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Description of Issuance, Transfer and Redemption Procedures for Policies
Offered by the Group VEL Account of SMA Life Assurance Company
Pursuant to Rule 6e-3(T)(b)(12)(ii)
Under the Investment Company Act of 1940
The Group VEL Account of Allmerica Financial Life Insurance and Annuity Company
("Company") is registered under the Investment Company Act of 1940 ("1940 Act")
as a unit investment trust. Within the Group VEL Account are 46 Sub-Accounts.
Procedures apply equally to each Sub-Account and for purposes of this
description are defined in terms of the Group VEL Account, except where a
discussion of both the Group VEL Account and the individual Sub-Accounts is
necessary. Each Sub-Account invests in shares of a corresponding investment
division of the Allmerica Investment Trust ("Trust"), Fidelity Variable
Insurance Products Fund ("VIPF"), Fidelity Variable Insurance Products Fund II
("VIPF II"), T. Rowe Price International Series, Inc., Delaware Group Premium
Fund, Inc. ("DGPF"), AIM Variable Insurance Funds ("AIM"), The Alger American
Fund Portfolios ("Alger"), Alliance Variable Products Series Fund, Inc.
("Alliance"), or Franklin Templeton Insurance Products Trust ("Franklin"), each
of which is a "series" type of mutual fund registered under the 1940 Act
(collectively, "Underlying Funds"). The investment experience of a Sub-Account
of the Group VEL Account depends on the market performance of its corresponding
investment division of the Underlying Funds. Although flexible premium variable
life insurance policies funded through the Group VEL Account may also provide
for fixed benefits supported by the Company's General Account, this description
assumes that net premiums are allocated exclusively to the Group VEL Account and
that all transactions involve only the Sub-Accounts of the Group VEL Account,
except as otherwise explicitly stated herein.
I. "PUBLIC OFFERING PRICE": PURCHASE AND RELATED TRANSACTIONS --
SECTION 22(d) AND RULE 22c-1
This section outlines Policy provisions and administrative procedures
which might be deemed to constitute, either directly or indirectly, a
"purchase" transaction. Because of the insurance nature of the policies,
the procedures involved necessarily differ in certain significant
respects from the purchase procedures for mutual funds and annuity plans.
The chief differences revolve around the structure of the cost of
insurance charges and the insurance underwriting process. Certain Policy
provisions, such as reinstatement and loan repayment, do not result in
the issuance of a Policy but require certain payments by the Policy Owner
and involve a transfer of assets supporting Policy reserve into the Group
VEL Account.
a. INSURANCE CHARGES AND UNDERWRITING STANDARDS
Premium payments are not limited as to frequency and number, but
there are limitations as to amount. No premium payment may be less
than $100 without the Company's consent, and the total of all
premiums paid can never exceed the then current maximum premiums
determined by Internal Revenue Service rules. If at any time a
premium is paid which would result in total premiums exceeding the
current maximum premium limitations, the Company will return the
amount in excess of such maximums to the Policy Owner.
The Policy will remain in force so long as the Policy value less
any outstanding debt is sufficient to pay certain monthly charges
in connection with the Policy. Cost of insurance charges for the
policies will not be the same for all Policy Owners. The insurance
principle of pooling and distribution of mortality risks is based
upon the assumption that each Policy Owner pays a cost of
insurance charge commensurate with the Insured's mortality risk,
which is actuarially determined based upon factors such as age,
health and occupation. In the context of life insurance, a uniform
mortality charge (the "cost of insurance charge") for all Insureds
would discriminate unfairly in favor of those Insureds
representing greater mortality risks to the disadvantage of those
representing lesser risks. Accordingly, there will be a different
"price" for each actuarial category of Policy Owners because
different cost of insurance rates will apply. Accordingly, while
not all
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Policy Owners will be subject to the same cost of insurance rate,
there will be a single "rate" for all Policy Owners in a given
actuarial category. The policies will be offered and sold pursuant
to the Company's underwriting standards and in accordance with
state insurance laws. Such laws prohibit unfair discrimination
among Insureds, but recognize that premiums must be based upon
factors such as age, health and occupation. Tables showing the
maximum cost of insurance charges will be delivered as part of the
Policy.
b. ENROLLMENT FORM AND INITIAL PREMIUM PROCESSING
Upon receipt of a completed enrollment form from a prospective
Policy Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed
Insured is insurable. This process may involve such verification
procedures as medical examinations and may require that further
information be provided by the proposed Policy Owner before a
determination can be made.
At the time of enrollment, the proposed insured will complete an
enrollment form, which lists the proposed amount of insurance and
indicates how much of that insurance is considered eligible for
simplified underwriting. If the answers to the eligibility
questions on the enrollment form are satisfactory, the Company
will provide immediate coverage equal to the simplified
underwriting amount. If the proposed insured is in a standard
premium class, any insurance in excess of the simplified
underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed
insured cannot answer the eligibility questions satisfactorily,
and if the proposed insured is not a standard risk, insurance
coverage will begin only after the Company (1) approves the
enrollment form, (2) the Certificate is delivered and accepted,
and (3) the first premium is paid.
Pending completion of insurance underwriting and Certificate
issuance procedures, any initial premiums will be held in the
General Account. If the enrollment form is approved and the
Certificate is issued and accepted, the initial premium held in
the General Account will be credited with interest not later than
the date of receipt of the premium at the Principal Office. IF THE
CERTIFICATE IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU
WITHOUT INTEREST.
These processing procedures are designed to provide insurance,
starting with the date of the application, to the proposed Policy
Owner in connection with payment of the initial premium and will
not dilute any benefit payable to any existing Policy Owner.
Although a Policy cannot be issued until the underwriting process
has been completed, the proposed Policy Owner will receive
immediate insurance coverage, if he has paid an initial premium
and proves to be insurable. If the initial premium is not paid
with the application, variability of benefits will commence within
three days of underwriting approval, subject to the restrictions
indicated above.
The Company will require that the Policy be delivered within a
specific delivery period to protect itself against anti-selection
by the prospective Policy Owner resulting from a deterioration of
the health of the proposed Insured. Generally, the period will not
exceed the shorter of 30 days from the date the Policy is issued
and 75 days from the date of Part 2 of the Application.
c. PREMIUM ALLOCATION
"Net premiums" are credited to the Policy as of the date the
premium payments are received by the Company, with the possible
exception of the first net premium. Net premiums are equal to the
gross premiums minus a premium expense charge. The premium expense
charge includes a charge for state and local premium taxes paid by
the
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Company, a charge to compensate the company for federal taxes
imposed for deferred acquisition costs ("DAC tax"), and a charge
for distribution expenses.
State premium taxes generally range from 0.75% to 5%, while local
premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not
exceed 10%. The premium tax charge may change when either the
applicable jurisdiction changes or the tax rate within the
applicable jurisdiction changes. The DAC tax deduction may range
from zero to 1% of premiums, depending on the group to which the
Policy is issued. The charge for distribution expenses may range
from zero to 10%. The distribution charge may vary, depending upon
such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the
Certificates, anticipated average annual premiums, and the actual
distribution expenses incurred by the Company. Upon request, the
Company may permit all or part of the Premium Expense Charge to be
deducted as part of the monthly deduction.
The Policy Owner may allocate net premiums among the Company's
General Account and up to twenty Sub-Accounts of the Group VEL
Account. The Policy Owner may change the allocation of net
premiums without charge at any time by providing written notice to
the Principal Office. The change will be effective as of the date
of receipt of the notice at the Principal Office. The Policy Owner
may transfer amounts among all of the sub-Accounts and the General
Account, subject to certain restrictions, but at no time may have
allocations in more than twenty Sub-Accounts.
d. REPAYMENT OF LOAN
A loan made under this Policy may be repaid with an amount equal
to the original loan plus loan interest.
When a loan is made, the Company will transfer from each
Sub-Account of the Group VEL Account to the General Account an
amount of that Sub-Account's Policy value equal to the loan amount
allocated to the Sub-Account. Since the Company will credit such
assets with interest of at least 6% per year (7.5% for preferred
loans), which is below the 8% interest rate charged on the loan,
the Company will retain the difference between these rates in
order to cover certain expenses and contingencies. Upon repayment
of debt, the Company will reduce the Policy value in the General
Account attributable to the loan and transfer assets supporting
corresponding reserves to the Sub-Accounts according to either
Policy Owner's instruction or, if none, the premium payment
allocation percentages then in effect. Loan repayments allocated
to the Group VEL Account cannot exceed Policy value previously
transferred from the Group VEL Account to secure the debt.
e. POLICY REINSTATEMENT
If the surrender value is insufficient to cover the next monthly
deduction plus loan interest accrued, or if Policy debt exceeds
the Policy value less surrender charges, the Company will notify
the Policy Owner and any assignee of record. The Policy Owner will
then have a grace period of 62 days, measured from the date the
notice is mailed, to make sufficient payments to prevent
termination.
Failure to make a sufficient payment within the grace period will
result in termination of the Policy without any Policy value. The
death benefit payable during the grace period will be reduced by
any overdue charges. If the Insured dies during the grace period,
the death proceeds will still be payable, but any monthly
deductions due and unpaid through the Policy month in which the
Insured dies will be deducted from the death proceeds.
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If the Policy has not been surrendered and the Insured is alive,
the terminated Policy may be reinstated anytime within three years
after the date of default by submitting the following to the
Company: (1) a written application for reinstatement; (2) evidence
of insurability satisfactory to the Company; and (3) a premium
that, after the deduction of the premium expense charges, is large
enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
If the Policy provides for a surrender charge, the surrender
charge on the date of reinstatement is the surrender charge that
would have been in effect had the Policy remained in force from
the date of issue.
Policy Value on Reinstatement -- The Policy value on the date of
reinstatement is:
(a) the net premium paid to reinstate the Policy increased by
interest from the date the payment was received at the
Company's Principal Office; plus
(b) an amount equal to the Policy value less debt on the date
of default; minus
(c) the monthly deduction due on the date of reinstatement.
The Policy Owner may repay or reinstate any debt outstanding on
the date of default or foreclosure.
f. CORRECTION OF MISSTATEMENT OF AGE
If the Company discovers that the age of the Insured has been
misstated, the death benefit and any rider benefits will be those
which would be purchased by the most recent deduction for the cost
of insurance and the cost of rider benefits at the correct age.
g. CONTESTABILITY
A Policy is contestable for two years, measured from the issue
date, for material misrepresentation s made in the initial
application for the Policy. Policy changes may be contested for
two years after the effective date of a change, and a
reinstatement may be contested for two years after the effective
date of reinstatement. No statement will be used to contest a
Policy unless it is contained in an application.
h. REDUCTION IN COST OF INSURANCE RATE CLASSIFICATION
By administrative practice, the Company will reduce the cost of
insurance rate classification for an outstanding Policy if new
evidence of insurability demonstrates that the Policy Owner
qualifies for a lower classification. After the reduced rating is
determined, the Policy Owner will pay a lower monthly cost of
insurance charge each month. If new evidence of insurability
provided in connection with an increase in Face Amount
demonstrates that the Policy Owner is in a higher risk
classification, the higher cost of insurance rate will apply only
to the increase in Face Amount.
II. "REDEMPTION PROCEDURES": SURRENDER AND RELATED TRANSACTIONS
a. GENERAL
The policies provide for the payment of monies to a Policy Owner
or beneficiary upon presentation of a Policy. Generally, except
for the payments of death proceeds, the imposition of cost of
insurance and administrative charges, and the possible effect of a
surrender charge (if any), the payee will receive a pro rata or
proportionate share of the
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Group VEL Account's assets, within the meaning of the 1940 Act, in
any transaction involving "redemption procedures." The amount
received by the payee will depend upon the particular benefit for
which the Policy is presented, including, for example, the cash
surrender value or death benefit. There are also certain Policy
provisions (e.g., partial withdrawals or the loan privilege) under
which the Policy will not be presented to the Company but which
will affect the Policy Owner's benefits and may involve a transfer
of the assets supporting the Policy reserve out of the Group VEL
Account. Any combined transactions on the same day which
counteract the effect of each other will be allowed. The Company
will assume the Policy Owner is aware of the possible conflicting
nature of the transactions and desires their combined result. If a
transaction is requested which the Company will not allow (e.g., a
request for a decrease in Face Amount which lowers the Face Amount
below the stated minimum) the Company will reject the whole
transaction and not just the portion which causes the
disallowance. The Policy Owner will be informed of the rejection
and will have an opportunity to give new instructions.
The Company will pay the net cash surrender value within seven
days after receipt, at its Principal Office, of the Policy and a
signed request for surrender. Computations with respect to the
investment experience of each Sub-Account will be made at the
close of trading of the New York Stock Exchange on each day in
which the degree of trading in the corresponding portfolio might
materially affect the net return of the Sub-Account and on which
the Company is open. This will enable the Company to pay a net
cash value on surrender based on the next computed value after the
surrender request is received. For valuation purposes, the
surrender is effective on the date the Company receives the
request at its Principal Office (although insurance coverage ends
the day the request is mailed).
The Policy value (equal to the value of all accumulations in the
Group VEL Account) may increase or decrease from day to day
depending on the investment experience of the Group VEL Account.
Calculation of the Policy value for any given day will reflect the
actual premiums paid, expenses charged and deductions taken. The
Company will deduct a premium expense charge from each premium
payment. The balance (net premium) is allocated to the
Sub-Accounts of the Group VEL Account according to Policy Owner's
instructions. The Company will also make monthly deductions from a
Policy to cover such expenses as the cost of insurance,
administrative expenses, mortality and expense risk, and
acquisition and underwriting costs. Other possible deductions from
a Policy (which will occur on a Policy-specific basis) may include
a charge for changing the Net Premium allocation instructions, for
partial withdrawals (if provided for under the Policy), for
changing the Face Amount, for changing the allocation of any
Monthly Deductions among the various Sub-Accounts, for a
projection of values, and for certain transfers.
b. TRANSACTION CHARGES ON PARTIAL WITHDRAWAL
After the first Policy year, partial withdrawals of surrender
value may be made. The minimum withdrawal is $500. Under Option 1,
the Face Amount is reduced by the amount of the partial
withdrawal, and a partial withdrawal will not be allowed if it
would reduce the Face Amount below $40,000. A transaction charge
which is the smaller of 2% of the amount withdrawn or $25 will be
assessed on each partial withdrawal.
III. OTHER PROVISIONS
a. DEATH BENEFIT
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The Company will pay a death benefit to the beneficiary within
seven days after receipt, at its Principal Office, of the Policy,
due proof of death of the Insured, and all other requirements
necessary to make payment.
The death proceeds payable will depend on the option in effect at
the time of death. Under Option 1 and Option 3, the death benefit
is the greater of either the Face Amount of insurance or the
guideline minimum sum Insured. Under Option 2, the death benefit
is the greater of either the Face Amount of insurance plus Policy
value or the guideline minimum sum Insured. The guideline minimum
sum Insured is calculated by multiplying the applicable percentage
from the following table for the Insured person's age (nearest
birthday) at the beginning of the Policy year of determination to
the Policy value.
GUIDELINE MINIMUM SUM INSURED
TABLE
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
---------------- ------------
<S> <C>
40 and Under.......................................... 250%
45.................................................... 215%
50.................................................... 185%
55.................................................... 150%
60.................................................... 130%
65.................................................... 120%
70.................................................... 115%
75.................................................... 105%
80.................................................... 105%
85.................................................... 105%
90.................................................... 105%
95.................................................... 100%
</TABLE>
For the ages not listed, the progression between the listed ages
is linear.
The Company will make payment of the death proceeds out of its
General Account, and will transfer assets from the Group VEL
Account to the General Account in an amount equal to the reserve
in the Group VEL Account attributable to the Policy. The excess,
if any, of the death proceeds over the amount transferred will be
paid out of the General Account reserve maintained for that
purpose.
b. DEFAULT AND OPTIONS ON LAPSE
The duration of insurance coverage depends upon the Policy value
being sufficient to cover the monthly deductions plus loan
interest accrued. If the surrender value at the beginning of a
month is less than the deductions for that month plus loan
interest accrued, a grace period of 62 days will begin. Written
notice will be sent to the Policy Owner and any assignee on the
Company's records stating that such a grace period has begun and
giving the amount of premium payment necessary to prevent
termination. If sufficient payment is not received during the
grace period, the Policy will terminate without value. Notice of
such termination will be sent to the owner and any assignee. If
the Insured should die during the grace period, an amount
sufficient to cover the overdue monthly deductions and other
charges will be deducted from the death proceeds.
c. POLICY LOAN
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The policies provide that in the first Policy year, a Policy Owner
may take a loan of up to 75% of "a minus b", where "a" is Policy
value less surrender charges and "b" is monthly deductions plus
interest on loans accrued to the end of the Policy year.
Thereafter, 90% of an amount equal to Policy value less surrender
charges may be borrowed. The Policy value for this purpose will be
that next computed after receipt, at the Principal Office, of a
loan request. Payment of the loan amount will be made to the
Policy Owner within seven days after such receipt.
The amount of any outstanding loan plus accrued interest is called
"debt". When a loan is made, the portion of the assets in the
Group VEL Account (which is a portion of the surrender value and
which also constitutes a portion of the reserves for the death
benefit) equal to the debt created thereby is transferred by the
Company from the Group VEL Account to the General Account.
Allocation of the loan among Sub-Accounts will be according to the
Policy Owner's request. If this allocation is not specified or not
possible, the loan will be allocated based on the proportion of
the Policy value in the General Account, less debt, and the Policy
value in each Sub-Account bears to the total Policy value, less
debt. Policy value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General
Account, and the number of Accumulation Units equal to the Policy
value so transferred will be cancelled. Because of the transfer, a
portion of the Policy is not variable during the loan period and,
therefore, the death benefit and the surrender value are
permanently affected by any debt, whether or not repaid in whole
or in part. The Company credits the Policy value in the General
Account attributable to the loan with a rate of return equal to an
effective annual yield of 6% (7.5% for preferred loans).
Interest is payable in arrears at the annual rate of 8%. Interest
is payable at the end of each Policy year or on a pro rata basis
for such shorter period as the loan may exist. Loan interest is
due on each Policy anniversary. If not paid when due, it is added
to the loan principal and is charged interest at the same rate of
8%. If the resulting loan principal exceeds the Policy value in
the General Account, the Company will transfer Policy value equal
to the excess debt from the Policy value in each Sub-Account to
the General Account, as security for the excess debt. The Company
will allocate the amount to be transferred among the Sub-Accounts
in the same proportion that the Policy value in each Sub-Account
bears to the total Policy values in all Sub-Accounts.
Failure to repay a loan will not necessarily terminate the Policy.
If the surrender value is not sufficient to cover the monthly
deductions for the cost of insurance and administrative expenses,
the Policy will go into a 62-day grace period as described above.
d. TRANSFERS AMONG SUB-ACCOUNTS
Amounts may be transferred, upon request, at any time from any
Sub-Account of the Group VEL Account to one or more other
Sub-Accounts. Transfers from a Sub-Account of the Group VEL
Account will take effect as of the receipt of a written request at
the Principal Office. The minimum amount allowed for a transfer is
the lesser of $500 or the total value in the Sub-Account. The
first twelve transfers are free of charge; however, the Company
will make an administrative charge not to exceed $25 for
additional transfers in a Policy year. Transfers resulting from
Policy loans, the exercise of conversion rights, and reallocation
of Policy value within 20 days of issue, will not be subject to a
transfer charge, and will not be counted for purposes of the
limitation on the number of "free" transfers allowed in each
Policy year. If a Policy Owner elects to have automatic transfers
made each month, the first automatic transfer counts as one
transfer towards the twelve free transfers allowed in each Policy
year; each subsequent automatic transfer does not reduce the
remaining number of transfers which may be made without charge.
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Transfer charges, if any, are allocated by Policy Owner request to
one or more Sub-Accounts. If an allocation is not specified or not
possible, the allocations will be based on the proportion that the
values in each of the Sub-Accounts of the Group VEL Account bears
to the total unloaned Policy value.
e. RIGHT OF WITHDRAWAL PROCEDURES
The Policy provides that the Policy Owner may cancel it by
returning the Policy along with a written request for cancellation
to the Principal Office by the latest of (1) 45 days after the
application was signed, or (2) 10 days (or such longer period as
may be required in a particular state) after the Policy Owner
receives the Policy. Upon returning the Policy, the Policy Owner
will receive within seven days a refund equal to the sum of (1)
the difference between the premium, including fees, paid and any
amount allocated to the Group VEL Account, and (2) the value of
the amounts allocated to the Group VEL Account, and (3) any fees
or charges imposed on the amounts allocated to the Group VEL
Account. Where required by State law, the Policy Owner will
receive a refund equal to the sum of the premium payments made
under the Policy. The postmark date on the envelope containing the
Policy will determine whether the Policy has been surrendered
within the Company's withdrawal period.
A free look privilege also applies after a requested increase in
Face Amount. After an increase, the Company will mail or deliver
notice of the "Free Look" with respect to the increase. The Policy
Owner will have the right to cancel the increase within 10 days,
and receive a credit for charges which would not have been
deducted but for the increase. Such charges with respect to the
increase will be added to Policy value unless the Policy Owner
requests a refund of such charges.
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