --------------------------------------------------------------------------------
Name of Broker/Dealer Branch #
- --------------------------------------------------------------------------------
Branch Office Street Address
- --------------------------------------------------------------------------------
City State Zip
Remarks:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
- --------------------------------------------------------------------------------
FOR HOME OFFICE USE ONLY
- --------------------------------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
AS-158-95NY PAGE 3
<PAGE>
First Allmerica Financial Life Authorization to
Insurance Company (the "Company") Obtain Information
================================================================================
- ---------------
Name of Insured
- --------------- ----------------------------------------------------------------
(Please Print)
- --------------------------------------------------------------------------------
AUTHORIZATION TO OBTAIN INFORMATION
- --------------------------------------------------------------------------------
To all physicians, medical professionals, hospitals, clinics, other health care
providers, employers, Medical Information Bureau, Inc. (MIB), consumer reporting
agencies, other insurance support organizations, the United States Internal
Revenue Service, the Puerto Rico Bureau of Income Tax, and other persons who
have the types of information described below about the proposed insured:
I authorize you to give the Company, its reinsurers, or its agent; (a) all
information you have as to illness, injury, medical history, diagnosis,
treatment, and prognosis (including any drug or alcohol abuse condition or
treatment) with respect to any physical or mental condition of the proposed
insured; and (b) any non-medical information, including but not limited to, an
investigative consumer report and copies of my tax returns filed with the United
States Internal Revenue Service and/or the Puerto Rico Bureau of Income Tax,
which the company believes it needs to perform the business functions described
below. I also authorize the Company to give MIB health or non-medical
information it has about me and that of any minor member of my family applying
for insurance.
The information obtained will be used to determine if the proposed insured is
eligible for: (a) the insurance requested; or (b) benefits under a policy which
is in force. It will also be used for any other business purpose which relates
to the insurance requested or the policy which is in force. This authorization
will be valid for 30 months. I know that under Federal Regulations, I may revoke
this authorization as it applies to drug and alcohol abuse treatment at any
time; but my revocation will not affect any information that has been released
prior thereto. I know that I may request a copy of this form. I agree that a
photocopy is as valid as the original. I have received the Insurance Information
Practices notice.
- --------------------------------------------------------------------------------
Signature of proposed insured
(if proposed insured is a minor, signature of legal guardian)
- --------------------------------------------------------------------------------
Signature of Spouse (if proposed for insurance)
- --------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
PERSONAL HISTORY INTERVIEW INFORMATION
- --------------------------------------------------------------------------------
Proposed Insured's (Professional Title)
- --------------------------------------------------------------------------------
Application For
| | Adult | | Juvenile Amount $___________
- --------------------------------------------------------------------------------
Home Telephone: (Area Code) and No.
(___)___________________________
Business Telephone: (Area Code) and No.
(___)____________________________
- --------------------------------------------------------------------------------
Driver's License Information
No. ___________________ State _______________
- --------------------------------------------------------------------------------
Allmerica may be contacting you to discuss this application. The best time for
us to call you is at (Eastern Time):
|_| Home |_| Business
1st Choice ________________
2nd Choice ________________
- --------------------------------------------------------------------------------
Broker Dealer Firm _____________________________________________________________
Registered Representative ______________________________________________________
FOR HOME OFFICE USE ONLY
- --------------------------------------------------------------------------------
Date Received in P.H.I Unit ___________
Attempts to Call
Date/Time _______________ Date/Time ________________
Date/Time _______________ Date/Time ________________
Date/Time _______________ Date/Time ________________
Date Call Completed _____________ Time |_|AM |_|PM
- --------------------------------------------------------------------------------
Remarks
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AS-157NY Rev 2/98
<PAGE>
April 15, 1998
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
RE: INHEIRITAGE ACCOUNT OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 33-74184 AND 811-8304
Gentlemen:
In my capacity as Counsel of First Allmerica Financial Life Insurance Company
(the "Company"), I have participated in the preparation of this Post-Effective
Amendment to the Registration Statement for the Inheiritage Account on Form S-6
under the Securities Act of 1933 with respect to the Company's individual
flexible premium second-to-die variable life insurance policies.
I am of the following opinion:
1. The Inheiritage Account is a separate account of the Company validly
existing pursuant to the Massachusetts Insurance Code and the regulations
issued thereunder.
2. The assets held in the Inheiritage Account equal to the reserves and other
Policy liabilities of the Policies which are supported by the Inheiritage
Account are not chargeable with liabilities arising out of any other
business the Company may conduct.
3. The individual flexible premium variable life insurance policies, when
issued in accordance with the Prospectuses contained in the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of the Inheiritage
Account on Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
April 15, 1998
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
RE: INHEIRITAGE ACCOUNT OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 33-74184 AND 811-8304
Gentlemen:
This opinion is furnished in connection with the filing by First Allmerica
Financial Life Insurance Company of a post-effective amendment to the
Registration Statement on Form S-6 of its second-to-die flexible premium
variable life insurance policies ("Policies") allocated to the Inheiritage
Account under the Securities Act of 1933. The prospectuses included in the
post-effective amendment to the Registration Statement describe the Policies. I
am familiar with and have provided actuarial advice concerning the preparation
of the post-effective amendment to the Registration Statement, including
exhibits.
In my professional opinion, the illustration of death benefits and cash values
included in Appendix C of the prospectuses, based on the assumptions stated in
the illustrations, are consistent with the provisions of the Policy. The rate
structure of the Policies has not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for Insureds age 55 than to
prospective purchasers of Policies for Insureds at other ages or underwriting
classes.
I am also of the opinion that the aggregate fees and charges under the Policy
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to the post-effective
amendment to the Registration Statement.
Sincerely,
/s/ William H. Mawdsley
William H. Mawdsley, FSA, MAAA
Vice President and Actuary
<PAGE>
Description of Issuance, Transfer
and Redemption Procedures for Policies
Offered by the Inheiritage Account of
State Mutual Life Assurance Company of America
Pursuant to Rule 6e-3(T)(b)(12)(ii)
under the Investment Company Act of 1940
The Inheiritage Account of State Mutual Life Assurance Company of America
("Company") is registered under the Investment Company Act of 1940 ("1940 Act")
as a unit investment trust. Within the Inheiritage Account are 14 Sub-Accounts.
Procedures apply equally to each subaccount and for purposes of this description
are defined in terms of the Inheiritage Account, except where a discussion of
both the Inheiritage Account and the individual Sub-Accounts is necessary. Each
Sub-Account invests in shares of a corresponding investment division of the
Allmerica Investment Trust ("Trust"), Variable Insurance Products Fund ("VTPF"),
or Delaware Group Premium Fund, Inc. ("DGPF"), each of which is a "series" type
of mutual fund registered under the 1940 Act. The investment experience of a
Sub-Account of the Inheiritage Account depends on the market performance of its
corresponding investment division of the Trust, VIPF or DGPF. Although flexible
premium variable life insurance policies funded through the Inheiritage Account
may also provide for fixed benefits supported by the Company's General Account,
this description assumes that net premiums are allocated exclusively to the
Inheiritage Account and that all transactions involve only the Sub-Accounts of
the Inheiritage Account, except as otherwise explicitly stated herein.
I. "Public Offering Price": Purchase and Related Transactions -- Section
22(d) and Rule 22c-1
This section outlines Policy provisions and administrative procedures
which might be deemed to constitute, either directly or indirectly, a
"purchase" transaction. Because of the insurance nature of the policies,
the procedures involved necessarily differ in certain significant respects
from the purchase procedures for mutual funds and annuity plans. The chief
differences revolve around the structure of the cost of insurance charges
and the insurance underwriting process. Certain Policy provisions, such as
reinstatement and loan repayment, do not result in the issuance of a
Policy but require certain payments by the Policyowner and involve a
transfer of assets supporting Policy reserve into the Inheiritage Account.
a. Insurance Charges and Underwriting Standards
Premium payments are not limited as to frequency and number, but
there are limitations as to amount. No premium payment may be less
than $100 without the Company's consent, and the total of all
premiums paid can never exceed the then current maximum premiums
determined by Internal Revenue Service rules. If at any time a
premium is paid which would result in total premiums exceeding the
current maximum premium limitations, the Company will return the
amount in excess of such maximums to the Policyowner.
The Policy will remain in force so long as the Policy value less any
outstanding debt is sufficient to pay certain monthly charges
imposed in connection with the Policy. Cost of insurance charges for
the policies will not be the same for all Policyowners. The
insurance principle of pooling and distribution of mortality risks
is based upon the assumption that each Policyowner pays a cost of
insurance charge commensurate with the Insured's mortality risk,
which is actuarially determined based upon factors such as age,
health and occupation. In the context of life insurance, a uniform
mortality charge (the "cost of insurance charge") for all Insureds
would discriminate unfairly in favor of those Insureds representing
greater mortality risks to the disadvantage of those representing
lesser risks. Accordingly, there will be a different "price" for
each actuarial category of Policyowners because different cost of
insurance rates will apply. Accordingly, while not all Policyowners
will be subject to the same cost of insurance rate, there will be a
single "rate" for all Policyowners in a given actuarial category.
The policies will be offered and sold pursuant to the Company's
underwriting standards and in accordance with state insurance laws.
Such laws prohibit unfair discrimination among Insureds, but
recognize that premiums must be based upon factors such as age,
health and occupation. Tables showing the maximum cost of insurance
charges will be delivered as part of the Policy.
-1-
<PAGE>
b. Application and Initial Premium Processing
Upon receipt 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 such verification procedures as
medical examinations and may require that further information be
provided by the proposed Policyowner before a determination can be
made. A Policy cannot be issued until this underwriting procedure
has been completed.
If at the time of Application a prospective Policyowner makes a
payment equal to at least one monthly deduction 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. If the application is approved, the
Policy will be issued as of the date the terms of the Conditional
Insurance Agreement were met. If the prospective Policyowner does
not wish to make any payment until the Policy is issued, upon
delivery of the Policy the Company will require payment of
sufficient premium to place the insurance in-force.
Pending completion of insurance underwriting and Policy issuance
procedures, the initial premium will be held in the Company's
General Account. If the application is approved and the Policy is
issued and accepted, the initial premium held in the General Account
will be credited with interest not later than the date of receipt of
the premium at the Company's Principal Office. Not later than three
days of underwriting approval of the Policy, the amounts held in the
Company's General Account will be allocated to the Sub-Accounts
according to Policyowner's instructions, for that part of the total
amount allocated to the Inheiritage Account which is less than
$10,000. If the amount allocated to the Inheiritage Account exceeds
$10,000 or if the Policy provides for planned premium payments
during the first year of $5,000 semi-annually, $2,500 quarterly or
$1,000 monthly, the entire amount will remain in the General Account
until expiration of the Free Look Period, as evidenced by a delivery
receipt. Amounts remaining in the General Account will continue to
be credited interest from date of receipt of the premium at the
Principal Office.
If a Policy is not issued, the premiums will be returned to the
Applicant without interest.
These processing procedures are designed to provide insurance,
starting with the date of the application, to the proposed
Policyowner in connection with payment of the initial premium and
will not dilute any benefit payable to any existing Policyowner.
Although a Policy cannot be issued until the underwriting process
has been completed, the proposed Policyowner will receive immediate
insurance coverage, if he has paid an initial premium and proves to
be insurable. If the initial premium is not paid with the
application, variability of benefits will commence within three days
of underwriting approval, subject to the restrictions indicated
above.
The Company will require that the Policy be delivered within a
specific delivery period to protect itself against anti-selection by
the prospective Policyowner resulting from a deterioration of the
health of the proposed Insured. Generally, the period will not
exceed the shorter of 30 days from the date the Policy is issued and
75 days from the date of Part 2 of the Application.
c. Premium Allocation
"Net premiums" are credited to the Policy as of the date the premium
payments are received by the Company, with the possible exception of
the first net premium. Net premiums are equal to the gross premiums
minus the tax expense charge. The tax expense charge compensates the
Company for applicable state and local taxes on premiums paid for
the Policy and for federal taxes imposed for deferred acquisition
costs ("DAC taxes"). It will be adjusted to reflect any increase or
decrease in the applicable state or local premium tax rate.
-2-
<PAGE>
The Policyowner may allocate net premiums among the Company's
General Account and up to seven Sub-Accounts of the Inheiritage
Account. The Policyowner may change the allocation of net premiums
without charge at any time by providing written notice to the
Principal Office. The change will be effective as of the date of
receipt of the notice at the Principal Office. The Policyowner may
transfer amounts among all of the Sub-Accounts and the General
Account, subject to certain restrictions, but at no time may have
allocations in more than seven Subaccounts.
d. Repayment of Loan
A loan made under this Policy may be repaid with an amount equal to
the original loan plus loan interest.
When a loan is made, the Company will transfer from each Sub-Account
of the Inheiritage Account to the General Account an amount of that
Sub-Account's Policy value equal to the loan amount allocated to the
Sub-Account. Since the Company will credit such assets with interest
at 6%, which is below the 8% interest rate charged on the loan, the
Company will retain the difference between these rates in order to
cover certain expenses and contingencies. Upon repayment of debt,
the Company will reduce the Policy value in the general account
attributable to the loan and transfer assets supporting
corresponding reserves to the Sub-Accounts according to either
Policyowner's instruction or, if none, the premium payment
allocation percentages then in effect. Loan repayments allocated to
the Inheiritage Account cannot exceed Policy value previously
transferred from the Inheiritage Account to secure the debt.
e. Policy Reinstatement
If the surrender value is insufficient to cover the next monthly
deduction plus loan interest accrued, or if Policy debt exceeds the
Policy value less surrender charges, the Company will notify the
Policyowner and any assignee of record. The Policyowner will then
have a grace period of 62 days, measured from the date the notice is
mailed, to make sufficient payments to prevent termination.
Failure to make a sufficient payment within the grace period will
result in termination of the Policy without any Policy value. The
death benefit payable during the grace period will be reduced by any
overdue charges. If the Insured dies during the grace period, the
death proceeds will still be payable, but any monthly deductions due
and unpaid through the Policy month in which the Insured dies will
be deducted from the death proceeds.
If the Policy has not been surrendered and the Insured is alive, the
terminated Policy may be reinstated anytime within three years after
the date of default by submitting the following to the Company: (1)
a written application for reinstatement; (2) evidence of
insurability satisfactory to the Company; and (3) a premium that,
after the deduction of the premium expense charges, is large enough
to cover the minimum amount payable, as described below.
If reinstatement is requested less than 48 months after the date of
issue or an increase in the face amount, the Policyowner must pay
the lesser of the amount shown in 1 or 2:
1. The minimum amount payable is the minimum monthly factor for
the three-month period beginning on the date of reinstatement.
2. The minimum amount payable is the sum of the amount by which
the surrender charge as of the date of the reinstatement
exceeds the Policy value on the date of default, plus
mortality deductions for the three-month period beginning on
the date of reinstatement.
If reinstatement is requested 48 months or more after the date of
issue or an increase in the face amount, the Policyowner must pay
the amount shown in 2 above.
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The surrender charge on the date of reinstatement is the surrender
charge which would have been in effect had the Policy remained in
force from the date of issue. The Policy value less debt on the date
of default will be restored to the Policy to the extent it does not
exceed the surrender charge on the date of reinstatement. Any policy
value less debt as of the date of default which exceeds the
surrender charge on the date of reinstatement will be forfeited to
the Company.
Policy Value on Reinstatement - The Policy value on the date of
reinstatement is:
(a) the net premium paid to reinstate the Policy increased by
interest from the date the payment was received at the
Company's Principal Office; plus
(b) 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
(c) the monthly deduction due on the date of reinstatement.
The Policyowner may not repay or reinstate any debt outstanding on
the date of default or foreclosure.
f. Correction of Misstatement of Age
If the Company discovers that the age of the Insured has been
misstated, the death benefit and any rider benefits will be those
which would be purchased by the most recent deduction for the cost
of insurance and the cost of rider benefits at the correct age.
g. Contestability
A Policy is contestable for two years, measured from the issue date,
for material misrepresentations made in the initial application for
the Policy. Policy changes may be contested for two years after the
effective date of a change, and a reinstatement may be contested for
two years after the effective date of reinstatement. No statement
will be used to contest a Policy unless it is contained in an
application.
h. Reduction in Cost of Insurance Rate Classification
By administrative practice, the Company will reduce the cost of
insurance rate classification for an outstanding Policy if new
evidence of insurability demonstrates that the Policyowner qualifies
for a lower classification. After the reduced rating is determined,
the Policyowner will pay a lower monthly cost of insurance charge
each month. If new evidence of insurability provided in connection
with an increase in face amount demonstrates that the Policyowner is
in a higher risk classification, the higher cost of insurance rate
will apply only to the increase in face amount.
II. "Redemption Procedures": Surrender and Related Transactions
The policies provide for the payment of monies to a Policyowner or
beneficiary upon presentation of a Policy. Generally, except for the
payments of death proceeds, the imposition of cost of insurance and
administrative charges, and the possible effect of a contingent surrender
charge, the payee will receive a pro rata or proportionate share of the
Inheiritage Account's assets, within the meaning of the 1940 Act, in any
transaction involving "redemption procedures". The amount received by the
payee will depend upon the particular benefit for which the Policy is
presented, including, for example, the cash surrender value or death
benefit. There are also certain Policy provisions (e.g., partial
withdrawals or the loan privilege) under which the Policy will not be
presented to the Company but which will affect the Policyowner's benefits
and may involve a transfer of the assets supporting the Policy reserve out
of the Inheiritage Account. Any combined transactions on the same day
which counteract the effect of each other will be allowed. The Company
will assume the Policyowner is aware of the possible conflicting nature of
the transactions and desires their combined result. If a transaction is
requested which the Company will not allow (e.g., a request for a decrease
in face amount which
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lowers the face amount below the stated minimum) the Company will reject
the whole transaction and not just the portion which causes the
disallowance. The Policyowner will be informed of the rejection and will
have an opportunity to give new instructions.
a. Surrender for Cash Values
The Company will pay the net cash surrender value within seven days
after receipt, at its Principal Office, of the Policy and a signed
request for surrender. Computations with respect to the investment
experience of each Sub-Account will be made at the close of trading
of the New York Stock Exchange on each day in which the degree of
trading in the corresponding portfolio might materially affect the
net return of the Sub-Account and on which the Company is open. This
will enable the Company to pay a net cash value on surrender based
on the next computed value after the surrender request is received.
For valuation purposes, the surrender is effective on the date the
Company receives the request at its Principal Office (although
insurance coverage ends the day the request is mailed).
The Policy value (equal to the value of all accumulations in the
Inheiritage Account) may increase or decrease from day to day
depending on the investment experience of the Inheiritage Account.
Calculation of the Policy value for any given day will reflect the
actual premiums paid, expenses charged and deductions taken. The
Company will deduct a charge for premium taxes and DAC taxes from
each premium payment. The balance (net premium) is allocated to the
Inheiritage Account according to Policyowner's instructions. The
Company will also make monthly deductions from a Policy to cover the
cost of insurance and administrative expenses for the following
month. The monthly administration charge is only $5 and is designed
to compensate the Company for administering and maintaining a
Policy. Other possible deductions from the Policy (which will occur
on a Policy-specific basis) include a charge for partial
withdrawals, a charge for increases in face amount and a charge for
certain transfers.
In calculating the cash surrender value, a surrender charge
comprised of a contingent deferred sales load and a contingent
deferred administrative charge will be deducted from the Policy. The
duration of the surrender charge is 15 years for issue ages 0
through 50, grading down to ten years for issue ages 55 and above.
The Company will make the payment of net cash surrender value out of
its General Account and, at the same time, transfer assets from the
Inheiritage Account to the General Account in an amount equal to the
Policy reserves in the Inheiritage Account. If the Policy is
surrendered in the first Policy year, any unpaid first year monthly
administrative charges will be deducted at surrender, in addition to
any contingent surrender charges which may be applicable.
The maximum surrender charge calculated upon issuance of the Policy
is equal to the sum of $8.50 per thousand dollars of the initial
face amount plus 49% of premiums received up to a maximum number of
the 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); provided, however, that in accordance with
limitations under state insurance regulations, the amount of the
Surrender Charge will not exceed a specified amount per one thousand
dollars of initial face amount, as indicated on the Policy and in
the prospectus. The maximum Surrender Charge remains level for the
first 40 Policy months and reduces by 0.5% or more per month
(depending on usage) thereafter. During the first two Policy years
following the date of issue, the actual Surrender Charge will be the
sum of $8.50 per thousand dollars of initial face amount plus an
amount not to exceed 29% of premiums received, up to one Guideline
Annual Premium, plus 9% of premiums received in excess of one
Guideline Annual Premium, but less than the maximum number of
Guideline Annual Premiums subject to the deferred sales charge.
A separate Surrender Charge is imposed for each increase in face
amount. The maximum Surrender Charge for the increase is $8.50 per
thousand dollars of increase plus 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);
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provided, however, that the amount of the Surrender Charge will not
exceed a specified amount per one thousand dollars of increase, as
indicated in the Policy and prospectus. This maximum Surrender
Charge remains level for the first 40 Policy months following the
increase and reduces by 0.5% or more (depending on age at increase)
thereafter. During the first two Policy years following an increase
in Face Amount, the actual Surrender Charge is the sum of $8.50 per
thousand dollars of increase, plus an amount not to exceed 29% of
premiums associated with the increase, up to one Guideline Annual
Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium, but less than
the maximum number of Guideline Annual Premiums (for the increase)
subject to the deferred sales charge. For purposes of calculating
actual Surrender Charges, premium and Policy value will be allocated
to the initial face amount and subsequent increases in face amount
according to the ratio of the respective Guideline Annual Premiums.
A Surrender Charge also will be made on a decrease in the face
amount. In the event of a decrease, the Surrender Charge imposed is
proportional to the charge that would apply to a full surrender of
the Policy. If more than one Surrender Charge is in effect, (i.e.,
pursuant to one or more increases in the face amount of a Policy),
partial surrenders will deemed attributable to that portion of the
face amount governed by the most recent Surrender Charge. Such
charges will be the Surrender Charge applicable to any increased
face amount plus a pro rata share of the Surrender Charge applicable
to a partial reduction in the initial face amount.
b. Charges on Partial Withdrawal
After the first Policy year, partial withdrawals of surrender value
may be made. The minimum withdrawal is $500. Under Option 1, the
face amount is reduced by the amount of the partial withdrawal, and
a partial withdrawal will not be allowed if it would reduce the face
amount below $40,000. A transaction charge which is the smaller of
2% of the amount withdrawn or $25 will be assessed on each partial
withdrawal.
A Partial Withdrawal Charge will also be deducted from Policy value
when more than 10% of the Policy value is withdrawn in a Policy year
("excess withdrawal"). Thus, for each partial withdrawal the
Policyowner may withdraw an amount equal to 10% of the Policy value
at that time 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 excess withdrawal
will be subject to the Partial Withdrawal Charge. The Partial
Withdrawal Charge is equal to 5 percent of the excess withdrawal up
to the amount of the surrender charge(s) on the date of withdrawal.
There will be no Partial Withdrawal Charge if there is no surrender
charge on the date of withdrawal.
This amount is not cumulative from Policy year to Policy year. In
other words, if only 8% of Policy value were withdrawn in Policy
year two, the amount the Policyowner could withdraw in subsequent
Policy years would not be increased by the amount the Policyowner
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. The Partial
Withdrawal Charge deducted will decrease existing surrender charges
in the following order:
o first, the surrender charge for the most recent increase in
Face Amount;
o second, the surrender charges for the next most recent
increase successively;
o last, the surrender charge for the initial face amount.
c. Death Benefit
The Company will pay a death benefit to the beneficiary within seven
days after receipt, at its Principal Office, of the Policy, due
proof of death of the Insured, and all other requirements necessary
to make payment.
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The death proceeds payable will depend on the option in effect at
the time of death. Under Option 1, the death benefit is the greater
of either the face amount of insurance or the guideline minimum sum
Insured. Under Option 2, the death benefit is the greater of either
the face amount of insurance plus Policy value or the guideline
minimum sum Insured. The guideline minimum sum Insured is calculated
by multiplying the applicable percentage from the following table
for the Insured person's age (nearest birthday) at the beginning of
the Policy year of determination to the Policy value.
GUIDELINE MINIMUM SUM Insured
TABLE
Age
of Insured on Percentage of
Date of Death Policy Value
------------- ------------
40 and less ............................... 250%
45: ....................................... 215%
50: ....................................... 185%
55: ....................................... 150%
60: ....................................... 130%
65: ....................................... 120%
70: ....................................... 115%
75: ....................................... 105%
80: ....................................... 105%
85: ....................................... 105%
90: ....................................... 105%
95: ....................................... 100%
For the ages not listed, the progression between the listed ages is
linear.
The Company will make payment of the death proceeds out of its
general account, and will transfer assets from the Inheiritage
Account to the general account in an amount equal to the reserve in
the Inheiritage Account attributable to the Policy. The excess, if
any, of the death proceeds over the amount transferred will be paid
out of the general account reserve maintained for that purpose.
d. Default and Options on Lapse
The duration of insurance coverage depends upon the Policy value
being sufficient to cover the monthly deductions plus loan interest
accrued. If the surrender value at the beginning of a month is less
than the deductions for that month plus loan interest accrued, a
grace period of 62 days will begin. Written notice will be sent to
the Policyowner and any assignee on the Company's records stating
that such a grace period has begun and giving the amount of premium
payment necessary to prevent termination. If sufficient payment is
not received during the grace period, the Policy will terminate
without value. Notice of such termination will be sent to the owner
and any assignee. If the Insured should die during the grace period,
an amount sufficient to cover the overdue monthly deductions and
other charges will be deducted from the death proceeds.
e. Policy Loan
The policies provide that in the first Policy year, a Policyowner
may take a loan of up to 75% of "a minus b", where "a' is Policy
value less surrender charges and "b" is monthly deductions plus
interest on loans accrued to the end of the Policy year. Thereafter,
90% of an amount equal to Policy value less surrender charges may be
borrowed. The Policy value for this purpose will be that next
computed after receipt, at the Principal Office, of a loan request.
Payment of the loan amount will be made to the Policyowner within
seven days after such receipt.
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The amount of any outstanding loan plus accrued interest is called
"debt". When a loan is made, the portion of the assets in the
Inheiritage Account (which is a portion of the surrender value and
which also constitutes a portion of the reserves for the death
benefit) equal to the debt created thereby is transferred by the
Company from the Inheiritage Account to the general account.
Allocation of the loan among Sub-Accounts will be according to the
Policyowner's request. If this allocation is not specified or not
possible, the loan will be allocated based on the proportion the
Policy value in the General Account, less debt, and the Policy value
in each Sub-Account bears to the total Policy value, less debt.
Policy value in each Sub-Account equal to the Policy loan allocated
to such Subaccount will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy value so
transferred will be cancelled. Because of the transfer, a portion of
the Policy is not variable during the loan period and, therefore,
the death benefit and the surrender value are permanently affected
by any debt, whether or not repaid in whole or in part. The Company
credits the Policy value in the General Account attributable to the
loan with a rate of return equal to an effective annual yield of 6%,
which is 2% lower than the fixed interest rate charged on the loan.
Interest is payable in arrears at the annual rate of 8%. Interest is
payable at the end of each Policy year or on a pro rata basis for
such shorter period as the ma exist. Loan interest is due on each
Policy anniversary. If not paid when due, it is added to the loan
principal and bears interest at the same rate of interest. If the
resulting loan principal exceeds the Policy value in the General
Account the Company will transfer Policy value equal to the excess
debt from the Policy value in each Sub-Account to the General
Account; as security for the excess debt. 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
values in all Sub-Accounts.
Failure to repay a loan will not necessarily terminate the Policy.
If the surrender value is not sufficient to cover the monthly
deductions for the cost of insurance and administrative expenses,
the Policy will go into a 62 day grace period as described above.
f. Transfers Among Subaccounts
Amounts may be transferred, upon request, at any time from any
Sub-Account of the Inheiritage Account to one or more other
Sub-Accounts. Transfers from a Sub-Account of the Inheiritage
Account will take effect as of the receipt of a written request at
the Principal Office. The minimum amount allowed for a transfer is
the lesser of $500 or the total value in the Sub-Account. The first
six transfers are free of charge; however, the Company will make an
administrative charge not to exceed $25 for additional transfers in
a Policy year. Transfers resulting from Policy loans, the exercise
of conversion rights, and reallocation of Policy value within 20
days of issue, will not be subject to a transfer charge, and will
not be counted for purposes of the limitation on the number of
"free" transfers allowed in each Policy year. If a Policy owner
elects to have automatic transfers made each month, the first
automatic transfer counts as one transfer towards the six free
transfers allowed in each Policy year; each subsequent automatic
transfer does not reduce the remaining number of transfers which may
be made without charge.
Transfer charges, if any, are allocated by Policyowner request to
one Sub-Account. If an allocation is not specified or not possible
the allocations will be based on the proportion that the values in
each of the Sub-Accounts of the Inheiritage Account bears to the
total unloaned Policy value.
g. Right of Withdrawal Procedures
The Policy provides that the Policyowner may cancel it by returning
the Policy along with a written request for cancellation to the
Principal Office by the latest of 1) 45 days after Part I of the
application was signed, 2) 10 days after the Policyowner receives
the Policy, or 3) 10 days after the Company mails or personally
delivers a written Notice of Withdrawal Right. Upon returning the
Policy, the Policyowner will receive within seven days a refund
equal to the sum of (1) the difference between the premium,
including fees, paid and any amount allocated to the Inheiritage
Account, and (2) the value of the amounts allocated to the
Inheiritage Account, and (3) any fees or charges imposed on the
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amounts allocated to the Inheiritage Account. Where required by
State law, the Policyowner will receive a refund equal to the sum of
the premium payments made under the Policy. The postmark date on the
envelope containing the Policy will determine whether the Policy has
been surrendered within the Company's withdrawal period.
A free look privilege also applies after a requested increase in
Face Amount. After an increase, the Company will mail or deliver
notice of the "Free Look" with respect to the increase. The
Policyowner will have the right to cancel the increase within 10
days, and receive a credit for charges which would not have been
deducted but for the increase. Such charges with respect to the
increase will be added to Policy value, unless the Policyowner
requests a refund of such charges.
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 8 to the Registration Statement of the
Inheiritage Account of First Allmerica Financial Life Insurance Company on
Form S-6 of our report dated February 3, 1998, relating to the financial
statements of First Allmerica Financial Life Insurance Company, and our report
dated March 25, 1998, relating to the financial statements of the Inheiritage
Account of First Allmerica Financial Life Insurance Company, both of which
appear in such Prospectus. We also consent to the reference to us under the
heading "Independent Accountants" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 15, 1998
