<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
INDIVIDUAL FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS
FUNDED THROUGH DIVISIONS OF
COLONIAL SEPARATE ACCOUNT VA-2
INVESTING IN SHARES OF PORTFOLIOS OF THE
UST MASTER VARIABLE SERIES, INC.
This Prospectus describes individual flexible payment deferred variable
annuity contracts ("Contracts") offered by The Colonial Life Insurance Company
of America ("Colonial Life"). The Contracts may be purchased on a non-tax
qualified basis ("Non-Qualified Contracts") or purchased and used in
connection with certain plans entitled to special income tax treatment under
section 408 of the Code ("Qualified Contracts"). (For information about the
tax status when Contracts are used in a particular type of situation, see
"FEDERAL TAX CONSIDERATIONS.") Annuity payments under the Contracts are
deferred until a selected later date.
The Contract Owner may allocate the Purchase Payments to one or more
divisions (the "Divisions") of the Colonial Separate Account VA-2 (the
"Separate Account"). Each Division will invest solely in a corresponding
investment series (a "Portfolio") of the UST Master Variable Series, Inc. (the
"Fund"), a Maryland corporation organized as an open-end management investment
company. Contract Owners may invest in seven separate Divisions, corresponding
to the following Portfolios:
Equity Portfolio
Early Life Cycle Portfolio
Intermediate-Term Managed Income Portfolio
Managed Income Portfolio
International Equity Portfolio
International Bond Portfolio
Money Portfolio
There is a period during which the Contract Owner has a limited right to
return a Contract for cancellation and a refund. If the Contract Owner elects
during this "free look" period to cancel the Contract, Colonial Life will
refund, the greater of (i) the Contract Value without deduction of any
Withdrawal Charge (or premium tax, if imposed), or (ii) or the entire amount
of the Purchase Payments made to the Contract, less any partial withdrawals.
Special rules may apply to Qualified Contracts. Any refund will be made within
seven days from the date the Contract is surrendered to Colonial Life.
Colonial Life will allocate the Purchase Payments made prior to the expiration
of the free look period in the Division investing in the Money Portfolio. On
the Valuation Date concurrent with or next following the end of the free look
period, the Purchase Payments will be allocated to the Divisions in accordance
with the directions of the Contract Owner, as set forth in the application.
Certain additional information about the Contracts is contained in a
Statement of Additional Information, dated May 1, 1995, as may be amended from
time to time, which has been filed with the Securities and Exchange Commission
("SEC"). The Statement of Additional Information is available upon request and
without charge. To obtain the Statement of Additional Information, contact The
Colonial Life Insurance Company of America, One Granite Place, Concord, New
Hampshire 03301, telephone (603) 226-5000.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, UNITED STATES TRUST COMPANY OF NEW YORK OR ANY OTHER BANKING INSTITUTION,
THEIR PARENTS OR AFFILIATES, AND THE CONTRACTS ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
THIS PROSPECTUS CONTAINS INFORMATION THAT A PROSPECTIVE PURCHASER SHOULD
KNOW BEFORE PURCHASING A CONTRACT. IT IS VALID ONLY WHEN ACCOMPANIED BY A
CURRENT PROSPECTUS OF THE FUND. PROSPECTIVE INVESTORS SHOULD READ THE CONTRACT
AND FUND PROSPECTUSES CAREFULLY AND RETAIN A COPY OF EACH FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 1995 IS INCORPORATED
HEREIN BY REFERENCE. THE TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL
INFORMATION APPEARS ON PAGE 30 OF THIS PROSPECTUS.
DATED MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL TERMS.............................................................. 3
SUMMARY.................................................................... 5
ANNUAL AND TRANSACTION EXPENSES............................................ 7
PERFORMANCE INFORMATION.................................................... 9
WHAT IS AN ANNUITY......................................................... 9
RIGHT TO REVOKE............................................................ 10
DESCRIPTION OF COLONIAL LIFE............................................... 10
THE SEPARATE ACCOUNT....................................................... 11
THE FUND................................................................... 11
VOTING INTERESTS........................................................... 13
CHARGES AND DEDUCTIONS..................................................... 14
A. Withdrawal Charge..................................................... 14
B. Premium Taxes......................................................... 15
C. Charges Against Separate Account Assets............................... 15
D. Expense Risk Charge................................................... 15
E. Transfer Charge....................................................... 16
F. Other Charges......................................................... 16
THE CONTRACTS.............................................................. 16
A. Sale Of The Contracts................................................. 16
B. Ownership Provisions.................................................. 17
C. Beneficiary........................................................... 17
D. Purchase Payments..................................................... 18
E. Transfer Privilege.................................................... 18
F. Telephone Transfers And Reallocations................................. 19
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
G. Surrender............................................................. 20
H. Partial Withdrawals................................................... 20
I. Deferment Of Payment And Transfers.................................... 20
J. Systematic Withdrawal................................................. 20
K. Provisions Applicable At Death........................................ 21
L. Assignment............................................................ 22
M. Electing the Form Of Annuity And The Annuity Date..................... 22
N. Description Of Annuity Options........................................ 23
O. Calculation Of Contract Values And Annuity Payments................... 23
FEDERAL TAX CONSIDERATIONS................................................. 25
A. Introduction.......................................................... 25
B. Taxation Of Colonial Life............................................. 25
C. Tax Status Of The Contract............................................ 26
D. Taxation Of Annuities................................................. 26
E. Qualified Contracts................................................... 28
F. Miscellaneous......................................................... 28
REPORTS.................................................................... 29
LEGAL MATTERS.............................................................. 29
FURTHER INFORMATION........................................................ 29
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION............... 29
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. COLONIAL LIFE DOES NOT AUTHORIZE ANY
INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS
PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION TO THIS PROSPECTUS, OR THE PROSPECTUS OF THE FUND OR THE
STATEMENT OF ADDITIONAL INFORMATION OF THE FUND.
2
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SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings.
There are other capitalized terms which are explained or defined in other parts
of this Prospectus.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Division
before the Annuity Date.
ANNUITANT: the person designated in the Contract to whom annuity payments are
typically paid and upon whose life any annuity payments involving life contin-
gencies depends. This person must be less than age 80 for Non-Qualified Con-
tracts and age 72 for Qualified Contracts at the Date of Issue, unless Colonial
Life has approved a request for an Annuitant of greater age. The Annuitant may
be changed, with the consent of Colonial Life, at any time prior to 30 days be-
fore the Annuity Date.
ANNUITY DATE: the date on which annuity payments begin.
ANNUITY UNIT: an accounting unit of measure used to calculate the value of
the periodic Variable Annuity payments under the Contract.
BENEFICIARY: the person or persons named by the Contract Owner to receive
Contract proceeds in the event of the Contract Owner's death (or the
Annuitant's death, in some circumstances), subject to the terms of the Con-
tract. The Beneficiary is shown in the application unless later changed.
CODE: the Internal Revenue Code of 1986, as amended.
COLONIAL LIFE: The Colonial Life Insurance Company of America.
CONTRACT: the Individual Flexible Payment Deferred Variable Annuity described
in this Prospectus, including the Contract application and any applicable en-
dorsements.
CONTRACT OWNER: the owner of a Contract who may exercise all rights under the
Contract, subject to the consent of any irrevocable Beneficiary. On and after
the Annuity Date, the Annuitant will be the Contract Owner, unless otherwise
provided by the Contract Owner.
CONTRACT VALUE: the sum of the value of all Accumulation Units in the Divi-
sions then credited to the Contract, on any date before the Annuity Date.
DATE OF ISSUE: the date set forth in the Contract, from which Contract years,
Contract months and Contract anniversaries are measured.
DEATH BENEFIT: the amount payable to the Beneficiary upon the death of the
Contract Owner (or the Annuitant, in some circumstances) before the Annuity
Date.
DIVISION: a separate division of the Separate Account. Each Division offered
under this Prospectus invests exclusively in the shares of a corresponding
Portfolio of the Fund.
FIXED ANNUITY: an annuity providing for payments which remain fixed in amount
throughout the annuity payment period and which are guaranteed by Colonial Life
as to dollar amount.
FUND: UST Master Variable Series, Inc., a Maryland corporation organized as
an open-end management investment company, currently consisting of the seven
separate Portfolios.
GENERAL ACCOUNT: all the assets of Colonial Life other than those held in a
separate investment account.
INDIVIDUAL RETIREMENT ANNUITY: an individual retirement account (IRA) funded
with an annuity contract.
IRS: the Internal Revenue Service.
JOINT ANNUITANT: if a Joint and Survivor Life Income Annuity Option is se-
lected, the person whose life, in addition to the life of the Annuitant, is
used to determine the duration of annuity payments. In such event, references
to "Annuitant" in this Prospectus will also apply to the Joint Annuitant, un-
less otherwise specified.
1940 ACT: The Investment Company Act of 1940, as amended.
NON-QUALIFIED CONTRACTS: as used herein, Contracts which are not issued in
connection with retirement plans qualifying for special income tax treatment
under the Code.
PORTFOLIO: a separate investment series of the Fund. The Portfolios currently
are: Equity Portfolio, Early Life Cycle Portfolio, Intermediate-Term Managed
Income Portfolio, Managed Income Portfolio, International Equity Portfolio, In-
ternational Bond Portfolio and Money Portfolio.
3
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PURCHASE PAYMENT(S): the premium amount(s) paid by the Contract Owner to Co-
lonial Life. The term "Purchase Payment" does not include transfers among the
Divisions.
QUALIFIED CONTRACTS: as used herein, Contracts issued in connection with cer-
tain retirement plans (such as SEPs and IRAs) which qualify for special income
tax treatment under section 408 of the Code.
SEC: the United States Securities and Exchange Commission.
SEPARATE ACCOUNT: Colonial Separate AccountVA-2, which consists of assets
segregated from other assets of Colonial Life. The investment performance of
the assets of the Separate Account is determined separately from the other as-
sets of Colonial Life. The assets of the
Separate Account equal to its reserves and other liabilities are not chargeable
with liabilities arising out of any other business which Colonial Life may con-
duct.
SERVICE CENTER: the principal service office of Colonial Life, located at One
Granite Place, Concord, New Hampshire 03301, telephone (603) 226-5000.
SIMPLIFIED EMPLOYEE PENSION (SEP): a retirement plan funded by an individual
retirement account (IRA).
VALUATION DATE: each day, as of the close of regular trading on the New York
Stock Exchange (which is currently 4:00 p.m. New York City time), on which the
net asset value of the shares of any of the Portfolios and unit values of the
Divisions are determined. Valuation Dates currently occur on each day on which
the New York Stock Exchange is open for trading, and Colonial Life and the in-
vestment adviser of the Fund are open for business.
VALUATION PERIOD: the interval between two consecutive Valuation Dates, com-
mencing at the close of regular trading on the New York Stock Exchange on each
Valuation Date and ending at the close of regular trading on the New York Stock
Exchange on the next succeeding Valuation Date.
VARIABLE ANNUITY: an annuity providing for payments varying in amount in ac-
cordance with the investment experience of the Divisions.
4
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SUMMARY
INVESTMENT OPTIONS. The Contracts permit the Purchase Payments to be
allocated among one or more divisions (the "Divisions") offered under this
Prospectus through the Colonial Separate Account VA-2 (the "Separate Account"),
a separate account of Colonial Life. The Separate Account is registered as a
unit investment trust under the 1940 Act but such registration does not involve
the supervision of the management or investment practices of the Contracts or
the Separate Account by the SEC.
Each Division offered under this Prospectus invests its assets without sales
charge in a corresponding investment series (the "Portfolios") of the UST
Master Variable Series, Inc. (the "Fund"). The Fund is a Maryland corporation
organized as an open-end, management investment company, and currently consists
of seven different Portfolios: Equity Portfolio, Early Life Cycle Portfolio,
Intermediate-Term Managed Income Portfolio, Managed Income Portfolio,
International Equity Portfolio, International Bond Portfolio and Money
Portfolio. Each Portfolio operates pursuant to different investment objectives,
discussed below.
For information about Colonial Life, the Separate Account and the Fund, see
"DESCRIPTION OF COLONIAL LIFE", "THE SEPARATE ACCOUNT" and "THE FUND".
INVESTMENT IN THE DIVISIONS. The value of each Division will vary daily
depending on the performance of the investments made by the respective
Portfolios.
There can be no assurance that the investment objectives of the Portfolios
can be achieved or that the value of a Contract will equal or exceed the
aggregate amount of the Purchase Payments made under the Contract. For more
information about the investments of the Portfolios, see "THE FUND." The
accompanying prospectus of the Fund describes the investment objectives and
risks of each of the Portfolios.
Dividends or capital gains distributions received from a Portfolio are
reinvested in additional shares of that Portfolio, which are retained as assets
of the Division.
TRANSFERS AMONG DIVISIONS. The Contracts permit amounts to be transferred
among the Divisions, subject to certain limitations described under "THE
CONTRACTS--E. Transfer Privilege."
ANNUITY PAYMENTS. The Contract Owner may select Variable Annuity payments,
Fixed Annuity payments, or a combination of Fixed Annuity and Variable Annuity
payments. Variable Annuity payments vary in amount in accordance with the
investment performance of the Portfolios. Fixed Annuity payments are guaranteed
by Colonial Life. See "THE CONTRACTS" for information about annuity payment
options, selecting the Annuity Date, and how annuity payments are calculated.
REVOCATION RIGHTS. A Contract Owner may elect during a "free look" period to
cancel the Contract and receive a refund. For more information about revocation
rights, see "RIGHT TO REVOKE".
PAYMENT MINIMUMS. Under the Contracts, Purchase Payments are not limited as
to frequency and number, but no Purchase Payments may be submitted within 30
days of the Annuity Date. Generally, the initial Purchase Payment must be at
least $50,000 for Non-Qualified Contracts. For Qualified Contracts, the initial
Purchase Payment must be at least $10,000. Any additional Purchase Payments,
regardless of type of Contract, must be at least $1,000. For more information
about payment minimums, see "THE CONTRACTS--D. Purchase Payments."
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES
AND DEDUCTIONS".
A. WITHDRAWAL CHARGE. No sales charge is deducted from the Purchase Payments
at the time the payments are made. However, depending on the length of time
that the Purchase Payments to which the withdrawal is attributed have remained
credited under the Contract, a Withdrawal Charge of up to 3% of Purchase
Payments may be assessed for a surrender or partial withdrawal.
B. PREMIUM TAXES. A deduction for state premium taxes, if any, may be made as
described under "CHARGES AND DEDUCTIONS--B. Premium Taxes."
5
<PAGE>
C. MORTALITY RISK CHARGE AND ADMINISTRATION CHARGE. Colonial Life deducts a
Mortality Risk Charge and an Administration Charge from the Separate Account
which are amounts computed daily and equal on an annual basis to 0.55% and
0.05%, respectively, of the total assets of the Separate Account.
D. EXPENSE RISK CHARGE. Colonial Life will deduct a monthly Expense Risk
Charge. This charge is calculated by taking the Contract Value (or the charge
basis, on and after the Annuity Date) as of the first day of each Contract
month (or on the next following Valuation Date if the first day of the Contract
month is not a Valuation Date) and multiplying such Contract Value (or charge
basis) by a monthly factor not to exceed 0.30% on an annual basis.
E. TRANSFER CHARGE. Up to twelve transfers in each Contract year may be made
without charge. After the twelfth transfer in a Contract year, each subsequent
transfer will be subject to a $75 transfer charge to reimburse Colonial Life
for the cost of processing the transfer. For purposes of the Dollar Cost
Averaging and the Automatic Division Re-Balancing programs, the first and any
subsequent automatic transfers made under these programs count as only one
transfer toward the twelve transfers which are free in each Contract year.
F. CHARGES OF THE PORTFOLIOS. In addition to the charges described above,
certain fees and expenses are deducted from the assets of the Portfolios. For
more information about these fees and expenses, see the accompanying prospectus
of the Fund.
SURRENDER OR PARTIAL WITHDRAWAL. At any time before the Annuity Date, the
Contract Owner has the right either to surrender the Contract in full and
receive its current Contract Value, minus any applicable Withdrawal Charge,
premium tax or tax withholding, or to withdraw a portion of the Contract Value
subject to certain limits and any applicable Withdrawal Charge. There may be
tax consequences for a surrender or partial withdrawal, including a 10% federal
penalty tax if the Contract Owner is under age 59 1/2. For further information,
see "CHARGES AND DEDUCTIONS" and "FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Contract Owner should die before the Annuity Date, a
Death Benefit will be paid to the Beneficiary. The Death Benefit is equal to
the greater of: (a) the Contract Value, or (b) the sum of the net Purchase
Payment(s) made under the Contract reduced proportionally to reflect all
previous partial withdrawals. If the Annuitant is not the Contract Owner and
dies before the Annuity Date, and the Contract Owner is a natural person, then
the Contract shall stay in force and the Contract Owner may choose a new
Annuitant. If the Contract Owner is not a natural person, the death of the
Annuitant shall be treated the same as the death of the Contract Owner. See
"THE CONTRACTS--K. Provisions Applicable At Death."
SALES OF CONTRACTS. The Contracts are sold by agents of Colonial Life who may
also be employees of an affiliate of the Fund and who are authorized by
applicable law to sell variable annuity contracts. These agents are also
registered representatives of Chubb Securities Corporation, an affiliate of
Colonial Life, which is the principal underwriter of the Contracts and a member
of the National Association of Securities Dealers, Inc., or of broker-dealers
who have entered into written sales agreements with the principal underwriter.
See "THE CONTRACTS--A. Sale of the Contracts."
6
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ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Contract Owner in
understanding the various costs and expenses that a Contract Owner will bear
directly or indirectly under the Contracts. The tables reflect charges under
the Contracts, expenses of the Divisions, and expenses of the Portfolios. In
addition to the charges and expenses described below, in some states premium
taxes may be applicable.
CONTRACT OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (as a percentage of Purchase Payments applied to the amount
withdrawn in excess of the amount, if any, which may be withdrawn free of
charge)
<TABLE>
<CAPTION>
NUMBER OF COMPLETE WITHDRAWAL
YEARS FROM DATE OF CHARGE
PURCHASE PAYMENT PERCENTAGE
------------------- ----------
<S> <C>
0 to 1......................................................... 3%
1+ to 2......................................................... 3%
2+ to 3......................................................... 2%
3+ to 4......................................................... 1%
4+.............................................................. 0%
TRANSFER CHARGE
<CAPTION>
CHARGE
----------
<S> <C>
First 12 Transfers in a Contract Year .......................... $ 0
Subsequent Transfers in a Contract Year......................... $75
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average Contract Value)
<TABLE>
<CAPTION>
CONTRACT VALUE
--------------------------------------
LESS THAN $250,000 BUT LESS $1,000,000
$250,000 THAN $1,000,000 OR GREATER
--------- ----------------- ----------
<S> <C> <C> <C>
Mortality Risk Charge.................... 0.55% 0.55% 0.55%
Expense Risk Charge*..................... 0.30% 0.20% 0.05%
Administration Charge.................... 0.05% 0.05% 0.05%
----- ----- -----
TOTAL: ................................ 0.90% 0.80% 0.65%
===== ===== =====
</TABLE>
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* Although shown here as a Separate Account annual expense, the Expense Risk
Charge is actually a charge at the Contract-level. It is calculated by
multiplying the Contract Value (or the charge basis, on and after the Annuity
Date) as of each Contract month anniversary by a monthly factor equal on an
annual basis to the percentage shown above. Prior to the Annuity Date, this
charge is deducted by redeeming enough Accumulation Units (or fractions
thereof) to cover the applicable charge. On and after the Annuity Date, this
charge is deducted from any Variable Annuity payments at the time such
payments are made. The Expense Risk Charge is shown here as a Separate
Account annual expense for illustrative purposes only to assist the Contract
Owners in making comparisons to other variable annuity products.
7
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UST MASTER VARIABLE SERIES, INC.--ANNUAL EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL PORTFOLIO
PORTFOLIO FEES EXPENSES* EXPENSES**
--------- ---------- --------- ---------------
<S> <C> <C> <C>
Equity Portfolio.......................... 0.75% 0.40% 1.15%
Early Life Cycle Portfolio................ 0.60% 0.39% 0.99%
Intermediate-Term Managed Income Portfo-
lio...................................... 0.35% 0.37% 0.72%
Managed Income Portfolio.................. 0.75% 0.30% 1.05%
International Equity Portfolio............ 1.00% 0.50% 1.50%
International Bond Portfolio.............. 0.90% 0.50% 1.40%
Money Portfolio........................... 0.25% 0.26% 0.51%
</TABLE>
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* The "Other Expenses" are based on estimated amounts of operating expenses
for the current fiscal year, and includes annual fees for administration
that are paid by the Fund. (See the prospectus of the Fund for additional
information about Portfolio fees and expenses.)
** A portion of expenses will be reimbursed by the Fund's investment adviser to
maintain the annual expense ratios stated. Absent any reimbursement of fees
and expenses, "Total Portfolio Expenses" are estimated to be 1.59%, 1.43%,
1.17%, 1.58%, 2.25%, 1.90%, and 1.00%, for the Equity Portfolio, the Early
Life Cycle Portfolio, the Intermediate-Term Managed Income Portfolio, the
Managed Income Portfolio, the International Equity Portfolio, the
International Bond Portfolio, and the Money Portfolio, respectively.
EXAMPLES
The following Examples demonstrate the cumulative expenses which would be
paid by the Contract Owner at 1-year and 3-year intervals under certain
contingencies. Because the expenses of the Portfolios differ, separate Examples
are used to illustrate the expenses incurred by a Contract Owner on an
investment in the various Divisions.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(a) If the Contract Owner surrenders the Contract at the end of the applicable
period, the Contract Owner would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS
--------- ------ -------
<S> <C> <C>
Equity Portfolio................................................. $48 $73
Early Life Cycle Portfolio....................................... $46 $68
Intermediate-Term Managed Income Portfolio....................... $43 $60
Managed Income Portfolio......................................... $47 $70
International Equity Portfolio................................... $51 $84
International Bond Portfolio..................................... $50 $81
Money Portfolio.................................................. $41 $54
</TABLE>
(b) If the Contract Owner does not surrender or if the Contract Owner elects to
receive annuity payments under the Contract at the end of the applicable
time period, the Contract Owner would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Equity Portfolio................................................. $21 $64
Early Life Cycle Portfolio....................................... $19 $60
Intermediate-Term Managed Income Portfolio....................... $17 $51
Managed Income Portfolio......................................... $20 $61
International Equity Portfolio................................... $24 $75
International Bond Portfolio..................................... $23 $72
Money Portfolio.................................................. $14 $45
</TABLE>
8
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PERFORMANCE INFORMATION
Colonial Life from time to time may advertise the "total return" and
"supplemental total return" of the Divisions, "yield" and "effective yield" of
the Division investing in the Money Portfolio and "yield" of the Divisions
investing in the Intermediate-Term Managed Income Portfolio and the Managed
Income Portfolio. THE TOTAL RETURN AND YIELD FIGURES ARE BASED ON HISTORICAL
EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The "total return" of a Division refers to the total income generated by an
investment in the Division and of the changes in the value of the principal
(due to realized and unrealized capital gains or losses) for a specified
period, reduced by certain charges, and expressed as a percentage of the
investment.
The "yield" of the Division investing in the Money Portfolio refers to the
income generated by an investment in the Division over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar, but when
annualized, the income earned by an investment in the Division is assumed to be
reinvested. Thus the "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
Yield for the Divisions investing in the Intermediate-Term Managed Income
Portfolio and the Managed Income Portfolio may also be advertised. The yield of
such Divisions refers to the annualized income generated by an investment under
a Contract in such Divisions over a specified thirty-day period. The yield is
calculated by assuming that the income generated by the investment during that
thirty-day period is generated each thirty-day period over a twelve-month
period and is shown as a percentage of the investment.
The total return and yield figures are adjusted to reflect the deduction of a
0.60% annual asset charge, which includes the 0.55% Mortality Risk Charge and
the 0.05% Administration Charge. The total return and yield figures also
reflect the monthly deduction of a maximum Expense Risk Charge equal to 0.30%
on an annual basis and the Withdrawal Charge which would be assessed if the
investment were completely redeemed at the end of the specified period.
Colonial Life may also advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Division and of the changes in value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by a 0.60% annual asset charge and a maximum monthly Expense Risk
Charge equal to 0.30% on an annual basis, and expressed as a percentage of the
investment. Because it is assumed that the investment is NOT redeemed at the
end of the specified period, the Withdrawal Charge is NOT included in the
calculation of supplemental total return.
Performance information for the Division may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Division
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity separate accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance
investment objectives and assets, or tracked by other services, companies,
publications, or persons, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) the Consumer Price
Index (a measure for inflation) to assess the real rate of return from an
investment in the Division. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
PERFORMANCE INFORMATION FOR ANY DIVISION REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE DIVISION DURING THE PARTICULAR TIME PERIOD ON
WHICH THE CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED
IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY
OF THE UNDERLYING SECURITIES PORTFOLIO OF THE PORTFOLIO IN WHICH THE DIVISION
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.
WHAT IS AN ANNUITY?
In general, an annuity is a contract designed to provide a retirement income
in the form of periodic payments for the lifetime of the purchaser or an
individual chosen by the purchaser. The retirement income payments are called
9
<PAGE>
"annuity payments," and the individual receiving the payments is called the
"annuitant." Annuity payments may begin immediately after a lump sum purchase
is made or may begin after an investment period during which the amount
necessary to provide the desired amount of retirement income is accumulated.
Under an annuity contract, the insurance company assumes a mortality risk and
an expense risk. The mortality risk arises from the insurance company's
guarantee that annuity payments will continue for the life of the annuitant,
regardless of how long the annuitant lives or how long all annuitants as a
group live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the contract,
regardless of actual costs of operations.
The purchaser's premium payments, less any applicable deductions, are
allocated by the insurance company to those investment options chosen by the
purchaser. After retirement, annuity payments are paid to the annuitant for
life or for such other period chosen by the contract owner. In the case of a
"fixed" annuity, the value of these annuity payments is guaranteed by the
insurance company, which assumes the risk of making the investments to enable
it to make the guaranteed payments. With a variable annuity, the value of the
contract and the annuity payments are not guaranteed but will vary depending on
the investment performance of a portfolio of securities. Any investment gains
or losses are reflected in the value of the contract and in the annuity
payments. If the portfolio increases in value, the value of the contract
increases. If the portfolio decreases in value, the value of the contract
decreases.
RIGHT TO REVOKE
The Contract Owner has a limited right to return a Contract for cancellation
and a refund at any time between the Date of Issue and the date 10 days after
receipt of the Contract. If the Contract Owner elects to cancel the Contract
during this free look period, Colonial Life will refund the greater of (i) the
Contract Value without deduction of any Withdrawal Charge (or premium tax, if
imposed), or (ii) the entire amount of the Purchase Payments made to the
Contract, less any partial withdrawals. Special rules may apply to Qualified
Contracts.
Colonial Life will allocate any Purchase Payments made prior to the
expiration of the free look period in the Division investing in the Money
Portfolio. On the Valuation Date concurrent with or next following the end of
the free look period, the Purchase Payments will be allocated to the Divisions
in accordance with the directions of the Contract Owner, as set forth in the
application.
In order to revoke the Contract, the Contract Owner must mail or deliver the
Contract (if it has already been received), to the agent through whom the
Contract was purchased or to the Service Center of Colonial Life. Mailing or
delivery must occur on or before 10 days after receipt of the Contract for the
revocation to be effective. Within seven days Colonial Life will make the
refund.
DESCRIPTION OF COLONIAL LIFE
The Colonial Life Insurance Company of America ("Colonial Life") is a stock
life insurance company chartered in 1897 in New Jersey and has been
continuously engaged in the insurance business since that time. It is licensed
to do life insurance business in fifty states of the United States, Puerto
Rico, the U.S. Virgin Islands, and in the District of Columbia. Colonial Life
is a wholly-owned subsidiary of Chubb Life Insurance Company of America ("Chubb
Life"), a New Hampshire life insurance company, which in turn is a wholly-owned
subsidiary of The Chubb Corporation, a New Jersey corporation. The principal
offices of The Chubb Corporation are located at 15 Mountain View Road, Warren,
New Jersey. Its telephone number is (908) 580-2000. Chubb Life's home office
and Colonial Life's service center are located at One Granite Place, Concord,
New Hampshire 03301, telephone number (603) 226-5000. Colonial Life's home
office is located at Eight Sylvan Way, Parsippany, New Jersey 17054, telephone
number (201) 455-1400. Colonial Life's total assets at December 31, 1994 were
$651,933,000.
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Colonial Life writes life and health insurance and annuities. It is subject
to the laws of the State of New Jersey governing insurance companies and to
regulation by the Commissioner of Insurance of New Jersey. In addition,
Colonial Life is subject to the insurance laws and regulations of other states
and jurisdictions in which it is licensed to operate.
Standard and Poor's currently assigns Colonial Life a rating of "AAA"
("Superior"), and A.M. Best and Company assigns Colonial Life a rating of "A"
("Excellent"). The ratings bear no relationship to the Separate Account,
Division or Portfolio performance. These ratings merely reflect the opinion of
the rating company as to the relative financial strength of Colonial Life and
Colonial Life's ability to meet its contractual obligations to its contract
holders. Even though assets in the Separate Account are held separately from
Colonial Life's other assets, ratings of Colonial Life may still be relevant to
Contract Owners to the extent that Colonial Life provides a guaranteed Death
Benefit and annuity purchase rates under the Contracts.
THE SEPARATE ACCOUNT
Colonial Separate Account VA-2 (the "Separate Account") is a separate account
of Colonial Life established on March 2, 1994 by a vote of the Board of
Directors of Colonial Life. The Separate Account meets the definition of a
"separate account" under the federal securities laws and is organized as a unit
investment trust registered with the SEC under the 1940 Act and is subject to
the 1940 Act's requirements. Such registration does not involve supervision of
the management or investment policies of the Separate Account or Colonial Life
by the SEC. Colonial Life is the depositor of the Separate Account. Under New
Jersey law, the assets of the Separate Account supporting the Contracts are
held exclusively for the benefit of Contract Owners and persons entitled to
payments under these Contracts. The assets of the Separate Account equal to the
reserves and other liabilities of the Separate Account are not chargeable with
liabilities arising out of any other business which Colonial Life may conduct.
In addition, the income and both realized and unrealized gains or losses on the
assets of each Division of the Separate Account are credited to or charged
against that Division without regard to income, gains or losses from any other
Division.
Colonial Life holds the assets of the Separate Account. These assets are kept
physically segregated and held separate and apart from the General Account.
Colonial Life maintains records of all purchases and redemptions of Portfolio
shares by each of the Divisions. The Separate Account presently has seven
Divisions but may, in the future, add or delete Divisions. Each Division
currently invests exclusively in shares representing an interest in a Portfolio
of the Fund.
Investment income and other distributions to each Division of the Separate
Account arising from the applicable underlying Portfolio of the Fund increases
the assets of the corresponding Division of the Separate Account. The income
and both realized and unrealized gains or losses on the assets of each Division
of the Separate Account are credited to or charged against that Division
without regard to income, gains or losses from any other Division.
THE FUND
The Separate Account invests in shares of the UST Master Variable Series,
Inc. (the "Fund"), an open-end, management investment company registered with
the SEC under the 1940 Act. Such registration does not involve supervision by
the SEC of the investments or investment policies of the Fund or its separate
investment series. The Fund was organized as a Maryland corporation on April
29, 1994.
The Fund was established to provide a vehicle for the investment of assets of
various separate accounts of Colonial Life and its affiliated life insurance
companies supporting variable annuity contracts. The Fund currently has seven
investment series, each issuing a separate series of shares (the "Portfolios"):
Equity Portfolio, Early Life Cycle Portfolio, Intermediate-Term Managed Income
Portfolio, Managed Income Portfolio, International Equity Portfolio,
International Bond Portfolio and Money Portfolio. The assets of each Portfolio
are held separate from the assets of the other Portfolios. Each Portfolio
operates as a separate investment vehicle, and the income or losses of one
Portfolio generally has no effect on the investment performance of another
Portfolio. Shares of the Portfolios are not offered to the general public but
solely to separate accounts of Colonial Life and its affiliated life insurance
companies.
The investment adviser for the Fund is United States Trust Company of New
York (the "investment adviser"). Foreign and Colonial Asset Management (the
"sub-adviser") is an SEC-registered investment adviser, and provides sub-
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advisory services to the International Equity Portfolio and the International
Bond Portfolio. (See the prospectus of the Fund for more information about the
adviser and sub-adviser.)
INVESTMENT OBJECTIVES. A summary of investment objectives of each of the
Portfolios is set forth below. The specialized nature of each Portfolio gives
rise to significant differences in the relative investment potential and market
and financial risks of each Portfolio. Contract Owners should consider the
unique features of each Portfolio before investing in any Portfolio. More
detailed information regarding the investment objectives, restrictions and
risks, expenses paid by the Portfolios, and other relevant information
regarding the Portfolios may be found in the Prospectus of the Fund which
accompanies this Prospectus. It should be read carefully before investing.
Also, the Statement of Additional Information of the Fund is available upon
request.
EQUITY PORTFOLIOS
The EQUITY PORTFOLIO seeks long-term capital appreciation by investing in
companies believed by the investment adviser to represent good long-term values
not currently recognized in the market prices of their securities.
The EARLY LIFE CYCLE PORTFOLIO seeks long term capital appreciation by
investing in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations.
FIXED INCOME PORTFOLIOS
The INTERMEDIATE-TERM MANAGED INCOME PORTFOLIO seeks as high a level of
current interest income consistent with relative stability of principal by
investing principally in investment grade or better debt obligations and money
market instruments. The Portfolio will ordinarily have a dollar-weighted
average portfolio maturity of three to ten years.
The MANAGED INCOME PORTFOLIO seeks higher current income consistent with what
is believed to be prudent risk of capital. Subject to this investment
objective, the investment adviser will consider the total rate of return on
portfolio securities in managing the Portfolio. Under normal market or economic
conditions, the Portfolio will invest a majority of its assets in investment
grade debt obligations and money market instruments.
INTERNATIONAL PORTFOLIOS
The INTERNATIONAL EQUITY PORTFOLIO seeks total return on its assets through
capital appreciation and income derived primarily from investments in a
diversified portfolio of marketable foreign equity securities.
The INTERNATIONAL BOND PORTFOLIO seeks above average current income by
investing in an internationally diversified portfolio of nondollar-denominated,
high-quality government and corporate bonds. The Portfolio also seeks capital
appreciation and protection of principal by actively managing its maturity
structure and currency exposure.
MONEY PORTFOLIO
The MONEY PORTFOLIO seeks as high a level of current income as is consistent
with liquidity and stability of principal. The Portfolio will generally invest
in money market instruments, including bank obligations, commercial paper and
U.S. Government obligations.
THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES OF ANY PORTFOLIO WILL BE
MET.
IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY OF
PARTICULAR PORTFOLIOS.
In the event of a material change in the investment policy of a Division or
the Portfolio in which it invests, the Contract Owners will be notified of the
change. If the Contract Owners have values in that Division, Colonial Life will
transfer it without charge on request by the Contract Owner to another
Division. Colonial Life must receive written request from the Contract Owner
within sixty (60) days of the later of: (a) the effective date of such change
in the investment policy, or (b) the receipt of the notice of the Contract
Owner's right to transfer.
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The Separate Account will purchase shares of the Fund at net asset value in
connection with Purchase Payments allocated to the Divisions in accordance with
the Contract Owner's directions and will redeem shares of the Fund to process
transfers, surrenders, partial withdrawals and generally to meet Contract
obligations or make adjustments in reserves. The Fund will sell and redeem its
shares at net asset value as of the date of receipt by the Separate Account of
Purchase Payments or notification by a Contract Owner.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS. Colonial Life reserves the
right, subject to applicable law, to make additions to, deletions from, or
substitutions for the shares that are held in the Divisions or that the
Divisions may purchase. If the shares of any Portfolio are no longer available
for investment or if in Colonial Life's judgment further investment in any
Portfolio should become inappropriate in view of the purposes of the Separate
Account or the affected Division, Colonial Life may redeem the shares of that
Portfolio and substitute shares of another registered management company.
Colonial Life will not substitute any shares attributable to a Contract's
interest in a Division without notice to the Contract Owner 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 Contracts or permit a conversion
between Contracts upon request by a Contract Owner.
Colonial Life also reserves the right to establish additional Divisions of
the Separate Account, each of which would invest in shares corresponding to a
new Portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
Colonial Life may, in its sole discretion, establish new Divisions or eliminate
one or more Divisions if marketing needs, tax considerations or investment
conditions warrant. Any new Divisions may be made available to existing
Contract Owners on a basis to be determined by Colonial Life. In addition,
Colonial Life reserves the right, subject to compliance with applicable law, to
change the names of the Separate Account or of the Divisions.
If any of these substitutions or changes are made, Colonial Life may by
appropriate endorsement change the Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If Colonial Life
deems it to be in the best interest of Contract Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or
any Division(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 Divisions or other separate accounts of Colonial
Life or its affiliated life insurance companies.
Colonial Life will not exercise any of the rights outlined in this section
without the approval of any applicable regulatory authorities, including the
insurance regulatory authority of the state in which the Contracts are
delivered.
VOTING INTERESTS
Colonial Life will vote Portfolio shares held by each Division in accordance
with instructions received from Contract Owners. Each person having a voting
interest in a Division will be provided with proxy materials of the Portfolio
together with a form with which to give voting instructions to Colonial Life.
Shares for which no timely instructions are received will be voted in
proportion to the instructions which are received. Colonial Life will also vote
shares in a Division that it owns and which are not attributable to Contracts
in the same proportion. If the 1940 Act or any rules thereafter should be
amended or if the present interpretation of the 1940 Act or such rules should
change, and as a result Colonial Life determines that it is permitted to vote
shares in its own right, whether or not such shares are attributable to the
Contracts, Colonial Life reserves the right to do so.
The number of votes which a Contract Owner may cast will be equal to the
number of Portfolio shares attributable to each Contract and will be determined
by Colonial Life as of the record date established by the Portfolios.
Before the Annuity Date, the number of Portfolio shares attributable to each
Contract will be determined by dividing the dollar value of the Accumulation
Units of the Division credited to the Contract by the net asset value of one
Portfolio share.
On or after the Annuity Date, the number of Portfolio shares attributable to
each Contract will be determined by dividing the reserve held in each Division
for the Contract's Variable Annuity portion by the net asset value of one
Portfolio share. Ordinarily, the Contract Owner's voting interest in the
Portfolio will decrease as the reserve for the Variable Annuity is depleted.
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<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Divisions are described below. Other deductions and expenses paid out of the
assets of the Portfolios are described in the Prospectus and Statement of
Additional Information of the Fund.
A. WITHDRAWAL CHARGE.
No charge for sales expense is deducted from the Purchase Payments at the
time the payments are made. However, a Withdrawal Charge may be deducted from
the Contract Value in the case of surrender or partial withdrawal of the
Contract, within certain time limits described below. In the case of a complete
surrender, the amount received by the Contract Owner is equal to the Contract
Value, minus any applicable Withdrawal Charge, premium tax and tax withholding.
For further information on surrender and partial withdrawal, including minimum
limits on amount surrendered and amount remaining under the Contract in the
case of partial withdrawal and important tax considerations, see "G. Surrender"
and "H. Partial Withdrawal" under "THE CONTRACTS", and "FEDERAL TAX
CONSIDERATIONS."
CHARGES FOR SURRENDER AND PARTIAL WITHDRAWAL. If a Contract is surrendered,
or if a partial withdrawal is made from the Contract, while the Contract is in
force and before the Annuity Date, a Withdrawal Charge may be imposed. The
amount of the Withdrawal Charge will depend upon the number of years that the
Purchase Payments to which the withdrawal is attributed have remained credited
under the Contract. Any partial withdrawal amount not subject to the Withdrawal
Charge is deducted first as described below. For the purpose of calculating
Withdrawal Charges all amounts withdrawn are assumed to be deducted first from
the earliest Purchase Payment and then from the next oldest Purchase Payment
and so on, until all Purchase Payments have been exhausted pursuant to the FIFO
(first-in first-out) method of accounting. Subsequent withdrawals will be
deducted from the amount of the Contract Value in excess of all Purchase
Payments that have not been previously withdrawn. Once all Purchase Payments
have been liquidated, additional amounts surrendered or withdrawn will not be
subject to a Withdrawal Charge. (See "FEDERAL TAX CONSIDERATION" for a
discussion of how withdrawals are treated for income tax purposes.)
The Withdrawal Charges are as follows:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE CHARGE AS PERCENTAGE OF
YEARS FROM DATE PURCHASE PAYMENTS
OF PURCHASE PAYMENT WITHDRAWN
------------------- -----------------------
<S> <C>
0 to 1............................................ 3%
1+ to 2........................................... 3%
2+ to 3........................................... 2%
3+ to 4........................................... 1%
4+................................................ 0%
</TABLE>
For up to four withdrawals each Contract year, Colonial Life will waive the
Withdrawal Charge, if any, on an amount up to 10% of the Contract Value as of
the Valuation Date that a partial withdrawal or surrender request is received
by Colonial Life at its Service Center, less any amounts previously withdrawn
during the same Contract year for which Withdrawal Charges were waived. If the
withdrawal constitutes a total surrender of the Contract, the amount of the
Withdrawal Charge that would have been waived if the withdrawal was partial
will be waived for the total surrender. Any unused portion of the partial
withdrawal amount not subject to the Withdrawal Charge is non-cumulative and
does not apply to partial withdrawals or a surrender made in subsequent
Contract years.
Unless otherwise requested by the Contract Owner, the amount withdrawn equals
the amount requested by the Contract Owner plus the Withdrawal Charge, if any,
which is applied against the amount requested. For example, if the applicable
Withdrawal Charge is 3% and the Contract Owner has requested $1,000, the
Contract Owner will receive $1,000 and the charge will be $30 (assuming no
partial withdrawal amount not subject to the Withdrawal Charge) for a total
withdrawal of $1,030. The Withdrawal Charge is applied as a percentage of
Purchase Payments withdrawn, but in no event will the total Withdrawal Charge
exceed a maximum limit of 3% of total gross Purchase Payments. Such total
charge equals the aggregate of all applicable Withdrawal Charges for surrender
and partial withdrawal.
No Withdrawal Charge is imposed if an Annuity Option is chosen or for amounts
withdrawn in connection with certain types of systematic withdrawal programs,
as described in "J. Systematic Withdrawals" under "THE CONTRACTS." The
Withdrawal Charge may also be eliminated when a Contract is exchanged for
another Colonial Life annuity contract or an annuity contract of any affiliates
of Colonial Life.
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SALES EXPENSES. Colonial Life intends to partially recoup the commissions and
other sales expenses through the Withdrawal Charge, described above. Any
shortfall will be made up from the General Account of Colonial Life, which may
indirectly include portions of the Mortality Risk Charge and Expense Risk
Charge described below, since Colonial Life expects to generate a reasonable
profit from these charges. Any Withdrawal Charges assessed on a Contract will
be retained by Colonial Life.
B. PREMIUM TAXES.
Some states impose a premium tax on Purchase Payments made to the Contracts.
Premium taxes vary from state to state, and are also imposed by certain
political subdivisions of states. Current state premium taxes, where charged,
range from 0.5% to 3.5% of Purchase Payments. Premium taxes assessed by
political subdivisions of states generally are less than 1% of Purchase
Payments. Most states do not assess premium taxes.
Colonial Life makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. Generally, the
current practice of Colonial Life is to deduct the premium tax at the time the
Purchase Payments are made, even though the premium tax may not be due at such
time. However, Colonial Life reserves the right to deduct any premium tax when
a surrender is made, the Contract Owner (or the Annuitant, in some
circumstances) dies prior to the Annuity Date, annuity payments begin or the
tax is otherwise incurred.
There is currently no premium tax in New York.
C. CHARGES AGAINST SEPARATE ACCOUNT ASSETS.
MORTALITY RISK CHARGE. Colonial Life deducts a Mortality Risk Charge from the
Separate Account which is an amount computed and deducted daily and equal on an
annual basis to 0.55% of the total assets of the Separate Account. The current
level of this charge is guaranteed not to increase. Colonial Life expects to
generate a reasonable profit through assessing this charge. To the extent this
charge results in a profit to Colonial Life, such profit will be available for
use by Colonial Life for, among other things, the payment of distribution,
sales and other expenses.
The Mortality Risk Charge is imposed prior to the Annuity Date, and, with
respect to reserves held for Variable Annuity payment options, on and after the
Annuity Date. The mortality risk arises from Colonial Life's guarantee of a
minimum Death Benefit and that it will make annuity payments in accordance with
annuity rate provisions established at the time the Contract is issued for the
life of the Contract Owner or Annuitant (or in accordance with the annuity
option selected), no matter how long the Annuitant lives and no matter how long
all Annuitants as a class live.
ADMINISTRATION CHARGE. Colonial Life deducts an Administration Charge from
the Separate Account which is an amount computed and deducted daily and equal
on an annual basis to 0.05% of the total assets of the Separate Account. The
current level of this charge is guaranteed not to increase. The Administration
Charge is imposed prior to the Annuity Date, and, with respect to reserves held
for Variable Annuity payment options, on and after the Annuity Date.
The Administration Charge is assessed to help defray administrative and
related expenses actually incurred in the administration of the Contracts and
Separate Account, and is not expected to be a source of profit. However, there
is no direct relationship between the amount of the Administration Charge
imposed on a given Contract and the amount of expenses directly attributable to
that Contract. The administrative functions and expenses assumed by Colonial
Life in connection with the Separate Account and the Contracts 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, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses and sales literature not
allocable to sales expense, filing and other fees.
D. EXPENSE RISK CHARGE.
Colonial Life will deduct an Expense Risk Charge to cover the expense risk
Colonial Life assumes under the Contracts. The current level of this charge is
guaranteed not to increase. The expense risk assumed by Colonial Life is that
the costs of administering the Contracts and the Separate Account will exceed
the amount received from the Administration Charge.
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<PAGE>
Prior to the Annuity Date, the Expense Risk Charge is calculated by taking
the Contract Value as of the first day of each Contract month (or the next
following Valuation Date if the first day of the Contract month is not a
Valuation Date) and multiplying such Contract Value by a monthly factor equal
on an annual basis to the following percentages:
<TABLE>
<CAPTION>
CONTRACT VALUE EXPENSE RISK
AS OF CONTRACT MONTH CHARGE
ANNIVERSARY PERCENTAGE
-------------------- ------------
<S> <C>
Less than $250,000........................................... 0.30%
$250,000 but less than $1,000,000............................ 0.20%
$1,000,000 or Greater........................................ 0.05%
</TABLE>
On and after the Annuity Date, the Expense Risk Charge is calculated on the
first day of each Contract month (or on the next following valuation date if
the first day of the Contract month is not a valuation date) by multiplying
the charge basis at that time by a monthly factor (which is fixed based on the
charge basis at annuitization) equal on an annual basis to the following
percentages:
<TABLE>
<CAPTION>
EXPENSE RISK
CHARGE BASIS AT THE CHARGE
TIME OF ANNUITIZATION PERCENTAGE
--------------------- ------------
<S> <C>
Less than $250,000........................................... 0.30%
$250,000 but less than $1,000,000............................ 0.20%
$1,000,000 or Greater........................................ 0.05%
</TABLE>
The charge basis is equal to the present value of future benefits applied
under the variable annuity payment option selected discounted at 4%, and based
on the 1983 "a" Individual Annuitant Mortality Table.
Prior to the Annuity Date, the Expense Risk Charge will be deducted by
cancelling Accumulation Units (or fractions thereof) from each Division in the
same proportion that the value in each Division bears to the total Contract
Value. On and after the Annuity Date, the Expense Risk Charge is deducted from
any Variable Annuity payments at the time such payments are made.
Colonial Life expects to generate a reasonable profit through assessing this
Expense Risk Charge. To the extent this charge results in a profit to Colonial
Life, such profit will be available for use by Colonial Life for, among other
things, the payment of distribution, sales and other expenses.
E. TRANSFER CHARGE.
Up to twelve transfers in each Contract year may be made without charge.
After the twelfth transfer in a Contract year, each subsequent transfer will
be subject to a $75 transfer charge to reimburse Colonial Life, without
profit, for its administrative expenses related to processing the transfer.
The transfer charge will be deducted from the amount that is transferred. The
amount of the transfer charge is guaranteed not to increase for outstanding
Contracts. For more information about Transfers, see "THE CONTRACTS--E.
Transfer Privilege."
F. OTHER CHARGES.
Because the Divisions purchase shares of the Fund, the value of the net
assets of the Portfolios will reflect the investment advisory fee and other
expenses incurred by the Portfolios. The Prospectus and Statement of
Additional Information of the Fund contain additional information concerning
expenses of the Portfolios.
THE CONTRACTS
A. SALE OF THE CONTRACTS.
The Contracts will be sold by individuals who, in addition to being licensed
as life insurance agents for Colonial Life, are also registered
representatives of Chubb Securities Corporation, the principal underwriter of
the Contracts, or of broker-dealers who have entered into written sales
agreements with the principal underwriter. Such individuals may also be
employees of an affiliate of the Fund. Chubb Securities Corporation, One
Granite Place, Concord, New Hampshire, 03301, is a New Hampshire corporation
organized in 1969, and is a wholly-owned subsidiary of Chubb Life Insurance
Company of America, Colonial Life's parent. Chubb Securities Corporation is
registered with the SEC under the Securities and Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities
Dealers, Inc. Commissions on the Contracts are paid by Colonial Life and do
not result in any additional charge to Contract Owners or to the Separate
Account. Commissions not to exceed 3% of Purchase Payments will be paid upon
the sale of the Contracts. Lower commissions may be payable in connection with
larger Purchase Payments. In addition, expense reimbursement allowances may be
paid. Additional payments may be made for other services not directly related
to the sale of the Contracts, including the recruitment and training of
personnel, production of promotional literature, and similar services.
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Contract Owners may direct any inquiries to The Colonial Life Insurance
Company of America, One Granite Place, Concord, New Hampshire, 03301.
B. OWNERSHIP PROVISIONS.
Unless otherwise provided, the Contract Owner has all rights under the
Contract. IF THE PURCHASER NAMES SOMEONE OTHER THAN HIMSELF OR HERSELF AS THE
OWNER, THE PURCHASER WOULD HAVE NO RIGHTS UNDER THE CONTRACT.
Except for transfers and reallocations of Purchase Payments, and where
otherwise provided, when an irrevocable Beneficiary is named, the exercise of
any ownership right in the Contract (including the right to surrender or make a
partial withdrawal of the Contract, to change the Contract Owner, the Annuitant
or the Beneficiary, the Annuity Payment Option or the Annuity Date) shall
require a written indication of an intent to exercise that right, which must be
signed by both the Contract Owner and such irrevocable Beneficiary.
Prior to the Annuity Date, the Contract Owner may name a new Contract Owner
of a Non-Qualified Contract. For the tax implications of such a change, see
"FEDERAL TAX CONSIDERATIONS". Any change of Contract Owner will automatically
revoke any prior Contract Owner designation. Any request for change of Contract
Owner must be made by proper written application and received and recorded by
Colonial Life at its Service Center. The change will become effective as of the
date the written request is signed by the current Contract Owner (and
irrevocable Beneficiary, if named) and the newly-named Contract Owner. A new
choice of Contract Owner will not apply to any payment made or action taken by
Colonial Life prior to the time it was received and recorded.
The Contract Owner of a Non-Qualified Contract may request a change in the
Annuitant within 30 days prior to the Annuity Date. Such a request must be made
in writing on a form acceptable to Colonial Life and must be signed by the
Contract Owner (and irrevocable Beneficiary, if named) and the person to be
named as the Annuitant. Any such change is subject to approval by Colonial
Life. In the event the Contract Owner is not a natural person, the change of
the Annuitant will be treated in the same manner as the death of the Contract
Owner, and a distribution will be made in accordance with the provisions of
"THE CONTRACTS--K. Provisions Applicable At Death."
On the Annuity Date, the Annuitant becomes the Contract Owner and all rights
of ownership pass to the Annuitant, unless the Contract Owner has specified, at
least 30 days prior to the Annuity Date, someone other than the Annuitant to be
the Contract Owner after the Annuity Date.
C. BENEFICIARY.
The Beneficiary is the person or persons named to receive payment of (i) the
Death Benefit, in the event the Contract Owner (or the Annuitant, in some
circumstances) dies before the Annuity Date; or (ii) any remaining guaranteed
annuity payments that may be due, in the event the Annuitant dies after the
Annuity Date and has chosen a period certain annuity option. If more than one
Beneficiary survives the Contract Owner or Annuitant, as the case may be, each
such surviving Beneficiary will share equally unless otherwise specified in the
Beneficiary designation. If no Beneficiary survives (or if a Beneficiary has
not been named), any payments due the Beneficiary will be made to the Contract
Owner's or Annuitant's estate, as the case may be. Any interest of a
Beneficiary who dies before the Contract Owner or Annuitant will terminate at
the death of the Beneficiary. Unless otherwise provided, the interest of any
Beneficiary who dies at the time, or within 15 days after, the Contract Owner's
or Annuitant's death will also terminate provided that no payments have been
made to that Beneficiary.
Subject to the terms of any existing assignment, the Contract Owner may
change a revocable Beneficiary at any time prior to the death of the Contract
Owner, or Annuitant as applicable, by written notice to Colonial Life. The
change, upon receipt by Colonial Life at its Service Center, will take effect
as of the time the written notice was signed by the Contract Owner (and
irrevocable Beneficiary, if named), whether or not the Contract Owner or
Annuitant is living at the time of recording, but without further liability as
to any payment or settlement made by Colonial Life before receipt of such
change.
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A Beneficiary may be named irrevocably. If there is an irrevocable
Beneficiary, all changes and requests, require such irrevocable Beneficiary's
written consent.
D. PURCHASE PAYMENTS.
The Purchase Payments are payable to Colonial Life and must be paid to
Colonial Life or through an authorized agent of Colonial Life for forwarding
to Colonial Life. In addition, Colonial Life has instituted administrative
procedures whereby Purchase Payments may be sent directly to Colonial Life's
bank. The initial Purchase Payment will be credited to the Contract as of the
date that the properly completed application is received by Colonial Life at
its Service Center. If an application is incomplete, or does not specify how
the initial Purchase Payment is to be allocated among the Divisions, the
initial Purchase Payment will be returned within five business days (unless
the prospective purchaser specifically consents to Colonial Life retaining the
initial Purchase Payment until the application is made complete). After a
Contract is issued, Accumulation Units will be credited to the Contract at the
unit value computed as of the Valuation Date that a Purchase Payment is
received at Colonial Life's Service Center.
Purchase Payments are not limited as to frequency and number, but there are
certain limitations as to amount. The initial Purchase Payment must be at
least $50,000 for Non-Qualified Contracts. For Qualified Contracts, the
initial Purchase Payment must be at least $10,000. Any additional Purchase
Payments, regardless of type of Contract, must be at least $1,000. Additional
Purchase Payments may only be made after the Date of Issue and before 30 days
prior to the Annuity Date and during the lifetime of the Annuitant and
Contract Owner. The minimum amount of the net Purchase Payment that can be
allocated to any one Division is the greater of $1,000 or 1% of the Contract
Value as of the date of the Purchase Payment. In addition, the allocation of
Purchase Payments to the Divisions must be made in whole number percentages.
Generally, the Purchase Payments will be allocated among the Divisions
according to the Contract Owner's instructions when the Contract is issued.
However, Colonial Life will allocate any Purchase Payments made prior to the
expiration of the free look period to the Division investing in the Money
Portfolio. (See, "RIGHT TO REVOKE".) Thereafter, all amounts will be allocated
according to the Contract Owner's instructions. The Contract Owner may change
allocation instructions for any Purchase Payments pursuant to written or
telephone request. A properly completed authorization form must be on file
before telephone requests will be honored. For more information about the
procedures for making telephone requests, see "THE CONTRACTS--F. Telephone
Transfers and Reallocations."
E. TRANSFER PRIVILEGE.
At any time and subject to Colonial Life's then current rules, a Contract
Owner may have amounts transferred among the Divisions. Transfers will be
effected as of the date the transfer request is received by Colonial Life at
its Service Center in a form and manner acceptable to Colonial Life. The
minimum amount of a transfer is $1,000 or 1% of the Contract Value at the time
of transfer, unless a lesser amount constitutes the entire value in the
Division being transferred. The minimum amount that must remain in a Division
following a transfer from that Division is the greater of $1,000 or 1% of the
total Contract Value at the time of transfer.
On and after the Annuity Date, reserves held in the Divisions for Variable
Annuity payments may be transferred subject to the following conditions.
Transfers among the Divisions may be made on the same basis as described
above. Transfer from the Separate Account to the General Account is permitted
once per Contract year. Reserves held for a Fixed Annuity in the General
Account, however, cannot be transferred from the General Account to any
Division(s) of the Separate Account.
Values transferred from one Division into another Division (or to the
General Account, after the Annuity Date) counts as one transfer. Similarly,
transferring values from more than one Division into one other Division (or to
the General Account, after the Annuity Date) counts as one transfer.
Colonial Life will make transfers pursuant to written or telephone request.
A properly completed authorization form must be on file before telephone
requests will be honored. For more information about the procedures for making
telephone requests, see "THE CONTRACTS--F. Telephone Transfers and
Reallocation."
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The first twelve transfers in a Contract year are free of any transfer
charge. For the thirteenth and each subsequent transfer in a Contract year,
Colonial Life assesses a charge of $75, without profit, to reimburse it for
the expense of processing transfers. Any transfer charge will be deducted from
the amount that is transferred. The amount of the transfer charge is
guaranteed not to increase for outstanding Contracts.
Colonial Life reserves the right to refuse to accept or to place certain
restrictions on transfers made by third-party agents acting on behalf of
multiple Contract Owners or made pursuant to market timing services when
Colonial Life determines, in its sole discretion, that such transfers will be
detrimental to the Funds and the Contract Owners as a whole. Such transfers
may cause increased trading and transaction costs, disruption of planned
investment strategies, forced and unplanned portfolio turnover, and lost
opportunity costs, and may subject the Fund to large asset swings that
diminishes the Fund's ability to provide maximum investment return to all
Contract Owners.
A feature called Dollar Cost Averaging is available to Contract Owners under
which a Contract Owner deposits an amount, subject to a minimum of $10,000, to
the Division investing in the Money Portfolio and elects to have a specified
dollar amount (the "Periodic Transfer Amount") automatically transferred to
one or more of the Divisions on a monthly, quarterly, or semi-annual basis.
This feature allows Contract Owners to systematically invest in the Divisions
at various prices which may be higher or lower than the price a Contract Owner
would pay when investing the entire amount at one time and at one price. The
total of Periodic Transfer Amounts in a given year must be at least $1,000. A
minimum of 1% of the Periodic Transfer Amount must be transferred to any
specified Division. These amounts are subject to change at Colonial Life's
discretion. If a transfer would reduce the remaining value in the Division
investing in the Money Portfolio to less than the Periodic Transfer Amount,
Colonial Life reserves the right to include such remaining value in the amount
transferred. Automatic transfers will continue until the amount designated for
Dollar Cost Averaging has been transferred or until the Contract Owner gives
notification of a change in allocation or cancellation of the feature.
Furthermore, any Dollar Cost Averaging program will automatically terminate at
the Annuity Date, which is a date no later than the earlier of the Annuitant's
or Joint Annuitant's 85th birthday. For purposes of assessing any Transfer
Charge, the first and all subsequent Periodic Transfer Amounts made under a
particular Dollar Cost Averaging program will count as only one transfer
toward the twelve transfers which are free each Contract year. Colonial Life
will not allow a Contract Owner to participate in any Dollar Cost Averaging
program at the same time such Contract Owner is participating in the Automatic
Division Rebalancing program or the Systematic Withdrawal program.
An Automatic Division Re-Balancing feature is also available to Contract
Owners. This feature provides a method for re-establishing fixed proportions
among the various Divisions on a systematic basis. Under this feature, the
allocation among Divisions will be automatically re-adjusted to the desired
allocation on a quarterly, semi-annual or annual basis. The minimum value in
each Division after such re-balancing must be at least the greater of $1,000
or 1% of the Contract Value as of the date of the re-balancing. For purposes
of assessing any Transfer Charge, the first and all subsequent automatic re-
balancing transfers made under a particular Automatic Division Re-Balancing
Program will count as only one transfer toward the twelve transfers which are
free each Contract year. Colonial Life will not allow a Contract Owner to
participate in any Automatic Division Rebalancing program at the same time
such Contract Owner is participating in the Dollar Cost Averaging program or
the Systematic Withdrawal program.
The Dollar Cost Averaging and the Automatic Division Re-Balancing programs
are subject to the consent of Colonial Life. Colonial Life reserves the right
to suspend these programs upon 30 days advance notice to Contract Owners.
F. TELEPHONE TRANSFERS AND REALLOCATIONS.
Contract Owners may request by telephone transfers of values in the
Divisions or reallocation of Purchase Payments (including allocation changes
pursuant to existing Dollar Cost Averaging and Automatic Division Re-Balancing
programs), provided that the appropriate authorization form is on file with
Colonial Life. During periods of heavy telephone transfers, implementing a
telephone transfer may be difficult. If a Contract Owner is unable to reach
Colonial Life via telephone, the Contract Owner should send a written request
to Colonial Life via an express mailing service or via the Colonial Life
telecopier machine at (603) 229-6044. (Any transfer requests received via
telecopier are considered telephone transfers and are bound by the conditions
outlined in the signed authorization form.) Colonial Life reserves the right
to discontinue telephone transfers at any time without notice to the Contract
Owners. Procedures have been established that are reasonably designed to
reduce the risk of unauthorized telephone transfers or allocation changes.
These procedures include requiring personal identification information, (such
as the Contract Owner's date of birth and social security number or taxpayer
identification number), tape recording calls and providing written
confirmations to Contract Owners.
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G. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Contract Value, less applicable charges. The Contract
Owner must return the Contract and a signed, written request for surrender,
satisfactory to Colonial Life, to Colonial Life's Service Center. The amount
payable to the Contract Owner upon surrender will be based on the Contract
Value as of the Valuation Date on which the request and the Contract are
received at Colonial Life's Service Center.
Before the Annuity Date, a Withdrawal Charge may be deducted when a Contract
is surrendered if payments have been credited to the Contract during the last
four full Contract years. See "CHARGES AND DEDUCTIONS."
For important tax consequences which may result from surrender, see "FEDERAL
TAX CONSIDERATIONS."
H. PARTIAL WITHDRAWAL.
At any time prior to the Annuity Date, a Contract Owner may redeem an amount
of the Contract Value of his or her Contract, subject to the limits stated
below. The Contract Owner must file a signed, written request for partial
withdrawal, satisfactory to Colonial Life, at Colonial Life's Service Center.
The written request must indicate the dollar amount the Contract Owner wishes
to receive and the Division(s) from which such amount is to be withdrawn. If
the Contract Owner does not specify the Division(s) from which such amount is
to be withdrawn, Colonial Life will surrender Accumulation Units from each
Division in the same proportion that the Contract Owner's interest in the
Division bears to the total Contract Value. Unless otherwise specified, the
amount redeemed equals the amount requested by the Contract Owner plus any
applicable Withdrawal Charge, as described under "CHARGES AND DEDUCTIONS."
Where allocations have been made to more than one Division, a percentage of
the partial withdrawal may be allocated to each such Division. A partial
withdrawal from a Division will result in cancellation of a number of units
equivalent in value to the amount redeemed, computed as of the Valuation Date
that the request is received at Colonial Life's Service Center.
The minimum amount of a partial withdrawal is $1,000. A partial withdrawal
may not reduce the total Contract Value to less than $25,000 for Non-Qualified
Contracts or less than $5,000 for Qualified Contracts. In addition, the
minimum amount that must remain in a Division following a partial withdrawal
from such Division is the greater of 1% of the total Contract Value at the
time of partial withdrawal or $1,000.
Partial withdrawals made prior to age 59 1/2 may be treated by the IRS as a
premature distribution from the Contract subject to a 10% federal tax penalty.
For more information, see "FEDERAL TAX CONSIDERATIONS."
I. DEFERMENT OF PAYMENT AND TRANSFERS.
Any amount surrendered, withdrawn or payable in respect of a Death Benefit
is normally payable within seven days following Colonial Life's receipt of the
surrender, partial withdrawal or complete Death Benefit payment request.
Colonial Life, however, reserves the right to defer such payments during any
period which: (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (b) the SEC has by order permitted such suspension, or (c) an
emergency, as determined by the SEC, exists such that disposal of Portfolio
securities or valuation of assets of each Division is not reasonably
practicable. Any payment which is derived, all or in part, from any amount
paid to Colonial Life by check or draft will be postponed until such time as
Colonial Life determines that such instrument has been honored. In addition,
transfers may be delayed under these circumstances.
J. SYSTEMATIC WITHDRAWALS.
A Contract Owner who is also the Annuitant may elect to make a series of
systematic withdrawals from the Contract according to a life expectancy
distribution ("LED"), by returning a properly signed LED request form to
Colonial Life's Service Center. The LED permits the Contract Owner to make
systematic withdrawals from the Contract over his or her lifetime. The amount
withdrawn from the Contract changes each year that a person lives. For
example, actuarial tables indicate that a person age 70 has a life expectancy
of 16 years, but a person who attains age 86 has a life expectancy of another
6.5 years.
If a Contract Owner elects the LED, in each Contract year a fraction of the
Contract Value is withdrawn from the Contract based on the Contract Owner's
then life expectancy. The numerator of the fraction is 1 (one) and the
denominator of the fraction is the remaining life expectancy of the Contract
Owner, as determined annually by Colonial Life. The resulting fraction,
expressed as a percentage, is applied to the Contract Value at the beginning
of the year to determine the amount to be distributed during the year. The
Contract Owner may elect monthly, bimonthly, quarterly, semiannual, or annual
distributions, and may terminate the LED at any time. The Contract Owner may
also elect to receive distributions under a LED which is determined on the
joint life expectancy of the Contract Owner and a beneficiary.
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Colonial Life may also offer other systematic withdrawal programs which are
not based on life expectancy. Colonial Life reserves the right to set limits on
any systematic withdrawal programs, including any minimum Contract Value amount
necessary for participation. Colonial Life will not allow a Contract Owner to
participate in any systematic withdrawal program at the same time such Contract
Owner is participating in the Dollar Cost Averaging program or the Automatic
Division Re-Balancing program. ANY PARTIAL WITHDRAWAL REQUEST MADE BY THE
CONTRACT OWNER WHICH IS IN ADDITION TO THE SYSTEMATIC WITHDRAWAL PROGRAM WILL
TERMINATE THE SYSTEMATIC WITHDRAWAL PROGRAM AUTOMATICALLY. The Contract Owner
may reapply for the systematic withdrawal program on or after the next Contract
anniversary.
If a Contract Owner makes withdrawals under the LED distribution or any other
distribution program prior to age 59 1/2, the withdrawals may be treated by the
IRS as premature distributions from the Contract. The payments would then be
taxed on an "income first" basis and be subject to a 10% federal tax penalty.
For more information, see "FEDERAL TAX CONSIDERATIONS."
Colonial Life reserves the right to discontinue offering Systematic
Withdrawals; however, any such discontinuation will not affect Systematic
Withdrawal programs already commenced. Furthermore, any Systematic Withdrawal
program will automatically terminate at the Annuity Date, which is a date no
later than the earlier of the Annuitant's or Joint Annuitant's 85th birthday.
K. PROVISIONS APPLICABLE AT DEATH.
The following provisions generally apply to Non-Qualified Contracts. Special
rules may apply with respect to Qualified Contracts. Purchasers of Qualified
Contracts should seek competent legal and tax advice regarding their particular
situations upon the death of the Contract Owner.
DEATH BENEFIT. The Death Benefit is the amount that may be payable by
Colonial Life to the Beneficiary if the Contract Owner dies before the Annuity
Date. The Death Benefit will be the greater of:
(a) The Contract Value; or
(b) the sum of all net Purchase Payments paid into the Contract reduced
proportionally to reflect the amount of all prior partial withdrawals. For
purposes of calculating the Death Benefit under this subsection (b), for
each partial withdrawal, the reduction will be calculated by multiplying
the total amount of the Purchase Payments by a fraction, the numerator of
which is the amount of the partial withdrawal and the denominator of which
is the Contract Value immediately prior to the withdrawal.
The Death Benefit will be determined and paid as of the Valuation Period next
following the date of receipt at Colonial Life's Service Center of notification
and due proof of death and an election for a single sum payment or an annuity
option.
IF THE CONTRACT OWNER DIES BEFORE THE ANNUITY DATE. Notwithstanding any other
provision of the Contract, if the Contract Owner dies before the Annuity Date,
the Death Benefit payable to the Beneficiary will be distributed as follows:
(a) the Death Benefit must be completely distributed within five years of
the Contract Owner's date of death; or
(b) the Contract Owner's Beneficiary may elect, within 60 days after the
Contract Owner's date of death, to receive the Death Benefit in the form of
any annuity from Colonial Life, provided that: (1) such annuity is
distributed in substantially equal installments over the life of such
Beneficiary or over a period not extending beyond the life expectancy of
such Beneficiary; and (2) such distributions begin not later than one year
after the Contract Owner's date of death.
Notwithstanding (a) and (b) above, if the sole Beneficiary is the deceased
Contract Owner's surviving spouse, then such spouse may elect within the one
year period after the Contract Owner's date of death, to continue the Contract
under the same terms as before the Contract Owner's death. Upon receipt of such
election from the spouse, in a form and manner acceptable to Colonial Life, at
its Service Center, or in the event the spouse fails to make an election within
one year: (1) all rights of the spouse as Beneficiary under the Contract in
effect prior to such election will cease; (2) the spouse will become the
Contract Owner and will also be treated as the Annuitant, if none has been
named and if the deceased Contract Owner was the Annuitant; and (3) all rights
and privileges granted by the Contract or allowed by Colonial Life will belong
to the spouse as Contract Owner.
The distribution provisions described in subparagraphs (a) and (b) above,
will apply even if the Annuitant is alive at the time of the Contract Owner's
death. If the nonspouse Beneficiary is not an individual, then only a cash
payment will be paid.
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If no election is received by Colonial Life from a nonspouse Beneficiary
within the 60 day period after the Contract Owner's date of death, then
Colonial Life will pay the Death Benefit to the Beneficiary in a cash payment.
Such cash payment will be in full settlement of all Colonial Life's liability
under the Contract.
IF THE CONTRACT OWNER IS NOT AN INDIVIDUAL. If the Contract Owner is a
corporation or other non-individual, the death of the Annuitant will be treated
as the death of the Contract Owner.
IF THE CONTRACT OWNER DIES ON OR AFTER THE ANNUITY DATE. If the Contract
Owner dies on or after the Annuity Date, any benefit payable will continue to
be distributed at least as rapidly as under the annuity option then in effect.
All of the Contract Owner's rights granted by the Contract or allowed by
Colonial Life will pass to the Beneficiary.
IF AN ANNUITANT WHO IS NOT THE CONTRACT OWNER DIES BEFORE THE ANNUITY
DATE. Upon the death of an Annuitant who is not a Contract Owner, the Contract
will stay in force if the Contract Owner is a natural person. The Contract
Owner will be entitled to name a new Annuitant. If a new Annuitant is not named
within 30 days of the death of the Annuitant, the Contract Owner will be the
new Annuitant.
L. ASSIGNMENT.
The Contract Owner of a Non-Qualified Contract may make a collateral
assignment of his or her rights under the Contract as security for a debt at
any time prior to the Annuity Date and while the Annuitant is alive.
Colonial Life will not be deemed to have knowledge of an assignment unless it
is made in writing in a form acceptable to Colonial Life and filed at Colonial
Life's Service Center. Colonial Life will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date or the date of death of the Annuitant or Contract
Owner, Colonial Life reserves the right to pay to the assignee, in one sum,
that portion of the Contract Value (less applicable charges) to which the
assignee appears to be entitled. Colonial Life will pay the balance, if any, in
one sum to the Contract Owner in full settlement of all liability under the
Contract. The interest of the Contract Owner and of any Beneficiary will be
subject to any assignment.
Qualified Contracts are not assignable. See "FEDERAL TAX CONSIDERATIONS."
M. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
On the Annuity Date, Colonial Life will begin making annuity payments under
the applicable annuity option selected. Annuity payments will be made to the
Annuitant or any named payee. The annuity distribution period cannot be less
than five years.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity payments are
determined according to the annuity tables in the Contract, by the annuity
option selected and by the investment performance of the Divisions selected.
To the extent a Fixed Annuity is selected, Contract Value will be transferred
to the General Account of Colonial Life, and the annuity payments will be fixed
in amount. The first Fixed Annuity payment will be determined by applying the
Contract Value, less any applicable premium tax, to the applicable Annuity
Table in accordance with the annuity option elected. This will be done at the
Annuity Date on an age last birthday basis. Fixed Annuity payments after the
first will remain constant in amount.
Under a Variable Annuity, a payment equal to the value of the number of
Annuity Units in the Division(s) is made each payment period. Since the value
of an Annuity Unit in a Division will reflect the investment performance of the
Division, the amount of each periodic payment will vary.
If at the time an annuity option becomes payable its accumulated value is
less than $2,000, or it would provide an income the initial amount of which is
less than $20 per month, Colonial Life reserves the right to change the
frequency of payments to the next less frequent payment mode or pay the
Annuitant or designated payee in a lump sum in lieu of an annuity. Once
Colonial Life begins making annuity payments, the Contract Owner cannot make
partial withdrawals or surrender the annuity benefit.
The Annuity Date is selected by the Contract Owner. To the extent permitted
in the Contract Owner's state or otherwise approved by Colonial Life, the
Annuity Date may be any day before the earlier of the Annuitant's or Joint
Annuitant's 85th birthday. The Annuitant and Joint Annuitant must be less than
age 80 for Non-Qualified Contracts and age 72 for Qualified Contracts at the
Date of Issue.
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While the Annuitant is living and up to 30 days prior to the Annuity Date,
the Contract Owner may elect to change the Annuity Date by sending a request to
Colonial Life's Service Center. The new Annuity Date must be within the life
expectancy of the Annuitant. Colonial Life shall determine such life expectancy
at the time a change in Annuity Date is requested. The Code imposes limitations
on the age at which annuity payments may commence and the type of annuity
option selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, annuity payments will be made
on a variable basis in accordance with Option 1, Life Income With 10 Years
Certain. Changes in either the Annuity Date or annuity option can be made up to
30 days prior to the Annuity Date.
N. DESCRIPTION OF ANNUITY OPTIONS.
Colonial Life currently provides the annuity options described below, which
are payable on an annual, semi-annual, quarterly or monthly basis. Other
annuity options may be offered by Colonial Life.
A supplementary agreement will be issued to the Contract Owner within 30 days
following the Annuity Date. This supplementary agreement will set forth the
terms of the annuity option selected. Colonial Life may request satisfactory
proof of age, sex and identity before Colonial Life begins to make annuity
payments.
OPTION 1--LIFE INCOME WITH 10 YEARS CERTAIN
Colonial Life will make a series of payments to the Annuitant or any named
payee. Payments will continue so long as the Annuitant is alive, or for 10
years, whichever is longer. If the Annuitant dies before payments have been
made for 10 years, Colonial Life will pay any remaining amounts due to the
Beneficiary.
OPTION 2--INCOME FOR FIXED PERIOD
Colonial Life will make payments for the period elected, between 5 and 30
years. If the Annuitant dies during this period, payments will be made to the
Beneficiary for the remainder of the period. This option is available under a
Fixed Annuity only.
OPTION 3--LIFE INCOME
Colonial Life will make a series of payments to the Annuitant or any named
payee. Payments will continue for the lifetime of the Annuitant. Payments will
end with the last payment due prior to the Annuitant's death. It would be
possible under this option for the Annuitant or other payee to receive only one
annuity payment if the Annuitant dies prior to the due date of the second
annuity payment, two annuity payments if the Annuitant dies before the due date
of the third annuity payment, and so on. However, payments will continue during
the lifetime of the Annuitant, no matter how long the Annuitant lives.
OPTION 4--JOINT AND SURVIVOR LIFE INCOME
Colonial Life will make payments during the joint lifetime of the Annuitant
and Joint Annuitant. Payments will continue during the lifetime of the
survivor. Payments will end with the last payment due prior to the death of the
surviving Annuitant.
O. CALCULATION OF CONTRACT VALUES AND ANNUITY PAYMENTS.
DETERMINING CONTRACT VALUE. The sum of the value of all Accumulation Units in
the Divisions attributable to the Contract is the Contract Value. The Contract
Value will reflect a number of factors, including the investment experience of
the Divisions that are invested in the Portfolios, any additional Purchase
Payments or partial withdrawals made, and any charges assessed in connection
with the Contract. The Contract Value is not guaranteed as to dollar amount.
In the event part or all of the Contract Value is withdrawn or charges or
deductions are made against the Contract Value, an appropriate number of
Accumulation Units from each Division will be deducted in the same proportion
that the Contract Owner's interest in the Division bears to the total Contract
Value.
THE ACCUMULATION UNIT. The Purchase Payments are allocated to the Division(s)
selected by the Contract Owner. Allocations to each Division are credited to
the Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Division. Each Purchase Payment allocated to a Division
will increase the number of Accumulation Units in that Division. Both full and
fractional Accumulation Units are credited.
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The number of Accumulation Units of each Division credited to the Contract is
equal to the portion of the Purchase Payment allocated to the Division, divided
by the dollar value of the applicable Accumulation Unit as of the Valuation
Period the Purchase Payment is credited to the Contract. The number of
Accumulation Units previously credited will not change because of subsequent
changes in Accumulation Unit value.
Certain transactions affect the number of Accumulation Units in a Division.
Surrenders, partial withdrawals, Withdrawal Charges, Transfer Charges and the
Expense Risk Charge involve the redemption of Accumulation Units and will
decrease the number of Accumulation Units. Transfers of amounts among the
Divisions will reduce or increase the number of Accumulation Units in a
Division, as appropriate.
The dollar value of an Accumulation Unit of each Division varies from
Valuation Period to Valuation Period based on the investment experience of that
Division and will reflect the investment performance, expenses and charges of
its underlying Portfolio.
The value of an Accumulation Unit for each Division was set initially at $10
when Portfolio shares in that Division were first available for purchase. The
value for any subsequent Valuation Period is determined by multiplying the
Accumulation Unit value for each Division for the immediately preceding
Valuation Period by the Net Investment Factor for the Division during the
subsequent Valuation Period.
THE NET INVESTMENT FACTOR. The Net Investment Factor measures the investment
experience of each Division of the Separate Account and is used to determine
changes in Accumulation Unit value from one Valuation Period to the next
Valuation Period. The Net Investment Factor for any Valuation Period is
determined by dividing (i) by (ii) and subtracting (iii) from the result where:
(i) is (a) the value of the assets of the Division at the end of the
preceding Valuation Period, plus, (b) the investment income and capital
gains, realized or unrealized, credited to the assets of the Division
during the Valuation Period for which the Net Investment Factor is being
determined, minus (c) capital losses, realized or unrealized, charged
against those assets during the Valuation Period, minus (d) any amount
charged against the Divisions for taxes or any amount set aside during the
Valuation Period by Colonial Life to provide for taxes attributable to the
operation or maintenance of that Division;
(ii) is the value of the assets of the Division at the end of the
preceding Valuation Period; and
(iii) is a charge representing the daily Mortality Risk Charge and
Administration Charge deducted from the assets of the Separate Account.
Such charge is equal to an annual rate of 0.60% of the daily net assets of
the Separate Account.
The Net Investment Factor may be greater or less than one; therefore, the
value of an Accumulation Unit may increase or decrease. The changes in the Net
Investment Factor may not be directly proportional to changes in the net asset
value of the underlying Portfolio shares because of the deduction for the
Mortality Risk Charge and the Administration Charge, and any charge or credit
for tax reserve which Colonial Life is not currently charging but has reserved
the right to do so in the future. See "FEDERAL TAX CONSIDERATIONS."
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a
measure of the value of the Annuitant's annuity payments under a Variable
Annuity option.
The value of an Annuity Unit in each Division initially was set at $10.00.
The value of an Annuity Unit under a Division on any Valuation Date thereafter
is equal to the value of such unit on the immediately preceding Valuation Date,
multiplied by the product of (1) the Net Investment Factor of the Division for
the current Valuation Period, and (2) a factor to adjust benefits to neutralize
the assumed interest rate. The assumed interest rate, discussed below, is
incorporated in the Variable Annuity options offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY PAYMENTS. The first annuity
payment is based upon the Contract Value as of a date not more than four weeks
preceding the date the first annuity payment is due.
The Contract provides annuity rates which determine the dollar amount of the
first monthly payment under each form of annuity for each $1,000 of applied
value (Contract Value applied under a specific annuity option to provide
annuity income payments, minus any applicable premium tax). The annuity rates
in the Contract for Annuity Options 1, 3 and 4 are based on the 1983 "a"
Individual Annuitant Mortality Table.
24
<PAGE>
The amount of the first payment depends upon the form of annuity selected,
the sex and age of the Annuitant and the value of the amount applied under the
annuity option. The Variable Annuity options offered by Colonial Life are based
on a 4% annual assumed investment rate. If the actual net investment rate after
deduction of the Mortality Risk Charge, Administration Charge and Expense Risk
Charge exceeds 4% annually, Variable Annuity payments will increase. If the
actual rate is less than 4% annually, Variable Annuity payments will decrease.
The dollar amount of the first Variable Annuity payment under a particular
option is determined by multiplying (1) the Contract Value applied under that
option (after deduction for applicable premium tax, if any) divided by $1,000,
by (2) the applicable amount of the first payment per $1,000 of value. The
dollar amount of the first Variable Annuity payment is then divided by the
value of an Annuity Unit of the selected Division(s) to determine the number of
Annuity Units represented by the first payment. In each subsequent period, the
dollar amount of the Variable Annuity payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit on the applicable
Valuation Date.
After the first payment, the dollar amount of each periodic Variable Annuity
payment will vary with subsequent variations in the value of the Annuity Unit
of the selected Division(s). The dollar amount of each Fixed Annuity payment is
fixed and will not change. Colonial Life may from time to time offer its
Contract Owners Fixed Annuity rates more favorable than those contained in the
Contract. Any such rates will be applied uniformly to all Contract Owners of
the same class.
Once Variable Annuity payments start, neither expenses actually incurred,
other than taxes on the investment return, nor mortality actually experienced
by Colonial Life, shall adversely affect the dollar amount of Variable Annuity
payments.
FEDERAL TAX CONSIDERATIONS
A. INTRODUCTION
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice. This
discussion is not intended to address all tax consequences resulting from the
purchase of a Contract. Any person concerned about these tax implications
should consult a competent tax adviser before initiating any transaction. This
discussion is based upon Colonial Life's understanding of the present federal
income tax laws as they are currently interpreted by the IRS. No representation
is made as to the likelihood of the continuation of the present federal income
tax laws or of the current interpretation by the IRS. Moreover, no attempt has
been made to consider any applicable state or other tax laws.
The Contracts may be purchased on a non-tax qualified basis ("Non-Qualified
Contracts") or purchased and used in connection with certain plans entitled to
special income tax treatment under section 408 of the Code ("Qualified
Contracts"). The ultimate effect of federal income taxes on the amounts held
under a Contract, on annuity payments, and on the economic benefit to the
Contract Owner, the Annuitant, or the Beneficiary may depend on the type of
retirement plan, and on the tax status of the individual concerned. In
addition, certain requirements must be satisfied in purchasing a Qualified
Contract and receiving distributions from a Qualified Contract in order to
continue receiving favorable tax treatment. Therefore, purchasers of Qualified
Contracts should seek competent legal and tax advice regarding the suitability
of the Contract for their situation, the applicable requirements, and the tax
treatment of the rights and benefits of the Contract.
B. TAXATION OF COLONIAL LIFE.
Colonial Life is taxed as a life insurance company under Part I of Subchapter
L of the Code. Since the Separate Account is not an entity separate from
Colonial Life, and its operation form a part of Colonial Life, it will not be
taxed separately as a "regulated investment company" under Subchapter M of the
Code. Investment income and realized capital gains are automatically applied to
increase reserves under the Contracts. Under existing federal income tax law,
Colonial Life believes that the Separate Account investment income and realized
net capital gains will not be taxed to the extent that such income and gains
are applied to increase the reserves under the Contracts.
Accordingly, Colonial Life does not anticipate that it will incur any federal
income tax liability attributable to the Separate Account and, therefore,
Colonial Life does not intend to make provisions for any such taxes. However,
if changes in the federal tax laws or interpretations thereof result in
Colonial Life being taxed on income or gains attributable to the Separate
Account, then Colonial Life may impose a charge against the Separate Account
(with respect to some or all Contracts) in order to set aside provisions to pay
such taxes.
25
<PAGE>
C. TAX STATUS OF THE CONTRACT.
DIVERSIFICATION. Section 817(h) of the Code requires that with respect to
Non-Qualified Contracts, the investments of the Fund be "adequately
diversified" in accordance with Treasury regulations in order for the Contracts
to qualify as annuity contracts under federal tax law. The Separate Account,
through the Portfolios, intends to comply with the diversification requirements
prescribed by the Treasury in Reg. Sec. 1.817-5, which affect how the
Portfolios' assets may be invested.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury Department has also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control for the
investments of a segregated asset account may cause the investor (i.e., the
Contract Owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also stated that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular [Divisions] without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, a Contract Owner has additional flexibility in allocating premium
payments and account values. These differences could result in a Contract Owner
being treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, Colonial Life does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. Colonial Life therefore reserves the right to
modify the Contract as necessary to attempt to prevent a Contract Owner from
being considered the owner of a pro rata share of the assets of the Separate
Account.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires Non-Qualified
Contracts to provide that (a) if any Contract Owner dies on or after the
Annuity Date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at
least as rapidly as under the method of distribution being used as of the date
of such Contract Owner's death; and (b) if any Contract Owner (or the
Annuitant, in some circumstances) dies prior to the Annuity Date, the entire
interest in the Contract will be distributed within five years after the date
of such Contract Owner's (or Annuitant's) death. The requirements in (b) above
will be considered satisfied as to any portion of a Contract Owner's interest
which is payable to or for the benefit of a "designated beneficiary" and which
is distributed over the life of such "designated beneficiary" or over a period
not extending beyond the life expectancy of that beneficiary, provided that
such distributions begin within one year of the Contract Owner's death. The
"designated beneficiary" refers to a natural person designated by the owner as
a Beneficiary. However, if the "designated beneficiary" is the surviving spouse
of a deceased Contract Owner, the Contract may be continued with the surviving
spouse as the new Contract Owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. Colonial Life intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code section 72(s) when clarified by regulation or
otherwise. Other rules may apply to Qualified Contracts.
The following discussion is based on the assumption that the Contract
qualifies as an annuity contract for federal income tax purposes.
D. TAXATION OF ANNUITIES.
IN GENERAL. Section 72 of the Code governs taxation of annuities in general.
Colonial Life believes that a Contract Owner who is a natural person generally
is not taxed on increases in the value of a Contract until distribution occurs
by withdrawing all or part of the Contract Value (e.g., partial withdrawals or
annuity payments under the annuity option elected). For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the
Contract Value (and in the case of a Qualified Contract, any portion of an
interest in the qualified plan) generally will be treated as a distribution.
The taxable portion of a distribution (in the form of a single sum payment or
an annuity) is taxable as ordinary income.
26
<PAGE>
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the Contract Value over the
"investment in the Contract" (discussed below) during the taxable year. There
are some exceptions to this rule and prospective Contract Owners that are not
natural persons may wish to discuss these with a competent tax adviser.
The following discussion generally applies to a Contract owned by a natural
person.
WITHDRAWALS. In the case of a withdrawal under a Qualified Contract,
including withdrawals under the Systematic Withdrawal program, a ratable
portion of the amount received is taxable, generally based on the ratio of the
"investment in the contract" to the individual's total accrued benefit under
the retirement plan. The "investment in the contract" generally equals the
amount of any non-deductible Purchase Payments paid by or on behalf of any
individual. For a Contract issued in connection with qualified plans, the
"investment in the contract" can be zero. Special tax rules may be available
for certain distributions from a Qualified Contract.
With respect to Non-Qualified Contracts, partial withdrawals, including
withdrawals under the Systematic Withdrawal program, are generally treated as
taxable income to the extent that the Contract Value immediately before the
withdrawal exceeds the "investment in the contract" at that time. Full
surrenders are treated as taxable income to the extent that the amount received
exceeds the "investment in the contract".
ANNUITY PAYMENTS. Although the tax consequences may vary depending on the
Annuity Option elected under the Contract, in general, only the portion of the
annuity payment that represents the amount by which the Contract Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is recovered, the full amount of any additional annuity payments is
taxable. For Variable Annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract". For
Fixed Annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the annuity payments for the term of the
payments; however, the remainder of each annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional annuity payments is taxable. If annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
PENALTY TAX. In the case of a distribution pursuant to a Non-Qualified
Contract, there may be imposed a federal income tax penalty equal to 10% of the
amount treated as taxable income. In general, however, there is no penalty tax
on distributions: (1) made on or after the date on which the taxpayer attains
age 59 1/2; (2) made as a result of death or permanent disability of an owner;
(3) received in substantially equal periodic payments as a life annuity or a
joint and survivor annuity for the lives or life expectancies of the owner and
a "designated beneficiary". Other tax penalties may apply to certain
distributions pursuant to a Qualified Contract.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from the
Contract because of the death of a Contract Owner (or an Annuitant, in some
circumstances). Generally, such amounts are includable in the income of the
recipient as follows: (1) if distributed in a lump sum, they are taxed in the
same manner as a full surrender as described above, or (2) if distributed under
an annuity option, they are taxed in the same manner as annuity payments, as
described above.
TRANSFERS, ASSIGNMENT OR EXCHANGES OF THE CONTRACT. A transfer of ownership
of a Contract, the designation of an Annuitant, payee or other Beneficiary who
is not also a Contract Owner, the selection of certain Annuity Dates, the
change of Annuitant, or the exchange of a Contract may result in certain tax
consequences that are not discussed herein. Anyone contemplating any such
designation, transfer, assignment, selection, or exchange should contact a
competent tax adviser with respect to the potential tax effects of such a
transaction.
MULTIPLE CONTRACTS. All deferred non-qualified annuity contracts that are
issued by Colonial Life (or its affiliates) to the same owner during any
calendar year are treated as one annuity contract for purposes of determining
the amount includable in gross income under section 72(e) of the Code. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of section 72(e) through the serial purchase of
annuity contracts or otherwise. Congress has also indicated that the Treasury
Department may have authority to treat the combination purchase of an immediate
annuity contract and separate deferred annuity contracts as a single annuity
contract under its general authority to prescribe rules as may be necessary to
enforce the income tax laws.
27
<PAGE>
E. QUALIFIED CONTRACTS
IN GENERAL. The Qualified Contract is designed for use with several types of
retirement plans, in particular, IRA rollovers and Simplified Employee Pensions
("SEPs"). The tax rules applicable to participants and beneficiaries in
retirement plans vary according to the type of plan and the terms and
conditions of the plan. Special favorable tax treatment may be available for
certain types of contributions and distributions. Adverse tax consequences may
result from contributions in excess of specified limits; distributions prior to
age 59 1/2 (subject to certain exceptions); distributions that do not conform
to specified commencement and minimum distribution rules; aggregate
distributions in excess of a specified annual amount; and in other specified
circumstances.
Colonial Life makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Owners and
participants under retirement plans as well as annuitants and beneficiaries are
cautioned that the rights of any person to any benefits under Qualified
Contracts may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract issued in connection
with such a plan. Some retirement plans are subject to distribution and other
requirements that are not incorporated in the administration of the Contracts.
Contract Owners are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts satisfy
applicable law. Purchasers of Contracts for use with any retirement plan should
consult their legal counsel and tax adviser regarding the suitability of the
Contract.
INDIVIDUAL RETIREMENT ANNUITIES. The Contract is designed for use with
connection with IRA rollovers. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity or Individual Retirement Account (each
hereinafter referred to as an "IRA"). Also, distributions from certain other
types of qualified plans may be "rolled over" on a tax-deferred basis into an
IRA. The sale of a Contract for use with an IRA may be subject to special
disclosure requirements of the IRS. Purchasers of a Contract for use with IRAs
will be provided with supplemental information required by the IRS or other
appropriate agency. Such purchasers will have the right to revoke their
purchase within 7 days of the earlier of the establishment of the IRA or their
purchase. A Qualified Contract issued in connection with an IRA will be amended
as necessary to conform to the requirements of the Code. Purchasers should seek
competent advice as to the suitability of the Contract for use with IRAs.
SIMPLIFIED EMPLOYEE PENSIONS ("SEPS"). Employees may establish Simplified
Employee Pensions ("SEPs") under Code Section 408(k) if certain requirements
are met. A SEP is an IRA to which the employer contributes under a written
formula. Purchasers should seek competent advice as to the suitability of the
Contract for use with SEPs.
F. MISCELLANEOUS
WITHHOLDING. Pension and annuity distributions generally are subject to
withholding for the recipient's federal income tax liability at rates that vary
according to the type of distribution and the recipient's tax status.
Recipients, however, generally are provided the opportunity to elect not to
have tax withheld from distributions.
POSSIBLE CHANGES IN TAXATION. In past years, legislation has been proposed
that would have adversely modified the federal taxation of certain annuities.
For example, one such proposal would have changed the tax treatment of non-
qualified annuities that did not have "substantial life contingencies" by
taxing income as it is credited to the annuity. Although, as of the date of
this Prospectus, Congress is not actively considering any legislation regarding
the taxation of annuities, there is always the possibility that the tax
treatment of annuities could change by legislation or other means (such as IRS
regulations, revenue rulings, judicial decisions, etc.). Moreover, it is also
possible that any change could be retroactive (that is, effective prior to the
date of the change).
OTHER TAX CONSEQUENCES. As noted above, the foregoing discussion of the
federal income tax consequences is not exhaustive and special rules are
provided with respect to other tax situations not discussed in this Prospectus.
Further, the federal income tax consequences discussed herein reflect Colonial
Life's understanding of the current law and the law may change. Federal estate
and gift tax consequences of ownership or receipt of distributions under the
Contract depend on the individual circumstances of each Contract Owner or
recipient of a distribution. A competent tax adviser should be consulted for
further information.
28
<PAGE>
GENERAL. At the time the initial Purchase Payment is paid, a prospective
purchaser must specify whether he or she is purchasing a Non-Qualified Contract
or a Qualified Contract. If the initial Purchase Payment is derived from an
exchange or surrender or another annuity contract, Colonial Life may require
that the prospective purchaser provide information with regard to the federal
income tax status of the previous annuity contract. Colonial Life will require
that persons purchase separate Contracts if they desire to invest monies
qualifying for different annuity tax treatment under the Code. Each such
separate Contract would require the minimum initial Purchase Payment stated
above. Additional Purchase Payments under a Contract must qualify for the same
federal income tax treatment as the initial Purchase Payment under the
Contract; Colonial Life will not accept an additional Purchase Payment under a
Contract if the federal income tax treatment of such Purchase Payment would be
different from that of the initial Purchase Payment.
REPORTS
A Contract Owner is sent a report semi-annually which states certain
financial information about the Divisions. Colonial Life will also furnish an
annual report to the Contract Owner containing a statement of his or her
account, including unit values and other information required by applicable
law, rules and regulations.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a
party or to which the assets of any of the Divisions are subject. Colonial Life
and Chubb Securities Corporation, the principal underwriter of the Contracts,
are not involved in any litigation that is of material importance in relation
to their respective total assets or that relate to the Separate Account.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the SEC. Certain portions of the Registration
Statement and amendments have been omitted in this Prospectus pursuant to the
rules and regulations of the SEC. The omitted information may be obtained from
the SEC's principal office in Washington, D.C., upon payment of the SEC's
prescribed fees.
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION AND HISTORY............................................ B-2
TAXATION OF THE SEPARATE ACCOUNT AND COLONIAL LIFE......................... B-2
SERVICES................................................................... B-2
UNDERWRITERS............................................................... B-2
ANNUITY PAYMENTS........................................................... B-3
PERFORMANCE INFORMATION.................................................... B-3
FINANCIAL STATEMENTS....................................................... B-5
</TABLE>
29
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF ADDITIONAL INFORMATION
FOR
INDIVIDUAL FLEXIBLE PAYMENT VARIABLE ANNUITY CONTRACTS
FUNDED THROUGH DIVISIONS OF COLONIAL SEPARATE ACCOUNT VA-2
INVESTING IN SHARES OF PORTFOLIOS OF THE
UST MASTER VARIABLE SERIES, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACTS DATED MAY 1, 1995 ("THE
PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM COLONIAL LIFE ANNUITY
CUSTOMER SERVICES, THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA, ONE GRANITE
PLACE, CONCORD, NEW HAMPSHIRE, 03301, TELEPHONE (603) 226-5000.
DATED MAY 1, 1995
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY............................................. B-2
TAXATION OF THE CONTRACTS, SEPARATE ACCOUNT AND COLONIAL LIFE............... B-2
SERVICES.................................................................... B-2
UNDERWRITERS................................................................ B-2
ANNUITY PAYMENTS............................................................ B-3
PERFORMANCE INFORMATION..................................................... B-3
FINANCIAL STATEMENTS........................................................ B-5
</TABLE>
B-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Colonial Separate Account VA-2 ("Separate Account") is a separate investment
account of The Colonial Life Insurance Company of America ("Colonial Life")
established by vote of the Board of Directors on March 2, 1994. Colonial Life
is a life insurance company organized under the laws of New Jersey in 1897.
Colonial Life is a wholly-owned subsidiary of Chubb Life Insurance Company of
America ("Chubb Life"), a New Hampshire life insurance company, which in turn
is a wholly- owned subsidiary of The Chubb Corporation. The Chubb Corporation,
15 Mountain View Road, Warren, New Jersey, 07061, is a holding company
organized under the laws of New Jersey. Colonial Life's home office is located
at Eight Sylvan Way, Parsippany, New Jersey 17054, telephone number (201) 455-
1400. Its service center is located at One Granite Place, Concord, New
Hampshire 03301, telephone 603-226-5000.
The Separate Account currently consists of seven (7) Divisions. Each of the
seven (7) Divisions invests in a corresponding investment series of the UST
Master Variable Series, Inc. (the "Fund"). The Fund is managed by United States
Trust Company of New York.
The Fund, a Maryland corporation, is an open-end, diversified series
investment company. The Fund currently consists of seven different investment
series: the Equity Portfolio, Early Life Cycle Portfolio, Intermediate-Term
Managed Income Portfolio, Managed Income Portfolio, International Equity
Portfolio, International Bond Portfolio and Money Portfolio (the "Portfolios").
Each Portfolio has its own investment objectives and certain attendant risks.
TAXATION OF THE CONTRACTS, SEPARATE
ACCOUNT AND COLONIAL LIFE
Colonial Life currently imposes no charge for taxes payable in connection
with the Contract, other than for state and local premium taxes and similar
assessments when applicable. Colonial Life reserves the right to impose a
charge for any other taxes that may become payable in the future in connection
with the Contracts or the Separate Account.
The Separate Account is considered to be a part of and taxed with the
operations of Colonial Life. Colonial Life is taxed as a life insurance company
under subchapter L of the Internal Revenue Code of 1986, as amended, and files
a consolidated tax return with its parent and affiliated companies.
Colonial Life reserves the right to make a charge for any effect which the
income, assets, or existence of Contracts or the Separate Account may have upon
its tax. Such charge for taxes, if any, will be assessed on a fair and
equitable basis in order to preserve equity among classes of Contract Owners.
The Separate Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. Colonial Life serves as custodian of the assets of
the Separate Account. Portfolio shares owned by the Divisions are held on an
open account basis. A Division's ownership of Portfolio shares is reflected on
the records of the Portfolio and is not represented by any transferable stock
certificates.
UNDERWRITERS
Chubb Securities Corporation, a registered broker-dealer under the Securities
and Exchange Act of 1934 and a member of the National Association of Securities
Dealers ("NASD"), serves as principal underwriter for the Contracts pursuant to
a contract among Chubb Securities Corporation, Colonial Life and the Separate
Account. Chubb Securities Corporation distributes the Contracts on a best
effort basis. Chubb Securities Corporation, One Granite Place, Concord, New
Hampshire, 03301, was organized in 1969 as a wholly-owned subsidiary of Chubb
Life.
B-2
<PAGE>
All persons selling the Contracts are required to be licensed by the
respective state insurance authorities for the sale of variable annuity
contracts. The following table indicates commission levels for cumulative
payments up to age 69:
<TABLE>
<CAPTION>
CUMULATIVE PAYMENTS COMMISSION
------------------- ----------
<S> <C>
Less Than $125,000............................................ 2.5%
$125,000 But Less Than $250,000............................... 2.0%
$250,000 But Less Than $625,000............................... 1.5%
$625,000 Or Greater........................................... 1.0%
</TABLE>
For issue ages 70 and above, commissions will be paid at one-half the
amounts indicated in the table. In addition, expense reimbursement allowances
may be paid. Additional payments may be made for other services not directly
related to the sale of the Contracts, including the recruitment and training
of personnel, production of promotional literature, and similar services.
Commissions paid by Colonial Life do not result in any charge to Contract
Owners or to the Separate Account in addition to the charges described under
"CHARGES AND DEDUCTIONS" in the Prospectus. Colonial Life intends to recoup
the commissions and other sales expense through a combination of anticipated
Withdrawal Charges imposed on surrender and partial withdrawal, and the
profit, if any, from the Mortality Risk Charge and the Expense Risk Charge.
ANNUITY PAYMENTS
The method by which the Contract Value under the Contract is determined is
described in detail under "THE CONTRACTS--O. Computation of Contract Values
and Annuity Payments" in the Prospectus.
PERFORMANCE INFORMATION
Performance information for a Division may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION". In addition, Colonial Life may provide advertising,
sales literature, periodic publications or other materials or information on
various topics of interest to Contract Owners and prospective Contract Owners.
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, including comparisons between the Contracts and the
characteristics of and market for such financial instruments.
YIELD AND EFFECTIVE YIELD (FOR THE DIVISION INVESTING IN THE MONEY PORTFOLIO)
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. Under those
methods, the yield quotation is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one Accumulation Unit of the Division at the
beginning of the period, subtracting a charge reflecting the annual 0.60%
asset charge deduction for the Mortality Risk Charge and Administration Charge
and a charge for the maximum monthly Expense Risk Charge equal to 0.30% on an
annual basis, dividing the difference by the value of the account at the
beginning of the same period to obtain the base period return, and then
multiplying the return for a seven-day period by (365/7), with the resulting
yield carried to the nearest hundredth of one percent. Effective yield is
computed by compounding the unannualized base period return by using the
formula:
( (367)
Effective Yield =( base period return + 1(-- ) - 1
( ( 7 )
YIELD (FOR DIVISIONS INVESTING IN THE INTERMEDIATE-TERM MANAGED INCOME AND THE
MANAGED INCOME PORTFOLIOS
The yield figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. Yield quotations are based on a 30-
day (or one month) periods computed by dividing the net investment
B-3
<PAGE>
income per Accumulation Unit earned during the period by the maximum offering
price per unit on the last day of the period, according to the following
formula:
(a - b ) )
Yield = 2(----- + 1) /6/ - 1)
( cd ) )
Where:
a = net investment income earned during the period by the Portfolio
attributable to shares owned by the Division.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Accumulation Units outstanding during the
period.
d = the maximum offering price per Accumulation Unit on the last day of the
period.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Division and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period,
reduced by a 0.60% annual asset charge, a monthly deduction of a maximum
Expense Risk Charge equal to 0.30% on an annual basis, and any applicable
Withdrawal Charge which would be assessed upon complete redemption of the
investment.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission. The quotations are computed by
finding the average annual compound rates of return over the specified periods
that would equate the initial amount invested to the ending redeemable values,
according to the following formula:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment to the Separate Account of $1,000.
T = average annual total return.
n = number of years.
ERV = the ending redeemable value of the $1,000 payment at the end of the
specified period.
The calculation of ending redeemable value assumes (1) the Contract was
issued at the beginning of the period and (2) a complete surrender of the
Contract at the end of the period. The deduction of the Withdrawal Charge, if
any, applicable at the end of the period is included in the calculation,
according to the following schedule.
<TABLE>
<CAPTION>
NUMBER OF COMPLETE CHARGE AS PERCENTAGE OF
YEARS FROM DATE PURCHASE PAYMENTS
OF PURCHASE PAYMENT WITHDRAWN
------------------- -----------------------
<S> <C>
0 to 1........................................ 3%
1+ to 2....................................... 3%
2+ to 3....................................... 2%
3+ to 4....................................... 1%
4+............................................ 0%
</TABLE>
No Withdrawal Charge is deducted upon expiration of the periods specified
above.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section refers to the total
of the income generated by an investment in a Division and of the changes of
value of the principal invested (due to realized and unrealized capital
B-4
<PAGE>
gains or losses) for a specified period reduced by a 0.60% annual asset charge
and a maximum monthly Expense Risk Charge equal to 0.30% on an annual basis.
However, it is assumed that the investment is NOT redeemed at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the
average annual compounded rates of return over the specified periods that would
equate the initial amount invested to the ending values, according to the
following formula:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment to the Separate Account of $1,000
T = average annual total return
n = number of years
ERV = The ending value of the $1,000 payment at the end of the specified
period.
FINANCIAL STATEMENTS
The financial statements of Colonial Life as of December 31, 1994 and for the
year then ended, appearing in this Statement of Additional Information, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing. The financial statements of Colonial Life included herein should be
considered only as bearing on the ability of Colonial Life to meet its
obligations under the Contracts. No financial statements of the Separate
Account are included in this Statement of Additional Information because, as of
December 31, 1994, the end of the Separate Account's most recent fiscal year,
the Separate Account had no assets and liabilities and had not yet commenced
operations.
B-5
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
The Colonial Life Insurance Company of America
We have audited the accompanying balance sheet of The Colonial Life Insurance
Company of America as of December 31, 1994, and the related statements of
operations, shareholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Colonial Life Insurance
Company of America at December 31, 1994, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
As described in Note 2 to the financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities in
1994.
Ernst & Young LLP
Boston, Massachusetts
February 3, 1995
F-1
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31, 1994
<TABLE>
<S> <C>
A S S E T S
Invested assets (Note 3)
Fixed maturities, held-to-maturity, at amortized cost.................... $183,531
Fixed maturities, available-for-sale, at market.......................... 283,395
Equity securities, at market............................................. 34,184
Short term investments, at cost.......................................... 31,546
Policy loans............................................................. 22,720
Mortgage loans on real estate............................................ 6,228
--------
TOTAL INVESTED ASSETS................................................ 561,604
Accrued investment income.................................................. 8,832
Uncollected premiums....................................................... 11,210
Reinsurance recoverable on life and health policy liabilities.............. 3,119
Deferred policy acquisition costs (Note 4)................................. 29,303
Federal income tax receivable (Note 5)..................................... 2,414
Deferred federal income tax (Note 5)....................................... 218
Property and equipment (Note 1)............................................ 3,352
Note receivable (Note 8)................................................... 26,000
Other assets............................................................... 5,881
--------
TOTAL ASSETS......................................................... $651,933
========
L I A B I L I T I E S
Policy liabilities
Policy fund balances..................................................... $ 94,339
Future policy benefits................................................... 221,117
Policy and contract claims............................................... 107,580
Premiums paid in advance................................................. 2,454
Other policyholders' funds............................................... 12,560
--------
438,050
Notes payable to Chubb Capital Corporation (Note 12)....................... 26,000
Accrued expenses and other liabilities..................................... 25,530
--------
TOTAL LIABILITIES.................................................... 489,580
Commitments and contingent liabilities (Note 7, 10, and 15)
S H A R E H O L D E R ' S E Q U I T Y
Common stock--$20 par value, 132,000 shares authorized, issued and out-
standing.................................................................. 2,640
Paid-in capital............................................................ 26,460
Unrealized depreciation of investments, net (Note 3)....................... (7,286)
Retained earnings.......................................................... 140,539
--------
TOTAL SHAREHOLDER'S EQUITY .......................................... 162,353
--------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........................... $651,933
========
</TABLE>
See accompanying notes.
F-2
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
REVENUES
Universal life and investment product policy charges.............. $ 8,129
Traditional life insurance premiums............................... 75,343
Accident and health premiums...................................... 500,378
Net investment income............................................. 47,170
Realized investment gains......................................... 2,786
Other income...................................................... 55
---------
TOTAL REVENUES.............................................. 633,861
BENEFITS, CLAIMS AND EXPENSES
Policy benefits and claims
Death............................................................. 39,141
Accident and health............................................... 453,347
Other............................................................. 41,726
Change in reserves for future policy benefits
Traditional life insurance........................................ (711)
Accident and health insurance..................................... (429)
---------
533,074
Expenses
Commissions and other operating expenses.......................... 114,544
Amortization of deferred policy acquisition costs................. 3,014
---------
117,558
---------
TOTAL BENEFITS, CLAIMS AND EXPENSES......................... 650,632
---------
LOSS BEFORE FEDERAL INCOME TAX.............................. (16,771)
Federal income tax (benefit)
Current........................................................... (9,157)
Deferred.......................................................... 2,495
---------
(6,662)
---------
NET LOSS.................................................... $ (10,109)
=========
</TABLE>
See accompanying notes.
F-3
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
COMMON STOCK
Balance, beginning and end of year................................. $ 2,640
--------
PAID-IN CAPITAL
Balance, beginning of year......................................... 16,460
Capital contribution by Chubb Life................................. 10,000
--------
Balance, end of year............................................... 26,460
--------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET
Balance, beginning of year......................................... 3,036
Cumulative effect, as of January 1, 1994, of change in accounting
principle, net (Note 2)........................................... 12,690
Change, net (Note 3)............................................... (23,012)
--------
Balance, end of year............................................... (7,286)
--------
RETAINED EARNINGS
Balance, beginning of year......................................... 150,648
Net loss........................................................... (10,109)
--------
Balance, end of year............................................... 140,539
--------
TOTAL SHAREHOLDER'S EQUITY........................................... $162,353
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................... $(10,109)
Adjustments to reconcile net loss to net cash used in operating ac-
tivities:
Decrease in future policy benefits, policy and contract claims
and premiums paid in advance, net............................... (34,639)
Decrease in uncollected premiums................................. 4,842
Increase in deferred policy acquisition costs.................... (1,810)
Decrease in accrued investment income............................ 1,426
Realized investment gains........................................ (2,786)
Accretion of investment discounts................................ (1,051)
Provision for depreciation....................................... 2,268
Provision for deferred income tax................................ 2,495
Decrease in federal income tax receivable........................ 474
Other, net....................................................... (19,143)
--------
Net cash used in operating activities.......................... (58,033)
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities............................ 60,322
Proceeds from maturities of fixed maturities....................... 38,115
Proceeds from sales of equity securities........................... 28,411
Purchases of fixed maturities...................................... (52,112)
Purchases of equity securities..................................... (18,021)
Increase in short term investments, net............................ (16,583)
Policy loans issued, net of repayments............................. (12)
Mortgage loans, net................................................ 1,782
Other, net......................................................... 28
--------
Net cash provided by investing activities...................... 41,930
FINANCING ACTIVITIES
Deposits credited to policyholders' funds.......................... 13,752
Withdrawals from policyholders' funds.............................. (5,838)
Decrease in cash overdraft......................................... (1,811)
Capital contribution by Chubb Life................................. 10,000
--------
Net cash provided by financing activities...................... 16,103
INCREASE IN CASH............................................. 0
--------
CASH, BEGINNING AND END OF YEAR (Note 1)..................... $ 0
========
</TABLE>
See accompanying notes.
F-5
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The Colonial Life Insurance Company of America (the
Company) is wholly-owned by Chubb Life Insurance Company of America (Chubb
Life). Chubb Life is a wholly-owned subsidiary of The Chubb Corporation.
Affiliates of the Company include Chubb Sovereign Life Insurance Company
(Sovereign), Chubb America Service Corporation (Chubb Service) and ChubbHealth
Holdings, Inc. (ChubbHealth).
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP).
RECOGNITION OF REVENUES, BENEFITS, CLAIMS AND EXPENSES:
Universal Life Products: Universal life products include universal life
insurance and other interest-sensitive life insurance policies. Revenues
for universal life products consist of policy charges for the cost of
insurance, policy administration and surrenders that have been assessed
against policy account balances during the period.
Policy fund liabilities for universal life and other interest-sensitive
life insurance policies are computed in accordance with the retrospective
deposit method and represent policy account balances before surrender
charges.
Policy claims that are charged to expense include claims incurred in the
period in excess of related policy account balances. Other policy benefits
include interest credited to universal life and other interest-sensitive
life insurance policies. Interest crediting rates ranged from 6 1/4% to 7
1/4%.
Investment Products: Investment products include structured settlement
annuities and other supplementary contracts without life contingencies.
Revenues for investment products consist of policy charges for the cost of
insurance, policy administration and surrenders that have been assessed
against policy account balances during the period. Deposits for these
products are recorded as policy fund liabilities, which are increased by
interest credited to the liabilities and decreased by withdrawals and
administrative charges assessed against the contract holders. Interest
crediting rates ranged from 3 1/2% to 8 7/8%.
Traditional Life Insurance Products: Traditional life insurance products
include those products with fixed and guaranteed premiums and benefits.
Premium revenues for traditional life insurance are recognized as revenues
when due. The liabilities for future policy benefits have been computed by
the net level premium method based on estimated future investment yield,
mortality and withdrawal experience. Interest rate assumptions ranged from
3% to 9%. Mortality has been calculated principally on an experience
multiple applied to select and ultimate tables in common usage in the
industry. Estimated withdrawals have been determined principally based on
industry tables. Policy benefits and claims are charged to expense as
incurred.
Accident and Health Insurance: Accident and health insurance premiums are
earned on a monthly pro rata basis over the terms of the policies. Benefits
include paid claims plus an estimate for known claims and claims incurred
but not reported as of the balance sheet date.
Reinsurance: In the ordinary course of business, the Company assumes and
cedes reinsurance with other insurance companies. These arrangements
minimize the maximum net loss potential arising from large risks.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
activities or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.
Reinsurance recoverable on life and health policy liabilities represent
estimates of the portion of such liabilities that will be recovered from
reinsurers, determined in a manner consistent with the liabilities
associated with the reinsured policies.
Deferred Policy Acquisition Costs: Certain costs of acquiring insurance
contracts, principally commissions, underwriting costs and certain variable
field office expenses, have been deferred. Deferred policy acquisition
costs for universal life and investment contracts are amortized over the
lives of the contracts in relation to the present value of estimated gross
profits expected to be realized. Beginning in 1994, deferred policy
acquisition costs related to universal life and investment contracts are
also adjusted to reflect the effect that the unrealized gains or losses on
F-6
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
investments classified as available-for-sale would have had on the present
value of estimated gross profits had such gains or losses actually been
realized. This adjustment is excluded from income and charged or credited
directly to the unrealized appreciation or depreciation of the investments
component of shareholder's equity, net of applicable deferred income tax.
Traditional life insurance deferred policy acquisition costs are being
amortized over the premium-payment period of the related policies using
assumptions consistent with those used in computing policy benefit
reserves.
Invested Assets: Short term investments, which have an original maturity of
one year or less, are carried at amortized cost.
Fixed maturities, which include bonds and redeemable preferred stocks, are
purchased to support the investment strategies of the Company. These strategies
are developed based on many factors, including rate of return, maturity, credit
risk, tax considerations and regulatory requirements. Those fixed maturities
which the Company has the ability and positive intent to hold to maturity are
considered held-to-maturity (previously referred to as held-for-investment) and
carried at amortized cost. Fixed maturities which may be sold prior to maturity
to support the investment strategies of the Company are considered available-
for-sale and carried at market value as of the balance sheet date. Prior to
1994, fixed maturities considered available-for-sale were carried at the lower
of the aggregate amortized cost or market value as of the balance sheet date.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Policy loans are carried at the unpaid balances. Mortgage loans on real
estate are carried at the unpaid balances, adjusted for amortization of premium
or discount.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income. Unrealized appreciation or depreciation on those investments which
are carried at market value is excluded from income and credited or charged
directly to a separate component of shareholder's equity.
Property and Equipment: Property and equipment used in operations are carried
at cost less accumulated depreciation of $40,790,000 at December 31, 1994.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets and was $2,268,000 for the year then ended.
Federal Income Taxes: The Company participates in the filing of a
consolidated federal income tax return with Chubb Life. Chubb Life joins in the
filing of a consolidated federal income tax return with its Parent. Federal
income tax is allocated as if the Company and Chubb Life filed separate income
tax returns. Deferred income tax assets and liabilities are recognized for the
expected future tax effects attributable to temporary differences between the
financial reporting and tax bases of assets and liabilities, based on enacted
tax rates and other provisions of tax law. Prior to 1993, deferred income taxes
were provided to recognize timing differences which resulted from reporting
certain revenues and expenses in different periods for financial reporting
purposes, rather than for income tax purposes.
Deferred income taxes related to unrealized appreciation or depreciation of
investments carried at market value are charged or credited directly to the
applicable component of shareholder's equity.
Fair Values of Financial Instruments: Fair values of financial instruments
are based on quoted market prices where available. Fair values of financial
instruments for which quoted market prices are not available are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rates and the estimates of future cash flows. Accordingly, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and are not necessarily indicative of the amounts that could be realized in
immediate settlement of the instrument. Certain financial instruments,
particularly insurance contracts, are excluded from fair value disclosure
requirements.
F-7
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The methods and assumptions used to estimate the fair value of certain
financial instruments are as follows:
. Fair values of fixed maturities with active markets are based on quoted
market prices. For fixed maturities that trade in less active markets,
fair values are obtained from independent pricing services. Fair values
of fixed maturities are principally a function of current interest rates.
Care should be used in evaluating the significance of these estimated
market values.
. Fair values of equity securities are based on quoted market prices.
. The carrying value of short term investments approximates fair value due
to the short maturities of these investments.
. Fair values of policy loans and mortgage loans are estimated using
discounted cash flow analyses and approximate carrying values.
. The carrying value of short term debt approximates fair value due to the
short maturities of the debt.
The carrying value and fair value of financial instruments at December 31,
1994, are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets
Fixed maturities
Held-to-maturity...................................... $183,531 $179,695
Available-for-sale.................................... 283,395 283,395
Equity securities....................................... 34,184 34,184
Short term investments.................................. 31,546 31,546
Policy loans............................................ 22,720 22,720
Mortgage loans on real estate........................... 6,228 6,228
Liabilities
Note payable............................................ 26,000 26,000
</TABLE>
Cash Flow Information: In the statement of cash flows, short term investments
are not considered to be cash equivalents. Cash overdrafts included in accrued
expenses and other liabilities were $11,386,000 at December 31, 1994.
2. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Similar to the Company's previous accounting policy for
investments in fixed maturities and equity securities, SFAS No. 115 provides
that the accounting for such securities depends on their classification as
either held-to-maturity (previously referred to as held-for-investment),
available-for-sale or trading. However, SFAS No. 115 establishes more stringent
criteria for classifying fixed maturities as held-to-maturity. Therefore, the
adoption of SFAS No. 115 resulted in an increase in the portion of the
Company's fixed maturities classified as available-for-sale and a similar
decrease in those classified as held-to-maturity. SFAS No. 115 also requires
that fixed maturities classified as available-for-sale be carried at market
value, with unrealized appreciation or depreciation excluded from income and
credited or charged directly to a separate component of shareholder's equity.
Prior to 1994, such fixed maturities were carried at the lower of the aggregate
amortized cost or market value. In conjunction with the Company's adoption of
SFAS No. 115, deferred policy acquisition costs related to universal life and
investment contracts were adjusted to reflect the effects that would have been
recognized had the unrealized gains relating to investments classified as
available-for-sale actually been realized, with a corresponding charge directly
to the separate component of shareholder's equity. SFAS No. 115 may not be
retroactively applied to prior years' financial statements. The cumulative
effect, as of January 1, 1994, of the change in accounting principle on
shareholder's equity, was as follows:
F-8
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. CHANGE IN ACCOUNTING PRINCIPLE--CONTINUED
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Unrealized appreciation of fixed maturities considered
available-for-sale......................................... $21,579
Adjustment to deferred policy acquisition costs............. (2,056)
-------
19,523
Deferred income tax......................................... 6,833
-------
Increase in shareholder's equity.......................... $12,690
=======
</TABLE>
Adoption of SFAS No. 115 did not have an impact on net income in 1994 nor is
it expected to in future years.
3. INVESTED ASSETS
The sources of net investment income for the year ended December 31, 1994
were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Fixed maturities.............................................. $43,196
Equity securities............................................. 2,107
Short term investments........................................ 638
Policy loans.................................................. 1,364
Mortgage loans................................................ 698
Other......................................................... 99
-------
Gross investment income..................................... 48,102
Investment expenses........................................... 932
-------
Net investment income....................................... $47,170
=======
</TABLE>
Realized investment gains and losses for the year ended December 31, 1994
were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross realized investment gains:
Fixed maturities............................................ $1,565
Equity securities........................................... 3,597
------
$5,162
======
Gross realized investment losses:
Fixed maturities............................................ $1,671
Equity securities........................................... 705
------
$2,376
======
Net realized investment gains (losses):
Fixed maturities............................................ $ (106)
Equity securities........................................... 2,892
------
$2,786
======
</TABLE>
Proceeds from sales of fixed maturities considered available-for-sale were
$60,322,000 in 1994. Gross gains of $1,565,000 and gross losses of $1,671,000
were realized on such sales.
F-9
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTED ASSETS--CONTINUED
The components of net unrealized appreciation (depreciation) of investments
carried at market value as of December 31, 1994 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Equity securities
Gross unrealized appreciation............................... $ 2,532
Gross unrealized depreciation............................... 1,272
-------
1,260
-------
Fixed maturities
Gross unrealized appreciation............................... 4,710
Gross unrealized depreciation............................... 13,874
-------
(9,164)
-------
(7,904)
Deferred policy acquisition costs adjustment.................. 951
-------
(6,953)
Deferred tax asset, net..................................... (2,434)
Tax valuation allowance..................................... 2,767
-------
$(7,286)
=======
</TABLE>
The change in unrealized appreciation or depreciation of investments carried
at market value for the year ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Change in unrealized appreciation of equity securities....... $ (3,412)
Change in unrealized appreciation of fixed maturities........ (30,743)
Change in deferred policy acquisition costs adjustment....... 3,007
--------
(31,148)
Deferred income tax (credit)................................. (10,903)
Change in tax valuation allowance............................ 2,767
--------
(23,012)
Cumulative effect, as of January 1, 1994, of change in ac-
counting principle, net..................................... 12,690
--------
$(10,322)
========
</TABLE>
The cost of equity securities was $32,924,000 at December 31, 1994.
F-10
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTED ASSETS--CONTINUED
The amortized cost and estimated market value of fixed maturities at December
31, 1994, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity
Tax exempt...................... $ 102 $ 4 $ 106
-------- ------ ------- --------
Taxable
U.S. Government and government
agency and authority obliga-
tions........................ 3,813 $ 45 3,768
Corporate bonds............... 90,015 3,480 694 92,801
Mortgage-backed securities.... 89,601 235 6,816 83,020
-------- ------ ------- --------
Total taxable............... 183,429 3,715 7,555 179,589
-------- ------ ------- --------
Total held-to-maturity...... 183,531 3,719 7,555 179,695
-------- ------ ------- --------
Available-for-sale
Taxable
U.S. Government and government
agency and authority obliga-
tions........................ 2,729 15 62 2,682
Corporate bonds............... 174,467 3,807 8,875 169,399
Mortgage-backed securities.... 113,527 888 4,931 109,484
Redeemable preferred stocks... 1,836 6 1,830
-------- ------ ------- --------
Total available-for-sale.... 292,559 4,710 13,874 283,395
-------- ------ ------- --------
Total fixed maturities...... $476,090 $8,429 $21,429 $463,090
======== ====== ======= ========
</TABLE>
The change in unrealized appreciation or depreciation of fixed maturities
carried at amortized cost is not reflected in the financial statements. The
change in unrealized appreciation or depreciation of such fixed maturities was
a decrease of $41,968,000 for the year ended December 31, 1994. The change in
1994 includes a reduction of $21,579,000 for the cumulative effect adjustment,
as of January 1, 1994, resulting from the adoption by the Company of SFAS No.
115.
The amortized cost and estimated market value of fixed maturities at December
31, 1994 by contractual maturity were as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less............. $ 100 $ 101
Due after one year through five
years.............................. $ 21,429 $ 21,999 43,711 44,662
Due after five years through ten
years.............................. 30,704 32,621 65,836 63,120
Due after ten years................. 41,797 42,055 69,385 66,028
-------- -------- -------- --------
Subtotal.......................... 93,930 96,675 179,032 173,911
Mortgage-backed securities.......... 89,601 83,020 113,527 109,484
-------- -------- -------- --------
$183,531 $179,695 $292,559 $283,395
======== ======== ======== ========
</TABLE>
Actual maturities could differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
F-11
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Balance, beginning of year................................... $26,542
Cumulative effect, as of January 1, 1994, of change in ac-
counting principle.......................................... (2,056)
Costs deferred during year................................... 4,824
Amortization during year..................................... (3,014)
Change in adjustment to reflect the effects of unrealized de-
preciation of investments................................... 3,007
-------
Balance, end of year......................................... $29,303
=======
</TABLE>
5. FEDERAL INCOME TAXES
The federal income tax provision for the year ended December 31, 1994 has
been computed using the tax rates and regulations in effect during the year.
The provision for federal income tax gives effect to permanent differences
between financial and taxable income. Accordingly, the effective tax rate is
higher than the statutory federal corporate tax rate. The reasons for the
higher effective tax rate were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Tax benefit at statutory federal income tax rate (35%)........ $(5,870)
Dividends received deduction and tax exempt income............ (940)
Other......................................................... 148
-------
Federal income tax benefit.................................... $(6,662)
=======
</TABLE>
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Deferred income tax assets:
Future policy benefits and policy fund balances............. $ 5,948
Valuation allowance......................................... (2,767)
Other....................................................... 4,375
-------
Total deferred income tax assets.............................. 7,556
Deferred income tax liabilities:
Deferred policy acquisition costs........................... 7,338
-------
Net deferred income tax assets................................ $ 218
=======
</TABLE>
The tax valuation allowance has been established primarily for the deferred
income tax asset related to the unrealized depreciation of investments at
December 31, 1994, due to the uncertainty as to when, if ever, such losses
might be realized.
Prior to 1984, life insurance companies were allowed certain special
deductions for federal income tax purposes which could become subject to tax at
normal rates under certain circumstances, including distribution to
shareholders. These special deductions were set aside in a Policyholders'
Surplus Account. Under the 1984 Act, no further additions to this account are
permitted. At December 31, 1994, approximately $4,664,000 of untaxed retained
earnings remained. No income taxes have been provided since management does not
anticipate any transaction that would cause this remaining amount to become
taxable. The unrecognized deferred tax related to the Policyholders' Surplus
Account is $1,632,000.
Federal income taxes received in 1994 were $9,631,000.
F-12
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
(A) The Company participates in the Pension Plan for the Employees of Chubb
Life Insurance Company of America and Participating Affiliates, which is a
defined noncontributory plan. The benefits are generally based on an employee's
years of service and average compensation during the last five years of
employment. Pension costs are determined using the projected unit credit
method. It is Chubb Life's policy to make annual contributions that meet the
minimum funding requirements of the Employee Retirement Income Security Act of
1974. Contributions are intended to provide not only for benefits attributed to
service but also for those expected to be earned in the future.
Accumulated plan benefits, net assets and net periodic pension costs by
component for the Company are not readily determinable. As of December 31,
1994, total plan assets at fair value were $66,833,000 and the projected
benefit obligation for service rendered to date was $71,280,000. The weighted
average discount rate used in determining the actuarial present value of the
projected benefit obligations at December 31, 1994 was 7 3/4% and the rate of
increase in future compensation levels was 6%. The expected long-term rate of
return on assets was 9%.
(B) The Company, with Chubb Life and its affiliates, provides certain other
postretirement benefits, principally health care and life insurance, to retired
employees and their beneficiaries and covered dependents. Substantially all
employees may become eligible for these benefits upon retirement if they meet
minimum age and years of service requirements.
The Company does not fund these benefits in advance. Benefits are paid as
covered expenses are incurred. Health care coverage is contributory. Retiree
contributions vary based upon a retiree's age, type of coverage and years of
service with the Company. Life insurance coverage is noncontributory.
Net postretirement benefit cost and accumulated postretirement benefit
obligation by component for the Company are not readily determinable. Net
postretirement benefit costs allocated to the Company for the year ended
December 31, 1994 were $1,072,000 and include service cost of the current
period and interest cost on accumulated benefit obligation. At December 31,
1994, the Company's allocated portion of the unfunded accumulated
postretirement benefit obligation for retirees and other fully eligible and
vested participants included in other liabilities was $10,465,000.
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1994
was 7 3/4%. The health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 14 1/2% for 1994. The rate is
assumed to decrease gradually to 7 1/2% for the year 2005 and remain at that
level thereafter. The health care cost trend rate assumption has a significant
effect on the amount of the accumulated postretirement benefit obligation and
the net postretirement benefit cost reported. To illustrate, a one percent
increase in the trend rate for each year would increase the accumulated
postretirement benefit obligation of the Company and its affiliates at December
31, 1994 by $2,590,000 and the aggregate of the service and interest cost
components of net postretirement benefit cost for the year ended December 31,
1994 by $349,000.
7. STOCK OWNERSHIP AND INCENTIVE PLANS
Substantially all of the Company's employees are eligible to participate in
the stock ownership and incentive plans of The Chubb Corporation. The aggregate
costs associated with the plans were approximately $2,027,000 for the year
ended December 31, 1994.
8. RELATED-PARTY TRANSACTIONS
Debt and Credit Arrangements: The Company entered into an agreement, whereby
it guaranteed a $10,000,000 first mortgage obtained by Chubb Life on December
9, 1985. The first mortgage loan is secured by a home office building, located
at One Granite Place, Concord, NH. The outstanding balance of the loan at
December 31, 1994 was $5,965,000.
Service Agreement: The Company entered into an agreement with Chubb Service,
whereby Chubb Service agreed to furnish to the Company, Chubb Life and other
affiliated companies, employee and administrative services and joint operations
as may be mutually-agreed upon. The net reimbursements paid to Chubb Service
during 1994 were $64,109,000. Amounts payable to Chubb Service, included in
other liabilities, at December 31, 1994 were $8,263,000.
F-13
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED-PARTY TRANSACTIONS--CONTINUED
Reinsurance: The Company assumes from Chubb Life, under a modified-
coinsurance agreement, premiums and benefits related to interest-sensitive
whole life and single premium whole life contracts. The net reimbursements paid
to Chubb Life during 1994 were $16,156,000. At December 31, 1994, the net
receivable from Chubb Life was $851,000.
The Company had a stop-loss reinsurance agreement during 1993, whereby it
ceded premiums and benefits related to group health products to Chubb Life. The
premiums and benefits ceded during 1994 were $8,572,000 and $6,109,000,
respectively.
Receivables: The Company has a loan agreement with an affiliate providing a
$29,000,000 revolving line of credit. The interest rate is variable and is
based on the Company's cost of short term funds. At December 31, 1994, the
Company had a note receivable of $26,000,000 under this agreement. Interest
earned on this loan in 1994 was $1,328,000.
9. REINSURANCE
The Company is involved in both the cession and assumption of reinsurance
with other insurance companies. Risks are reinsured with other companies to
permit the recovery of a portion of the direct losses. The Company's
reinsurance activity is primarily with Chubb Life. The maximum amount of
individual life insurance retained on any one life, including accidental death
benefits, is $1,400,000.
Selected data regarding reinsurance amounts appearing in the financial
statements for 1994 were as follows:
<TABLE>
<CAPTION>
CEDED TO ASSUMED
DIRECT OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
-------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Premiums earned and policy charges
for the year:
Life insurance................... $ 39,061 $ 1,849 $46,260 $ 83,472
Accident and health insurance.... 510,122 9,753 9 500,378
-------- ------- ------- --------
Total premiums and policy
charges......................... $549,183 $11,602 $46,269 $583,850
======== ======= ======= ========
</TABLE>
Reinsurance recoveries of the Company which have been deducted from benefits,
claims and expenses were $8,002,000 in 1994.
10. ACCIDENT AND HEALTH UNPAID CLAIMS
The process of estimating loss reserves is an imprecise science and reflects
significant judgmental factors. Management considers facts currently known and
the present state of health care markets in which it operates when establishing
accident and health claim reserves. Management believes that the aggregate
claim liabilities at December 31, 1994 are adequate to cover claims for losses
which have occurred, including both those known and those yet to be reported.
However, changes in market conditions may require additional increases in claim
reserves which may adversely affect results in future periods. This emergence
cannot be precisely estimated.
F-14
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. ACCIDENT AND HEALTH UNPAID CLAIMS--CONTINUED
A reconciliation of the beginning and ending liability for accident and
health unpaid claims, net of reinsurance recoverable, and a reconciliation of
the net liability to the corresponding liability on a gross basis at December
31, 1994, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross liability at beginning of year.......................... $132,382
Less: reinsurance recoverable............................... 847
--------
Net liability at beginning of year............................ 131,535
Incurred:
Current year................................................ 462,993
Prior years................................................. (15,052)
--------
Total incurred................................................ 447,941
Paid:
Current year................................................ 359,464
Prior years................................................. 116,482
--------
Total paid.................................................... 475,946
--------
Net liability at end of year.................................. 103,530
Plus: reinsurance recoverable............................... 1,545
--------
Gross liability at end of year................................ $105,075
========
</TABLE>
During 1994, the accident and health business experienced overall favorable
development of $15,052,000 on claim reserves established as of the previous
year end. This difference has been reflected in operating results. Claims
settlement costs are not developed as part of the claim liability and are
reflected in operating results in the years the claims are paid.
11. DIVIDEND RESTRICTIONS
The Company is required to file annual statements with state insurance
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). GAAP differs in certain respects from
statutory accounting practices.
A comparison of shareholder's equity on a GAAP basis and policyholders'
surplus on a statutory basis as of December 31, 1994 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
GAAP.......................................................... $162,353
Statutory..................................................... 99,322
</TABLE>
A comparison of GAAP and statutory net loss for the year ended December 31,
1994 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
GAAP.......................................................... $(10,109)
Statutory..................................................... (12,677)
</TABLE>
The Company may pay dividends from statutory earned surplus as determined in
accordance with accounting practices prescribed or permitted by regulatory
authorities and the State of New Jersey. Dividend distributions exceeding the
greater of 10% of policyholders' surplus or statutory net income during the
preceding year are considered "extraordinary" and are subject to the prior
approval of the State of New Jersey Department of Insurance. The maximum
ordinary dividend distribution that may be made by the Company to Chubb Life
during 1995 is approximately $9,900,000.
F-15
<PAGE>
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. DEBT AND CREDIT ARRANGEMENTS
The Company has borrowed in the short term commercial paper market during
1994. These notes were issued by Chubb Capital Corporation, a subsidiary of The
Chubb Corporation. The interest rate is variable and based on Chubb Capital
Corporation's cost of funds. Interest paid on the borrowings in 1994 was
$1,094,000. In addition, the Company has a loan agreement with a bank providing
for a line of credit of $26,000,000 at a variable interest rate. At December
31, 1994, there were no borrowings against this line of credit.
13. BUSINESS SEGMENTS
The Company is principally engaged in the sale of individual and group life
and health insurance products. Insurance revenues, net investment income and
earnings before federal income taxes for each class of business for the year
ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Revenues:
Individual insurance:
Premiums and policy charges................................. $ 68,123
Investment income........................................... 34,682
Group insurance:
Premiums.................................................... 515,727
Investment income........................................... 12,488
Earnings (loss) before federal income taxes:
Individual insurance........................................ 2,645
Group insurance............................................. (22,202)
Realized gains.............................................. 2,786
--------
$(16,771)
========
</TABLE>
It is not practicable to determine identifiable assets and capital
expenditures applicable to the foregoing classes of business.
Earnings before federal income taxes by class of business reflect allocations
of investment income and significant expenses using allocation methods deemed
to be reasonable. Other acceptable allocation methods could produce different
results by groupings of classes of business.
14. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. Under SFAS No. 114, a
loan is considered impaired and a valuation allowance is established when it is
probable that a creditor will be unable to collect all principal and interest
amounts due according to the contractual terms of the loan agreement. SFAS No.
114 requires creditors to measure impairment of a loan based on the present
value of expected future cash flows discounted at the loans's effective
interest rate or, as a practical expedient, based on the market price of the
loan or the fair value of the collateral if the loan is collateral dependent.
Currently, the Company measures impairment of a loan based on undiscounted
expected future cash flows. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994. Restatement of prior years' financial
statements is not permitted. The Company will adopt SFAS No. 114 in the first
quarter of 1995. The adoption will not have a significant effect on net income
in 1995.
15. LITIGATION
The Company is involved in pending or threatened lawsuits arising from the
normal conduct of its insurance business. Several suits have been brought
against the Company seeking both punitive and compensatory damages. Management
is of the opinion that these suits are substantially without merit, that valid
defenses exist, and that such litigation will not have a material effect on the
financial statements.
F-16
